-----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, MERDW1XFhl+J9S4vkK4tspci9VcTaAU6Y60Ya5Ms5rafrIHu+F14fN76TVrm/2pO w9/wU6ROE115TwXMaeY3vg== 0000950134-99-002376.txt : 19990402 0000950134-99-002376.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950134-99-002376 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K SEC ACT: SEC FILE NUMBER: 000-22433 FILM NUMBER: 99581464 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-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1998 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 10-K ------------------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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: BRIGHAM EXPLORATION COMPANY (Exact name of Registrant as Specified in its Charter) DELAWARE 75-2692967 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6300 BRIDGE POINT PARKWAY BUILDING 2, SUITE 500 78730 AUSTIN, TEXAS (Zip Code) (Address of principal executive offices) (512) 427-3300 (Registrant's telephone number, including area code) --------------- Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ None None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of Class) 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 12 months (or for 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 26, 1999, the Registrant had outstanding 13,306,206 shares of Common Stock. The aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on March 26, 1999, as reported on The Nasdaq Stock Market(sm), was approximately $18 million. Pursuant to Rule 12b-25 under the Act, (1) combined financial statements of the Registrant's subsidiaries whose securities are pledged as collateral for the Registrant's Senior Subordinated Secured Notes and (2) certain exhibits have been omitted from this Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the Registrant's 1999 Annual Meeting of Stockholders to be held on May 13, 1999, are incorporated by reference in Part III of this Form 10-K. Such definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to December 31, 1998. ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. BUSINESS.......................................................................1 ITEM 2. PROPERTIES.....................................................................9 ITEM 3. LEGAL PROCEEDINGS.............................................................18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS............................18 EXECUTIVE OFFICERS OF THE REGISTRANT.......................................................19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........................................................20 ITEM 6. SELECTED FINANCIAL DATA.......................................................21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................................................22 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......................................................39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................40 ITEM 11. EXECUTIVE COMPENSATION........................................................40 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................................40 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS..........................40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...............41 GLOSSARY OF OIL AND GAS TERMS..............................................................47 SIGNATURES.................................................................................51 INDEX TO FINANCIAL STATEMENTS............................................................F1-1
- i - 3 BRIGHAM EXPLORATION COMPANY 1998 ANNUAL REPORT ON FORM 10-K PART I ITEM 1. BUSINESS OVERVIEW Brigham Exploration Company ("Brigham" or the "Company") is an independent exploration and production company that applies 3-D seismic imaging and other advanced technologies to systematically explore and develop onshore oil and natural gas provinces in the United States. The Company focuses its 3-D seismic activity in provinces where it believes 3-D technology may be effectively applied to generate relatively large potential reserve volumes per well and per field, high potential production rates and multiple producing objectives. The Company's exploration activities are concentrated primarily in three core provinces: the Anadarko Basin of western Oklahoma and the Texas Panhandle; the onshore Gulf Coast of south Texas and, to a lesser extent, the transition zone of Louisiana; and West Texas. The Company pioneered the acquisition of large scale onshore 3-D seismic surveys for exploration, obtaining extensive 3-D seismic data and experience in capturing undiscovered oil and natural gas reserves. As of December 31, 1998, Brigham has acquired 5,236 square miles (3.3 million acres) of 3-D seismic data and has identified an estimated 1,140 potential drilling locations, of which the Company has drilled 442. The Company generates most of its exploratory projects and, therefore, has the ability to retain a sizeable working interest to the extent that it decides not to place interests with industry participants. From inception in 1990 through 1998, Brigham has drilled 378 exploratory and 64 development wells on its 3-D generated prospects with an aggregate 64% success rate and an average working interest of 29%. As of December 31, 1998, the Company has added 114 Bcfe of net proved reserves to its reserve base, approximately 92 net Bcfe of which were discovered by Brigham through its systematic 3-D exploration drilling activities at an average net drilling cost of $0.82 per Mcfe. The Company's estimated net proved reserves as of December 31, 1998 were 97.8 Bcfe having an aggregate Present Value of Future Net Revenues of $81.7 million, compared to estimated net proved reserves as of December 31, 1996 of 21.9 Bcfe having an aggregate Present Value of Future Net Revenues of $44.5 million. The Company's net proved reserve volumes at December 31, 1998 are 73% natural gas and 57% proved developed reserves. BUSINESS STRATEGY Brigham's principal objective and business strategy is to achieve superior growth in shareholder value through the application of its systematic exploration approach, which emphasizes the integrated use of 3-D seismic imaging and other advanced technologies to reduce drilling risks and finding costs. Since its inception in 1990, the Company has achieved rapid growth in its acquisition of 3-D seismic data, identification of potential drilling locations, discovery of proved reserves and production volumes. Brigham completed its initial public offering of common stock in May 1997, raising approximately $24 million to fund the Company's accelerated 3-D seismic acquisition and exploration drilling activities. Key elements of the Company's long-term growth strategy at its initial public offering and continuing today include: (i) acquiring 3-D seismic data in proven producing trends to identify and capture potential drilling locations; (ii) retaining significant working interests in its exploration projects to capture a greater share of the reserves that the Company discovers; (iii) identifying higher potential, higher impact prospects; and (iv) monetizing the value of its 3-D seismic investments by drilling its inventory of 3-D seismic delineated locations. - 1 - 4 Since its initial public offering in early 1997, Brigham has been effective in the implementation of its long-term growth strategy. During 1997 and 1998, the Company acquired 2,475 square miles of 3-D seismic data at an average working interest of 73%, which nearly doubled its inventory of gross onshore 3-D seismic data to 5,236 square miles as compared to year-end 1996 and increased its net onshore 3-D seismic data in inventory more than three-fold from 780 square miles at year-end 1996 to 2,590 square miles at year-end 1998. Brigham's overall level of 3-D seismic acquisition during the past two years represents the most active in the Company's history, and 90% of the recently acquired data is located in Brigham's higher potential Anadarko Basin and Gulf Coast provinces where it has achieved historically lower finding costs for drilling than in its West Texas province. As a result of these significant investments in 3-D seismic acquisition and interpretation in proven natural gas producing trends, the Company believes it has assembled a significant competitive knowledge base and strategic position in each of its two active exploration provinces. Brigham further believes it has captured a high quality inventory of 3-D delineated potential drilling locations that can be monetized through the drillbit at profitable finding costs over the next several years, thereby providing opportunities for future reserve, production and cash flow growth. Brigham has substantially reduced its planned capital expenditure budget for 1999 and has undertaken a number of strategic initiatives in an effort to improve and preserve its capital liquidity in the current environment. While the Company remains focused on its long-term growth objectives and the continuation of its established business model for 3-D seismic-based exploration, Brigham has adapted its business strategy in the near-term in an effort to maximize value for its shareholders on a long-term basis through the implementation of the following principal strategic initiatives: (i) focusing all of the Company's planned exploration efforts in 1999 toward the drilling of its highest- grade 3-D prospects identified in its Anadarko Basin and Gulf Coast projects, concentrated primarily in trends where Brigham has achieved exploration success, (ii) eliminating substantially all planned seismic and land expenditures for new projects until its capital resources can support such additional activity, (iii) seeking to divest certain producing natural gas and oil properties in an effort to raise capital to reduce debt borrowings and to redirect capital to drilling projects that have the potential to generate higher investment returns, (iv) restructuring its outstanding senior and subordinated debt agreements to provide the Company with flexibility needed to preserve cash flow to fund its expected near-term exploration activities, (v) implementing an overhead reduction plan to reduce general and administrative expenses, and (vi) evaluating opportunities to raise additional equity capital either through the sales of interests in certain of its seismic projects or the issuance of equity securities. The Company believes that the successful execution of these strategic initiatives will provide Brigham with sufficient capital resources to execute its planned 1999 exploration program and position the Company to realize the significant value it believes it has captured in its inventory of 3-D seismic projects and delineated drilling locations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Operating Results -- Liquidity" and "-- Capital Resources." EXPLORATION AND OPERATING APPROACH The Company has acquired 3-D seismic data covering 5,236 square miles (3.3 million acres) in over 20 geologic trends in seven basins and seven states. Through this activity, the Company has developed expertise in the selection of geologic trends that are suitable for 3-D seismic exploration. Brigham uses experience that it gains within a trend to enhance the quality of subsequent projects in the same trend and other analogous trends, contributing to lower finding and development costs, compressed project cycle times and increased project rates of return. The Company typically acquires 3-D seismic data in and around existing production where the Company can benefit from the imaging of producing analogs. These 3-D defined analogs, combined with the Company's experience in drilling 442 wells, provide the Company with a knowledge base to evaluate other potential geologic trends, 3-D seismic projects within trends and 3-D delineated potential drilling locations. The Company's knowledge base assists in identifying geologic trends where Brigham believes it can find and develop economic volumes of oil and natural gas. The Company has experience exploring with 3-D seismic in a wide range of reservoir types and geologic trapping styles, both stratigraphic and structural (including reefs, salt domes, channel sands, complex faulted and fractured reservoirs and pinchout plays). The Company seeks to supplement its knowledge base with the best local geologic expertise available for a particular geologic trend. In addition, the Company typically acquires digital data bases for - 2 - 5 integration on the Company's CAEX workstations, including digital land grids, well information, log curves, production information, geologic studies, geologic top data bases and existing 2-D seismic data. The Company uses its knowledge base, local geological expertise and digital data bases integrated with 3-D seismic to create maps of producing and potentially productive reservoirs. The Company believes its 3-D generated maps are more accurate than previous reservoir maps (which generally were based on subsurface geological information and 2-D seismic surveys), enabling the Company to more precisely evaluate recoverable reserves and the economic feasibility of projects and drilling locations. Brigham acquires most of its raw 3-D seismic data using seismic acquisition vendors on either a proprietary basis or through alliances affording it the exclusive right to interpret and use data for extended periods of time. In addition, the Company participates in non-proprietary group shoots of 3-D data when it believes the expected full cycle project economics are justified. In its proprietary acquisitions and alliances, Brigham selects the sites of projects, primarily guided by its knowledge and experience in the core provinces it explores; establishes and monitors the seismic parameters of each project for which data is shot; and typically selects the equipment that will be used. Data is generally priced on the basis of square miles shot. See "Item 1. Business -- Industry Alliances." EXPLORATION STAFF Over the last eight years the Company has assembled an exploration staff that includes ten geophysicists, ten geologists, four petroleum engineers, five computer applications specialists, five geophysical/geological/engineering technicians, six landmen and six lease and division order analysts. Brigham's ten geophysicists have different but complementary backgrounds, and their diversity of experience in varied geological and geophysical settings, combined with various technical specializations (from hardware and systems to software and seismic data processing), provide the Company with valuable technical intellectual resources. The Company's team of explorationists has over 310 years of exploration experience and more than 85 years of 3-D CAEX workstation experience, most of which was acquired at Brigham and various major and large independent oil companies. Occasionally, the Company complements and leverages its exploration staff by seeking out alliances or retainer relationships with geologists having extensive experience in a particular area of interest. 3-D SEISMIC TECHNOLOGY The Company's strategy is to use 3-D seismic and other advanced technologies, including CAEX, to systematically explore and develop domestic onshore oil and natural gas provinces. In general, 3-D seismic is the process of acquiring seismic data along multiple lines and grids. The primary advantage of 3-D seismic over 2-D seismic is that it provides information with respect to multiple horizontal and vertical points within a geologic formation instead of information on a single vertical line or multiple vertical lines within the formation. Acquiring larger amounts of data relating to a geologic formation allows a user to better correlate the data and, in some cases, obtain a greater understanding and image of the formation. Although it is impossible to predict with certainty the specific configuration or composition of any underground geologic formation, the use of 3-D seismic data provides clearer and more accurate projected images of complex geologic formations, which can assist a user in evaluating whether to drill for oil and natural gas reserves. If a decision to drill is made, 3-D seismic data can also help in determining the optimal location to drill. CAEX is the process of accumulating and analyzing the various seismic, production and other data obtained relating to a geographic area. In general, CAEX involves accumulating various 2-D and 3-D seismic data with respect to a potential drilling location, correlating that data with historical well control and production data from similar properties and analyzing the available data through computer programs and modeling techniques to project the likely geologic composition of a potential drilling location and potential locations of undiscovered oil and natural gas reserves. This process relies on a comparison of data with respect to the potential drilling location and historical data with respect to the density and sonic characteristics of different types of rock formations, hydrocarbons and other subsurface minerals, resulting in a projected three dimensional image of the subsurface. This modeling is performed through the use of advanced interactive computer workstations and various combinations of available computer programs that have been developed solely for this application. - 3 - 6 Brigham has invested extensively in the advanced computer hardware and software necessary for 3-D seismic exploration. The Company has both Landmark and Geoquest CAEX workstations. This workstation flexibility provides the Company the opportunity to interpret a project on the particular CAEX workstation that it believes is best suited for defining those particular geologic objectives. Brigham's explorationists can access a diverse software tool kit including SeisWorks, StratWorks, EarthCube, OpenVision, Open Explorer, ZAP, Zmap+, ARIES, SynTool, Poststack, TDQ, AutoPix, MapView, GeoViz, Voxels, SynView, CSA (Computed Seismic Attributes), Surface Slice, Hampson -- Russell AVO Analysis and Modeling and ZEH Graphics CGMage Builder (graphics montage tool). The Company believes that its use of 3-D seismic technology provides it with a number of benefits in the exploration, delineation and development process that are not generally available to those who only use 2-D seismic data and conventional processing methods. In particular, the Company believes that it obtains clearer and more accurate projected images of underground formations through computer modeling, and is therefore better able to identify potential locations of hydrocarbon accumulations based on the characteristics of the formations and analogies made with nearby fields and formations where hydrocarbons have been found. This enhanced data has been used to assist the Company in eliminating potential drilling locations that might otherwise have been drilled had the Company relied solely on 2-D seismic data. This data has also been used to assist the Company in attempting to identify the most desirable location for the wellbore to increase the prospects of a successful exploratory or development well and production from the reservoir. INDUSTRY ALLIANCES Veritas Anadarko Basin Acquisition Alliances. Pursuant to certain alliances with Veritas DGC Land Ltd. ("Veritas"), Brigham has acquired approximately 1,460 square miles of 3-D seismic in the Anadarko Basin through December 31, 1998 and has agreed to acquire from 165 to 265 additional square miles of data to be divided among individual projects in that province. In exchange for the Company's commitment to Veritas, the Company and its assignees only pay a portion of the 3-D seismic acquisition costs as the data is acquired. As the Company leases acreage or drills wells, it pays Veritas the balance of the deferred costs in the form of leasing and drilling fees until such deferred costs are repaid or until certain time periods have occurred. In addition, in the event that the outstanding balance of deferred seismic acquisition costs exceeds certain threshold amounts, the Company must pre-pay part of the leasing and drilling fees to cause the outstanding balance to fall below the current threshold amount. These arrangements afford the Company access to 3-D seismic acquisition in a compressed cycle time, providing the Company with significant operational efficiencies. In addition, Veritas Geoservices, Ltd. provides employees that maintain and operate seismic data processing workstations in Brigham's offices. Supervised by Brigham's geophysicists, the vendor's employees process most of the Company's 3-D seismic. The associated improvement in communication and integration, from field data acquisition to processing, reduces project cycle times, and therefore costs, while improving the quality of the data for Brigham's subsequent interpretation. Anadarko Basin Alliance I. The Company has entered into alliances with Vintage Petroleum, Inc. ("Vintage") and Stephens Production Company ("Stephens") which provided for their participation with Brigham in all of the projects that the Company conducted within a 625 square mile 3-D seismic program that was completed in 1997 with Veritas in the Anadarko Basin. Vintage and Stephens incurred a disproportionate share of all pre-seismic and certain seismic costs on all projects in the program. Net of the interests of Vintage and Stephens, the Company holds a 37.5% interest in the program. The Company believes that this leveraging of its costs was possible because of the expertise and knowledge that the Company has developed, enabling the Company to build its revenue and cash flow base at a time when it has been capital constrained. Anadarko Basin Alliance II. Upon completion of data acquisition in its Alliance I program, Brigham began acquiring 3-D seismic under a second alliance with Veritas in the Anadarko Basin. From August 1997 through November 1998, the Company acquired approximately 835 square miles of 3-D seismic under this alliance with a 100% working interest. Pursuant to the terms of its acquisition agreement with Veritas, Brigham ceased acquisition of 3-D seismic data in the Alliance II program in early November 1998, and the Company will consider acquiring the balance of the data contemplated in this program when it determines that its capital resources are sufficient to incur such - 4 - 7 expenditures. The Company currently intends to retain a majority working interest in its Alliance II seismic projects subsequent to the sale and potential future sales of a portion of its working interests in certain of these projects. See "-- Duke Project Financing." Carry-to-Casing Point Programs. From 1996 through 1998, Brigham has entered into annual agreements with certain industry parties to participate in all of the wells drilled by the Company during the term of the agreement on a promoted drilling cost basis. For example, in order to participate in wells drilled by the Company between April 1, 1998 and March 31, 1999, Gasco Limited Partnership ("Gasco") agreed to fund 8% of the Company's drilling costs and 4% of its completion costs for each well. In return, the Company agreed to assign to Gasco an undivided 4% of the Company's interest in the leasehold allocated to the production unit for each completed well. As a result, the Company pays for 92% of costs attributable to its working interest to casing point, and 96% of its completion costs, for 96% of its original working interest for each well funded during the term of the agreement. Brigham entered into a carry-to-casing point agreement in late 1998 with a major drilling contractor to participate in four wells drilled by the Company. Pursuant to the agreement, the drilling contractor agreed to fund 25% of the Company's drilling costs and 12.5% of its completion costs for each of these four wells. In return, the Company agreed to utilize the drilling contractor's services for the drilling of the wells and to assign to the drilling contractor an undivided 12.5% of the Company's interest in the leasehold allocated to the production unit for each completed well. As a result, the Company pays for 75% of costs attributable to its working interest to casing point, and 87.5% of its completion costs, for 87.5% of its original working interest for each well drilled under the agreement. Brigham is currently in discussions with the drilling contractor to extend this arrangement to provide for the participation in all of the wells spud by the Company over an annual term. However, there can be no assurance that such an arrangement will be reached or that the terms of any such arrangement will not differ from those in its prior agreements. The Company believes that current industry conditions have provided it with the opportunity to seek such arrangements with industry service providers to fund a portion of its capital expenditures in exchange for service commitments with such providers at competitive prices. The Company believes that its carry-to-casing point agreements have been beneficial because they have allowed the Company to leverage its working interests in its properties by requiring it to bear a disproportionately smaller share of drilling costs, thereby enhancing its returns on drilling capital investments. Depending on future conditions, the Company may seek to enter into similar types of arrangements with industry or financial participants. To the extent that the Company does seek to enter into such future arrangements, the terms of these arrangements, including the percentages of costs borne and interests assigned, may vary from those in the Company's past and present arrangements. Duke Project Financing. In February 1999, the Company entered into a project financing arrangement with Duke Energy Financial Services, Inc. ("Duke") to fund the continued exploration of five projects covered by approximately 200 square miles of 3-D seismic data acquired in 1998 as part of its Anadarko Basin Alliance II program. In this transaction, the Company conveyed 100% of its working interest (land and seismic) in these project areas to a newly formed limited liability company (the "Duke LLC") for total consideration of $10 million. The Company is the managing member of the Duke LLC with a 1% interest, and Duke is the sole remaining member with a 99% interest. Pursuant to the terms of the Duke LLC agreement, Brigham pays 100% of the drilling and completion costs for all wells drilled by the Duke LLC within the designated project areas in exchange for a 70% working interest in the wells (and their allocable drilling and spacing units), with the remaining 30% working interest remaining in the Duke LLC, subject in each instance to proportionate reduction by any ownership rights held by third parties. Upon 100% project payout, the Company has the right to back-in for 80% of the Duke LLC's working interest in all of the then producing wells (and their allocable drilling and spacing units) and a 96% working interest in any wells (and their allocable drilling and spacing units) drilled after payout within the designated project areas governed by the Duke LLC agreement, thereby increasing the Company's effective working interest in the Duke LLC wells from 70% to 94%. The Company believes this project financing arrangement to be beneficial as it enabled Brigham to recoup substantially all of its pre-seismic land and seismic data acquisition costs incurred in these project areas and provided capital to drill the first six wells within these projects. - 5 - 8 NATURAL GAS AND OIL MARKETING AND MAJOR CUSTOMERS Most of the Company's natural gas and oil production is sold under price sensitive or spot market contracts. The revenues generated by the Company's operations are highly dependent upon the prices of and demand for natural gas and oil. The price received by the Company for its natural gas and oil production depends on numerous factors beyond the Company's control, including seasonality, competition, the condition of the United States economy, foreign imports, political conditions in other oil-producing and natural gas-producing countries, the actions of the Organization of Petroleum Exporting Countries, and domestic government regulation, legislation and policies. Decreases in the prices of natural gas and oil could have an adverse effect on the carrying value of the Company's proved reserves and the Company's revenues, profitability and cash flow. Although the Company is not currently experiencing any significant involuntary curtailment of its natural gas or oil production, market, economic and regulatory factors may in the future materially affect the Company's ability to sell its natural gas or oil production. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", "--Risk Factors - -- Volatility of Natural Gas and Oil Prices" and "--Risk Factors -- Marketability of Production." For the year ended December 31, 1998, sales to Highland Energy Company, Ward Petroleum Corporation, Lantern Petroleum Corporation and Louis Dreyfus Natural Gas Corporation were approximately 25%, 15%, 11% and 11%, respectively, of the Company's natural gas and oil revenues. Due to the availability of other markets and pipeline connections, the Company does not believe that the loss of any single natural gas or oil customer would have a material adverse effect on the Company's results of operations. COMPETITION The oil and gas industry is highly competitive in all of its phases. The Company encounters competition from other oil and gas companies in all areas of its operations, including the acquisition of seismic and leasing options and oil and natural gas leases on properties. The Company's competitors include major integrated oil and natural gas companies and numerous independent oil and natural gas companies, individuals and drilling and income programs. Many of its competitors are large, well established companies with substantially larger operating staffs and greater capital resources than the Company's. Such companies may be able to pay more for seismic and lease options on oil and natural gas properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than the Company's financial or human resources permit. The Company's ability to acquire additional properties and to discover reserves in the future will be dependent upon its ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. See "Item 7. Management's Discussion and Analysis of Risk Factors -- Competition" and "-- Risk Factors -- Substantial Capital Requirements." OPERATING HAZARDS AND UNINSURED RISKS Drilling activities are subject to many risks, including the risk that no commercially productive reservoirs will be encountered. There can be no assurance that new wells drilled by the Company will be productive or that the Company will recover all or any portion of its investment. Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. The cost of drilling, completing and operating wells is often uncertain. The Company's drilling operations may be curtailed, delayed or canceled as a result of numerous factors, many of which are beyond the Company's control, including title problems, weather conditions, compliance with governmental requirements and shortages or delays in the delivery of equipment and services. The Company's future drilling activities may not be successful and, if unsuccessful, such failure may have a material adverse effect on the Company's business, financial condition or results of operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Dependence on Exploratory Drilling Activities." In addition, use of 3-D seismic technology requires greater pre-drilling expenditures than traditional drilling strategies. Although the Company believes that its use of 3-D seismic technology will increase the probability of drilling success, some unsuccessful wells are likely, and there can be no assurance unsuccessful drilling efforts will not have a material adverse effect on the Company's business, financial condition or results of operations. - 6 - 9 The Company's operations are subject to hazards and risks inherent in drilling for and producing and transporting oil and natural gas, such as fires, natural disasters, explosions, encountering formations with abnormal pressures, blowouts, cratering, pipeline ruptures and spills, any of which can result in the loss of hydrocarbons, environmental pollution, personal injury claims and other damage to properties of the Company and others. The Company maintains insurance against some but not all of the risks described above. In particular, the insurance maintained by the Company does not cover claims relating to failure of title to oil and natural gas leases, trespass during 3-D survey acquisition or surface change attributable to seismic operations, business interruption or loss of revenues due to well failure. In certain circumstances in which insurance is available the Company may not purchase it. The occurrence of an event that is not covered, or not fully covered, by insurance could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES On March 26, 1999, the Company had 66 full-time employees. None is represented by any labor union. The Company believes its relations with its employees are good. The Company also relies on several regional consulting service companies to provide field landmen to support the Company on a project-by-project basis. One of these companies, Brigham Land Management, is owned by Vincent M. Brigham, who is the brother of Ben M. Brigham, the Company's Chief Executive Officer, President and Chairman of the Board. FACILITIES The Company's principal executive offices are located in Austin, Texas, where it leases approximately 34,330 square feet of office space at 6300 Bridge Point Parkway, Building 2, Suite 500, Austin, Texas 78730. The Company also leases a 4,100 square foot office at 450 Gears Road, Suite 240, Houston, Texas 77067. TITLE TO PROPERTIES The Company believes it has satisfactory title, in all material respects, to substantially all of its producing properties in accordance with standards generally accepted in the oil and gas industry. The Company's properties are subject to royalty interests, standard liens incident to operating agreements, liens for current taxes and other inchoate burdens which the Company believes do not materially interfere with the use of or affect the value of such properties. The Company's Credit Facility (as defined) is secured by a first lien against substantially all of the Company's oil and natural gas properties and other tangible assets, and the Company's Subordinated Notes (as defined) are secured by a second lien against all collateral pledged by the Company as security under its Credit Facility. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." GOVERNMENTAL REGULATION The Company's oil and natural gas exploration, production and marketing activities are subject to extensive laws, rules and regulations promulgated by federal and state legislatures and agencies. Failure to comply with such laws, rules and regulations can result in substantial penalties. The legislative and regulatory burden on the oil and gas industry increases the Company's cost of doing business and affects its profitability. Although the Company believes it is in substantial compliance with all applicable laws and regulations, because those laws and regulations are frequently amended, interpreted and reinterpreted, the Company is unable to predict the future cost or impact of complying with such laws and regulations. The State of Texas and many other states require permits for drilling operations, drilling bonds and reports concerning operations and impose other requirements relating to the exploration and production of natural gas and oil. These states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of natural gas and oil properties, the establishment of maximum rates of production from wells and the regulation of spacing, plugging and abandonment of such wells. - 7 - 10 ENVIRONMENTAL MATTERS The Company's operations and properties are, like the oil and gas industry in general, subject to extensive and changing federal, state and local laws and regulations relating to environmental protection, including the generation, storage, handling, emission, transportation and discharge of materials into the environment, and relating to safety and health. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue. These laws and regulations may require the acquisition of a permit or other authorization before construction or drilling commences and for certain other activities; limit or prohibit seismic acquisition, construction, drilling and other activities on certain lands lying within wilderness and other protected areas; and impose substantial liabilities for pollution resulting from the Company's operations. The permits required for various of the Company's operations are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violations are subject to fines or injunction, or both. In the opinion of management, the Company is in substantial compliance with current applicable environmental laws and regulations, and the Company has no material commitments for capital expenditures to comply with existing environmental requirements. Nevertheless, changes in existing environmental laws and regulations or in interpretations thereof could have a significant impact on the Company, as well as the oil and gas industry in general. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and comparable state statutes impose strict and arguably joint and several liability on owners and operators of certain sites and on persons who disposed of or arranged for the disposal of "hazardous substances" found at such sites. It is not uncommon for the neighboring land owners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. The Resource Conservation and Recovery Act ("RCRA") and comparable state statutes govern the disposal of "solid waste" and "hazardous waste" and authorize imposition of substantial fines and penalties for noncompliance. Although CERCLA currently excludes petroleum from its definition of "hazardous substance," state laws affecting the Company's operations impose clean-up liability relating to petroleum and petroleum related products. In addition, although RCRA classifies certain oil field wastes as "non-hazardous," such exploration and production wastes could be reclassified as hazardous wastes thereby making such wastes subject to more stringent handling and disposal requirements. Federal regulations require certain owners or operators of facilities that store or otherwise handle oil, such as the Company, to prepare and implement spill prevention, control countermeasure and response plans relating to the possible discharge of oil into surface waters. The Oil Pollution Act of 1990 ("OPA") contains numerous requirements relating to the prevention of and response to oil spills into waters of the United States. For onshore and offshore facilities that may affect waters of the United States, the OPA requires an operator to demonstrate financial responsibility. Regulations are currently being developed under federal and state laws concerning oil pollution prevention and other matters that may impose additional regulatory burdens on the Company. In addition, the Clean Water Act and analogous state laws require permits to be obtained to authorize discharge into surface waters or to construct facilities in wetland areas. With respect to certain of its operations, the Company is required to maintain such permits or meet general permit requirements. The Environmental Protection Agency ("EPA") recently adopted regulations concerning discharges of storm water runoff. This program requires covered facilities to obtain individual permits, participate in a group or seek coverage under an EPA general permit. The Company believes that it will be able to obtain, or be included under, such permits, where necessary, and to make minor modifications to existing facilities and operations that would not have a material effect on the Company. The Company has acquired leasehold interests in numerous properties that for many years have produced natural gas and oil. Although the Company believes that the previous owners of these interests have used operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties. In addition, some of the Company's properties are operated by third parties over whom the Company has no control. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Matters" and "-- Risk Factors -- Compliance with Environmental Regulations." - 8 - 11 ITEM 2. PROPERTIES PRIMARY EXPLORATION PROVINCES Brigham focuses its 3-D seismic exploration efforts in natural gas and oil producing provinces where it believes 3-D technology may be effectively applied to generate relatively large potential reserve volumes per well and per field, high potential production rates and multiple producing objectives. Brigham's exploration activities are concentrated primarily in three core provinces: the Anadarko Basin of western Oklahoma and the Texas Panhandle; the onshore Gulf Coast of south Texas and, to a lesser extent, the transition zone of Louisiana; and West Texas. Brigham is concentrating substantially all of its current 3-D seismic and drilling activities on its natural gas projects in its Anadarko Basin and Gulf Coast provinces primarily due to the continuation of historically low oil prices which has made its inventory of potential drilling locations in its West Texas province less economically attractive. Brigham has made significant investments in 3-D seismic and prospective acreage in its Anadarko Basin and Gulf Coast provinces during the past three years. Through these investments, the Company believes it has assembled an inventory of potential drilling locations that will support a multi-year drilling program, thereby providing attractive opportunities for long-term growth. Based upon the interpreted portion of its 3-D seismic data as of December 31, 1998, the Company estimates that it has identified approximately 700 potential undrilled locations within its three core exploration provinces. From inception in 1990 through 1998, Brigham has achieved net drilling costs of $0.82 per Mcfe added through its 3-D seismic exploration efforts. In addition, over 500 of Brigham's estimated potential drilling locations are in its currently active Anadarko Basin and Gulf Coast provinces where the Company has achieved inception-to-date net drilling costs of $0.68 and $0.59 per Mcfe, respectively. Furthermore, the Company estimates that approximately 800 square miles of its 1,213 total square miles of 3-D seismic data acquired in 1998 had either not been interpreted or only partially interpreted at December 31, 1998, which should provide additional potential drilling locations. As a result of the Company's substantial investments to identify potential drilling locations and its currently limited capital resources, Brigham intends to devote substantially all of its efforts and available capital resources in 1999 to the drilling and monetization of its highest grade prospects identified or to be identified from its over 5,000 square mile inventory of 3-D seismic data. The Company's current 1999 capital budget is estimated to be $17.5 million, which represents a significant reduction from 1998 expenditures and its previously anticipated 1999 levels in an effort to match Brigham's current and expected future capital resources. The Company's budgeted 1999 capital expenditures consist of approximately $10 million to drill an estimated 20 to 25 gross wells, $3.5 million for seismic and land costs (primarily previous commitments and obligations to acquire 3-D data and acreage), and $4 million for capitalized general and administrative expenses and other fixed asset expenditures. Brigham expects that its 1999 drilling expenditures will be allocated approximately 50% to its Anadarko Basin province and 50% to its Gulf Coast province, and such expenditures will be devoted to the drilling of the highest grade prospects in the Company's inventory of identified potential drilling locations. Additionally, Brigham's 1999 drilling program will be concentrated within trends where the Company has experienced exploration success to date. Management believes that the Company has an attractive opportunity to profitably drill its highest grade 3-D delineated locations due to its historical drilling costs and the currently low cost drilling environment. Therefore, management's goal is to access additional capital to further monetize its prospect inventory. As a result, the Company's actual capital expenditures in 1999 may differ significantly from these estimates based upon capital availability during the year. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity" and "-- Capital Resources". Although the Company is interpreting 3-D seismic data within the provinces discussed below and has identified an estimated 700 potential drilling locations yet to be drilled in those provinces, there can be no assurance that any of the remaining seismic data will be interpreted or will generate additional drilling locations or that any potential drilling locations will be drilled at all or within the expected time frame. The final determination with respect to the drilling of any well, including those currently budgeted, will depend on a number of factors, including (i) the results of exploration efforts and the review and analysis of the seismic data, (ii) the availability of sufficient capital resources by the Company and other participants for drilling prospects, (iii) economic and industry conditions at the time of drilling, including prevailing and anticipated prices for oil and natural gas and the availability of drilling rigs and crews, (iv) the financial resources and results of the Company and (v) the availability of leases on reasonable terms - 9 - 12 and permitting for the potential drilling location. There can be no assurance that the budgeted wells will, if drilled, encounter reservoirs of commercial quantities of natural gas or oil. Anadarko Basin The Anadarko Basin is a prolific natural gas province that the Company believes offers a combination of lower risk exploration and development opportunities in shallower horizons and deeper, higher potential objectives that have been relatively under explored. This province has produced in excess of 90 Tcfe to date from numerous, historically elusive stratigraphic targets, such as the Red Fork, Upper Morrow and Springer channel sands, as well as from deeper, higher potential structural objectives, such the Lower Morrow sandstones and the Hunton and Arbuckle carbonates. In some cases, these objectives have produced in excess of 30 Bcf of natural gas from a single well at rates of up to 30 MMcf of natural gas per day. In addition, drilling economics in the Anadarko Basin are enhanced by the multi-pay nature of many of the prospects in this province, with secondary or tertiary targets serving as either incremental value or bailout potential relative to the primary target zone. Each of the stratigraphic and structural objectives in the Anadarko Basin can provide excellent targets for 3-D seismic imaging. The Company has assembled an extensive digital data base in this province, including geologic studies, basin wide geologic tops, production data, well data, geographic data and over 8,400 miles of 2-D seismic data. Working with its team of in-house geologists and supplemented by consulting geologists, the Company's explorationists integrate this data with their extensive expertise and knowledge base to generate 3-D projects in the Anadarko Basin. Following its initial 3-D seismic acquisition in the province in 1991 (12.5 square miles), the Company acquired 51 square miles of 3-D seismic in the Anadarko Basin in 1993. Over the last several years the Company has accelerated its activity in the Anadarko Basin, acquiring 151 square miles of 3-D seismic in 1994, 195 square miles in 1995, 457 square miles in 1996, 675 square miles in 1997 and 583 square miles in 1998. The Company retained a 75% average working interest in its 1997 and 1998 Anadarko Basin 3-D seismic projects which consisted of an aggregate of 1,258 square miles of 3-D seismic data. As of December 31, 1998, the Company had acquired 2,124 square miles (1.4 million acres) of 3-D seismic data in the Anadarko Basin, of which an estimated 300 square miles had either not been interpreted or only partially interpreted. The Company does not currently intend to acquire additional 3-D seismic data in this province in 1999. As of December 31, 1998, Brigham had completed 71 wells in 95 attempts (75% success rate) in the Anadarko Basin and had found cumulative net proved reserves of 48 Bcfe at an average net drilling cost of $0.68 per Mcfe. In addition to its drilling activity in this province, the Company acquired 21.5 Bcfe of net proved reserves in the Anadarko Basin in late 1997 at a cost of $0.63 per Mcfe in an effort to capture additional prospects for future potential drilling. In its Anadarko Basin drilling program in 1998, the Company completed 27 wells in 40 attempts (68% success rate) with an average working interest of 50%, resulting in the addition of 9.5 net Bcfe of proved reserves (including revisions to prior years' estimates) at an average net drilling cost of $1.93 per Mcfe. Brigham's Anadarko Basin net drilling costs per Mcfe in 1998 were negatively impacted by the unsuccessful drilling of several proved undeveloped locations booked during 1997, particularly three high equity interest direct offset locations to the Company's Christopher 84 #1 Lower Morrow discovery in Hemphill County, Texas, and by several unsuccessful exploratory wells with high equity interests that were drilled late in the year. Despite the disappointing drilling costs realized in 1998, the Company has achieved average net drilling costs of $0.68 per Mcfe in its Anadarko Basin province from 1994 to 1998. As of December 31, 1998, the Company had identified an estimated 430 3-D delineated potential drilling locations in the Anadarko Basin, of which the Company intends to drill 10 to 15 gross wells in 1999 with an estimated average working interest of 40%. As part of its strategic initiatives to improve its capital resources and liquidity in 1999, Brigham is currently marketing three producing property packages among its Anadarko Basin province reserve base. These three packages consist of proved reserves totaling approximately 41 net Bcfe as of December 31, 1998. The Company may or may not divest all or a portion these reserves, depending primarily upon the offers received during the marketing process. - 10 - 13 Brigham intends to focus its 1999 exploration activities in its Anadarko Basin province in the following key project areas: Arnett Project Brigham's Arnett Project covers approximately 129,000 acres in Ellis County, Oklahoma, and targets Morrow and Hunton producing horizons at depths of 10,000 to 14,000 feet. In 1997 and 1998, the Company acquired 127 square miles of 3-D seismic in the first three of four planned phases of this project. Following seismic interpretation and initial prospect delineation on this data, Brigham began drilling in the Arnett Project in late 1998. While two of the first three exploration wells in this project were unsuccessful, the Company was completing a fourth well in mid- March 1999 in the primary objectives, the Hunton and Morrow, and has logged additional pay behind pipe in a secondary pay zone, the Tonkawa. Successful completion and production results from this well could provide offset development drilling opportunities particularly for the Morrow which is productive in the immediate area. In mid- March 1999, a fifth well was drilling in this project, also targeting the Hunton and Morrow as primary objectives. Following the sale of a portion of its interest in this project in early 1999, Brigham retains a 70% effective working interest in its Arnett Project. See "Item 1. Business -- Industry Alliances -- Duke Project Financing". Falcon Project Brigham's Falcon Project covers approximately 43,500 acres in the northeastern portion of the Texas Panhandle in Lipscomb County, Texas. This project is located in an area which produces from a number of Pennsylvanian-aged sands, with primary targets in the Upper and Lower Morrow and secondary targets in the shallower Tonkawa and Cleveland sands. The Upper and Lower Morrow zones produce from horizons in the area at depths ranging from 9,000 to 12,000 feet. The Falcon Project is located within a trend where Brigham has considerable exploration history having acquired over 280 miles of 3-D seismic and discovered over 37 Bcfe of gross reserves in the Upper and Lower Morrow reservoirs. Based on this historical success, the Company acquired an additional 68 square miles of 3-D seismic data in its Falcon Project during the second half of 1998 and has already delineated several Upper and Lower Morrow prospects in the early stages of interpretation. Brigham spud the first exploration well in its Falcon Project in March 1999 to test a potentially significant Lower Morrow sand structural feature with associated upside potential in the shallower Tonkawa sands. Based on predrill estimates, gross unrisked reserve potential for this structural prospect is over 5 Bcfe. Following the sale of a portion of its interest in this project in early 1999, Brigham retains a 70% effective working interest in its Falcon Project. See "Item 1. Business -- Industry Alliances -- Duke Project Financing". Gold Project The Gold Project is located in Dewey and Blaine Counties, Oklahoma, and targets dual natural gas producing objectives in the Morrow sandstones and Hunton carbonates at depths of 9,500 to 11,500 feet. The initial acquisition of 89 square miles of 3-D seismic data covering the project acreage was completed in 1996 and drilling activity commenced in 1998 resulting in two Hunton and one Morrow discovery. The Thomas #2 well (Brigham 34% working interest) discovered 2.4 gross Bcfe of proved reserves in the Hunton formation at a depth of 11,450 feet and was producing 2.5 MMcf of natural gas per day in mid-March 1999. The Thomas #2 is producing from a location which is believed to be associated with a potentially larger Hunton natural gas accumulation which could lead to several development locations. The Willie Porter #1 well (Brigham 34% working interest) found 2.3 gross Bcfe of proved reserves in the Hunton formation at 12,250 feet and was producing at a rate of 570 Mcf of natural gas per day in mid- March 1999. In late 1998, the Sturgeon State #1 (Brigham 34% working interest) was completed in a Morrow sand zone and was producing 70 Bbls of oil per day in mid-March 1999 before stimulation of the well. The Company and its participants have a number of additional Hunton and Morrow locations, mostly extensional and developmental in nature, planned for drilling in the Gold Project in 1999. Brigham has a 37.5% working interest in its Gold Project. Huskie and Boilermaker Projects Brigham's Huskie and Boilermaker Projects consist of 103 and 96 square miles, respectively, of continuous 3-D seismic data covering approximately 127,000 acres in Blaine County, Oklahoma. These projects target stratigraphic - 11 - 14 sand channels in the Springer with additional stratigraphic sand objectives in the Red Fork and Morrow in several identified prospects. Brigham initiated acquisition of data in its Huskie Project in 1996 where it retained a 37.5% working interest and, based upon the prospect density and reserve potential interpreted from this initial data set, the Company subsequently acquired data in its adjacent Boilermaker Project in 1998 where it retained a 100% working interest. The Company assembled acreage over a number of potential drilling locations in these project areas during 1998 and has at least one exploratory well planned for each project in 1999. An exploratory well in the Huskie Project will test a prospect with greater than 15 Bcfe of gross unrisked reserve potential which is an extension to a prolific Springer channel that has produced over 128 Bcfe of natural gas. Success from this initial exploratory well would likely establish several development locations. Wildcat and Panther Projects The Company's Wildcat and Panther Projects consist of 50 and 99 square miles, respectively, of continuous 3-D seismic data covering approximately 95,000 acres in the southern portion of the Texas Panhandle in Wheeler County, Texas and Beckham County, Oklahoma. The primary exploration targets within these projects are high potential, structural features at depths ranging from 7,500 to 21,000 feet. Brigham initiated acquisition of data in its Wildcat Project in 1997 where it retained a 37.5% working interest. Based upon the interpretation of this initial data set, the Company subsequently acquired data in its adjacent Panther Project in 1998 where it retained a 100% working interest. In its Wildcat Project, the Company has a deep 21,000 foot exploratory well planned for the second half of 1999 to drill an updip location to a Hunton well that has produced over 14.5 Bcfe since 1981 and was still producing in mid-March 1999. The Company believes successful completion of this exploratory test could prove up an additional 27 Bcfe of remaining gross unrisked reserves in the attic of this producing structure. Also in the second half of 1999, the Company plans to drill a 7,500 foot test for 17 Bcfe of gross unrisked potential reserves in a dual objective Brown Dolomite/Granite Wash structure. Chitwood Project Brigham's Chitwood Project consists of approximately 13 square miles of 3-D seismic data located in the prolific Carter Knox anticline in Grady County, Oklahoma. This project targets a mix of intermediate and deep prospects that range from lower risk, development locations to higher risk, exploratory objectives. Brigham initially entered this area with its 24 square mile West Bradley Project acquired in 1994. In November 1997, the Company acquired an interest in the producing Chitwood properties and undeveloped acreage which is located adjacent to the West Bradley Project area. During 1998, as part of a larger 142 square mile non-proprietary 3-D survey, Brigham and its project participant acquired 13 square miles of 3-D seismic data over the entire Chitwood Project, which led to the delineation of a number of prospects in the Springer, Big Four, and Bromide that are developmental and extensional in nature. In addition, the Company also imaged a large Arbuckle structure with in excess of 100 Bcfe of gross unrisked reserve potential which has not been optimally tested. The targeted objectives in the Chitwood Project range in depth from 12,000 to 19,000 feet. In March 1999, the Company and its project participant drilled the first well in the Chitwood Project based upon interpretation of the recently acquired 3-D seismic data. The Chitwood Boatwright Sand Unit #9 (Brigham working interest 50%) was completed in the Springer formation at a depth of 11,970 feet and was testing 300 Bbls of oil and 500 Mcf gas per day in mid-March 1999. Brigham and its project participant have delineated over 25 potential 3-D drilling locations among the four primary objectives within the Chitwood Project. Brigham has retained a 50% working interest in its Chitwood Project. As part of its strategic initiatives to raise capital for its 1999 exploration program, the Company is marketing its 50% working interest in acreage and producing wells in the Chitwood Project. To the extent that the Company does not receive adequate offers for its interest in this project, Brigham may retain its interest and engage in further drilling of its identified locations in the Chitwood Project during 1999. Gulf Coast The onshore Gulf Coast region of Texas and South Louisiana is a high potential, multi-pay province that lends itself to 3-D seismic exploration due to its substantial structural and stratigraphic complexity. The Company has assembled a digital data base including geographical, production, geophysical and geological information that the - 12 - 15 Company evaluates on its CAEX workstations. Working with a team of in-house geologists supplemented by consultants, the Company integrates this data with their extensive expertise and knowledge base to generate 3-D projects in the Gulf Coast. The Company has assembled projects in the Expanded Wilcox and Expanded Vicksburg trends in South Texas, the Miocene and Upper, Middle, and Lower Frio trends of the mid-to-southern regions of Texas, and the Lower Miocene trend in the transition zone of South Louisiana, each of which are active 3-D seismic exploration trends. Brigham was attracted to the Gulf Coast province because of the opportunity to apply the Company's established 3-D seismic exploration approach and its staff's extensive Gulf Coast experience to a prolific, highly complex structural province with potential to discover significant natural gas reserves and production. The Company initiated its Gulf Coast effort in 1995 with the acquisition of 39 square miles of seismic data in its Esperson Dome Project in which the Company retained a small net profits interest that converts to a variable back-in working interest of 12% to 20% upon project payout. Brigham's exploration efforts in its Esperson Dome Project to date have yielded the discovery of approximately 22 Bcfe of gross proved reserves from 11 wells, mostly from objectives above 6,000 feet, with a number of prospects still remaining to be drilled. Over the last three years the Company has accelerated its activity in the Gulf Coast, acquiring 115 square miles of 3-D seismic in 1996, 404 square miles in 1997, and 590 square miles in 1998. The Company retained a 77% average working interest in its Gulf Coast 3-D seismic projects acquired from 1996 through 1998 which consisted of an aggregate of 1,109 square miles of 3-D seismic data. Brigham anticipates that its increased project assemblage and 3-D seismic acquisition activity in the Gulf Coast will result in the allocation of a higher percentage of its drilling budget to this province in 1999, and will be a significant factor in the Company's future growth. A portion of Brigham's 3-D seismic data acquisition in the Gulf Coast has been accomplished by the Company's participation in certain non-proprietary, or speculative, seismic programs. By converting certain of the Company's proprietary seismic projects in core exploration areas to speculative data, the Company was able to leverage these proprietary projects for access to substantially larger non-proprietary speculative data for minimal or no additional cost to the Company. The Company believes this 3-D seismic acquisition strategy in the Gulf Coast, in certain circumstances, can accelerate the addition of attractive potential drilling locations in targeted trends at costs that are considerably less than those associated with proprietary 3-D seismic programs, thereby enhancing expected project rates of return. As of December 31, 1998, the Company had acquired 1,148 square miles (734,720 acres) of 3-D seismic data in its Gulf Coast province, of which an estimated 470 square miles had either not been interpreted or only partially interpreted. The Company does not currently intend to acquire additional 3-D seismic data in this province in 1999. As of December 31, 1998, Brigham had completed 25 wells in 32 attempts (78% success rate) in the Gulf Coast and had found cumulative proved reserves of 24 net Bcfe at an average net drilling cost of $0.59 per Mcfe. In its Gulf Coast drilling program in 1998, the Company completed 17 wells in 21 attempts with an average working interest of 59% adding 21 net Bcfe of proved reserves (including revisions to prior years' estimates) at an average net drilling cost of $0.64 per Mcfe. As of December 31, 1998, the Company had identified an estimated 120 3-D delineated potential drilling locations in the Gulf Coast province, of which the Company intends to drill 10 gross wells in 1999 with an estimated average working interest of 55%. Brigham intends to focus its 1999 exploration activities in its Gulf Coast province in the following key project areas: Diablo Project Brigham's Diablo Project covers 57 square miles in Brooks County, Texas, and targets shallow Frio and deep Vicksburg producing horizons. The Company has entered into a venture with a major integrated oil company that controls adjoining acreage to explore on the combined acreage for potential below 10,000 feet in the Vicksburg formation. Brigham has retained a 34% working interest in this joint exploration project. However, in prospective zones above 10,000 feet, primarily the Frio, Brigham has retained a 100% working interest in its original 4,000 acre lease block. The Company initially acquired 25 square miles of proprietary 3-D seismic in this project in 1997, and - 13 - 16 acquired an additional 33 square miles in 1998 in its Diablo Project. The Company and its participant control approximately 12,000 net acres of leasehold in this project area. In the fourth quarter of 1998, Brigham made a potentially significant Lower Vicksburg discovery in its Diablo Project with the completion of the Brigham Palmer State #1 well (Brigham 33% working interest). The Palmer State #1 was successfully completed in three of five possible Lower Vicksburg pay zones at a depths ranging from 9,600 to 12,800 feet and had initially tested at a rate of 2.8 MMcf of natural gas and 668 Bbls of condensate per day. This discovery well appears to be located on the downdip flank of a structure which exceeds 800 acres in closure and contains potential reserves exceeding 50 Bcfe. A minimum of five potential development locations have been identified on the crest of the structure which are updip to the Palmer State #1 discovery well, the first of which is expected to spud in the late second or early third quarter of 1999. In addition, the Company has identified a large, downthrown, four-way closure in an adjacent fault block which has produced over 86 Bcfe from the Frio formation, but which has not been tested in the equivalent Vicksburg sands that produce in the Company's Palmer State #1 well. Brigham plans to spud an exploratory well to test this high potential faulted closure in mid-1999. Southwest Danbury Project Located in Brazoria County, Texas, Brigham's Southwest Danbury Project is an approximate 29 square mile 3-D project targeting a series of pressured Lower Frio sands at depths ranging from 12,000 to 13,000 feet. In the first half of 1998, the Brigham Nold Gas Unit #1 (Brigham working interest 46%) was drilled to a depth of approximately 12,700 feet to test a Lower Frio amplitude, or bright spot, and encountered 29 feet of net pay in the Rucks interval of the Lower Frio sands. This well has produced at an average daily rate of 2.6 MMcf of natural gas with 17 Bbls of condensate and 13 Bbls of water since August 1998. Based on the results from this initial well, the Company spud the Brigham Renn Gas Unit #1 (Brigham working interest 83.5%) in December 1998 to test another Lower Frio 3-D bright spot prospect with over 6 Bcfe gross unrisked reserve potential. This well reached total depth and was in the process of completing in late March 1999. In addition, Brigham is evaluating several additional Lower Frio prospects in its Southwest Danbury Project which could expose the Company to significant upside potential. Hawkins Ranch Project Brigham's Hawkins Ranch Project is a 160 square mile 3-D seismic program in the Miocene/Frio trend located in Matagorda County, Texas. In 1998, the Company acquired approximately 85 square miles of new proprietary 3-D seismic that was converted to speculative data and merged with 65 square miles of adjacent speculative 3-D data already in inventory. The Hawkins Ranch Project targets potential in the shallow, nonpressured Miocene and Frio sands as well as the deeper, pressured Frio sands. In addition to the shallow Miocene potential, the Company has identified a number of prospects targeting deeper Frio objectives in its Hawkins Ranch Project. The first exploratory Frio well is planned to spud during the second half of 1999. This well is a 14,000 foot pressured test of a 500 acre structure with associated gross unrisked reserve potential exceeding 33 Bcfe. Brigham retains a 60% working interest in this project, following the sale of a 15% interest in the project to an industry participant for $1.5 million in early 1999. El Sauz Project In May 1997, Brigham initiated its El Sauz Project with a seismic option covering approximately 94,000 acres in Willacy and Kennedy Counties, Texas. In 1998, the Company acquired 200 square miles of 3-D seismic data over this acreage and sold a 45% working interest in the project to two industry participants which provided the Company with significant carry on the pre-seismic land and seismic acquisition costs of the project. The El Sauz Project is an underexplored area which is bordered on three sides by Miocene and Frio fields which have in aggregate produced over 740 Bcf of natural gas and 94 MMBbls of oil. Primary targets in the El Sauz Project are expected to be in Miocene and Frio sands at depths of 4,500 to 10,000 feet, with additional potential as deep as 18,000 feet in the Lower Frio. Reserve targets range from 5 to 20 Bcf per well. Three prospects are planned for drilling in 1999, two of which target the Frio at depths of 9,300 feet and 9,800 feet and one of which is a Miocene test at 4,500 feet. Brigham retained a 55% working interest in its El Sauz Project. - 14 - 17 West Texas The Company's limited drilling activity in the West Texas region in 1998 was focused in the Horseshoe Atoll, the Midland Basin and the Eastern Shelf of the Permian Basin. Due to a combination of continuing low oil prices and less than anticipated drilling results in its recent exploratory activity in this province, the Company has ceased all 3-D seismic and drilling activities in its West Texas projects and intends to focus substantially all of its exploration efforts in 1999 on its predominately natural gas prospects in its Anadarko Basin and Gulf Coast provinces. To the extent that oil prices improve in the future from current levels, the Company would resume selective drilling of its remaining undrilled locations in its West Texas province if such projects are competitive with its Anadarko Basin and Gulf Coast projects based on estimated risk adjusted, pre-drill economic return analysis. As of December 31, 1998, the Company had acquired 1,689 square miles (1.1 million acres) in the West Texas region, the vast majority of which has been interpreted. The Company does not currently intend to acquire additional 3-D seismic data in this province for the foreseeable future. As of December 31, 1998, Brigham had completed 185 wells in 298 attempts (62% success rate) with an average working interest of 23% in its West Texas province and had found cumulative proved reserves of 20 net Bcfe at an average net drilling cost of $1.39 per Mcfe. In its West Texas drilling program in 1998, the Company completed 6 wells in 11 attempts with an average working interest of 45% adding 0.5 net Bcfe of proved reserves (including revisions to prior years' estimates) at an average net drilling cost of $9.06 per Mcfe. As of December 31, 1998, the Company had an estimated 140 3-D delineated potential drilling locations in the West Texas region. The Company does not currently plan to drill any wells in its West Texas province in 1999. NATURAL GAS AND OIL RESERVES The Company's estimated total net proved reserves of natural gas and oil as of December 31, 1996, 1997 and 1998 and the present values attributable to these reserves as of those dates were as follows:
AS OF DECEMBER 31, ------------------------------ 1996(1) 1997 1998 -------- -------- -------- Estimated net proved reserves: Natural gas (MMcf) ....................... 10,257 53,230 71,166 Oil (MBbls) .............................. 1,940 3,181 4,433 Natural gas equivalent (MMcfe) ........... 21,897 72,316 97,764 Proved developed reserves as a percentage of proved reserves ....................... 67% 65% 57% Present Value of Future Net Revenues (in thousands) ........................... $ 44,506 $ 69,249 $ 81,741 Standardized Measure (in thousands) .......... $ 44,506 $ 64,274 $ 81,649
- ------------------------- (1) Prior to the Exchange consummated in February 1997, the Company was a partnership and not subject to income taxes. Had the Company been a taxable corporation at December 31, 1996, the Standardized Measure would have been $32.4 million, reflecting a pro forma estimate for the discounted value of future income taxes. The reserve estimates reflected above were prepared by Cawley, Gillespie & Associates, Inc. ("Cawley Gillespie"), the Company's petroleum consultants, and are part of reports on the Company's oil and natural gas properties prepared by Cawley Gillespie. The base sales prices for the Company's reserves were $3.71 per Mcf for natural gas and $25.37 per Bbl for oil as of December 31, 1996, $2.27 per Mcf for natural gas and $15.50 per Bbl for oil as of December 31, 1997, and $2.12 per Mcf for natural gas and $9.50 per Bbl for oil as of December 31, 1998. These base prices were adjusted to reflect applicable transportation and quality differentials on a well-by-well basis to arrive at realized sales prices used to estimate the Company's reserves at these dates. - 15 - 18 In accordance with applicable requirements of the SEC, estimates of the Company's proved reserves and future net revenues are made using sales prices estimated to be in effect as of the date of such reserve estimates and are held constant throughout the life of the properties (except to the extent a contract specifically provides for escalation). Estimated quantities of proved reserves and future net revenues therefrom are affected by oil and natural gas prices, which have fluctuated widely in recent years. There are numerous uncertainties inherent in estimating oil and natural gas reserves and their estimated values, including many factors beyond the control of the Company. The reserve data set forth in this Form 10-K represents only estimates. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geologic interpretation and judgment. As a result, estimates of different engineers, including those used by the Company, may vary. In addition, estimates of reserves are subject to revision based upon actual production, results of future development and exploration activities, prevailing oil and natural gas prices, operating costs and other factors. The revisions may be material. Accordingly, reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered and are highly dependent upon the accuracy of the assumptions upon which they are based. The Company's estimated proved reserves have not been filed with or included in reports to any federal agency. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors -- Uncertainty of Reserve Information and Future Net Revenue Estimates." Estimates with respect to proved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history will result in variations in the estimated reserves that may be substantial. DRILLING ACTIVITIES The Company drilled, or participated in the drilling of, the following number of wells during the periods indicated:
YEAR ENDED DECEMBER 31, 1996 1997 1998 -------------------- -------------------- -------------------- GROSS NET GROSS NET GROSS NET --------- ---------- --------- ---------- --------- ---------- Exploratory Wells: Natural gas............................................. 5 1.2 15 6.5 30 15.6 Oil..................................................... 22 5.2 21 7.9 7 2.5 Non-productive ......................................... 24 7.0 26 9.8 17 8.0 --------- ---------- --------- ---------- --------- ---------- Total................................................ 51 13.4 62 24.2 54 26.1 ========= ========== ========= ========== ========= ========== Development Wells: Natural gas............................................. 10 1.3 4 1.6 10 6.6 Oil..................................................... 5 1.0 5 1.6 3 1.5 Non-productive ......................................... 1 0.2 2 0.9 5 3.4 --------- ---------- --------- ---------- --------- ---------- Total................................................ 16 2.5 11 4.1 18 11.5 ========= ========== ========= ========== ========= ==========
The Company does not own any drilling rigs, and the majority of its drilling activities have been conducted by industry participant operators or independent contractors under standard drilling contracts. Consistent with its business strategy, the Company has continued to retain operations of an increasing number of the wells it drills. Brigham operated 57% of the gross and 76% of the net wells it participated in during 1998. - 16 - 19 PRODUCTIVE WELLS AND ACREAGE Productive Wells The following table sets forth the Company's ownership interest as of December 31, 1998 in productive natural gas and oil wells in the areas indicated.
NATURAL GAS OIL TOTAL --------------- ---------------- --------------- PROVINCE GROSS NET GROSS NET GROSS NET - -------- ----- ----- ----- ----- ----- ------ Anadarko Basin............................ 66 21.8 18 2.1 84 23.9 Gulf Coast................................ 15 5.7 8 3.0 23 8.7 West Texas ............................... 4 1.0 86 24.5 90 25.5 Other..................................... -- -- 5 0.8 5 0.8 ----- ----- ----- ------ ----- ------ Total................................ 85 28.5 117 30.4 202 58.9 ===== ===== ===== ====== ===== ======
Productive wells consist of producing wells and wells capable of production, including wells waiting on pipeline connection. Wells that are completed in more than one producing horizon are counted as one well. Of the gross wells reported above, none had multiple completions. Acreage Undeveloped acreage includes leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas, regardless of whether or not such acreage contains proved reserves. A gross acre is an acre in which an interest is owned. A net acre is deemed to exist when the sum of fractional ownership interests in gross acres equals one. The number of net acres is the sum of the fractional interests owned in gross acres expressed as whole numbers and fractions thereof. The following table sets forth the approximate developed and undeveloped acreage in which the Company held a leasehold, mineral or other interest at December 31, 1998:
DEVELOPED UNDEVELOPED TOTAL ----------------- ------------------- ------------------ PROVINCE GROSS NET GROSS NET GROSS NET - -------- -------- ------- --------- -------- -------- -------- Anadarko Basin...................... 26,751 13,411 116,546 60,627 143,297 74,038 Gulf Coast.......................... 1,041 447 23,300 16,822 24,341 17,269 West Texas ......................... 6,570 1,898 18,740 7,919 25,310 9,817 Other............................... 520 148 48,189 18,105 48,709 18,253 -------- ------- --------- -------- -------- -------- Total............................ 34,882 15,904 206,775 103,473 241,657 119,377 ======== ======= ========= ======== ======== ========
All the leases for the undeveloped acreage summarized in the preceding table will expire at the end of their respective primary terms unless the existing leases are renewed, production has been obtained from the acreage subject to the lease prior to that date, or some other "savings clause" is implicated. The following table sets forth the minimum remaining terms of leases for the gross and net undeveloped acreage:
ACRES EXPIRING ------------------------- GROSS NET --------- --------- Twelve Months Ending: December 31, 1999.............................. 58,205 28,464 December 31, 2000.............................. 60,347 26,998 December 31, 2001.............................. 68,759 41,222 Thereafter..................................... 19,464 6,789 --------- --------- Total..................................... 206,775 103,473 ========= =========
- 17 - 20 In addition, the Company had lease options as of December 31, 1998 to acquire an additional 173,670 gross (128,166 net) acres, substantially all of which expire within eighteen months. VOLUMES, PRICES AND PRODUCTION COSTS The following table sets forth the production volumes, average prices received and average production costs associated with the Company's sale of oil and natural gas for the periods indicated.
YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 1998 ------ ------ ------ Production: Natural gas (MMcf) ............................... 698 1,382 4,269 Oil (MBbls) ...................................... 227 291 396 Natural gas equivalent (MMcfe) ................... 2,060 3,126 6,644 Average sales price: Natural gas (per Mcf) ............................ $ 2.30 $ 2.56 $ 2.04 Oil (per Bbl) .................................... 9.98 19.40 12.85 Average production expenses and taxes (per Mcfe) .... $ 0.53 $ 0.55 $ 0.46
COSTS INCURRED AND CAPITALIZED COSTS The costs incurred in oil and natural gas acquisition, exploration and development activities are as follows (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------- 1996 1997 1998 -------- -------- -------- Cost incurred for the year: Exploration..................................... $ 10,527 $ 29,516 $ 67,110 Property acquisition............................ 6,195 26,956 16,245 Development..................................... 1,328 2,953 10,427 Proceeds from participants...................... (4,111) (319) (10,502) -------- -------- -------- $ 13,939 $ 59,106 $ 83,280 ======== ======== ========
Costs incurred represent amounts incurred by the Company for exploration, property acquisition and development activities. Periodically, the Company will receive reimbursement of certain costs from participants in its projects subsequent to project initiation in return for an interest in the project. These payments are described as "Proceeds from participants" in the table above. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS No matter was submitted to a vote of the Company's securityholders during the fourth quarter of 1998. - 18 - 21 EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to Instruction 3 to Item 401(b) of the Regulation S-K and General Instruction G(3) to Form 10-K, the following information is included in Part I of this report. The following table sets forth certain information concerning the executive officers of the Company as of March 31, 1999:
NAME AGE POSITION ---- --- -------- Ben M. Brigham 39 Chief Executive Officer and President Jon L. Glass 43 Vice President--Exploration Craig M. Fleming 41 Chief Financial Officer David T. Brigham 38 Vice President--Land and Administration, Corporate Secretary A. Lance Langford 36 Vice President--Operations Karen E. Lynch 37 Vice President and General Counsel
Set forth below is a description of the backgrounds of the executive officers of the Company. Ben M. "Bud" Brigham has served as Chief Executive Officer, President and Chairman of the Board of the Company since founding the Company in 1990. From 1984 to 1990, Mr. Brigham served as an exploration geophysicist with Rosewood Resources, an independent oil and gas exploration and production company. Mr. Brigham began his career in Houston as a seismic data processing geophysicist for Western Geophysical, a provider of 3-D seismic services, after earning his B.S. in Geophysics from the University of Texas. Mr. Brigham is the husband of Anne L. Brigham, Director, and the brother of David T. Brigham, Vice President--Land and Administration and Corporate Secretary. Jon L. Glass joined the Company in 1992 and has served as Vice President -- Exploration since 1994 and a Director of the Company since 1995. From 1984 to 1992, Mr. Glass served in various capacities with Santa Fe Minerals, an oil and gas exploration company, in a variety of staff and managerial positions mainly focused on Santa Fe Minerals' exploration activities in the midcontinent and Gulf of Mexico (onshore and offshore). During this time Mr. Glass also assisted in the development of exploration and acquisition opportunities for Santa Fe Minerals in Canada and South America. Mr. Glass' early geological experience includes three years with Mid-America Pipeline Company and two years with Texaco USA, serving mainly as a midcontinent exploration geologist. Mr. Glass holds a B.S. and an M.S. in Geology from Oklahoma State University and an M.B.A. from the University of Tulsa. Craig M. Fleming has served as the Chief Financial Officer of the Company since 1993. From 1990 to 1993, Mr. Fleming served as Controller of Odyssey Petroleum Co., Ltd., an independent energy company. From 1988 to 1990, Mr. Fleming served as Controller and Treasurer for Harken Exploration Company, an independent energy company. Mr. Fleming began his career with Arthur Anderson & Co. in the Oil and Gas Audit Division and is a Certified Public Accountant. Mr. Fleming holds a B.B.A. in Accounting from Texas A&M University. David T. Brigham joined the Company in 1992 and has served as Vice President -- Land and Administration and Corporate Secretary of the Company since February 1998. Mr. Brigham served as Vice President -- Legal of the Company from 1994 until February 1998. From 1987 to 1992, Mr. Brigham was an oil and gas attorney with Worsham, Forsythe, Sampels & Wooldridge. Before attending law school, Mr. Brigham was a landman for Wagner & Brown Oil and Gas Producers, an independent oil and gas exploration and production company. Mr. Brigham holds a B.B.A. in Petroleum Land Management from the University of Texas and a J.D. from Texas Tech School of Law. Mr. Brigham is the brother of Ben M. Brigham, Chief Executive Officer, President and Chairman of the Board. A. Lance Langford joined the Company as Manager of Operations in 1995 and has served as Vice President -- Operations since January 1997. From 1987 to 1995, Mr. Langford served in various engineering capacities with Meridian Oil Inc., handling a variety of reservoir, production and drilling responsibilities. Mr. Langford holds a B.S. in Petroleum Engineering from Texas Tech University. - 19 - 22 Karen E. Lynch joined the Company in October 1997 as General Counsel and has served as Vice President -- Legal and General Counsel of the Company since February 1998. Prior to joining the Company, Ms. Lynch was a shareholder in the Dallas-based law firm of Thompson & Knight, P.C., where she practiced in the energy area since joining the firm in 1987. Ms. Lynch holds a B.B.A. in Petroleum Land Management from the University of Texas and a J.D. from the University of Oklahoma. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock (the "Common Stock") has been publicly traded on The Nasdaq Stock Market(sm) under the symbol "BEXP" since the Company's initial public offering effective May 8, 1997. The following table summarizes the high and low last reported sales prices on Nasdaq for each quarterly period since the Company's initial public offering:
COMMON STOCK ----------------- HIGH LOW ------- ------- 1997: Second Quarter (from May 9, 1997)............................. $ 8.75 $ 7.00 Third Quarter................................................. $ 14.31 $ 8.25 Fourth Quarter................................................ $ 17.13 $ 12.00 1998: First Quarter................................................. $ 14.00 $ 10.50 Second Quarter................................................ $ 15.50 $ 8.75 Third Quarter................................................. $ 10.25 $ 5.13 Fourth Quarter................................................ $ 9.50 $ 4.75
The closing market price of the Company's Common Stock on March 26, 1999 was $3.50 per share. As of March 26, 1999, the Company estimates that there were more than 80 record and 1,100 beneficial owners of the Company's Common Stock. No dividends have been declared or paid on the Company's Common Stock to date. The Company intends to retain all future earnings for the development of its business. In addition, the Credit Facility (as defined) and the Indenture (as defined) restrict the Company's ability to pay dividends on the Company's Common Stock. - 20 - 23 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and related notes included in "Item 8. Financial Statements and Supplementary Data."
YEAR ENDED DECEMBER 31, ---------------------------------------------------- STATEMENT OF OPERATIONS DATA: 1994 1995 1996 1997 1998 -------- ------- -------- -------- --------- Revenues: Natural gas and oil sales....................... $ 2,565 $ 3,578 $ 6,141 $ 9,184 $ 13,799 Workstation revenue............................. 815 635 627 637 390 -------- ------- -------- -------- --------- Total revenues.............................. 3,380 4,213 6,768 9,821 14,189 Costs and expenses: Lease operating................................. 491 761 726 1,151 2,172 Production taxes................................ 126 165 362 549 850 General and administrative...................... 1,785 1,897 2,199 3,570 4,672 Depletion of oil and natural gas properties.... 1,104 1,626 2,323 2,743 8,410 Capitalized ceiling impairment................. -- -- -- -- 24,847 Depreciation and amortization .................. 561 533 487 694 785 -------- ------- -------- -------- --------- Total costs and expenses.................... 4,067 4,982 6,097 8,707 41,736 -------- ------- -------- -------- --------- Operating income (loss)......................... (687) (769) 671 1,114 (27,547) Other income (expense): Interest income................................. 56 128 52 145 136 Interest expense................................ (668) (936) (1,173) (1,190) (7,120) -------- ------- -------- -------- --------- Total other income (expense)................ (612) (808) (1,121) (1,045) (6,984) Net income (loss) before income taxes........... (1,299) (1,577) (450) 69 (34,531) Income tax expense, net......................... -- -- -- (1,186)(1) 1,186 -------- ------- -------- -------- --------- Net loss.................................... $ (1,299) $(1,577) $ (450) $ (1,117)(1) $ (33,345) ======== ======= ======== ======== ========= Net loss per share.............................. $ (0.15) $ (0.18) $ (0.05) $ (0.10) $ (2.64) ======== ======= ======== ======== ========= Weighted average common shares outstanding...... 8,929 8,929 8,929 11,081 12,626 STATEMENT OF CASH FLOWS DATA: Net cash provided by operating activities....... $ 626 $ 1,383 $ 3,710 $ 9,806 $ 13,622 Net cash used in investing activities........... (5,463) (8,005) (11,796) (57,300) (85,075) Net cash provided by financing activities....... 4,634 7,724 7,731 47,748 72,321 OTHER FINANCIAL DATA: Capital expenditures............................ $ 5,445 $ 7,935 $ 13,612 $ 57,170 $ 84,055
AS OF DECEMBER 31, --------------------------------------------------- 1994 1995 1996 1997 1998 ------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents .............. $ 700 $ 1,802 $ 1,447 $ 1,701 $ 2,569 Oil and natural gas properties, net .... 11,970 18,538 28,005 84,294 134,317 Total assets ........................... 15,781 22,916 33,614 92,519 150,516 Total debt ............................. 7,950 16,000 24,000 32,000 94,786 Total equity ........................... 5,271 3,694 3,244 43,313 24,681
(1) Includes a net $1.2 million ($0.10 per share) non-cash deferred income tax charge related to the Company's conversion from a partnership to a corporation in 1997. - 21 - 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is an independent exploration and production company that applies 3-D seismic imaging and other advanced technologies to systematically explore and develop onshore oil and natural gas provinces in the United States. From inception in 1990 through December 31, 1998, Brigham acquired 5,236 square miles of 3-D seismic data, identified an estimated 1,140 potential drilling locations and drilled 442 wells delineated by 3-D seismic analysis. Through its 3-D seismic-based drilling efforts, the Company had discovered an aggregate of 92 Bcfe of net proved reserves as of December 31, 1998. The Company believes this performance demonstrates a systematic methodology for finding oil and natural gas in onshore domestic oil and natural gas provinces. Combining its geologic and geophysical expertise with a sophisticated land effort, the Company manages the majority of its projects from conception through 3-D acquisition, processing and interpretation and leasing. In addition, the Company manages the negotiation and drafting of most of its geophysical exploration agreements, resulting in reduced contract risk and more consistent deal terms. Because it generates most of its projects, the Company can control the size of the working interest that it retains as well as the selection of the operator and the non-operating participants. Consistent with its business strategy, Brigham has increased the working interest it retained in its projects, based on capital availability and perceived risk. The Company's average working interest in its 3-D seismic projects acquired during 1996, 1997 and 1998 was 37%, 67% and 80%, respectively, while its average working interest in its wells drilled during this period was 24%, 39% and 52%, respectively. Beginning in 1995, the Company has managed operations through the drilling and production phases on an increasing portion of its 3-D seismic projects. Brigham operated 57% of its gross wells and 76% of its net wells drilled in 1998 as compared with 10% of its gross wells and 16% of its net wells drilled in 1996. Expenditures made in oil and natural gas exploration vary from project to project depending primarily on the costs related to land, seismic acquisition, drilling costs and the working interest retained by the Company. Historically, the Company's participants have typically borne a disproportionate share of the costs of optioning available acreage and acquiring, processing and interpreting the 3-D seismic data, and the Company and its participants each typically incurred leasing, drilling and completion costs in proportion to their ownership interests. In recent years, Brigham has retained majority working interests in its new 3-D seismic projects, and has thereby reduced the financial leverage it has historically received on the costs of optioning available acreage and acquiring, processing and interpreting the 3-D seismic data on its projects. From inception through 1996, the Company acquired 2,761 gross (781 net) square miles of 3-D seismic data. Initially, the Company focused its efforts in West Texas. In 1995, the Company began to devote substantial attention to the Anadarko Basin, and since 1996 the Company has devoted the majority of its resources to the Anadarko Basin and Gulf Coast. With this shift in regional focus, the majority of the Company's production volumes has shifted from oil to natural gas. To finance these project generation and drilling activities, the Company supplemented cash flow from operations with private placements of debt and equity, commercial bank credit facilities and placements of working interests in projects with industry participants. As the Company's cash flows from operations and other sources of capital have increased during this period, it retained larger average working interests in its projects. In 1997 and 1998, the Company acquired 2,475 gross (1,810 net) square miles of 3-D seismic and continued to focus the majority of its 3-D exploration efforts in the Anadarko Basin and the Gulf Coast. During the past two years, the Company acquired 1,258 square miles (51%) of 3-D seismic in the Anadarko Basin, making this basin the most active 3-D seismic acquisition province for the Company. Brigham also significantly increased its Gulf Coast activity, acquiring 994 square miles (40%) of 3-D seismic in this period. During 1997 and 1998, the Company drilled 145 gross (65.9 net) wells based on its 3-D seismic data analysis. In addition to its drilling activities, the Company acquired 21.3 net Bcfe of proved reserves and an interest in undeveloped acreage (the "Chitwood Acquisition") at the northern end of the Carter Knox anticline in Grady County, Oklahoma for $13.4 million in November 1997. As a result of these activities, the Company's net natural gas and oil production increased from 2.1 Bcfe in 1996 to 6.6 Bcfe - 22 - 25 in 1998. The Company's net production volumes consisted of 79% natural gas on an equivalent basis during the fourth quarter 1998 as compared with 36% during the fourth quarter 1996. The Company supplemented cash flow from operations in 1997 and 1998 with borrowings under commercial bank credit facilities, $24 million raised in its initial public offering of common stock in May 1997, $47.5 million raised through the placement of debt and equity securities in August 1998 and the placement of working interests in projects to industry participants to finance its project generation, property acquisition and drilling activities. The Company uses the full-cost method of accounting for its natural gas and oil properties. Under this method, all acquisition, exploration and development costs, including certain internal costs that are directly attributable to the Company's acquisition, exploration and development activities, are capitalized in the amortizable base of the "full-cost pool" as incurred. Upon the interpretation by the Company of the 3-D seismic associated with unproved properties, the geological and geophysical costs of acreage that is not specifically identified as prospective are transferred to the amortizable base of the full-cost pool. Geological and geophysical costs associated with prospective acreage, as well as leasehold costs, are transferred to the amortizable base of the full-cost pool when the prospects are drilled. The Company records depletion of its full-cost pool using the unit of production method. To the extent that the costs capitalized in the full-cost pool (net of depreciation, depletion and amortization and related deferred taxes) exceed the present value (using a 10% discount rate and based on period-end natural gas and oil prices) of estimated future net after-tax cash flows from proved natural gas and oil reserves plus the capitalized cost of unproved properties, such costs are charged to operations as a writedown of the carrying value of natural gas and oil properties, or a "capitalized ceiling impairment" charge. The risk that the Company will be required to write down the carrying value of its oil and gas properties increases when oil and gas prices are depressed, even if such prices are temporary. In addition, capitalized ceiling impairment charges may occur if the Company experiences poor drilling results or has substantial downward revisions in its estimated proved reserves. A capitalized ceiling impairment is a charge to earnings that does not impact cash flows, but does impact operating income and stockholders' equity. Once incurred, a capitalized ceiling impairment charge to natural gas and oil properties cannot be reversed at a later date. Primarily as a result of the significant declines in both oil and natural gas prices at December 31, 1998 and disappointing drilling results on several of the Company's high working interest wells in 1998, the Company recorded a capitalized ceiling impairment charge at December 31, 1998 of $24.8 million (see Note 2 of Notes to the December 31, 1998 Consolidated Financial Statements). No assurance can be given that the Company will not experience a capitalized ceiling impairment charge in future periods. See "-- Risk Factors -- Dependence on Exploratory Drilling Activities"; "-- Risk Factors -- Volatility of Natural Gas and Oil Prices"; and " -- Risk Factors -- Uncertainty of Reserve Information and Future Net Revenue Estimates." In connection with the Exchange in 1997, the Company issued options to purchase 644,097 shares of Common Stock to certain of its officers and employees. The Company recorded an unearned stock compensation balance of $2.5 million in the first quarter 1997, of which approximately one-half will be added to the amortizable base of the full-cost pool over the vesting period of the options and the balance will be recorded as a noncash compensation expense over the vesting period of the options. As a result, the Company expects to incur unearned stock compensation amortization expenses of approximately $189,000 in 1999, $115,800 in 2000 and an aggregate of $111,000 in the three years thereafter. The Company's predecessor was classified as a partnership for federal income tax purposes. Therefore, no income taxes were paid or provided for by the Company prior to the Exchange. The Company is a taxable entity. In connection with the Exchange on February 27, 1997, the Company incurred a $5 million charge to record a deferred income tax liability to recognize the differences between the financial statement basis and tax basis of the Company's predecessor partnership's natural gas and oil properties at the Exchange date, given the provisions of enacted tax laws. During the fourth quarter 1997, the Company elected to record a step-up in the basis of its assets for tax purposes as a result of the Exchange. Due to this election, the Company recorded a $3.8 million non-cash deferred income tax benefit during the fourth quarter 1997, which resulted in a net $1.2 million ($0.10 per dividend share) non-cash deferred income tax charge for the year ended December 31, 1997. - 23 - 26 RESULTS OF OPERATIONS The following table sets forth certain operating data for the periods presented.
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1997 1998 ------- ------ ------- Production: Natural gas (MMcf) ............................. 698 1,382 4,269 Oil (MBbls) .................................... 227 291 396 Natural gas equivalent (MMcfe) ................. 2,060 3,126 6,644 % Natural gas .................................. 34% 44% 64% Average sales prices per unit (1): Natural gas (per Mcf) .......................... $ 2.30 $ 2.56 $ 2.04 Oil (per Bbl) .................................. 19.98 19.40 12.85 Natural gas equivalent (per Mcfe) .............. 2.98 2.94 2.08 Costs and expenses per Mcfe: Lease operating ................................ $ 0.35 $ 0.37 $ 0.33 Production taxes ............................... 0.18 0.18 0.13 General and administrative ..................... 1.07 1.14 0.70 Depletion of natural gas and oil properties .... 1.13 0.88 1.27
- --------------- (1) Reflects the effects of the Company's hedging activities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Matters -- Hedging Activities." Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Natural gas and oil sales. Natural gas and oil sales increased 50% from $9.2 million in 1997 to $13.8 million in 1998. Production volume increases accounted for $9.4 million (204%) of this increase and were offset by $4.8 million (104%) from a decrease in the average sales price received for natural gas and oil sales. Production volumes for natural gas increased 209% from 1,382 MMcf in 1997 to 4,269 MMcf in 1998. The average price received for natural gas decreased 20% from $2.56 per Mcf in 1997 to $2.04 per Mcf in 1998. Production volumes for oil increased 36% from 291 MBbls in 1997 to 396 MBbls in 1998. The average price received for oil decreased 34% from $19.40 per Bbl in 1997 to $12.85 per Bbl in 1998. Natural gas and oil sales in 1998 were increased by production from wells completed and flowing to sales since December 31, 1997, offset partially by the natural decline of existing production, and from certain wells acquired in the Chitwood Acquisition which were included in the Company's results of operations effective September 1, 1997. As a result of hedging activities, natural gas revenues increased by $555,240 ($0.13 per Mcf) in 1998, compared to a decrease in oil revenues of $6,191 ($0.02 per Bbl) in 1997. See "-- Other Matters -- Hedging Activities." Workstation revenue. Workstation revenue decreased 39% from $637,000 in 1997 to $390,000 in 1998. Workstation revenue is recognized by the Company as industry participants in the Company's seismic programs are charged an hourly rate for the work performed by the Company on its 3-D seismic interpretation workstations. This decrease is primarily attributable to the Company's increased working interests in its recently acquired 3-D seismic data, which reduces the amount of workstation interpretation costs that the Company can bill to its participants. The Company expects workstation revenue to continue to decline in 1999 due to the Company's increased working interests in the square miles of 3-D seismic it acquired in 1997 and 1998. Lease operating expenses. Lease operating expenses increased 89% from $1.2 million ($0.37 per Mcfe) in 1997 to $2.2 million ($0.33 per Mcfe) in 1998. This increase was primarily due to an increase in the number of producing wells during 1998 from those in 1997. The decrease in the per unit amount was primarily due to an increase in natural gas production as a percentage of total equivalent production (44% in 1997 and 64% in 1998) since a typical natural gas well produces with lower average lease operating costs per unit of production than a typical oil well. - 24 - 27 Production taxes. Production taxes increased 55% from $549,000 ($0.18 per Mcfe) in 1997 to $850,000 ($0.13 per Mcfe) in 1998 as a direct result of increased production volumes. The effective average production tax rate increased from 6% of natural gas and oil sales revenues in 1997 to 6.2% in 1998 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. The decrease in the per unit amount was primarily attributable to the decline in natural gas and oil sales prices in 1998 as compared with 1997. General and administrative expenses. General and administrative expenses increased 31% from $3.6 million ($1.14 per Mcfe) in 1997 to $4.7 million ($0.70 per Mcfe) in 1998. This increase was primarily attributable to the hiring of additional personnel and related expenses necessary to manage the Company's growing operations. The decrease in the per unit rate was a result of a greater increase in natural gas and oil production volumes than general and administrative expenses from 1997 to 1998 due to the aforementioned factors. The Company has initiated an overhead reduction plan during 1999, consisting primarily of a Company-wide salary reduction beginning in the second quarter of 1999 and the elimination or reduction of various other discretionary administrative expenditures. The Company plans to continue to evaluate its overhead cost structure during the course of 1999 and may take further steps to reduce its administrative expenses depending upon the outcome of its various strategic initiatives underway to improve its capital resources and liquidity. Depletion of natural gas and oil properties. Depletion of natural gas and oil properties increased 207% from $2.7 million ($0.88 per Mcfe) in 1997 to $8.4 million ($1.27 per Mcfe) in 1998. Of this increase, $4.5 million was attributable to the increase in production volumes during the period and $1.2 million was due to the increase in the depletion rate per unit of production. The increase in depletion rate per unit of production was primarily the result of the addition of natural gas and oil reserves at higher average capital costs due to a reduction in drilling performance and downward revisions to previous reserve estimates. Interest expense. Interest expense increased from $1.2 million in 1997 to $7.1 million in 1998 due to the Company's higher average outstanding debt balance in 1998 combined with a higher average effective interest rate. The Company's weighted average outstanding debt balance increased 450% from $12 million in 1997 to $66 million in 1998. This increase in debt was incurred primarily to fund the Company's increased capital expenditures and working capital needs, net of operating cash flow, during 1998. The effective annual interest rate on the Company's outstanding indebtedness increased from 9.4% in 1997 to 10.6% in 1998, primarily due to the Company's issuance of $40 million of Senior Subordinated Secured Notes due 2003 (the "Subordinated Notes") in August 1998, which bore interest at an annual rate of 12% from the date of issuance. In addition, interest expense in 1998 included (i) approximately $1 million of non-cash charges related to the amortization of deferred loan fees and the amortization of discount on the Subordinated Notes, and (ii) $507,000 of interest expenses related to the Subordinated Notes that was paid through the issuance of additional Subordinated Notes in lieu of cash in February 1999. Pursuant to the recently amended terms of the Credit Facility and the Subordinated Notes, the Company expects to pay its interest obligations related to the Subordinated Notes in 1999 through the issuance of additional Subordinated Notes in lieu of cash in an effort to preserve cash flow to fund capital expenditures and working capital. Borrowings under the Company's commercial bank credit facility had an effective annual interest rate of 7.2% at December 31, 1998. See "-- Liquidity" and "-- Capital Resources." Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Natural gas and oil sales. Natural gas and oil sales increased 50% from $6.1 million in 1996 to $9.2 million in 1997. Production volume increases accounted for $3.2 million (104%) of this increase and were offset by $134,000 (4%) from a decrease in the average sales price received for natural gas and oil sales. Production volumes for natural gas increased 98% from 698,036 Mcf in 1996 to 1,381,996 Mcf in 1997. The average price received for natural gas increased 11% from $2.30 per Mcf in 1996 to $2.56 per Mcf in 1997. Production volumes for oil increased 28% from 226,925 Bbls in 1996 to 290,624 Bbls in 1997. The average price received for oil decreased 3% from $19.98 per Bbl in 1996 to $19.40 per Bbl in 1997. Natural gas and oil sales were increased by production from 46 wells completed in 1997, which was partially offset by the natural decline of existing production. Hedging activities in 1997 reduced the amount by which oil revenues increased by $6,191, compared to a decrease in oil revenues of $301,280 as a result of hedging activities in 1996. - 25 - 28 Workstation revenue. Workstation revenue increased 2% from $627,000 in 1996 to $637,000 in 1997. Workstation revenue is recognized by the Company as industry participants in the Company's seismic programs are charged an hourly rate for the work performed by the Company on its 3-D seismic interpretation workstations. Lease operating expenses. Lease operating expenses increased 59% from $726,000 ($0.35 per Mcfe) in 1996 to $1.2 million ($0.37 per Mcfe) in 1997. The increase was primarily due to an increase in producing wells during the year. Production taxes. Production taxes increased 52% from $362,000 ($0.18 per Mcfe) in 1996 to $549,000 ($0.18 per Mcfe) in 1997 as a direct result of increased production volumes. The effective average production tax rate remained unchanged at 6% of natural gas and oil sales revenues for each period. General and administrative expenses. General and administrative expenses increased 62% from $2.2 million ($1.07 per Mcfe) in 1996 to $3.6 million ($1.14 per Mcfe) in 1997. Approximately $300,000 of the increase in 1997 resulted from nonrecurring expenses related to the Company's relocation of its corporate headquarters from Dallas, Texas to Austin, Texas, and the balance was primarily attributable to the hiring of additional personnel and related expenses necessary to manage the Company's growing operations. The increase in the per unit rate was a result of a greater increase in aggregate general and administrative expenses than natural gas and oil production volumes from 1996 to 1997 due to the aforementioned factors. Depletion of natural gas and oil properties. Depletion of natural gas and oil properties increased 18% from $2.3 million ($1.13 per Mcfe) in 1996 to $2.7 million ($0.88 per Mcfe) in 1997 as a result of higher production volumes. The per unit amount decreased due to the addition of proved reserves during 1997. Interest expense. Interest expense was essentially unchanged from 1996 to 1997 as the Company's lower average outstanding debt balance in 1997 was offset by a higher effective average interest rate. The weighted average outstanding debt balance decreased 39% from $19.7 million in 1996 to $12 million in 1997. The effective interest rate increased 83% from 5.7% in 1996 to 10.5% in 1997. The decrease in the weighted average outstanding debt balance and increase in the effective average interest rate resulted primarily from the conversion to equity of privately placed 5% notes in February 1997, the retirement of $13.3 million of borrowings under its previous credit facility in connection with the Company's May 1997 initial public offering, and $32 million of borrowings incurred under its previous credit facility subsequent to the Company's initial public offering to fund the Company's increased exploration activity and its $13.5 million acquisition of properties from Mobil adjacent to its West Bradley 3-D Project area. The Company's previous credit facility had an effective interest rate of 8.8% at December 31, 1997. LIQUIDITY Despite the Company's success in building its inventory of 3-D seismic data and potential drilling locations, a number of key factors have recently contributed to significantly limit the Company's capital resources available to fund its continued long-term growth-oriented exploration strategy. Management believes these principal factors include: (i) lower commodity sales prices, which reduced revenues and cash flow from the Company's production volumes, (ii) reduced access to public, private and industry sources of capital on cost-effective terms due to the continuing low commodity price environment and outlook, (iii) less than anticipated success in placing working interests with industry or financial participants in certain of its high equity interest projects, resulting in lower levels of project cost recoupment than budgeted, (iv) high levels of expenditures for 3-D seismic and land activities that do not generate proved reserves and cash flow until the drilling stage of the project cycle, (v) the utilization of high levels of debt to fund its accelerating exploration expenditures, and (vi) disappointing drilling results during 1998 on a number of high equity interest exploratory and development wells, several of which were completed and subsequently plugged and abandoned or otherwise performed below expectations. As a result of these limiting factors and an expectation for continuing difficult industry and capital markets conditions, Brigham has substantially reduced its planned capital budget for 1999 and has undertaken a number of strategic initiatives in an effort to improve and preserve its capital liquidity in the current environment. While the Company remains focused on its long-term growth objectives and the continuation of its established business model - 26 - 29 for 3-D seismic-based exploration, Brigham has adapted its business strategy in the near-term in an effort to maximize value for its shareholders on a long-term basis through the implementation of the following principal strategic initiatives: (i) focusing all of the Company's planned exploration efforts in 1999 toward the drilling of its highest- grade 3-D prospects identified in its Anadarko Basin and Gulf Coast projects, concentrated primarily in trends where Brigham has achieved exploration success, (ii) eliminating substantially all planned seismic and land expenditures for new projects until its capital resources can support such additional activity, (iii) seeking to divest certain producing natural gas and oil properties in an effort to raise capital to reduce debt borrowings and to redirect capital to drilling projects that have the potential to generate higher investment returns, (iv) restructuring its outstanding senior and subordinated debt agreements to provide the Company with flexibility needed to preserve cash flow to fund its expected near-term exploration activities, (v) implementing an overhead reduction plan to reduce general and administrative expenses, and (vi) evaluating opportunities to raise additional equity capital either through the sales of interests in certain of its seismic projects or the issuance of equity securities. The Company believes that the successful execution of these strategic initiatives will provide Brigham with sufficient capital resources to execute its planned 1999 exploration program and position the Company to realize the significant value it believes it has captured in its inventory of 3-D seismic projects and delineated drilling locations. While the Company has initiated each of these strategic directives in late 1998 and early 1999, and has effected certain of them to date, the successful completion of any or all of these efforts to improve the Company's capital availability within the expected timeframe is uncertain and will likely have a material impact on the Company's near-term capital expenditure levels and growth profile. On March 30, 1999, the Company entered into an agreement with Veritas DGC Land, Inc. ("Veritas") to exchange 1,002,865 shares of newly issued Brigham common stock valued at $3.50 per share for approximately $3.5 million of payment obligations due to Veritas in 1999 for certain seismic acquisition and processing services previously performed. In addition, this agreement provides for the payment by Brigham of up to $1 million in future seismic processing services to be performed by Veritas in newly issued shares of Brigham common stock valued at $3.50 per share, in the event that the Company does not elect to pay for such services in cash. The settlement of these future seismic processing services will be determined on a quarterly basis through December 31, 1999. Brigham considers this arrangement to be beneficial as it will enable the Company to reduce its working capital commitments and preserve additional cash flow and capital availability to fund its 1999 drilling program. CAPITAL RESOURCES The Company's primary sources of capital have been revolving credit facility and other debt borrowings, public and private equity financings, the sale of interests in projects and funds generated by operations. The Company's primary capital requirements are 3-D seismic acquisition, processing and interpretation costs, land acquisition costs and drilling expenditures. During May 1997, 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 January 1998, the Company entered into a new revolving credit facility that provided for borrowing availability of $75 million that was used to repay its then outstanding borrowings under its previous credit facility and to fund capital expenditures. In August 1998, the Company issued $50 million of debt and equity securities, including the $40 million of Subordinated Notes, 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. Revolving Credit Facility In January 1998, the Company entered into a new revolving credit agreement (the "Credit Facility"), which provided for borrowing availability of $75 million. The Company used a portion of the funds available under the Credit Facility to repay the $32 million in borrowings outstanding at December 31, 1997 under its previous commercial bank credit facility. Principal outstanding under the Credit Facility is due at maturity on January 26, 2001 with interest due monthly for base rate tranches or periodically as LIBOR tranches mature. The annual interest rate for borrowings under the Credit Facility has been either the lender's base rate or LIBOR plus 2.25%, at the Company's option. The Credit Facility's borrowing availability was subsequently reduced from $75 million to $65 million upon the Company's issuance of the Subordinated Notes in August 1998. In March 1999, the Company and its lenders entered into an amendment to the Credit Facility. Pursuant to this amendment, the borrowing availability under the Credit Facility will remain at $65 million until June 1, 1999, when the borrowing availability will be redetermined by the lenders based on the Company's then proved reserve value and cash flows. In addition, certain financial covenants of the Credit Facility have been amended, additional covenants have been included that place significant restrictions on the Company's ability to incur certain capital expenditures, the annual interest rate for borrowings under the Credit Facility has been amended to the lender's base rate or LIBOR plus 3.00%, and the Company will pay the lenders a $500,000 transaction fee over a ten month period. The Company's obligations under the Credit Facility are secured by substantially all of the natural gas and oil properties - 27 - 30 and other tangible assets of the Company. At March 26, 1999, the Company had $59 million in borrowings outstanding under the Credit Facility, which bear interest at an annual rate of 7.4%. See Note 5 of Notes to the December 31, 1998 Consolidated Financial Statements. The Credit Facility has certain financial covenants including current and interest coverage ratios, as defined. The Company and its lenders effected the recent amendment to the Credit Facility to enable the Company to comply with certain financial covenants of the Credit Facility, including the minimum current ratio, minimum interest coverage ratio and the limitation on capital expenditures related to seismic and land activities. The Company believes this most recent amendment is indicative of its lenders' cooperation in the current oil and natural gas pricing environment. If this pricing environment continues or deteriorates further beyond the date of redetermination of borrowing availability, the Company believes its lenders will expect the Company to substantially reduce its level of borrowing under the Credit Facility. With this in mind, the Company has initiated the business strategy noted above. Should the Company be unable to comply with certain of the financial covenants, its lenders may be unwilling to waive compliance or amend the covenants in the future. 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. Subordinated Notes In August 1998, the Company issued $50 million of debt and equity securities to affiliates of Enron Corp. ("Enron"). Securities issued by the Company in connection with this financing transaction included: (i) $40 million of Subordinated Notes, (ii) warrants to purchase 1,000,000 shares of the Company's common stock at a price of $10.45 per share (the "Warrants"), and (iii) 1,052,632 shares of the Company's common stock at a price of $9.50 per share. The approximate $47.5 million in net proceeds received by the Company from this financing transaction were used to repay a portion of outstanding borrowings under its Credit Facility, which increased the Company's borrowing availability under its Credit Facility to fund capital expenditures. Principal outstanding under the Subordinated Notes is due at maturity on August 20, 2003. Interest on the Subordinated Notes is payable quarterly at rates that vary depending upon whether accrued interest is paid in cash or "in kind" through the issuance of additional Subordinated Notes ("PIK Interest"). Interest shall be paid in cash at interest rates of 12%, 13% and 14% per annum during years one through three, year four and year five, respectively, of the term of the Subordinated Notes; provided, however, that if the payment of interest accrued on the Subordinated Notes in cash would cause a borrowing base deficiency under the Credit Facility or would cause the Company to be in violation of any covenant or other restriction set forth in any senior loan document or any agreement entered into by the Company or subsidiary of the Company in connection with the Subordinated Notes, the Company may pay PIK Interest at interest rates of 13%, 14% and 15% per annum during years one through three, year four and year five, respectively, of the term of the Notes. The Subordinated Notes rank subordinate in right of payment to Senior Indebtedness (as defined) and senior to all other financings (other than any allowed capital leases and purchase money financings) of the Company. The Subordinated Notes are secured by a second lien against substantially all of the natural gas and oil properties and other tangible assets of the Company. The Subordinated Notes may be prepaid at any time, in whole or in part, without premium or penalty, provided that all partial prepayments must be pro rata to the various holders of the Subordinated Notes. The Subordinated Notes were issued pursuant to an indenture (the "Indenture") that contains certain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends, make distributions, enter into certain sale and leaseback transactions, enter into certain transactions with affiliates, dispose of certain assets, incur liens, and engage in mergers and consolidations. In March 1999, the Company and Chase Bank of Texas, National Association, as trustee (the "Trustee") for the holders of the Subordinated Notes, entered into an amendment to the Indenture. This amendment provides the Company with the option to pay interest due on the Subordinated Notes in kind, for any reason, through the second quarter of 2000. In addition, certain financial and other covenants were amended. The amendment also provides for a reduction in the exercise price per share of the Warrants from $10.45 per share to $3.50 per share. - 28 - 31 The Indenture governing the Subordinated Notes has certain financial covenants including current and interest coverage ratios, as defined. The Company and the holders of the Subordinated Notes effected the recent amendment to the Indenture to enable the Company to comply with certain financial covenants of the Indenture that parallel those of the Credit Facility, including the minimum current ratio and the minimum interest coverage ratio. Should the Company be unable to comply with certain of the financial covenants, the holders of the Subordinated Notes may be unwilling to waive compliance or amend the covenants in the future. 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. Cash Flow Analysis Cash Flows from Operating Activities. Cash flows provided by operating activities were $13.6 million in 1998, $9.8 million in 1997, and $3.7 million in 1996. The increase in cash flows for 1998 compared to 1997 was due primarily to an increase in natural gas and oil revenues, net of lease operating expenses, production taxes and general and administrative expenses, and net changes in working capital items. The increase in cash flows for 1997 compared to 1996 was due primarily to an increase in natural gas and oil revenues, net of lease operating expenses, production taxes and general and administrative expenses. Cash Flows from Investing Activities. Cash flows used in investing activities increased to $85.1 million in 1998 compared to $57.3 million in 1997 and $11.8 million in 1996. These increases are directly related to an increase in capital expenditures related to the Company's exploration and development activities. Capital expenditures were $84.1 million in 1998, $57.2 million in 1997 and $13.6 million in 1996. The Company acquired 1,213 gross (968 net) square miles of 3-D seismic in 1998, 1,262 gross (842 net) square miles in 1997, and 655 gross (241 net) square miles in 1996. The Company's drilling efforts resulted in the completion of 50 wells (26.3 net) in 1998, 45 wells (17.6 net) in 1997 and 42 wells (8.7 net) in 1996, which resulted in aggregate net increases in proved reserve volumes (net of revisions to previous estimates) of 31.2 Bcfe in 1998, 32.4 Bcfe in 1997, and 11.3 Bcfe in 1996. In addition, the Company sold certain producing properties in 1996 for $2.1 million and acquired certain producing properties and related interests for $13.5 million in 1997 and $1.0 million in 1998. Cash Flows from Financing Activities. Cash flows provided by financing activities for 1998 were $72.3 million, primarily as a result of borrowings under the Credit Facility, the issuance of the Subordinated Notes and the sale of $10 million of common stock. Cash flows from financing activities for 1997 were $47.7 million, primarily as a result of borrowings under the Company's previous credit facility and proceeds from the common stock sold in the Company's initial public offering. Cash flows from financing activities for 1996 were $7.7 million, primarily as a result of borrowings under the Company's previous credit facility. Capital Expenditures As a result of the Company's limited available capital resources, Brigham has significantly reduced its planned capital expenditure budget for 1999 from the Company's previously anticipated levels in an effort to match the its current and expected future capital resources. The Company's current 1999 capital budget is estimated to be $17.5 million, or approximately 21% of 1998 expenditures. The Company's budgeted 1999 capital expenditures consist of approximately $10 million to drill an estimated 20 to 25 gross wells, $3.5 million for seismic and land costs, consisting primarily of previous year commitments and obligations to acquire 3-D data and acreage, and $4 million for capitalized general and administrative expenses and other fixed asset expenditures. Brigham expects that its 1999 drilling expenditures will be allocated approximately 50% to its Anadarko Basin province and 50% to its Gulf Coast province, and such expenditures will be devoted to the drilling of the highest grade prospects in the Company's inventory of identified potential drilling locations. The Company intends to fund these budgeted capital expenditures through a combination of cash flow from operations, available borrowings under its Credit Facility and the sales of certain assets (including the potential divestitures of certain producing property packages from among its Anadarko Basin properties and interests in certain 3-D seismic projects). In addition to these sources of capital, the Company is also evaluating opportunities to raise additional capital to enable it to increase its planned capital expenditures for drilling in 1999. However, since the Company's capital availability during 1999 will depend to a large extent on the - 29 - 32 Company's success raising additional financing through its planned and potential strategic initiatives, the Company's actual 1999 capital expenditures may differ from its current estimates. In the event additional financing is not available in the amounts or timing needed, the Company may be required to curtail its planned exploration activities in 1999 and take further measures to reduce the size and scope of its business. See "Item 2. Properties -- Primary Exploration Provinces." OTHER MATTERS Hedging Activities The Company believes that hedging, although not free of risk, allows the Company to reduce its exposure to natural gas and oil sales price fluctuations and thereby to achieve more predictable cash flows. However, hedging arrangements, when utilized, limit the benefit to the Company of increases in the prices of the hedged commodity. Moreover, the Company's hedging arrangements apply only to a portion of its production and provide only partial price protection against declines in commodity prices. The Company expects that the amount of its hedges will vary from time to time. See "-- Risk Factors -- Risk of Hedging Activities" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." In 1995 the Company, in an attempt to reduce its sensitivity to volatile commodity prices, began using crude oil swap arrangements resulting in a fixed price over a period of six months. Total oil purchased and sold subject to swap arrangements entered into by the Company was 118,150 Bbls in 1996 and 54,900 Bbls in 1995. The Company accounts for all these transactions as hedging activities and, accordingly, adjusts the price received for natural gas and oil production during the period the hedged transactions occur. Adjustments to the price received for oil under these swap arrangements resulted in an increase in oil revenues of $40,849 in 1995 and decreases in oil revenues of $301,280 in 1996 and $6,191 in 1997. As of December 31, 1997, the Company had no hedging contracts outstanding. In 1998, the Company began using natural gas swap arrangements in an attempt to reduce its sensitivity to volatile commodity prices as its production base became increasingly weighted toward natural gas. Pursuant to these arrangements the Company exchanges a floating market price for a fixed contract price. Payments are made by the Company when the floating price exceeds the fixed price for a contract month and payments are received by the Company when the fixed price exceeds the floating price. Settlements of these swaps are based on the difference between the ANR Pipeline Co.-Oklahoma index price (as published in Inside FERC's Gas Market Report) for a contract month and the fixed contract price for the same month. The following table summarizes the Company's natural gas swap arrangements entered into from February 1998 through March 1999:
DAILY DAILY AVERAGE VOLUMES TOTAL VOLUMES HEDGED (MMBTU) FIXED HEDGED --------------------------------------------- CONTRACT PRICE (MMBTU) MONTHLY TERM 1998 1999 2000 2001 ($/MMBTU)(1) -------- -------------------------- --------- ---------- ---------- ---------- -------------- Contract #1 10,000 April 1998 - October 1999 2,750,000 3,040,000 $2.163 Contract #2 5,000 April 1999 - October 1999 1,070,000 $2.015 Contract #3 15,000 November 1999 - April 2001 915,000 5,490,000 1,800,000 $2.065
- ----------------- (1) Based on the ANR Pipeline Co.-Oklahoma index price as published in Inside FERC's Gas Market Report. For the year ended December 31, 1998, the Company realized an increase in revenues attributable to natural gas hedges of $555,240. - 30 - 33 Effects of Inflation and Changes in Prices The Company's results of operations and cash flows are affected by changing natural gas and oil prices. If the price of natural gas and oil increases (decreases), there could be a corresponding increase (decrease) in revenues as well as the operating costs that the Company is required to bear for operations. Inflation has had a minimal effect on the Company. Environmental and Other Regulatory Matters The Company's business is subject to certain federal, state and local laws and regulations relating to the exploration for and the development, production and marketing of natural gas and oil, as well as environmental and safety matters. Many of these laws and regulations have become more stringent in recent years, often imposing greater liability on a larger number of potentially responsible parties. Although the Company believes it is in substantial compliance with all applicable laws and regulations, the requirements imposed by laws and regulations are frequently changed and subject to interpretation, and the Company is unable to predict the ultimate cost of compliance with these requirements or their effect on its operations. Any suspensions, terminations or inability to meet applicable bonding requirements could materially adversely affect the Company's financial condition and operations. Although significant expenditures may be required to comply with governmental laws and regulations applicable to the Company, compliance has not had a material adverse effect on the earnings or competitive position of the Company. Future regulations may add to the cost of, or significantly limit, drilling activity. See "-- Risk Factors - -- Compliance with Environmental Regulations," "Item 1. Business -- Governmental Regulation" and "Item 1. Business -- Environmental Matters." Year 2000 Issues Many computer software systems, as well as certain hardware and equipment using date-sensitive data, were structured to use a two-digit date field meaning that they may not be able to properly recognize dates in the year 2000. The Company has developed a plan to address this issue and is taking steps to review its information technology systems, such as computer hardware and software, as well as non information technology systems, including computer controlled equipment and electronic devices used to operate equipment involved in processing and interpreting 3-D seismic data. The Company has completed the initial phases of its plan by identifying all computerized systems and substantially completing an inventory of its equipment and component parts. Both information technology and non information technology systems may contain embedded technology, which complicates the Company's Year 2000 identification, assessment, remediation and testing efforts. The Company continues to inventory its equipment and facilities to determine if they contain embedded date-sensitive technology. The Company is currently reviewing all of its systems to determine which are not Year 2000 compliant and will need to be replaced or modified. This current phase includes comparisons of inventory to manufacturer's information and/or performance testing. If problems are identified, the Company will undertake remediation, replacement or alternative procedures for non-compliant equipment or facilities on a business priority basis. The Company's identification and assessment efforts to date have not identified any computer equipment or software it currently uses which will require replacement or modification, except that one of the word processing software programs the Company uses may be non-compliant and may need to be discontinued or upgraded. In addition, in the ordinary course of replacing computer equipment and software, the Company attempts to obtain replacements that are Year 2000 compliant. The Company currently anticipates that its identification, assessment, remediation and testing efforts will continue and, depending upon the results of the assessment efforts, be completed during the first three quarters of 1999. As of December 31, 1998, all costs incurred by the Company in connection with its Year 2000 compliance efforts were included within the Company's normal general and administrative expenses (for example, regular maintenance of software programs). The Company is currently expensing as incurred all costs related to the assessment and remediation of the Year 2000 issue, and these costs are being funded through operating cash flow. However, in certain instances the Company may determine that replacing existing equipment may be appropriate and may capitalize such replacements. The Company is unable currently to estimate the amount of its total out-of-pocket costs to become - 31 - 34 Year 2000 compliant, but the Company currently expects that such costs will not have a material adverse effect on the Company's financial condition, operations or liquidity. The foregoing timetable and assessment of costs to become Year 2000 compliant reflect management's current best estimates. These estimates are based on many assumptions, including assumptions about the cost, availability and ability of resources to locate, remediate and modify affected systems, equipment and facilities. Based upon its activities to date, the Company does not currently believe that these factors will cause results to differ significantly from those estimated. However, the Company cannot reasonably estimate the potential impact on its financial condition and operations if key third parties including, among others, suppliers, contractors, joint venture partners, financial institutions, customers and governments do not become Year 2000 compliant on a timely basis. The Company is currently identifying third parties whose business significantly impacts the Company, has contacted some significant third parties to determine the extent to which interfaces with such entities are vulnerable to Year 2000 issues, and will contact others as it completes the identification phase. In the event that the Company is unable to complete the remediation or replacement of its critical systems, facilities and equipment, establish alternative procedures in a timely manner, or if those with whom the Company conducts business are unsuccessful in implementing timely solutions, Year 2000 issues could have a material adverse effect on the Company's liquidity and results of operations. At this time, the potential effect in the event the Company and/or third parties are unable to timely resolve their Year 2000 problems is not determinable. A contingency plan has not been developed for dealing with the most reasonably likely worst case scenario, and such scenario has not yet been clearly identified. However, the Company currently believes that it will be able to resolve its own Year 2000 issues in a timely manner. The disclosure set forth in this section is provided pursuant to Securities Act Release No. 33-7558. As such it is protected as a forward-looking statement under the Private Securities Litigation Reform Act of 1995. See "Forward-Looking Statements." This disclosure is also subject to protection under the Year 2000 Information and Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness Disclosure" as defined therein. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 130, "Reporting Comprehensive Income" which established standards for reporting, in addition to net income, comprehensive income and its components. Adoption of this standard has no impact on the Company's financial statements. 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. As all of the Company's natural gas and oil properties and related operations are located in the United States, management has determined that the Company has one reportable segment. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. The Company is currently assessing the impact adoption of this standard will have on its financial statement presentation. FORWARD LOOKING INFORMATION Brigham or its representatives may make forward looking statements, oral or written, including statements in this report, press releases and filings with the SEC, regarding estimated future net revenues from oil and natural gas reserves and the present value thereof, planned capital expenditures (including the amount and nature thereof), increases in oil and gas production, the number of wells the Company anticipates drilling through 1999 and the Company's financial position, business strategy and other plans and objectives for future operations. Although the Company believes that the expectations reflected in these forward looking statements are reasonable, there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected effects on its business or operations. Among the factors that could cause - 32 - 35 actual results to differ materially from the Company's expectations are general economic conditions, inherent uncertainties in interpreting engineering data, operating hazards, delays or cancellations of drilling operations for a variety of reasons, competition, fluctuations in oil and gas prices, the ability of the Company to successfully integrate the business and operations of acquired companies, government regulations and other factors set forth among the risk factors noted below or in the description of the Company's business in Item 1 of this report. All subsequent oral and written forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. The Company assumes no obligation to update any of these statements. RISK FACTORS Effects of Leverage. The Company had long-term debt outstanding of $99 million (principal amount) as of December 31, 1998 and $100.3 million (principal amount) as of March 26, 1999. The Indenture limits the amounts of additional debt borrowings, including borrowings under the Credit Facility or other Senior Indebtedness (as defined). However, the Indenture permits the Company to borrow under the Credit Facility up to the lesser of $75 million or the borrowing base under the Credit Facility ($65 million as of December 31, 1998 and March 26, 1999), which would provide the Company with the ability to borrow up to $6 million of additional indebtedness under its Credit Facility as of December 31, 1998 and March 26, 1999. In addition, the Indenture allows the Company to borrow up to $25 million of future subordinated indebtedness that is pari passu in right of payment with the Subordinated Notes if the holders of the Subordinated Notes have been given a first look and right to make a proposal for such subordinated indebtedness. The Company's level of indebtedness will have several important effects on its operations, including (i) a substantial portion of the Company's cash flow from operations will be dedicated to the payment of interest on its indebtedness and will not be available for other purposes; (ii) the covenants contained in the Credit Facility and the Indenture limit its ability to borrow additional funds or to dispose of assets and may affect the Company's flexibility in planning for, and reacting to, changes in business conditions and (iii) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired. Moreover, future exploration, development or acquisition activities may require the Company to alter its capitalization significantly. These changes in capitalization may significantly alter the leverage of the Company. The Company's ability to meet its debt service obligations and to reduce its total indebtedness will be dependent upon the Company's future performance, which will be subject to general economic conditions and to financial, business and other factors affecting the operations of the Company, many of which are beyond its control. There can be no assurance that the Company's future performance will not be adversely affected by such economic conditions and financial, business and other factors. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity" and "-- Capital Resources." Substantial Capital Requirements; Limited Current Liquidity. The Company makes and will continue to make substantial capital expenditures in its exploration and development projects. The Company's available capital resources at March 26, 1999 are limited and not sufficient to fund its planned working capital needs and capital expenditures for 1999. The Company intends to finance these working capital needs and planned capital expenditures with cash flow from operations, borrowings available under the Credit Facility, the potential sales of interests in certain producing properties and 3-D seismic projects and the potential issuance of additional equity securities. Additional financing will be required in the future to fund the Company's exploratory and developmental drilling and 3-D seismic acquisition activities at currently budgeted levels. No assurance can be given as to the availability or terms of any such additional financing that may be required or that financing will continue to be available under the existing or new financing arrangements. If additional capital resources are not available to the Company, its drilling and other activities may be curtailed and its business, financial condition and results of operations could be materially adversely affected. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity" and " -- Capital Resources." Dependence on Exploratory Drilling Activities. The Company's revenues, operating results and future rate of growth are highly dependent upon the success of its exploratory drilling program. Exploratory drilling involves numerous risks, including the risk that no commercially productive natural gas or oil reservoirs will be encountered. The cost of drilling, completing and operating wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including unexpected drilling conditions, pressure or - 33 - 36 irregularities in formations, equipment failures or accidents, adverse weather conditions, compliance with governmental requirements and shortages or delays in the availability of drilling rigs and the delivery of equipment. Despite the use of 3-D seismic and other advanced technologies, exploratory drilling remains a speculative activity. Even when fully utilized and properly interpreted, 3-D seismic data and other advanced technologies only assist geoscientists in identifying subsurface structures and do not enable the interpreter to know whether hydrocarbons are in fact present in those structures. In addition, the use of 3-D seismic data and other advanced technologies requires greater predrilling expenditures than traditional drilling strategies, and the Company could incur losses as a result of such expenditures. The Company's future drilling activities may not be successful. There can be no assurance that the Company's overall drilling success rate or its drilling success rate for activity within a particular province will not decline. Unsuccessful drilling activities could have a material adverse effect on the Company's results of operations and financial condition. The Company often gathers 3-D seismic data over large areas. The Company's interpretation of data delineates those portions of an area desirable for drilling. Therefore, the Company may choose not to acquire option and lease rights prior to acquiring seismic and, in many cases, the Company may identify a drilling location before seeking option or lease rights in the location. Although the Company has identified numerous potential drilling locations, there can be no assurance that they will ever be leased or drilled or that natural gas or oil will be produced from these or any other potential drilling locations. Volatility of Oil and Natural Gas Prices. The Company's revenues, operating results and future rate of growth are highly dependent upon the prices received for the Company's oil and natural gas. Historically, the markets for oil and natural gas have been volatile and are likely to continue to be volatile in the future. Various factors beyond the control of the Company will affect prices of its oil and natural gas, including worldwide and domestic supplies of oil and natural gas, the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls, political instability or armed conflict in oil-producing regions, the price and level of foreign imports, the level of consumer demand, the price and availability of alternative fuels, the availability of pipeline capacity, weather conditions, domestic and foreign governmental regulations and taxes, and the overall economic environment. During 1998, the high and low prices for oil on the NYMEX were $17.82 per Bbl and $10.72 per Bbl, and the high and low prices for natural gas on the NYMEX were $2.69 per MMBtu and $1.65 per MMBtu. The recent decline in oil prices is generally thought to be caused primarily by an oversupply of worldwide crude oil inventory created, in part, by unusually warm winters in the United States and Europe in 1997 and 1998, an announced increase in crude oil production quotas for OPEC countries in late 1997 and a possible decline in demand in certain Asian markets. The recent decline in natural gas prices is generally thought to be caused primarily by an oversupply of domestic natural gas inventory created, in part, by reduced demand for natural gas due to unusually warm winters in the United States in 1997 and 1998. It is impossible to predict future oil and natural gas price movements with certainty. If such declines in the NYMEX crude oil or natural gas prices worsen or persist for a protracted period, it would adversely affect the Company's revenues, net income and cash flows from operations. Also, if these prices maintain their present level for an extended time period or decline further, the Company may delay or postpone certain of its capital projects. Declines in oil and natural gas prices may materially adversely affect the Company's financial condition, liquidity, ability to finance planned capital expenditures and results of operations. Lower oil and natural gas prices also may reduce the amount of oil and natural gas that the Company can produce economically. Any significant decline in the price of natural gas or oil would adversely affect the Company's revenues and operating income and may require a reduction in the carrying value of the Company's oil and natural gas properties. See "Item 1. Business -- Competition" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations". Historical Operating Losses and Variability of Operating Results. The Company had net losses of approximately $1.3 million in 1994, $1.6 million in 1995, $450,000 in 1996, $1.1 million (including a net $1.2 million non-cash deferred income tax charge incurred in connection with the Company's conversion from a partnership to a corporation) in 1997, and $33.3 million (including a $24.8 million non-cash writedown in the carrying value of its natural gas and oil properties) in 1998. The Company has incurred net losses in each year of operation, and there can be no assurance that the Company will be profitable in the future. At December 31, 1998, the Company's accumulated earnings were a deficit of $33.4 million and its total stockholders' equity was $24.7 million. In addition, the Company's future operating results may fluctuate significantly depending upon a number of factors, including industry conditions, prices of oil and natural gas, rates of drilling success, rates of production from completed wells and the timing and amount of capital expenditures. This variability could have a material adverse effect on the Company's business, financial - 34 - 37 condition and results of operations. In addition, any failure or delay in the realization of expected cash flows from operating activities could limit the Company's ability to invest and participate in economically attractive projects. See "Item 6. Selected Financial Data" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Reserve Replacement Risk. In general, production from oil and natural gas properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Except to the extent the Company conducts successful exploration and development activities or acquires properties containing proved reserves, or both, the proved reserves of the Company will decline as reserves are produced. The Company's future oil and natural gas production is highly dependent upon its ability to economically find, develop or acquire reserves in commercial quantities. The business of exploring for or developing reserves is capital intensive. To the extent cash flow from operations is reduced and external sources of capital become limited or unavailable, the Company's ability to make the necessary capital investment to maintain or expand its asset base of oil and natural gas reserves would be impaired. The Company participates in a percentage of its wells as a non-operator. The failure of an operator of the Company's wells to adequately perform operations, or an operator's breach of the applicable agreements, could adversely impact the Company. In addition, there can be no assurance that the Company's future exploration and development activities will result in additional proved reserves or that the Company will be able to drill productive wells at acceptable costs. Furthermore, although the Company's revenues could increase if prevailing prices for oil and natural gas increase significantly, the Company's finding and development costs could also increase. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Operating Hazards and Uninsured Risks. The Company's operations are subject to hazards and risks inherent in drilling for and producing and transporting oil and natural gas, such as fires, natural disasters, explosions, encountering formations with abnormal pressures, blowouts, cratering, pipeline ruptures and spills, any of which can result in the loss of hydrocarbons, environmental pollution, personal injury claims and other damage to properties of the Company and others. As protection against operating hazards, the Company maintains insurance coverage against some, but not all, potential losses. The Company may elect to self-insure if management believes that the cost of insurance, although available, is excessive relative to the risks presented. The Company generally maintains insurance for the hazards and risks inherent in drilling for and producing and transporting oil and natural gas and believes this insurance is adequate. Nevertheless, the occurrence of an event that is not covered, or not fully covered, by insurance could have a material adverse effect on the Company's financial condition and results of operations. In addition, pollution and environmental risks generally are not fully insurable. See "Item 2. Business and Properties -- Operating Hazards and Uninsured Risks" and " Uncertainty of Reserve Information and Future Net Revenue Estimates. Numerous uncertainties are inherent in estimating quantities of proved reserves and their values, including many factors beyond the Company's control. The reserve information in herein is an estimate only. Although the Company believes these estimates are reasonable, reserve estimates are imprecise and are expected to change as additional information becomes available. Estimates of oil and natural gas reserves by necessity are projections based on engineering data, and uncertainties are inherent in the interpretation of this data, the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geologic interpretation, and judgment. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies, and assumptions concerning future oil and natural gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of reserves based on risk of recovery, and estimates of the future net cash flows may vary substantially. Moreover, there can be no assurance that the Company's reserves will ultimately be produced or that the Company's proved undeveloped reserves will be developed within the periods anticipated. Any significant variance in the assumptions could materially affect the estimated quantity and value of the Company's reserves. Actual production, revenues and expenditures with respect to the - 35 - 38 Company's reserves will likely vary from estimates, and such variances may be material. See "Item 2. Business and Properties -- Oil and Natural Gas Reserves." The Present Value of Future Net Revenues referred to herein should not be construed as the current market value of the estimated oil and natural gas reserves attributable to the Company's properties. In accordance with applicable requirements of the SEC, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as the amount and timing of actual production, supply and demand for oil and natural gas, curtailments or increases in consumption by gas purchasers, and changes in governmental regulations or taxation. The timing of actual future net cash flows from proved reserves, and thus their actual present value, will be affected by the timing of both the production and the incurrence of expenses in connection with development and production of oil and natural gas properties. In addition, the 10% discount factor, which must be used to calculate discounted future net cash flows for SEC reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and gas industry in general. Competition. The Company operates in the highly competitive areas of oil and natural gas exploration, exploitation, acquisition and production with other companies. In seeking to acquire desirable producing properties or new leases for future exploration and in marketing its oil and natural gas production, as well as in seeking to acquire the equipment and expertise necessary to operate and develop those properties, the Company faces intense competition from a large number of independent, technology-driven companies as well as both major and other independent oil and natural gas companies. Many of these competitors have financial and other resources substantially in excess of those available to the Company. The effects of this highly competitive environment could have a material adverse effect on the Company. See "Item 1. Business -- Competition." Compliance with Government Regulations. The Company's business is subject to federal, state and local laws and regulations relating to the exploration for, and the development, production and marketing of, oil and natural gas, as well as safety matters. Although the Company believes it is in substantial compliance with all applicable laws and regulations, legal requirements are frequently changed and subject to interpretation, and the Company is unable to predict the ultimate cost of compliance with these requirements or their effect on its operations. Significant expenditures may be required to comply with governmental laws and regulations. See "Item 1. Business -- Governmental Regulation." Compliance with Environmental Regulations. The Company's operations are subject to complex environmental laws and regulations adopted by federal, state and local governmental authorities. Environmental laws and regulations are frequently changed. The implementation of new, or the modification of existing, laws or regulations could have a material adverse effect on the Company. The discharge of natural gas, oil, or other pollutants into the air, soil or water may give rise to significant liabilities on the part of the Company to the government and third parties and may require the Company to incur substantial costs of remediation. No assurance can be given that existing environmental laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations will not materially adversely affect the Company's results of operations and financial condition. See "Item 1. Business -- Environmental Matters." Risk of Hedging Activities. In an attempt to reduce its sensitivity to energy price volatility, the Company uses swap arrangements that generally result in a fixed price over a period of six to eighteen months. If the Company's reserves are not produced at rates equivalent to the hedged position, the Company would be required to satisfy its obligations under hedging contracts on potentially unfavorable terms without the ability to hedge that risk through sales of comparable quantities of its own production. Further, the terms under which the Company enters into hedging contracts are based on assumptions and estimates of numerous factors such as cost of production and pipeline and other transportation costs to delivery points. Substantial variations between the assumptions and estimates used by the Company and actual results experienced could materially adversely affect the Company's anticipated profit margins and its ability to manage the risk associated with fluctuations in oil and natural gas prices. Additionally, hedging contracts limit the benefits the Company will realize if actual prices rise above the contract prices. In addition, hedging contracts are subject to the risk that the other party may prove unable or unwilling to perform its obligations - 36 - 39 under such contracts. Any significant nonperformance could have a material adverse financial effect on the Company. For the year ended December 31, 1998, the Company realized an increase in revenues attributable to natural gas hedges of $555,240. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Matters -- Hedging Activities" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." Marketability of Production. The marketability of the Company's production depends in part upon the availability, proximity and capacity of natural gas gathering systems, pipelines and processing facilities. The Company generally delivers natural gas through gas gathering systems and gas pipelines that it does not own. Federal and state regulation of oil and natural gas production and transportation, tax and energy policies, changes in supply and demand and general economic conditions all could adversely affect the Company's ability to produce and market its oil and natural gas. Any dramatic change in market factors could have a material adverse effect on the Company. Dependence on Key Personnel. The Company has assembled a team of geologists, geophysicists and engineers having considerable experience applying 3-D imaging technology. The Company is dependent upon the knowledge, skills and experience of these experts to provide 3-D imaging and assist the Company in reducing the risks associated with its participation in oil and natural gas exploration projects. In addition, the success of the Company's business also depends to a significant extent upon the abilities and continued efforts of its management, particularly Ben M. Brigham, the Company's Chief Executive Officer, President and Chairman of the Board. The Company has an employment agreement with Ben M. Brigham, but does not have an employment agreement with any of its other employees. The Company has key man life insurance on Mr. Brigham in the amount of $2 million. The loss of services of key management personnel or the Company's technical experts, or the inability to attract additional qualified personnel, could have a material adverse effect on the Company's business, financial condition, results of operations, development efforts and ability to grow. There can be no assurance that the Company will be successful in attracting and retaining such executives, geophysicists, geologists and engineers. See "Item 1. Business -- Exploration Staff" and "Executive Officers of the Registrant". Control by Existing Stockholders. As of March 26, 1999, directors, executive officers and principal stockholders of the Company, and certain of their affiliates, beneficially owned approximately 63% of the Company's outstanding Common Stock. Accordingly, these stockholders, as a group, will be able to control the outcome of stockholder votes, including votes concerning the election of directors, the adoption or amendment of provisions in the Company's Certificate of Incorporation or Bylaws and the approval of mergers and other significant corporate transactions. The existence of these levels of ownership concentrated in a few persons make it unlikely that any other holder of Common Stock will be able to affect the management or direction of the Company. These factors may also have the effect of delaying or preventing a change in the management or voting control of the Company. Certain Antitakeover Considerations. The Company's Certificate of Incorporation authorizes the Board of Directors of the Company to issue up to 10 million shares of preferred stock without stockholder approval and to set the rights, preferences and other designations, including voting rights, of those shares as the Board of Directors may determine. These provisions, alone or in combination with the matters described in "Risk Factors -- Control by Existing Stockholders," may discourage transactions involving actual or potential changes of control of the Company, including transactions that otherwise could involve payment of a premium over prevailing market prices to holders of Common Stock. The Company also is subject to provisions of the Delaware General Corporation Law that may make some business combinations more difficult. Year 2000 Compliance. Many computer software systems, as well as certain hardware and equipment using date-sensitive data, were structured to use a two-digit date field meaning that they may not be able to properly recognize dates in the year 2000. The Company currently expects that any costs necessary for the Company to become Year 2000 compliant will not have a material adverse effect on the Company's financial condition, operations or liquidity. However, the Company cannot reasonably estimate the potential impact on its financial condition and operations if key third parties including, among others, suppliers, contractors, joint venture partners, financial institutions, customers and governments do not become Year 2000 compliant on a timely basis. There can be no assurance that the Company will be able to complete any necessary remediation or replacement of its critical systems, facilities and equipment or establish alternative procedures in a timely manner; that those with whom the Company - 37 - 40 conduct business will be successful in implementing timely solutions; or that Year 2000 issues will not have a material adverse effect on the Company's business, financial position and results of operations. See "Item 7. Management's Discussion and Analysis of Financial Conditions and Result of Operations -- Other Matters -- Year 2000 Issues". Possible Stock Price Volatility. The trading price of the Common Stock and the price at which the Company may sell securities in the future could be subject to large fluctuations in response to limited trading volume in the Company's stock and changes in government regulations, quarterly variations in operating results, litigation, general market conditions, the prices of natural gas and oil, announcements by the Company and its competitors, the liquidity of the Company, the Company's ability to raise additional funds and other events. - 38 - 41 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MANAGEMENT OPINION CONCERNING DERIVATIVE INSTRUMENTS The Company limits its use of derivative instruments principally to commodity price hedging activities, whereby gains and losses are generally offset by price changes in the underlying commodity. As a result, management believes that its use of derivative instruments does not expose the Company to material risk. The Company's use of derivative instruments for hedging activities could materially affect the Company's results of operations in particular quarterly or annual periods since such instruments can limit the Company's ability to benefit from favorable oil and natural gas price movements. However, management believes that use of these instruments will not have a material adverse effect on the Company's financial position or liquidity. COMMODITY PRICE RISK The Company's primary commodity market risk exposure is to changes in the prices related to the sale of its oil and natural gas production. The market prices for oil and natural gas have been volatile and are likely to continue to be volatile in the future. As such, the Company employs established policies and procedures to manage its exposure to fluctuations in the sales prices it receives for its oil and natural gas production through hedging activities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Matters -- Hedging Activities." The Company believes that hedging, although not free of risk, allows the Company to reduce its exposure to oil and natural gas sales price fluctuations and thereby to achieve more predictable cash flows. However, hedging arrangements, when utilized, limit the benefit to the Company of increases in the prices of the hedged commodity. Moreover, the Company's hedging arrangements apply only to a portion of its production and provide only partial price protection against declines in commodity prices. The Company expects that the amount of its hedges will vary from time to time. Based on the Company's natural gas swap arrangements outstanding at December 31, 1998, an adverse change (defined as a hypothetical 10% and 25% increase in underlying commodity prices for open positions) would lower revenue and income before taxes by approximately $902,000 and $2.3 million, respectively, from currently projected levels. Additionally, as the Company utilizes swap arrangements to hedge anticipated and firmly committed transactions, a loss in fair value for those instruments is generally offset by price changes in the underlying commodity. The impact of these price changes are not reflected in this sensitivity analysis. INTEREST RATE RISK The Company does not utilize derivative instruments to protect against changes in interest rates on debt borrowings. See Note 11 of Notes to Consolidated Financial Statements for a description of the Company's financial instruments at December 31, 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements required by this item are included on the pages immediately following the Index to Financial Statements appearing on page F1-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. - 39 - 42 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to information under the caption "Proposal 1 - Election of Directors" and to the information under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's definitive Proxy Statement (the "1999 Proxy Statement") for its annual meeting of stockholders to be held on May 13, 1999. The 1999 Proxy Statement will be filed with the Securities and Exchange Commission (the "Commission") not later than 120 days subsequent to December 31, 1998. Pursuant to Item 401(b) of Regulation S-K, the information required by this item with respect to executive officers of the Company is set forth in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the 1999 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the 1999 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The information required by this item is incorporated herein by reference to the 1999 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 1998. - 40 - 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Consolidated Financial Statements: See Index to Consolidated Financial Statements on page F-1. 2. Financial Statement Schedules: See Index to Consolidated Financial Statements on page F-1. 3. Exhibits: The following documents are filed as exhibits to this report:
Number Description - ------ ----------- 2.1 -- Exchange Agreement (filed as Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 3.1 -- Certificate of Incorporation (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 3.2 -- Bylaws (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 4.1 -- Form of Common Stock Certificate (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 4.2+ -- Indenture dated as of August 20, 1998 between Brigham Exploration Company and Chase Bank of Texas, National Association, as Trustee. 4.2.1++ -- Supplemental Indenture dated as of March 26, 1999 between Brigham Exploration Company and Chase Bank of Texas, National Association, as Trustee. 4.3++ -- Form of Warrant Certificate. 4.4 -- Form of Senior Subordinated Secured Note due 2003 (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.1 -- Agreement of Limited Partnership, dated May 1, 1992, between Brigham Exploration Company and General Atlantic Partners III, L.P. as general partners, and Harold D. Carter and GAP-Brigham Partners, L.P. as limited partners (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.1.1 -- Amendment No. 1 to Agreement of Limited Partnership of Brigham Oil & Gas, L.P., dated May 1, 1992, by and among Brigham Exploration Company, General Atlantic Partners III, L.P., GAP-Brigham Partners, L.P. and Harold D. Carter (filed as Exhibit 10.1.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.1.2 -- Amendment No. 2 to Agreement of Limited Partnership of Brigham Oil & Gas, L.P., dated September 30, 1994, by and among Brigham Exploration Company, General Atlantic Partners III, L.P., GAP-Brigham Partners, L.P., Harold D. Carter and the additional signatories thereto (filed as Exhibit 10.1.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.1.3 -- Amendment No. 3 to Agreement of Limited Partnership of Brigham Oil & Gas, L.P., dated August 24, 1995, by and among Brigham Exploration Company, General Atlantic Partners III, L.P., GAP-Brigham Partners, L.P., Harold D.
