-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M+CysIvDg8mD9IGz10RU6AoEZRbMW7AX3ZJgredKbIRRH8yPDtcYDmeakAaybm0P 0fm4DlAOKyMnf+YMTwoNVg== 0000950134-98-008883.txt : 19981116 0000950134-98-008883.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950134-98-008883 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRIGHAM EXPLORATION CO CENTRAL INDEX KEY: 0001034755 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 752692967 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22433 FILM NUMBER: 98747770 BUSINESS ADDRESS: STREET 1: 6300 BRIDGE POINT PARKWAY STREET 2: BUILDING TWO, SUITE 500 CITY: AUSTIN STATE: TX ZIP: 78730 BUSINESS PHONE: 512-427-3300 MAIL ADDRESS: STREET 1: 6300 BRIDGE POINT PARKWAY STREET 2: BUILDING TWO, SUITE 500 CITY: AUSTIN STATE: TX ZIP: 78730 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1998 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----- ----- Commission File Number 000-22433 BRIGHAM EXPLORATION COMPANY (Exact name of registrant as specified in its charter)
DELAWARE 1311 75-2692967 (State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number)
6300 BRIDGE POINT PARKWAY BLDG. 2, SUITE 500 AUSTIN, TEXAS 78730 (512) 427-3300 (Name, address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- As of October 31, 1998, 13,306,206 shares of Common Stock, $.01 per share, were outstanding. ================================================================================ 2 BRIGHAM EXPLORATION COMPANY INDEX
PAGE PART I. FINANCIAL INFORMATION: NUMBER ------ Item 1. Unaudited Condensed Consolidated Financial Statements a) Balance Sheets - December 31, 1997 and September 30, 1998 1 b) Statements of Operations - Three and nine months ended September 30, 1997 and 1998 2 c) Statements of Cash Flows - Nine months ended September 30, 1997 and 1998 3 d) Statement of Changes in Stockholders' Equity - September 30, 1998 4 e) Notes to Condensed Consolidated Financial Statements 5 - 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9 - 12 PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K 13
3 PART I. FINANCIAL INFORMATION: Item 1. Financial Statements BRIGHAM EXPLORATION COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, September 30, 1997 1998 --------- --------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,701 $ 1,251 Accounts receivable 4,909 8,107 Prepaid expenses 280 354 --------- --------- Total current assets 6,890 9,712 --------- --------- Natural gas and oil properties, at cost, net 84,176 133,558 Other property and equipment, at cost, net 1,239 1,782 Drilling advances paid 78 404 Deferred loan fees -- 3,333 Other noncurrent assets 18 12 --------- --------- $ 92,401 $ 148,801 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 11,892 $ 13,651 Accrued drilling costs 2,406 3,203 Participant advances received 489 926 Other current liabilities 726 2,373 --------- --------- Total current liabilities 15,513 20,153 --------- --------- Notes payable 32,000 37,000 Senior subordinated notes, net -- 35,574 Deferred income tax liability 1,228 116 Other noncurrent liabilities 507 522 Stockholders' equity: Preferred stock, $.01 par value, 10 million shares authorized, none issued and outstanding -- -- Common stock, $.01 par value, 30 million shares authorized, 13,306,206 issued and outstanding 123 133 Additional paid-in capital 44,344 58,230 Unearned stock compensation (1,340) (774) Retained earnings (accumulated deficit) 26 (2,153) --------- --------- Total stockholders' equity 43,153 55,436 --------- --------- $ 92,401 $ 148,801 ========= =========
See accompanying notes to the condensed consolidated financial statements. 1 4 BRIGHAM EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months Nine Months Ended September 30, Ended September 30, -------------------------------- -------------------------------- 1997 1998 1997 1998 ------------- ------------- ------------- ------------- Revenues: Natural gas and oil sales $ 2,097 $ 4,162 $ 5,951 $ 11,292 Workstation revenue 133 75 457 322 ------------- ------------- ------------- ------------- 2,230 4,237 6,408 11,614 ------------- ------------- ------------- ------------- Costs and expenses: Lease operating 317 564 787 1,542 Production taxes 120 255 339 705 General and administrative 995 1,069 2,450 3,362 Depletion of natural gas and oil properties 713 1,688 2,108 4,472 Depreciation and amortization 59 113 231 288 Amortization of stock compensation 86 49 201 239 ------------- ------------- ------------- ------------- 2,290 3,738 6,116 10,608 ------------- ------------- ------------- ------------- Operating income (loss) (60) 499 292 1,006 ------------- ------------- ------------- ------------- Other income (expense): Interest income 41 37 122 114 Interest expense (87) (1,979) (459) (4,411) Interest expense - related party - - (173) - ------------- ------------- ------------- ------------- (46) (1,942) (510) (4,297) ------------- ------------- ------------- ------------- Net loss before income taxes (106) (1,443) (218) (3,291) Income tax (expense) benefit 10 491 (4,803) 1,112 ------------- ------------- ------------- ------------- Net loss $ (96) $ (952) $ (5,021) $ (2,179) ============= ============= ============= ============= Net loss per share: Basic / Diluted $ (0.01) $ (0.08) $ (0.47) $ (0.18) Weighted average common shares outstanding: Basic / Diluted 12,254 12,677 10,686 12,396