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Number Description - ------ ----------- Carter, Craig M. Fleming, David T. Brigham and Jon L. Glass (filed as Exhibit 10.1.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.1.4+ -- Amended and Restated Agreement of Limited Partnership of Brigham Oil & Gas, L.P., dated December 30, 1997 by and among Brigham, Inc., Brigham Holdings I, L.L.C. and Brigham Holdings II, L.L.C. 10.2 -- Agreement of Limited Partnership of Venture Acquisitions, L.P., dated September 23, 1994, by and between Quest Resources, L.L.C. and RIMCO Energy, Inc. as general partners, and RIMCO Production Company, Inc., RIMCO Exploration Partners, L.P. I and RIMCO Exploration Partners, L.P. II, as limited partners (filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.3 -- Regulations of Quest Resources, L.L.C. (filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.4 -- Management and Ownership Agreement, dated September 23, 1994, by and among Brigham Oil & Gas, L.P., Brigham Exploration Company, General Atlantic Partners III, L.P., Harold D. Carter, Ben M. Brigham and GAP- Brigham Partners, L.P. (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.5* -- Consulting Agreement, dated May 1, 1997, by and between Brigham Oil & Gas, L.P. and Harold D. Carter (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 33-53873), and incorporated herein by reference). 10.6* -- Employment Agreement, by and between Brigham Exploration Company and Ben M. Brigham (filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.7* -- Form of Confidentiality and Noncompete Agreement between the Registrant and each of its executive officers (filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.8* -- 1997 Incentive Plan of Brigham Exploration Company (filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 333- 22491), and incorporated herein by reference). 10.8.1* -- Form of Option Agreement for certain executive officers (filed as Exhibit 10.9.1 to the Company's Registration Statement on Form S-1 (Registration No. 333- 22491), and incorporated herein by reference). 10.8.2* -- Option Agreement dated as of March 4, 1997, by and between Brigham Exploration Company and Jon L. Glass (filed as Exhibit 10.9.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.9* -- Incentive Bonus Plan dated as of February 28, 1997 of Brigham, Inc. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.10 -- Two Bridgepoint Lease Agreement, dated September 30, 1996, by and between Investors Life Insurance Company of North America and Brigham Oil & Gas, L.P. (filed as Exhibit 10.14 to the Company's Registration Statement on Form S- 1 (Registration No. 333-22491), and incorporated herein by reference).
- 42 - 45
Number Description - ------ ----------- 10.10.1 -- First Amendment to Two Bridge Point Lease Agreement dated April 11, 1997 between Investors Life Insurance Company of North America and Brigham Oil & Gas, L.P. (filed as Exhibit 10.9.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.10.2 -- Second Amendment to Two Bridge Point Lease Agreement dated October 13, 1997 between Investors Life Insurance Company of North America and Brigham Oil & Gas, L.P. (filed as Exhibit 10.9.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.10.3 -- Letter dated April 17, 1998 exercising Right of First Refusal to Lease "3rd Option Space" (filed as Exhibit 10.9.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.11 -- Anadarko Basin Seismic Operations Agreement, dated February 15, 1996, by and between Brigham Oil & Gas, L.P. and Veritas Geophysical, Ltd. (filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.11.1 -- Letter Amendment to Anadarko Basin Seismic Operations Agreement, dated June 10, 1996, between Brigham Oil & Gas, L.P. and Veritas Geophysical, Ltd. (filed as Exhibit 10.15.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.12 -- Expense Allocation and Participation Agreement, dated April 1, 1996, between Brigham Oil & Gas, L.P. and Gasco Limited Partnership. (filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration No. 333- 22491), and incorporated herein by reference). 10.12.1 -- Amendment to Expense Allocation and Participation Agreement, dated October 21, 1996, between Brigham Oil & Gas, L.P. and Gasco Limited Partnership (filed as Exhibit 10.16.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.13 -- Expense Allocation and Participation Agreement, dated April 1, 1996, between Brigham Oil & Gas, L.P. and Middle Bay Oil Company, Inc. (filed as Exhibit 10.17 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.13.1 -- Amendment to Expense Allocation and Participation Agreement, dated September 26, 1996, between Brigham Oil & Gas, L.P. and Middle Bay Oil Company, Inc. (filed as Exhibit 10.17.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.13.2 -- Letter Amendment to Expense Allocation and Participation Agreement, dated May 20, 1996, between Brigham Oil & Gas, L.P. and Middle Bay Oil Company, Inc. (filed as Exhibit 10.17.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.14 -- Anadarko Basin Joint Participation Agreement, dated May 1, 1996, by and among Stephens Production Company and Brigham Oil & Gas, L.P. (filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.15 -- Anadarko Basin Joint Participation Agreement, dated May 1, 1996, by and between Vintage Petroleum, Inc. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.19 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.16 -- Processing Alliance Agreement, dated July 20, 1993, between Veritas Seismic Ltd. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.20 to the Company's
- 43 - 46
Number Description - ------ ----------- Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.16.1 -- Letter Amendment to Processing Alliance Agreement, dated November 3, 1994, between Veritas Seismic Ltd. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.20.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.17 -- Agreement and Assignment of Interest, West Bradley Project, dated September 1, 1995, by and between Aspect Resources Limited Liability Company and Brigham Oil & Gas, L.P. (filed as Exhibit 10.21 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.18 -- Agreement and Assignment of Interests in lands located in Grady County, Oklahoma, West Bradley Project, dated December 1, 1995, by and between Aspect Resources Limited Liability Company, Brigham Oil & Gas, L.P. and Venture Acquisitions, L.P. (filed as Exhibit 10.22 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.19 -- Agreement and Assignment of Interests, West Bradley Project, dated December 1, 1995, by and between Aspect Resources Limited Liability Company and Brigham Oil & Gas, L.P. (filed as Exhibit 10.23 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.20 -- Geophysical Exploration Agreement, Hardeman Project, Hardeman and Wilbarger Counties, Texas and Jackson County, Oklahoma, dated March 15, 1993 by and among General Atlantic Resources, Inc., Maynard Oil Company, Ruja Muta Corporation, Tucker Scully Interests Ltd., JHJ Exploration, Ltd., Cheyenne Petroleum Company, Antrim Resources, Inc., and Brigham Oil & Gas, L.P. (filed as Exhibit 10.24 to the Company's Registration Statement on Form S- 1 (Registration No. 333-22491), and incorporated herein by reference). 10.21 -- Agreement and Partial Assignment of Interests in OK13-P Prospect Area, Jackson County, Oklahoma (Hardeman Project), dated August 1, 1995, by and between Brigham Oil & Gas, L.P. and Aspect Resources Limited Liability Company (filed as Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.22 -- Agreement and Partial Assignment of Interests in Q140-E Prospect Area, Hardeman County, Texas (Hardeman Project), dated August 1, 1995, by and between Brigham Oil & Gas, L.P. and Aspect Resources Limited Liability Company (filed as Exhibit 10.26 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.23 -- Agreement and Partial Assignment of Interests in Hankins #1 Chappel Prospect Agreement, Jackson County, Oklahoma (Hardeman Project), dated March 21, 1996, by and between Brigham Oil & Gas, L.P., NGR, Ltd. and Aspect Resources Limited Liability Company (filed as Exhibit 10.27 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.24 -- Form of Indemnity Agreement between the Registrant and each of its executive officers (filed as Exhibit 10.28 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.25 -- Registration Rights Agreement dated February 26, 1997 by and among Brigham Exploration Company, General Atlantic Partners III L.P., GAP-Brigham Partners, L.P., RIMCO Partners, L.P. II, RIMCO Partners L.P. III, and RIMCO Partners, L.P. IV, Ben M. Brigham, Anne L. Brigham, Harold D.
- 44 - 47
Number Description - ------ ----------- Carter, Craig M. Fleming, David T. Brigham and Jon L. Glass (filed as Exhibit 10.29 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.26 -- 1997 Director Stock Option Plan (filed as Exhibit 10.30 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.27 -- Form of Employee Stock Ownership Agreement (filed as Exhibit 10.31 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.28 -- Agreement and Assignment of Interest in Geophysical Exploration Agreement, Esperson Dome Project, dated November 1, 1994, by and between Brigham Oil & Gas, L.P. and Vaquero Gas Company (filed as Exhibit 10.33 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.29 -- Geophysical Exploration Agreement, Southwest Danbury Project, Brazoria County, Texas, dated as of July 1, 1996, by and among UNEXCO, Inc. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.34 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.30 -- Geophysical Exploration Agreement, Welder Project, Duval County, Texas, dated as of October 1, 1996, by and among UNEXCO, Inc. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.35 to the Company's Registration Statement on Form S- 1 (Registration No. 333-22491), and incorporated herein by reference). 10.31 -- Proposed Trade Structure, RIMCO/Tigre Project, Vermillion Parish, Louisiana, among Brigham Oil & Gas, L.P., Tigre Energy Corporation and Resource Investors Management Company (filed as Exhibit 10.36 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.31.1 -- Letter relating to Proposed Trade Structure, RIMCO/Tigre Project, dated January 31, 1997, from Resource Investors Management Company to Brigham Oil & Gas, L.P. (filed as Exhibit 10.36 to the Company's Registration Statement on Form S- 1 (Registration No. 333-22491), and incorporated herein by reference). 10.32 -- Anadarko Basin Seismic Operations Agreement II, dated as of April 1, 1997, by and between Brigham Oil & Gas, L.P. (filed as Exhibit 10.37 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.32.1 -- Letter Amendment to Anadarko Basin Seismic Operations Agreement II, dated March 20, 1997, between Brigham Oil & Gas, L.P. and Veritas DGC Land, Inc. (filed as Exhibit 10.37 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.33 -- Expense Allocation and Participation Agreement II, dated April 1, 1997, between Brigham Oil & Gas, L.P., and Gasco Limited Partnership (filed as Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference). 10.36 -- Credit Agreement dated as of January 26, 1998 among Brigham Oil & Gas, L.P., Bank of Montreal, as Agent, and the lenders signatory thereto (filed as Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference). 10.36.1+ -- First Amendment to Credit Agreement dated as of August 20, 1998 among Brigham Oil & Gas, L.P., Bank of Montreal, as Agent, and the lenders signatory thereto.
- 45 - 48
Number Description - ------ ----------- 10.36.2++ -- Second Amendment to Credit Agreement dated as of March 26, 1999 among Brigham Oil & Gas, L.P., Bank of Montreal, as Agent, and the lenders signatory thereto. 10.37 -- Guaranty Agreement dated January 26, 1998 by Brigham Exploration Company in favor of Bank of Montreal, as Agent, and each of the Lenders party to the Credit Agreement (filed as Exhibit 10.33.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.37.1 -- First Amendment to Guaranty Agreement dated as of March 30, 1998 between Brigham Exploration Company and Bank of Montreal, as Agent for the Lenders party to the Credit Agreement (filed as Exhibit 10.33.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.37.2+ -- Second Amendment to Guaranty Agreement dated as of August 20, 1998 between Brigham Exploration Company and Bank of Montreal, as Agent for the Lenders party to the Credit Agreement. 10.37.3++ -- Third Amendment to Guaranty Agreement dated as of March 26, 1999 between Brigham Exploration Company and Bank of Montreal, as Agent for the Lenders party to the Credit Agreement. 10.38+ -- Securities Purchase Agreement dated as of August 20, 1998 among Brigham Exploration Company, Enron Capital & Trade Resources Corp. and Joint Energy Development Investments II Limited Partnership. 10.39+ -- Registration Rights Agreement dated as of August 20, 1998, by and among Brigham Exploration Company, Enron Capital & Trade Resources Corp. and Joint Energy Development Investments II Limited Partnership. 10.39.1++ -- Amendment to Registration Rights Agreement dated as of March 26, 1999, by and among Brigham Exploration Company, Enron Capital & Trade Resources Corp., ECT Merchant Investments Corp. and Joint Energy Development Investments II Limited Partnership. 10.40+ -- Form of Guaranty for subsidiaries. 10.41++ -- Exchange Agreement dated as of March 30, 1999 by and between Brigham Exploration Company and Veritas DGC Land, Inc. 10.42++ -- Registration Rights Agreement dated as of March 30, 1999 by and between Brigham Exploration Company and Veritas DGC Land, Inc. 21+ -- Subsidiaries of the Registrant. 23.1+ -- Consent of Price Waterhouse LLP, independent public accountants. 23.2+ -- Consent of Cawley, Gillespie & Associates, Inc., independent petroleum engineers. 27+ -- Financial Data Schedule.
- --------------- * Management contract or compensatory plan. + Filed herewith ++ Not filed herewith pursuant to Rule 12b-25 under the Act, and to be filed by amendment. (b) The following reports on Form 8-K were filed by the Company during the last quarter of the period covered by this Annual Report on Form 10-K: None. - 46 - 49 GLOSSARY OF OIL AND GAS TERMS The following are abbreviations and definitions of certain terms commonly used in the oil and gas industry and in this report. Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to oil or other liquid hydrocarbons. Bcf. One billion cubic feet. Bcfe. One billion cubic feet of natural gas equivalent. In reference to natural gas, natural gas equivalents are determined using the ratio of 6 Mcf of natural gas to 1 Bbl of oil, condensate of natural gas liquids. CAEX. Computer-aided exploration. Completion. The installation of permanent equipment for the production of oil or natural gas. Developed Acreage. The number of acres which are allocated or assignable to producing wells or wells capable of production. Development Well. A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive. Drilling Costs. The costs associated with drilling and completing a well (exclusive of seismic and land acquisition costs for that well and future development costs associated with proved undeveloped reserves added by the well) divided by total proved reserve additions. Dry Well. A well found to be incapable of producing either oil or natural gas in sufficient quantities to justify completion of an oil or gas well. Exploratory Well. A well drilled to find and produce oil or natural gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir. Finding and Development Costs. Capital costs incurred in the acquisition, exploration and development of proved oil and natural gas reserves divided by total proved reserve additions. Gross Acres or Gross Wells. The total acres or wells, as the case may be, in which the Company has a working interest. MBbl. One thousand barrels of oil or other liquid hydrocarbons. Mcf. One thousand cubic feet of natural gas. Mcfe. One thousand cubic feet of natural gas equivalents. MMBbl. One million barrels of oil or other liquid hydrocarbons. MMBtu. One million Btu, or British Thermal Units. One British Thermal Unit is the quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit. MMcf. One million cubic feet of natural gas. MMcfe. One million cubic feet of natural gas equivalents. - 47 - 50 Net Acres or Net Wells. Gross acres or wells multiplied, in each case, by the percentage working interest owned by the Company. Net Production. Production that is owned by the Company less royalties and production due others. Oil. Crude oil, condensate or other liquid hydrocarbons. Operator. The individual or company responsible for the exploration, development, and production of an oil or gas well or lease. Present Value of Future Net Revenues or PV10%. The pretax present value of estimated future revenues to be generated from the production of proved reserves calculated in accordance with SEC guidelines, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without giving effect to non-property related expenses such as general and administrative expenses, debt service and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%. Proved Developed Reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved Reserves. The estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved Undeveloped Reserves. Reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Royalty. An interest in an oil and gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner's royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner. Spud. Start drilling a new well (or restart). Standardized Measure. The aftertax present value of estimated future revenues to be generated from the production of proved reserves calculated in accordance with SEC guidelines, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without giving effect to non-property related expenses such as general and administrative expenses, debt service and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%. Success Rate. The number of wells on which production casing has been run for a completion attempt as a percentage of the number of wells drilled. 2-D Seismic. The method by which a cross-section of the earth's subsurface is created through the interpretation of reflecting seismic data collected along a single source profile. 3-D Seismic. The method by which a three dimensional image of the earth's subsurface is created through the interpretation of reflection seismic data collected over surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do conventional surveys and contribute significantly to field appraisal, development and production. Working Interest. An interest in an oil and gas lease that gives the owner of the interest the right to drill for and produce oil and natural gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations. - 48 - 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunder duly authorized, as of March 31, 1999. BRIGHAM EXPLORATION COMPANY By: /s/ Ben M. Brigham -------------------------------------- Ben M. Brigham Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of March 31, 1999, by the following persons on behalf of the Registrant and in the capacity indicated. /s/ Ben M. Brigham - ------------------------------------------------------- Ben M. Brigham Chief Executive Officer, President and Chairman of the Board /s/ Jon L. Glass - ------------------------------------------------------- Jon L. Glass Vice President - Exploration and Director /s/ Craig M. Fleming - ------------------------------------------------------- Craig M. Fleming Chief Financial Officer (principal financial and accounting officer) /s/ Anne L. Brigham - ------------------------------------------------------- Anne L. Brigham Director /s/ Harold D. Carter - ------------------------------------------------------- Harold D. Carter Director /s/ W. Craig Childers - ------------------------------------------------------- W. Craig Childers Director /s/ Alexis M. Cranberg - ------------------------------------------------------- Alexis M. Cranberg Director /s/ Stephen P. Reynolds - ------------------------------------------------------- Stephen P. Reynolds Director - 49 - 52 INDEX TO FINANCIAL STATEMENTS
PAGE ----- Financial Statements of Brigham Exploration Company Report of Independent Accountants............................................................. F1-2 Consolidated Balance Sheets as of December 31, 1998 and 1997.................................. F1-3 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997, and 1996.......................................................... F1-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997, and 1996.......................................................... F1-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996.......................................................... F1-6 Notes to the Consolidated Financial Statements................................................ F1-7 Financial Statements of Brigham Exploration Company Guarantor Subsidiaries* Report of Independent Accountants............................................................. F2-1 Combined Balance Sheets as of December 31, 1998............................................... F2-2 Combined Balance Sheets as of December 31, 1997............................................... F2-3 Combined Statements of Operations for the Year Ended December 31, 1998........................ F2-4 Combined Statements of Operations for the Year Ended December 31, 1997........................ F2-5 Combined Statements of Equity for the Year Ended December 31, 1998............................ F2-6 Combined Statements of Equity for the Year Ended December 31, 1997............................ F2-7 Combined Statements of Cash Flows for the Year Ended December 31, 1998........................ F2-8 Combined Statements of Cash Flows for the Year Ended December 31, 1997........................ F2-9 Notes to the Combined Financial Statements.................................................... F2-10
As all Brigham Exploration Company subsidiaries fully and unconditionally guarantee the Senior Subordinated Secured Notes and the Company has no significant assets other than its investments in its subsidiaries, the consolidated financial statements are substantially the same as the financial statements of the subsidiary guarantors and separate financial statements have been omitted as they would not be meaningful to investors. Financial statements for the wholly owned subsidiaries whose securities are pledged as collateral for the Senior Subordinated Notes are included in the combined financial statements.* - -------------- *These items are omitted from this Form 10-K pursuant to Rule 12b-25 under the Act and will be filed by amendment to this Form 10-K. F1-1 53 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Brigham Exploration Company In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and changes in stockholders' equity and of cash flows, after the restatement discussed in Note 12, present fairly, in all material respects, the financial position of Brigham Exploration Company and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Houston, Texas March 30, 1999 F1-2 54 BRIGHAM EXPLORATION COMPANY CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, -------------------- 1998 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 2,569 $ 1,701 Accounts receivable 7,938 4,909 Prepaid expenses 290 280 -------- -------- Total current assets 10,797 6,890 -------- -------- Natural gas and oil properties, at cost, net 134,317 84,294 Other property and equipment, at cost, net 2,014 1,239 Drilling advances paid 230 78 Other noncurrent assets 3,158 18 -------- -------- $150,516 $ 92,519 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 19,883 $ 11,892 Accrued drilling costs 1,219 2,406 Participant advances received 764 489 Other current liabilities 1,647 726 -------- -------- Total current liabilities 23,513 15,513 -------- -------- Notes payable 59,000 32,000 Senior subordinated notes, net 35,786 -- Other noncurrent liabilities 7,536 507 Deferred income tax liability -- 1,186 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 and 12,253,574 issued and outstanding at December 31, 1998 and 1997, respectively 133 123 Additional paid-in capital 58,838 44,919 Unearned stock compensation (890) (1,674) Accumulated deficit (33,400) (55) -------- -------- Total stockholders' equity 24,681 43,313 -------- -------- $150,516 $ 92,519 ======== ========
The Company uses the full cost method to account for its natural gas and oil properties. See accompanying notes to the consolidated financial statements. F1-3 55 BRIGHAM EXPLORATION COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Year Ended December 31, ---------------------------------- 1998 1997 1996 ---------- -------- -------- Revenues: Natural gas and oil sales $ 13,799 $ 9,184 $ 6,141 Workstation revenue 390 637 627 ---------- -------- -------- 14,189 9,821 6,768 ---------- -------- -------- Costs and expenses: Lease operating 2,172 1,151 726 Production taxes 850 549 362 General and administrative 4,672 3,570 2,199 Depletion of natural gas and oil properties 8,410 2,743 2,323 Depreciation and amortization 413 306 487 Capitalized ceiling impairment 24,847 -- -- Amortization of stock compensation 372 388 -- ---------- -------- -------- 41,736 8,707 6,097 ---------- -------- -------- Operating income (loss) (27,547) 1,114 671 ---------- -------- -------- Other income (expense): Interest income 136 145 52 Interest expense (7,120) (1,017) (373) Interest expense - related party -- (173) (800) ---------- -------- -------- (6,984) (1,045) (1,121) ---------- -------- -------- Net income (loss) before income taxes (34,531) 69 (450) Income tax benefit (expense) 1,186 (1,186) -- ---------- -------- -------- Net loss $ (33,345) (1,117) $ (450) ========== ======== ======== Net loss per share: Basic/Diluted $ (2.64) $ (0.10) $ (0.05) Common shares outstanding: Basic/Diluted 12,626 11,081 8,929 Unaudited pro forma information (Notes 1 and 2) Net loss $ (450) Pro forma Exchange adjustments 275 -------- Pro forma net loss before income taxes (175) Pro forma income tax benefit 147 -------- Pro forma net loss $ (28) ======== Pro forma net loss per basic/diluted common share $ (0.00) Pro forma weighted average number of common basic/diluted shares outstanding 9,170
See accompanying notes to the consolidated financial statements. F1-4 56 BRIGHAM EXPLORATION COMPANY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
Common Stock Additional Unearned ---------------------- Paid-in Stock Accumulated Predecessor Shares Amounts Capital Compensation Deficit Capital Total ---------- --------- ---------- ------------ -------------- ------------- ------- Balance, December 31, 1995 -- $ -- $ -- $ -- $ -- $ 3,694 $ 3,694 Net loss -- -- -- -- -- (450) (450) ---------- --------- ---------- ------------ ------------ ------------- ------- Balance, December 31, 1996 -- -- -- -- -- 3,244 3,244 Consummation of the Exchange 8,928,574 90 19,580 -- -- (3,244) 16,426 Issuance of stock options -- -- 2,576 (2,576) -- -- -- Forfeiture of stock options -- -- (69) 69 -- -- -- Issuance of common stock 3,325,000 33 23,894 -- -- -- 23,927 Net loss for period ended February 27, 1997 -- -- (4,869) -- -- -- (4,869) Net income for period from February 27, 1997 to Dec. 31, 1997 -- -- 3,807 -- (55) -- 3,752 Amortization of unearned stock compensation -- -- -- 833 -- -- 833 ---------- --------- ---------- ----------- ------------ ------------- ------- Balance, December 31, 1997 12,253,574 123 44,919 (1,674) (55) -- 43,313 Net loss -- -- -- -- (33,345) -- (33,345) Issuance of common stock 1,052,632 10 9,419 -- -- -- 9,429 Issuance of warrants -- -- 4,500 -- -- -- 4,500 Amortization of unearned stock compensation -- -- -- 784 -- -- 784 ----------- ---------- ---------- ----------- ------------ ------------- ------- Balance, December 31, 1998 13,306,206 $ 133 $ 58,838 $ (890) $ (33,400) $ -- $24,681 =========== ========= ========== =========== ============ ============= =======
See accompanying notes to the consolidated financial statements. F1-5 57 BRIGHAM EXPLORATION COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year ended December 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net loss $ (33,345) $ (1,117) $ (450) Adjustments to reconcile net loss to cash provided by operating activities: Depletion of natural gas and oil properties 8,410 2,743 2,323 Depreciation and amortization 413 306 487 Capitalized ceiling impairment 24,847 -- -- Amortization of stock compensation 372 388 -- Amortization of deferred loan fees and debt issuance costs 726 -- -- Amortization of discount on senior subordinated notes 286 -- -- Changes in working capital and other items: Increase in accounts receivable (3,029) (2,213) (1,440) (Increase) decrease in prepaid expenses (10) (128) 25 Increase in accounts payable 7,991 8,955 1,619 Increase (decrease) in participant advances received 275 (648) 804 Increase in interest payable on senior subordinated notes 507 -- -- Increase in other current liabilities 355 50 60 Increase in deferred interest payable - related party -- 53 320 Increase (decrease) in deferred income tax liability (1,186) 1,186 -- Other noncurrent assets 6 281 (224) Other noncurrent liabilities 7,004 (50) 186 --------- --------- --------- Net cash provided by operating activities 13,622 9,806 3,710 --------- --------- --------- Cash flows from investing activities: Additions to natural gas and oil properties (84,055) (57,170) (13,612) Proceeds from the sale of natural gas and oil properties -- 74 2,149 Additions to other property and equipment (868) (545) (41) (Increase) decrease in drilling advances paid (152) 341 (292) --------- --------- --------- Net cash used by investing activities (85,075) (57,300) (11,796) --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock 9,429 23,927 -- Proceeds from issuance of senior subordinated notes payable and warrants 40,000 -- -- Increase in notes payable 105,800 37,250 8,000 Repayment of notes payable (78,800) (13,250) -- Principal payments on capital lease obligations (236) (179) (269) Deferred loan fees and debt issuance costs (3,872) -- -- --------- --------- --------- Net cash provided by financing activities 72,321 47,748 7,731 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 868 254 (355) Cash and cash equivalents, beginning of year 1,701 1,447 1,802 --------- --------- --------- Cash and cash equivalents, end of year $ 2,569 $ 1,701 $ 1,447 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 5,490 $ 1,679 $ 762 ========= ========= ========= Supplemental disclosure of noncash investing and financing activities: Capital lease asset additions $ 320 $ 403 $ 101 ========= ========= =========
See accompanying notes to the consolidated financial statements. F1-6 58 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS Brigham Exploration 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"). Hereinafter, Brigham Exploration Company and the Partnership are collectively referred to as "the Company." Brigham, Inc. is a Nevada 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 primarily 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The Exchange has been reflected in the consolidated financial statements of the Company as a reorganization. Principles of Consolidation The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries, and its proportionate share of assets, liabilities and income and expenses of the limited partnerships in which the Company, or any of its subsidiaries has a participating interest. All significant intercompany accounts and transactions have been eliminated. F1-7 59 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Cash and Cash Equivalents The Company considers all highly liquid financial instruments with an original maturity of three months or less to be cash equivalents. Property and Equipment The Company uses the full cost method of accounting for its investment in natural gas and oil properties. Under this method, all acquisition, exploration and development costs, including certain payroll and other internal costs, incurred for the purpose of finding natural gas and oil reserves are capitalized. Internal costs capitalized are directly attributable to acquisition, exploration and development activities and do not include costs related to production, general corporate overhead or similar activities. Costs associated with production and general corporate activities are expensed in the period incurred. The capitalized costs of the Company's natural gas and oil properties plus future development, dismantlement, restoration and abandonment costs (the "Amortizable Base"), net of estimated of salvage values, are amortized using the unit-of-production method based upon estimates of total proved reserve quantities. The Company's capitalized costs of its natural gas and oil properties, net of accumulated amortization, are limited to the total of estimated future net cash flows from proved natural gas and oil reserves, discounted at ten percent, plus the cost of unevaluated properties. There are many factors, including global events, that may influence the production, processing, marketing and valuation of natural gas and oil. A reduction in the valuation of natural gas and oil properties resulting from declining prices or production could adversely impact depletion rates and capitalized cost limitations. All costs directly associated with the acquisition and evaluation of unproved properties are initially excluded from the Amortizable Base. Upon the interpretation by the Company of the 3-D seismic data associated with unproved properties, the geological and geophysical costs related to acreage that is not specifically identified as prospective are added to the Amortizable Base. Geological and geophysical costs associated with prospective acreage, as well as leasehold costs, are added to the Amortizable Base when the prospects are drilled. Costs of prospective acreage are reviewed annually for impairment on a property-by-property basis. At December 31, 1998, a capitalized ceiling impairment of $24.8 million was recognized. The write down was calculated based on the estimated discounted present value of future net cash flows from proved natural gas and oil reserves using prices in effect at December 31, 1998. Other property and equipment, which primarily consists of 3-D seismic interpretation workstations, are depreciated on a straight-line basis over the estimated useful lives of the assets after considering salvage value. Estimated useful lives are as follows: Furniture and fixtures.................................. 10 years Machinery and equipment................................. 5 years 3-D seismic interpretation workstations and software.... 3 years
F1-8 60 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Betterments and major improvements that extend the useful lives are capitalized, while expenditures for repairs and maintenance of a minor nature are expensed as incurred. Revenue Recognition The Company recognizes natural gas and oil sales from its interests in producing wells under the sales method of accounting. Under the sales method, the Company recognizes revenues based on the amount of natural gas or oil sold to purchasers, which may differ from the amounts to which the Company is entitled based on its interest in the properties. Gas balancing obligations as of December 31, 1996, 1997 and 1998 were not significant. Industry participants in the Company's seismic programs are charged on an hourly basis for the work performed by the Company on its 3-D seismic interpretation workstations. The Company recognizes workstation revenue as service is provided. Derivative Instruments Net realized gains or losses and related cash flows arising from the Company's commodity price swaps (see Note 11) are recognized in the period incurred as a component of natural gas and oil sales. If subsequent to being hedged, underlying transactions are determined not to be likely to occur, the related derivatives gains and losses are recognized in that period as "Other income." Stock Based Compensation The Company measures compensation expense for its stock based incentive plan using the intrinsic value method and has provided in Note 12 the pro forma disclosure of the effect on net loss and net loss per common share as if the fair value based method prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation," had been applied in measuring compensation expense. Federal and State Income Taxes Prior to the consummation of the Exchange, there was no income tax provision included in the financial statements as the Partnership was not a taxpaying entity. 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 became subject to federal income taxes through its ownership by the Company. 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. Related to this election, the Company recorded a $3.8 million deferred income tax benefit, resulting in a net $1.2 million deferred income tax charge for the year ended December 31, 1997. F1-9 61 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Unaudited Pro Forma Information Pro forma net loss for the year ended December 31, 1996 reflects the Exchange, including income taxes that would have been recorded had the Partnership been a taxable entity. Pro forma exchange adjustments primarily represent the amortization of the compensation expense related to employee stock options granted upon the formation of the Company (see Note 12), and the reduction of interest expense related to the elimination of debt as part of the Exchange. Pro forma income taxes have been included in the Statement of Operations pursuant to the rules and regulations of the SEC for instances when a partnership becomes subject to federal income taxes. Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." The standard, which was 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. Adoption of this Standard has no impact on the Company's financial statements. Recent Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction. For fair value hedge transactions in which the Company is hedging changes in an asset's, liability's, or firm commitment's fair value, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current period earnings. The Company must adopt SFAS No. 133 effective January 1, 2000. The Company is in the process of analyzing the potential impact of this standard on its financial statements presentation. 3. ACQUISITION On November 12, 1997, the Company acquired a 50% interest in certain producing properties in Grady County, Oklahoma (the "Acquisition"). These properties were formerly owned by Mobil and were acquired by Ward Petroleum. The acquisition was accounted for as a purchase and the results of operations of the properties acquired were included in the Company's results of operations effective September 1, 1997. The purchase price of $13.4 million was financed primarily through the Company's existing revolving credit facility and was based on the Company's determination of the fair value of the assets acquired. F1-10 62 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Pro Forma Information The following unaudited pro forma statement of operations information has been prepared to give effect to the Acquisition as if the transaction had occurred at the beginning of 1996 and 1997. The historical results of operations have been adjusted to reflect (i) the difference between the acquired properties' historical depletion and such expense calculated based on the value allocated to the acquired assets, (ii) the increase in interest expense associated with the debt issued in the transaction, and (iii) the increase in federal income taxes related to historical net income attributable to the properties acquired. The pro forma amounts do not purport to be indicative of the results of operations that would have been reported had the Acquisition occurred as of the dates indicated, or that may be reported in the future (in thousands).
PRO FORMA YEAR ENDED DECEMBER 31, ------------------- 1997 1996 -------- ------- Revenues.......................................................................... $ 11,194 $ 8,516 Costs and expenses: Lease operating and production taxes ....................................... 1,864 1,300 General and administrative ................................................. 3,570 2,199 Depletion of natural gas and oil properties ................................ 3,307 2,791 Depreciation and amortization .............................................. 593 487 Interest expense, net ...................................................... 2,235 2,355 -------- ------- Total costs and expenses ................................................... 11,569 9,132 -------- ------- Net loss before income taxes ..................................................... (375) (616) Income tax expense ......................................................... 1,035 -- -------- ------- Net loss......................................................................... $ (1,410) $ (616) ======== ======= Net loss per share: Basic/Diluted.............................................................. $ (0.13) $ (0.07) ======== ======= Common shares outstanding: Basic/Diluted .............................................................. 11,081 8,929 ======== =======
4. PROPERTY AND EQUIPMENT Property and equipment, at cost, are summarized as follows (in thousands):
DECEMBER 31, ---------------------------- 1998 1997 ------------ ------------ Natural gas and oil properties.................................... $ 179,867 $ 96,587 Accumulated depletion............................................. (45,550) (12,293) ------------ ------------ 134,317 84,294 ------------ ------------ Other property and equipment: 3-D seismic interpretation workstations and software.......... 2,186 1,693 Office furniture and equipment................................ 1,774 1,095 Accumulated depreciation...................................... (1,946) (1,549) ------------ ------------ 2,014 1,239 ------------ ------------ $ 136,331 $ 85,533 ============ ============
F1-11 63 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The accumulated depletion balance for natural gas and oil properties at December 31, 1998, includes the effect of a capitalized ceiling impairment of $24.8 million described at Note 2, "Property and Equipment." The Company sold its interest in certain producing properties for $74,000 during 1997. No gain or loss was recognized on this transaction because the Company applies the full cost method of accounting for its investment in natural gas and oil properties. The Company capitalizes certain payroll and other internal costs directly attributable to acquisition, exploration and development activities as part of its investment in natural gas and oil properties over the periods benefited by these activities. Capitalized costs do not include any costs related to production, general corporate overhead, or similar activities. During the years ended December 31, 1996, 1997 and 1998, these capitalized costs amounted to $1.8 million, $3.5 million and $4.6 million, respectively. 5. NOTES PAYABLE AND SENIOR SUBORDINATED NOTES PAYABLE In April 1996, the Company entered into a revolving credit facility which provided for borrowings up to $25 million. On November 10, 1997, this facility was amended and the amount available under the agreement was increased to $75 million. The Company's borrowings under this facility were limited to a borrowing base determined periodically by the lender. This determination was based upon the proved reserves of the Company's natural gas and oil properties. The amounts outstanding under this facility, excluding a $5.4 million special advance made November 12, 1997, bore interest, at the borrower's option, at the Base Rate or (i) LIBOR plus 1.75% if the principal outstanding was less than or equal to 50% of the borrowing base, (ii) LIBOR plus 2.0% if the principal outstanding was less than or equal to 75% but more than 50% of the borrowing base, and (iii) LIBOR plus 2.25% if the principal outstanding was greater than 75% of the borrowing base. The Base Rate is the fluctuating rate of interest per annum established from time to time by the lender. Interest accrued on the $5.4 million special advance at 11.50% per annum. The Company also paid a quarterly commitment fee of 0.5% per annum for the unused portion of the borrowing base. In January 1998, the Company entered into a new 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. A portion of the funds available under the Credit Facility were used to repay in full the debt outstanding under the Company's previous revolving credit facility. Principal outstanding under the Credit Facility is due at maturity on January 26, 2001 with interest due monthly for base rate tranches or periodically as LIBOR tranches mature. Amounts outstanding under the Credit Facility bore interest at either the lender's Base Rate or LIBOR plus 2.25%, at the Company's option. The Credit Facility contains covenants restricting the Company's ability to declare or pay dividends on its stock. 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 are amortized over the life of the loan. The Credit Facility's borrowing base was reduced to $65 million upon issuance of the senior subordinated notes in August 1998. F1-12 64 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In March 1999, the Company and its lenders entered into an amendment to the Credit Facility. Pursuant to this amendment, the borrowing availability under the Credit Facility remains at $65 million and the initial borrowing availability redetermination date was extended from January 31, 1999 to June 1, 1999, when the borrowing availability will be redetermined by the lenders based on the Company's then proved reserve value and cash flows. To the extent that the amounts outstanding under the Credit Facility exceed the borrowing availability at the redetermination date, the Company may be required to repay such excess under provision of the amendment. In addition, certain financial covenants have been amended, additional covenants have been included that place significant restrictions on the Company's ability to make certain capital expenditures, and the annual interest rate for borrowings under the Credit Facility is revised to the lender's base rate or LIBOR plus 3.0% and the Company will pay the lender a $500,000 transaction fee over a ten month period. The Company's obligations under the Credit Facility are secured by substantially all of the natural gas and oil properties and other tangible assets of the Company. 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 (the "Warrants") to purchase the Company's common stock and the sale of $10 million of the Company's common stock, or 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, distributions, affiliate transactions, liens and sale and leaseback transactions. The indenture prohibits all dividends on the Company's stock. 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. 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 are amortized over the five year term of the Notes. In March 1999, the indenture governing the Notes was amended to provide the Company with the option to pay interest due on the Notes in kind, for any reason, through the second quarter of 2000. In addition, certain financial and other covenants were amended. The amendment also provides for a reduction in the exercise price per share of the Warrants from $10.45 per share to $3.50 per share. F1-13 65 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. CAPITAL LEASE OBLIGATIONS Property under capital leases consists of the following (in thousands):
DECEMBER 31, -------------------- 1998 1997 -------- -------- 3-D seismic interpretation workstations and software....................... $ 620 $ 497 Office furniture and equipment............................................. 167 204 -------- -------- 787 701 Accumulated depreciation and amortization.................................. (276) (241) -------- -------- $ 511 $ 460 ======== ========
The obligations under capital leases are at fixed interest rates ranging from 8.7% to 17.9% and are collateralized by property, plant and equipment. The future minimum lease payments under the capital leases and the present value of the net minimum lease payments at December 31, 1998 are as follows (in thousands): 1999............................................................................................. $ 323 2000............................................................................................. 237 2001............................................................................................. 95 2002............................................................................................. 24 ------ Total minimum lease payments..................................................................... 679 Estimated executory costs included in capital leases......................................... (50) ------ Net minimum lease payments....................................................................... 629 Amounts representing interest................................................................ (90) ------ Present value of net minimum lease payments...................................................... 539 Less: current portion........................................................................... (240) ------ Noncurrent portion............................................................................... $ 299 ======
7. INCOME TAXES The provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 ------------ ------------ Current income taxes: Federal...................................................................... $ -- $ -- State........................................................................ -- -- Deferred income taxes: Federal ..................................................................... (1,186) 1,186 State........................................................................ -- -- ------------ ------------ $ (1,186) $ 1,186 ============ ============
The difference in income taxes provided and the amounts determined by applying the federal statutory tax rate to income before income taxes result from the following (in thousands): F1-14 66 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 ------------ ------------ Tax at statutory rate............................................................ $ (11,740) $ 23 Add (deduct) the effect of: January and February 1997 income, not taxable................................ -- (44) Tax effect of Exchange....................................................... -- 1,193 Nondeductible expenses ...................................................... 10 14 Valuation reserve............................................................ 10,544 -- ------------- ------------ $ (1,186) $ 1,186 ============= ============
The components of deferred income tax assets and liabilities are as follows (in thousands):
DECEMBER 31, --------------------------- 1998 1997 ----------- ------------ Deferred tax assets: Net operating loss carryforwards.............................................. $ 11,219 $ 5,563 Amortization of stock compensation............................................ 258 132 Other......................................................................... 3 3 ----------- ------------ 11,480 5,698 Deferred tax liability: Depreciable and depletable property........................................... (936) (6,884) Valuation reserve............................................................. (10,544) -- ----------- ------------ $ -- $ (1,186) =========== ============
At December 31, 1998, the Company had regular and alternative minimum tax net operating loss carryforwards of approximately $32.9 million and $23.7 million, respectively, each including separate return limitation year carryovers of approximately $1.2 million, which expire by December 31, 2018. 8. NET INCOME (LOSS) PER SHARE Net income (loss) per share is presented in the consolidated financial statements based on a basic EPS calculation 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 net loss per common share for 1996 is based on shares issued upon consummation of the Exchange, assuming such shares has been outstanding for all periods presented. Net loss per share for 1997 is presented giving effect to the shares issued pursuant to the Exchange as well as shares issued in the initial public offering. At December 31, 1997 and 1998, options and warrants to purchase 628,737 and 1,194,654, 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. F1-15 67 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 9. CONTINGENCIES, COMMITMENTS AND FACTORS WHICH MAY AFFECT FUTURE OPERATIONS Litigation The Company is, from time to time, party to certain lawsuits and claims arising in the ordinary course of business. While the outcome of lawsuits and claims cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on the financial condition, results of operations or cash flows of the Company. As of December 31, 1998, there were no known environmental or other regulatory matters related to the Company's operations which are reasonably expected to result in a material liability to the Company. Compliance with environmental laws and regulations has not had, and is not expected to have, a material adverse effect on the Company's capital expenditures, earnings or competitive position. Lease Commitments The Company leases office equipment and space under operating leases expiring at various dates through 2002. The future minimum annual rental payments under the noncancelable terms of these leases at December 31, 1998, are as follows (in thousands): 1999........................................................ $ 868 2000........................................................ 790 2001........................................................ 789 2002........................................................ 395 ------------ $ 2,842 ============
Rental expense for the years ended December 31, 1996, 1997 and 1998 was $253,112, $606,173 and $875,150, respectively. Factors Which May Affect Future Operations Since the Company's major products are commodities, significant changes in the prices of natural gas and oil could have a significant impact on the Company's results of operations for any particular year. Due to an expectation for continuing difficult industry and capital markets conditions, the Company has substantially reduced its planned capital budget for 1999 and has undertaken a number of strategic initiatives in an effort to improve and preserve its capital liquidity in the current environment. The Company has adapted its business strategy in the near-term through the implementation of the following principal strategic initiatives: (i) focusing all of the Company's planned exploration efforts in 1999 towards the drilling of its highest grade 3-D prospects, (ii) eliminating substantially all planned seismic and land expenditures for new projects until its capital resources can support such additional activity, (iii) seeking to divest certain producing natural gas and oil properties in an effort to raise capital to reduce debt borrowings and to redirect capital to drilling projects that have the potential to generate higher investment returns, (iv) restructuring its outstanding senior and subordinated debt agreements to provide the Company with flexibility needed to preserve cash flow to fund its expected near-term exploration activities, (v) implementing an overhead F1-16 68 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) reduction plan to reduce annual general and administrative expenses, and (vi) evaluating opportunities to raise additional equity capital either through the sales of interests in certain of its seismic projects or the issuance of equity securities. The Company believes that the successful execution of these strategic initiatives will provide it with sufficient capital resources to execute its planned 1999 exploration program and position it to realize the significant value it believes it has captured in its inventory of 3-D seismic projects and delineated drilling locations. While the Company has initiated each of these strategic directives in late 1998 and early 1999, and has effected certain of them to date, the successful completion of any or all of these efforts to improve the Company's capital availability within the expected time frame is uncertain and will likely have a material impact on the Company's near-term capital expenditure levels and growth profile. 10. SEGMENT INFORMATION In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which the Company adopted in the first quarter of 1998. The statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. It also requires disclosures about products and services, geographic areas and major customers. All of the Company's natural gas and oil properties and related operations are located in the United States and management has determined that the Company has one reportable segment. During 1998, approximately 25%, 15%, 11% and 11% of the Company's natural gas and oil production was sold to four separate customers. During 1997, approximately 14% and 12% of the Company's natural gas and oil production was sold to two separate customers. During 1996, approximately 16%, 12% and 10% of the Company's natural gas and oil production was sold to three separate customers. However, due to the availability of other markets, the Company does not believe that the loss of any one of these individual customers would adversely affect the Company's result of operations. 11. FINANCIAL INSTRUMENTS The Company periodically enters into commodity price swap agreements which require payments to (or receipts from) counterparties based on the differential between a fixed price and a variable price for a fixed quantity of natural gas or crude oil without the exchange of the underlying volumes. The notional amounts of these derivative financial instruments are based on planned production from existing wells. The Company uses these derivative financial instruments to manage market risks resulting from fluctuations in commodity prices. Commodity price swaps are effective in minimizing these risks by creating essentially equal and offsetting market exposures. The derivative financial instruments held by the Company are not leveraged and are held for purposes other than trading. In 1996 and 1997, the Company was a party to a crude oil swap arrangement resulting in a fixed price over a period of time for a specified volume of crude oil. Adjustment to the price received for oil under these F1-17 69 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) swap arrangements resulted in a decrease in oil revenues of $301,280 and $6,191 in 1996 and 1997, respectively. In February 1998, the Company entered into a hedging contract whereby 10,000 MMBtu per day of natural gas is purchased and sold subject to a fixed price swap agreement for monthly periods from April 1998 through October 1999. Pursuant to these arrangements the Company exchanges a floating market price for a contract month and payments are received when the fixed price exceeds the floating price. Total natural gas subject to this hedging contract is 2,750,000 MMBtu in 1998 and 3,040,000 MMBtu in 1999. As a result of this natural gas hedging contract, the Company realized an increase in revenues of $555,240 during 1998. In August 1998, the Company entered into a hedging contract whereby 5,000 MMBtu per day of natural gas is purchased and sold subject to a fixed price swap agreement for monthly periods from April 1999 through October 1999. Pursuant to these arrangements the Company exchanges a floating market price for a fixed contract price of $2.015 per MMBtu. Payments are made by the Company when the floating price exceeds the fixed price for a contract month and payments are received when the fixed price exceeds the floating price. Total natural gas subject to this hedging contract is 1,070,000 MMBtu in 1999. In January 1999, the Company entered into a swap agreement with terms similar to existing agreements which relates to production for monthly periods from November 1999 through April 2001. Pursuant to these arrangements, 15,000 MMBtu per day of natural gas is purchased and sold subject to a fixed price swap agreement, and the Company exchanges a floating market price for a fixed contract price of $2.065 per MMBtu. Total natural gas volumes subject to this agreement are 915,000 MMBtu, 5,490,000 MMBtu and 1,800,000 MMBtu in 1999, 2000 and 2001, respectively. The Company's non-derivative financial instruments include cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their immediate or short maturities. The carrying value of the Company's revolving credit facility (see Note 5) approximates its fair market value since it bears interest at floating market interest rates. The Company's accounts receivable relate to natural gas and oil sales to various industry companies, amounts due from industry participants for expenditures made by the Company on their behalf and workstation revenues. Credit terms, typical of industry standards, are of a short-term nature and the Company does not require collateral. The Company's accounts receivable at December 31, 1998 do not represent significant credit risks as they are dispersed across many counterparties. Counterparties to the natural gas and crude oil price swaps are investment grade financial institutions. 12. EMPLOYEE BENEFIT PLANS Retirement Savings Plan During 1996 the Company adopted a defined contribution 401(k) plan for substantially all of its employees. Eligible employees may contribute up to 15% of their compensation to this plan. The 401(k) plan provides that the Company may, at its discretion, match employee contributions. The Company has not matched employee contributions in any plan year. F1-18 70 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Stock Compensation In 1994 three employees were granted restricted interests in the Company which vest in increments through July 1999. At the date of grant, the value of these interests was immaterial. On February 26, 1997, in connection with the Exchange (see Note 1), the three employees transferred these company interests to the Company in exchange for 156,250 shares of restricted common stock of the Company. The terms of the restricted stock and the restricted company interests are substantially the same. The shares vest over a three-year period ending in 1999. No compensation expense will result from this exchange. The Company adopted an incentive plan, effective upon completion of the Exchange (see Note 1), which provides for the issuance of stock options, stock appreciation rights, stock, restricted stock, cash or any combination of the foregoing. The objective of this plan is to reward key employees whose performance may have a significant effect on the success of the Company. An aggregate of 1,588,170 shares of the Company's common stock was reserved for issuance pursuant to this plan. The Compensation Committee of the Board of Directors will determine the type of awards made to each participant and the terms, conditions and limitations applicable to each award. Options granted subsequent to March 4, 1997 have an exercise price equal to the fair market value of the Company's common stock on the date of grant and generally vest, in increments, over five to six years. The Company also maintains a plan under which it offers stock compensation to non-employee directors. Pursuant to the terms of the plan, non-employee directors are entitled to annual grants. Options granted under this plan have an exercise price equal to the fair value of the Company's common stock on the date of grant and generally vest over five years. The following table summarizes activity under the incentive plan for each of the two years ended December 31, 1998:
WEIGHTED AVERAGE EXERCISE SHARES PRICE ------------ ------------ Options outstanding December 31, 1996........................................... -- $ -- Options granted .......................................................... 646,097 5.03 Options forfeited or cancelled............................................ (17,360) 5.00 Options exercised......................................................... -- -- ------------ ------------ Options outstanding December 31, 1997........................................... 628,737 5.03 Options granted........................................................... 873,500 8.62 Options forfeited or cancelled............................................ (307,583) (12.88) Options exercised......................................................... -- -- ------------ ------------ Options outstanding December 31, 1998........................................... 1,194,654 $ 5.63 ============ ============
On December 14, 1998, the Board of Directors approved a proposal to cancel and reissue outstanding employee stock options which were granted in January 1998 with an exercise price of $12.88. A total of 305,250 options with an exercise price of $12.88 per share were cancelled and reissued with an exercise price F1-19 71 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) of $6.31 per share, the fair market value of the Company's stock at the date of reissuance. Vesting schedules remained unchanged by the reissuance. Exercise prices for options outstanding at December 31, 1997 range from $5.00 to $14.375 and remaining contractual lives range from 5.5 years to 6 years. Exercise prices for options outstanding at December 31, 1998 range from $5.00 to $14.375 and remaining contractual lives range from 5.5 years to 7 years. No options were exercisable at December 31, 1997 and 145,740 were exercisable at December 31, 1998. The weighted average fair value per share of stock compensation issued during 1997 and 1998 was $6.24 and $5.40, respectively. The fair value for these options was estimated using the Black-Scholes model with the following weighted average assumptions for grants made in 1997 and 1998: risk free interest rate of 6.24% and 4.70%; volatility of the expected market prices of the Company's common stock of 38% and 77%; expected dividend yield of zero and weighted average expected option lives of 7.3 and 5.0 years, respectively. The Black-Scholes valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are transferable. Additionally, the assumptions required by the valuation model are highly subjective. Because the Company's stock options have significantly different characteristics from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the model does not necessarily provide a reliable single measure of the fair value of the Company's stock options. Had compensation cost for the Company's stock options been determined based on the fair market value at the grant dates of the awards consistent with the methodology prescribed by SFAS No. 123 the Company's net loss and net loss per share for 1998, 1997 and 1996 would have been the pro forma amounts indicated below:
1998 1997 ----------- ----------- Net loss: As reported.............................................................................. $ (33,345) $ (1,117) Pro forma ......................................................................... (33,591) (1,314) Net loss per share: As reported.............................................................................. (2.64) (0.10) Pro forma................................................................................ (2.66) (0.12)
The Company granted 644,097 stock options as of March 4, 1997. These options have an exercise price of $5.00 compared to an originally determined estimated fair market value of the Company's common stock at date of grant of $8.00. This grant resulted in noncash compensation expense which is being recognized over the related vesting period of the options. During 1999, the Company revised the fair market value of its common stock at the date these options were granted from $8.00 to $9.00. As a result, the Company restated its financial statements to reflect the impact of this change in estimate. The impact of the restatement on the 1997 financial statements is presented below: F1-20 72 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AS PREVIOUSLY AS REPORTED RESTATED -------------- ------------- For the year ended December 31, 1997 Net loss .............................................................. $ (1,036) $ (1,117) Net loss per share: Basic/Diluted....................................................... (0.09) (0.10) As of December 31, 1997 Retained earnings/(accumulated deficit)................................ 26 (55) Total stockholders' equity......................................... 43,153 43,313
13. RELATED PARTY TRANSACTIONS During the years ended December 31, 1996, 1997 and 1998, the Company paid approximately $596,000, $837,000 and $851,000 respectively, in fees for land acquisition services performed by a company owned by a brother of the Company's President and Chief Executive Officer. Other participants in the Company's 3-D seismic projects reimbursed the Company for a portion of these amounts. In 1996 and 1997, the Company paid $110,000 and $18,000 for working interests in natural gas and oil properties owned by affiliates of a member of the Company's board of directors/management committee. The Company billed the affiliates $68,000 in 1996 for their proportionate share of the costs related to this project. A Director of the Company served as a consultant to the Company on various aspects of the Company's business and strategic issues. Fees paid for these services by the Company were $79,200, $86,580 and $100,539 for the twelve month periods ended December 31, 1996, 1997 and 1998, respectively. Additional disbursements totaling approximately $13,000 and $12,000 were made during 1997 and 1998, respectively, for the reimbursement of certain expenses. 14. SUBSEQUENT EVENT In February 1999, the Company entered into a project financing arrangement with Duke Energy Financial Services, Inc. ("Duke") to fund the continued exploration of five projects covered by approximately 200 square miles of 3-D seismic data acquired in 1998. In this transaction, the Company conveyed 100% of its working interest in land and seismic in these project areas to a newly formed limited liability company (the "Duke LLC") for a total consideration of $10 million. The Company is the managing member of the Duke LLC with a 1% interest, and Duke is the sole remaining member with a 99% interest. Pursuant to the terms of the Duke LLC agreement, the Company pays 100% of the drilling and completion costs for all wells drilled by the Duke LLC in exchange for a 70% working interest in the wells and their associated drilling and spacing units and allocable seismic data. Upon 100% project payout, the Company has certain rights to back-in for up to a 94% effective working interest in the Duke LLC properties. F1-21 73 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 15. NATURAL GAS AND OIL EXPLORATION AND PRODUCTION ACTIVITIES The tables presented below provide supplemental information about natural gas and oil exploration and production activities as defined by SFAS No. 69, "Disclosures about Oil and Gas Producing Activities." Results of Operations for Natural Gas and Oil Producing Activities (in thousands)
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- --------- --------- Natural gas and oil sales............................................... $ 13,799 $ 9,184 $ 6,141 Costs and expenses: Lease operating..................................................... 2,172 1,151 726 Production taxes.................................................... 850 549 362 Depletion of natural gas and oil properties......................... 8,410 2,743 2,323 Capitalized ceiling impairment...................................... 24,847 -- -- Income tax expense (benefit) (a).................................... (7,868) 1,318 -- ---------- --------- --------- Total costs and expenses................................................ 28,411 5,761 3,411 ---------- --------- --------- $ (14,612) $ 3,423 $ 2,730 ========== ========= ========= Depletion per physical unit of production (equivalent Mcf of gas)....... $ 1.27 $ 0.88 $ 1.13 ========== ========= =========
- ------------ (a) The income tax expense (benefit) for 1997 and 1998 is calculated at the statutory rate and determined without regard to the Company's deduction for general and administrative expenses, interest costs and other income tax deductions and credits. Natural gas and oil sales reflect the market prices of net production sold or transferred, with appropriate adjustments for royalties, net profits interest and other contractual provisions. Lease operating expenses include lifting costs incurred to operate and maintain productive wells and related equipment, including such costs as operating labor, repairs and maintenance, materials, supplies and fuel consumed. Production taxes include production and severance taxes. No provision was made for income taxes for 1996 since these taxes are the responsibility of the partners (see Note 2). Depletion of natural gas and oil properties relates to capitalized costs incurred in acquisition, exploration and development activities. Results of operations do not include interest expense and general corporate amounts. Costs Incurred and Capitalized Costs The costs incurred in natural gas and oil acquisition, exploration and development activities follow (in thousands):
DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Costs incurred for the year: Exploration.................................................... $ 67,110 $ 29,516 $ 10,527 Property acquisition........................................... 16,245 26,956 6,195 Development.................................................... 10,427 2,953 1,328 Proceeds from participants..................................... (10,502) (319) (4,111) ----------- ----------- ----------- $ 83,280 $ 59,106 $ 13,939 =========== =========== ===========
F1-22 74 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Costs incurred represent amounts incurred by the Company for exploration, property acquisition and development activities. Periodically, the Company will receive proceeds from participants subsequent to project initiation for an assignment of an interest in the project. These payments are represented by "Proceeds from participants" in the table above. Capitalized costs related to natural gas and oil acquisition, exploration and development activities follow (in thousands):
DECEMBER 31, ---------------------------- 1998 1997 ------------ ------------ Cost of natural gas and oil properties at year-end: Proved..................................................................... $ 127,491 $ 67,744 Unproved................................................................... 52,376 28,843 ------------ ------------ Total capitalized costs.................................................... 179,867 96,587 Accumulated depletion...................................................... (45,550) (12,293) ------------ ------------ $ 134,317 $ 84,294 ============ ============
Following is a summary of costs (in thousands) excluded from depletion at December 31, 1998, by year incurred. At this time, the Company is unable to predict either the timing of the inclusion of these costs and the related natural gas and oil reserves in its depletion computation or their potential future impact on depletion rates.