See accompanying notes to the condensed consolidated financial statements. 2 5 BRIGHAM EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Nine Months Ended Months Ended September 30, September 30, 1997 1998 ------------- ------------- Cash flows from operating activities: Net loss $ (5,021) $ (2,179) Adjustments to reconcile net loss to cash provided by operating activities: Depletion of natural gas and oil properties 2,108 4,472 Depreciation and amortization 231 288 Amortization of stock compensation 201 239 Amortization of deferred loan fees -- 463 Amortization of discount on senior subordinated notes -- 74 Changes in deferred income tax liability 4,803 (1,112) Changes in working capital and other items: Increase in accounts receivable (1,042) (3,198) Increase in prepaid expenses (250) (74) Increase (decrease) in accounts payable (160) 1,759 Increase in participant advances received 2,279 437 Increase (decrease) in other current liabilities (125) 1,612 Other noncurrent assets 115 6 Other noncurrent liabilities (229) (94) -------- -------- Net cash provided by operating activities 2,910 2,693 -------- -------- Cash flows from investing activities: Additions to natural gas and oil properties (22,325) (52,782) Additions to other property and equipment (456) (511) (Increase) decrease in drilling advances paid 35 (326) -------- -------- Net cash used by investing activities (22,746) (53,619) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 23,927 9,448 Proceeds from issuance of senior subordinated notes -- 40,000 Increase in notes payable 13,250 83,800 Repayment of notes payable (13,250) (78,800) Principal payments on capital lease obligations (128) (176) Deferred loan fees -- (3,796) -------- -------- Net cash provided by financing activities 23,799 50,476 -------- -------- Net increase (decrease) in cash and cash equivalents 3,963 (450) Cash and cash equivalents, beginning of period 1,447 1,701 -------- -------- Cash and cash equivalents, end of period $ 5,410 $ 1,251 ======== ========
See accompanying notes to the condensed consolidated financial statements. 3 6 BRIGHAM EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) (unaudited)
Retained Common Stock Additional Unearned Earnings/ --------------------------- Paid-in Stock (Accum. Shares Amounts Capital Compensation Deficit) Total ----------- ---------- ---------- ------------ ---------- ---------- Balance, December 31, 1997 12,253,574 $ 123 $ 44,344 $ (1,340) $ 26 $ 43,153 Net loss for the period ended Sept. 30, 1998 -- -- -- -- (2,179) (2,179) Issuance of common stock 1,052,632 10 13,938 -- -- 13,948 Amortization of unearned stock compensation -- -- -- 514 -- 514 Stock options forfeited -- -- (52) 52 -- -- ----------- ---------- ---------- ---------- ---------- ---------- Balance, September 30, 1998 13,306,206 $ 133 $ 58,230 $ (774) $ (2,153) $ 55,436 =========== ========== ========== ========== ========== ==========
See accompanying notes to the condensed consolidated financial statements. 4 7 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Organization and Nature of Operations Brigham Exploration Company (the "Company") is a Delaware corporation formed on February 25, 1997 for the purpose of exchanging its common stock for the common stock of Brigham, Inc. and the partnership interests of Brigham Oil & Gas, L.P. (the "Partnership"). Brigham, Inc. is a Texas corporation whose only asset is its ownership interest in the Partnership. The Partnership was formed in May 1992 to explore and develop onshore domestic natural gas and oil properties using 3-D seismic imaging and other advanced technologies. Since its inception, the Partnership has focused its exploration and development of natural gas and oil properties in West Texas, the Anadarko Basin and the onshore Gulf Coast. Pursuant to an exchange agreement dated February 26, 1997 (the "Exchange Agreement") and upon the initial filing on February 27, 1997 of a registration statement with the Securities and Exchange Commission (the "SEC") for the public offering of common stock (the "Offering"), the shareholders of Brigham, Inc. transferred all of the outstanding stock of Brigham, Inc. to the Company in exchange for 3,859,821 shares of common stock of the Company. Pursuant to the Exchange Agreement, the Partnership's other general partner and the limited partners also transferred all of their partnership interests to the Company in exchange for 3,314,286 shares of common stock of the Company. Furthermore, the holders of the Partnership's subordinated convertible notes transferred these notes to the Company in exchange for 1,754,464 shares of common stock. These transactions are referred to as the "Exchange." In completing the Exchange, the Company issued 8,928,571 shares of common stock to the stockholders of Brigham, Inc., the partners of the Partnership and the holder of the Partnership's subordinated notes payable. As a result of the Exchange, the Company now owns all the partnership interests in the Partnership. In May 1997, the Company sold 3,325,000 shares of its common stock in the Offering at a price of $8.00 per share. With a portion of the proceeds from the Offering, the Company repaid the then outstanding borrowings ($13.3 million) under the Company's revolving credit facility. 2. Basis of Presentation The unaudited condensed consolidated balance sheets at December 31, 1997 and September 30, 1998 reflect the consolidated accounts of the Company. The unaudited condensed consolidated statements of operations and of cash flows for the nine months ended September 30, 1997 and 1998 include the results of operations and of cash flows of the Partnership for the period from January 1, 1997 to February 27, 1997 and of the Company for the period from February 25, 1997, the date of its inception, to September 30, 1997 and for the nine months ended June 30, 1998. As the Exchange was the conversion of a partnership to a corporation, the Exchange was accounted for by the Company as a reorganization. The accompanying condensed consolidated financial statements are unaudited, and in the opinion of management, reflect all adjustments that are necessary for a fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the entire year. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's 1997 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. 5 8 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. Notes Payable In January 1998, the Company entered into a reserve based revolving credit facility (the "Credit Facility"). The Credit Facility originally provided for borrowings up to $75 million, all of which was immediately available for borrowing to fund capital expenditures. The borrowing base was reduced to $65 million upon issuance of the Notes. On January 31, 1999, the borrowing availability will be redetermined by the lender based on the Company's proved reserve value at that time. The Company may elect, at its option, to have the borrowing availability redetermined based on the Company's proved reserve value at any time prior to January 31, 1999. Amounts outstanding under the Credit Facility bear interest at either the lender's Base Rate or LIBOR plus 2.25%, at the Company's option. The Company's obligations under the Credit Facility are secured by substantially all of the natural gas and oil properties of the Company. A portion of the funds borrowed under the Credit Facility were used to repay in full the debt outstanding under the Company's previous revolving credit facility. In connection with the origination of the Credit Facility, certain bank fees and other expenses totaling approximately $1.9 million were recorded as deferred costs and will be amortized over the life of the loan which matures January 26, 2001. 4. The Offering In August 1998, upon the filing of a registration statement with the SEC, the Company issued $50 million of debt and equity securities to two affiliated institutional investors. The financing transaction consisted of the issuance of $40 million of senior subordinated secured notes (the "Notes") with warrants to purchase the Company's common stock and the sale of $10 million of the Company's common stock, 1,052,632 shares at a price of $9.50 per share. The combined sale of the Notes and common stock of the Company generated proceeds, net of offering costs, of approximately $47.5 million that was used to repay a portion of the then outstanding borrowings under the Company's Credit Facility. The Notes mature in August 2003, with no principal payments required until maturity and quarterly interest payments payable either in cash at an annual rate of 12% or, in limited circumstances, the issuance of additional notes at an annual interest rate of 13% for the first three years. The Company may repay the Notes in full without premium at any time prior to maturity. The indenture governing the Notes contains certain covenants including, but not limited to, limitations or restrictions on indebtedness, dividends and distributions, affiliate transactions, liens and sale and leaseback transactions. Warrants to purchase 1 million shares of the Company's common stock exercisable during a period of seven years at a price of $10.45 per share were issued in connection with the Notes. The Notes are