DECEMBER 31, ----------------------------------- PRIOR 1998 1997 1996 YEARS TOTAL ---------- ---------- --------- --------- ---------- Property acquisition.......................... $ 9,659 $ 13,161 $ 1,176 $ 1,278 $ 25,274 Exploration................................... 21,577 5,072 320 133 27,102 ---------- ---------- --------- --------- ---------- Total......................................... $ 31,236 $ 18,233 $ 1,496 $ 1,411 $ 52,376 ========== ========== ========= ========= ==========
16. NATURAL GAS AND OIL RESERVES AND RELATED FINANCIAL DATA (UNAUDITED) Information with respect to the Company's natural gas and oil producing activities is presented in the following tables. Reserve quantities as well as certain information regarding future production and discounted cash flows were determined by the Company's independent petroleum consultants and internal petroleum reservoir engineer. Natural Gas and Oil Reserve Data The following tables present the Company's estimates of its proved natural gas and oil reserves. The Company emphasizes that reserve estimates are approximates and are expected to change as additional information becomes available. Reservoir engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Accordingly, there can be no assurance that the reserves set forth herein will ultimately be produced nor can there be assurance that the proved undeveloped reserves will be developed within the periods anticipated. A substantial portion of the reserve balances were estimated utilizing the volumetric method, as opposed to the production performance method. F1-23 75 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NATURAL GAS OIL (MMCF) (MBBLS) ------------ ------------ Proved reserves at December 31, 1995........................................... 4,257 1,672 Revisions to previous estimates............................................ (1,005) (232) Extensions, discoveries and other additions................................ 7,742 996 Purchase of minerals-in-place.............................................. 260 3 Sales of minerals-in-place................................................. (299) (272) Production................................................................. (698) (227) ------------ ------------ Proved reserves at December 31, 1996........................................... 10,257 1,940 Revisions to previous estimates............................................ (3,044) (447) Extensions, discoveries and other additions................................ 33,721 735 Purchase of minerals-in-place.............................................. 13,718 1,244 Sales of minerals-in-place................................................. (40) -- Production................................................................. (1,382) (291) ------------ ------------ Proved reserves at December 31, 1997........................................... 53,230 3,181 Revisions of previous estimates............................................ (26,696) (115) Extensions, discoveries and other additions................................ 48,050 1,752 Purchase of minerals-in-place.............................................. 851 11 Production................................................................. (4,269) (396) ------------ ------------ Proved reserves at December 31, 1998........................................... 71,166 4,433 ============ ============ Proved developed reserves at December 31: 1996....................................................................... 6,034 1,453 1997....................................................................... 30,677 2,665 1998....................................................................... 38,571 2,935
Proved reserves are estimated quantities of crude natural gas and oil which geological and engineering data indicate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Standardized Measure of Discounted Future Net Cash Inflows and Changes Therein The following table presents a standardized measure of discounted future net cash inflows (in thousands) relating to proved natural gas and oil reserves. Future cash flows were computed by applying year end prices of natural gas and oil relating to the Company's proved reserves to the estimated year-end quantities of those reserves. Future price changes were considered only to the extent provided by contractual agreements in existence at year-end. Future production and development costs were computed by estimating those expenditures expected to occur in developing and producing the proved natural gas and oil reserves at the end of the year, based on year-end costs. Actual future cash inflows may vary considerably and the standardized measure does not necessarily represent the fair value of the Company's natural gas and oil reserves. F1-24 76 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Future cash inflows................................................ $ 198,082 $ 165,156 $ 84,987 Future development and production costs............................ (61,064) (40,923) (20,998) Future income taxes................................................ (6,972) (22,919) -- ----------- ----------- ----------- Future net cash inflows............................................ $ 130,046 $ 101,314 $ 63,989 =========== =========== =========== Future net cash inflow before income taxes, discounted at 10% per annum............................................... $ 81,741 $ 69,249 $ 44,506 =========== =========== =========== Standardized measure of future net cash inflows discounted at 10% per annum............................................... $ 81,649 $ 64,274 $ 44,506 =========== =========== ===========
The base sales prices for the Company's reserves were $3.71 per Mcf for natural gas and $25.37 per Bbl for oil as of December 31, 1996, $2.27 per Mcf for natural gas and $15.50 per Bbl for oil as of December 31, 1997, and $2.12 per Mcf for natural gas and $9.50 per Bbl for oil as of December 31, 1998. These base prices were adjusted to reflect applicable transportation and quality differentials on a well-by-well basis to arrive at realized sales prices used to estimate the Company's reserves at these dates. Changes in the future net cash inflows discounted at 10% per annum follow:
DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Beginning of period................................................ $ 64,274 $ 44,506 $ 18,222 Sales of natural gas and oil produced, net of production costs..................................................... (10,776) (7,484) (5,053) Development costs incurred..................................... 5,423 1,955 246 Extensions and discoveries..................................... 52,389 38,016 29,457 Purchases of minerals-in-place................................. 687 16,965 384 Sales of minerals-in-place..................................... -- (94) (2,380) Net change of prices and production costs...................... (11,921) (20,466) 7,023 Change in future development costs............................. (656) 319 303 Changes in production rates and other.......................... (6,109) (1,954) (342) Revisions of quantity estimates................................ (23,470) (6,964) (5,176) Accretion of discount.......................................... 6,925 4,450 1,822 Change in income taxes ........................................ 4,883 (4,975) -- ----------- ----------- ----------- End of period...................................................... $ 81,649 $ 64,274 $ 44,506 =========== =========== ===========
F1-25 77 EXHIBIT INDEX
Number Description - ------ ----------- 2.1 -- Exchange Agreement (filed as Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 3.1 -- Certificate of Incorporation (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 3.2 -- Bylaws (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 4.1 -- Form of Common Stock Certificate (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 4.2+ -- Indenture dated as of August 20, 1998 between Brigham Exploration Company and Chase Bank of Texas, National Association, as Trustee. 4.2.1++ -- Supplemental Indenture dated as of March 26, 1999 between Brigham Exploration Company and Chase Bank of Texas, National Association, as Trustee. 4.3++ -- Form of Warrant Certificate. 4.4 -- Form of Senior Subordinated Secured Note due 2003 (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.1 -- Agreement of Limited Partnership, dated May 1, 1992, between Brigham Exploration Company and General Atlantic Partners III, L.P. as general partners, and Harold D. Carter and GAP-Brigham Partners, L.P. as limited partners (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.1.1 -- Amendment No. 1 to Agreement of Limited Partnership of Brigham Oil & Gas, L.P., dated May 1, 1992, by and among Brigham Exploration Company, General Atlantic Partners III, L.P., GAP-Brigham Partners, L.P. and Harold D. Carter (filed as Exhibit 10.1.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.1.2 -- Amendment No. 2 to Agreement of Limited Partnership of Brigham Oil & Gas, L.P., dated September 30, 1994, by and among Brigham Exploration Company, General Atlantic Partners III, L.P., GAP-Brigham Partners, L.P., Harold D. Carter and the additional signatories thereto (filed as Exhibit 10.1.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.1.3 -- Amendment No. 3 to Agreement of Limited Partnership of Brigham Oil & Gas, L.P., dated August 24, 1995, by and among Brigham Exploration Company, General Atlantic Partners III, L.P., GAP-Brigham Partners, L.P., Harold D.
78
Number Description - ------ ----------- Carter, Craig M. Fleming, David T. Brigham and Jon L. Glass (filed as Exhibit 10.1.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.1.4+ -- Amended and Restated Agreement of Limited Partnership of Brigham Oil & Gas, L.P., dated December 30, 1997 by and among Brigham, Inc., Brigham Holdings I, L.L.C. and Brigham Holdings II, L.L.C. 10.2 -- Agreement of Limited Partnership of Venture Acquisitions, L.P., dated September 23, 1994, by and between Quest Resources, L.L.C. and RIMCO Energy, Inc. as general partners, and RIMCO Production Company, Inc., RIMCO Exploration Partners, L.P. I and RIMCO Exploration Partners, L.P. II, as limited partners (filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.3 -- Regulations of Quest Resources, L.L.C. (filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.4 -- Management and Ownership Agreement, dated September 23, 1994, by and among Brigham Oil & Gas, L.P., Brigham Exploration Company, General Atlantic Partners III, L.P., Harold D. Carter, Ben M. Brigham and GAP- Brigham Partners, L.P. (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.5* -- Consulting Agreement, dated May 1, 1997, by and between Brigham Oil & Gas, L.P. and Harold D. Carter (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 33-53873), and incorporated herein by reference). 10.6* -- Employment Agreement, by and between Brigham Exploration Company and Ben M. Brigham (filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.7* -- Form of Confidentiality and Noncompete Agreement between the Registrant and each of its executive officers (filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.8* -- 1997 Incentive Plan of Brigham Exploration Company (filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 333- 22491), and incorporated herein by reference). 10.8.1* -- Form of Option Agreement for certain executive officers (filed as Exhibit 10.9.1 to the Company's Registration Statement on Form S-1 (Registration No. 333- 22491), and incorporated herein by reference). 10.8.2* -- Option Agreement dated as of March 4, 1997, by and between Brigham Exploration Company and Jon L. Glass (filed as Exhibit 10.9.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.9* -- Incentive Bonus Plan dated as of February 28, 1997 of Brigham, Inc. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.10 -- Two Bridgepoint Lease Agreement, dated September 30, 1996, by and between Investors Life Insurance Company of North America and Brigham Oil & Gas, L.P. (filed as Exhibit 10.14 to the Company's Registration Statement on Form S- 1 (Registration No. 333-22491), and incorporated herein by reference).
79
Number Description - ------ ----------- 10.10.1 -- First Amendment to Two Bridge Point Lease Agreement dated April 11, 1997 between Investors Life Insurance Company of North America and Brigham Oil & Gas, L.P. (filed as Exhibit 10.9.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.10.2 -- Second Amendment to Two Bridge Point Lease Agreement dated October 13, 1997 between Investors Life Insurance Company of North America and Brigham Oil & Gas, L.P. (filed as Exhibit 10.9.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.10.3 -- Letter dated April 17, 1998 exercising Right of First Refusal to Lease "3rd Option Space" (filed as Exhibit 10.9.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.11 -- Anadarko Basin Seismic Operations Agreement, dated February 15, 1996, by and between Brigham Oil & Gas, L.P. and Veritas Geophysical, Ltd. (filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.11.1 -- Letter Amendment to Anadarko Basin Seismic Operations Agreement, dated June 10, 1996, between Brigham Oil & Gas, L.P. and Veritas Geophysical, Ltd. (filed as Exhibit 10.15.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.12 -- Expense Allocation and Participation Agreement, dated April 1, 1996, between Brigham Oil & Gas, L.P. and Gasco Limited Partnership. (filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 (Registration No. 333- 22491), and incorporated herein by reference). 10.12.1 -- Amendment to Expense Allocation and Participation Agreement, dated October 21, 1996, between Brigham Oil & Gas, L.P. and Gasco Limited Partnership (filed as Exhibit 10.16.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.13 -- Expense Allocation and Participation Agreement, dated April 1, 1996, between Brigham Oil & Gas, L.P. and Middle Bay Oil Company, Inc. (filed as Exhibit 10.17 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.13.1 -- Amendment to Expense Allocation and Participation Agreement, dated September 26, 1996, between Brigham Oil & Gas, L.P. and Middle Bay Oil Company, Inc. (filed as Exhibit 10.17.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.13.2 -- Letter Amendment to Expense Allocation and Participation Agreement, dated May 20, 1996, between Brigham Oil & Gas, L.P. and Middle Bay Oil Company, Inc. (filed as Exhibit 10.17.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.14 -- Anadarko Basin Joint Participation Agreement, dated May 1, 1996, by and among Stephens Production Company and Brigham Oil & Gas, L.P. (filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.15 -- Anadarko Basin Joint Participation Agreement, dated May 1, 1996, by and between Vintage Petroleum, Inc. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.19 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.16 -- Processing Alliance Agreement, dated July 20, 1993, between Veritas Seismic Ltd. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.20 to the Company's
80
Number Description - ------ ----------- Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.16.1 -- Letter Amendment to Processing Alliance Agreement, dated November 3, 1994, between Veritas Seismic Ltd. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.20.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.17 -- Agreement and Assignment of Interest, West Bradley Project, dated September 1, 1995, by and between Aspect Resources Limited Liability Company and Brigham Oil & Gas, L.P. (filed as Exhibit 10.21 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.18 -- Agreement and Assignment of Interests in lands located in Grady County, Oklahoma, West Bradley Project, dated December 1, 1995, by and between Aspect Resources Limited Liability Company, Brigham Oil & Gas, L.P. and Venture Acquisitions, L.P. (filed as Exhibit 10.22 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.19 -- Agreement and Assignment of Interests, West Bradley Project, dated December 1, 1995, by and between Aspect Resources Limited Liability Company and Brigham Oil & Gas, L.P. (filed as Exhibit 10.23 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.20 -- Geophysical Exploration Agreement, Hardeman Project, Hardeman and Wilbarger Counties, Texas and Jackson County, Oklahoma, dated March 15, 1993 by and among General Atlantic Resources, Inc., Maynard Oil Company, Ruja Muta Corporation, Tucker Scully Interests Ltd., JHJ Exploration, Ltd., Cheyenne Petroleum Company, Antrim Resources, Inc., and Brigham Oil & Gas, L.P. (filed as Exhibit 10.24 to the Company's Registration Statement on Form S- 1 (Registration No. 333-22491), and incorporated herein by reference). 10.21 -- Agreement and Partial Assignment of Interests in OK13-P Prospect Area, Jackson County, Oklahoma (Hardeman Project), dated August 1, 1995, by and between Brigham Oil & Gas, L.P. and Aspect Resources Limited Liability Company (filed as Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.22 -- Agreement and Partial Assignment of Interests in Q140-E Prospect Area, Hardeman County, Texas (Hardeman Project), dated August 1, 1995, by and between Brigham Oil & Gas, L.P. and Aspect Resources Limited Liability Company (filed as Exhibit 10.26 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.23 -- Agreement and Partial Assignment of Interests in Hankins #1 Chappel Prospect Agreement, Jackson County, Oklahoma (Hardeman Project), dated March 21, 1996, by and between Brigham Oil & Gas, L.P., NGR, Ltd. and Aspect Resources Limited Liability Company (filed as Exhibit 10.27 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.24 -- Form of Indemnity Agreement between the Registrant and each of its executive officers (filed as Exhibit 10.28 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.25 -- Registration Rights Agreement dated February 26, 1997 by and among Brigham Exploration Company, General Atlantic Partners III L.P., GAP-Brigham Partners, L.P., RIMCO Partners, L.P. II, RIMCO Partners L.P. III, and RIMCO Partners, L.P. IV, Ben M. Brigham, Anne L. Brigham, Harold D.
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Number Description - ------ ----------- Carter, Craig M. Fleming, David T. Brigham and Jon L. Glass (filed as Exhibit 10.29 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.26 -- 1997 Director Stock Option Plan (filed as Exhibit 10.30 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.27 -- Form of Employee Stock Ownership Agreement (filed as Exhibit 10.31 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.28 -- Agreement and Assignment of Interest in Geophysical Exploration Agreement, Esperson Dome Project, dated November 1, 1994, by and between Brigham Oil & Gas, L.P. and Vaquero Gas Company (filed as Exhibit 10.33 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.29 -- Geophysical Exploration Agreement, Southwest Danbury Project, Brazoria County, Texas, dated as of July 1, 1996, by and among UNEXCO, Inc. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.34 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.30 -- Geophysical Exploration Agreement, Welder Project, Duval County, Texas, dated as of October 1, 1996, by and among UNEXCO, Inc. and Brigham Oil & Gas, L.P. (filed as Exhibit 10.35 to the Company's Registration Statement on Form S- 1 (Registration No. 333-22491), and incorporated herein by reference). 10.31 -- Proposed Trade Structure, RIMCO/Tigre Project, Vermillion Parish, Louisiana, among Brigham Oil & Gas, L.P., Tigre Energy Corporation and Resource Investors Management Company (filed as Exhibit 10.36 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.31.1 -- Letter relating to Proposed Trade Structure, RIMCO/Tigre Project, dated January 31, 1997, from Resource Investors Management Company to Brigham Oil & Gas, L.P. (filed as Exhibit 10.36 to the Company's Registration Statement on Form S- 1 (Registration No. 333-22491), and incorporated herein by reference). 10.32 -- Anadarko Basin Seismic Operations Agreement II, dated as of April 1, 1997, by and between Brigham Oil & Gas, L.P. (filed as Exhibit 10.37 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.32.1 -- Letter Amendment to Anadarko Basin Seismic Operations Agreement II, dated March 20, 1997, between Brigham Oil & Gas, L.P. and Veritas DGC Land, Inc. (filed as Exhibit 10.37 to the Company's Registration Statement on Form S-1 (Registration No. 333-22491), and incorporated herein by reference). 10.33 -- Expense Allocation and Participation Agreement II, dated April 1, 1997, between Brigham Oil & Gas, L.P., and Gasco Limited Partnership (filed as Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference). 10.36 -- Credit Agreement dated as of January 26, 1998 among Brigham Oil & Gas, L.P., Bank of Montreal, as Agent, and the lenders signatory thereto (filed as Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference). 10.36.1+ -- First Amendment to Credit Agreement dated as of August 20, 1998 among Brigham Oil & Gas, L.P., Bank of Montreal, as Agent, and the lenders signatory thereto.
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Number Description - ------ ----------- 10.36.2++ -- Second Amendment to Credit Agreement dated as of March 26, 1999 among Brigham Oil & Gas, L.P., Bank of Montreal, as Agent, and the lenders signatory thereto. 10.37 -- Guaranty Agreement dated January 26, 1998 by Brigham Exploration Company in favor of Bank of Montreal, as Agent, and each of the Lenders party to the Credit Agreement (filed as Exhibit 10.33.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.37.1 -- First Amendment to Guaranty Agreement dated as of March 30, 1998 between Brigham Exploration Company and Bank of Montreal, as Agent for the Lenders party to the Credit Agreement (filed as Exhibit 10.33.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-53873), and incorporated herein by reference). 10.37.2+ -- Second Amendment to Guaranty Agreement dated as of August 20, 1998 between Brigham Exploration Company and Bank of Montreal, as Agent for the Lenders party to the Credit Agreement. 10.37.3++ -- Third Amendment to Guaranty Agreement dated as of March 26, 1999 between Brigham Exploration Company and Bank of Montreal, as Agent for the Lenders party to the Credit Agreement. 10.38+ -- Securities Purchase Agreement dated as of August 20, 1998 among Brigham Exploration Company, Enron Capital & Trade Resources Corp. and Joint Energy Development Investments II Limited Partnership. 10.39+ -- Registration Rights Agreement dated as of August 20, 1998, by and among Brigham Exploration Company, Enron Capital & Trade Resources Corp. and Joint Energy Development Investments II Limited Partnership. 10.39.1++ -- Amendment to Registration Rights Agreement dated as of March 26, 1999, by and among Brigham Exploration Company, Enron Capital & Trade Resources Corp., ECT Merchant Investments Corp. and Joint Energy Development Investments II Limited Partnership. 10.40+ -- Form of Guaranty for subsidiaries. 10.41++ -- Exchange Agreement dated as of March 30, 1999 by and between Brigham Exploration Company and Veritas DGC Land, Inc. 10.42++ -- Registration Rights Agreement dated as of March 30, 1999 by and between Brigham Exploration Company and Veritas DGC Land, Inc. 21+ -- Subsidiaries of the Registrant. 23.1+ -- Consent of Price Waterhouse LLP, independent public accountants. 23.2+ -- Consent of Cawley, Gillespie & Associates, Inc., independent petroleum engineers. 27+ -- Financial Data Schedule.
- --------------- * Management contract or compensatory plan. + Filed herewith ++ Not filed herewith pursuant to Rule 12b-25 under the Act, and to be filed by amendment. EX-4.2 2 INDENTURE DATED AUGUST 20, 1998 1 EXHIBIT 4.2 - ------------------------------------------------------------------------------- BRIGHAM EXPLORATION COMPANY Borrower AND CHASE BANK OF TEXAS, NATIONAL ASSOCIATION Trustee _______________ I N D E N T U R E Dated as of August 20, 1998 _______________ $50,000,000 Senior Subordinated Secured Notes due 2003 2 TABLE OF CONTENTS PRELIMINARY STATEMENT......................................................... 1 ARTICLE I DEFINITIONS.............................................................. 1 Section 1.01 Definitions................................................ 1 Section 1.02 Accounting Procedures and Interpretation...................16 ARTICLE II ISSUE, DESCRIPTION, FORM, EXECUTION, REGISTRATION OF TRANSFER AND EXCHANGE OF NOTES........................................17 Section 2.01 Form and Dating............................................17 Section 2.02 Execution and Authentication...............................17 Section 2.03 Denomination of Notes and Record Date......................17 Section 2.04 Manual Execution...........................................18 Section 2.05 Transfer and Exchange......................................18 Section 2.06 Replacement Notes..........................................19 Section 2.07 Cancellation of Notes......................................20 Section 2.08 No Third Party Benefit.....................................20 ARTICLE III SUBORDINATION............................................................20 ARTICLE IV SECURITY FOR THE OBLIGATIONS.............................................20 Section 4.01 Security...................................................20 ARTICLE V [RESERVED]...............................................................22 ARTICLE VI [RESERVED]...............................................................22 ARTICLE VII AFFIRMATIVE COVENANTS....................................................22 Section 7.01 Financial Statements and Reports...........................22 Section 7.02 Litigation.................................................24 Section 7.03 Maintenance, Etc...........................................24 Section 7.04 Environmental Matters......................................25 Section 7.05 Further Assurances.........................................25 Section 7.06 Performance of Obligations.................................26 Section 7.07 Engineering Reports........................................26 Section 7.08 Intentionally Omitted......................................27
-i- 3 Section 7.09 Additional Collateral......................................27 Section 7.10 ERISA Information and Compliance...........................28 Section 7.11 Subsidiary Security........................................28 ARTICLE VIII NEGATIVE COVENANTS.......................................................29 Section 8.01 Debt.......................................................29 Section 8.02 Liens......................................................30 Section 8.03 Investments, Loans and Advances............................30 Section 8.04 Dividends, Distributions and Redemptions...................31 Section 8.05 Sales and Leasebacks.......................................32 Section 8.06 Nature of Business.........................................32 Section 8.07 Mergers, Etc...............................................32 Section 8.08 Proceeds of Notes..........................................32 Section 8.09 ERISA Compliance...........................................32 Section 8.10 Sale of Oil and Gas Properties.............................33 Section 8.11 Environmental Matters......................................34 Section 8.12 Transactions with Affiliates...............................34 Section 8.13 Negative Pledge Agreements.................................34 Section 8.14 Gas Imbalances, Take-or-Pay Prepayments....................34 Section 8.15 Borrower as Operator.......................................34 Section 8.16 Consolidated Interest Coverage Ratio.......................35 Section 8.17 Current Ratio..............................................35 ARTICLE IX PAYMENT OF THE NOTES.....................................................35 Section 9.01 Repayment..................................................35 Section 9.02 Interest...................................................35 Section 9.03 Payments and Computations..................................38 ARTICLE X DEFAULT AND REMEDIES.....................................................39 Section 10.01 Events of Default.........................................39 Section 10.02 Remedies..................................................41 Section 10.03 Production and Proceeds...................................42 Section 10.04 Set-Off...................................................42 ARTICLE XI THE AGENT................................................................42 Section 11.01 Authorization and Action..................................42 Section 11.02 Agent's Reliance, Etc.....................................43 Section 11.03 The Agent and Its Affiliates..............................43 Section 11.04 Noteholders Loan Decision.................................43 Section 11.05 Indemnification...........................................44 Section 11.06 Successor Agent...........................................44
-ii- 4 ARTICLE XII TRUSTEE..................................................................45 Section 12.01 Duties of Trustee.........................................45 Section 12.02 Rights of Trustee.........................................46 Section 12.03 Individual Rights of Trustee..............................47 Section 12.04 Trustee's Disclaimer......................................47 Section 12.05 Notice of Defaults........................................47 Section 12.06 Reports by Trustee to Noteholders.........................47 Section 12.07 Compensation and Indemnity................................48 Section 12.08 Replacement of Trustee....................................49 Section 12.09 Successor Trustee by Merger, etc..........................50 Section 12.10 Eligibility, Disqualification.............................50 Section 12.11 Preferential Collection of Claims Against Borrower........50 Section 12.12 Appointment of Co-Trustee.................................50 Section 12.13 No Conflict...............................................51 ARTICLE XIII MISCELLANEOUS............................................................51 Section 13.01 Interpretation and Survival of Provisions.................51 Section 13.02 Costs, Expenses and Taxes.................................52 Section 13.03 No Waiver; Modifications in Writing.......................54 Section 13.04 Binding Effect; Assignment................................54 Section 13.05 Communications............................................55 Section 13.06 Governing Law.............................................56 Section 13.07 Arbitration...............................................56 Section 13.08 Confidentiality...........................................57 Section 13.09 Execution in Counterparts.................................58 Section 13.10 Trust Indenture Act Controls..............................58 Section 13.11 Communication by Noteholders with Other Noteholders.......58 Section 13.12 Certificate and Opinion as to Conditions Precedent........58 Section 13.13 Statements Required in Certificate or Opinion.............59 Section 13.14 Rules by Trustee and Agents...............................59 Section 13.15 Legal Holidays............................................59 EXHIBITS Exhibit A Form of Note Exhibit B Form of Guaranty Agreement Exhibit C Form of Subordination Agreement Exhibit D Form of Security Agreement Exhibit E Form of Security Agreement Exhibit F Form of Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement Exhibit G Acceptance of Appointment
-iii- 5 INDENTURE, dated as of August 20, 1998, between BRIGHAM EXPLORATION COMPANY, a corporation duly organized and existing under the laws of the State of Delaware (hereinafter sometimes referred to as the "Borrower"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association existing under the laws of the United States (hereinafter sometimes referred to as the "Trustee"). PRELIMINARY STATEMENT All covenants and agreements made by the Borrower herein are for the benefit and security of the holders of the Borrower's Senior Subordinated Secured Notes due 2003. ARTICLE I DEFINITIONS Section 1.01 Definitions. "Acquired Shares" means 1,052,632 shares of Common Stock acquired by the Noteholders on the Funding Date in accordance with Section 2.01 of the Securities Purchase Agreement and any additional shares of Common Stock of the Borrower issued to the Noteholders after the Funding Date in accordance with Section 2.01(ii) of the Securities Purchase Agreement. "Adjusted Consolidated Net Tangible Assets" or "ACNTA" means (without duplication), as of the date of determination, (a) the sum of (i) the discounted future net revenue from proved crude oil and natural gas reserves of the Borrower and its Consolidated Subsidiaries calculated in accordance with Commission guidelines before any state or federal income taxes, as estimated in the most current Reserve Report, as increased by, as of the date of determination, the discounted future net revenue of (A) estimated proved crude oil and natural gas reserves of the Borrower and its Consolidated Subsidiaries attributable to acquisitions consummated since the date of such Reserve Report, and (B) estimated proved crude oil and natural gas reserves of the Borrower and its Consolidated Subsidiaries attributable to extensions, discoveries and other additions and upward determinations of estimates of proved crude oil and natural gas reserves due to exploration, development or exploitation, production or other activities which reserves were not reflected in the most current Reserve Report which would, in the case of determination made pursuant to clauses (A) and (B), in accordance with standard industry practice, result in such determinations, in each case calculated in accordance with Commission guidelines (utilizing the Commission guideline prices utilized in the most current Reserve Report), and decreased by, as of the date of determination, the discounted future net revenue attributable to (C) estimated proved crude oil and natural gas reserves of the Borrower and its Consolidated Subsidiaries reflected in the most current Reserve Report produced or disposed of since the date of such Reserve Report and (D) reductions in the estimated proved crude oil and natural gas reserves of the Borrower and its Consolidated Subsidiaries reflected in such Reserve Report since the date of such Reserve Report attributable to downward determinations of estimates of proved crude oil and natural gas reserves due to exploration, development or exploitation, production -1- 6 or other activities conducted or otherwise occurring since the date of the most current Reserve Report which would, in the case of determinations made pursuant to clauses (C) and (D), in accordance with standard industry practice, result in such determinations, in each case calculated in accordance with Commission guidelines (utilizing the Commission guideline prices utilized in the most current Reserve Report); provided, however, that, in the case of each of the determinations made pursuant to clauses (A) through (D), such increases and decreases shall be as estimated by the Borrower's engineers, except that if as a result of such acquisitions, dispositions, discoveries, extensions or revisions, there is a net increase in the ACNTA which exceeds $10,000,000, the Agent shall have the right to require that such increases and decreases in the discounted future net revenue be confirmed in writing by an independent petroleum engineer, at the Borrower's expense, (ii) the capitalized costs that are attributable to seismic and undeveloped oil and gas leases of the Borrower and its Consolidated Subsidiaries to which no proved crude oil and natural gas reserves are attributed, based on the Borrower's books and records as of a date no earlier than the date of the Borrower's latest annual or quarterly financial statements, (iii) the Net Working Capital on a date no earlier than the date of the Borrower's latest annual or quarterly financial statements and (iv) the greater of (I) the net book value on a date no earlier than the date of the Borrower's latest annual or quarterly financial statements and (II) the appraised value, as estimated by independent appraisers reasonably acceptable to the Agent, of other tangible assets of the Borrower and its Consolidated Subsidiaries as of a date no earlier than the date of the Borrower's latest audited financial statements, minus (b) to the extent not otherwise taken into account in the immediately preceding clause (a), the sum of (i) minority interests, (ii) any natural gas balancing liabilities and credits of the Borrower and its Consolidated Subsidiaries reflected in the Borrower's latest audited financial statements, (iii) the discounted future net revenue, calculated in accordance with Commission guidelines (utilizing the Commission guideline prices utilized in the Borrower's most current Reserve Report), attributable to reserves subject to participation interests, overriding royalty interests or other interests of third parties, pursuant to participation, partnership, vendor financing or other agreements then in effect, or which otherwise are required to be delivered to third parties, (iv) the discounted future net revenue, calculated in accordance with Commission guidelines (utilizing the Commission guideline prices utilized in the Borrower's most current Reserve Report), attributable to reserves that are required to be delivered to third parties to fully satisfy the obligations of the Borrower and its Consolidated Subsidiaries with respect to volumetric production payments and (v) the discounted future net revenue, calculated in accordance with Commission guidelines, attributable to reserves subject to dollar-denominated production payments that, based on the estimates of production included in determining the discounted future net revenue specified in the immediately preceding clause (a) (i) (utilizing the Commission guideline prices utilized in the Borrower's most current Reserve Report), would be necessary to satisfy fully the obligations of the Borrower and its Consolidated Subsidiaries with respect to dollar-denominated production payments. "Affiliate" of any Person shall mean (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one -2- 7 or more members of such immediate family and any Person who is controlled by any such member or trust. For purposes of this definition, any Person which owns directly or indirectly 20% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 20% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to "control" (including, with its correlative meanings, "controlled by" and "under common control with") such corporation or other Person. "Agent" means JEDI-II in its capacity as agent pursuant to Article XI and includes any successor agent pursuant to Section 11.06. "Agent's Account" shall have the meaning specified in Section 9.03. "Average Share Price" means $9.50. "Basic Documents" means, collectively, this Indenture, the Securities Purchase Agreement and the other Loan Documents. "Board of Directors" means the Board of Directors of the Borrower. "BOG" means Brigham Oil & Gas, L.P., a Delaware limited partnership. "Business Day" means any day other than a Saturday, Sunday, or a legal holiday for commercial banks in Houston, Texas, or New York, New York. "Business Opportunities Agreement" means the Corporate Shareholders' Agreement dated as of even date herewith between the Purchasers and the Borrower. "Capital Stock" of any Person means any and all shares, interests, participations, or other equivalents (however designated) of, or rights, warrants, or options to purchase, corporate stock, partnership interests, or any other equity interest (however designated) of or in such Person. "Change in Control" means (i) a transaction, including any merger or consolidation of Borrower with any other Person, in which the shareholders of the Borrower immediately prior to such transaction (treating the holders of the Warrants as holders of voting shares) do not own at least fifty-one percent (51.0%) of the voting shares of stock of the Borrower (or the surviving entity in the case of a merger or consolidation) immediately following the consummation of such transaction, or (ii) a transaction, including any merger or consolidation of Borrower with any other Person, in which the members of the Board of Directors immediately prior to such transaction do not comprise at least a majority of the board of directors of the Borrower (or the surviving entity in the case of a merger or consolidation) for a period of twelve (12) months immediately following the consummation of such transaction, or (iii) an event, including any merger or consolidation of Borrower with any other Person, such that Mr. Ben Brigham no longer manages the Borrower (or the surviving -3- 8 entity in the case of a merger or consolidation), other than as a result of his death or disability. "Closing" has the meaning provided therefor in Section 2.02 of the Securities Purchase Agreement. "Closing Date" means the date upon which the Closing occurs as provided in Section 2.02 of the Securities Purchase Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute. "Collateral" means the properties, property interests and rights described in Section 4.01 hereof, or otherwise covered by the Collateral Documents, as security for the Obligations. "Collateral Documents" means collectively the documents required by the Agent or the Noteholders to obtain the security interests in the Collateral, as described in Section 4.01 hereof, and all other agreements, documents and instruments required in Section 4.01, as the same may from time to time be amended or supplemented. "Commission" means the United States Securities and Exchange Commission. "Common Stock" means the common stock, par value $0.01 per share, of the Borrower or such other class of securities as shall, after the date of this Indenture, constitute the common equity of the Borrower. "Consolidated Indebtedness" means all Debt of the Borrower and its Consolidated Subsidiaries. "Consolidated Interest Coverage Ratio" means, as of the date of determination, the ratio of (i) EBITDA for the preceding four calendar quarters to (ii) Interest Expense for the same four calendar quarters. "Consolidated Net Income" means with respect to the Borrower and its Consolidated Subsidiaries, for any period, the aggregate of the net income (or loss) of the Borrower and its Consolidated Subsidiaries after allowance for taxes for such period, determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded from the calculation of such net income (to the extent otherwise included therein) the following: (i) the net income of any Person in which Borrower or any Consolidated Subsidiary has an interest (which interest does not cause the net income of such other Person to be consolidated with the net income of Borrower and its Consolidated Subsidiaries in accordance with GAAP), except to the extent of the amount of dividends or distributions actually paid in such period by such other Person to the Borrower or to a Consolidated Subsidiary, as the case may be; (ii) the net income (but not loss) of any Consolidated Subsidiary to the extent that -4- 9 the declaration or payment of dividends or similar distributions or transfers or loans by that Consolidated Subsidiary is not at the time permitted by operation of the terms of its charter or any agreement, instrument or Governmental Requirement applicable to such Consolidated Subsidiary, or is otherwise restricted or prohibited, in each case determined in accordance with GAAP; (iii) the net income (or loss) of any Person acquired in a pooling-of-interests transaction for any period prior to the date of such transaction; (iv) any extraordinary gains or losses, including gains or losses attributable to Property sales not in the ordinary course of business; and (v) the cumulative effect of a change in accounting principles and any gains or losses attributable to writeups or writedowns of assets. "Consolidated Subsidiaries" shall mean each Subsidiary of the Borrower (whether now existing or hereafter created or acquired) the financial statements of which shall be (or should have been) consolidated with the financial statements of the Borrower in accordance with GAAP. "corporate trust office" of the Trustee means the office of the Trustee at the address set out in Section 13.05 or at any other office or agency so designated by the Trustee. "Debt" means, for any Person the sum of the following (without duplication): (i) all obligations of such Person for borrowed money or evidenced by bonds, debentures, notes or other similar instruments (including principal and earned but unpaid issuance fees); (ii) all obligations of such Person (whether contingent or otherwise) in respect of bankers' acceptances, letters of credit, surety or other bonds and similar instruments; (iii) all obligations of such Person to pay the deferred purchase price of Property or services (other than for borrowed money) excluding Trade Payables but including Schedule 8.02 Payables; (iv) all obligations under leases which shall have been, or should have been, in accordance with GAAP, recorded as capital leases in respect of which such Person is liable (whether contingent or otherwise); (v) all obligations under leases (other than capital leases and oil and gas leases) which require such Person or its Affiliate to make payments exceeding $100,000 (or $500,000 in the aggregate) over the term of such lease, including payments at termination, which are substantially equal to at least eighty percent (80%) of the purchase price of the Property subject to such lease plus interest at an imputed rate of interest; (vi) all Debt (as described in the other clauses of this definition) of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person; (vii) all Debt (as described in the other clauses of this definition) of others guaranteed by such Person or in which such Person otherwise assures a creditor against loss of the Debt of others; (viii) all obligations or undertakings of such Person to maintain or cause to be maintained the financial position or covenants of others including without limitation agreements expressed as an agreement to purchase the Debt or Property of others or otherwise; (ix) obligations to deliver Hydrocarbons in consideration of advance payments; (x) obligations to pay for goods or services whether or not such goods or services are actually received or utilized by such Person; (xi) any capital stock of such Person in which such Person has a mandatory obligation to redeem such stock; (xii) any Debt of a Special Entity for which such Person is liable either by agreement or because of a Governmental Requirement; (xiii) the undischarged balance of any production payment created by such Person or for the creation -5- 10 of which such Person directly or indirectly received payment; and (xiv) all obligations of such Person under Hedging Agreements, provided that "Debt" shall not include (a) interest or fees (other than earned but unpaid issuance fees) on any of the foregoing, (b) obligations associated with bid, performance, surety or appeal bonds (including those required by Governmental Requirements in connection with Oil and Gas Properties), (c) gas balancing obligations (whether volumetric or dollar denominated), (d) intercompany obligations among the Borrower and its Consolidated Subsidiaries, (e) indemnity obligations which have not matured into fixed liabilities, and (f) purchase price adjustments and similar post-closing obligations (but excluding the deferred payment of any purchase price) incurred in connection with the permitted purchase and sale of Property or stock, and which is to be determined and payable no later than 180 days following the closing of such purchase and sale. "Default" shall mean an Event of Default or an event which with notice or lapse of time, or both, would become, an Event of Default. "Default Rate" means, for any applicable period, an interest rate equal to the then applicable rate of interest on the Notes (for cash payments of interest) plus 4.00% per annum, but in no event shall the Default Rate exceed the Maximum Rate. "EBITDA" shall mean, for any period, the sum of Consolidated Net Income for such period plus the following expenses or charges to the extent deducted from Consolidated Net Income in such period: interest, taxes, depreciation, depletion and amortization, and other non-cash charges, minus all non-cash income added to Consolidated Net Income in such period. "ECT" means Enron Capital & Trade Resources Corp., a Delaware corporation. "Effective Date" means the date this Indenture is executed by all the parties hereto. "Employee Plan" means any employee benefit plan, program or policy with respect to which the Borrower or any ERISA Affiliate may have any liability or any obligation to contribute, other than a Plan or a Multiemployer Plan. "Environmental Laws" means any and all Governmental Requirements pertaining to the environment in effect in any and all jurisdictions in which the Borrower or any Subsidiary is conducting or at any time has conducted business, or where any Property of the Borrower or any Subsidiary is located, including, without limitation, the Oil Pollution Act of 1990 ("OPA"), as amended, the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and other environmental conservation or protection laws. As used in the provisions hereof relating to Environmental -6- 11 Laws, the term "oil" has the meaning specified in OPA; the terms "hazardous substance" and "release" (or "threatened release") have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") have the meanings specified in RCRA; provided, however, that (i) in the event either OPA, CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment, and (ii) to the extent the laws of the state in which any Property of the Borrower or any Subsidiary is located establish a meaning for "oil," "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either OPA, CERCLA or RCRA, such broader meaning shall apply. "Equity Documents" means the Warrants, the stock certificates representing the Acquired Shares, the Registration Rights Agreement and the Business Opportunities Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Borrower or any Subsidiary of the Borrower would be deemed to be a "single employer" within the meaning of Section 4001(b)(1) of ERISA or subsections (b), (c), (m) or (o) of section 414 of the Code. "Event of Default" shall have the meaning assigned such term in Section 10.01. "Excepted Liens" means (i) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (ii) Liens in connection with workman's compensation, unemployment insurance or other social security, old age pension or public liability obligations not yet due or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (iii) operators', vendors', carriers', warehousemen's, repairmen's, mechanics', workmen's, materialmen's, construction or other like Liens arising by operation of law in the ordinary course of business or incident to the exploration, development, operation and maintenance of Oil and Gas Properties or customary landlord's liens, each of which is in respect of obligations that have not been outstanding more than 90 days or which are being contested in good faith by appropriate proceedings and for which adequate reserves have been maintained in accordance with GAAP; (iv) any Liens reserved in leases or farmout agreements for rent or royalties and for compliance with the terms of the farmout agreements or leases in the case of leasehold estates, to the extent that any such Lien referred to in this clause does not materially impair the use of the Property covered by such Lien for the purposes for which such Property is held or materially impair the value of the Property subject thereto; (v) encumbrances (other than to secure the payment of borrowed money or the deferred purchase price of Property or services), easements, restrictions, servitudes, permits, conditions, covenants, exceptions or reservations in any rights of way or other Property for the purpose of roads, pipelines, transmission lines, transportation lines, -7- 12 distribution lines for the removal of gas, oil, coal or other minerals or timber, and other like purposes, or for the joint or common use of real estate, rights of way, facilities and equipment, and defects, irregularities, zoning restrictions and deficiencies in title of any rights of way or other Property which in the aggregate do not materially impair the use of such rights of way or other Property for the purposes for which such rights of way and other Property are held or materially impair the value of such Property subject thereto; (vi) deposits of cash or securities to secure the performance of bids, trade, contracts, leases, statutory obligations and other obligations of a like nature incurred in the ordinary course of business; and (vii) Liens permitted by the Loan Documents. "Federal Funds Rate" means, for any day, a fluctuating interest rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for any such day on such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. "Financial Statements" means the financial statement or statements described or referred to in Section 4.02 of the Securities Purchase Agreement. "First Reserve Report" shall have the meaning set out in Section 7.07(a). "Funding Date" means the first Business Day following the date all of the conditions precedent to funding in Article VI of the Securities Purchase Agreement have been satisfied. "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time. "Governmental Authority" shall include the country, the state, county, city and political subdivisions in which any Person or such Person's Property is located or which exercises valid jurisdiction over any such Person or such Person's Property, and any court, agency, department, commission, board, bureau or instrumentality of any of them including monetary authorities which exercises valid jurisdiction over any such Person or such Person's Property. Unless otherwise specified, all references to Governmental Authority herein shall mean a Governmental Authority having jurisdiction over, where applicable, the Borrower, the Subsidiaries or any of their Property or the Agent or any Noteholder. "Guarantors" means Brigham, Inc., Brigham Holdings I, LLC, Brigham Holdings II, LLC, BOG and any other Person who becomes party to a Guaranty Agreement pursuant to the terms of Section 7.11. -8- 13 "Guaranty Agreements" means the agreements executed by the Guarantors substantially in the form of Exhibit B guarantying, unconditionally, payment of the Obligations, as the same may be amended, modified or supplemented from time to time. "Hedging Agreements" means any commodity, interest rate or currency swap, cap, floor, collar, forward agreement or other exchange or protection agreements or any option with respect to any such transaction. "Hydrocarbon Interests" means all rights, titles, interests and estates now or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee interests, overriding royalty and royalty interests, net profit interests and production payment interests, including any reserved or residual interests of whatever nature. "Hydrocarbons" means oil, gas, casinghead gas, drip gasoline, natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined or separated therefrom. "Indenture" means this instrument as originally executed, or, if amended or supplemented as herein provided, as so amended or supplemented. "Initial Reserve Report" means the report of Cawley, Gillespie & Associates with respect to the Oil and Gas Properties of BOG as of November 30, 1997, a copy of which has been delivered to Agent. "Interest Expense" means, for each applicable period for which EBITDA is to be calculated, the sum of all required cash payments of interest during such period on borrowed money. Interest on the Notes, for purposes of this definition, shall be deemed cash payments, calculated at the cash interest rate, whether paid in cash or in kind, except that if a payment of interest is made in kind on any Interest Payment Date, an amount equal to the cash payment of interest that would have been due on such Interest Payment Date if payment in kind had not been made shall be deemed subtracted from Interest Expense for the four quarter period ending on the last day of the fiscal quarter preceding such Interest Payment Date (but not for any other four quarter period for which Interest Expense is calculated). "Interest Payment Date" means each November 20, February 20, May 20, and August 20 following the Funding Date until and including the Maturity Date. "JEDI-II" means Joint Energy Development Investments II Limited Partnership, a Delaware limited partnership. "Lien" means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and whether such obligation or claim is fixed or contingent, -9- 14 and including but not limited to (i) the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes or (ii) production payments and the like payable out of Oil and Gas Properties. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of this Indenture, a Person shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, or leases under a financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person in a transaction intended to create a financing. "Loan Documents" means this Indenture, the Notes, the Structuring Fee Agreement, the Collateral Documents, and any and all other agreements or instruments now or hereafter executed and delivered by the Borrower or any Subsidiary or Affiliate of the Borrower (other than the Equity Documents and any assignments, participation or similar agreements between any Noteholder and any other lender or creditor with respect to any Obligations pursuant to this Indenture) in connection with, or as security for the payment or performance of, the Notes or this Indenture, as such agreements may be amended, supplemented or restated from time to time. "Majority Noteholders" means, at any time, the Noteholders holding more than 50% of the outstanding principal balance of the Notes. "Material Adverse Effect" means any material and adverse effect on (i) the assets, liabilities, financial condition, business, operations or affairs of the Borrower and its Subsidiaries taken as a whole, from those reflected in the Financial Statements, or from the facts represented or warranted in any Loan Document at the time made, or (ii) the ability of the Borrower and its Subsidiaries taken as a whole to carry out their business as of the Closing Date or as proposed as of the Closing Date to be conducted or to meet their obligations under the Loan Documents on a timely basis. "Maturity Date" means August 20, 2003, or in the event of an acceleration of the Obligations, such earlier date as the Obligations become due and payable in full. "Maximum Rate" means at any particular time in question, the maximum nonusurious rate of interest, if any, which under applicable law may then be charged on the Notes. If such maximum rate changes after the date hereof, the Maximum Rate shall be automatically increased or decreased, as the case may be, without notice to the Borrower from time to time as the effective date of each change in such maximum rate. "Mortgage" means the "Mortgage" referred to in Section 4.01(c) or 4.01(f)(ii) and any other mortgages executed pursuant to Section 7.09 hereof. "Mortgaged Property" means the Property owned by the Borrower and its Subsidiaries which is subject to the Liens existing and to exist under the Loan Documents. -10- 15 "Multiemployer Plan" means a Plan defined as such in Section 3(37) or 4001(a)(3) of ERISA. "NASDAQ" means the National Association of Securities Dealers Automated Quotation System. "Net Working Capital" means, for any Person or group of Persons and as of any date of its determination, the difference (shown on the balance sheets of such Person or group as of the end of the most recent fiscal quarter of such Person or group for which internal financial statements are available) between (i) all current assets of such Person or group and (ii) all current liabilities of such Person or group, except the current portion of long-term Debt. "Notes" means the Senior Subordinated Secured Notes issued pursuant to Section 2.03 of the Securities Purchase Agreement, in the aggregate face amount of $50,000,000, dated as of the date hereof, made by the Borrower and payable to the order of the Noteholders in their respective Participations. "Noteholders" means ECT and JEDI-II and/or, to the extent then applicable, each assignee of ECT or JEDI-II or their respective successors or assigns in whose name a Note may be registered in the Note Register kept for that purpose. "Noteholder's Account" means for any Noteholder, the account specified by such Noteholder as its Noteholder's Account by notice in writing to the Agent. "Note Register" and "Note Registrar" have the respective meanings specified in Section 2.05. "Obligations" means any and all amounts, liabilities and obligations owing from time to time by Borrower to the Agent or the Noteholders, pursuant to any of the Basic Documents and all renewals, extensions and/or rearrangements thereof, whether such amounts, liabilities or obligations be liquidated or unliquidated, now existing or hereafter arising, absolute or contingent. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the President or any Vice President and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary of the Borrower. Each such certificate shall include the statements provided for in Section 13.13, if and to the extent required by the provisions thereof. "Oil and Gas Properties" means Hydrocarbon Interests; the Properties now or hereafter pooled or unitized with Hydrocarbon Interests; all presently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including without limitation all units created under orders, regulations and rules of any Governmental Authority) which may affect all or any portion of the Hydrocarbon Interests; -11- 16 all operating agreements, contracts and other agreements which relate to any of the Hydrocarbon Interests or the production, sale, purchase, exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon Interests; all Hydrocarbons in and under and which may be produced and saved or attributable to the Hydrocarbon Interests, including all oil in tanks, the lands covered thereby and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests; all tenements, hereditaments, appurtenances and Properties in any manner appertaining, belonging, affixed or incidental to the Hydrocarbon Interests; and all Properties, rights, titles, interests and estates described or referred to above, including any and all Property, real or personal, now owned or hereafter acquired and situated upon, used, held for use or useful in connection with the operating, working or development of any of such Hydrocarbon Interests or Property (excluding drilling rights, automotive equipment or other personal property which may be on such premises for the purpose of drilling a well or other similar temporary use) and including any and all oil wells, gas wells, injection wells or other wells, buildings, structures, fuel separators, liquid extraction plants, plant compressors, pumps, pumping units, field gathering systems, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, similar equipment, surface leases, rights-of-way, easements and servitudes together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing. "Opinion of Counsel" means an opinion in writing signed by legal counsel who shall be reasonably satisfactory to the Trustee and may be counsel to the Borrower. Each such opinion shall include the statements provided for in Section 13.13, if and to the extent required by the provisions thereof. "outstanding", when used with reference to Notes, means, as of any particular time, all Notes authenticated and delivered by the Trustee under this Indenture, except (a) Notes that have been canceled by the Trustee or delivered to the Trustee for cancellation; (b) Notes for which monies in the necessary amount for payment or redemption shall have been deposited in trust with the Trustee or with any paying agent (other than the Borrower), provided that, if such Notes are to be redeemed, notice of such redemption shall have been given as provided in Article IV or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Notes in lieu of or in substitution for which other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.06. "Participation" means, for each Noteholder, such Noteholder's proportionate share of the Obligations and the Warrants. As of the Effective Date, ECT's Participation shall be 25% and JEDI-II's Participation shall be 75%. -12- 17 "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions. "Permitted Debt" means: (a) The Senior Loan, up to the lesser of $75,000,000 or the "Borrowing Base" under the Senior Credit Agreement; (b) The Notes or other Obligations arising under the Loan Documents or any guaranty of or suretyship arrangement for the Notes or other Obligations arising under the Loan Documents; (c) Debt of the Borrower which is existing on the Closing Date and is reflected in the Financial Statements or which constitutes Schedule 8.02 Payables, and any renewals or extensions (but not increases) thereof; (d) Accounts payable for the deferred purchase price of Property or services (other than Trade Payables) from time to time incurred in the ordinary course of business which, if greater than 60 days past the invoice or billing date, are being contested in good faith by appropriate proceedings if reserves adequate under GAAP shall have been established therefor; (e) Debt of the Borrower under capital leases (as required to be reported on the financial statements of the Borrower pursuant to GAAP) not to exceed $2,000,000; (f) Debt of the Borrower under Hedging Agreements with a Senior Lender or another investment grade counterparty the notional amounts on which do not exceed 75% of Borrower's anticipated oil and/or gas production to be produced during the term of such Hedging Agreements entered into as a part of its normal business operations as a risk management strategy and/or hedge against changes resulting from market conditions related to the Borrower's and its Subsidiaries' operations; and (g) Debt of the Borrower not described in clauses (a) through (f) which, in the aggregate, does not exceed $1,000,000 at any one time outstanding. "Person" means any individual, corporation, company, voluntary association, partnership, joint venture, trust, limited liability company, unincorporated organization or government or any agency, instrumentality or political subdivision thereof, or any other form of entity. "Plan" means any employee pension benefit plan, as defined in Section 3(2) of ERISA, which (i) is currently or hereafter sponsored, maintained or contributed to by the Borrower, any Subsidiary or an ERISA Affiliate or (ii) was at any time during the preceding -13- 18 six calendar years sponsored, maintained or contributed to, by the Borrower, any Subsidiary or an ERISA Affiliate. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Registration Rights Agreement" means the Registration Rights Agreement dated as of the date hereof, made by the Borrower relating to the Warrants, the Warrant Shares and the Acquired Shares. "Reportable Event" means an event described in Section 4043(c) of ERISA with respect to a Plan, other than an event described in paragraphs (1) through (8) as to which the 30 day notice requirement has been waived by the PBGC. "Reserve Report" means a report, in form satisfactory to the Senior Loan Agent (or if there is no Senior Loan or requirement for a Reserve Report under the Senior Loan, the Agent), setting forth, as of the dates set forth in Sections 7.07(a) and (b) (or such other date in the event of an unscheduled redetermination); (i) the proved oil and gas reserves attributable to the Borrower's and its Subsidiaries' Hydrocarbon Interests together with a projection of the rate of production and future net income, taxes, operating expenses and capital expenditures with respect thereto as of such date, based upon the pricing assumptions consistent with Commission reporting requirements at the time and (ii) such other information as the Senior Loan Agent (or, if there is no Senior Loan, or requirement for a Reserve Report under the Senior Loan, the Agent) may reasonably request. The term "Reserve Report" shall also include the Initial Reserve Report, the First Reserve Report, the supplemental Reserve Reports described in Section 7.07(b), and the information to be provided by the Borrower each year pursuant to Section 7.07(d). "Responsible Officer" means, as to any Person, the Chief Executive Officer, the President, any Vice President or the Chief Financial Officer of such Person. Unless otherwise specified, all references to a Responsible Officer herein shall mean a Responsible Officer of the Borrower. "Responsible Officer" when used with respect to the Trustee means the chairman or the vice-chairman of the board of directors, the chairman of the executive committee of the board of directors, the president, any vice president, any second or assistant vice president, the cashier, any assistant cashier, the secretary, any assistant secretary, the treasurer, any assistant treasurer, any senior trust officer or trust officer, or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. "Schedule 8.02 Payables" means payables owing under the agreements listed on Schedule 8.02 which are outstanding more than 75 days after they become fixed and owing, provided that the aggregate amounts of such payables under each such agreement do not exceed the amount set forth for each such agreement on such schedule. -14- 19 "Scheduled Redetermination Date" means the last Business Day of each September and March during the term of the Notes, commencing September 1999. "Securities" means the Notes, the Warrants and the Acquired Shares. "Securities Act" means the Securities Act of 1933, as amended from time to time, and the rules and regulations of the Commission promulgated thereunder. "Securities Purchase Agreement" means the Securities Purchase Agreement dated of even date herewith between the Noteholders and the Borrower. "Senior Credit Agreement" means the Credit Agreement dated as of January 26, 1998, among BOG, the Senior Loan Agent, and the Senior Lenders, as it may from time to time be amended, modified or supplemented from time to time, and any Credit Agreement or similar agreement executed with banks or other financial institutions in connection with any refinancing of the Senior Loan permitted hereunder and under the Subordination Agreement. "Senior Loan Agent" means the agent or agents designated under the Senior Credit Agreement. Bank of Montreal is the Senior Loan Agent as of the date hereof. "Senior Lenders" means each of the lenders from time to time under the Senior Credit Agreement. "Senior Loan" shall mean, collectively, any advance or advances of principal made by the Senior Lenders to BOG or the Borrower under the Senior Credit Agreement and the other Senior Loan Documents. "Senior Loan Documents" means the Senior Credit Agreement and all promissory notes, collateral documents and other agreements, documents and instruments executed or delivered in connection therewith, as such agreements may be amended, modified or supplemented from time to time. "Special Entity" means any joint venture, limited liability company or partnership, general or limited partnership or any other type of partnership or company other than a corporation, in which a Person or one or more of its other Subsidiaries is a member, owner, partner or joint venturer and owns, directly or indirectly, at least a majority of the equity of such entity or controls such entity, but excluding any tax partnerships that are not classified as partnerships under state law. For purposes of this definition, any Person which owns directly or indirectly an equity investment in another Person which allows the first Person to manage or elect managers who manage the normal activities of such second Person will be deemed to "control" such second Person (e.g.,a sole general partner controls a limited partnership). "Structuring Fee Agreement" means the agreement between the Borrower and ECT Securities Corp. dated as of the date hereof. -15- 20 "Subordination Agreement" means the Intercreditor and Subordination Agreement dated as of even date herewith, by and among the Trustee, the Senior Loan Agent, the Senior Lenders, the Agent, the Noteholders, the Borrower and certain Subsidiaries, substantially in the form of Exhibit C as the same may be supplemented or amended from time to time. "Subsidiary" means (i) any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by a Person or one or more of its Subsidiaries or by a Person and one or more of its Subsidiaries and (ii) any Special Entity. Unless otherwise indicated herein, each reference to the term "Subsidiary" shall mean a Subsidiary of the Borrower. Quest Resources L.L.C. and Venture Acquisitions L.P. shall not be considered Subsidiaries of Borrower. "TIA" (except as herein otherwise expressly provided or unless the context otherwise requires) means the Trust Indenture Act of 1939, as amended, as in force at the date of this Indenture as originally executed. "Trade Payables" means customary trade payables incurred in the ordinary course of business. "Trustee" means Chase Bank of Texas, National Association, and, subject to the provisions of Article XII, shall also include its successors and assigns. "Warrants" means the Warrants issued by the Borrower to ECT and JEDI-II in their respective Participations pursuant to Section 2.03 of the Securities Purchase Agreement, for the purchase of an aggregate of 1,000,000 shares of Common Stock, and any Warrants issued upon the transfer thereof or in substitution therefore, pursuant to the Warrant Certificate to be issued to ECT and JEDI-II, forms of which are attached to the Securities Purchase Agreement as Exhibit A. "Warrant Shares" means the shares of Common Stock and other securities receivable upon exercise of the Warrants. Section 1.02 Accounting Procedures and Interpretation . Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished to the Agent or the Noteholders (including ACNTA calculations) hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent with the Financial Statements (except for changes concurred with by the Borrower's independent public accountants). -16- 21 ARTICLE II ISSUE, DESCRIPTION, FORM, EXECUTION, REGISTRATION OF TRANSFER AND EXCHANGE OF NOTES Section 2.01 Form and Dating. The Notes and the Trustee's certificate of authentication are to be substantially in the form of Exhibit A, with such appropriate insertions, omissions, substitutions, amendments, changes and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange on which the Notes may be listed or as may, consistently herewith, be determined by the officers executing such Notes as evidenced by their execution of the Notes. The terms and provisions contained in the Notes and each Guaranty Agreement shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Borrower and the Guarantors, by their execution and delivery of this Indenture and each Guaranty Agreement, expressly agree to such terms and provisions and to be bound thereby. The definitive Notes shall be printed or produced in any manner as may be determined by the officers executing such Notes, as evidenced by their execution of such Notes. Section 2.02 Execution and Authentication. The Notes and each Guaranty Agreement shall be executed by the Borrower and Guarantors, respectively, and be delivered to the Trustee for authentication, and the Trustee shall thereupon, or from time to time thereafter, authenticate and deliver said Notes and each Guaranty Agreement to and upon the written order of the Borrower, signed by its President or a Vice President and by its Treasurer, Assistant Treasurer, Secretary or Assistant Secretary, without any further action by the Borrower. Section 2.03 Denomination of Notes and Record Date. The Notes shall be issuable as registered Notes without coupons in denominations of $1,000 and any integral multiple thereof. Each Note shall be dated the date of its authentication. The person in whose name any Note is registered at the close of business on any record date (as hereinafter defined) with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date. The term "record date" as used with respect to any Interest Payment Date shall mean the day of the calendar month preceding the day on which such Interest Payment Date falls. The principal of, and premium, if any, and interest on, the Notes shall be payable at the principal office of the Borrower and any other office or agency of the Borrower designated for that purpose; provided, however, that principal and interest may be payable at the option of the Noteholders to the Agent's Account. -17- 22 Section 2.04 Manual Execution. The Notes and Guaranty Agreements shall be signed manually or by facsimile signature on behalf of the Borrower by its President or a Vice President attested by the manual or facsimile signature of its Secretary or an Assistant Secretary. Only such Notes as shall bear thereon a certificate of authentication substantially in the form recited in Exhibit A, manually executed by the Trustee, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee upon any Note executed by the Borrower shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder. In case any officer of the Borrower who shall have signed any of the Notes shall cease to be such officer before the Notes so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Borrower, such Notes nevertheless may be authenticated and delivered or disposed of as though the person who signed such Notes had not ceased to be such officer of the Borrower; and any Note may be signed on behalf of the Borrower by such persons as, at the actual date of the execution of such Note, shall be the proper officers of the Borrower, although at the date of the execution of this Indenture any such person was not an officer. Section 2.05 Transfer and Exchange. The Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. Notes to be exchanged shall be surrendered at the Borrower's principal office, and the Borrower shall execute and the Trustee shall authenticate and deliver in exchange therefor the Note or Notes which the Noteholder making the exchange shall be entitled to receive. The Borrower shall keep or cause to be maintained at said office or agency a register (herein sometimes referred to as the "Note Register") in which, subject to such reasonable regulations as it may prescribe, the Borrower shall register Notes and shall register the transfer of Notes as in this Article II provided. For the purposes of registration, exchange, registration of transfer, redemption or conversion of Notes, the Trustee is hereby appointed Note Registrar. Upon surrender for registration of transfer of any Note at said office or agency, the Borrower shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Note or Notes in a like aggregate principal amount. At all reasonable times the Note Register shall be open for inspection by the Trustee. No transfer of any Note shall be valid unless made at said office or agency. All Notes presented or surrendered for registration of transfer, exchange, conversion or payment shall (if so required by the Borrower or the Trustee) be accompanied by a written instrument or instruments of transfer, in form satisfactory to the Borrower and the Trustee, duly executed by the registered Noteholder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Notes, or issue of new Notes in case of partial prepayment or conversion, but the Borrower may -18- 23 require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto. The Borrower shall not be required (i) to issue, register the transfer of, or exchange any Note during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of the Notes selected for redemption and ending on the day of such mailing, or (ii) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portions of Notes being redeemed in part. Section 2.06 Replacement Notes. In case any Note shall become mutilated or be destroyed, lost or stolen, the Borrower shall execute, and the Trustee shall authenticate and deliver, a new Note, in exchange and substitution for the mutilated Note or in lieu of and substitution for the Note destroyed, lost or stolen. In every case, the applicant for a substituted Note shall furnish to the Borrower and the Trustee such security or indemnity as may be required by them to hold each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Borrower and to the Trustee evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof. The Trustee may authenticate any such substituted Note and deliver the same upon the request or authorization of the Borrower. Upon the issuance of any substituted Note, the Borrower may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith, including fees and expenses of the Trustee. In case any Note which has matured or is about to mature or has been called for prepayment or has been presented for conversion shall become mutilated or be destroyed, lost or stolen, the Borrower may, instead of issuing a substitute Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) if the applicant for such payment shall furnish the Borrower and the Trustee with such security or indemnity as may be required by them to hold each of them harmless, and, in case of destruction, loss or theft, evidence to the satisfaction of the Borrower and the Trustee of the destruction, loss or theft of such Note and of the ownership thereof. If, after the delivery of such replacement Note, a bona fide purchaser of the original Note in lieu of which such replacement Note was issued presents for payment or registration such original Note, the Trustee shall be entitled to recover such replacement Note from the person to whom it was delivered or any person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the borrower or Trustee in connection therewith. Every substituted Note issued pursuant to the provisions of this Section 2.06 upon evidence that any Note is destroyed, lost or stolen shall, with respect to such Note, constitute an additional contractual obligation of the Borrower, whether or not the destroyed, lost or stolen Note shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. -19- 24 All Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes, and shall preclude any and all other rights or remedies, notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. Section 2.07 Cancellation of Notes. All Notes surrendered for payment, conversion, registration of transfer or exchange shall, if surrendered to the Borrower or any paying agent, be delivered to the Trustee for cancellation, or, if surrendered to the Trustee, shall be canceled by it, and no Notes shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. On request of the Borrower, the Trustee shall deliver to the Borrower canceled Notes held by the Trustee; provided, however, that the Trustee may at any time destroy any canceled Notes and deliver to the Borrower a certificate of such destruction. If the Borrower shall acquire any of the Notes, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes unless and until the same are delivered to the Trustee or surrendered to the Trustee for cancellation. Section 2.08 No Third Party Benefit. Subject to the terms of the Subordination Agreement, nothing in this Indenture or in the Notes, expressed or implied, shall give or be construed to give to any person, firm or corporation, other than the parties hereto and the Noteholders, any legal or equitable right, remedy or claim under or in respect of this Indenture, or under any covenant, condition or provision herein contained; all its covenants, conditions and provisions being for the sole benefit of the parties hereto and of the Noteholders. ARTICLE III SUBORDINATION The Notes shall be subject to the Subordination Agreement. ARTICLE IV SECURITY FOR THE OBLIGATIONS Section 4.01 Security. The Obligations shall be secured by the following which, in each case shall be subordinate in priority only to those liens, security interests or rights granted in the same collateral to secure the performance of Borrower under the Senior Loan Documents, in accordance with, but subject to, the terms of the Subordination Agreement: (a) (i) A Security Agreement substantially in the form of Exhibit D duly executed by the Borrower in favor of the Trustee for the ratable benefit of the Noteholders granting a security interest in all of the Borrower's right, title and interest in and to the Capital Stock of Brigham, Inc. and Brigham Holdings I, LLC, together with proper UCC-1 -20- 25 Financing Statements duly filed in Texas, (ii) a Security Agreement substantially in the form of Exhibit D duly executed by Brigham, Inc. in favor of the Trustee for the ratable benefit of the Noteholders granting a security interest in all of Brigham, Inc.'s right, title and interest in and to the Capital Stock of Brigham Holdings II, LLC and BOG, together with proper UCC-1 Financing Statements duly filed in Texas, (iii) a Security Agreement substantially in the form of Exhibit D duly executed by Brigham Holdings II, LLC in favor of the Trustee for the ratable benefit of the Noteholders granting a security interest in all of Brigham Holdings II, LLC's, right, title and interest in and to the Capital Stock of BOG, together with proper UCC-1 Financing Statements duly filed in Texas and (iv) a Security Agreement substantially in the form of Exhibit D duly executed by Brigham Holdings I, LLC in favor of the Trustee for the ratable benefit of the Noteholders granting a security interest in all of Brigham Holdings I, LLC's right, title and interest in and to the Capital Stock of BOG, together with proper UCC-1 Financing Statements duly filed in Texas. (b) A Security Agreement, substantially in the form of Exhibit E duly executed by BOG in favor of the Trustee, as collateral agent for the ratable benefit of the Noteholders granting a security interest in all of BOG's right, title and interest in and to all accounts, general intangibles, equipment and inventory of BOG subject to Liens under the Senior Loan Documents. (c) A Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement substantially in the form of Exhibit F executed by BOG in favor of the Trustee, as collateral agent for the ratable benefit of the Noteholders covering all of the Property of BOG subject to Liens under the Senior Loan Documents. (d) A Guaranty Agreement duly executed by each of BOG, Brigham, Inc., Brigham Holdings I, LLC and Brigham Holdings II, LLC in favor of the Trustee for the ratable benefit of the Noteholders guarantying the payment and performance of the Obligations. (e) Stock Powers executed by the Borrower and related stock certificates of Brigham, Inc. (f) (i) Guaranty Agreements from each and every Person now or hereafter guaranteeing all or any portion of the Senior Loan, (ii) Mortgages covering any and all real property (including Oil and Gas Property) now or hereafter pledged as collateral for all or any portion of the Senior Loan, (iii) security agreements covering any and all Property (other than real property subject to a Mortgage) now or hereafter pledged as collateral for all or any portion of the Senior Loan, and (iv) financing statements, stock pledges or other agreements necessary or appropriate to perfect the liens and/or security interests granted pursuant to any of the foregoing. Each of the foregoing instruments shall be in substantially the same form and substance as those executed of even date herewith or otherwise. -21- 26 ARTICLE V [RESERVED] ARTICLE VI [RESERVED] ARTICLE VII AFFIRMATIVE COVENANTS Unless the Agent's prior written consent to the contrary is obtained, the Borrower will, for the benefit of each of the Noteholders, at all times comply with the covenants contained in this Article VII (or cause each Subsidiary's compliance with the applicable covenants), from the date hereof and for so long as any part of the Obligations is outstanding. Section 7.01 Financial Statements and Reports. The Borrower shall deliver, or shall cause to be delivered, to the Agent with sufficient copies for each of the Noteholders: (a) Annual Financial Statements. As soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, the audited consolidated statements of income, stockholders' equity, changes in financial position and cash flow of the Borrower and its Consolidated Subsidiaries for such fiscal year, and the related consolidated and unaudited consolidating balance sheets of the Borrower and its Consolidated Subsidiaries as at the end of such fiscal year, and setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, and accompanied by the related opinion of independent public accountants of recognized national standing acceptable to the Senior Loan Agent (or in the absence of a Senior Loan, the Agent) which opinion shall state that said financial statements fairly present the consolidated financial condition and results of operations of the Borrower and its Consolidated Subsidiaries as at the end of, and for, such fiscal year and that such financial statements have been prepared in accordance with GAAP except for such changes in such principles with which the independent public accountants shall have concurred and such opinion shall not contain a "going concern" or like qualification or exception. (b) Quarterly Financial Statements. As soon as available and in any event within 60 days after the end of each of the first three fiscal quarterly periods of each fiscal year of the Borrower, consolidated statements of income, stockholders' equity, changes in financial position and cash flow of the Borrower and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated and consolidating balance sheets as at the end of such period, setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, accompanied by the certificate of a Responsible Officer, which certificate shall state that said financial statements fairly present -22- 27 the consolidated financial condition and results of operations of the Borrower and its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments). (c) Notice of Default. Promptly after the Borrower knows that any Default or any Material Adverse Effect has occurred, a notice of such Default or Material Adverse Effect, describing the same in reasonable detail and the action the Borrower proposes to take with respect thereto. (d) Other Accounting Reports. Promptly upon receipt thereof, a copy of each other report or letter (excluding routine correspondence and audit request letters) submitted to the Borrower by independent accountants in connection with any annual, interim or special audit made by them of the books of the Borrower, and a copy of any response by the Borrower to such letter or report (including responses to any audit request letters). (e) SEC Filings, Etc. Promptly upon its becoming available, each financial statement, report, notice or proxy statement sent by the Borrower to stockholders generally and each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Borrower with or received by the Borrower in connection therewith from any securities exchange or the Commission or any successor agency. (f) Notices Under Other Loan Agreements. Promptly after the furnishing thereof, copies of any statement, report or notice furnished to any Person pursuant to the terms of any indenture, loan or credit or other similar agreement, other than this Indenture and not otherwise required to be furnished to the Agent or the Trustee pursuant to any other provision of this Section 7.01. (g) Other Matters. Subject to any applicable restrictions on disclosure, from time to time such other information regarding the business, affairs or financial condition of the Borrower (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as may be requested by and provided to the Senior Lender or Senior Loan Agent. (h) Annual Budgets. Concurrent with the First Reserve Report and each January 1 Reserve Report thereafter, a one-year financial projection for the Borrower and its Subsidiaries in form acceptable to the Senior Loan Agent (or in the absence of a Senior Loan or Senior Loan Agent, the Agent), which projection shall include revenues, expenses and capital expenditures. (i) Monthly Operating Statements. As soon as available and in any event within 30 days after the end of each month, monthly operating statements of BOG including, without limitation, production reports and general and administrative cost summaries by lease for its Oil and Gas Properties, which reports shall include quantities or volume of production, revenue, realized product prices, taxes, capital expenditures by category and lease -23- 28 operating costs which have accrued to BOG's accounts in such period, and such other information with respect thereto as the Senior Loan Agent (or in the absence of a Senior Loan or Senior Loan Agent, the Agent) may require. The Borrower will furnish to the Agent, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate substantially in the form of Exhibit C-2 to the Senior Credit Agreement executed by a Responsible Officer (i) certifying as to the matters set forth therein and stating that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail), (ii) setting forth in reasonable detail the computations necessary to determine whether the Borrower is in compliance with Sections 8.01 and 8.16 as of the end of the respective fiscal quarter or fiscal year, and (iii) certifying that said financial statements fairly present the consolidated and consolidating financial condition and consolidated results of operations in accordance with GAAP, as at the end of, and for, such period (subject to normal year-end audit adjustments). Section 7.02 Litigation. The Borrower shall promptly give to the Agent notice of: (i) all legal or arbitral proceedings, and of all proceedings before any Governmental Authority involving the Borrower or any Guarantor, except proceedings which, if adversely determined within any reasonable range of loss, would not have a Material Adverse Effect, and (ii) of any material litigation or material proceeding against the Borrower or any Guarantor in which the amount involved is not covered in full by insurance (subject to normal and customary deductibles), or in which injunctive or similar relief is sought. The Borrower will, and will cause each of the Guarantors to, promptly notify the Agent of any claim, judgment, Lien or other encumbrance affecting any Property of the Borrower or any Guarantor if the value of the claim, judgment, Lien, or other encumbrance affecting such Property shall exceed $1,000,000. Section 7.03 Maintenance, Etc. (a) The Borrower shall and shall cause each Subsidiary to: upon reasonable notice, permit representatives of the Agent, during normal business hours, to examine, copy and make extracts from its financial books and records, to inspect its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably required by the Agent; keep, or cause to be kept, insured by financially sound and reputable insurers all Property of a character usually insured by Persons engaged in the same or similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such Persons and carry such other insurance as is usually carried by such Persons including, without limitation, environmental risk insurance to the extent reasonably available; and, where failure to do so would have a Material Adverse Effect: preserve and maintain its corporate existence and all of its material attendant rights, privileges and franchises, keep appropriate books of record and account in relation to its business and activities, comply with all Governmental Requirements, pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property, except for any such tax, assessment, charge or levy the payment of which is being contested in -24- 29 good faith and by proper proceedings and against which adequate reserves are being maintained. (b) Contemporaneously with the delivery of the financial statements required by Section 7.01(a) to be delivered for each year, the Borrower will furnish or cause to be furnished to the Agent a certificate of insurance coverage from the insurer in form and scope reasonably satisfactory to the Agent and, if required by the Agent, will furnish the Agent copies of the applicable policies. (c) The Borrower will and will cause each Subsidiary to maintain and operate its Oil and Gas Properties and other material Properties or cause or make reasonable and customary efforts to cause such Oil and Gas Properties and other material Properties to be maintained and operated in all material respects in a good and workmanlike manner in accordance with the practices of the industry and in compliance with all applicable contracts and agreements and in compliance in all material respects with all Governmental Requirements. The covenants contained in this Section 7.03(c) shall not apply to insignificant Properties unless a failure of such covenant could have a Material Adverse Effect. Section 7.04 Environmental Matters. (a) To the extent that a reasonably prudent owner or operator would do so under the same or similar circumstances, the Borrower will and will cause each Subsidiary to establish and implement such procedures as may be reasonably necessary to periodically determine and assure that all Oil and Gas Properties of the Borrower and the Subsidiaries and the operations conducted thereon and other activities of the Borrower and the Subsidiaries are in compliance with and do not violate the requirements of any Environmental Laws, where failure of the foregoing would have a Material Adverse Effect. (b) The Borrower will promptly notify the Agent in writing of any threatened action, investigation or inquiry by any Governmental Authority of which the Borrower has knowledge in connection with any Environmental Laws with respect to the Property of the Borrower or any Subsidiary, excluding routine testing, compliance and correction action. Section 7.05 Further Assurances. The Borrower will and will cause each Guarantor to cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of the Basic Documents. The Borrower at its expense will and will cause each Guarantor to promptly execute and deliver to the Agent upon request all such other documents, agreements and instruments to further evidence and more fully describe the collateral intended as security for the Notes, or to correct any omissions in the Basic Documents, or to state more fully the security obligations set out herein or in any of the Basic Documents, or to perfect, protect or preserve any Liens created pursuant to any of the Basic Documents, or to make any recordings, to file any notices or obtain any consents, all as may be necessary or appropriate in connection therewith. -25- 30 Section 7.06 Performance of Obligations. The Borrower will pay the Notes according to the reading, tenor and effect thereof; and the Borrower will and will cause each Guarantor to do and perform every act and discharge all of the obligations to be performed and discharged by them under the Basic Documents, at the time and times and in the manner specified. Section 7.07 Engineering Reports. (a) Not less than 30 days prior to the First Borrowing Base Determination Date, the Borrower shall furnish to the Agent a Reserve Report prepared as of December 1, 1998 or later (the "First Reserve Report") and as provided in clause 7.07(b) below. (b) On January 31, 1999 and not less than 30 days prior to each Scheduled Redetermination Date thereafter, commencing with the Scheduled Redetermination Date to occur on September 30, 1999, the Borrower shall furnish to the Agent a Reserve Report. The Reserve Report furnished for the September 30 Scheduled Redetermination Date shall be prepared as of the preceding July 1 and the Reserve Report furnished for the March Scheduled Redetermination Date (as well as the Reserve Report furnished on January 31, 1999) shall be prepared as of the preceding January 1. The Reserve Report furnished on January 31, 1999 and the January 1 Reserve Report of each year beginning January 1, 2000 shall be prepared by certified independent petroleum engineers or other independent petroleum consultant(s) acceptable to the Agent and the First Reserve Report and the July 1 Reserve Report of each year shall be prepared by or under the supervision of the chief engineer or Vice President of Operations of the Borrower who shall certify such Reserve Report to have been prepared in accordance with the procedures used in the immediately preceding First Reserve Report or January 1 Reserve Report, as appropriate. At Borrower's option, the July 1 Reserve Report of each year may instead consist of a report from the independent petroleum engineers referred to above on any new wells and a roll- forward by Borrower on any wells previously reported on. (c) In addition, the Borrower shall furnish to the Agent copies of any additional Reserve Reports (other than those specified in Sections 7.07(a) and (b) above) that Borrower or any of its Subsidiaries deliver to the Senior Loan Agent or Senior Lenders pursuant to the Senior Loan Documents. (d) With the delivery of each Reserve Report, the Borrower shall provide to the Agent: (i) a certificate from a Responsible Officer certifying that, to the best of his knowledge and in all material respects: (i) the most recently delivered Reserve Report does not in the belief of such officer and based upon information in the Borrower's possession, materially overstate the oil and gas reserves of the Borrower and the Subsidiaries as a whole bearing in mind that reserves are evaluated based upon estimates and assumptions with respect to which reasonable minds of competent engineers may differ, (ii) except as set forth in such Reserve Report or on -26- 31 an exhibit to the certificate, on a net basis there are no gas imbalances, take or pay or other prepayments with respect to its Oil and Gas Properties evaluated in such Reserve Report which would violate Section 8.14, (iii) none of its proved Hydrocarbon Interests have been sold since the date of the last Borrowing Base determination except as set forth on an exhibit to the certificate, which certificate shall list all of its proved Hydrocarbon Interests sold and in such detail as reasonably required by the Agent, (iv) attached to the certificate is a list of its proved Hydrocarbon Interests added to and deleted from the immediately prior Reserve Report and a list showing any change in working interest or net revenue interest in its Hydrocarbon Interests occurring, (v) at the Agent's request, attached to the certificate is a list of all Persons disbursing proceeds to the Borrower from its Oil and Gas Properties and (vi) except as set forth on a schedule attached to the certificate all of the proved Hydrocarbon Interests evaluated by such Reserve Report are Mortgaged Property; and (ii) a certificate from a Responsible Officer certifying that, to the best of his knowledge and in all material respects (i) the representations of the Borrower in Section 4.10 are true and correct and apply to the Hydrocarbon Interests evaluated in the Reserve Report that are described in the Mortgage and (ii) the Borrower has, with respect to those material Hydrocarbon Interests that are evaluated in the most recently delivered Reserve Report, but that are not covered by a Mortgage, conducted overall title due diligence that, in all material respects, equals or exceeds industry standards given the applicable facts and circumstances. (e) In addition to the foregoing, on August 30, 1998, the Borrower shall furnish to the Agent a Reserve Report prepared as of July 1, 1998, by or under the supervision of the chief engineer or Vice President of Operations of the Borrower who shall certify such Reserve Report to have been prepared in accordance with the procedures used in the immediately preceding Initial Reserve Report. (f) Notwithstanding the foregoing, so long as there is a Senior Credit Agreement in effect which requires the semi-annual delivery to the Senior Lenders of reserve reports evaluating the Borrower's and its Subsidiaries' Oil and Gas Properties, delivering the Agent and Noteholders with a copy of each such reserve report and any accompanying officer's certificate (certified to Agent and the Noteholders) required thereunder shall satisfy the Borrower's obligations under this Section 7.07, so long as such reserve report includes a calculation of reserve value based upon pricing assumptions consistent with Commission reporting requirements at the time. Section 7.08 Intentionally Omitted. Section 7.09 Additional Collateral. (a) Should any of the Borrower's or any Subsidiary's Properties which are not Mortgaged Property be pledged as collateral for the payment of all or any portion of the -27- 32 Senior Loan Obligations, the Borrower will simultaneously with such pledge in favor of the Senior Lenders (or Senior Loan Agent) grant or cause such Subsidiary to grant to the Trustee as security for the Obligations a second- priority Lien interest (subject only to Excepted Liens, the matters set out on Schedule 4.10 of the Securities Purchase Agreement, and any additional qualifications and exceptions accepted by the Senior Lenders under any mortgage of such Property to the Senior Agent) in the Borrower's or the Subsidiary's interest in such Properties not already subject to a Lien of the Basic Documents, which Lien will be created and perfected by and in accordance with the provisions of deeds of trust, security agreements and financing statements, or other Basic Documents, all in form substantially the same as the previous Collateral Documents and in sufficient executed (and acknowledged where necessary or appropriate) counterparts for recording purposes. (b) Concurrently with the granting of the Lien or other action referred to in Section 7.09(a) above, the Borrower will provide to the Agent all title information provided to the Senior Lenders or Senior Loan Agent in connection therewith and any legal opinion (addressed to the Agent as well) provided to the Seniors Lenders or Senior Loan Agent in connection therewith. Section 7.10 ERISA Information and Compliance. Immediately after any Responsible Officer of the Borrower knows or has reason to know any of the following items are true, the Borrower will deliver to the Agent a certificate of a Responsible Officer of the Borrower setting forth details as to such occurrence and such action, if any, the Borrower or any ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by the Borrower or its ERISA Affiliate with respect thereto: that a Reportable Event has occurred or that an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard; that a Multiemployer Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that any required contribution which is material to a Plan, Multiemployer Plan or Employee Plan has not been or may not be timely made; that proceedings may be or have been instituted under Section 4069(a) of ERISA to impose liability on the Borrower or an ERISA Affiliate or under Section 4042 of ERISA to terminate a Plan or appoint a trustee to administer a Plan; that the Borrower or any ERISA Affiliate has incurred or may incur any liability (including any contingent or secondary liability) on account of the termination of or withdrawal from a Plan or a Multiemployer Plan; and that the Borrower or any ERISA Affiliate may be required to provide security to a Plan under Section 401(a)(29) of the Code; or any other condition(s) exist(s) or may occur with respect to one or more Plans, Employee Plans and/or Multiemployer Plans which would reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect. Section 7.11 Subsidiary Security. Should the Borrower grant to the Senior Loan Agent for the benefit of the Senior Lenders, or to the Senior Lenders, a security interest and pledge of the Capital Stock of any Subsidiary (whether existing as of the Closing Date or created or acquired thereafter), the Borrower will, simultaneously with such pledge in favor of the Senior Loan Agent or Senior Lenders, grant to the Trustee for the benefit of the Noteholders, a second in priority security interest and pledge of such Capital Stock in form -28- 33 and substance satisfactory to the Agent and if any Subsidiary should guaranty all or any portion of the Senior Loan, the Borrower will cause such Subsidiary to enter into a Guaranty Agreement of the Obligations in substantially the same form as the Guaranty Agreement given by Brigham, Inc. on the Closing Date or otherwise in form and substance satisfactory to the Agent. The delivery of such security and guaranty shall be accompanied by such back up corporate authority and opinions of counsel (addressed to the Agent as well as the Senior Loan Agent) as are provided to the Senior Loan Agent. ARTICLE VIII NEGATIVE COVENANTS Unless the Agent's prior written consent to the contrary is obtained, for the benefit of each of the Noteholders, the Borrower will at all times comply with the covenants contained in this Article VIII (or cause each Subsidiary's compliance with the applicable covenants), from the date hereof and for so long as any part of the Obligations is outstanding. Section 8.01 Debt. Neither the Borrower nor any Subsidiary will: (a) Incur, create or assume any Debt, other than Permitted Debt, such that the ratio of the Borrower's Adjusted Consolidated Net Tangible Assets (as at the end of the immediately preceding calendar quarter) to the sum of (i) Borrower's Consolidated Indebtedness (after such incurrence, creation or assumption of additional Debt other than Permitted Debt) plus (ii) past due interest on Debt, is less than 1.5 to 1.0. This covenant shall also apply to any such Debt incurred or assumed as a result of a merger or consolidation with any other Person. Any such Debt so incurred, created or assumed (without violation of this Section 8.01) must be fully subordinated to the Obligations unless the Agent agrees otherwise, provided that, so long as ECT has been given a first look and right to make a proposal for any future subordinated indebtedness, up to $25,000,000 (less the maximum potential balance at the time in question of the Schedule 8.02 Payables) in the aggregate of such Debt may be incurred that is pari passu in right of payment with the Notes. Notwithstanding the foregoing, in the event of any refinancing of the Senior Loan, which refinancing does not violate, on a proforma basis for the four fiscal quarters of the Borrower after the refinancing, the interest coverage test of Section 8.16, the current ratio test of Section 8.17, or, provided the amount of such refinanced Senior Loan is more than $75,000,000, the covenant in the first sentence of this subsection (a), the refinanced Senior Loan shall remain senior to (and shall not be subordinate to) the Obligations; or (b) Incur, create, suffer or assume any accounts payable for the deferred purchase price of Property or services or any Trade Payables which are more than 75 days past the invoice or billing date, unless such accounts payable are either (i) being contested in good faith by appropriate proceedings and reserves as required under GAAP shall have been established therefor, or (ii) Schedule 8.02 Payables which are not past due. -29- 34 Notwithstanding the foregoing, if at any time the ratio of the Borrower's Adjusted Consolidated Net Tangible Assets to the sum of (a) Borrower's Consolidated Indebtedness plus (b) past due interest on Debt, is less than 1.5 to 1.0, the Agent shall have the right to require, and the Borrower covenants and agrees to convey (or cause to be conveyed) to the Trustee or the Agent for the benefit of the Agent and the Noteholders, such additional Potential Collateral as the Agent shall require (subject to the Senior Lenders' rights to a first and prior lien in such Potential Collateral). Such conveyance shall be made within 30 days following receipt of written notice from the Agent and shall be deemed a pledge of additional Collateral in accordance with Section 7.09. As used in this paragraph, "Potential Collateral" means any of Borrower's or any Subsidiary's Oil and Gas Properties (which are not already Collateral) which are identified as containing proved Hydrocarbon reserves, whether currently existing or hereafter acquired. Section 8.02 Liens. Neither the Borrower nor any Subsidiary will create, incur, assume or permit to exist any Lien on any of its Properties (now owned or hereafter acquired), except: (a) Liens securing the Senior Loan; provided the Trustee or the Agent is granted a second Lien in such Property securing the payment of the Obligations; (b) Liens securing the payment of the Obligations; (c) Excepted Liens; (d) Liens securing leases allowed under clause (e) of the definition of Excepted Liens but only on the Property under lease; (e) Liens disclosed on Schedule 8.02; and (f) Any Permitted Encumbrances as described in the Mortgage. Section 8.03 Investments, Loans and Advances. Neither the Borrower nor any Subsidiary will make or permit to remain outstanding any loans or advances to or investments in any Person, except that the foregoing restriction shall not apply to: (a) investments, loans or advances reflected in the Financial Statements or which are disclosed to the Noteholders in Schedule 8.03; (b) accounts receivable arising in the ordinary course of business; (c) direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, in each case maturing within one year from the date of creation thereof; -30- 35 (d) commercial paper maturing within one year from the date of creation thereof rated in the highest grade by Standard & Poors Corporation or Moody's Investors Service, Inc.; (e) deposits maturing within one year from the date of creation thereof with, including certificates of deposit issued by any office located in the United States, Canada, or England of, any bank or trust company which is organized under the laws of the United States, Canada, England or any state or province thereof, which has capital, surplus and undivided profits aggregating at least $100,000,000.00 (as of the date of such bank or trust company's most recent financial reports) and has a short term deposit rating of no lower than A2 or P2, as such rating is set forth from time to time, by Standard & Poors Corporation or Moody's Investors Service, Inc. (or their successors), respectively; (f) deposits in money market funds investing exclusively in investments described in Section 8.03(c), 8.03(d) or 8.03(e); (g) investments of up to $400,000 in the aggregate in Quest Resources L.L.C.; (h) (i) investments, distributions, loans and advances by the Borrower in or to any Subsidiary of the Borrower which is a Guarantor, (ii) investments, distributions, loans and advances by the Borrower in or to any Subsidiary of the Borrower which is not a Guarantor, provided that such Subsidiary has direct or indirect ownership interests in Oil and Gas Properties or gas gathering systems, gas plants, and similar assets related thereto and the aggregate outstanding amount of such investments, distributions, loans and advances under this clause (ii) shall not exceed $1,000,000 at any time, or (iii) investments in equity interests in any Person (other than a Subsidiary as provided in clauses (i) or (ii)) whose business is the acquisition, exploration and development of Oil and Gas Properties, gas gathering systems, gas plants, or any line of business which is closely related thereto, provided that the aggregate outstanding amount of any such investments under this clause (iii) shall not exceed $1,000,000 at any time; (i) investments, distributions, loans and advances by a Subsidiary to the Borrower; (j) extensions of credit to purchasers, working interest owners, employees and other persons in the ordinary course of business, up to an aggregate of $1,000,000 at any one time. Section 8.04 Dividends, Distributions and Redemptions. Neither the Borrower or any Subsidiary will declare or pay any dividend, purchase, redeem or otherwise acquire for value any of its stock now or hereafter outstanding, return any capital to its stockholders or make any distribution of its assets to its partners, except to the Borrower or any Subsidiary. -31- 36 Section 8.05 Sales and Leasebacks. Neither the Borrower nor any Subsidiary will enter into any arrangement, directly or indirectly, with any Person whereby the Borrower or any Subsidiary shall sell or transfer any of its Property, whether now owned or hereafter acquired, and whereby the Borrower or any Subsidiary shall then or thereafter rent or lease as lessee such Property or any part thereof or other Property which the Borrower or any Subsidiary intends to use for substantially the same purpose or purposes as the Property sold or transferred. Section 8.06 Nature of Business. Neither the Borrower nor any Subsidiary will allow any material change to be made in the character of its business as an independent oil and gas exploration and production company. Section 8.07 Mergers, Etc. The Borrower will not and will not permit any Subsidiary to merge into or with or consolidate with any other Person (other than the Borrower or a Subsidiary) or sell, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its Property or assets to any other Person (other than the Borrower or a Subsidiary) unless (i) no Default or Event of Default exists and after giving effect to such merger, no Default or Event of Default shall exist, (ii) after giving effect to such merger or consolidation, the surviving entity (as the Borrower hereunder), or in the event of a merger or consolidation of a Subsidiary, the Borrower, would be able to incur at least $1 in additional Debt (other than Permitted Indebtedness), and (iii) the surviving entity ratifies and confirms its Obligations under the Basic Documents and the Notes to the reasonable satisfaction of the Agent and each Guarantor whose Guaranty Agreement is in full force and effect ratifies and confirms its Guaranty Agreement to the reasonable satisfaction of the Agent. Section 8.08 Proceeds of Notes. The Borrower will not permit proceeds of the Notes to be used for any purpose other than the partial payment of the Senior Loan. Neither the Borrower nor any Person acting on behalf of the Borrower has taken or will take any action which might cause any of the Basic Documents to violate Regulation G, U or X or any other regulation of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect. Section 8.09 ERISA Compliance. The Borrower will not at any time: (a) Engage in, or permit any ERISA Affiliate to engage in, any transaction in connection with which the Borrower or any ERISA Affiliate could be subjected to either a civil penalty assessed pursuant to section 502(c), (i), or (l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code, which could reasonably be expected to have a Material Adverse Effect; (b) Terminate, or permit any ERISA Affiliate to terminate, any Plan in a manner, or take any other action with respect to any Plan, which could reasonably be -32- 37 expected to result in any liability of the Borrower or any ERISA Affiliate to the PBGC, which could have a Material Adverse Effect; (c) Permit to exist, or allow any ERISA Affiliate to permit to exist, any accumulated funding deficiency within the meaning of Section 302 of ERISA or section 412 of the Code, whether or not waived, with respect to any Plan which, if funded, could reasonably be expected to have a Material Adverse Effect; (d) Permit, or allow any ERISA Affiliate to permit, the actuarial present value of the benefit liabilities under any Plan maintained by the Borrower or any ERISA Affiliate which is regulated under Title IV of ERISA to exceed the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities by an amount which could, if such benefits become payable, reasonably be expected to have a Material Adverse Effect. The term "actuarial present value of the benefit liabilities" shall have the meaning specified in section 4041 of ERISA; (e) Contribute to or assume an obligation to contribute to, or permit any ERISA Affiliate to contribute to or assume an obligation to contribute to, any Multiemployer Plan; (f) Incur, or permit any ERISA Affiliate to incur, a liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201 or 4204 of ERISA which, in the aggregate for all such liabilities, could reasonably be expected to have a Material Adverse Effect; (g) Contribute to or assume an obligation to contribute to, or permit any ERISA Affiliate to contribute to or assume an obligation to contribute to, any employee welfare benefit plan, as defined in section 3(1) of ERISA, including, without limitation, any such plan maintained to provide benefits to former employees of such entities, that may not be terminated by such entities in their sole discretion at any time without any material liability; or (h) Amend or permit any ERISA Affiliate to amend, a Plan resulting in an increase in current liability such that Borrower or any ERISA Affiliate is required to provide security to such Plan under section 401(a)(29) of the Code. Section 8.10 Sale of Oil and Gas Properties. The Borrower will not, and will not permit any Subsidiary to, sell, assign, farm-out, convey or otherwise transfer any Hydrocarbon Interests except for (i) the sale of Hydrocarbons in the ordinary course of business; (ii) assignments, farmouts, and other disposition of Hydrocarbon Interests which do not contain identified proved Hydrocarbon reserves, provided such assignments, farmouts, and other dispositions are in the normal course of business (e.g., in bringing in participants or disposing of unattractive prospects); (iii) the sale or transfer of equipment that is no longer necessary for the business of the Borrower or such Subsidiary or is replaced by equipment -33- 38 of at least comparable value and use and (iv) during any consecutive four fiscal quarters, sales of Hydrocarbon Interests containing identified proved Hydrocarbon reserves which, when taken together with the proceeds of any permitted sales of Subsidiaries during such four quarters under the next sentence of this Section 8.10, shall not exceed $3,000,000 in the aggregate. The Borrower will not sell, and will not permit the sale of, any interest in any Subsidiary unless all or substantially all of the Borrower's interest in such Subsidiary is sold and, during any consecutive four fiscal quarters, the proceeds of any such sale taken together with the proceeds of any sale of Hydrocarbon Interests permitted under clause (iv) of this Section 8.10 does not exceed $3,000,000. Section 8.11 Environmental Matters. Neither the Borrower nor any Subsidiary will knowingly cause or permit any of its Property to be in violation of, or knowingly do anything or permit anything to be done which will subject any such Property to any remedial obligations under any Environmental Laws, assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to such Property, where such violations or remedial obligations would have a Material Adverse Effect. Section 8.12 Transactions with Affiliates. Neither the Borrower nor any Subsidiary will enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property or the rendering of any service, with any Affiliate (other than the Borrower or a Subsidiary) unless such transaction (a) is otherwise not in violation of this Indenture, and (b) unless approved by a majority of the disinterested members of the Board of Directors, is in the ordinary course of its business and is upon fair and reasonable terms no less favorable to it than it would obtain in a comparable arm's length transaction with a Person not an Affiliate. Section 8.13 Negative Pledge Agreements. The Borrower will not and will not permit any Subsidiary to create, incur, assume or suffer to exist any contract, agreement or understanding (other than the Basic Documents) which in any way prohibits or restricts any Subsidiary from paying dividends or making any other distribution to the Borrower or which requires the consent of a notice to other Persons in connection with any of the foregoing, other than the restrictions contained in the Senior Loan Documents as they exist on the day hereof. Section 8.14 Gas Imbalances, Take-or-Pay Prepayments. The Borrower will not allow gas imbalances, take-or-pay or other prepayments with respect to the Hydrocarbon Interests of the Borrower and its Subsidiaries which would require the Borrower or its Subsidiaries to deliver five percent (5%) or more of the Borrower's and its Subsidiaries' Hydrocarbons produced on a monthly basis from the Hydrocarbon Interests at some future time without then or thereafter receiving full payment therefor. Section 8.15 Borrower as Operator. The Borrower will not and will not allow any of its Subsidiaries to voluntarily resign as operator of more than twenty-five percent (25%) of their currently operated Oil and Gas Properties, unless a substitute operator is appointed -34- 39 that is another Subsidiary of the Borrower or is otherwise acceptable to the Majority Noteholders, approval of such substitute operator not to be unreasonably withheld. Section 8.16 Consolidated Interest Coverage Ratio. As of the last day of each fiscal quarter, the Borrower will not permit the Consolidated Interest Coverage Ratio to be less than (i) 1.5 to 1.0 as of the end of the first four (4) fiscal quarters following the Closing Date and (ii) 2.0 to 1.0 as of the end of each fiscal quarter thereafter. Section 8.17 Current Ratio. The Borrower will not permit its ratio of (i) consolidated current assets of the Borrower and its Consolidated Subsidiaries (including, without limitation, any unused and available commitments under the Senior Credit Agreement) to (ii) their consolidated current liabilities (excluding any principal or interest payments due on the Senior Loan or the Notes), to be less than .8 to 1.0 at any time. ARTICLE IX PAYMENT OF THE NOTES Section 9.01 Repayment. The Borrower shall pay to the Noteholders on the Maturity Date an amount equal to the outstanding principal amount of the Notes plus the accrued and unpaid interest on the outstanding principal amount of the Notes. The Borrower may prepay the Obligations at any time in whole or in part without penalty or premium. Section 9.02 Interest. (a) Subject to the provisions of Section 9.02(b), the outstanding principal amount of the Notes shall bear interest at the following rates per annum:
Period Rate Funding Date through August 20, 2001 12% August 21, 2001 through August 20, 2002 13% August 21, 2002 through Maturity Date 14%
The foregoing rates shall apply only to interest which is paid in cash. In the event the Borrower should elect to make any interest payments in kind as permitted by Section 9.02(b), the rates applicable to such payments shall be as set forth in Section 9.02(b). (b) So long as there exists no Event of Default, if on any Interest Payment Date either (i) there exists a "Borrowing Base Deficiency" under the Senior Credit Agreement or (ii) the payment in cash of interest accrued on the Notes would cause the Borrower to be in violation of any covenant or other restriction set forth in the Senior Loan Documents or any Basic Document, the Borrower may pay such interest in kind, as provided in this Section 9.02(b). In such event the accrued interest due on such Interest Payment -35- 40 Date shall be calculated at the rates set forth in this Section 9.02(b) and the interest due (calculated at the rates set forth in this Section 9.02(b)) shall be deemed an advance of principal under the Notes and, as of the Interest Payment Date, shall be added to the outstanding principal balance of the Notes (notwithstanding that the outstanding principal balance may exceed, in the aggregate, the face amount of the Notes). In order to exercise its option to pay interest in kind under this Section 9.02(b), the Borrower shall, on or before the applicable Interest Payment Date, deliver written notice to the Agent executed by a Responsible Officer specifying the applicable covenant or restriction of the Senior Loan Documents or the Basic Documents that will be violated by payment of accrued interest in cash and notifying Agent of its election to pay interest in kind. Any such election must be made as to all Notes. Should Borrower fail to deliver such written notice in a timely fashion Borrower shall be deemed to have irrevocably elected to make payment of accrued interest in cash and any subsequent failure to do so in a timely fashion (subject to the thirty (30) day grace period provided in Section 10.01(a)) shall constitute an Event of Default hereunder. Notwithstanding anything contained herein to the contrary, the Borrower may not pay interest in kind over the term of the Notes for more than six (6) calendar quarters. In the event the Borrower elects to pay interest in kind, such interest to be paid shall be calculated at the following rates commencing on the immediately preceding Interest Payment Date: Period Rate Funding Date through August 20, 2001 13% August 21, 2001 through August 20, 2002 14% August 21, 2002 through Maturity Date 15% (c) In the event any sum due and payable hereunder is not paid when due such past due amount shall accrue interest at the Default Rate from the date due until paid. Should an Event of Default occur hereunder, interest on the Obligations shall accrue at the Default Rate from the date of occurrence of the Default to which such Event of Default is attributable, until such Event of Default is cured or waived. (d) Interest shall be computed based on a year of 360 days and twelve 30-day months (pro-rated appropriately for the period from the Funding Date until the first Interest Payment Date and for any period of less than three months for which interest may be due as a result of the prepayment or acceleration of the Notes). The rates of interest applicable to the Notes provided in Sections 9.02(a) and (b) shall commence on the first day immediately following the Funding Date or the applicable anniversary of the Funding Date and remain in effect through the next succeeding anniversary of the Funding Date, or the Maturity Date, as applicable. (e) Accrued interest on the Notes shall be due and payable in cash or, if permitted by Section 9.02(b), in kind, quarterly on each Interest Payment Date (including the -36- 41 Maturity Date) or, in the event the maturity of the Notes is accelerated pursuant to the terms of the Basic Documents, such earlier date as the Notes become due and payable, or the date the Notes are paid in full, whichever first occurs. If any Interest Payment Date is not a Business Day, the interest payment that would be due thereon shall instead be due on the next following Business Day. (f) Notwithstanding anything herein or in the other Basic Documents to the contrary, it is the intention of the parties hereto to conform strictly to usury laws applicable to this transaction. Accordingly, if the transactions contemplated hereby would be usurious under applicable law, then, in that event, notwithstanding anything to the contrary in the Notes, this Indenture or in any other Basic Document or agreement entered into in connection with or as security for the Notes, it is agreed as follows: (a) the aggregate of all consideration which constitutes interest under law applicable to the Noteholders that is contracted for, taken, reserved, charged or received under the Notes, this Indenture or under any of the other Basic Documents or agreements or otherwise in connection with this transaction shall under no circumstances exceed the maximum amount allowed by such applicable law, and any excess shall be canceled automatically and, if already paid, shall be credited by the Noteholders on the principal amount of the Obligations (or, to the extent that the principal amount of the Obligations shall have been or would thereby be paid in full, refunded to the Borrower); and (b) in the event that the maturity of the Notes is accelerated by reason of any Event of Default under this Indenture or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to this transaction may never include more than the maximum amount allowed by such applicable law, and (c) excess interest, if any, provided for in this Indenture or otherwise in connection with the Notes shall be canceled automatically and, if already paid, shall be credited by the Noteholders on the principal amount of the Obligations (or, to the extent that the principal amount of the Obligations shall have been or would thereby be paid in full, refunded by the Noteholders to the Borrower). All sums paid or agreed to be paid to the Noteholders for the use, forbearance or detention of sums included in the Obligations shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Notes until payment in full so that the rate or amount of interest on account of the Obligations does not exceed the applicable usury ceiling, if any. As used in this Section 9.02(f), the term "applicable law" shall mean the laws which govern this Indenture as described in Section 12.07 (or the law of any other jurisdiction whose laws may be mandatorily applicable notwithstanding other provisions of this Indenture), or law of the United States of America applicable to the Noteholders and the Notes which would permit the Noteholders to contract for, charge, take, reserve or receive a greater amount of interest than under any other applicable law. If the stated rate of interest under this Indenture ever exceeds the Maximum Rate, then the outstanding principal amount of the Notes made hereunder shall bear interest at the Maximum Rate until the difference between the interest which would have been due at the stated rates of interest and the amount due at the Maximum Rate (the "Lost Interest") has been recaptured by the Noteholders. If the Notes are repaid in full and the Lost Interest has not been fully recaptured by the Noteholders pursuant to the preceding sentence, then the Notes shall be deemed to have accrued interest at the Maximum Rate since the date the initial advance under the Notes was -37- 42 made to the extent necessary to recapture the Lost Interest not recaptured pursuant to the preceding sentence and, to the extent allowed by law, the Borrower shall pay to the Noteholders the amount of the Lost Interest remaining to be recaptured by the Noteholders. Section 9.03 Payments and Computations. (a) All payments and obligations by Borrower under the Notes or any other Basic Document shall be made to the Agent, without any presentment and without any notation of such payment being made on the Notes (i) by wire transfer in immediately available funds to such account as the Agent may designate from time to time by written notice to the Borrower (the "Agent's Account") or (ii) in such other manner as may be designated in writing to the Borrower by the Agent. (b) The Borrower shall make each payment under this Indenture and under the Notes not later than 2:00 p.m. (Houston, Texas time) on the day when due in U.S. Dollars to the Agent at the location specified in paragraph (a) above in immediately available funds. All payments by the Borrower hereunder shall be made without any offset, abatement, withholding, or reduction. (c) Whenever any payment under the Basic Documents shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and (other than an interest payment subject to Section 9.02(e) above) such extension of time shall in such case be included in the computation of payment of interest. If the time for payment for an amount payable is not specified in the Basic Documents, or in any other document, the payment shall be due and payable ten days after the date on which the Agent or any Noteholder demands payment therefor. (d) Following receipt of payment in cash of any obligations due under the Notes or any other Basic Document the Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal, interest or fees ratably to the Noteholders at their respective Noteholder's Account. If and to the extent that the Agent receives any payment or prepayment from the Borrower and fails to distribute such payment or prepayment to the Noteholders ratably on the basis of their respective Participations on the day the Agent receives such payment or prepayment (if received prior to 1:00 P.M. (Houston, Texas time) on such day) or the next Business Day (if received after 1:00 P.M. (Houston, Texas time) on such day), then the Agent shall pay to each Noteholder such Noteholder's Participation of such payment or prepayment together with interest thereon at the Federal Funds Rate for each day from the date such amount should have been distributed by the Agent until such payment or prepayment is actually distributed to the Noteholders. All payments and prepayments received shall be applied first to accrued interest and second to the reduction of principal. (e) Unless the Agent shall have received written notice from the Borrower prior to the date on which any payment is due to the Noteholders that the Borrower will not make such payment in full or will make such payment in kind pursuant to Section 9.02(b), -38- 43 the Agent may assume that the Borrower has made such payment in full, in cash, to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Noteholder on such date an amount equal to the amount then due such Noteholder. If and to the extent the Borrower shall not have so made such payment in full, in cash, to the Agent, each Noteholder shall repay to the Agent forthwith on demand such amount distributed to such Noteholder, together with interest, for each day from the date such amount is distributed to such Noteholder until the date such Noteholder repays such amount to the Agent, at the Federal Funds Rate for such day. ARTICLE X DEFAULT AND REMEDIES Section 10.01 Events of Default. The occurrence of any of the following shall be an "Event of Default" for the purposes of this Indenture and the Notes: (a) the Borrower shall default in the payment or prepayment when due of any Obligations, and such default, other than a default of a payment or prepayment of principal (which shall have no cure period), shall continue unremedied for a period of thirty (30) days after such Obligations become due, in the case of interest, or thirty (30) days after the Borrower receives notice from the Agent that such Obligations are due, in the case of Obligations other than principal or interest; or (b) (i) The Borrower or any Guarantor shall, as to any Debt (other than the Obligations and the Senior Loan) aggregating more than $2,000,000 default in the payment when due of any principal of or interest thereon, or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Debt shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Debt (or a trustee or agent on behalf of such holder or holders) to cause, such Debt to become due prior to its stated maturity, or (ii) as to the Senior Loan, there shall have occurred a default thereunder and the holders of the Senior Loan shall have elected to accelerate the payment of the Senior Loan (or it shall be accelerated automatically or otherwise be due and payable in full); or (c) any representation, warranty or certification made or deemed made herein or in any other Basic Document by the Borrower or any Guarantor, or any certificate furnished by the Borrower or any Guarantor to the Trustee, any Noteholder or the Agent pursuant to the provisions hereof or any other Basic Document, shall prove to have been false or misleading as of the time made or furnished in any material and adverse respect and such default shall continue unremedied for a period of forty-five (45) days after notice thereof to the Borrower by the Agent; or (d) the Borrower shall default in the performance of any of its obligations under Article VIII which are not capable of being cured, or under Sections 8.01, 8.16, 8.17 or 7.01(c); or the Borrower shall default in the performance of any of its obligations under -39- 44 Article VIII which are capable of being cured (other than Sections 8.01, 8.16 and 8.17) or any other Article of this Indenture (other than 7.01(c)) or under any other Basic Document to which it is a party (other than the payment of amounts due which shall be governed by Section 10.01(a)) and such default shall continue unremedied for a period of forty-five (45) days after notice thereof to the Borrower by the Agent; or (e) any Guarantor shall default in the performance of its obligation to pay the Liabilities (as defined in the Guaranty Agreement) at maturity, or any Guarantor shall default in the performance of any of its other obligations under its Guaranty Agreement and such default shall continue unremedied for a period of forty-five (45) days after notice thereof to the Guarantor by the Agent; or (f) the Borrower shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (g) the Borrower shall (i) apply for a consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, liquidation or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Federal Bankruptcy Code, or (vi) take any corporate action for the purpose of effecting any of the foregoing, or (h) a proceeding or case shall be commenced, without the application or consent of the Borrower, in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debt; (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Borrower of all or any substantial part of its assets, or (iii) similar relief in respect of the Borrower under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgement or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 days; or an order for relief against the Borrower shall be entered in an involuntary case under the Federal Bankruptcy Code; or (i) a judgment or judgments for the payment of money in excess of $2,000,000 in the aggregate shall be rendered by a court against the Borrower and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within forty- five (45) days from the date of entry thereof and the Borrower shall not, within said period of 45 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or -40- 45 (j) any of the Basic Documents after delivery thereof shall for any reason, except to the extent permitted by the terms thereof, cease to be in full force and effect and valid, binding and enforceable in all material respects in accordance with their terms, or cease in any material respect to create a valid and perfected Lien of the priority required thereby on any of the collateral purported to be covered thereby, except to the extent permitted by the terms of this Indenture, or the Borrower or any Guarantor shall so state in writing, and such Default shall continue unremedied for a period of forty-five (45) days after notice thereof to the Borrower by the Agent; or (k) any Guarantor takes, suffers or permits to exist any of the events or conditions referred to in paragraphs (f), (g), (h) or (i) hereof or if any Guaranty Agreement related thereto shall for any reason cease to be valid and binding on such Guarantor in all material respects or if such Guarantor shall so state in writing, and such Default shall continue unremedied for a period of forty-five (45) days after notice thereof to the Guarantor by the Agent; or (l) there occurs a Change in Control; or (m) any annual audited financial statement delivered to Agent pursuant to Section 7.01(a) is qualified (as to going concern or similar qualifications). Section 10.02 Remedies. (a) At any time during the continuance of any Event of Default specified in Section 10.01 (other than clauses (f), (g) or (h) of Section 10.01), or in clause (k) as it relates to clauses (f), (g) or (h) thereof, the Agent may by written notice to the Borrower declare the entire principal amount of all Obligations then outstanding, including interest accrued thereon, to be immediately due and payable without presentment, demand, protest, notice of protest or dishonor, notice of intent to accelerate, or other notice of default of any kind, all of which are hereby expressly waived by the Borrower. Once an acceleration has been declared pursuant to the foregoing, no subsequent cure of the Event of Default shall negate such acceleration or the rights and remedies of the Trustee, Agent or Noteholders with respect thereto without the express written consent of the Agent. (b) Upon the happening of any Event of Default specified in clauses (f), (g) or (h) of Section 10.01, or clause (k) as it relates to clauses (f), (g) or (h), the entire principal amount of all Obligations then outstanding, including interest accrued thereon, shall, without notice or action by the Trustee, the Agent or the Noteholders be immediately due and payable without presentment, demand, protest, notice of protest or dishonor, notice of intent to accelerate or other notice of default of any kind, all of which are hereby expressly waived by the Borrower. (c) In addition to the foregoing, upon the happening of any of the events described in subsections (a) and (b) above, the Trustee, at the direction of the Agent may -41- 46 exercise any of the rights or remedies provided in the Collateral Documents and other Basic Documents or avail itself of any rights or remedies provided by applicable law. (d) All proceeds received after maturity of the Notes, whether by acceleration or otherwise shall be applied first to reimbursement of expenses and indemnities provided for in the Basic Documents; second to accrued interest on the Notes; third to fees; fourth pro rata to principal outstanding on the Notes and other Obligations; and any excess shall be paid to the Borrower or as otherwise required by any Governmental Requirement. Section 10.03 Production and Proceeds. Notwithstanding that, by the terms of the various Mortgages and other Basic Documents, the Borrower and any other mortgagors are and will be assigning to the Trustee all of the Hydrocarbons covered thereby and all of the products thereof and proceeds and revenues attributable thereto and all payments in lieu of such Hydrocarbons (in this section collectively called the "Production and Proceeds"), so long as no Default has occurred and is continuing (a) the Borrower and such mortgagors may continue to receive all such Production and Proceeds, subject, however, to the Liens created under the Mortgages and other Basic Documents, and (b) upon the Borrower's request the Agent will confirm to any purchasers of Hydrocarbons, title examiners, or other Persons that the Borrower and such mortgagors continue to have the right so to receive such Production and Proceeds until notification by the Agent of the occurrence of a Default. During the continuance of an Event of Default, however, the Trustee at the direction of the Agent may (subject to all rights of the Senior Loan Agent and the Senior Lenders under the Senior Loan Documents) exercise its rights and remedies granted under the Mortgages and the other Basic Documents, including the rights and remedies granted under the Mortgages and the other Basic Documents, including the right to obtain possession of all Production and Proceeds then held by the Borrower and such mortgagors and to receive directly from the purchasers of Hydrocarbons all other Production and Proceeds. In no case shall any failure by the Trustee to collect directly any such Production and Proceeds constitute in any way a release of any of its or the Agent's rights under the Basic Documents. Section 10.04 Set-Off. Upon the occurrence of any Event of Default, any Noteholder shall have the right to set-off any funds of the Borrower in the possession of the Noteholder against any Debt (or accrued interest on Debt) then due by the Borrower to the Noteholder. The Borrower agrees that any holder of Notes or a participation in the Notes may exercise any and all rights of counter-claim, set-off, banker's lien and other liens with respect to any and all monies owing by the Borrower to such holder as fully as if such holder of a participation were a holder of a Note in the amount of such participation. ARTICLE XI THE AGENT Section 11.01 Authorization and Action. Each Noteholder hereby appoints and authorizes the Agent to take such action on behalf of such Noteholder and to exercise such powers under this Indenture as are delegated to the Agent by the terms hereof and of the other Basic Documents, together with such powers as are reasonably incidental thereto. As -42- 47 to any matters not expressly provided for by this Indenture or any other Basic Document (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) only upon the instructions of the Majority Noteholders, and such instructions shall be binding upon Noteholders; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Indenture, any other Basic Document, or applicable law. Section 11.02 Agent's Reliance, Etc. Neither the Agent nor any of the Agent's directors, officers, agents or employees shall be liable for any action taken or omitted to be taken (including the Agent's own negligence) by it or them under or in connection with this Indenture or the other Basic Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (b) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representation to any Noteholder and shall not be responsible to any Noteholder for any statements, warranties or representations made in or in connection with this Indenture or the other Basic Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Indenture or any other Basic Document on the part of the Borrower or any Subsidiary or to inspect the Property (including the books and records) of such Persons; (e) shall not be responsible to any Noteholder for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Indenture or any other Basic Document; and (f) shall incur no liability under or in respect of this Indenture or any other Basic Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopy) reasonably believed by it to be genuine and signed or sent by the proper party or parties. Section 11.03 The Agent and Its Affiliates. With respect to its Participation, and the Note issued to it, the Agent shall have the same rights and powers under this Indenture as any other Noteholder and may exercise the same as though it were not an Agent hereunder. The term "Noteholder" or "Noteholders" shall, unless otherwise expressly indicated, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower or any Subsidiary, and any Person who may do business with or own securities of the Borrower, or any Subsidiary, all as if the Agent were not an agent hereunder and without any duty to account therefor to the Noteholders. Section 11.04 Noteholders Loan Decision. Each Noteholder acknowledges that it has, independently and without reliance upon the Agent or any other Noteholder and based on the Financial Statements and such other documents and information as it has deemed -43- 48 appropriate, made its own credit analysis and decision to enter into the Basic Documents. Each Noteholder also acknowledges that it will, independently and without reliance upon the Agent or any other Noteholder and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Indenture. Section 10.05 Indemnification. The Noteholders severally agree to indemnify the Agent and each Affiliate thereof and their respective directors, officers, employees and agents (to the extent not reimbursed by the Borrower), according to their respective Participations from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Indenture or any action taken or omitted by the Agent under this Indenture or any other Basic Document (INCLUDING THE AGENT'S OWN NEGLIGENCE), provided that no Noteholder shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Noteholder agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of- pocket expenses (including counsel fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Indenture or any other Basic Document, to the extent that the Agent is not reimbursed for such expenses by the Borrower. Section 11.06 Successor Agent. The Agent may resign at any time by giving written notice thereof to the Noteholders and the Borrower and may be removed at any time with cause by the Majority Noteholders upon receipt of written notice from the Majority Noteholders to such effect. Upon receipt of notice of any such resignation or removal, the Majority Noteholders shall have the right to appoint a successor Agent with, if no Default exists, the consent of the Borrower, which consent shall not be unreasonably withheld. If no successor Agent shall have been so appointed by the Majority Noteholders with the consent of the Borrower, if required, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Majority Noteholders, removal of the retiring Agent, then the retiring Agent may, on behalf of the Noteholders and the Borrower, appoint a successor Agent. Upon the acceptance of any appointment as Agent by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Indenture and the other Basic Documents. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article XI shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent this Indenture and the other Basic Documents. -44- 49 ARTICLE XII TRUSTEE Section 12.01 Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such rights and powers vested in it by this Indenture and use the same degree of care and skill in such exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) The Trustee need perform only those duties that are specifically set forth (or incorporated by reference) in this Indenture and no others. (ii) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein). (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) This paragraph (c) does not limit the effect of paragraph (b) of this Section. (ii) The Trustee shall not be liable for any error of judgment made in good faith by an officer of the Trustee, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (iii) The Trustee shall not be liable with respect to action it takes or omits to take in good faith in accordance with a direction received by it from the Agent, and the Trustee shall be entitled from time to time to request such a direction. (d) Every provision of this Indenture and each Collateral Document that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee shall be under no obligation and may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. No provision of this Indenture or any Collateral Document shall -45- 50 require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Borrower. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) The Trustee shall not be required to take notice, and shall not be deemed to have notice, of any Default or Event of Default hereunder, unless the Trustee shall be notified specifically of the Default or Event of Default in a written instrument or document delivered to it by the Borrower or any Guarantor, or by the Agent or the Majority Noteholders. In the absence of delivery of a notice satisfying those requirements, the Trustee may assume that there is no Default or Event of Default, except as noted above. Section 12.02 Rights of Trustee. (a) The Trustee may conclusively rely on and shall be fully protected in acting or refraining from acting upon any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Borrower, personally or by agent or attorney, to the extent reasonably required by such inquiry or investigation at the sole expense of the Borrower and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation. (b) Before the Trustee acts or refrains from acting, it may require an Officers, Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) The Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. -46- 51 (f) The Trustee will not, without the consent of the Agent, give any consent, waiver or approval required under the Collateral Documents or by the terms hereof with respect to the Collateral or agree to any amendment or modification of the Collateral Documents. (g) The Trustee may settle or compromise at any time any and all claims against it which may be asserted by any governmental body or private party for the alleged violation of any Environmental Laws affecting any of the Collateral, and may disclaim (as to itself, but not as to the Indenture or any successor Trustee) any power (including, without limitation, the power to sell the Collateral) granted by the Indenture, the Collateral Documents or any statute or rule of law, the exercise of which power may, in the sole discretion of the Trustee, as advised by counsel, cause the Trustee to incur corporate or personal lability under any Environmental Laws. Section 12.03 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Borrower or its Subsidiaries or Affiliates with the same rights it would have if it were not Trustee. The provision of this Section shall extend to Affiliates of the Trustee. Any Agent may do the same with like rights. However, the Trustee must comply with Sections 12.10 and 12.11. Section 12.04 Trustee's Disclaimer. The Trustee makes no representation as to the value or condition of the Collateral or any part thereof, or as to the title of the Borrower or any Subsidiary thereto, or as to the security afforded thereby or hereby, or as to the validity or genuineness of any Collateral pledged and deposited with the Trustee, or the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Borrower's use of the proceeds from the Notes or any offering memorandum or solicitation documents, and it shall not be responsible for any statement in the Basic Documents other than its certificate of authentication. Section 12.05 Notice of Defaults. If a Default occurs and is continuing and if it is actually known to a Responsible Officer of the Trustee pursuant to Section 12.01(g), the Trustee shall mail to each Noteholder and the Agent pursuant to Section 13.05 a notice of the Default within 90 days after it occurs. Except in the case of a Default in any payment on any Note, the Trustee may withhold the notice if and so long as the board of directors, executive committee or a trust committee of officers in good faith determines that withholding the notice is in the interests of the Noteholders. Section 12.06 Reports by Trustee to Noteholders. Within 60 days after each November 15, beginning with the November 15 following the date of this Indenture, the Trustee shall mail to each Noteholder a brief report dated as -47- 52 of such November 15, that complies with TIA (S)313(a), but only if such report is required in any year under TIA (S)313(a). The Trustee also shall comply with TIA (SS)313(b) and 313(c). A copy of each report at the time of its mailing to Noteholders shall be filed with the SEC and each stock exchange on which the Notes are listed. The Borrower shall promptly notify the Trustee in writing when the Notes become listed on any national securities exchange or of any delisting thereof. Section 12.07 Compensation and Indemnity. The Borrower and the Guarantors jointly and severally agree to pay the Trustee from time to time such compensation as shall be agreed in writing between the Borrower and the Trustee for its services (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust). The Borrower and the Guarantors jointly and severally agree to reimburse the Trustee upon request for all reasonable out-of- pocket expenses, disbursements and advances incurred by. it. Such expenses shall include when applicable the reasonable compensation and expenses of the Trustee's agents and counsel. The Borrower and the Guarantors jointly and severally agree to indemnify each of the Trustee and any predecessor Trustee against any and all loss, liability, damage, claim or expenses, including taxes (other than taxes based on the income of the Trustee) incurred by it arising out of or in connection with the acceptance and administration of the trust and its duties hereunder as Trustee and/or Note Registrar, including the costs and expenses of enforcing this Indenture against the Borrower (including with respect to this Section 12.07) and of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Trustee shall notify the Borrower and the Guarantors of any claim for which it may seek indemnity; however, unless the position of the Borrower is materially prejudiced by such failure, the failure of the Trustee to promptly notify the Borrower shall not limit its right to indemnification. The Borrower shall defend each such claim and the Trustee shall cooperate in the defense. The Trustee may retain separate counsel and the Borrower shall reimburse the Trustee for the reasonable fees and expenses of such counsel if the Borrower is advised by an Opinion of Counsel that the Trustee has separate defenses and that separate representation is appropriate or if the Trustee reasonably determines that such joint defense would otherwise involve a conflict of interest. The Borrower need not pay for any settlement made without its consent. Neither the Borrower nor the Guarantors shall be obligated to reimburse any expense or indemnify against any loss or liability incurred by the Trustee through the Trustee's breach of the applicable standard of care for its conduct under Section 12.01. When the Trustee incurs expenses or renders services after the occurrence of any Event of Default specified in Sections 10.01(f), (g) or (h), the expenses and the compensation -48- 53 for the services are intended to constitute expenses of administration under any Bankruptcy Law. The provisions of this Section 12.07 shall survive the satisfaction and discharge or other termination of this Indenture. Section 12.08 Replacement of Trustee. The Trustee may resign by so notifying the Borrower and the Guarantors. The Agent may remove the Trustee by so notifying the Trustee, in writing. The Borrower may remove the Trustee if. (a) the Trustee fails to comply with Section 12.10; (b) the Trustee is adjudged a bankrupt or an insolvent; (c) a receiver or other public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting as Trustee hereunder. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Borrower shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Agent may appoint a successor Trustee to replace the successor Trustee appointed by the Borrower. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Borrower and the Guarantors. Immediately after that, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Noteholder. If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Borrower or the Agent may petition, at the expense of the Borrower, any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 12.10, the Agent may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Any successor Trustee shall comply with TIA (S)310(a)(5). -49- 54 Section 12.09 Successor Trustee by Merger, etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee; provided such corporation or association shall be otherwise eligible and qualified under this Article. Section 12.10 Eligibility, Disqualification. This Indenture shall always have a Trustee which satisfies the requirements of TIA (S)310(a)(1) and (5). The Trustee shall always have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall also comply with TIA (S)310(b). Section 12.11 Preferential Collection of Claims Against Borrower. The Trustee shall comply with TIA (S)311(a), excluding any creditor relationship listed in TIA (S)311(b). A Trustee who has resigned or been removed shall be subject to TIA (S)311(a) to the extent indicated therein. Section 12.12 Appointment of Co-Trustee. If the Trustee deems it necessary or desirable in connection with the Collateral and/or the enforcement of the Collateral Documents, the Trustee may appoint a co-Trustee with such powers of the Trustee as may be designated by the Trustee at the time of such appointment (including acting as separate trustee of any Collateral), and the Borrower shall, on request, execute and deliver to such co-Trustee any deeds, conveyances or other instruments required by such co- Trustee so appointed by the Trustee to more fully and certainly vest in and confirm to such co-Trustee its rights, powers, trusts, duties and obligations hereunder. All rights (including rights to indemnification hereunder), powers, duties and obligations conferred or imposed upon the Trustee shall be conferred or imposed upon and exercised or performed by the Trustee or jointly by the Trustee and such co-Trustees, except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed the Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations shall be exercised and performed by such co-Trustees. No Trustee or co-Trustee shall be personally liable by reason of any act or omission of any other Trustee or co-Trustee hereunder. Any co- Trustee appointed pursuant to this Section 12.12 may be removed by the Trustee pursuant to the terms of this Indenture and may be removed and may resign pursuant to the provisions of the applicable Collateral Document and of this Indenture. A co-Trustee shall not be responsible for and makes no representation as to the value or condition of the Collateral or any part thereof, or as to the title of the Borrower thereto, or as to the security afforded thereby or hereby, or as to the validity or genuineness of any -50- 55 Collateral pledged and deposited with such co-Trustee, or the validity or adequacy of this Indenture or the Notes; a co-Trustee shall not be accountable for the Borrower's use of the proceeds from the Notes, and it shall not be responsible for any statement of the Borrower in this Indenture or any document issued in connection with the sale of the Notes or any statement in the Notes. A co-Trustee makes no representations with respect to the effectiveness or adequacy of this Indenture or any Basic Document or the validity or perfection, if any, of Liens granted under this Indenture or the Collateral Documents. A co- Trustee shall not be responsible for independently ascertaining or maintaining such validity or perfection, if any, and shall be fully protected in relying upon certificates and opinions delivered to it in accordance with the terms of this Indenture or the Collateral Documents. Section 12.13 No Conflict. It is the purpose of this section of the Indenture to remove any potential conflict of interest in the instance in which Chase Bank of Texas, National Association ("Chase") is acting as Trustee and, in its commercial banking capacity, has or may develop a lending relationship with the Borrower or any of its Subsidiary Guarantors. Accordingly, in the event that Chase, in its commercial banking capacity, has or may develop a lending relationship with the Borrower or any of Subsidiary Guarantors, Chase may, but is not obligated to, resign as Trustee, such resignation to be effective automatically upon receipt by the Trustee of notice from the successor Trustee evidencing its assumption of the duties of Trustee hereunder, without notice to and without prior approval of any party. In the event Chase resigns as trustee pursuant to this Section 12.13, First Union National Bank, a national banking association duly organized and existing under the laws of the United States of America with a corporate trust office in Jacksonville, Florida, or any successor appointed pursuant to the "Acceptance of Appointment" attached hereto as Exhibit G, has agreed to and shall automatically become successor Trustee hereunder for all purposes. Chase shall give notice of its resignation in writing to the Borrower, the Agent and the Noteholders as soon as possible but in any event not less than forty-five (45) days after its resignation, provided that failure to give such notice shall not impair the effectiveness of such resignation. The provisions of this section shall extend to Affiliates of Chase. ARTICLE XIII MISCELLANEOUS Section 13.01 Interpretation and Survival of Provisions. Article, Section, Schedule, and Exhibit references are to this Indenture, unless otherwise specified. All references to instruments, documents, contracts, and agreements are references to such instruments, documents, contracts, and agreements as the same may be amended, supplemented, and otherwise modified from time to time, unless otherwise specified. The word "including" shall mean "including but not limited to." Whenever the Borrower has an obligation under the Basic Documents, the expense of complying with that obligation shall be an expense of the Borrower unless otherwise specified. Whenever any determination, consent, or approval is to be made or given by the Noteholders, such action shall be in the Noteholders' sole discretion unless -51- 56 otherwise specified in this Indenture. If any provision in the Basic Documents is held to be illegal, invalid, not binding, or unenforceable, such provision shall be fully severable and the Basic Documents shall be construed and enforced as if such illegal, invalid, not binding, or unenforceable provision had never comprised a part of the Basic Documents, and the remaining provisions shall remain in full force and effect. The Basic Documents have been reviewed and negotiated by sophisticated parties with access to legal counsel and shall not be construed against the drafter. The representations, warranties, and covenants made in this Indenture, the Notes or any other Basic Document shall remain operative and in full force and effect regardless of (a) any investigation made by or on behalf of the Borrower or the Noteholders or (b) acceptance of any of the Notes and payment therefor and repayment or repurchase thereof. All indemnification obligations of the Borrower and the provisions of Section 13.02 shall remain operative and in full force and effect unless such obligations are expressly terminated in a writing referencing those individual Sections, regardless of any purported general termination of this Indenture or any other Basic Document. Section 13.02 Costs, Expenses and Taxes. (a) Intentionally Deleted. (b) The Borrower agrees to indemnify the Agent and the Noteholders, and their respective officers, directors, employees, representatives, agents, attorneys, and Affiliates (collectively, "Related Parties") from, hold each of them harmless against and promptly upon demand pay or reimburse each of them for, any and all actions, suits, proceedings (including any investigations, litigation, or inquiries), claims, demands, and causes of action, and, in connection therewith, all reasonable costs, losses, liabilities, damages, or expenses of any kind or nature whatsoever (collectively the "Indemnity Matters") which may be incurred by or asserted against or involve any of them (whether or not any of them is designated a party thereto) as a result of, arising out of, or in any way related to (i) any actual or proposed use by the Borrower of the proceeds of any sale of the Notes, (ii) the operations of the business of the Borrower or any Subsidiary, (iii) any bodily injury or death or property damage occurring in or upon or in the vicinity of any Collateral, (iv) any claim by any third Person against any Collateral assigned to or paid to any Noteholder pursuant to any Collateral Document, (v) the failure of the Borrower or any Subsidiary to comply with any Governmental Requirement, or (vi) any other aspect of this Indenture and the other Basic Documents, including, without limitation, the reasonable fees and disbursements of counsel and all other reasonable expenses incurred in connection with investigating, defending or preparing to defend any such action, suit, proceeding (including any investigations, litigation, or inquiries), or claim and INCLUDING ALL INDEMNITY MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY INDEMNITEE (but excluding all Indemnity Matters arising solely by reason of claims between the Noteholders or any Noteholder and the Agent or any Noteholder's shareholders against the Agent or any Noteholder or by reason of the gross negligence or wilful misconduct of any Indemnitee). (c) The Borrower agrees to pay and hold the Noteholders harmless from and against any and all present and future stamp and other similar taxes with respect to this -52- 57 Indenture and Basic Documents and save the Noteholders harmless from and against any and all liabilities with respect to or resulting from any delay or omission to pay such taxes, and will indemnify the Noteholders for the full amount of taxes paid by the Noteholders in respect of payments made or to be made under this Indenture, any Note, or any other Basic Document and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto, whether or not such taxes were correctly or legally asserted. (d) The Borrower agrees to indemnify and hold harmless from time to time the Noteholders, and their respective Related Parties, together with the Trustee, from and against any and all losses, claims, cost recovery actions, administrative orders or proceedings, damages, and liabilities to which any such Person may become subject (i) under any Environmental Law applicable to the Borrower, any Subsidiary, or any of their respective Properties, (ii) as a result of the breach or non-compliance by the Borrower or any Subsidiary with any Environmental Law applicable to the Borrower or any Subsidiary, or any of their respective Properties, (iii) due to the ownership by the Borrower or any Subsidiary of their respective Properties or any activity on any of their respective Properties, or any past activity on any of their respective Properties which, though lawful and fully permissible at the time, could result in present liability, (iv) the presence, use, release, storage, treatment, or disposal of hazardous substances on or at any of the properties owned or operated by the Borrower or any Subsidiary, or (v) any other environmental, health, or safety condition in connection with this Indenture or any other Basic Document. (e) In the case of any indemnification hereunder, the Noteholder or other Person indemnified hereunder shall give notice to the Borrower within a reasonable period of time of any such claim or demand being made against the Noteholder or other indemnified Person and the Borrower at its sole cost and expense shall provide a defense of such claim, provided, however, that (i) if the Borrower has failed to assume the defense and employ counsel or (ii) if the defendants in any such action include both the indemnified party and the Borrower or any Subsidiary and counsel to the indemnified party shall have concluded that there may be reasonable defenses available to the indemnified party that are different from or additional to those available to the Borrower or such Subsidiary or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the Borrower or such Subsidiary, then the indemnified party shall have the right to select a separate counsel and to assume such legal defense and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the Borrower as incurred. (f) No indemnitee may settle any claim to be indemnified without the consent of the indemnitor, such consent not to be unreasonably withheld; provided, that the indemnitor may not reasonably withhold consent to any settlement that an indemnitee proposes if the indemnitor does not have the financial ability to pay all its obligations outstanding and asserted against the indemnitee at that time, including the maximum potential claims against the indemnitee to be indemnified pursuant to this Section 13.02. -53- 58 (g) This Section 13.02 shall not apply to actions, suits, proceedings, investigations, demands, losses, liabilities, claims, damages, deficiencies, interest, judgments, costs, or expenses relating to any Property to the extent arising from the acts or omissions of the Agent or any Noteholder during the period after which such Person, its successors or assigns shall have acquired possession of such Property (whether through foreclosure or deed in lieu of foreclosure, as mortgagee in possession or otherwise). (h) The Borrower's obligations under this Section 13.02 shall survive any termination of this Indenture and the payment of the Obligations. Section 13.03 No Waiver; Modifications in Writing. (a) No failure or delay on the part of the Trustee, the Borrower, the Agent or the Noteholders in exercising any right, power, or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power, or remedy preclude any other or further exercise thereof or the exercise of any right, power, or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Borrower, the Trustee, the Agent or the Noteholders at law or in equity or otherwise. (b) Except as otherwise provided herein, no amendment, waiver, consent, modification, or termination of any provision of this Indenture, the Notes or any other Basic Document, shall be effective unless signed by the Borrower and the Majority Noteholders. The Noteholders have all rights to take such actions under this Indenture and the other Basic Documents without the consent or joinder of any holder of the Acquired Shares or Warrants. Any amendment, supplement or modification of or to any provision of this Indenture or the Notes or any other Basic Document, any waiver of any provision of this Indenture, the Notes or any other Basic Document, and any consent to any departure by the Borrower from the terms of any provision of this Indenture, the Notes or any other Basic Document, shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Indenture, no notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 13.04 Binding Effect; Assignment. This Indenture shall be binding upon the Borrower, the Trustee, the Agent and the Noteholders, and their respective successors and permitted assigns. Except as expressly provided in this Indenture, this Indenture shall not be construed so as to confer any right or benefit upon any Person other than the Borrower, Trustee, Agent and Noteholders, and their respective successors and permitted assigns. Subject to applicable federal law and state securities law, all or any portion of the rights and obligations of the Noteholders under this Indenture with respect to the Basic Documents may be sold, assigned or pledged by any Noteholder. Upon any assignment of the Basic Documents, the acquiring Noteholder shall succeed to all of the selling Noteholder's rights and obligations under the Basic Documents to the extent assigned and the selling Noteholder -54- 59 shall be automatically released from any such obligations hereunder with respect to the Basic Documents to the extent assigned. Section 13.05 Communications. All notices and demands provided for hereunder shall be in writing and shall be given by registered or certified mail, return receipt requested, telecopy, air courier guaranteeing overnight delivery or personal delivery to the following addresses: If to the Trustee: Chase Bank of Texas, National Association Global Trust Services 600 Travis Street, Suite 1150 Houston, Texas 77002 Attention: Mauri J. Cowen Telephone: (713) 216-6686 Telecopier: (713) 216-5474 If to the Agent: Enron Capital Management II Limited Partnership c/o Enron Capital II Corp. 1400 Smith Street Houston, Texas 77002 Attention: Shirley Hudler Telecopier: (713) 646-8008 and Attention: Donna Lowry Telecopier: (713) 646-4039 If to the Noteholders: Enron Capital Management II Limited Partnership c/o Enron Capital II Corp. 1400 Smith Street Houston, Texas 77002 Attention: Shirley Hudler Telecopier: (713) 646-8008 and -55- 60 Enron Capital & Trade Resources Corp. 1400 Smith Street Houston, Texas 77002 Attention: Donna Lowry Telecopier: (713) 646-4039 If to the Borrower: 6300 Bridge Point Parkway Building 2, Suite 500 Austin, Texas 78730 Attention: Craig M. Fleming Telecopier: (512) 472-3400 or to such other address as the Borrower, Agent or any Noteholder may designate in writing. All other communications may be by regular mail. All notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; four days after being sent by certified mail, return receipt requested, if mailed; when receipt acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. Notwithstanding the foregoing, notices to the Trustee shall be effective only upon receipt. Section 13.06 Governing Law. This Indenture will be construed in accordance with and governed by the laws of the State of Texas without regard to principles of conflicts of laws. Section 13.07 Arbitration. (a) Binding Arbitration. Subject to the provisions of subparagraph (e), on the request of either the Borrower, the Agent or any Noteholder, whether made before or after the institution of any legal proceeding, any action, dispute, claim or controversy of any kind now existing or hereafter arising between any of the parties hereto in any way arising out of, pertaining to or in connection with this Indenture (a "Dispute") shall be resolved by binding arbitration in accordance with the terms hereof. Either the Borrower, the Agent or any Noteholder may, by summary proceedings, bring an action in court to compel arbitration of any Dispute. (b) Governing Rules. Any arbitration shall be administered by the American Arbitration Association (the "AAA") in accordance with the terms of this Section, the Commercial Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal Arbitration Act. Judgment on any award rendered by an arbitrator may be entered in any court having jurisdiction. (c) Arbitrators. Any arbitration shall be conducted before a three person panel of neutral arbitrators. Such panel shall consist of one person from each of the -56- 61 following categories: (1) an attorney who has practiced in the area of commercial law for at least 10 years or a retired judge at the Texas or United States District Court or an appellate court level; (2) a person with at least 10 years experience in commercial lending; and (3) a person with at least 10 years experience in the energy service industry. The AAA shall submit a list of persons meeting the criteria outlined above for each category of arbitrator, and the parties shall select one person from each category in the manner established by the AAA. If the parties cannot agree on an arbitrator within 30 days after the request for an arbitration, then any party may request the AAA to select an arbitrator. The arbitrator may engage engineers, accountants or other consultants that the arbitrator deems necessary to render a conclusion in the arbitration proceeding. (d) Conduct of Arbitration. To the maximum extent practicable, an arbitration proceeding hereunder shall be concluded within 180 days of the filing of the Dispute with the AAA. Arbitration proceedings shall be conducted in Houston, Texas. At the conclusion of any arbitration proceeding, the arbitrator shall make specific written findings of fact and conclusions of law. The arbitrator shall have the power to award recovery of all costs and fees to the prevailing party. The Borrower, the Agent and the Noteholders each agree to keep all Disputes and arbitration proceedings strictly confidential except for disclosure of information required by applicable law. (e) Parties' Rights. Nothing in the preceding paragraph shall require arbitration prior to the Agent's or the Noteholders' exercise of any rights and remedies under Article X. In addition, nothing in this Section 13.07, nor the exercise of any right to arbitrate thereunder, shall limit the right of the Borrower, the Agent, the Trustee or any Noteholder: (a) to foreclose against any Collateral by the exercise of the power of sale under, or to secure direct payment of the proceeds of any Collateral as provided under, any deed of trust, mortgage, or other security agreement or instrument or applicable law; (b) to exercise self-help remedies such as setoff or repossession; or (c) to obtain provisional or ancillary remedies or relief such as replevin, injunctive relief, attachment or appointment of a receiver from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding. Any foreclosure action, or the institution and maintenance of any action for such judicial relief, or pursuit of provisional or ancillary remedies, or exercise of self-help remedies shall not constitute a waiver of the right of the exercising party to submit any claim or dispute to arbitration. (f) Costs of Arbitration. All fees of the arbitrator and any engineer, accountant or other consultant engaged by the arbitrator, shall be paid by the Borrower (as to 50%) and the Noteholders (as to 50%) unless otherwise awarded by the arbitrator. Section 13.08 Confidentiality. In the event that the Borrower or any Guarantor (hereinafter called the "Subject Entities") provides to the Agent or the Noteholders written confidential information or, if communicated as confidential, oral confidential information belonging to any Subject Entity, the Agent and the Noteholders shall thereafter maintain such information in confidence in accordance with the standards of care and diligence that each utilizes in maintaining its own confidential information. This obligation of confidence shall -57- 62 not apply to such portions of the information which (i) are in the public domain, (ii) hereafter become part of the public domain without the Agent or the Noteholders breaching their obligation of confidence to any Subject Entity, (iii) are previously known by the Agent or the Noteholders from some source other than any Subject Entity, (iv) are hereafter developed by the Agent or the Noteholders without using a Subject Entity's information, (v) are hereafter obtained by or available to the Agent or the Noteholders from a third party who owes no obligation of confidence to any Subject Entity with respect to such information, (vi) are disclosed with a Subject Entity's consent, (vii) must be disclosed either pursuant to any Governmental Requirement or to Persons regulating the activities of the Agent or the Noteholders, or (viii) may be required to be disclosed by law or regulation or order of any Governmental Authority in any judicial, arbitration or governmental proceeding. Further, the Agent or a Noteholder may disclose any such information to any other Noteholder, any independent petroleum engineers or consultants, any independent certified public accounts, any legal counsel employed by such Person in connection with this Indenture or any other Basic Document, including without limitation, the enforcement or exercise of all rights and remedies thereunder, or, subject to Section 13.04, any assignee or participant (including prospective assignees and participants) in the Obligations; provided, however, that the Agent or the Noteholders shall receive a confidentiality agreement from the Person to whom such information is disclosed such that said person shall have the same obligation to maintain the confidentiality of such information as is imposed upon the Agent or the Noteholders hereunder. Notwithstanding anything to the contrary provided herein, this obligation of confidence shall cease three (3) years from the date the information was furnished, unless the Borrower requests in writing at least thirty (30) days prior to the expiration of such three (3) year period, to maintain the confidentiality of such information for an additional three year period. Section 13.09 Execution in Counterparts. This Indenture may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. Section 13.10 Trust Indenture Act Controls. Whether prior to or following the qualification of this Indenture under the TIA, if any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of TIA (S)318(c) upon an Indenture qualified under the TIA, the imposed duties shall control under this Indenture. Section 13.11 Communication by Noteholders with Other Noteholders. Noteholders may communicate pursuant to TIA (S)312(b) with other Noteholders with respect to their rights under this Indenture or the Notes. The Company, the Guarantors, the Trustee, the Registrar and anyone else shall have the protection of TIA (S)312(c). Section 13.12 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Borrower or any Guarantor to the Trustee to take any action under this Indenture, the Borrower or such Guarantor, as the case may be, shall furnish to the Trustee: -58- 63 (a) an Officers' Certificate (which shall include the statements set forth in Section 13.13) stating that, in the opinion of the signers, the conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; (b) an Opinion of Counsel stating that, in the opinion of such counsel, such conditions precedent have been complied with; and (c) any Opinion of Counsel may assume the existence of non-existence of facts necessary to support such Opinion unless such counsel has actual knowledge that such assumption would be contrary to the actual facts. Section 13.13 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of each such person, such covenant or condition has been complied with. Section 13.14 Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or a meeting of the Noteholders. The Note Registrar may make reasonable rules for its functions. Section 13.15 Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday, or a day on which banks and trust companies in the City of New York are not required by law or executive order to be open. If a payment date is a Legal Holiday at a place of payment, payment may be made at the place on the next succeeding day that is not a Legal Holiday, without additional interest. -59- 64 IN WITNESS WHEREOF, BRIGHAM EXPLORATION COMPANY has caused this Indenture to be signed by its President or one of its Vice Presidents, and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION has caused this Indenture to be signed by one of its duly authorized trust officers, all as of the day and year first above written. BRIGHAM EXPLORATION COMPANY By: /s/ CRAIG M. FLEMING ----------------------------------- Craig M. Fleming Vice President and Chief Financial Officer CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, as Trustee By: /s/ MAURI COWEN ----------------------------------- Name: Mauri J. Cowen --------------------------------- Title: Vice President & Trust Officer -------------------------------- -60- 65 STATE OF TEXAS (S) (S) COUNTY OF HARRIS (S) BEFORE ME, the undersigned authority, a Notary Public in and for said state, on this day personally appeared Craig M. Fleming known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said BRIGHAM EXPLORATION COMPANY, a Delaware corporation, and that he executed the same as the act of said corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 20th day of August, 1998. ------------------------------------------- Notary Public in and for the State of Texas My commission expires: - --------------------------- STATE OF TEXAS (S) (S) COUNTY OF HARRIS (S) BEFORE ME, the undersigned authority, a Notary Public in and for said state, on this day personally appeared __________________, known to me to be the person and officer whose names are subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association, and that she executed the same as the act of said national banking association for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 20th day of August, 1998. ------------------------------------------- Notary Public in and for the State of Texas My commission expires: - --------------------------- -61- EX-10.1.4 3 AMENDED & RESTATED AGREEMENT DATED 12/30/97 1 EXHIBIT 10.1.4 - ------------------------------------------------------------------------------- AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP ------------------- BRIGHAM OIL & GAS, L.P. ------------------- Dated as of December 30, 1997 - ------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I -- Formation of Partnership..................................................2 Section 1.1. Formation.......................................................2 Section 1.2. Name............................................................2 Section 1.3. Business........................................................3 Section 1.4. Place of Business and Registered Agent..........................3 Section 1.5. Names and Addresses of Partners.................................3 Section 1.6. Term............................................................3 Section 1.7. Filings.........................................................4 Section 1.8. Title to Partnership Property...................................4 ARTICLE II -- Definitions and References...............................................4 Section 2.1. Defined Terms...................................................4 Section 2.2. References and Titles...........................................6 ARTICLE III -- Capitalization..........................................................6 Section 3.1. Capital Contributions of Partners...............................6 Section 3.2. Additional Capital Contributions................................6 Section 3.3. Non-payment of Capital Contributions............................7 Section 3.4. Return of Capital Contributions.................................7 Section 3.5. Payments and Advances by General Partner........................7 ARTICLE IV -- Allocations and Distributions............................................8 Section 4.1. Allocation of Profits and Losses. ..........................8 Section 4.2. Distributions...............................................8 ARTICLE V -- Management................................................................8 Section 5.1. Power and Authority of General Partner..........................8 Section 5.2. Contracts With Affiliates......................................10 Section 5.3. Tax Elections..................................................10 Section 5.4. Tax Returns; Tax Matters Partner...............................11 Section 5.5. Reimbursement of Expenses......................................11 ARTICLE VI -- Rights of Limited Partner...............................................11 Section 6.1. Rights of Limited Partner......................................11 Section 6.2. Limitations on Limited Partner.................................11 Section 6.3. Liability of Limited Partner...................................12 Section 6.4. Withdrawal and Return of Capital Contributions.................12 ARTICLE VII -- Books, Records and Bank Accounts.......................................12 Section 7.1. Capital Accounts, Books and Records............................12 Section 7.2. Reports........................................................13 Section 7.3. Bank Accounts..................................................13 Section 7.4. Information Relating to the Partnership........................13
(ii) 3
PAGE ---- ARTICLE VIII -- Dissolution, Liquidation and Termination..............................13 Section 8.1. Dissolution....................................................13 Section 8.2. Liquidation and Termination....................................14 Section 8.3. Reconstitution.................................................15 ARTICLE IX -- Assignments of Interests................................................15 Section 9.1. Assignment by Partners.........................................15 ARTICLE X -- Miscellaneous............................................................16 Section 10.1. Notices.......................................................16 Section 10.2. Amendment.....................................................16 Section 10.3. Partition.....................................................16 Section 10.4. Entire Agreement..............................................16 Section 10.5. Severability..................................................16 Section 10.6. No Waiver.....................................................16 Section 10.7. Applicable Law................................................16 Section 10.8. Meetings of the Partners......................................17 Section 10.9. Successors and Assigns........................................17 Section 10.10. Counterparts.................................................17
(iii) 4 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP BRIGHAM OIL & GAS, L.P. THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (this "Agreement") dated as of December 30, 1997, is made by and between Brigham, Inc., a Nevada corporation, as the general partner (the "General Partner"), and Brigham Holdings I, LLC, a Nevada limited liability company ("BHILLC"), as a limited partner, and Brigham Holdings II, LLC, a Nevada limited liability company ("BHIILLC"), as a limited partner (BHILLC and BHIILLC shall individually referred to herein as a "Limited Partner", and together shall be referred to as the "Limited Partners"). W I T N E S S E T H: WHEREAS, Brigham Oil & Gas, L.P., a Delaware limited partnership (the "Partnership") was formed on May 1, 1992 pursuant to an Agreement of Limited Partnership by and among Brigham Exploration Company, a Texas corporation (which subsequently changed its name to Brigham, Inc. ("BI") and was merged with and into its parent, Brigham I, Inc., a Nevada corporation now know as Brigham, Inc. ("Brigham Nevada") after the merger), as a general partner, and certain additional parties, as general and limited partners; WHEREAS, the Agreement of Limited Partnership for the Partnership was amended on three occasions for various purposes, including the admission of certain additional parties as limited partners (the Agreement of Limited Partnership as so amended herein called the "Original Agreement"); WHEREAS, on February 26, 1997, in an exchange (the "Exchange") made pursuant to an Exchange Agreement dated on such date, all of the shareholders of BI contributed all of their stock in BI to a newly-organized corporation, Brigham Exploration Company, a Delaware corporation ("BEC"), and all of the other partners of the Partnership (the "Other Partners") contributed their interests in the Partnership to BEC, all in exchange for common stock in BEC; WHEREAS, BI's interest in the profits and capital of the Partnership at the time of the Exchange was approximately 54.00% and the interests of the Other Partners in profits and capital was approximately 46.00%; WHEREAS, at the time of the Exchange, the Partnership was indebted to RIMCO Partners, LP II, RIMCO Partners, LP III and RIMCO Partners, LP IV (collectively "RIMCO") in the approximate amount of $16,486,000.00 (the "RIMCO Debt"); WHEREAS, RIMCO contributed the RIMCO Debt to BEC as a part of the Exchange and received therefor common stock in BEC, whereupon BEC contributed the RIMCO Debt to the Partnership as a contribution to capital; 5 WHEREAS, following the contribution of the RIMCO Debt by BEC to the Partnership as a contribution to capital, the Partnership interests of the of the partners were 43.23% for BI, and 56.77% for BEC; WHEREAS, pursuant to a prospectus dated May 8, 1997, BEC issued additional shares in an initial public offering, the proceeds of which were contributed by BEC to the capital of the Partnership, resulting in further adjustments in the Partnership interests of the partners, with BI's interest being reduced to 31.5% and BEC's interest being increased to 68.5%; and WHEREAS, the partners now wish to amend and restate the Original Agreement to reflect the current percentage interests of the partners, to convert BEC's interests in the Partnership into limited partner interests, to convert BI's interest in the Partnership, which is now held by Brigham Nevada due to the merger, into a 1% general partner interest and a 30.5% limited partner interest, to admit Brigham Holdings I, LLC, a Nevada limited liability company and assignee of BEC's 68.5% limited partner interest, as a limited partner, to admit Brigham Holdings II, LLC, a Nevada limited liability company and assignee of BI's 30.5% limited partner interest, as a limited partner, and to make additional changes to eliminate certain obsolete provisions and incorporate certain additional provisions to reflect current operations of the Partnership; NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the General Partner and Limited Partners agree as follows: ARTICLE I Formation of Partnership Section 1.1. Formation. The Partnership was organized on May 1, 1992, as a limited partnership pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act (Del. Code Ann. tit. 6 Sections 17-101 to 17-1109), as amended from time to time, and any successor statute or statutes (the "Act"). Section 1.2. Name. The name of the Partnership shall be "Brigham Oil & Gas, L.P." Subject to all applicable laws, the business of the Partnership shall be conducted in the name of the Partnership unless under the law of some jurisdiction in which the Partnership does business such business must be conducted under another name. In such a case, the business of the Partnership in such jurisdiction may be conducted under such other name or names (except the name of the General Partner, any Affiliate of the General Partner or the name of the Limited Partner) as the General Partner shall determine to be necessary so long as it does not affect adversely the limited liability of the Limited Partner hereunder or jeopardize in any manner the title to or ownership of any Partnership assets. The General Partner shall cause to be filed on behalf of the Partnership such partnership or -2- 6 assumed or fictitious name certificate or certificates or similar instruments as may from time to time be required by law. Section 1.3. Business. The business of the Partnership shall be (a) to acquire and own or lease all types of real and personal property, specifically including oil, gas and other mineral interests in real property (the "Oil & Gas Properties"); (b) explore, drill, develop and operate such Oil & Gas Properties; (c) produce, collect, store, treat, deliver, market, sell or otherwise dispose of oil, gas and related hydrocarbons, minerals and other products from such Oil & Gas Properties; (d) farmout, sell, abandon and otherwise dispose of such Oil & Gas Properties and other Partnership assets; (e) obtain and market seismic data; and (g) take all such other actions incidental to any of the foregoing as the General Partner may determine to be necessary or desirable. Section 1.4. Place of Business and Registered Agent. (a) The principal United States office and place of business of the Partnership and its street address shall be 6300 Bridge Point Parkway, Bldg. 2, Suite 500, Austin, Texas 78730. The General Partner, at any time and from time to time, may change the location of the Partnership's principal United States office and place of business and may establish such additional place or places of business of the Partnership as the General Partner shall determine to be necessary or desirable, provided notice thereof is concurrently given to the Limited Partner. (b) The registered office of the Partnership in the State of Delaware shall be The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, and the registered agent for service of process on the Partnership shall be The Corporation Trust Company, a corporation whose business address is the same as the Partnership's registered office. The General Partner, at any time and from time to time, may change the Partnership's registered office or registered agent or both by complying with the applicable provisions of the Act and giving concurrent notice thereof to the Limited Partners and may establish, appoint and change additional registered offices and registered agents of the Partnership in such other states as the General Partner shall determine to be necessary or advisable. Section 1.5. Names and Addresses of Partners. The General Partner is the sole general partner of the Partnership, and the mailing and street address of its business is 6300 Bridge Point Parkway, Bldg. 2, Suite 500, Austin, Texas 78730. The Limited Partners are the only limited partners of the Partnership, and the mailing and street address of each of their businesses, which is the same for each, is 3773 Howard Hughes Parkway, Suite 300 North, Las Vegas, Nevada 89109. The General Partner and the Limited Partners may agree to admit additional Limited Partners to the Partnership, in which case any such additional Limited Partner shall provide its mailing and street address to the Partnership. Section 1.6. Term. The Partnership shall be formed and commence upon the completion of filing for record an initial certificate of limited partnership of the Partnership with the Secretary of State of the State of Delaware and shall continue until terminated in accordance with Article VIII. -3- 7 The General Partner shall not be required to deliver or mail a copy of the certificate of limited partnership to the Limited Partners. Section 1.7. Filings. Upon the request of the General Partner, the Limited Partners shall promptly execute and deliver all such certificates and other instruments conforming hereto as shall be necessary for the General Partner to accomplish all filing, recording, publishing and other acts appropriate to comply with all requirements for the formation and operation of the Partnership as a limited partnership under the laws of the State of Delaware and for the qualification or reformation and operation of the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in all other jurisdictions where the Partnership shall propose to conduct business. Prior to the conducting of any business in any jurisdiction, the General Partner shall to the full extent necessary to establish limited liability for the Limited Partners under the laws of such jurisdiction and otherwise to comply with the laws of such jurisdiction, cause the Partnership to comply with all requirements for the registration, qualification or reformation of the Partnership to conduct business as a limited partnership (or a partnership in which the Limited Partners have limited liability) in such jurisdiction. Thereafter, the General Partner shall cause the Partnership to continue to comply with all such requirements and all other requirements necessary to maintain the limited liability of the Limited Partners in each jurisdiction where the Partnership does business. Section 1.8. Title to Partnership Property. All property owned by the Partnership, whether real or personal, tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually, shall have any ownership of such property. The Partnership shall hold its property in its own name. The Partnership shall hold all of its assets in the name of the Partnership unless under the law of some jurisdiction in which the Partnership owns assets such assets must be held in another name. In such a case, such assets in such jurisdiction shall be held under such other name or names (except the name of the General Partner, any Affiliate of the General Partner or the name of the Limited Partners) as the General Partner shall determine to be necessary so long as it does not affect adversely the limited liability of the Limited Partners hereunder or jeopardize in any manner the title to or ownership of any Partnership assets. ARTICLE II Definitions and References Section 2.1. Defined Terms. When used in this Agreement, the following terms shall have the respective meanings set forth below: "Act" shall mean the Delaware Revised Uniform Limited Partnership Act (Del. Code Ann. tit. 6 Sections 17-101 to 17-1109), as amended from time to time, and any successor statute or statutes. -4- 8 "Affiliate" shall mean (a) any person directly or indirectly owning, controlling or holding with power to vote 10% or more of the outstanding voting securities of the General Partner, (b) any person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote by the General Partner, (c) any person directly or indirectly controlling, controlled by or under common control with the General Partner, and (d) any officer, director or partner of the General Partner or any person described in subsection (a), (b) or (c) of this paragraph. As used in this Agreement, the term "person" shall include an individual, an estate, a corporation, a partnership, an association, a joint stock company and a trust. "Agreed Rate" shall mean a rate per annum which is equal to the lesser of (a) the rate of interest as published from time to time in the Wall Street Journal as the "prime rate" (defined as the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks), adjusted from time to time to reflect any changes in such rate determined hereunder, or (b) the maximum rate from time to time permitted by applicable law. "BHILLC" shall mean Brigham Holdings I, LLC, a Nevada limited liability company. "BHIILLC" shall mean Brigham Holdings II, LLC, a Nevada limited liability company. "Capital Account" shall have the meaning set forth in Section 7.1(b) hereof. "Capital Contributions" shall mean for any Partner at the particular time in question the aggregate of the dollar amounts of any cash and the fair market value of any property contributed to the capital of the Partnership, or, if the context in which such term is used so indicates, the dollar amounts of cash and the fair market value of any property agreed to be contributed, or requested to be contributed, by such Partner to the capital of the Partnership. "General Partner" shall mean Brigham, Inc., a Nevada corporation, and any person who becomes a substituted General Partner of the Partnership pursuant to the terms hereof. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute or statutes. "Limited Partner" shall mean each of BHILLC and BHIILLC, and any person who becomes a substituted Limited Partner or an additional Limited Partner of the Partnership pursuant to the terms hereof. "Partners" shall mean the General Partner and the Limited Partner. "Partnership" shall mean Brigham Oil & Gas, L.P., a Delaware limited partnership. "Sharing Ratio" shall mean 1% for the General Partner, 30.5% for BHIILLC and 68.5% for BHILLC. -5- 9 Section 2.2. References and Titles. All references in this Agreement to articles, sections, subsections and other subdivisions refer to corresponding articles, sections, subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any of such subdivisions are for convenience only and shall not constitute part of such subdivisions and shall be disregarded in construing the language contained in such subdivisions. The words "this Agreement," "herein," "hereof," "hereby," "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. Pronouns in masculine, feminine and neuter genders shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. ARTICLE III Capitalization Section 3.1. Capital Contributions of Partners. The General Partner and the Limited Partners have already made Capital Contributions to the Partnership in such amounts and at such times as are reflected in the books of the Partnership. Notwithstanding anything to the contrary contained herein, such Capital Contributions shall be the maximum contribution to the Partnership that the Partners shall be required to make (unless the Partners otherwise elect as provided in Section 3.2). Section 3.2. Additional Capital Contributions. At any time after the making of the Capital Contributions referred to in Section 3.1, the General Partner may request that each Partner make additional Capital Contributions to the Partnership in accordance with each Partner's Sharing Ratio for the purpose of (i) acquiring additional Oil & Gas Properties, or (ii) for such other uses as are consistent with the purpose of the Partnership. No Partner shall be obligated to make any such additional Capital Contributions unless and until such time as each Partner agrees to make such additional Capital Contributions. In the event that a Partner shall decline to make all or any portion of the additional Capital Contributions requested at any time, the General Partner may elect to take any of the following actions: (a) The General Partner may borrow funds in the name of the Partnership for expenditure for such purposes, subject to Section 5.2(a) ; (b) The Partners electing to make additional Capital Contributions may pay their pro rata share of all of the additional Capital Contributions which a Partner shall decline to make; and the General Partner shall adjust the Sharing Ratios accordingly; or (c) The General Partner may cause the Partnership and/or the Partners to take such other actions upon which the Partners shall agree. -6- 10 Section 3.3. Non-payment of Capital Contributions. (a) The Partnership shall have the right to pursue any remedy existing at law or in equity for the collection of the unpaid amount of the Capital Contributions agreed to be made in Section 3.l or hereafter agreed to be made in accordance with Section 3.2, including without limitation the prosecution of a suit against a defaulting Partner. (b) The Partnership may retain any revenues otherwise distributable to a defaulting Partner pursuant to this Agreement in an amount equal to the amount such Partner failed or refused to contribute as required pursuant to the terms of this Agreement, together with interest on such past-due amounts at a rate equal to the Agreed Rate. Any amount so withheld shall be deemed, for all purposes of this Agreement, to have been distributed to the defaulting Partner and, other than that portion of such amounts representing interest, be deemed to have been recontributed by the defaulting Partner to the capital of the Partnership for the purposes for which contributions were initially requested. To the extent that a Partner has advanced funds to the Partnership as a result of the default of a Partner, such Partner shall be entitled to be reimbursed from the amounts so withheld from the defaulting Partner. Section 3.4. Return of Capital Contributions. Except as provided in Section 3.5, no interest shall accrue on any contributions to the capital of the Partnership; and no Partner shall have the right to withdraw or be repaid any capital contributed by such Partner except as provided in Section 8.2 of this Agreement. All interest which accrues on Partnership funds shall be allocated and credited to the Partners in accordance with Section 4.1. Section 3.5. Payments and Advances by General Partner. The General Partner shall have the right to pay any indebtedness or obligation of the Partnership out of funds of the General Partner, and may bill the Partnership in the same manner that the Partnership may bill the Limited Partners. Further, if at any time the General Partner advances funds to or on behalf of the Partnership or the General Partner is required to pay any indebtedness or obligation of the Partnership in excess of the Capital Contributions of the General Partner agreed to be made in this Article III, such advance or payment shall constitute a loan by the General Partner to the Partnership. If any such advance or payment is outstanding for more than sixty(60) days and except as provided in Section 3.4, such advance or payment shall bear interest from the date first made at a rate equal to the Agreed Rate. No such advance or payment by the General Partner shall be deemed to be a contribution by the General Partner to the capital of the Partnership. Any advances by the General Partner (other than (i) for a required payment by the General Partner which is beyond the control of the General Partner of any indebtedness or obligation of the Partnership in excess of the Capital Contributions of the General Partner agreed to be made in this Article III, or (ii) a payment by the General Partner of any costs and expenses allocated and charged to a Limited Partner upon the default by the Limited Partner in the payment of any Capital Contributions previously agreed to be made by the Limited Partner) shall be subject to the limitations on borrowing specified in Section 5.2(a). Any loan made by the General Partner hereunder to pay any costs or expenses allocated and charged to any Partner -7- 11 shall be repaid (with payments to be applied first to the payment of interest and then to the repayment of principal) from the revenues that would otherwise be next distributed to such Partner hereunder. ARTICLE IV Allocations and Distributions Section 4.1. Allocation of Profits and Losses. Except as may be otherwise required under Section 704 of the Internal Revenue Code and the Treasury Regulations promulgated thereunder (including those Regulations governing allocations with respect to nonrecourse indebtedness and property carried on the books of the Partnership at an amount which differs from its adjusted tax basis), each item of income, gain, loss, deduction, and credit of the Partnership shall be allocated and charged to the Partners in accordance with their respective Sharing Ratios. Section 4.2. Distributions. All cash funds of the Partnership (other than Capital Contributions and any borrowed funds) which the General Partner reasonably determines are not needed for the payment of existing or foreseeable (within 30 days) Partnership obligations and expenditures shall be distributed to the Partners in proportion to their Sharing Ratios. Payment of all distributions made by the Partnership to the Limited Partners shall be made by transfer of immediately available funds in accordance with such written instructions to the General Partner as may be provided by the Limited Partners from time to time. All distributions in liquidation of a Partner's interest in the Partnership shall be made in accordance with Section 8.2. ARTICLE V Management Section 5.1. Power and Authority of General Partner. The General Partner shall have full and exclusive power and authority on behalf of the Partnership to manage, control, administer and operate the properties, business and affairs of the Partnership and to do or cause to be done any and all acts deemed by the General Partner to be necessary or appropriate thereto, and the scope of such power and authority shall encompass all matters in any way connected with such business or incident thereto, including but not limited to, the power and authority: (a) To purchase or otherwise acquire real or personal property of every nature considered necessary or appropriate to carry on and conduct the business of the Partnership; (b) To borrow monies for the purchase, development and maintenance of Partnership assets and other aspects of the Partnership's business and from time to time to draw, make, execute and issue promissory notes and other negotiable or non-negotiable instruments and evidences of indebtedness; to secure the payment of the sums so borrowed and to mortgage, pledge or assign in -8- 12 trust all or any part of the property of the Partnership, and to assign any monies owing or to be owing to the Partnership; (c) To enter into any agreements of joint venture or partnership or for sharing of risks, expenses or profits, with any person, firm, corporation, government or agency thereof engaged in any business or transaction in which the Partnership is authorized to engage; (d) To maintain, develop, manage and defend Partnership property; to contract with third parties for such purposes; and to do any and all other things necessary or appropriate to carry out the terms and provisions of this Agreement which would or might be done by a normal and prudent businessman in the development and management of its own property; (e) To sell, assign, convey or otherwise dispose of, for such consideration and upon such terms and conditions as the General Partner may determine to be in the best interests of the Partnership, all or any part of the Partnership property, any interest therein, or any interest payable therefrom, and in connection therewith to execute and deliver such deeds, assignments and conveyances containing such warranties as the General Partner may determine to be appropriate; (f) To purchase, lease, rent or otherwise acquire or obtain the use of facilities and all other kinds and types of real or personal property that may in anyway be deemed necessary, convenient, or advisable in connection with carrying on the business of the Partnership; (g) To pay any amounts necessary or appropriate to the maintenance or operation of any Partnership property; (h) To make and to enter into such agreements and contracts with such parties and to give such receipts, releases and discharges with respect to any and all of the foregoing and any matters incident thereto as the General Partner may deem advisable or appropriate; (i) To procure and maintain in force such insurance as the General Partner shall deem prudent to serve as protection against liability for loss and damage which may be occasioned by the activities to be engaged in by the Partnership or the General Partner on behalf of the Partnership; (j) To sue and be sued, complain and defend in the name of and on behalf of the Partnership; (k) To quitclaim, surrender, release or abandon any Partnership property, with or without consideration therefor; (l) To execute and deliver all checks, drafts, endorsements and other orders for the payment of Partnership funds; -9- 13 (m) To employ on behalf of the Partnership agents, employees and officers (having such duties and titles and having such authority by delegation from the General Partner as the General Partner shall designate), accountants, attorneys, brokers, consultants and all other professionals, clerical help and such other assistance and services as the General Partner may deem proper and to pay therefor such remuneration as the General Partner may determine to be reasonable and appropriate; (n) To appear and to represent the Partnership before any governmental authority or regulatory agency and to make all necessary or appropriate filings before such authority or agency; and (o) To take such other action, execute and deliver such other documents and perform such other acts as may be deemed by the General Partner to be appropriate to carry out the business and affairs of the Partnership in accordance with this Agreement. Section 5.2. Contracts With Affiliates. The Partnership may enter into contracts and agreements with the General Partner and its Affiliates for the rendering of services, the sale and lease of supplies and equipment, provided that the amount of the compensation, price or rental that can be charged to or by the Partnership therefor must be no less favorable to the Partnership than those available from unrelated third parties in the area engaged in the business of rendering comparable services or selling or leasing comparable properties, equipment and supplies which could reasonably be made available to or by the Partnership. Section 5.3. Tax Elections. The General Partner shall make the following elections on behalf of the Partnership: (a) To elect a fiscal year of the Partnership to be the calendar year; (b) To elect the accrual method of accounting if permitted by applicable law; (c) To elect, in accordance with Sections 195 and 709 of the Internal Revenue Code and applicable regulations and comparable state law provisions, to treat all start-up and organization costs of the Partnership as deferred expenses amortizable over sixty (60) months; and (d) To elect with respect to such other federal, state and local tax matters as shall be deemed to be in the best interests of the Partnership and the Partners. Section 5.4. Tax Returns; Tax Matters Partner. The General Partner shall be the "tax matters partner" of the Partnership and shall prepare and timely file all federal, state and local income and other tax returns and reports as may be required as a result of the business of the Partnership. Section 5.5. Reimbursement of Expenses. All direct and indirect costs and expenses incurred by the General Partner in organizing the Partnership and in managing and conducting the business and -10- 14 affairs of the Partnership, including, without limitation, (i) all costs and expenses incurred in oil and gas exploration, development, operation, production and marketing activities including all costs and expenses incurred in connection with activities in support of or related to directly or indirectly such oil and gas exploration, development, of operation, production and marketing activities, (ii) all other costs and expenses incurred in any business of the Partnership other than oil and gas exploration, development and production, (iii) secretarial, telephone, office rent and other office expenses, (iv) salaries and other compensation expenses of employees, officers and directors, (v) other administrative expenses, (vi) travel expenses, (vii) legal, accounting, geological, engineering and well supervision costs and expenses and (viii) expenses incurred in providing or obtaining such other professional, technical, administrative services and advice as the General Partner may deem necessary or desirable, shall be paid or reimbursed by the Partnership as a Partnership expense. The General Partner shall determine which expenses are allocable to the Partnership in a manner which is fair and reasonable to the General Partner and the Partnership, and if such allocation is made by the General Partner in good faith it shall be conclusive in the absence of manifest error. ARTICLE VI Rights of Limited Partner Section 6.1. Rights of Limited Partner. Each of the Limited Partners shall have the right to: (a) have the Partnership books and records (including, without limitation, those required under the Act) kept at the principal United States office of the Partnership and at all reasonable times to inspect and copy any of them at the sole expense of such Partner; (b) have on demand true and full information of all things affecting the Partnership and a formal account of Partnership affairs whenever circumstances render it just and reasonable; (c) have dissolution and winding up by decree of court as provided for in the Partnership; and (d) exercise all rights of a limited partner under the Partnership (except to the extent otherwise specifically provided herein). Section 6.2. Limitations on Limited Partner. Each of the Limited Partners shall not: (a) be permitted to take part in the business or control of the business or affairs of the Partnership; (b) have any voice in the management or operation of any Partnership property; or (c) have the authority or power to act as agent for or on behalf of the Partnership or any other Partner, to do any act which would be binding on the Partnership or any other Partner, or to incur any expenditures on behalf of or with respect to the Partnership. No Partner shall hold out or represent to any third party that any of the Limited Partners have any such power or right or that the Limited Partners are anything other than a "limited partner" in the Partnership. Section 6.3. Liability of Limited Partner. Each of the Limited Partners shall not be liable for the debts, liabilities, contracts or other obligations of the Partnership except to the extent of any unpaid Capital Contributions agreed to be made by a Limited Partner as set forth in Section 3.1, any additional Capital Contributions hereafter agreed to be made by a Limited Partner in accordance with Section 3.2 and a Limited Partner's share of the assets (including undistributed revenues) of the Partnership; and in all events, a Limited Partner shall be liable and obligated to make payments of its -11- 15 Capital Contributions only as and when such payments are due in accordance with the terms of this Agreement, and a Limited Partner shall not be required to make any loans to the Partnership. The Partnership shall indemnify and hold harmless each of the Limited Partners in the event it (a) becomes liable for any debt, liability, contract or other obligation of the Partnership except to the extent expressly provided in the preceding sentence or (b) is directly or indirectly required to make any payments with respect thereto. Section 6.4. Withdrawal and Return of Capital Contributions. Each of the Limited Partners shall not be entitled to (a) withdraw from the Partnership except upon the assignment by such Limited Partner of all of its interest in the Partnership and the substitution of the Limited Partner's assignee as a Limited Partner of the Partnership in accordance with Section 9.1, or (b) the return of its Capital Contributions except to the extent, if any, that distributions made pursuant to the express terms of this Agreement may be considered as such by law or by unanimous agreement of the Partners, or upon dissolution and liquidation of the Partnership, and then only to the extent expressly provided for in this Agreement and as permitted by law. ARTICLE VII Books, Records and Bank Accounts Section 7.1. Capital Accounts, Books and Records. (a) The General Partner shall keep books of account for the Partnership in accordance with the terms of this Agreement. Such books shall be maintained at the principal office of the Partnership. (b) An individual capital account (a "Capital Account") shall be maintained by the Partnership for each Partner in accordance with the requirements of the applicable Treasury Regulations under Section 704 of the Internal Revenue Code. Section 7.2. Reports. The General Partner shall deliver to the Limited Partners such reports and financial statements as the General Partner shall determine or as the Limited Partners shall reasonably request from time to time. Section 7.3. Bank Accounts. The General Partner shall cause one or more accounts to be maintained in the name of the Partnership in one or more banks which each have capital, surplus and undivided profits of at least $200,000,000, which accounts shall be used for the payment of expenditures incurred by the General Partner in connection with the business of the Partnership and in which shall be deposited any and all receipts of the Partnership. The General Partner may also temporarily invest the cash funds of the Partnership in any manner it determines to be in the best interests of the Partnership and the Partners. All amounts shall be and remain the property of the -12- 16 Partnership and shall be received, held and disbursed by the General Partner for the purposes specified in this Agreement. There shall not be deposited in any of such accounts any funds other than funds belonging to the Partnership, and no other funds shall in any way be commingled with such funds. Section 7.4. Information Relating to the Partnership. Upon request, the General Partner shall supply to the Limited Partners any information requested regarding the Partnership or its activities. During ordinary business hours, the Limited Partners and its authorized agents and representatives shall have reasonable access to all books, records and materials in the Partnership's offices regarding the Partnership or its activities. ARTICLE VIII Dissolution, Liquidation and Termination Section 8.1. Dissolution. The Partnership shall be dissolved upon the occurrence of any of the following: (a) The occurrence of December 31, 2025. (b) The sale, disposition or termination of all of the property then owned by the Partnership. (c) The occurrence of an event of withdrawal from the Partnership by the General Partner as provided for in the Partnership. (d) The consent in writing of the General Partner and all of the Limited Partners. (e) The occurrence of any event which, under the Act, causes the dissolution of a limited partnership. Section 8.2. Liquidation and Termination. Upon dissolution of the Partnership, the General Partner or, if the withdrawal of the General Partner caused the dissolution of the Partnership, a person selected by all of the Limited Partners, shall act as liquidator or shall appoint one or more liquidators who shall have full authority to wind up the affairs of the Partnership and make final distribution as provided herein. The liquidator shall continue to operate the Partnership properties with all of the power and authority of the General Partner. The steps to be accomplished by the liquidator are as follows: (a) As promptly as possible after dissolution and again after final liquidation, the liquidator, if requested by any Partner, shall cause a proper accounting to be made by the Partnership's independent accountants of the Partnership's assets, liabilities and operations through -13- 17 the last day of the month in which the dissolution occurs or the final liquidation is completed, as appropriate. (b) The liquidator shall pay all of the debts and liabilities of the Partnership (including all expenses incurred in liquidation) or otherwise make adequate provision therefor (including without limitation the establishment of a cash escrow fund for contingent liabilities in such amount and for such term as the liquidator may reasonably determine). After making payment or provision for all debts and liabilities of the Partnership, the Partners' Capital Accounts shall then be adjusted by (i) assuming the sale of all remaining assets of the Partnership for cash at their respective fair market values (as determined by an appraiser selected by the liquidator) as of the date of termination of the Partnership and (ii) debiting or crediting each Partner's Capital Account with its respective share of the hypothetical gains or losses resulting from such assumed sales in the same manner as each such Capital Account would be debited or credited for gains or losses on actual sales of such assets. The liquidator shall then by payment of cash or property (valued as of the date of termination of the Partnership at its fair market value by the appraiser selected in the manner provided above) distribute to the Partners such amounts as are required to pay the positive balances of their respective Capital Accounts. Such a distribution shall be in cash or in kind as determined by the liquidator. Any distribution to the Partners in liquidation of the Partnership shall be made by the latter of either the end of the taxable year in which the liquidation occurs or on a date which is not more than ninety (90) days after the date of such liquidation. For purposes of the preceding sentence, the term "liquidation" shall have the same meaning as set forth in Treasury Regulation Section 1.704-1(b)(2)(ii) as in effect at such time. Each Partner shall have the right to designate another person to receive any property which otherwise would be distributed in kind to that Partner pursuant to this Section 8.2. (c) Except as expressly provided herein, the liquidator shall comply with any applicable requirements of the Act and all other applicable laws pertaining to the winding up of the affairs of the Partnership and the final distribution of its assets. (d) Notwithstanding any provision in this Agreement to the contrary, no Partner shall be obligated to restore a deficit balance in its Capital Account at any time. The distribution of cash and/or property to the Partners in accordance with the provisions of this Section 8.2 shall constitute a complete return to the Partners of their Capital Contributions and a complete distribution to the Partners of their interest in the Partnership and all Partnership property. Section 8.3. Reconstitution. Notwithstanding the foregoing or any other provision of this Agreement, upon the occurrence of an event of dissolution described in Section 8.1, the Partners may unanimously consent to the reconstitution of the Partnership, and the business of the Partnership shall be continued without being wound up as provided for in the Act. -14- 18 ARTICLE IX Assignments of Interests Section 9.1. Assignment by Partners. (a) No Partner's interest in the Partnership shall be assigned, mortgaged, pledged, subjected to a security interest or otherwise encumbered, in whole or in part, without the prior written consent of all of the other Partners, and any attempt by a Partner to assign its interest without such consent shall be void ab initio. (b) Unless an assignee becomes a substituted Partner in accordance with the provisions set forth below, such assignee shall not be entitled to any of the rights granted to a Partner hereunder, other than the right to receive allocations of income, gain, loss, deduction, credit and similar items and distributions to which the assignor would otherwise be entitled, to the extent such items are assigned. (c) An assignee of the interest of a Partner, or any portion thereof, shall become a substituted Partner entitled to all of the rights of a Partner if, and only if (i) the assignor gives the assignee such right, (ii) the Partners consent to such substitution, the granting or denying of which shall be in each Partner's sole discretion, and (iii) the assignee executes and delivers such instruments, in form and substance satisfactory to the General Partner, as the General Partner may deem necessary or desirable to effect such substitution and to confirm the agreement of the assignee to be bound by all of the terms and provisions of this Agreement. Upon the satisfaction of such requirements, the General Partner shall concurrently (or as of such later date as shall be provided for in any applicable written instruments furnished to the General Partner) admit any such assignee as a substituted Partner of the Partnership and reflect such admission and the date thereof in the records of the Partnership. (d) The Partnership and the General Partner shall be entitled to treat the record owner of any Partnership interest as the absolute owner thereof in all respects and shall incur no liability for distributions of cash or other property made in good faith to such owner until such time as a written assignment of such interest that complies with the terms of this Agreement has been received by the General Partner. -15- 19 ARTICLE X Miscellaneous Section 10.1. Notices. All notices, elections, demands or other communications required or permitted to be made or given pursuant to this Agreement shall be in writing and shall be considered as properly given or made if given by (a) personal delivery, (b) prepaid telegram, telex or facsimile (provided that such telegram, telex or facsimile is confirmed by expedited delivery service), or (c) expedited delivery service with proof of delivery, addressed to the respective addressee(s) specified in Section 1.5. Any Partner may change its address by giving notice in writing to the other Partners of its new address. Section 10.2. Amendment. This Agreement may be changed, modified or amended only by an instrument in writing agreed upon by the General Partner and the Limited Partner. Section 10.3. Partition. Each of the Partners hereby irrevocably waives for the term of the Partnership any right that such Partner may have to maintain any action for partition with respect to the Partnership property. Section 10.4. Entire Agreement. This Agreement constitutes the full and complete agreement of the parties hereto with respect to the subject matter hereof. Section 10.5. Severability. Every provision in this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement. Section 10.6. No Waiver. The failure of any Partner to insist upon strict performance of a covenant hereunder or of any obligation hereunder, irrespective of the length of time for which such failure continues, shall not be a waiver of such Partner's right to demand strict compliance in the future. No consent or waiver, express or implied, to or of any breach or default in the performance of any obligation hereunder shall constitute a consent or waiver to or of any other breach or default in the performance of the same or any other obligation hereunder. Section 10.7. Applicable Law. This Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted, construed and enforced in accordance with the laws of the State of Delaware. Section 10.8. Meetings of the Partners. The General Partner may hold meetings with the Limited Partners from time to time to inform and consult with the Limited Partners concerning such matters as the General Partner deems appropriate. Such meetings may be held by conference telephone and shall be held at such times and places, as often and in such manner as shall be determined by the General Partner. The General Partner shall give notice of the time, place and topic of each such meeting at least ten business days prior thereto. Notwithstanding the foregoing -16- 20 provisions of this Section 10.8, the Limited Partners shall not be permitted to take part in the business or control of the business of the Partnership; it being the intention of the parties that the involvement of the Limited Partners as contemplated in this Section 10.8 is for the purpose of informing the Limited Partners with respect to various Partnership matters, explaining any information furnished to the Limited Partners in connection therewith, answering any question the Limited Partners may have with respect thereto and receiving any ideas or suggestions the Limited Partners may have with respect thereto; it being the further intention of the parties that the General Partner shall have full and exclusive power and authority on behalf of the Partnership to manage, control, administer and operate the property, business and affairs of the Partnership in accordance with this Agreement. Section 10.9. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that no Partner may sell, assign, transfer or otherwise dispose of all or any part of its rights or interest in the Partnership or under this Agreement except in accordance with Article IX. Section 10.10. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which shall constitute but one and the same document. -17- 21 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SHARING RATIO: GENERAL PARTNER: 1% BRIGHAM, INC. By: /s/ Ben M. Brigham ----------------------------------- Ben M. Brigham, President LIMITED PARTNERS: 68.5% BRIGHAM HOLDINGS I, LLC By: /s/ Ben M. Brigham ----------------------------------- Ben M. Brigham, President 30.5% BRIGHAM HOLDINGS II, LLC By /s/ Ben M. Brigham -------------------------------- Ben M. Brigham, President -18- EX-10.36.1 4 1ST AMENDMENT TO CREDIT AGREEMENT DATED 8/20/98 1 EXHIBIT 10.36.1 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") dated as of August 20, 1998 is among: BRIGHAM OIL & GAS, L.P., a Delaware limited partnership (the "Borrower"); each of the Lenders (as defined in the Credit Agreement as hereinafter defined); and BANK OF MONTREAL, a Canadian bank (in its individual capacity, "BMO"), as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"). R E C I T A L S A. The Borrower, the Agents, and the Lenders have entered into that certain Credit Agreement dated as of January 26, 1998 (the "Credit Agreement"), pursuant to which the Lenders have agreed to make certain loans and extensions of credit to the Borrower upon the terms and conditions as provided therein; and B. The Borrower, the Agents, and the Lenders now desire to make certain amendments to the Credit Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration and the mutual benefits, covenants and agreements herein expressed, the parties hereto now agree as follows: Section 1. Certain Definitions. Unless otherwise defined herein, all terms beginning with a capital letter which are defined in the Credit Agreement shall have the same meanings herein as therein unless the context hereof otherwise requires. Section 2. Amendments to Credit Agreement. (a) Additional Defined Terms. Section 1.02 of the Credit Agreement is hereby amended and supplemented by adding the following new definitions, which are read in their entirety as follows: "First Amendment" shall mean that certain First Amendment to Credit Agreement dated as of August 20, 1998 among the Borrower, the Lenders and the Agent. "Indenture" shall mean that certain Indenture dated as of August 20, 1998 between Brigham Exploration, as the issuer of the Subordinated Debt, and Chase Bank of Texas, National Association, as the trustee. 