fully and unconditionally guaranteed, on a joint and several basis, by each of the Company's subsidiaries (the "Subsidiary Guarantors"), all of which are directly or indirectly wholly-owned by the Company. The obligations of the Subsidiary Guarantors under the subsidiary guaranty agreements are subordinated to the senior indebtedness of the Subsidiary Guarantors. The assets of the parent, Brigham Exploration Company, consist solely of investments in its subsidiaries. Financial statements for the Subsidiary Guarantors are not presented because management has determined that they would not be material to investors. Concurrent with the issuance of the Notes, the Company recorded a discount on the Notes of $4.5 million to reflect the estimated value of the warrants. Also in connection with the issuance of the Notes, certain fees and expenses totaling approximately $1.8 million were recorded as deferred costs. The Note discount and deferred fees will be amortized over the five year term of the Notes. 6 9 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. Income Taxes Prior to the consummation of the Exchange, the Partnership was not subject to federal income taxes. Income and losses were passed through to its partners on the basis of the allocation provisions established by the partnership agreement. Upon consummation of the Exchange, the Partnership's net income became subject to federal income taxes through its ownership by the Company. Also, in conjunction with the Exchange, the Company recorded a deferred income tax liability of $5 million to recognize the temporary differences between the financial statement and tax bases of the assets and liabilities of the Partnership at the Exchange date, February 27, 1997, given the provisions of enacted tax laws. Subsequent to this date, the Company elected to record a step-up in basis of its assets for tax purposes as a result of the Exchange. As a result of this election, the Company recorded a $3.8 million deferred income tax benefit in the fourth quarter of 1997, which resulted in a net $1.2 million non-cash deferred income tax charge for the year ended December 31, 1997. 6. Earnings Per Share Earnings per share have been calculated in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128. The implementation of this standard has resulted in the presentation of a basic EPS calculation in the consolidated financial statements as well as a diluted EPS calculation. Basic EPS is computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares and common share equivalents outstanding, if dilutive, during each period. The number of common share equivalents outstanding is computed using the treasury stock method. Historical earnings per share for the nine months ended September 30, 1997 is based on shares of common stock issued upon consummation of the Exchange (Note 1). At September 30, 1997 and 1998, options and warrants to purchase 644,097 and 1,935,154, respectively, shares of common stock were outstanding but were not included in the computation of diluted EPS due to the anti-dilutive effect they would have on EPS if converted. 7. Reporting Comprehensive Income In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." The new standard, which is effective for financial statements issued for periods ending after December 15, 1997, established standards for reporting, in addition to net income, comprehensive income and its components including, as applicable, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. Upon adoption, the Company is also required to reclassify financial statements for earlier periods provided for comparative purposes. The Company adopted this standard in the first quarter of 1998. There is no difference between the Company's net income as reported and comprehensive income. 8. Segment Reporting In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which the Company adopted in the first quarter of 1998. The standard established requirements for reporting information about operating segments in interim financial reports issued to shareholders. It also 7 10 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) established standards for related disclosures about products and services, geographic areas and major customers. Under SFAS No. 131, operating segments are to be determined consistent with management's organization and evaluation of financial information internally for making operating decisions and assessing performance. The disclosure provisions of this standard are not applicable for interim periods in the year of adoption. The adoption of this new standard is not expected to have a material impact on the Company's consolidated balance sheet or statement of operations. 9. Accounting for Derivative Instruments and Hedging Activities In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard is effective for fiscal years beginning after June 15, 1999, but earlier application is permitted. SFAS No. 133 requires that all derivatives be recognized on the balance sheet as either assets or liabilities and measured at fair value regardless of any hedge relationship that exists. The corresponding gains and losses should be reported based on the hedge relationship that exists. The adoption of this new standard is not expected to have a material impact on the Company's consolidated balance sheet or statement of operations. 8 11 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Comparison of three month periods ended September 30, 1997 and September 30, 1998 Natural gas and oil sales. Natural gas and oil sales increased 98% from $2.1 million in the third quarter of 1997 to $4.2 million in the third quarter of 1998. Of this net increase, $2.9 million was attributable to an increase in production, offset by $872,000 attributable to a decrease in the average sales price for natural gas and oil. Production volumes for natural gas increased 263% from 330 MMcf in the third quarter of 1997 to 1,198 MMcf in the third quarter of 1998. The average price received for natural gas increased 10% from $2.10 per Mcf in the third quarter of 1997 to $2.32 per Mcf in the third quarter of 1998. Production volumes for oil increased 51% from 76 MBbls in the third quarter of 1997 to 114 MBbls in the third quarter of 1998. The average price received for oil decreased 34% from $18.53 per Bbl in the third quarter of 1997 to $12.14 per Bbl in the third quarter of 1998. Natural gas and oil sales were increased by production from wells completed since the end of the third quarter of 1997, partially offset by the natural decline of existing production, and from certain wells acquired from Ward Petroleum in Grady County, Oklahoma which were included in the Company's results of operations effective September 1, 1997. As a result of hedging activities, natural gas revenues increased $235,900, or $0.20 per Mcf, in the third quarter of 1998. Lease operating expenses. Lease operating expenses increased 78% from $317,000 for the third quarter of 1997 to $564,000 for the third quarter of 1998, while, on a per unit of production basis, lease operating expenses for the same periods decreased 25% from $0.40 per Mcfe to $0.30 per Mcfe. The increase in lease operating expenses was primarily due to an increase in the number of producing wells in the third quarter of 1998 as compared with the same period in 1997. The decrease in the per unit rate was primarily due to an increase in natural gas production as a percentage of total equivalent production (42% and 64% for the third quarters of 1997 and 1998, respectively) since a typical natural gas well produces with lower average lease operating costs per unit of production than a typical oil well. Production taxes. Production taxes increased 113% from $120,000 ($0.15 per Mcfe) for the third quarter of 1997 to $255,000 ($0.14 per Mcfe) for the third quarter of 1998 as a direct result of increased production volumes. The effective average production tax rate increased from 5.7% of natural gas and oil sales revenues to 6.1% for the third quarters of 1997 and 1998, respectively, due to the increase in natural gas production as a percentage of total equivalent production as natural gas is typically burdened with higher production tax rates than oil production. General and administrative expenses. General and administrative expenses increased 7% from $995,000 for the third quarter of 1997 to $1.1 million for the third quarter of 1998. On a per unit of production basis, general and administrative expenses decreased 55% from $1.27 per Mcfe for the third quarter of 1997 to $0.57 per Mcfe for the third quarter of 1998. Depletion of natural gas and oil properties. Depletion of natural gas and oil properties increased 137% from $713,000 ($0.91 per Mcfe) in the third quarter of 1997 to $1.7 million ($0.90 per Mcfe) in the third quarter of 1998. Of this net increase, $999,000 was due to the increase in production volumes, which was slightly offset by $24,000 due to a 1% decrease in the depletion rate. Interest expense. Net interest expense increased from $46,000 in the third quarter of 1997 to $1.9 million in the third quarter of 1998. This increase was primarily due to a higher average debt balance in the third quarter of 1998 as compared with the third quarter of 1997 resulting from increased capital expenditures related to the Company's exploration activities during the twelve months ended September 30, 1998. The weighted average outstanding debt balance increased from $2.4 million in the third quarter of 1997 to $71.6 million in the third quarter of 1998. Interest expense increased an additional $271,000 in the third quarter of 1998 compared to the same period in 1997 due to the non-cash amortization of deferred financing fees and debt discounts incurred in connection with the establishment of the Credit Facility in January 1998 and the issuance of the Notes in August 9 12 1998. Of these non-cash interest expenses, $197,000 related to the amortization of deferred financing fees and $74,000 related to the amortization of debt discount. The Company expects to continue to recognize deferred financing fees in the amounts of approximately $159,000 per quarter over the term of the Credit Facility which matures in January 2001 and approximately $90,000 per quarter over the term of the Notes which mature in August 2003. In connection with issuance of the Notes in August 1998, the Company recorded the Notes at a discount of $4.5 million to reflect the estimated value of the warrants to purchase common stock that were issued in connection with the issuance of the Notes. The Company will amortize this debt discount over the five-year term of the Notes based on the interest method of amortization and will include such amortization in interest expense. Comparison of nine month periods ended September 30, 1997 and September 30, 1998 Natural gas and oil sales. Natural gas and oil sales increased 90% from $6 million in the first nine months of 1997 to $11.3 million in the first nine months of 1998. Of this increase, $9.5 million was attributable to an increase in production, offset by $4.2 million attributable to a decrease in the average sales price for natural gas and oil. Production volumes for natural gas increased 299% from 788 MMcf in the first nine months of 1997 to 3,145 MMcf in the first nine months of 1998. The average price received for natural gas decreased 9% from $2.40 per Mcf in the first nine months of 1997 to $2.18 per Mcf in the first nine months of 1998. Production volumes for oil increased 70% from 203 MBbls in the first nine months of 1997 to 346 MBbls in the first nine months of 1998. The average price received for oil decreased 36% from $19.99 per Bbl in the first nine months of 1997 to $12.82 per Bbl in the first nine months of 1998. Natural gas and oil sales were increased by production from wells completed since September 30, 1997, partially offset by the natural decline of existing production, and from certain wells acquired from Ward Petroleum in Grady County, Oklahoma which were included in the Company's results of operations effective September 1, 1997. As a result of hedging activities, natural gas revenues increased $274,600, or $0.09 per Mcf, for the first nine months of 1998, compared to a decrease in oil revenues of $6,191, or $0.03 per Bbl, for the first nine months of 1997. Lease operating expenses. Lease operating expenses increased 96% from $787,000 in the first nine months of 1997 to $1.5 million in the first nine months of 1998, while, on a per unit of production basis, lease operating expenses for the same periods decreased 23% from $0.39 per Mcfe to $0.30 per Mcfe. The increase in lease operating expenses was primarily due to an increase in the number of producing wells for the first nine months of 1998 as compared with the same period in 1997. The decrease in the per unit rate was primarily due to an increase in natural gas production as a percentage of total equivalent production (39% and 60% for the first nine months of 1997 and 1998, respectively) since a typical natural gas well produces with lower average lease operating costs per unit of production than a typical oil well. Production taxes. Production taxes increased 108% from $339,000 ($0.17 per Mcfe) for the first nine months of 1997 to $705,000 ($0.14 per Mcfe) for the first nine months of 1998 as a direct result of increased production volumes. The effective average production tax rate increased from 5.7% of natural gas and oil sales revenues to 6.2% for the nine months ended 1997 and 1998, respectively, due to the increase in natural gas production as a percentage of total equivalent production as natural gas is typically burdened with higher production tax rates than oil production. General and administrative expenses. General and administrative expenses increased 37% from $2.5 million in the first nine months of 1997 to $3.4 million in the first nine months of 1998. This increase was primarily attributable to the hiring of additional employees to support the Company's increased level of operational activities. Additionally, office rent, other office expenses and costs related to the administration of a public corporation increased for the first nine months of 1998 as compared to the same period for 1997. On a per unit of production basis, general and administrative expenses decreased 48% from $1.22 per Mcfe for the first nine months of 1997 to $0.64 per Mcfe for the first nine months of 1998. Depletion of natural gas and oil properties. Depletion of natural gas and oil properties increased 112% from $2.1 million ($1.05 per Mcfe) in the first nine months of 1997 to $4.5 million ($0.86 per Mcfe) in the first nine months of 1998. Of this net increase, $3.4 million was due to the increase in production volumes, which was 10 13 offset by $1 million due to an 18% decrease in the depletion rate. The depletion rate per unit of production decreased due to the addition of natural gas and oil reserves at lower average capital costs. Interest expense. Net interest expense increased from $510,000 in the first nine months of 1997 to $4.3 million in the first nine months of 1998. This increase was primarily due to a higher average debt balance in the first nine months of 1998 as compared with the same period in 1997 resulting from the funding of increased capital expenditures related to the Company's exploration activities during the twelve months ended September 30, 1998. The weighted average outstanding debt balance increased from $9.5 million in the first nine months of 1997 to $58.1 million in the first nine months of 1998. Interest expense increased an additional $537,000 in the first nine months of 1998 compared to the same period in 1997 due to the non-cash amortization of deferred financing fees and debt discounts incurred in connection with the establishment of the Credit Facility in January 1998 and the issuance of the Notes in August 1998. Of these non-cash interest expenses, $463,000 related to the amortization of deferred financing fees and $74,000 related to the amortization of debt discounts. Liquidity and Capital Resources The Company's primary sources of capital have been debt borrowings (revolving credit facility and private placement debt), working capital, the sale of interests in projects and sales of equity. During May 1997, as described in Note 1 to the Condensed Consolidated Financial Statements included herein, the Company completed an initial public offering of common stock of the Company that generated proceeds of approximately $24 million, net of offering costs, that were used to repay all outstanding debt ($13.3 million) under the Company's then existing revolving credit facility and to fund capital expenditures. In August 1998, the Company issued $50 million of debt and equity securities, as described in Note 4 to the Condensed Consolidated Financial Statements included herein, that generated proceeds of approximately $47.5 million, net of offering costs, that were used to repay a portion of then outstanding borrowings under the Credit Facility, thereby increasing the Company's borrowing availability under its Credit Facility to fund capital expenditures. Cash Flow Analysis In the first nine months of 1998, cash flow provided by operations was $2.7 million primarily as a result of the net effects of increased natural gas and oil revenues, net of lease operating expenses, production taxes and general and administrative expenses, and increases in interest expenses and working capital components. Cash flow used in investing activities was $53.6 million in the first nine months of 1998 primarily as a result of capital expenditures related to exploration activities. Cash flow provided by financing activities was $50.5 million in the first nine months of 1998 primarily as a result of borrowings in excess of repayments under the Credit Facility, the issuance of the Notes and the issuance of $10 million of common stock to fund the difference between cash flow from operations and cash flow from investing activities. Revolving Credit Facility The Company's $75 million credit agreement (the "Credit Facility") has a current borrowing base of $65 million. On January 31, 1999, the Credit Facility borrowing base will be redetermined by the lenders based primarily on the Company's then proved reserve value. Principal outstanding under the Credit Facility is due at maturity on January 26, 2001 with interest due monthly for base rate traunches or periodically as Eurodollar traunches mature. The Company's obligations under the Credit Facility are secured by substantially all of the natural gas and oil properties of the Company. At November 10, 1998, the Company had $48 million in borrowings outstanding under the Credit Facility, which bear interest at an average annual rate of 7.6%. The Credit Facility has certain financial covenants including current and interest coverage ratios, as defined. Should the Company be unable to comply with certain of the financial covenants, its lender may be unwilling to waive noncompliance. In such instance, the Company's liquidity may be adversely affected, which could in turn have an adverse impact on the Company's future financial position and results of operations. The Company is currently in compliance with all such covenants and anticipates being in compliance in the foreseeable future. 11 14 Capital Expenditures The Company currently estimates that its net capital expenditures in 1998 will be approximately $59 million. The Company expects to incur these capital expenditures primarily to drill 90 gross (45 net) planned wells, to acquire approximately 1,300 gross (925 net) square miles of 3-D seismic and to continue to add to and upgrade its 3-D seismic interpretation hardware and software. The actual number of wells drilled, square miles acquired and costs incurred may differ significantly from these estimates. Due to the Company's active 3-D seismic acquisition and drilling programs, the Company has experienced and expects to continue to experience substantial working capital and capital expenditure requirements. The Company believes that cash flow from operations, borrowings under the Credit Facility and proceeds expected to be received from potential sales of interests in certain of its seismic projects will allow the Company to finance its operations at least through 1998 based on current conditions. However, the Company expects that additional financing will be required in the future to fund the Company's planned 3-D seismic acquisition and drilling programs in 1999. In the event additional financing is not available, the Company will be required to curtail these activities. Such curtailment may include a reduction of the number of wells drilled by the Company and the level of working interest retained by the Company in its 3D seismic projects. Year 2000 The Year 2000 issue stems from the way dates are recorded and computed in many computer systems because such programs use only the last two digits to indicate the year. If uncorrected, these computer programs will be unable to interpret dates beyond the year 1999, which could cause computer system failure or other computer errors, thereby disrupting operations. The Company has reviewed the effect of the Year 2000 issue relating to its information systems. The Company has determined that the Year 2000 issues directly related to its information systems will not have a material impact on its business, operations or its financial position. The Company is currently evaluating the potential impact third party noncompliance could have on its operations and is developing contingency plans which will be finalized in 1999. However, the Company cannot determine what effect, if any, the Year 2000 issues affecting its vendors, customers, other businesses and the numerous local, state, federal and other US governmental entities with which it conducts business or by which it is regulated or governed or taxed will have on its business or financial position. The Company is expensing as incurred all costs related to the assessment and remediation of the Year 2000 issue. These costs are being funded through operating cash flow and are not material to the Company's consolidated financial condition or results of operations. Forward Looking Information The Company may make forward looking statements, oral or written, including statements in this report, press releases and other filings with the SEC, relating to the Company's drilling plans, its potential drilling locations, capital expenditures, use of offering proceeds, the ability of expected sources of liquidity to support working capital and capital expenditure requirements and the Company's financial position, business strategy and other plans and objectives for future operations. Such statements involve risks and uncertainties, including those relating to the Company's dependence on exploratory drilling activities, the volatility of natural gas and oil prices, the risks associated with growth (including the risk of reduced availability of seismic gathering and drilling services in the face of growing demand), the substantial capital requirements of the Company's exploration and development projects, operating hazards and uninsured risks and other factors detailed in the Company's registration statement and other filings with the SEC. All subsequent oral and written forward looking statements attributable to the Company are expressly qualified in their entirety by these factors. The Company assumes no obligation to update these statements. 12 15 PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto, duly authorized, in the City of Austin, State of Texas, on the 11th day of November, 1998. BRIGHAM EXPLORATION COMPANY By: /s/ BEN M. BRIGHAM -------------------------- Ben M. Brigham Chief Executive Officer, President and Chairman of the Board By: /s/ CRAIG M. FLEMING -------------------------- Craig M. Fleming Chief Financial Officer 13 16
SEQUENTIALLY EXHIBIT NUMBERED NO. INDEX TO EXHIBITS PAGE ------- ----------------- ------------ 27 Financial Data Schedule Tabbed by Exhibit No.
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1,251 0 8,107 0 0 9,712 135,340 0 148,801 20,153 0 0 0 133 55,303 148,801 11,292 11,614 0 2,247 8,361 0 4,297 (3,291) (1,112) (2,179) 0 0 0 (2,179) (.18) (.18)
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