2 "Securities Purchase Agreement" shall mean that certain Securities Purchase Agreement dated August 20, 1998 among Brigham Exploration, Enron Capital & Trade Resources Corp., and Joint Energy Development Investments II Limited Partnership, as agent for such purchasers regarding the Subordinated Debt. "Subordinated Debt" shall mean the Debt in the principal amount not to exceed $40,000,000 (plus up to an additional $10,000,000 for interest paid in kind pursuant to Section 9.02 of the Indenture) of Brigham Exploration incurred under the Indenture and expressly subordinated to the Indebtedness pursuant to the Subordination Agreement. "Subordination Agreement" shall mean that certain Intercreditor and Subordination Agreement dated as of August 20, 1998, and from time to time amended, among Enron Capital & Trade Resources Corp., Joint Energy Development Investments 11 Limited Partnership, and Bank of Montreal. (b) Section 2.03. Section 2.03 (a) is hereby deleted in its entirety, and the following is substituted therefor: "(a) The Aggregate Commitments shall at all times be equal to $65,000,000 until January 31, 1999 after which date it shall be equal to the lesser of (i) the Aggregate Maximum Credit Amounts after adjustments resulting from reductions pursuant to Section 2.03(b) hereof or (ii) the Borrowing Base as determined from time to time." (c) Section 2.07. Section 2.07(c) of the Credit Agreement is hereby deleted in its entirety, and the following is substituted therefor: "(c) Upon any redeterinination of the amount of the Borrowing Base in accordance with Section 2.08, if the redetermined Borrowing Base is less than the aggregate outstanding principal amount of the Loans plus the LC Exposure, then the Borrower shall within ninety (90) days (or such shorter period as hereinafter provided) of receipt of written notice thereof. (i) prepay the Loans in an aggregate principal amount equal to such excess, together with interest on the principal amount paid accrued to the date of such prepayment, provided however, that upon the first Borrowing Base determination such required prepayment shall be made on or before 30 days after such first Borrowing Base determination if such deficiency is ten percent (10%) or more of the Borrowing Base and (ii) if a Borrowing Base deficiency remains after prepaying all of the Loans because of LC Exposure, the Borrower shall pay to the Agent on behalf of the Lenders an amount equal to such Borrowing Base deficiency to be held as cash collateral as provided in Section 2.10(b) hereof." -2- 3 (d) Section 7.21. Section 7.21 of the Credit Agreement is hereby deleted in its entirety, and the following is substituted therefor: "Restriction on Liens. Neither the Borrower nor any Subsidiary is a party to or subject to any agreement or arrangement (other than the Loan Documents, the documents described in Section 4.01 (a) through (d) of the Indenture, the Indenture, and any other documents permitted under Section 9.02(f)), or subject to any order, judgment, writ or decree, which either restricts or purports to restrict its ability to grant Liens to other Persons on or in respect of their respective assets or Properties." (e) Section 9.01. Section 9.01 of the Credit Agreement is hereby amended by adding the following new clause (i): "(i) Guarantees of the Borrower and its Subsidiaries which have executed prior and senior guarantees of the Indebtedness in form and substance satisfactory to the Agent, of the Subordinated Debt, which Guarantees are subordinated and otherwise in form and substance satisfactory to the Agent consistent with the Subordination Agreement." (f) Section 9.02. Section 9.02 of the Credit Agreement is hereby amended by adding the following new clause (f): "(f) Liens securing the Subordinated Debt or Guarantees permitted under Section 9.01(i) on Properties upon which prior Liens have been granted to secure the Indebtedness pursuant to documents in form and substance satisfactory to the Agent, provided such Liens (i) are subordinated and are otherwise in form. and substance satisfactory to the Agent consistent with the Subordination Agreement and (ii) do not directly or indirectly secure any Hedging Agreements." (g) Section 9.03. Section 9.03(j)(a) of the Credit Agreement is hereby deleted in its entirety and the following is substituted therefor: "(a) to Brigham Exploration, Brigham, Inc., Brigham Holdings I, LLC and/or Brigham Holdings II, LLC (i) to pay Federal or State taxes owing by any of them, payroll and payroll related taxes and other reasonable general and administrative expenses, or consisting of forgiveness of indebtedness, and (ii) so long as no Borrowing Base deficiency exists or will be created thereby, no Event of Default or, with respect to Section 5.2(q), (r), (s) or (u) of the Guaranty Agreement of Brigham Exploration, Default, is in existence or will be created thereby, to enable Brigham Exploration to pay accrued and unpaid interest owing on the "Notes" (as defined in the Indenture)." -3- 4 (h) Section 9.17. Section 9.17 of the Credit Agreement is hereby deleted in its entirety, and the following is substituted therefor: "Section 9.17 Negative Pledge Agreements. The Borrower will not and will not permit any Subsidiary to create, incur, assume or suffer to exist any contract, agreement or understanding (other than the Loan Documents) which in any way prohibits or restricts (i) the granting, conveying, creation or imposition of any Lien on any of its Property (other than the Indenture, the documents described in Section 4.01(a) through (d) of the Indenture, and any other documents permitted under Section 9.02 (f)) or (ii) any Subsidiary from paying dividends or making any other distribution to the Borrower or which requires the consent of or notice to other Persons in connection with any of the foregoing." (i) Article IX. Article IX is hereby supplemented by adding the following new section: "Section 9.19 Borrower as Operator. The Borrower will not and will not permit any of the Subsidiaries to voluntarily resign as operator of more than twenty-five percent (25%) of their currently operated Oil and Gas Properties unless the new operator is acceptable to the Majority Lenders." (j) Section 10.02 Section 10.02(a) of the Credit Agreement is hereby deleted in its entirety, and the following is substituted therefor: "(a) At any time during the continuance of an Event of Default other than one referred to in clauses (f), (g) or (h) of Section 10.01 or in clause (m) to the extent it relates to clauses (f), (g) or (h), the Agent, upon request of the Majority Lenders, shall, by notice to the Borrower, cancel the Commitments and/or declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Borrower hereunder and under the Notes (including without limitation the payment of cash collateral to secure the LC Exposure as provided in Section 2.10(b) hereof) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other formalities of any kind, all of which are hereby expressly waived by the Borrower. Once an acceleration has been declared pursuant to the foregoing, no subsequent cure of the Event of Default shall negate such acceleration or the rights and remedies of the Agent and the Lenders with respect thereto without the express written consent of all of the Lenders." -4- 5 Section 3. Conditions Precedent. This Amendment shall become binding upon the receipt by the Agent of the following documents and satisfaction of the other conditions provided in this Section 3, each of which must be satisfactory to the Agent in form and substance: (a) counterparts of this Amendment executed by the Borrower and the Lenders; (b) certificates of the Secretary or an Assistant Secretary of the Borrower and of the Guarantor setting forth for each of them (i) the resolutions of its board of directors with respect to the authorization to execute, deliver and perform this Amendment; (ii) the officer of such entity authorized to sign this Amendment, and (iii) the signature of such authorized officer of such entity; (c) evidence of the closing and concurrent funding of the Subordinated Debt pursuant to the Indenture and the equity issuance pursuant to the Securities Purchase Agreement; (d) a copy of the Securities Purchase Agreement and the Indenture and all documents executed with respect to the Subordinated Debt all in form and substance acceptable to the Lenders; and (e) A security agreement executed by Brigham Exploration in favor of the Agent granting a first-priority security interest in all of Brigham Exploration's right, title and interest to the ownership interests of Brigham Holdings I, LLC; (f) A security agreement executed by Brigham Inc. in favor of the Agent granting a first-priority security interest in all of Brigham Inc.'s right, title and interest in and to the ownership interests of Brigham Holdings II, LLC and the Borrower; (g) such other documents as Agent or its counsel may reasonably request. Upon performance of such conditions satisfactory to the Agent, the Agent shall be deemed to have consented, on behalf of the Lenders, to the matters described in the preceding subsections (c), (d), (e) and (f). Section 4. Representations and Warranties. The Borrower hereby reaffirms that as of the effective date of this Amendment, the representations and warranties made by the Borrower in the Credit Agreement will be true and correct as though made on and as of the effective date of this Amendment, and further, the Borrower represents that no Default or Material Adverse Effect shall have occurred and be continuing on such date. Section 5. Limitations. The amendments set forth herein are limited precisely as written and shall not be deemed to (a) be a consent to, or waiver or modification of, any other term or -5- 6 condition of the Credit Agreement or any of the other Loan Documents, or (b) prejudice any right or rights which the Lenders may now have or may have in the future under or in connection with the Credit Agreement or any of the other Loan Documents. Except as expressly supplemented, amended or modified hereby, the terms and provisions of the Credit Agreement or any other Loan Documents are and shall remain in full force and effect. In the event of a conflict between this Amendment and any of the foregoing documents, the terms of this Amendment shall be controlling. Section 6. Governing Law. This Amendment and the rights and obligations of the parties hereunder and under the Credit Agreement shall be construed in accordance with and be governed by the laws of the State of Texas and the United States of America. Section 7. Descriptive Headings. etc. The descriptive headings of the several Sections of this Amendment are inserted for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 8. Counterparts. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts and all of such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above. NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SECTION 26.02 THIS AMENDMENT AND OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENT BETWEEN THE PARTIES. -6- 7 BORROWER: BRIGHAM OIL & GAS, L.P. By: Brigham, Inc., its General Partner By: /s/ Craig M. Fleming ------------------------------- Craig M. Fleming Vice President & Chief Financial Officer LENDER AND AGENT: BANK OF MONTREAL By: /s/ Robert Roberts --------------------------------- Name: Robert L. Roberts Title: Director, U.S. Corporate Banking -7- EX-10.37.2 5 2ND AMENDMENT TO GUARANTY AGREEMENT 1 EXHIBIT 10.37.2 SECOND AMENDMENT TO GUARANTY AGREEMENT THIS SECOND AMENDMENT TO GUARANTY AGREEMENT (this "Amendment") dated as of August 20,1998 is between BRIGHAM EXPLORATION COMPANY, a Delaware corporation (the "Guarantor") and BANK OF MONTREAL, as agent ("Agent") for the lenders (the "Lenders") that are or become parties to the Credit Agreement defined below. RECITALS A. Brigham Oil & Gas, L.P., a Delaware limited partnership (the "Borrower"), the Agent and the Lenders previously entered into that certain Credit Agreement dated as of January 26, 1998 as amended by First Amendment to Credit Agreement of even date herewith (as amended, the "Credit Agreement"), pursuant to which the Lenders agreed to make certain loans and extensions of credit to the Borrower. B. Pursuant to the terns and conditions stated in the Credit Agreement, Guarantor executed that certain Guaranty Agreement of even date therewith by Guarantor, as amended by First Amendment to Guaranty Agreement dated as of March 30, 1998 (such Guaranty Agreement as amended called the "Guaranty Agreement"). C. Guarantor and the Agent now desire to amend certain provisions of the Guaranty Agreement. NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained, the Guarantor, the Agent and the Lenders hereby agree that the Guaranty Agreement shall be amended as follows: Section 1. Certain Definitions. As used in this Amendment, the terms "Agent", "Amendment", "Borrower", "Credit Agreement", "Guarantor" and "Lenders" shall have the meanings indicated above; and unless otherwise defined herein, all terms beginning with a capital letter which are defined in the Guaranty Agreement shall have the same meanings herein as therein unless the context hereof otherwise requires. Section 2. Amendments to Guaranty Agreement. (a) Additional Defined Terms. Section 1.02 of the Guaranty Agreement is hereby amended and supplemented by adding the following new definitions, which are read in their entirety as follows: 2 "Indenture" shall mean that certain Indenture dated as of August 20, 1998, between the Guarantor, as issuer of the Subordinated Debt, and Chase Bank of Texas, National Association, as trustee. "Securities Purchase Agreement" shall mean that certain Securities Purchase Agreement dated as of August 20, 1998 among the Guarantor, Enron Capital & Trade Resources Corp., and Joint Energy Development Investments II Limited Partnership regarding $50,000,000 Senior Subordinated Secured Notes due 2003. "Subordination Agreement" shall mean that certain Intercreditor and Subordination Agreement dated August 20, 1998, as from time to time amended, among Enron Capital and Trade Resources Corp., Joint Energy Development Investments II Limited Partnership, and Bank of Montreal. "Subordinated Debt" shall mean the Debt in the principal amount not to exceed $40,000,000 (plus up to an additional $10,000,000 for interest paid in kind pursuant to Section 9.02 of the Indenture) of Guarantor incurred under the Indenture and expressly subordinated to the Indebtedness pursuant to the Subordination Agreement. "Subordinated Guarantees" shall mean the Guarantees permitted under Section 5.2(a)(7). (b) Section 3.1(m) is hereby amended by adding the following phrase at the end thereof. ", except for liens and security interests securing the Liabilities or as permitted under Section 5.2(b)(4)." (c) Section 5.2. Section 5.2 is hereby amended as follows: (i) Section 5.2(a) is amended by adding the following new clauses (6) and (7): "(6) the Subordinated Debt." "(7) Guarantees by Subsidiaries of the Guarantor (which also are obligated upon or otherwise guarantee the Liabilities pursuant to documents in form and substance satisfactory to the Agent) which guarantee the Subordinated Debt permitted under Section 5.2(a)(6) above, which Guarantees are subordinated consistent with the Subordination Agreement and otherwise are in form and substance satisfactory to the Agent consistent with the Subordination Agreement." (ii) Section 5.2(b) is amended by adding the following new clause (4): "(4) Liens securing the Subordinated Debt or the Subordinated Guarantees on Properties upon which prior Liens have been granted to secure the Liabilities pursuant to documents in form and substance satisfactory to the Agent, provided that such Liens (i) are subordinated and otherwise are in form and substance satisfactory to the Agent consistent with -2- 3 the Subordination Agreement and (ii) do not directly or indirectly secure any Hedging Agreements." (iii) Section 5.2(o) is hereby amended by deleting the parenthetical clause in the third line and inserting the following in lieu thereof: "(other than the Loan Documents, the Indenture and the documents described in Section 4.01(a) through (d) of the Indenture, and any other documents establishing Liens permitted under Section 5.2(b)(4))" (iv) Section 5.2(s) is hereby deleted in its entirety, and the following is substituted therefor: "(s) Interest Coverage Ratio. The Guarantor will not permit its Interest Coverage Ratio as of the end of any fiscal quarter of the Guarantor (calculated quarterly at the end of each fiscal quarter) to be less than the following ratios during the following periods. Interest Coverage Ratio shall mean the ratio of (i) EBITDA to (ii) interest payments accruing (excluding amortizations of fee expense incurred in connection with this Agreement and the closing of the Indenture and Securities Purchase Agreement and any capitalized lease expense included in interest) during the following periods (for purposes hereof interest on the Subordinated Debt shall be deemed cash payments, calculated at the cash interest rate applicable to the Subordinated Debt, whether paid in cash or in kind, except that if a payment of interest is made in kind on any interest payment date applicable to the Subordinated Debt, an amount equal to the cash payment of interest that would have been due on such interest payment date if payment in kind had not been made shall be deemed subtracted from interest expense for the applicable test period ending on the last day of the fiscal quarter preceding such interest payment date (but not for any other test period): (i) not less than 1.25 to 1 for the three (3) month period ending December 31, 1998; (ii) not less than 1.75 to I for the six (6) month period ending March 31, 1999; (iii) not less than 2 to 1 for the nine (9) month period ending June 30, 1999; (iv) not less than 2.25 to 1 for the twelve (12) month period ending September 30, 1999; (v) not less than 2.75 to I for the twelve (12) month period ending December 31, 1999; and -3- 4 (vi) thereafter, not less than 3 to 1 for the twelve (12) month periods ending at the end of each fiscal quarter of the Guarantor." (v) Section 5.2 is amended by adding the following new clauses (t) and (u): "(t) Securities Purchase Agreement and Indenture. The Guarantor will not agree to any amendment or modification to the Securities Purchase Agreement or the Indenture without the express written consent of the Agent." "(u) Payments on Subordinated Debt. No prepayments of principal will be made on the Subordinated Debt without prior written consent of the Lenders. No payments of interest will be made in cash on the Subordinated Debt if (i) an Event of Default or, with respect to Section 5.2(q), (r) or (s), Default, is in existence or would be created thereby; (ii) a Borrowing Base deficiency is in existence under the Credit Agreement; (iii) such payment will be in contravention of the Subordination Agreement or (iv) the Interest Coverage Ratio is less than the following ratios during the following periods: (i) 1.5 to 1 for the twelve (12) month period ending December 31, 1998; (ii) 1.75 to 1 for the twelve (12) month periods ending March 31, 1999 and June 30, 1999; (iii) 2.5 to 1 for the twelve (12) month period ending September 30, 1999; (iv) 2.75 to 1 for the twelve month period ending December 30, 1999; and (v) thereafter, 3 to 1 for the twelve (12) month periods ending at the end of each fiscal quarter of the Guarantor." Section 4. Representations and Warranties. Guarantor hereby reaffirms that as of the effective date of this Amendment, the representations and warranties made by the Guarantor in Article III of the Guaranty Agreement will be true and correct as though made on and as of the effective date of this Amendment. Section 5. Ratification. Guarantor hereby expressly ratifies and affirms its obligations under the Guaranty Agreement as amended by this Amendment and agrees that the Guaranty Agreement as amended by this Amendment remains in full force and effect. -4- 5 Section 6. Governing Law. This Amendment and the rights and obligations of the parties hereunder and under the Credit Agreement shall be construed in accordance with and be governed by the laws of the State of Texas and the United States of America. Section 7. Descriptive Headings. etc. The descriptive headings of the several Sections of this Amendment are inserted for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 8. Counterparts. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts and all of such counterparts shall together constitute one and the same instrument. -5- 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered and effective as of the date first above written. NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SECTION 26.02 THIS AMENDMENT AND OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NOT UNWRITTEN ORAL AGREEMENT BETWEEN THE PARTIES. GUARANTOR: BRIGHAM EXPLORATION COMPANY By: /s/ Craig M. Fleming ------------------------------------------- Name: Craig M. Fleming Title: Vice President & Chief Financial Officer AGENT AND LENDER: BANK OF MONTREAL By: /s/ Robert Roberts ------------------------------------------- Name: Robert L. Roberts Title: Director, U.S. Corporate Banking -6- EX-10.38 6 SECURITIES PURCHASE AGREEMENT - AUGUST 20, 1998 1 EXHIBIT 10.38 =============================================================================== SECURITIES PURCHASE AGREEMENT BETWEEN BRIGHAM EXPLORATION COMPANY AND ENRON CAPITAL & TRADE RESOURCES CORP. AND JOINT ENERGY DEVELOPMENT INVESTMENTS II LIMITED PARTNERSHIP DATED AS OF AUGUST 20, 1998 $50,000,000 SENIOR SUBORDINATED SECURED NOTES DUE 2003, Warrants to Purchase 1,000,000 Shares of Common Stock; AND ACQUISITION OF 1,052,632 SHARES OF COMMON STOCK =============================================================================== 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS.......................................................... 1 Section 1.01 Definitions.......................................... 1 Section 1.02 Accounting Procedures and Interpretation............. 10 ARTICLE II ISSUANCE OF SECURITIES; RIGHTS OF PURCHASERS......................... 10 Section 2.01 Issuance of Securities............................... 10 Section 2.02 The Closing; Funding Date............................ 11 Section 2.03 Delivery............................................. 11 Section 2.04 Payment.............................................. 11 Section 2.05 Tax Matters.......................................... 11 Section 2.06 Rights of Purchasers................................. 12 ARTICLE III SECURITY FOR THE OBLIGATIONS......................................... 12 Section 3.01 Security............................................. 12 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SELLER......................... 12 Section 4.01 Corporate Existence.................................. 12 Section 4.02 Financial Condition.................................. 13 Section 4.03 Litigation........................................... 13 Section 4.04 No Breach............................................ 13 Section 4.05 Authority............................................ 14 Section 4.06 Approvals............................................ 14 Section 4.07 Use of Loans......................................... 14 Section 4.08 ERISA................................................ 14 Section 4.09 Taxes................................................ 15 Section 4.10 Titles, etc.......................................... 15 Section 4.11 No Material Misstatements............................ 16 Section 4.12 Investment Company Act............................... 17 Section 4.13 Public Utility Holding Company Act................... 17 Section 4.14 Subsidiaries......................................... 17 Section 4.15 Location of Business and Offices..................... 17 Section 4.16 Defaults............................................. 17 Section 4.17 Environmental Matters................................ 17 Section 4.18 Compliance with the Law.............................. 18 Section 4.19 Insurance............................................ 19 Section 4.20 Hedging Agreements................................... 19 Section 4.21 Restriction on Liens................................. 20
-i- 3 Section 4.22 Material Agreements.................................. 20 Section 4.23 Gas Imbalances....................................... 20 Section 4.24 Capitalization....................................... 20 Section 4.25 Acquired Shares...................................... 20 Section 4.26 Warrant Shares....................................... 21 Section 4.27 No Restrictions...................................... 21 Section 4.28 Certain Fees......................................... 21 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS..................... 21 Section 5.01 Investment........................................... 21 Section 5.02 Nature of Purchasers................................. 22 Section 5.03 Receipt of Information; Authorization................ 22 ARTICLE VI CONDITIONS PRECEDENT TO FUNDING...................................... 22 Section 6.01 Conditions Precedent to Obligations of the Purchasers 22 Section 6.02 Conditions Precedent to Obligations of the Seller.... 25 Section 6.03 Conditions Precedent to the Obligations of Purchasers and Seller................................ 26 ARTICLE VII AFFIRMATIVE COVENANTS................................................ 26 Section 7.01 Warrants............................................. 26 Section 7.02 Hart-Scott -Rodino Compliance........................ 26 Section 7.03 Board Representation................................. 27 Section 7.04 Common Stock; Dividends; Voting Rights............... 27 ARTICLE VIII [OMITTED BY THE PARTIES HERETO]...................................... 27 ARTICLE IX [OMITTED BY THE PARTIES HERETO]...................................... 27 ARTICLE X [OMITTED BY THE PARTIES HERETO]...................................... 27 ARTICLE XI [OMITTED BY THE PARTIES HERETO]...................................... 27 ARTICLE XII MISCELLANEOUS........................................................ 28 Section 12.01 INTERPRETATION AND SURVIVAL OF PROVISIONS............ 28 Section 12.02 COSTS, EXPENSES AND TAXES............................ 28 Section 12.03 NO WAIVER; MODIFICATIONS IN WRITING.................. 30
-ii- 4 Section 12.04 BINDING EFFECT; ASSIGNMENT........................... 30 Section 12.05 REPLACEMENT SECURITIES............................... 30 Section 12.06 COMMUNICATIONS....................................... 31 Section 12.07 GOVERNING LAW........................................ 31 Section 12.08 ARBITRATION.......................................... 31 Section 12.09 EXECUTION IN COUNTERPARTS............................ 32 Exhibits: Exhibit A - Form of Warrants Schedules: Schedule 4.02 - Liabilities Schedule 4.03 - Litigation Schedule 4.09 - Taxes Schedule 4.10 - Titles, Etc. Schedule 4.14 - Subsidiaries and Addresses Schedule 4.19 - Insurance Schedule 4.20 - Hedging Agreements Schedule 4.22 - Material Agreements Schedule 4.23 - Gas Imbalances Schedule 4.24 - Voting Agreements; Registration Rights
-iii- 5 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT, dated as of August 20, 1998 (this "Agreement"), among BRIGHAM EXPLORATION COMPANY, a Delaware corporation, ENRON CAPITAL & TRADE RESOURCES CORP., a Delaware corporation ("ECT") and JOINT ENERGY DEVELOPMENT INVESTMENTS II LIMITED PARTNERSHIP, a Delaware limited partnership ("JEDI-II"). In consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS Section 1.01 DEFINITIONS. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Acquired Shares" means 1,052,632 shares of Common Stock acquired by the Purchasers on the Funding Date in accordance with Section 2.01 and any additional shares of Common Stock of the Seller issued to the Purchasers after the Funding Date in accordance with Section 2.01(ii). "Affiliate" of any Person shall mean (i) any Person directly or indirectly controlled by, controlling or under common control with such first Person, (ii) any director or officer of such first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. For purposes of this definition, any Person which is the sole general partner of a limited partnership, or which owns directly or indirectly 20% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 20% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to "control" (including, with its correlative meanings, "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") such corporation or other Person. "Agent" is defined in the Indenture. "Average Share Price" means $9.50. "Basic Documents" means, collectively, this Agreement, the other Loan Documents, the Structuring Fee Agreement and the Equity Documents. "Board of Directors" means the Board of Directors of the Seller. "BOG" means Brigham Oil & Gas, L.P., a Delaware limited partnership. -1- 6 "Business Day" means any day other than a Saturday, Sunday, or a legal holiday for commercial banks in Houston, Texas, or New York, New York. "Business Opportunities Agreement" means the Corporate Opportunities Shareholders' Agreement dated as of even date herewith between the Purchasers and the Seller. "Capital Stock" of any Person means any and all shares, interests, participations, or other equivalents (however designated) of, or rights, warrants, or options to purchase, corporate stock, partnership interests, or any other equity interest (however designated) of or in such Person. "Closing" has the meaning provided therefor in Section 2.02. "Closing Date" means the date upon which the Closing occurs as provided in Section 2.02. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute. "Collateral" is defined in the Indenture. "Collateral Documents" is defined in the Indenture. "Commission" means the United States Securities and Exchange Commission. "Common Stock" means the common stock, par value $0.01 per share, of the Seller or such other class of securities as shall, after the date of this Agreement, constitute the common equity of the Seller. "Consolidated Subsidiaries" shall mean each Subsidiary of the Seller (whether now existing or hereafter created or acquired) the financial statements of which shall be (or should have been) consolidated with the financial statements of the Seller in accordance with GAAP. "Debt" means, for any Person the sum of the following (without duplication): (i) all obligations of such Person for borrowed money or evidenced by bonds, debentures, notes or other similar instruments (including principal and past due issuance fees); (ii) all obligations of such Person (whether contingent or otherwise) in respect of bankers' acceptances, letters of credit, surety or other bonds and similar instruments; (iii) all obligations of such Person to pay the deferred purchase price of Property or services (other than for borrowed money) excluding Trade Payables; (iv) all obligations under leases which shall have been, or should have been, in accordance with GAAP, recorded as capital leases in respect of which such Person is liable (whether contingent or otherwise); (v) all obligations under leases (other than capital leases and oil and gas leases) which require such Person or its Affiliate to make payments exceeding $100,000 (or $500,000 in the aggregate) over the term of such lease, including payments at termination, which are substantially equal to at least eighty percent (80%) of the purchase price of the Property subject to such lease plus interest at an imputed rate of interest; (vi) all Debt (as described in the other clauses of this definition) of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person; (vii) all Debt (as described in the other clauses of this -2- 7 definition) of others guaranteed by such Person or in which such Person otherwise assures a creditor against loss of the Debt of others; (viii) all obligations or undertakings of such Person to maintain or cause to be maintained the financial position or covenants of others including without limitation agreements expressed as an agreement to purchase the Debt or Property of others or otherwise; (ix) obligations to deliver Hydrocarbons in consideration of advance payments; (x) obligations to pay for goods or services whether or not such goods or services are actually received or utilized by such Person; (xi) any capital stock of such Person in which such Person has a mandatory obligation to redeem such stock; (xii) any Debt of a Special Entity for which such Person is liable either by agreement or because of a Governmental Requirement; (xiii) the undischarged balance of any production payment created by such Person or for the creation of which such Person directly or indirectly received payment; and (xiv) all obligations of such Person under Hedging Agreements, provided that "Debt" shall not include (a) interest and fees (other than past due issuance fees) on any of the foregoing, (b) obligations associated with bid, performance, surety or appeal bonds (including those required by Governmental Requirements in connection with Oil and Gas Properties), (c) gas balancing obligations (whether volumetric or dollar denominated), (d) intercompany obligations among the Seller and its Consolidated Subsidiaries, (e) indemnity obligations which have not matured into fixed liabilities, and (f) purchase price adjustments and similar post-closing obligations (but excluding the deferred payment of any purchase price) incurred in connection with the permitted purchase and sale of Property or stock, and which is to be determined and payable no later than 180 days following the closing of such purchase and sale. "Designee" shall have the meaning set forth in Section 7.03. "Effective Date" means the date this Agreement is executed by all the parties hereto. "Employee Plan" means any employee benefit plan, program or policy with respect to which the Seller or any ERISA Affiliate may have any liability or any obligation to contribute, other than a Plan or a Multiemployer Plan. "Environmental Laws" means any and all Governmental Requirements pertaining to the environment in effect in any and all jurisdictions in which the Seller or any Subsidiary is conducting or at any time has conducted business, or where any Property of the Seller or any Subsidiary is located, including, without limitation, the Oil Pollution Act of 1990 ("OPA"), as amended, the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and other environmental conservation or protection laws. As used in the provisions hereof relating to Environmental Laws, the term "oil" has the meaning specified in OPA; the terms "hazardous substance" and "release" (or "threatened release") have the meanings specified in CERCLA, and the terms "solid waste" and -3- 8 "disposal" (or "disposed") have the meanings specified in RCRA; provided, however, that (i) in the event either OPA, CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment, and (ii) to the extent the laws of the state in which any Property of the Seller or any Subsidiary is located establish a meaning for "oil," "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either OPA, CERCLA or RCRA, such broader meaning shall apply. "Equity Documents" means the Warrants, the stock certificates representing the Acquired Shares, the Registration Rights Agreement and the Business Opportunities Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Seller or any Subsidiary of the Seller would be deemed to be a "single employer" within the meaning of Section 4001(b)(1) of ERISA or subsections (b), (c), (m) or (o) of section 414 of the Code. "Excepted Liens" means (i) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (ii) Liens in connection with workman's compensation, unemployment insurance or other social security, old age pension or public liability obligations not yet due or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (iii) operators', vendors', carriers', warehousemen's, repairmen's, mechanics', workmen's, materialmen's, construction or other like Liens arising by operation of law in the ordinary course of business or incident to the exploration, development, operation and maintenance of Oil and Gas Properties or customary landlord's liens, each of which is in respect of obligations that have not been outstanding more than 90 days or which are being contested in good faith by appropriate proceedings and for which adequate reserves have been maintained in accordance with GAAP; (iv) any Liens reserved in leases or farmout agreements for rent or royalties and for compliance with the terms of the farmout agreements or leases in the case of leasehold estates, to the extent that any such Lien referred to in this clause does not materially impair the use of the Property covered by such Lien for the purposes for which such Property is held or materially impair the value of the Property subject thereto; (v) encumbrances (other than to secure the payment of borrowed money or the deferred purchase price of Property or services), easements, restrictions, servitudes, permits, conditions, covenants, exceptions or reservations in any rights of way or other Property for the purpose of roads, pipelines, transmission lines, transportation lines, distribution lines for the removal of gas, oil, coal or other minerals or timber, and other like purposes, or for the joint or common use of real estate, rights of way, facilities and equipment, and defects, irregularities, zoning restrictions and deficiencies in title of any rights of way or other Property which in the aggregate do not materially impair the use of such rights of way or other Property for the purposes for which such rights of way and other Property are held or materially impair the value of such Property subject thereto; (vi) deposits of cash or securities to secure the performance of bids, trade, contracts, leases, statutory -4- 9 obligations and other obligations of a like nature incurred in the ordinary course of business; and (vii) Liens permitted by the Loan Documents. "Financial Statements" means the financial statement or statements described or referred to in Section 4.02. "Financing Agreement" means an agreement between the Seller and ECT Securities Corp. pursuant to which the Seller grants to ECT Securities Corp. the right and option to participate during the three years following the Closing Date for up to 20% on any public or private (e.g. 144A) high yield debt offering by the Seller with gross proceeds in excess of $50,000,000. "Funding Date" means the first Business Day following the date all of the conditions precedent to funding in Article VI have been satisfied. "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time. "Governmental Authority" shall include the country, the state, county, city and political subdivisions in which any Person or such Person's Property is located or which exercises valid jurisdiction over any such Person or such Person's Property, and any court, agency, department, commission, board, bureau or instrumentality of any of them including monetary authorities which exercises valid jurisdiction over any such Person or such Person's Property. Unless otherwise specified, all references to Governmental Authority herein shall mean a Governmental Authority having jurisdiction over, where applicable, the Seller, the Subsidiaries or any of their Property or any Purchaser. "Government Requirement" means any law, statute, code, ordinance, order, determination, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other directive or requirement (in the case of banking regulatory authorities whether or not having the force of law), including without limitation, Environmental Laws, energy regulations and occupational, safety and health standards or controls of any Governmental Authority. "Guarantors" means Brigham, Inc., Brigham Holdings I, LLC, Brigham Holdings II, LLC, BOG and any other Person who becomes party to a Guaranty Agreement pursuant to the terms of the Loan Documents. "Guaranty Agreements" means the agreements executed by the Guarantors in form and substance satisfactory to the Trustee and the Purchasers guarantying, unconditionally, payment of the Obligations, as the same may be amended, modified or supplemented from time to time. "Hedging Agreements" means any commodity, interest rate or currency swap, cap, floor, collar, forward agreement or other exchange or protection agreements or any option with respect to any such transaction. -5- 10 "Hydrocarbon Interests" means all rights, titles, interests and estates now or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee interests, overriding royalty and royalty interests, net profit interests and production payment interests, including any reserved or residual interests of whatever nature. "Hydrocarbons" means oil, gas, casinghead gas, drip gasoline, natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined or separated therefrom. "Indenture" means that certain Indenture dated as of August 20, 1998, executed by Seller. "Investment Unit" has the meaning provided therefor in Section 2.05 of this Agreement. "Lien" means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and whether such obligation or claim is fixed or contingent, and including but not limited to (i) the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes or (ii) production payments and the like payable out of Oil and Gas Properties. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of this Agreement, a Person shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, or leases under a financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person in a transaction intended to create a financing. "Loan Documents" means this Agreement, the Indenture, the Notes, the Structuring Fee Agreement, the Collateral Documents, and any and all other agreements or instruments now or hereafter executed and delivered by the Seller or any Subsidiary or Affiliate of the Seller (other than the Equity Documents and any assignments, participation or similar agreements between any Purchaser and any other lender or creditor with respect to any Obligations pursuant to this Agreement) in connection with, or as security for the payment or performance of, the Notes or this Agreement, as such agreements may be amended, supplemented or restated from time to time. "Majority Purchasers" means, at any time, the Purchasers holding more than 50% of the Warrants. "Material Adverse Effect" means any material and adverse effect on (i) the assets, liabilities, financial condition, business, operations or affairs of the Seller and its Subsidiaries taken as a whole, from those reflected in the Financial Statements, or from the facts represented or warranted in any Loan Document at the time made, or (ii) the ability of the Seller and its Subsidiaries taken as a whole to carry out their business as of the Closing Date or as proposed as of the Closing Date to be conducted or to meet their obligations under the Loan Documents on a timely basis. -6- 11 "Mortgage" is defined in the Indenture. "Mortgaged Property" means the Property owned by the Seller and its Subsidiaries which is subject to the Liens existing and to exist under the Loan Documents. "Multiemployer Plan" means a Plan defined as such in Section 3(37) or 4001(a)(3) of ERISA. "NASDAQ" means the National Association of Securities Dealers Automated Quotation System. "Notes" means the Senior Subordinated Secured Notes issued pursuant to Section 2.03 of this Agreement and the Indenture, in the aggregate face amount of $50,000,000, dated as of the date hereof, made by the Seller and initially payable to the order of the Purchasers in their respective Participations. "Noteholders" means, from time to time, the holders of the Notes. "Obligations" means any and all amounts, liabilities and obligations owing from time to time by Seller to the Agent or the Noteholders, pursuant to any of the Loan Documents and all renewals, extensions and/or rearrangements thereof, whether such amounts, liabilities or obligations be liquidated or unliquidated, now existing or hereafter arising, absolute or contingent. "Oil and Gas Properties" means Hydrocarbon Interests; the Properties now or hereafter pooled or unitized with Hydrocarbon Interests; all presently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including without limitation all units created under orders, regulations and rules of any Governmental Authority) which may affect all or any portion of the Hydrocarbon Interests; all operating agreements, contracts and other agreements which relate to any of the Hydrocarbon Interests or the production, sale, purchase, exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon Interests; all Hydrocarbons in and under and which may be produced and saved or attributable to the Hydrocarbon Interests, including all oil in tanks, the lands covered thereby and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests; all tenements, hereditaments, appurtenances and Properties in any manner appertaining, belonging, affixed or incidental to the Hydrocarbon Interests; and all Properties, rights, titles, interests and estates described or referred to above, including any and all Property, real or personal, now owned or hereafter acquired and situated upon, used, held for use or useful in connection with the operating, working or development of any of such Hydrocarbon Interests or Property (excluding drilling rights, automotive equipment or other personal property which may be on such premises for the purpose of drilling a well or other similar temporary use) and including any and all oil wells, gas wells, injection wells or other wells, buildings, structures, fuel separators, liquid extraction plants, plant compressors, pumps, pumping units, field gathering systems, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, similar equipment, surface leases, rights- -7- 12 of-way, easements and servitudes together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing. "Participation" means, for each Purchaser, such Purchaser's proportionate share of the Obligations and the Warrants. As of the Effective Date, ECT's Participation shall be 25% and JEDI-II's Participation shall be 75%. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions. "Person" means any individual, corporation, company, voluntary association, partnership, joint venture, trust, limited liability company, unincorporated organization or government or any agency, instrumentality or political subdivision thereof, or any other form of entity. "Plan" means any employee pension benefit plan, as defined in Section 3(2) of ERISA, which (i) is currently or hereafter sponsored, maintained or contributed to by the Seller, any Subsidiary or an ERISA Affiliate or (ii) was at any time during the preceding six calendar years sponsored, maintained or contributed to, by the Seller, any Subsidiary or an ERISA Affiliate. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Purchasers" means ECT and JEDI-II and/or, to the extent then applicable, each assignee of ECT or JEDI-II or their respective successors or assigns pursuant to Section 12.04. "Registration Rights Agreement" means the Registration Rights Agreement dated as of the date hereof, made by the Seller in favor of the Purchasers relating to the Warrants, the Warrant Shares and the Acquired Shares. "Reportable Event" means an event described in Section 4043(c) of ERISA with respect to a Plan, other than an event described in paragraphs (1) through (8) as to which the 30 day notice requirement has been waived by the PBGC. "Reserve Report" is defined in the Indenture. "Responsible Officer" means, as to any Person, the Chief Executive Officer, the President or any Vice President of such Person and the Chief Financial Officer of such Person. Unless otherwise specified, all references to a Responsible Officer herein shall mean a Responsible Officer of the Seller. "Securities" means the Notes, the Warrants and the Acquired Shares. "Securities Act" means the Securities Act of 1933, as amended from time to time, and the rules and regulations of the Commission promulgated thereunder. -8- 13 "Seller" means Brigham Exploration Company, a Delaware corporation. "Senior Credit Agreement" means the Credit Agreement dated as of January 26, 1998, among BOG, the Senior Loan Agent, and the Senior Lenders, as it may from time to time be amended, modified or supplemented from time to time, and any Credit Agreement or similar agreement executed in connection with any refinancing of the Senior Loan permitted hereunder and under the Subordination Agreement. "Senior Loan Agent" means the agent or agents designated under the Senior Credit Agreement. Bank of Montreal is the Senior Loan Agent as of the date hereof. "Senior Lenders" means each of the lenders from time to time under the Senior Credit Agreement. "Senior Loan" shall mean, collectively, any advance or advances of principal made by the Senior Lenders to BOG under the Senior Credit Agreement and the other Senior Loan Documents. "Senior Loan Documents" means the Senior Credit Agreement and all promissory notes, collateral documents and other agreements, documents and instruments executed or delivered in connection therewith, as such agreements may be amended, modified or supplemented from time to time. "Special Entity" means any joint venture, limited liability company or partnership, general or limited partnership or any other type of partnership or company other than a corporation, in which a Person or one or more of its other Subsidiaries is a member, owner, partner or joint venturer and owns, directly or indirectly, at least a majority of the equity of such entity or controls such entity, but excluding any tax partnerships that are not classified as partnerships under state law. For purposes of this definition, any Person which owns directly or indirectly an equity investment in another Person which allows the first Person to manage or elect managers who manage the normal activities of such second Person will be deemed to "control" such second Person (e.g.,a sole general partner controls a limited partnership). "Structuring Fee Agreement" means the agreement between the Seller and ECT Securities Corp. dated as of the date hereof. "Subordination Agreement" means the Intercreditor and Subordination Agreement dated as of even date herewith, by and among the Senior Loan Agent, the Agent, the Purchasers, the Seller and certain Subsidiaries, as the same may be supplemented or amended from time to time. "Subsidiary" means (i) any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by a Person or one or more of -9- 14 its Subsidiaries or by a Person and one or more of its Subsidiaries and (ii) any Special Entity. Unless otherwise indicated herein, each reference to the term "Subsidiary" shall mean a Subsidiary of the Seller. Quest Resources L.L.C. and Venture Acquisitions L.P. shall not be considered Subsidiaries of Seller. "Trade Payables" means customary trade payables incurred in the ordinary course of business. "Trustee" means the Trustee as defined in the Indenture. "Warrant Shares" means the shares of Common Stock and other securities receivable upon exercise of the Warrants. "Warrants" means the Warrants issued by the Seller to the Purchasers in their respective Participations pursuant to Section 2.03, for the purchase of an aggregate of 1,000,000 shares of Common Stock, and any Warrants issued upon the transfer thereof or in substitution therefor, pursuant to the Warrant Certificates to be issued to ECT and JEDI-II, forms of which are attached hereto as Exhibit A. Section 1.02. ACCOUNTING PROCEDURES AND INTERPRETATION. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished by the Seller hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent with the Financial Statements (except for changes concurred with by the Seller's independent public accountants). ARTICLE II ISSUANCE OF SECURITIES; RIGHTS OF PURCHASERS Section 2.01 ISSUANCE OF SECURITIES. Subject to the terms and conditions herein set forth, the Seller agrees that it will issue the Securities to the Purchasers and the Purchasers agree that they shall each purchase the Securities from the Seller for an aggregate cash consideration of $50,000,000, as follows: (i) The Notes and the Warrants will be purchased by the Purchasers in their respective participations and sold for an aggregate cash consideration of $40,000,000. (ii) The Acquired Shares will be purchased by the Purchasers or their respective Affiliates for a total cash consideration of $10,000,000. The number of Acquired Shares to be purchased and sold on the Funding Date shall be determined by dividing the $10,000,000 purchase price by the Average Share Price. If within 180 days following the Funding Date the Seller enters into an agreement to issue or issues new Common Stock for a price per share that is less than the Average Share -10- 15 Price (a "Post Funding Sale Price"), the Seller shall, contemporaneously with the issuance of such new Common Stock, issue and deliver to the Purchasers or their respective Affiliates additional shares of Common Stock (which shall be deemed additional Acquired Shares) such that, after issuance and delivery of such additional Acquired Shares, the total number of Acquired Shares received by the Purchasers or their respective Affiliates multiplied by the Post Funding Date Sale Price, shall aggregate $10,000,000. Section 2.02 THE CLOSING; FUNDING DATE. (a) The execution of the Basic Documents and all other instruments required pursuant to Section 6.01 will take place at a closing (the "Closing") to be held at the offices of Bracewell & Patterson, L.L.P. on such date as the Seller and the Purchasers shall agree. The date and time at which the Closing occurs is the "Closing Date". (b) Delivery of the Securities by the Seller to the Purchasers, and payment by the Purchasers to the Seller of the consideration therefor as set forth in Section 2.01, shall occur on the Funding Date. Section 2.03 DELIVERY. Delivery of the Securities pursuant to this Agreement shall be made on the Funding Date by the Seller delivering to the Purchasers, against payment of the purchase price therefor, as follows: (i) one Note executed by the Seller in the face amount of $12,500,000.00, payable to the order of ECT and one Note executed by the Seller in the face amount of $37,500,000.00, payable to the order of JEDI-II, (ii) one certificate executed by the Seller representing ECT's Participation in the Warrants and one certificate executed by the Seller representing JEDI-II's Participation in the Warrants, registered in the names of ECT and JEDI-II, respectively (or such other Person as either Purchaser may have designated in writing to the Seller at least three Business Days prior to the Funding Date) and (iii) a certificate or certificates of Common Stock executed by the Seller representing the Purchasers and/or their respective Affiliates share of the Acquired Shares registered in the name(s) of the Purchasers and/or their respective Affiliates (or such other Person as either Purchaser may have designated in writing to the Seller at least three Business Days prior to the Funding Date). Section 2.04 PAYMENT. Payment of the consideration for the Securities shall be made on the Funding Date by wire transfer of immediately available funds to such account of the Seller as shall have been designated to ECT at least two Business Days prior to the Funding Date. Section 2.05 TAX MATTERS. The Seller and the Purchasers agree as follows: (i) Purchasers' acquisition of the Securities constitutes the purchase of an "investment unit" (the "Investment Unit") for purposes of Treas. Reg. (S)1.1273- 2(h)(1); (ii) the issue price of the Investment Unit is $50,000,000, as determined in accordance with Treas. Reg. (S)1.1273-2(a)(1); (iii) the issue price for the Investment Unit shall be allocated among the Notes, the Warrants, and the Acquired Shares in accordance with their relative fair market values, as required by Treas. Reg. (S)1.1273-2(h)(1); and -11- 16 (iv) the parties agree that the issue price shall be allocated among the Notes, the Warrants, and the Acquired Shares as follows and the parties shall be bound by such allocation for all tax-related purposes: Notes: $39,900,000 Warrants: $ 100,000 Acquired Shares: $10,000,000
Section 2.06 RIGHTS OF PURCHASERS. The Purchasers shall have such rights with respect to the registration of the Warrant Shares and the Acquired Shares under the Securities Act and state securities laws as are set forth in the Registration Rights Agreement, which shall be executed by the Seller and the Purchasers at the Closing. ARTICLE III SECURITY FOR THE OBLIGATIONS Section 3.01 SECURITY. The Obligations shall be secured by the Collateral and the Collateral Documents in accordance with the Indenture. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller represents and warrants to the Purchasers, for the benefit of each of the holders of the Notes, the holders of the Warrants and the holders of the Acquired Shares, which representations and warranties shall survive the execution of any Basic Document, that as of the date of this Agreement: Section 4.01 CORPORATE EXISTENCE. The Seller: (i) is a corporation duly organized, legally existing and in good standing under the laws of the State of Delaware; (ii) has all requisite power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualifications necessary and where failure so to qualify would have a Material Adverse Effect. Brigham, Inc.: (i) is a corporation duly organized, legally existing and in good standing under the laws of the State of Nevada; (ii) has all requisite power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualifications necessary and where failure so to qualify would have a Material Adverse Effect. Each of Brigham Holdings I, LLC and Brigham Holdings II, LLC: (i) is a limited liability company duly organized, legally existing and in good standing under the laws of the State of Nevada; (ii) has all requisite power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualifications -12- 17 necessary and where failure so to qualify would have a Material Adverse Effect. Brigham Oil & Gas, L.P.: (i) is a limited partnership duly organized, legally existing and in good standing under the laws of the State of Delaware; (ii) has all requisite power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (iii) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualifications necessary and where failure so to qualify would have a Material Adverse Effect. Section 4.02 FINANCIAL CONDITION. The audited consolidated balance sheet of the Seller and its Consolidated Subsidiaries as at December 31, 1997 and the related consolidated statement of income, stockholders' equity and cash flow of the Seller and its Consolidated Subsidiaries for the fiscal year ended on said date, with the opinion thereon of Price Waterhouse, heretofore furnished to the Purchasers and the unaudited consolidated balance sheet of the Seller and its Consolidated Subsidiaries as at June 30, 1998, and their related consolidated statements of income, stockholders' equity and cash flow of the Seller and its Consolidated Subsidiaries for the six-month period ended on such date heretofore furnished to the Purchasers, are complete and correct and fairly present the consolidated financial condition of the Seller and its Consolidated Subsidiaries as at said dates and the results of its operations for the fiscal year and the six-month period on said dates, all in accordance with GAAP, as applied on a consistent basis (subject, in the case of the interim financial statements, to normal year-end adjustments). Neither the Seller nor any Consolidated Subsidiary has on the Closing Date any material Debt, Trade Payables, contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in the Financial Statements or in Schedule 4.02. Since June 30, 1998, there has been no change or event having a Material Adverse Effect. Since the date of the Financial Statements, neither the business nor the Properties of the Seller or any of the Consolidated Subsidiaries, taken as a whole, have been materially and adversely affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of Property or cancellation of contracts, permits or concessions by any Governmental Authority, riot, activities of armed forces or acts of God or of any public enemy. Section 4.03 LITIGATION. Except as disclosed to the Purchasers in Schedule 4.03, at the Closing Date there is no litigation, legal, administrative or arbitral proceeding, investigation or other action of any nature pending or, to the knowledge of the Seller, threatened against or affecting the Seller or any Subsidiary which both (a) involves the possibility of any judgment or liability against the Seller or any Subsidiary not fully covered by insurance (except for normal deductibles), and (b) would be more likely than not to have a Material Adverse Effect. Section 4.04 NO BREACH. Neither the execution and delivery of the Basic Documents, nor compliance with the terms and provisions thereof will conflict with or result in a breach of, or require any consent which has not been obtained as of the Closing Date under, the Articles of Incorporation or by-laws of the Seller, the respective charter, by-laws, partnership agreements or regulations of any Subsidiary or any Governmental Requirement or any material agreement or instrument to which the Seller or any Subsidiary is a party or by which it is bound or to which it or its Properties are subject, -13- 18 or constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien upon any of the material revenues or assets of the Seller or any Subsidiary pursuant to the terms of any such agreement or instrument other than the Liens created by the Loan Documents and the restrictions contained in the Senior Loan Documents (as amended concurrently herewith) which limit the circumstances in which BOG can make dividends or distributions to the Seller and in which the Seller can make cash payments of interest on the Notes. Section 4.05 AUTHORITY. The Seller and each Subsidiary has all necessary power and authority to execute, deliver and perform its obligations under the Basic Documents to which it is a party; and the execution, delivery and performance by the Seller and each Subsidiary of the Basic Documents to which it is a party, have been duly authorized by all necessary action on its part; and the Basic Documents constitute the legal, valid and binding obligations of the Seller and each Subsidiary, enforceable in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent transfer and similar laws affecting creditors' rights generally or by general principles of equity. Section 4.06 APPROVALS. Except for registration of the Securities under the Securities Act, no authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority are necessary for the execution, delivery or performance by the Seller or any Subsidiary of the Basic Documents or for the validity or enforceability thereof. Section 4.07 USE OF LOANS. The purchase price of the Notes, the Warrants and the Acquired Shares shall be used solely to pay principal and interest outstanding on the Senior Loan. In no event shall the purchase price of the Notes, the Warrants or the Acquired Shares be used to finance in whole or in part any hostile acquisition. The Seller is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, or buying or carrying margin stock (within the meaning of Regulation G, U or X of the Board of Governors of the Federal Reserve System) and no part of the purchase price of the Notes, the Warrants or the Acquired Shares will be used to buy or carry any margin stock. Section 4.08 ERISA. (a) The Seller and each ERISA Affiliate have complied in all material respects with ERISA and, where applicable, the Code regarding such Plan. (b) Each Plan is, and has been, maintained in substantial compliance with ERISA and, where applicable, the Code. (c) No act, omission or transaction has occurred which could result in imposition on the Seller or any ERISA Affiliate (whether directly or indirectly) of an amount of $100,000 or more as (i) either a civil penalty assessed pursuant to section 502(c), (i) or (1) of ERISA or a tax imposed pursuant to Chapter 43 of Subtitle D of the Code or (ii) breach of fiduciary duty liability damages under section 409 of ERISA. (d) No Plan (other than a defined contribution plan) or any trust created under any such Plan has been terminated since September 2, 1974. No liability to the PBGC in excess of $100,000 (other than for the payment of current premiums which are not past due) by the Seller or any ERISA Affiliate has been or is expected by the Seller or -14- 19 any ERISA Affiliate to be incurred with respect to any Plan. No ERISA Event with respect to any Plan has occurred which could reasonably expected to result in liabilities of $100,000 or more. (e) Full payment when due has been made of all amounts which the Seller or any ERISA Affiliate is required under the terms of each Plan or applicable law to have paid as contributions to such Plan, and no accumulated funding deficiency in an amount of $100,000 or more (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan. (f) The actuarial present value of the benefit liabilities under each Plan which is subject to Title IV of ERISA does not, as of the end of the Seller's most recently ended fiscal year, exceed the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities by $100,000 or more. The term "actuarial present value of the benefit liabilities" shall have the meaning specified in section 4041 of ERISA. (g) None of the Seller or any ERISA Affiliate sponsors, maintains, or contributes to an employee welfare benefit plan, as defined in section 3(1) of ERISA, including, without limitation, any such plan maintained to provide benefits to former employees of such entities, that may not be terminated by the Seller or any ERISA Affiliate in its sole discretion at any time without any material liability. (h) None of the Seller or any ERISA Affiliate sponsors, maintains or contributes to, or has at any time in the preceding six calendar years, sponsored, maintained or contributed to, any Multiemployer Plan. (i) None of the Seller or any ERISA Affiliate is required to provide security under section 401(a)(29) of the Code due to a Plan amendment that results in an increase in current liability for the Plan. Section 4.09 TAXES. Except as set out in Schedule 4.09, the Seller and each Subsidiary has filed all United States Federal income tax returns and all other tax returns which are required to be filed by it and has paid all material taxes due pursuant to such returns or pursuant to any assessment received by the Seller or any such Subsidiary, except for any taxes which are being contested in good faith and by proper proceedings and against which adequate reserves are being maintained. The charges, accruals and reserves on the books of the Seller and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Seller, adequate. No tax lien has been filed and, to the knowledge of the Seller, no claim is being asserted with respect to any such tax, fee or other charge, except for any taxes, fees or other charges which are being contested in good faith and by proper proceedings and against which adequate reserves are being maintained. -15- 20 Section 4.10 TITLES, ETC. (a) Subject to the matters set out in Schedule 4.10, each of the Seller and the Subsidiaries has good and defensible title to (i) the Oil and Gas Properties that are both (A) evaluated in the most recently delivered Reserve Report and (B) described in Part One of Exhibit A to the Mortgage, free and clear of all Liens except Liens permitted by Section 8.02 of the Indenture, and (ii) to the best of Seller's knowledge, the balance of Seller's material (individually or in the aggregate) Oil and Gas Properties (and/or those of the Subsidiaries) that are described in the Mortgage or that are otherwise evaluated in the most recently delivered Reserve Report, are free and clear (to the best of Seller's knowledge) of all Liens except Liens permitted by Section 8.02 of the Indenture. Except for immaterial divergences, after giving full effect to the Excepted Liens and the matters set forth in Schedule 4.10, the Seller or its Subsidiaries own the net interests in production attributable to the Hydrocarbon Interests that are both (A) evaluated in the most recently delivered Reserve Report and (B) reflected in the Mortgage, and the ownership of such Hydrocarbon Interests shall not in any material respect obligate the Seller or its Subsidiaries to bear the costs and expenses relating to the maintenance, development and operations of each such Hydrocarbon Interest in an amount in excess of the working interest of such Hydrocarbon Interest set forth in the Mortgage (without a corresponding increase in net revenue interest). The Seller does not believe, based upon information in its possession, that its most recently delivered Reserve Report materially overstates its (or any Subsidiaries) oil and gas reserves, bearing in mind that reserves are evaluated based upon estimates and assumptions with respect to which reasonable minds of competent reserve engineers may differ and that reserve estimates are affected by the oil and gas prices used in the preparation thereof. (b) All leases and agreements necessary for the conduct of the business of the Seller and the Subsidiaries are valid and subsisting, in full force and effect and there exists no default or event or circumstance which with the giving of notice or the passage of time or both would give rise to a default under any such lease or leases, which would affect in any material respect the conduct of the business of the Seller and the Subsidiaries. (c) The Properties presently owned, leased or licensed by the Seller and the Subsidiaries, including, without limitation, all easements and rights of way, include all Properties necessary to permit the Seller and the Subsidiaries to conduct their business in all material respects in the same manner as its business has been conducted prior to the Closing Date. (d) All of the Properties of the Seller and the Subsidiaries which are reasonably necessary for the operation of their business are in good working condition in all material respects and are maintained in accordance with prudent business standards. Section 4.11 NO MATERIAL MISSTATEMENTS. Taken as a whole, the written information, statements, exhibits, certificates, documents and reports furnished to the Purchasers by the Seller or any Guarantor in connection with the negotiation of this Agreement do not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained therein not materially misleading in the light of the circumstances in which made and with respect to the Seller or any Guarantor. As of the Closing Date, there is no fact peculiar to the Seller or any Guarantor which has a Material Adverse Effect or in the future is reasonably likely to have -16- 21 (so far as the Seller can now foresee) a Material Adverse Effect and which has not been set forth in this Agreement or the other documents, certificates and statements furnished to the Purchasers by or on behalf of the Seller or any Guarantor prior to, or on, the Closing Date in connection with the transactions contemplated hereby. Section 4.12 INVESTMENT COMPANY ACT. Neither the Seller nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. Section 4.13 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Seller nor any Subsidiary is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 4.14 SUBSIDIARIES. Except as set forth on Schedule 4.14, the Seller has no Subsidiaries or any direct or indirect ownership interest in any other Persons. Schedule 4.14 sets forth the ownership interest of the Seller (direct or indirect) in and to all such Persons. Section 4.15 LOCATION OF BUSINESS AND OFFICES. As of the Closing Date, the Seller's principal place of business and chief executive offices are located at the address stated in Section 12.06. The principal place of business and chief executive office of each Subsidiary are located at the addresses stated on Schedule 4.14. Section 4.16 DEFAULTS. Neither the Seller nor any Subsidiary is in default nor has any event or circumstance occurred which, but for the expiration of any applicable grace period or the giving of notice, or both, would constitute a default under any material agreement or instrument to which the Seller or any Subsidiary is a party or by which the Seller or any Subsidiary is bound which default would have a Material Adverse Effect. No Default hereunder has occurred and is continuing. No "Event of Default" under the Senior Loan Documents has occurred and is continuing nor has Seller or any of its Subsidiaries received any notice of a "Default" under the Senior Loan Documents that has triggered a cure period. Section 4.17 ENVIRONMENTAL MATTERS. Except as provided in Schedule 4.17 or for matters which are more likely than not to not to have a Material Adverse Effect (or with respect to (c), (d) and (e) below, where the failure to take such actions is more likely than not to not have a Material Adverse Effect): (a) Neither any Property of the Seller or any of its Subsidiaries nor the operations conducted thereon violate any order or requirement of any court or Governmental Authority or any Environmental Laws; (b) Without limitation of clause (a) above, no Property of the Seller or any of its Subsidiaries nor the operations currently conducted thereon or, to the best knowledge of the Seller, by any prior owner or operator of such Property or operation, are in violation of or subject to any -17- 22 existing, pending or threatened action, suit, investigation, inquiry or proceeding by or before any court or Governmental Authority or to any remedial obligations under Environmental Laws; (c) All notices, permits, licenses or similar authorizations, if any, required to be obtained or filed by the Seller or any of its Subsidiaries in connection with the operation or use of any and all Property of the Seller and each of its Subsidiaries, including without limitation present, or to the best of Seller's knowledge, past treatment, storage, disposal or release of a hazardous substance or solid waste into the environment, have been duly obtained or filed, and the Seller and each Subsidiary thereof are in compliance with the terms and conditions of all such notices, permits, licenses and similar authorizations; (d) All hazardous substances, solid waste, and oil and gas exploration and production wastes, if any, generated at any and all Property of the Seller and each of its Subsidiaries have in the past, during Seller's or its Subsidiaries' tenure of ownership and to the best of Seller's knowledge, prior thereto, been transported, treated and disposed of in accordance with Environmental Laws and so as not to pose an imminent and substantial endangerment to public health or welfare or the environment, and, to the best knowledge of the Seller, all such transport carriers and treatment and disposal facilities have been and are operating in compliance with Environmental Laws and so as not to pose an imminent and substantial endangerment to public health or welfare or the environment, and are not the subject of any existing, pending or threatened action, investigation or inquiry by any Governmental Authority in connection with any Environmental Laws; (e) The Seller has taken all steps reasonably necessary to determine and has determined that no hazardous substances, solid waste, or oil and gas exploration and production wastes, have been disposed of or otherwise released and there has been no threatened release of any hazardous substances on or to any Property of the Seller or any of its Subsidiaries except in compliance with Environmental Laws and so as not to pose an imminent and substantial endangerment to public health or welfare or the environment; (f) To the extent applicable, all Property of the Seller and each of its Subsidiaries currently satisfies all design, operation, and equipment requirements imposed by the OPA or scheduled as of the Closing Date to be imposed by OPA during the term of this Agreement, and the Seller does not have any reason to believe that such Property, to the extent subject to OPA, will not be able to maintain compliance with the OPA requirements during the term of this Agreement; and (g) Neither the Seller nor any of its Subsidiaries has any known contingent liability in connection with any release or threatened release of any oil, hazardous substance or solid waste into the environment. Section 4.18 COMPLIANCE WITH THE LAW. Neither the Seller nor any Subsidiary has violated any Governmental Requirement or failed to obtain any license, permit, franchise or other governmental authorization necessary for the ownership of any of its Properties or the conduct of its business, which violation or failure would have (in the event such violation or failure were -18- 23 asserted by any Person through appropriate action) a Material Adverse Effect. Except for such acts or failures to act as would not have a Material Adverse Effect, the Oil and Gas Properties (and properties unitized therewith) of the Seller and its subsidiaries have been maintained, operated and developed in a good and workmanlike manner and in conformity with all applicable laws and all rules, regulations and orders of all duly constituted authorities having jurisdiction and in conformity with the provisions of all leases, subleases or other contracts comprising a part of the Hydrocarbon Interests and other contracts and agreements forming a part of such Oil and Gas Properties; specifically in this connection, but subject to the Material Adverse Effect qualification set forth above, (i) after the Closing Date, no such Oil and Gas Property is subject to having allowable production reduced below the full and regular allowable (including the maximum permissible tolerance) because of any overproduction (whether or not the same was permissible at the time) prior to the Closing Date and (ii) none of the wells comprising a part of such Oil and Gas Properties (or properties unitized therewith) are deviated from the vertical more than the maximum permitted by applicable laws, regulations, rules and orders, and such wells are, in fact, bottomed under and are producing from, and the well bores are wholly within, such Oil and Gas Properties (or in the case of wells located on properties unitized therewith, such unitized properties). Section 4.19 INSURANCE. Schedule 4.19 attached hereto contains an accurate and complete description of all material policies of fire, liability, workmen's compensation and other forms of insurance owned or held by the Seller and each Subsidiary as of the Closing Date. All such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been paid, and no notice of cancellation or termination has been received with respect to any such policy. Such policies are sufficient for compliance with all requirements of law and of all agreements to which the Seller or any Subsidiary is a party; are valid, outstanding and enforceable policies; provide adequate insurance coverage in at lease such amounts and against at least such risks (but including in any event public liability) as are usually insured against in the same general area by companies engaged in the same or a similar business for the assets and operations of the Seller and each Subsidiary; will remain in full force and effect through the respective dates set forth on Schedule 4.19 without the payment of additional premiums; and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. Schedule 4.19 identifies all material risks, if any, which the Seller, the Subsidiaries and their respective board of directors or officers have designated as being self insured. Neither the Seller nor any Subsidiary has been refused any insurance with respect to its assets or operations, nor has its coverage been limited below usual and customary policy limits, by an insurance carrier to which it has applied for any such insurance or with which is has carried insurance during the last three years. Section 4.20 HEDGING AGREEMENTS. Schedule 4.20 sets forth, as of the Closing Date, a true and complete list of all Hedging Agreements (including commodity price swap agreements, forward agreements or contracts of sale which provide for prepayment for deferred shipment or delivery of oil, gas or other commodities) of the Seller and each Subsidiary, the material terms thereof (including the type, term, effective date, termination date and notional amounts of volumes), the net mark to market value thereof, all credit support agreements relating thereto (including any margin required or supplied), and the counterparty to each such agreement. -19- 24 Section 4.21 RESTRICTION ON LIENS. Neither the Seller nor any Subsidiary is a party to any agreement or arrangement (other than the Loan Documents and the Senior Loan Documents), or subject to any order, judgment, writ or decree, which either restricts or purports to restrict ability to grant Liens to other Persons on or in respect of their respective assets or Properties. Section 4.22 MATERIAL AGREEMENTS. Set forth on Schedule 4.22 hereto is a complete and correct list of all material agreements, leases, indentures, purchase agreements, obligations in respect of letters of credit, guarantees, joint venture agreements, and other instruments in effect or to be in effect as of the Closing Date (other than the Senior Loan Documents and Hedging Agreements) providing for, evidencing, securing or otherwise relating to any material Debt of the Seller or any Subsidiary, and all obligations of the Seller or any Subsidiary to issuers of surety or appeal bonds (excluding operator's bonds, plugging and abandonment bonds, and similar surety obligations obtained in the ordinary course of business) issued for account of the Seller or any such Subsidiary, and such list correctly set forth the names of the debtor or lessee and creditor or lessor with respect to the Debt or lease obligations outstanding or to be outstanding and the property subject to any Lien securing such Debt or lease obligations. Section 4.23 GAS IMBALANCES. As of the Closing Date, except as set forth in the most recent Reserve Report furnished to the Purchasers or on Schedule 4.23, on a net basis there are no gas imbalances, take or pay or other prepayments with respect to the Seller's or any Subsidiary's Hydrocarbon Interests which would require the Seller or such Subsidiary to deliver five percent (5%) or more of the monthly production from the Seller's and its Subsidiaries' Hydrocarbons produced on a monthly basis from the Hydrocarbon Interests, at some future time without then or thereafter receiving full payment therefor. Section 4.24 CAPITALIZATION. The authorized Capital Stock of the Seller consists of: (a) 30,000,000 shares of Common Stock, par value $.01 per share and (b) 10,000,000 shares of Preferred Stock, par value $.01 per share, of which there are issued and outstanding 12,253,574 shares of Common Stock and no other shares of Capital Stock. All outstanding shares of Common Stock are validly issued, fully paid and nonassessable and were issued free of preemptive rights. Except as set forth on Schedule 4.24, the Seller is not a party to any voting trust or other agreement with respect to the voting of its Capital Stock. Except for the Warrants, there are no (i) outstanding securities convertible or exchangeable into Capital Stock of the Seller or (ii) warrants, contracts, commitments, agreements, understandings, or arrangements of any kind to which the Seller is a party relating to the repurchase or issuance of any Capital Stock. Except as set forth on Schedule 4.24 and except as contemplated in the Equity Documents, the Seller is not a party to or bound by any agreement with respect to any of its securities which grants registration rights to any Person. Section 4.25 ACQUIRED SHARES. When issued and delivered against payment therefor in accordance with the terms of this Agreement, the Acquired Shares will be duly and validly issued, fully paid, nonassessable, free of preemptive rights and free from all taxes payable by the Seller and Liens (except any Liens created or suffered to be created by the Purchasers) and will not be subject to any restriction on the voting or transfer thereof created by the Seller other than in the Equity Documents and the applicable provisions of federal and state securities laws. -20- 25 Section 4.26 WARRANT SHARES. When issued and delivered against payment therefor in accordance with the terms of the Warrants, the Warrant Shares issuable upon exercise of the Warrants will be duly and validly issued, fully paid, nonassessable, free of preemptive rights and free from all taxes payable by the Seller and Liens (except any Liens created or suffered to be created by the Purchasers) and will not be subject to any restriction on the voting or transfer thereof created by the Seller other than in the Equity Documents and the applicable provisions of federal and state securities laws. The Seller has duly and validly reserved the Warrant Shares, as of the Closing Date, for issuance upon conversion of the Warrants. Section 4.27 NO RESTRICTIONS. The Seller currently is not, and in the future will not, be subject to any agreements that purport to impose restrictions or limitations on the Purchasers, as affiliates of the Seller or otherwise, without the prior written consent and authorization of each of the Purchasers. Section 4.28 CERTAIN FEES. Except for the fees payable to ECT Securities Corp. and JEDI-II pursuant to the Structuring Fee Agreement, no fees or commissions will be payable by the Seller to brokers, finders, investment bankers, or Purchasers with respect to the issuance and sale of any of the Securities or the consummation of the transaction contemplated by this Agreement. The Seller agrees that it will indemnify and hold harmless the Purchasers from and against any and all claims, demands, or liabilities for broker's, finders, placement, or other similar fees or commissions incurred by the Seller or alleged to have been incurred by the Seller in connection with the issuance or sale of the Securities or the consummation of the transaction contemplated by this Agreement. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS The Purchasers each represent and warrant to the Seller, which representations and warranties shall survive the execution of any Basic Document, that as of the date of this Agreement: Section 5.01 INVESTMENT. Each Purchaser represents and warrants to, and covenants and agrees with, the Seller that the Securities are being acquired for its own account and with no intention of distributing or reselling the Notes, the Warrants, the Warrant Shares or the Acquired Shares in any transaction which would be in violation of the securities laws of the United States of America or any State, without prejudice, however, to Purchaser's right at all times to sell or otherwise dispose of all or any part of the Notes, the Warrants, the Warrant Shares or the Acquired Shares under a registration statement under the Securities Act and applicable state securities laws or under an exemption from such registration available thereunder (including, without limitation, if available, Rule 144A promulgated thereunder). If either Purchaser should in the future decide to dispose of any of the Notes, the Warrants, the Warrant Shares or the Acquired Shares, the Purchasers understand and agree (i) that it may do so only (A) in compliance with the Securities Act and applicable state securities law, as then in effect, and (B) in the manner contemplated by any registration statement pursuant to which such securities are being offered, and (ii) that stop-transfer instructions to that effect will be in effect with respect to such securities. The Purchasers agree to -21- 26 the imprinting, so long as appropriate, of a legend on each Note and on each certificate representing Warrants, Warrant Shares or the Acquired Shares, to the effect as set forth above. Section 5.02 NATURE OF PURCHASERS. Each Purchaser represents and warrants to, and covenants and agrees with, the Seller that, (i) it is an "accredited investor" within the meaning of paragraphs (a)(3) or (8) of Rule 501 under the Securities Act and (ii) by reason of its business and financial experience it has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, is able to bear the economic risk of such investment and, at the present time, would be able to afford a complete loss of such investment. Section 5.03 RECEIPT OF INFORMATION; AUTHORIZATION. Each Purchaser acknowledges that it has been furnished all information that it deems necessary or desirable to the making of an informed investment decision concerning the Securities. Each Purchaser acknowledges that it has had an opportunity to ask questions of and receive satisfactory answers from designated representatives of the Seller concerning the terms and conditions pursuant to which the purchase of the Securities are made. Each Purchaser acknowledges that it has been afforded an opportunity to examine such documents and other information which it has requested for the purpose of verifying the information provided to it and for the purpose of answering any questions it may have concerning the business affairs and financial condition of the Seller. Each Purchaser represents that it alone or with its advisors has knowledge and experience in the business of the Seller and the Seller so as to be capable of evaluating the merits and risks of an investment in the Seller based upon the information furnished to it, its knowledge of the business and affairs of the Seller, the records, files, and plans of the Seller (which have been made available to it), such additional information as it has requested and has received from the Seller, and the independent inquiries and investigations undertaken by it. Each Purchaser represents and warrants that the purchase of the Securities by it has been duly and properly authorized and this Agreement and each Basic Document to which the Purchasers are a signatory has been duly executed and delivered by it or on its behalf. ARTICLE VI CONDITIONS PRECEDENT TO FUNDING Section 6.01 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASERS. The obligation of the Purchasers to acquire the Securities on the Funding Date is subject to each of the following: (a) The accuracy as of the Closing Date of each and every representation and warranty of the Seller, each Guarantor, and the Senior Loan Agent made in this Agreement or any other Basic Document, or in any certificate delivered to the Purchasers pursuant to or in connection with this Agreement, and receipt by the Purchasers of a Certificate executed by a duly Responsible Officer, dated as of the Funding Date, certifying that each of the representations and warranties of the Seller and each Guarantor made in this Agreement or any other Basic Document are true and correct as of the Funding Date, and that the Seller and each Guarantor has performed to date all of its respective covenants and agreements under the Basic Documents. -22- 27 (b) The absence as of the Closing Date and the Funding Date of a Default or Event of Default hereunder or an "Event of Default" under the Senior Credit Agreement or any Default hereunder the Senior Loan Documents that has triggered a cure period. (c) The performance by the Seller of its respective obligations to be performed hereunder on or before the Funding Date. (d) The satisfaction of each of the following conditions as of or prior to the Closing Date: (i) The Purchasers (or the Trustee, where appropriate) shall have received the following, each in form and substance satisfactory to the Purchasers and in sufficient counterparts: (A) Duly executed counterparts of this Agreement and the Indenture signed by all the parties hereto and thereto. (B) The duly executed Financing Agreement, Structuring Fee Agreement, Guaranty Agreements, Subordination Agreement and Registration Rights Agreement, dated as of the Closing Date in form and substance satisfactory to Purchasers. (C) Duly executed counterparts of the Collateral Documents (including without limitation UCC-1 Financing Statements). (D) Certificates of good standing as to the Seller and each Guarantor issued by the Secretary of State of their respective states of incorporation or formation. (E) The duly executed certificate of the Secretary of the Seller setting forth (i) resolutions of its directors in form and substance satisfactory to the Purchasers with respect to the authorization of this Agreement and the other Basic Documents to which it is a party and the transactions contemplated hereby and thereby; (ii) the names and true signatures of the officers authorized to sign such instruments; and (iii) copies of the articles or certificate of incorporation and the bylaws of the Seller. (F) The duly executed certificate of the Secretary of each Guarantor which is a corporation setting forth (i) resolutions of its directors in form and substance satisfactory to the Purchasers with respect to the authorization of the Guaranty Agreements executed by such Guarantors and the transactions contemplated hereby and thereby; (ii) the names and true signatures of the officers authorized to sign such instruments; and (iii) copies of the articles or certificate of incorporation and the bylaws of each Guarantor. -23- 28 (G) The duly executed certificate of all the partners of each Guarantor that is a Partnership and each member of each Guarantor that is a limited liability company, setting forth (i) the authorization of the Guaranty Agreements and the transactions contemplated hereby and thereby; (ii) the names and title of all persons authorized to sign such instruments; and (iii) copies of the applicable partnership agreement or other regulating documents of each such Guarantor. (H) Evidence that the insurance required hereunder and under the other Basic Documents has been obtained and is in full force and effect. (I) Copies of the Senior Loan Documents. (J) Any other document which the Purchasers may reasonably request, including opinions addressed to Purchasers, dated as of the Closing Date, from the counsel for the Seller and each of the Guarantors acceptable to each of the Purchasers addressing the existence and good standing of the Seller, the authorization of the Basic Documents, the enforceability of the Basic Documents, the absence of conflicts with law, other material agreements, and court orders, the absence of litigation, and such other matters as the Purchasers may reasonably request. (ii) The Seller shall have executed (but not delivered) the Notes, Warrants and Acquired Shares, each in form and substance satisfactory to the Purchasers. (iii) The Seller shall have received consents to the Basic Documents by the Senior Lenders; and the Senior Loan Documents shall have been amended in form and substance reasonably satisfactory to Purchasers to permit the transactions contemplated by the Loan Documents, including the payment of dividends or other distributions by Subsidiaries to the Seller in order for the Seller to meet its debt service obligations to the Purchasers under the Notes. (iv) The Purchasers shall have completed a due diligence review of the Seller and the Subsidiaries to the satisfaction of the Purchasers in their sole discretion. (v) The Purchasers shall have received the latest internally prepared consolidated financial statements of the Seller and its Subsidiaries which shall be at least through June 30, 1998. Since June 30, 1998, there shall have occurred no event which could have a Material Adverse Effect. (vi) The Board of Directors of each of the Seller, the Guarantors, the Purchasers and Enron Corp. must have approved the transactions contemplated under this Agreement and the other Basic Documents. (vii) All other consents, including without limitation any required shareholder approval, and waivers necessary to complete the transactions under this -24- 29 Agreement and the other Basic Documents shall have been obtained by the Seller, the Guarantors and the Purchasers. (e) The Warrants Shares and the Acquired Shares shall have been approved for listing on NASDAQ and the registration statement on Form S-1 registering the Notes, the Warrants, and the Acquired Shares shall have been declared effective by the Commission and no stop order with respect thereto shall have been issued. (f) The Seller shall have delivered to the Purchasers the executed Notes, Warrants and Acquired Shares. (g) The Mortgages shall have been filed in two counties of Purchasers's choice. (h) The Seller shall have paid to ECT Securities Corp. and JEDI-II all payments required under the terms of the Structuring Fee Agreement. (i) If requested in writing by either of the Purchasers, a Designee of the Purchasers shall have been appointed to the Board of Directors of the Seller pursuant to Section 7.03. (j) The Seller shall have duly and validly reserved the Warrant Shares for issuance upon conversion of the Warrants. (k) The issuance of the Securities by the Seller shall not as of the Funding Date be enjoined (temporarily or permanently) under the laws of any jurisdiction to which the Seller is subject. (l) Each of the Basic Documents shall have been executed and delivered by all the respective parties thereto and shall be in full force and effect. Section 6.02 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLER. The obligations of the Seller to issue and sell Securities hereunder is subject, on the Funding Date, to the prior or simultaneous satisfaction or waiver of the following conditions: (a) The representations and warranties made by the Purchasers herein shall be true and correct in all respects on and as of the Funding Date with the same effect as though such representations and warranties had been made on and as of the Funding Date. (b) The Purchasers shall have accepted delivery of and made payment for the Securities. (c) The issuance of the Securities by the Seller shall not as of the Funding Date be enjoined (temporarily or permanently) under the laws of any jurisdiction to which the Seller is subject. -25- 30 (d) Each of the Basic Documents shall have been executed and delivered by all the respective parties thereto and shall be in full force and effect. Section 6.03 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASERS AND SELLER. The obligations of the Purchasers and Seller hereunder are contingent upon the Funding Date occurring on or before 5:00 p.m., Houston, Texas time on September 1, 1998. ARTICLE VII AFFIRMATIVE COVENANTS Unless the prior written consent to the contrary is obtained from (i) the holders of the majority of the Warrants (as to Sections 7.01 and 7.02) and (ii) ECT (as to Sections 7.03 and 7.04) the Seller will, for the benefit of each of the holders of the Warrants or Warrant Shares and the holders of the Acquired Shares, comply with the covenants contained in this Article VII (or cause each Subsidiary's compliance with the applicable covenants). Section 7.01 WARRANTS. Seller shall at all times during the term of the Warrants maintain a sufficient number of shares of Common Stock of the Seller to be issued as Warrant Shares upon the exercise of all or part of the Warrants. Seller shall (i) notify the holders of the Warrants promptly after the exercise of any of the Warrants by a holder or holders thereof, of the exercise thereof, (ii) provide to the holders of the Warrants such information or materials in connection therewith as may be reasonably requested by the holders of the Warrants, and (iii) otherwise provide to all the holders of the Warrants copies of all notices provided to or from the Seller in connection with the Warrants. Seller's obligations under this Section 7.01 shall expire upon expiration of the term of the Warrants. Section 7.02 HART-SCOTT-RODINO COMPLIANCE. As soon as practicable after the receipt from any holder of the Warrants or any Seller (the "Notice Giver") of notice of the exercise of a number of Warrants sufficient to require a filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules, regulations and formal interpretations thereunder, as amended from time to time (the "HSR Act"), but in any event no later than the 10th Business Day after receipt of such notice, the Seller will (i) prepare and file with the Antitrust Division of the Department of Justice (the "DOJ") and the Federal Trade Commission (the "FTC") the Notification and Report Form (accompanied by all documentary attachments contemplated thereby) required by the HSR Act, (ii) upon the request of any holder of the Warrants (the "Notice Giver"), request early termination of the waiting period imposed by the HSR Act, (iii) coordinate and cooperate with the Notice Giver in responding to formal and informal requests for additional information and documentary material from the DOJ and the FTC in connection with such filing, and (iv) use its best efforts to take, or cause to be taken, all reasonable action and to do, or cause to be done, all things reasonably necessary and appropriate to permit the issuance to the Notice Giver of the shares of common stock issuance upon the exercise of the warrants with respect to which any filing is required under the HSR Act, and (v) reimburse the holders of the Warrants for the entire amount of any filing fee or any other costs and expenses incurred by holders of the Warrants in connection therewith (including legal fees), or as required to be paid under the HSR Act. Seller's obligations under this Section 7.02 shall expire one (1) year following the expiration of the term of the Warrants. -26- 31 Section 7.03 BOARD REPRESENTATION. ECT or its designated Affiliate (the "Acting Party") shall have the right (a) to designate one member of the Board of Directors of the Seller or (b) (i) to receive (and Seller covenants and agrees to deliver to the Acting Party) prior notice of any proposed board action and to receive (and Seller covenants and agrees to deliver to the Acting Party) reasonable notice of and a right to attend any meeting of the Seller's Board of Directors, (ii) to receive (and Seller covenants and agrees to deliver to the Acting Party), promptly after they are produced, all management reports and accounts relating to the Seller that are provided to Seller's Board of Directors or any committee of the Board of Directors and (iii) upon reasonable notice, to have reasonable access to the books and records of the Seller, including statutory books, minute books and customer lists. In the event the Acting Party elects to designate a person to serve as a member of the Board of Directors of the Seller (the "Designee"), the Seller shall (x) expand as required the number of directors constituting the entire board, (y) fill the vacancy created by such expansion with such Designee and (z) submit the name of such Designee to the stockholders of the Seller (together with a recommendation of his or her election) at each meeting of stockholders at which directors are elected, until requested otherwise by the Acting Party. The obligations of the Seller pursuant to this Section 7.03 shall continue in full force and effect for so long as the ECT and JEDI-II and/or their respective Affiliates beneficially own 5% or more of the outstanding Common Stock of the Seller (including the Warrant Shares represented by the Warrants, whether exercised or not). Any Designee shall agree to resign at the request of the Seller, at any time after the expiration of the rights of the ECT and any Acting Party pursuant to this Section 7.03. The rights of ECT under this Section 7.03 shall not be assignable other than to an Affiliate of ECT. Section 7.04 COMMON STOCK; DIVIDENDS; VOTING RIGHTS. The declaration of dividends by the Seller shall be solely at the discretion of the Board of Directors of the Seller. Except for holders of Common Stock, no other class of Capital Stock of the Seller shall have any voting rights whatsoever, either separately or in conjunction with the Common Stock. Seller's obligations under this Section 7.04 shall expire upon payment of the Notes in full. ARTICLE VIII [OMITTED BY THE PARTIES HERETO] ARTICLE IX [OMITTED BY THE PARTIES HERETO] ARTICLE X [OMITTED BY THE PARTIES HERETO] ARTICLE XI [OMITTED BY THE PARTIES HERETO] -27- 32 ARTICLE XII MISCELLANEOUS Section 12.01. INTERPRETATION AND SURVIVAL OF PROVISIONS. Article, Section, Schedule, and Exhibit references are to this Agreement, unless otherwise specified. All references to instruments, documents, contracts, and agreements are references to such instruments, documents, contracts, and agreements as the same may be amended, supplemented, and otherwise modified from time to time, unless otherwise specified. The word "including" shall mean "including but not limited to." Whenever the Seller has an obligation under the Basic Documents, the expense of complying with that obligation shall be an expense of the Seller unless otherwise specified. Whenever any determination, consent, or approval is to be made or given by the Purchasers, any holder of the Warrants or the Acquired Shares, such action shall be in such Person's sole discretion unless otherwise specified in this Agreement. If any provision in the Basic Documents is held to be illegal, invalid, not binding, or unenforceable, such provision shall be fully severable and the Basic Documents shall be construed and enforced as if such illegal, invalid, not binding, or unenforceable provision had never comprised a part of the Basic Documents, and the remaining provisions shall remain in full force and effect. The Basic Documents have been reviewed and negotiated by sophisticated parties with access to legal counsel and shall not be construed against the drafter. The representations, warranties, and covenants made in this Agreement, the Notes or any other Basic Document shall remain operative and in full force and effect regardless of (a) any investigation made by or on behalf of the Seller or the Purchasers or (b) acceptance of any of the Securities and payment therefor and repayment or repurchase thereof. All indemnification obligations of the Seller and the provisions of Section 12.02 shall remain operative and in full force and effect unless such obligations are expressly terminated in a writing referencing those individual Sections, regardless of any purported general termination of this Agreement. Section 12.02 COSTS, EXPENSES AND TAXES. (a) Intentionally Deleted. (b) The Seller agrees to indemnify the Purchasers, and their respective officers, directors, employees, representatives, agents, attorneys, and Affiliates (collectively, "Related Parties") from, hold each of them harmless against and promptly upon demand pay or reimburse each of them for, any and all actions, suits, proceedings (including any investigations, litigation, or inquiries), claims, demands, and causes of action by third parties, and, in connection therewith, all reasonable costs, losses, liabilities, damages, or expenses of any kind or nature whatsoever (collectively the "INDEMNITY MATTERS") which may be incurred by or asserted against or involve any of them (whether or not any of them is designated a party thereto) as a result of, arising out of, or in any way related to (i) any actual or proposed use by the Seller of the proceeds of any sale of the Securities, (ii) the operations of the business of the Seller or any Subsidiary, (iii) any bodily injury or death or property damage occurring in or upon or in the vicinity of any Collateral, (iv) any claim by any third Person against any Collateral assigned to or paid to any Noteholder pursuant to any Collateral Document, (v) the failure of the Seller or any Subsidiary to comply with any Governmental Requirement, or (vi) any other aspect of this Agreement and the other Basic -28- 33 Documents, including, without limitation, the reasonable fees and disbursements of counsel and all other reasonable expenses incurred in connection with investigating, defending or preparing to defend any such action, suit, proceeding (including any investigations, litigation, or inquiries), or claim and INCLUDING ALL INDEMNITY MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY INDEMNITEE (but excluding all Indemnity Matters arising solely by reason of claims between the Purchasers or any Purchaser's shareholders against any Purchaser or by reason of the gross negligence or wilful misconduct of any Indemnitee). (c) The Seller agrees to pay and hold the Purchasers harmless from and against any and all present and future stamp and other similar taxes with respect to this Agreement and the Equity Documents and save the Purchasers harmless from and against any and all liabilities with respect to or resulting from any delay or omission to pay such taxes, and will indemnify the Purchasers for the full amount of taxes paid by the Purchasers in respect of payments made or to be made under this Agreement, any other Equity Document and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto, whether or not such taxes were correctly or legally asserted. (d) In the case of any indemnification hereunder, the Purchaser or other Person indemnified hereunder shall give notice to the Seller within a reasonable period of time of any such claim or demand being made against the Purchaser or other indemnified Person and the Seller, at its sole cost and expense, shall provide a defense of such claim, provided, however, that, (i) if the Seller has failed to assume the defense and employ counsel or (ii) if the defendants in any such action include both the indemnified party and the Seller or any Subsidiary and counsel to the indemnified party shall have concluded that there may be reasonable defenses available to the indemnified party that are different from or additional to those available to the Seller or such Subsidiary or if the interests of the indemnified party reasonably may be deemed to conflict with the interest of the Seller or such Subsidiary, then the indemnified party shall have the right to select a separate counsel and to assume such legal defense and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the Seller as incurred. (e) No indemnitee may settle any claim to be indemnified without the consent of the indemnitor, such consent not to be unreasonably withheld; provided, that the indemnitor may not reasonably withhold consent to any settlement that an indemnitee proposes if the indemnitor does not have the financial ability to pay all its obligations outstanding and asserted against the indemnitee at that time, including the maximum potential claims against the indemnitee to be indemnified pursuant to this Section 12.02. (f) This Section 12.02 shall not apply to actions, suits, proceedings, investigations, demands, losses, liabilities, claims, damages, deficiencies, interest, judgements, costs, or expenses relating to any Property to the extent arising from the acts or omissions of the Agent or any Noteholder during the period after which such Person, its successors or assigns shall have acquired possession of such Property (whether through foreclosure or deed in lieu of foreclosure, as mortgagee in possession or otherwise). -29- 34 (g) The Seller's obligations under this Section 12.02 shall survive any termination of this Agreement and the payment of the Obligations. Section 12.03 NO WAIVER; MODIFICATIONS IN WRITING. (a) No failure or delay on the part of the Seller or the Purchasers in exercising any right, power, or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power, or remedy preclude any other or further exercise thereof or the exercise of any right, power, or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Seller or the Purchasers at law or in equity or otherwise. (b) Except as otherwise provided herein, no amendment, waiver, consent, modification, or termination of any provision of this Agreement, shall be effective unless signed by the Seller and the holders of more than 50% of the outstanding principal balance of the Notes and the holders of more than 50% of the Warrants. Any amendment, supplement or modification of or to any provision of this Agreement or any other Equity Document, any waiver of any provision of this Agreement or any other Equity Document, and any consent to any departure by the Seller from the terms of any provision of this Agreement or any other Equity Document, shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on the Seller in any case shall entitle the Seller to any other or further notice or demand in similar or other circumstances. Section 12.04 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon the Seller and the Purchasers, and their respective successors and permitted assigns. Except as expressly provided in this Agreement, this Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement, and their respective successors and permitted assigns. Subject to applicable federal and state securities laws the rights and obligations of the Purchasers under this Agreement with respect to the Warrants and the Equity Documents may be sold, assigned or pledged by any Purchaser, in whole or in part, in accordance with the provisions of the Warrants, and upon any such assignment, the holders of the Warrants shall succeed to all of the selling Purchaser's rights and obligations under this Agreement with respect to the Warrants and the Equity Documents to the extent assigned and the selling Purchaser shall be automatically released from any obligations thereunder with respect to the Warrants and the Equity Documents to the extent assigned. Subject to applicable federal and state securities laws the Acquired Shares may be sold, assigned or pledged subject only to the Registration Rights Agreement and upon any such assignment the holders of the Acquired Shares shall succeed to the Purchaser's rights and obligations under the Registration Rights Agreement. Upon request of any Purchaser in connection with any transfer of the Warrants or Acquired Shares, the Seller shall execute and deliver any amendment to this Agreement, the Warrants, and the other Equity Documents reasonably requested by the Purchaser to reflect the transfer and delineate the rights of the transferor and the transferee. Section 12.05 REPLACEMENT SECURITIES. Upon receipt of evidence satisfactory to the Seller of the loss, theft, destruction, or mutilation of any Warrants, Warrant Shares or Acquired Shares and, -30- 35 in the case of any such loss, theft, or destruction, upon delivery of any unsecured letter of indemnity reasonably satisfactory to the Seller or, in the case of any such mutilation, upon surrender or cancellation thereof, the Seller will issue a new Warrants, Warrant Shares or Acquired Shares, as applicable. Section 12.06 COMMUNICATIONS. All notices and demands provided for hereunder shall be in writing and shall be given by registered or certified mail, return receipt requested, telecopy, air courier guaranteeing overnight delivery or personal delivery to the following addresses: If to the Purchasers: Enron Capital Management II Limited Partnership c/o Enron Capital II Corp. 1400 Smith Street Houston, Texas 77002 Attention: Shirley Hudler Telecopier: (713) 646-8008 and Enron Capital & Trade Resources Corp. 1400 Smith Street Houston, Texas 77002 Attention: Donna Lowry Telecopier: (713) 646-4039 If to the Seller: 6300 Bridge Point Parkway Building 2, Suite 500 Austin, Texas 78730 Attention: Craig M. Fleming Telecopier: (512) 472-3400 or to such other address as the Seller or any Purchaser may designate in writing. All other communications may be by regular mail. All notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; four days after being sent by certified mail, return receipt requested, if mailed; when receipt acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. Section 12.07 GOVERNING LAW. This Agreement will be construed in accordance with and governed by the laws of the State of Texas without regard to principles of conflicts of laws. -31- 36 Section 12.08 ARBITRATION. (a) BINDING ARBITRATION. Subject to the provisions of subparagraph (e), on the request of either the Seller or any Purchaser, whether made before or after the institution of any legal proceeding, any action, dispute, claim or controversy of any kind now existing or hereafter arising between any of the parties hereto in any way arising out of, pertaining to or in connection with this Agreement (a "Dispute") shall be resolved by binding arbitration in accordance with the terms hereof. Either the Seller or any Purchaser may, by summary proceedings, bring an action in court to compel arbitration of any Dispute. (b) GOVERNING RULES. Any arbitration shall be administered by the American Arbitration Association (the "AAA") in accordance with the terms of this Section, the Commercial Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal Arbitration Act. Judgment on any award rendered by an arbitrator may be entered in any court having jurisdiction. (c) ARBITRATORS. Any arbitration shall be conducted before a three person panel of neutral arbitrators. Such panel shall consist of one person from each of the following categories: (1) an attorney who has practiced in the area of commercial law for at least 10 years or a retired judge at the Texas or United States District Court or an appellate court level; (2) a person with at least 10 years experience in commercial lending; and (3) a person with at least 10 years experience in the energy service industry. The AAA shall submit a list of persons meeting the criteria outlined above for each category of arbitrator, and the parties shall select one person from each category in the manner established by the AAA. If the parties cannot agree on an arbitrator within 30 days after the request for an arbitration, then any party may request the AAA to select an arbitrator. The arbitrator may engage engineers, accountants or other consultants that the arbitrator deems necessary to render a conclusion in the arbitration proceeding. (d) CONDUCT OF ARBITRATION. To the maximum extent practicable, an arbitration proceeding hereunder shall be concluded within 180 days of the filing of the Dispute with the AAA. Arbitration proceedings shall be conducted in Houston, Texas. At the conclusion of any arbitration proceeding, the arbitrator shall make specific written findings of fact and conclusions of law. The arbitrator shall have the power to award recovery of all costs and fees to the prevailing party. The Seller and the Purchasers each agree to keep all Disputes and arbitration proceedings strictly confidential except for disclosure of information required by applicable law. (e) COSTS OF ARBITRATION. All fees of the arbitrator and any engineer, accountant or other consultant engaged by the arbitrator, shall be paid by the Seller (as to 50%) and the Purchasers (as to 50%) unless otherwise awarded by the arbitrator. Section 12.09 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. -32- 37 IN WITNESS WHEREOF, the parties hereto execute this Agreement, effective as of the date first above written. BRIGHAM EXPLORATION COMPANY, a Delaware corporation By: /s/ CRAIG M. FLEMING --------------------------------------------- Craig M. Fleming Chief Financial Officer -33- 38 JOINT ENERGY DEVELOPMENT INVESTMENTS II LIMITED PARTNERSHIP, a Delaware limited partnership, as Purchaser By: Enron Capital Management II Limited Partnership, its General Partner By: Enron Capital II Corp., its General Partner By: /s/ MARK J. WARNER ---------------------------------- Name: Mark J. Warner -------------------------------- Title: Agent and Attorney-in-Fact ------------------------------- ENRON CAPITAL & TRADE RESOURCES CORP., a Delaware corporation By: /s/ MARK J. WARNER -------------------------------------------- Name: Mark J. Warner ------------------------------------------ Title: Agent and Attorney-in-Fact ----------------------------------------- -34- EX-10.39 7 REGISTRATION RIGHTS AGREEMENT - AUGUST 20, 1998 1 EXHIBIT 10.39 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of August 20, 1998, by and among Brigham Exploration Company, a Delaware corporation (the "Company"), Joint Energy Development Investments II Limited Partnership, a Delaware limited partnership ("JEDI"), and Enron Capital & Trade Resources Corp., a Delaware corporation ("ECT"). This Agreement is made pursuant to the Securities Purchase Agreement. In order to induce ECT and JEDI to enter into the Securities Purchase Agreement, the Company has agreed to provide the registration and other rights set forth in this Agreement. Pursuant to the Securities Purchase Agreement, ECT and JEDI will purchase the Acquired Shares and Warrants. The execution and delivery of this Agreement is a condition to the Closing (as defined in the Securities Purchase Agreement). The parties agree as follows: ARTICLE I Section 1.01. Definitions. Capitalized terms used herein without definition shall have the meanings given to them in the Securities Purchase Agreement. The terms set forth below are used herein as so defined: "Commission" has the meaning specified therefor in Section 1.02 of this Agreement. "Common Stock" means the common stock, par value $0.01 per share, of the Company. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Holder" means the record holder of any Registrable Securities. "Inspector" has the meaning specified therefor in Section 2.03 this Agreement. "Losses" has the meaning specified therefor in Section 2.07 of this Agreement. "Other Holders" has the meaning specified therefor in Section 2.01 of this Agreement. "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, business trust, trust or unincorporated entity. "Records" has the meaning specified therefor in Section 2.03 of this Agreement. 2 "Registrable Securities" means the Acquired Shares, the Warrants, the Warrant Shares and any other securities issued upon the exercise of the Warrants, until such time as such securities cease to be Registrable Securities pursuant to Section 1.02 hereof. "Requesting Holder(s)" has the meaning specified therefor in Section 2.01 of this Agreement. "Request Notice" has the meaning specified therefor in Section 2.01 of this Agreement. "Registration Statement" has the meaning specified therefor in Section 2.01 of this Agreement. "Securities Act" has the meaning specified therefor in Section 1.02 of this Agreement. "Securities Purchase Agreement" means the Securities Purchase Agreement, dated as of August 20, 1998, among the Company, ECT and JEDI, individually and as agent. "Selling Holder" means a Holder who is selling Registrable Securities pursuant to a Registration Statement. Section 1.02. Registrable Securities. Any Registrable Security will cease to be a Registrable Security when (i) a Registration Statement covering such Registrable Security has been declared effective by the Securities and Exchange Commission (the "Commission") and such Registrable Security has been sold or disposed of pursuant to such effective Registration Statement; (ii) such Registrable Security is disposed of pursuant to Rule 144 (or any similar provision then in force) under the Securities Act of 1933, as amended (the "Securities Act"); (iii) such Registrable Security is eligible to be, and at the time of determination can be, disposed of pursuant to paragraph (k) of Rule 144 (or any similar provision then in force) under the Securities Act; or (iv) such Registrable Security is held by the Company or one of its subsidiaries. ARTICLE II Section 2.01. Demand Registration. (a) Any time after the Funding Date, as defined in the Securities Purchase Agreement, (i) any Holder or Holders who collectively beneficially own at least 25% (twenty-five percent) of the Registrable Securities may request (a "Request Notice") the Company to register under the Securities Act (other than pursuant to a shelf registration on Form S- 3) all or any portion of the Registrable Securities that are held by such Holder or Holders (collectively, the "Requesting Holder") for sale in the manner specified in the Request Notice and (ii) in the event that the Company is eligible to file a Registration Statement on Form S-3, any Holders who collectively beneficially own at least a majority of the Registrable Securities may submit a Request Notice to the Company to register under Form S-3 all or any portion of the Registrable Securities that are held by such Requesting Holder(s) for sale in the manner specified in the Request Notice. 2 3 (b) Promptly following receipt of a Request Notice, the Company shall immediately notify each Holder (except the Requesting Holder) of the receipt of a Request Notice and shall use its best efforts to file a registration statement under the Securities Act (each such registration statement is hereinafter referred to as a "Registration Statement") effecting the registration under the Securities Act, for public sale in accordance with the method of disposition specified in such Request Notice, of the Registrable Securities specified in the Request Notice (and in any notices that the Company receives from other Holders no later than the 15th day after receipt of the notice sent by the Company) (such other Holders and the Requesting Holder are hereinafter referred to as the "Requesting Holders"). If such method of disposition shall be an underwritten public offering, the Requesting Holders holding a majority of the Registerable Securities to be registered may designate the managing underwriter of such offering, subject to the approval of the Company, which approval shall not be withheld unreasonably. The Company shall be obligated to register Registrable Securities pursuant to this Section 2.01 on two occasions only. A request pursuant to this Section 2.01 shall be counted ("Counted") only when (i) all the Registrable Securities requested to be included in any such registration have been so included, (ii) the corresponding Registration Statement has become effective under the Securities Act, and (iii) the public offering has been consummated and the Registrable Securities have been sold on the terms and conditions specified therein; provided, however, that in the event of a shelf registration if the Company is then eligible to file a Registration Statement on Form S-3, the Company shall keep such Registration Statement effective for two years from the effective date of the Registration Statement. (c) The Company may delay the filing or effectiveness of a Registration Statement after receipt of a Request Notice (i) for up to 90 days if at the time of such request, the Company is engaged in a firm commitment underwritten public offering of its securities in which Holders may include Registrable Securities and for which the Company has delivered the notice to the Holders required by Section 2.02 or (ii) for up to 60 days if at the time of such request the Board of Directors of the Company determines in its reasonable judgment and in good faith that the filing of such a Registration Statement or the making of any required disclosure in connection therewith would have a material adverse effect on the Company or substantially interfere with a significant transaction in which the Company is then engaged; provided that the Company may not delay the filing of a Registration Statement in reliance on this clause (ii) more than once during any period of twelve consecutive calendar months. (d) The Company and the parties to the Registration Rights Agreement with the Company dated February 26, 1997, who are entitled to piggy-back registration rights as of the Closing Date ("Other Holders") with respect to a Registration Statement filed pursuant to Section 2.01 may include securities of the Company in such Registration Statement, but only to the extent that, in the good faith opinion of the managing underwriter (if such method of disposition shall be an underwritten public offering) supported by written reasons therefor, the inclusion of such shares would not raise a substantial doubt as to whether the proposed offering could successfully be consummated. Subject to Section 2.01(c) above, except as provided in this subsection (d), the Company will not effect any other registration of its equity securities (except with respect to Registration Statements on Form S-4 or S-8 or for purposes permissible under such forms as of the date hereof), whether for its own account or that of any Other Holder, from the date of receipt of a 3 4 Request Notice related to an underwritten public offering until the completion of the distribution by the underwriters of all securities thereunder. (e) Exercise of the right to convert the Warrants to Warrant Shares shall at the Holder's sole election and discretion be contingent upon the registration of the Warrant Shares in accordance with this Agreement and should such registration not be completed pursuant to the terms hereof, Holder shall have the right, at its sole discretion, to rescind its election to convert the Warrants. (f) From and after the date of this Agreement and until no Registrable Securities remain outstanding, the Company shall not grant registration rights to any Person if such rights would conflict with the provisions of this Agreement. Section 2.02. Piggy-Back Registration. If the Company proposes to register any of its equity securities under the Securities Act for sale to the public, whether for its own account or for the account of Other Holders or both (except with respect to Registration Statements on Forms S-4 or S-8 or for purposes permissible under such forms as of the date hereof), each such time it will give written notice to all Holders of its intention to do so no less than 20 days prior to the anticipated filing date. Upon the written request received by the Company from any Holder no later than the 15th day after receipt by such Holder of the notice sent by the Company (which request shall state the intended method of disposition thereof), the Company will use best efforts to cause the Registrable Securities as to which registration shall have been so requested to be included in the securities to be covered by such Registration Statement, all to the extent requisite to permit the sale or other disposition by each Holder (in accordance with its written request) of such Registrable Securities so registered; provided, however, that the Company may at any time prior to the effectiveness of any such Registration Statement, in its sole discretion and without the consent of any Holder, abandon any proposed offering by the Company in which any Holder had requested to participate. The number of Registrable Securities to be included in such a registration may be reduced or eliminated if and to the extent, in the case of an underwritten offering, the managing underwriter shall advise the Company that such inclusion would materially jeopardize the successful marketing of the securities (including the Registrable Securities) proposed to be sold therein; provided, however, that such number of shares of Registrable Securities shall not be reduced if any securities included in such registration are included other than for the account of the Company unless the shares included in the Registration for the account of such Persons are also reduced on a pro rata basis, provided, in the case of a Registration Statement filed pursuant to the exercise of demand registration rights of any Other Holders, priority shall be given first to the Other Holders demanding such registration. Section 2.03. Registration Procedures. If and whenever the Company is required pursuant to this Agreement to effect the registration of any of the Registrable Securities under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission a Registration Statement, on a form available to the Company, with respect to such securities (which filing shall be made (i) as promptly 4 5 as possible (but in no event later than 30 days after the receipt by the Company of a Request Notice) in the case of a shelf registration if the Company is then eligible to file a Registration Statement on Form S-3 or (ii) as promptly as possible (but in no event later than 60 days after the receipt by the Company of a Request Notice) in the case of any underwritten offering or if the Company is not eligible to file a Registration Statement on Form S-3, provided that in no event will the Company be obligated to file a Registration Statement pursuant to (i) or (ii) prior to the Funding Date pursuant to the Securities Purchase Agreement. The Company shall thereafter use best efforts to cause such Registration Statement to become and remain effective for the period of the distribution in order for it to be Counted; (b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the distribution period to be Counted and as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement in accordance with the Holders intended method of disposition; (c) furnish to each Selling Holder and to each underwriter such number of copies of the Registration Statement and the prospectus included therein (including each preliminary prospectus and each document incorporated by reference therein to the extent then required by the rules and regulations of the Commission) as such Persons may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities covered by such Registration Statement; (d) if applicable, use best efforts to register or qualify the Registrable Securities covered by such Registration Statement under the securities or blue sky laws of such jurisdictions as the Selling Holders or, in the case of an underwritten public offering, the managing underwriter, shall reasonably request, provided that the Company will not be required to qualify generally to transact business in any jurisdiction where it is not then required to so qualify or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject; (e) immediately notify each Selling Holder and each underwriter, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus contained in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing and as promptly as practicable amend or supplement the prospectus or take other appropriate action so that the prospectus does not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (f) in the case of an underwritten public offering, furnish upon request, (i) on the date that Registrable Securities are delivered to the underwriters for sale pursuant to such 5 6 Registration Statement, an opinion of counsel for the Company dated as of such date and addressed to the underwriters and to the Selling Holders, stating that such Registration Statement has become effective under the Securities Act and that (A) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, (B) the Registration Statement, the related prospectus, and each amendment or supplement thereof, comply as to form in all material respects with the requirements of the Securities Act and the applicable rules and regulations thereunder of the Commission (except that such counsel need express no opinion as to the financial statements, or any expertized schedule, report or information contained or incorporated therein) and (C) to such other effects as may reasonably be requested by counsel for the underwriters, and (ii) on the effective date of the Registration Statement and on the date that Registrable Securities are delivered to the underwriters for sale pursuant to such Registration Statement, a letter dated such dates from the independent accountants retained by the Company, addressed to the underwriters and, if available, to the Selling Holders, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company and the schedules thereto that are included or incorporated by reference in the Registration Statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable requirements of the Securities Act and the published rules and regulations thereunder, and such letter shall additionally address such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) included in the Registration Statement in respect of which such letter is being given as the underwriters may reasonably request; (g) make available for inspection by the Selling Holders designated by a majority thereof, any underwriter participating in any distribution pursuant to such Registration Statement, and any attorney, accountant or other agent retained by such representative of the Selling Holders or underwriter (the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspector in connection with such Registration Statement. (h) cause the Registerable Securities to be listed on New York Stock Exchange, American Stock Exchange or on the NASDAQ National Market if the Common Stock is or becomes so listed; (i) use best efforts to keep effective and maintain for the period of distribution to be Counted, qualification, approval or listing obtained to cover the Registrable Securities as may be necessary for the Selling Holders to dispose thereof and shall from time to time amend or supplement any prospectus used in connection therewith to the extent necessary in order to comply with applicable law; (j) use best efforts to cause the Registrable Securities to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the 6 7 business and operations of the Company to enable the Selling Holders to consummate the disposition of such Registrable Securities; and (k) take such other actions as are reasonably requested by the Selling Holders or the underwriters, if any, in order to expedite, facilitate or consummate the disposition of such Registrable Securities. In connection with each registration hereunder with respect to an underwritten public offering, the Company and each Selling Holder agrees to enter into a written agreement with the managing underwriter or underwriters selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between underwriters and companies of the Company's size and investment stature, provided that such agreement shall not contain any such provision applicable to the Company or the Selling Holders that is inconsistent with the provisions hereof; and further provided, that the time and place of the closing under said agreement shall be as mutually agreed upon among the Company, the Selling Holders and such managing underwriter. In connection with each registration hereunder, each Selling Holder will furnish promptly to the Company in writing such information with respect to itself and the proposed distribution by it as shall be necessary in order to ensure compliance with federal and applicable state securities laws. Section 2.04. Restrictions on Public Sale by Selling Holders of Registrable Securities. To the extent not inconsistent with applicable law, including insurance codes, each Selling Holder whose Registrable Securities are included in a Registration Statement pursuant to this Agreement agrees not to effect any public sale or distribution of the issue being registered (or any securities of the Company convertible into or exchangeable or exercisable for securities of the same type as the issue being registered) during the 14 days before, and during the 90-day period beginning on, the effective date of such Registration Statement (except as part of such registration), but only if and to the extent requested in writing (with reasonable prior notice) by the managing underwriter or underwriters in the case of an underwritten public offering by the Company of securities of the same type as the Registrable Securities, provided that the duration of the foregoing restrictions shall be no longer than the duration of the shortest restriction imposed by the underwriters on the officers or directors or any other stockholder of the Company; and provided further, that the period of time for which the Company is required to keep such registration statement which includes Registrable Securities continuously effective shall be increased by a period equal to such requested holdback period. Section 2.05. Restrictions on Public Sale by the Company. To the extent required by an underwriter in an underwritten public offering, the Company agrees not to effect on its own behalf any public sale or distribution of any securities similar to those being registered, or any securities convertible into or exchangeable or exercisable for such securities, during the 14 days before, and during the 90-day period beginning on, the effective date of any registration statement in which the Selling Holders of Registrable Securities are participating, other than pursuant to such registration statement or a Registration Statement on Form S-8 or Form S-4. 7 8 Section 2.06. Expenses. (a) "Registration Expenses" means all expenses incident to the Company's performance under or compliance with this Agreement, including without limitation, all registration and filing fees, blue sky fees and expenses, printing expenses, listing fees, fees and disbursements of counsel and independent public accountants for the Company, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of insurance and reasonable out-of-pocket expenses (including without limitation, reasonable legal fees of one counsel for all Selling Holders), but excluding any Selling Expenses. "Selling Expenses" means all underwriting fees, discounts and selling commissions allocable to the sale of the Registrable Securities. (b) The Company will pay all Registration Expenses in connection with each Registration Statement filed pursuant to this Agreement, whether or not the Registration Statement becomes effective, and the Selling Holders shall pay all Selling Expenses in connection with any Registrable Securities registered pursuant to this Agreement. Section 2.07. Indemnification. (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless each Selling Holder thereunder and each underwriter, pursuant to the applicable underwriting agreement with such underwriter, of Registrable Securities thereunder and each Person, if any, who controls such Selling Holder or underwriter within the meaning of the Securities Act and the Exchange Act, against any losses, claims, damages or liabilities (including reasonable attorneys' fees) ("Losses"), joint or several, to which such Selling Holder or underwriter or controlling Person may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Losses, (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such Selling Holder, each such underwriter and each such controlling Person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Loss or actions; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by such Selling Holder, such underwriter or such controlling Person in writing specifically for use in such Registration Statement or prospectus. (b) Each Selling Holder agrees to indemnify and hold harmless the Company, its directors, officers, employees and agents and each Person, if any, who controls the Company within the meaning of the Securities Act or of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Selling Holder, but only with respect to information regarding such Selling Holder furnished in writing by or on behalf of such Selling Holder expressly for 8 9 inclusion in any Registration Statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto; provided, however, that the liability of such Selling Holder shall not be greater in amount than the dollar amount of the proceeds (net of any Selling Expenses) received by such Selling Holder from the sale of the Registrable Securities giving rise to such indemnification. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 2.07 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel as so elected; provided, however, that, (i) if the indemnifying party has failed to assume the defense and employ counsel or (ii) if the defendants in any such action include both the indemnified party and the indemnifying party and counsel to the indemnified party shall have concluded that there may be reasonable defenses available to the indemnified party that are different from or additional to those available to the indemnifying party or that the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, then the indemnified party shall have the right to select a separate counsel and to assume such legal defense and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) If the indemnification provided for in this Section 2.07 is unavailable to the Company or the Selling Holders or is insufficient to hold them harmless in respect of any Losses, then each such indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Losses as between the Company on the one hand and each Selling Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of each Selling Holder on the other in connection with the statements or omissions which resulted in such Losses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and each Selling Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statements of a material fact or the omission or alleged omission to state a material fact has been made by, or relates to, information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 9 10 No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who is not guilty of such fraudulent misrepresentation. ARTICLE III Section 3.01 Communications. All notices and other communications provided for or permitted hereunder shall be made in writing by telecopy, courier service or personal delivery: (a) if to a Holder, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 3.01, which address initially is, with respect to JEDI or ECT, the address set forth in the Securities Purchase Agreement, and (b) if to the Company, initially at its address set forth in the Securities Purchase Agreement, and (c) for each, thereafter at such other address, notice of which is given in accordance with the provisions of this Section 3.01. All such notices and communications shall be deemed to have been received at the time delivered by hand, if personally delivered; when receipt acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. Section 3.02. Successor and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including subsequent holders of Registrable Securities. Section 3.03. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. Section 3.04. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. Section 3.05. Governing Law. THE LAWS OF THE STATE OF TEXAS SHALL GOVERN THIS AGREEMENT WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. Section 3.06. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting or impairing the validity or enforceability of such provision in any other jurisdiction. 10 11 Section 3.07. Entire Agreement. This Agreement, together with the Securities Purchase Agreement and the other Basic Documents (as defined in the Securities Purchase Agreement) are intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Securities Purchase Agreement. This Agreement, the Securities Purchase Agreement and the other Basic Documents supersede all prior agreements and understandings between the parties with respect to such subject matter. Section 3.08. Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, the successful party shall be entitled to recover reasonable attorneys' fees in addition to its costs and expenses and any other available remedy. Section 3.09. Amendment. This Agreement may be amended only by means of a written amendment signed by the Company and by the Holders of a majority of the Registrable Securities. Section 3.10. Registrable Securities Held by the Company or Its Affiliates. In determining whether the Holders of the required amount of Registrable Securities have concurred in any direction, amendment, supplement, waiver or consent, Registrable Securities owned by the Company or one of its Affiliates shall be disregarded. Section 3.11. Assignment of Rights. The rights of any Holder under this Agreement may be assigned to any Person who acquires any Registrable Securities. Any assignment of registration rights pursuant to this Section 3.11 shall be effective only upon receipt by the Company of written notice from such assigning Holder stating the name and address of any assignee. The rights of an assignee under this Section 3.11 shall be the same rights granted to the assigning Holder under this Agreement. In connection with any such assignment, the term "Holder" as used herein shall, where appropriate to assign the rights and obligations of the assigning Holder hereunder to such assignee, be deemed to refer to the assignee. 11 12 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. BRIGHAM EXPLORATION COMPANY By: /s/ CRAIG M. FLEMING ------------------------------------ Craig M. Fleming Chief Financial Officer JOINT ENERGY DEVELOPMENT INVESTMENTS II LIMITED PARTNERSHIP By: Enron Capital Management II Limited Partnership, its General Partner By Enron Capital II Corp., its General Partner By: /s/ MARK J. WARNER ------------------------------- Name: Mark J. Warner ----------------------------- Title: Agent and Attorney-in-Fact ---------------------------- ENRON CAPITAL & TRADE RESOURCES CORP. By: /s/ MARK J. WARNER ------------------------------- Name: Mark J. Warner ----------------------------- Title: Agent and Attorney-in-Fact ---------------------------- 12 EX-10.40 8 GUARANTY AGREEMENT 1 EXHIBIT 10.40 GUARANTY AGREEMENT BY [SEE SCHEDULE I HERETO] IN FAVOR OF CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, AS TRUSTEE AUGUST 20, 1998 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 GENERAL TERMS Section 1.1 Terms Defined Above or in the Indenture.....................................2 Section 1.2 Certain Definitions.........................................................2 ARTICLE 2 THE GUARANTY Section 2.1 Liabilities Guaranteed......................................................4 Section 2.2 Nature of Guaranty..........................................................4 Section 2.3 Trustee's Rights............................................................4 Section 2.4 Guarantor's Waivers.........................................................5 Section 2.5 Maturity of Liabilities; Payment............................................5 Section 2.6 Trustee's, Agent's and Noteholders' Expenses................................5 Section 2.7 Liability...................................................................5 Section 2.8 Events and Circumstances Not Reducing or Discharging Guarantor's Obligations.....................................................6 Section 2.9 Right of Subrogation and Contribution.......................................7 ARTICLE 3 REPRESENTATIONS AND WARRANTIES Section 3.1 By Guarantor................................................................8 Section 3.2 No Representation by Noteholders............................................9 ARTICLE 4 SUBORDINATION OF INDEBTEDNESS Section 4.1 Subordination of All Guarantor Claims.......................................9 Section 4.2 Claims in Bankruptcy.......................................................10 Section 4.3 Payments Held in Trust.....................................................10 Section 4.4 Liens Subordinate..........................................................10 ARTICLE 5 MISCELLANEOUS Section 5.1 Successors and Assigns.....................................................11 Section 5.2 Notices....................................................................11 Section 5.3 Business and Financial Information.........................................11 Section 5.4 Construction...............................................................11 Section 5.5 Invalidity.................................................................11 Section 5.6 Subordination Agreement....................................................11 Section 5.7 ENTIRE AGREEMENT...........................................................12
-i- 3 GUARANTY AGREEMENT THIS GUARANTY AGREEMENT by [see Schedule I hereto] (hereinafter called "Guarantor"), is in favor of CHASE BANK OF TEXAS, NATIONAL ASSOCIATION in its capacity as trustee under the Indenture (as hereinafter defined), and each and every successor trustee under the Indenture (the "Trustee"), for the ratable benefit of Agent and the Noteholders (each as hereinafter defined). W I T N E S S E T H: A. Brigham Exploration Company, a Delaware corporation ("Borrower") has executed an Indenture, dated as of August 20, 1998, by and among the Borrower and Chase Bank of Texas, National Association (the "Indenture"), pursuant to which the Borrower has issued and will issue its Senior Subordinated Secured Notes in the aggregate face amount of $50,000,000, with final maturity on August 20, 2003 (such notes, as from time to time supplemented, amended or modified and all other notes given in substitution therefor or in modification, renewal or extension thereof, in whole or in part, being hereinafter called the "Notes"), to Joint Energy Development Investments II Limited Partnership, a Delaware limited partnership ("JEDI-II") and Enron Capital & Trade Resources Corp., a Delaware corporation ("ECT"). B. Brigham Oil & Gas, L.P., a Delaware limited partnership ("BOG") and Bank of Montreal, as Agent ("B-MO"; B-MO, together with any other parties from time to time constituting lenders under the Senior Credit Agreement (as hereinafter defined) are herein called the "Senior Lenders") have entered into that certain Credit Agreement dated as of January 28, 1998 as heretofore and hereafter amended (such agreement, as the same may from time to time be modified, extended, renewed, restated, replaced, amended or supplemented, being herein called the "Senior Credit Agreement") pursuant to which the Senior Lenders made and continue to make loans to BOG as evidenced by and to be evidenced by the notes in the aggregate original principal amount of $75,000,000 (such notes, as the same may from time to time be modified, extended, renewed, restated, amended, replaced or supplemented, being herein called the "BMO Notes"). C. The BMO Notes and all other obligations now or hereafter existing or to exist under the Senior Credit Agreement are guaranteed by various guaranties (such instruments, together with any others as may now exist or hereafter be executed pursuant to the Senior Credit Agreement, as any of the same may from time to time be amended, renewed, restated, modified or supplemented, being referred to herein collectively as the "Senior Guaranties"). D. In connection with the execution and delivery of the Indenture, JEDI-II, as agent (the "Agent"), JEDI-II, individually, ECT and B-MO, as agent for the Senior Lenders (the "Senior Loan Agent"), have executed an Intercreditor and Subordination Agreement dated as of August 20, 1998 (the "Subordination Agreement") in order to evidence the relative priorities and rights of the Senior -1- 4 Loan Agent and the Senior Lenders under the Senior Credit Agreement to the rights and obligations of the Agent and the Noteholders under the Indenture. E. The Guarantor will derive substantial benefit, both directly and indirectly, from the making of the loans under the Indenture and the Notes and has agreed to execute and deliver this Guaranty Agreement to the Trustee for the benefit of the Agent and the Noteholders. NOW, THEREFORE, (i) in order to comply with the terms and conditions of the Indenture, (ii) to induce the Noteholders to loan monies, with or without security to or for the account of Borrower in accordance with the terms of the Indenture, (iii) at the special insistence and request of the Noteholders, and (iv) for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Guarantor hereby agrees as follows: ARTICLE 1 GENERAL TERMS Section 1.1 Terms Defined Above or in the Indenture. As used in this Guaranty Agreement, the terms defined above shall have the meanings respectively assigned to them. Other capitalized terms which are defined in the Indenture but which are not defined herein shall have the same meanings as defined in the Indenture. Section 1.2 Certain Definitions. As used in this Guaranty Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Contribution Obligation" shall mean an amount equal, at any time and from time to time and for each respective Subsidiary Guarantor, to the product of (a) its Contribution Percentage times (b) the sum of all payments made previous to or at the time of calculation by all Subsidiary Guarantors in respect of the Liabilities, as a Subsidiary Guarantor (less the amount of any such payments previously returned to any Subsidiary Guarantor by operation of law or otherwise, but not including payments received by any Subsidiary Guarantor by way of its rights of subrogation and contribution under Section 2.9 of the other Guaranty Agreements), provided, however, such Contribution Obligation for any Subsidiary Guarantor shall in no event exceed such Subsidiary Guarantor's Maximum Guaranteed Amount, as defined in the respective Guaranty Agreement of such Subsidiary Guarantor. "Contribution Percentage" shall mean for any Subsidiary Guarantor for any applicable date as of which such percentage is being determined, an amount equal to the quotient of (a) the Net Worth of such Subsidiary Guarantor as of such date, divided by (b) the sum of the Net Worth of all the Subsidiary Guarantors as of such date. "Guarantor Claims" shall have the meaning indicated in Section 4.1 hereof. -2- 5 "Guaranty Agreement" shall mean this Guaranty Agreement, and where the context indicates, the Guaranty Agreement of any other Subsidiary Guarantor, as the same may from time to time be amended or supplemented. "Liabilities" shall mean: (a) any and all indebtedness, obligations and liabilities of the Borrower to the Agent and the Noteholders pursuant to the Indenture, including without limitation, the unpaid principal of and interest on the Notes; (b) any additional Obligations (as defined in the Indenture) owing to the Agent and the Noteholders; and (c) all renewals, rearrangements, increases, extensions for any period, amendments or supplements in whole or in part of the Notes or any documents evidencing the above. "Maximum Guaranteed Amount" shall mean, for the Guarantor, the greater of (a) the "reasonably equivalent value" or "fair consideration" (or equivalent concept) received by the Guarantor in exchange for the obligation incurred hereunder, within the meaning of any applicable state or federal fraudulent conveyance or transfer laws; or (b) the lesser of (i) the maximum amount that will not render the Guarantor insolvent, or (ii) the maximum amount that will not leave the Guarantor with any property deemed an unreasonably small capital. Clauses (i) and (ii) are and shall be determined pursuant to and as of the appropriate date mandated by such applicable state or federal fraudulent conveyance or transfer laws and to the extent allowed by law take into account the rights to contribution and subrogation under Section 2.9 in each Guaranty Agreement so as to provide for the largest Maximum Guaranteed Amount possible. "Net Payments" shall mean an amount equal, at any time and from time to time and for each respective Subsidiary Guarantor, to the difference of (a) the sum of all payments made previous to or at the time of calculation by such Subsidiary Guarantor in respect to the Liabilities, as a Subsidiary Guarantor, and in respect of its obligations contained in this Guaranty Agreement, less (b) the sum of all such payments previously returned to such Subsidiary Guarantor by operation of law or otherwise and including payments received by such Subsidiary Guarantor by way of its rights of subrogation and contribution under Section 2.9 of the other Guaranty Agreements. "Net Worth" shall mean for any Subsidiary Guarantor, calculated on and as of any applicable date on which such amount is being determined, the difference between (a) the sum of all such Subsidiary Guarantor's property, at a fair valuation and as of -3- 6 such date, minus (b) the sum of all such Subsidiary Guarantor's debts, at a fair valuation and as of such date, excluding the Liabilities. "Noteholders" shall mean the holders of the Notes from time to time, and the holders of any promissory note or notes given in substitution or replacement thereof, including, without limitation, pursuant to Section 2.06 of the Indenture. "Subsidiary Guarantors" shall mean the Guarantors as defined in the Indenture, including the Guarantor. ARTICLE 2 THE GUARANTY Section 2.1 Liabilities Guaranteed. Guarantor hereby irrevocably and unconditionally guarantees the prompt payment of the Liabilities when due, whether at maturity or otherwise, provided, however, that, notwithstanding anything herein or in any other Basic Document to the contrary, the maximum liability of Guarantor hereunder shall in no event exceed the Maximum Guaranteed Amount. Section 2.2 Nature of Guaranty. This Guaranty Agreement is an absolute, irrevocable, completed and continuing guaranty of payment and not a guaranty of collection, and no notice of the Liabilities or any extension of credit already or hereafter contracted by or extended to Borrower need be given to Guarantor. This Guaranty Agreement may not be revoked by Guarantor and shall continue to be effective with respect to debt under the Liabilities arising or created after any attempted revocation by Guarantor and shall remain in full force and effect until the Liabilities are paid in full. Borrower and the Noteholders may modify, alter, rearrange, extend for any period and/or renew from time to time, the Liabilities, and the Noteholders may waive any Default or Events of Default without notice to the Guarantor and in such event Guarantor will remain fully bound hereunder on the Liabilities. This Guaranty Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of the Liabilities is rescinded or must otherwise be returned by any of the Noteholders upon the insolvency, bankruptcy or reorganization of Borrower or otherwise, all as though such payment had not been made. This Guaranty Agreement may be enforced by the Trustee, Agent and any holder of any of the Liabilities and shall not be discharged by the assignment or negotiation of all or part of the Liabilities. Guarantor hereby expressly waives presentment, demand, notice of non-payment, protest and notice of protest and dishonor, notice of Default or Event of Default, and also notice of acceptance of this Guaranty Agreement, acceptance on the part of the Noteholders being conclusively presumed by the Noteholders' request for this Guaranty Agreement and delivery of the same to the Trustee. Section 2.3 Trustee's Rights. Guarantor authorizes the Trustee, without notice or demand and without affecting Guarantor's liability hereunder, to take and hold security for the payment of this Guaranty Agreement and/or the Liabilities, and exchange, enforce, waive and release any such security; and to apply such security and direct the order or manner of sale thereof as the Trustee in -4- 7 its discretion may determine; and to obtain a guaranty of the Liabilities from any one or more Persons and at any time or times to enforce, waive, rearrange, modify, limit or release any of such other Persons from their obligations under such guaranties. Section 2.4 Guarantor's Waivers. Guarantor waives any right to require the Trustee, Agent or any of the Noteholders to (i) proceed against Borrower or any other person liable on the Liabilities, (ii) enforce any of their rights against any other guarantor of the Liabilities (iii) proceed or enforce any of their rights against or exhaust any security given to secure the Liabilities (iv) have Borrower joined with Guarantor in any suit arising out of this Guaranty Agreement and/or the Liabilities, or (v) pursue any other remedy in the Trustee's, the Agent's or the Noteholders' powers whatsoever. Neither the Trustee, Agent, nor the Noteholders shall be required to mitigate damages or take any action to reduce, collect or enforce the Liabilities. Guarantor waives any defense arising by reason of any disability, lack of corporate authority or power, or other defense of Borrower or any other guarantor of the Liabilities, and shall remain liable hereon regardless of whether Borrower or any other guarantor be found not liable thereon for any reason. Whether and when to exercise any of the remedies of the Trustee, Agent or the Noteholders under any of the Basic Documents shall be in the sole and absolute discretion of the Trustee, acting on behalf of itself, the Agent and the Noteholders, and no delay by the Trustee in enforcing any remedy, including delay in conducting a foreclosure sale, shall be a defense to the Guarantor's liability under this Guaranty Agreement. Section 2.5 Maturity of Liabilities; Payment. Guarantor agrees that if the maturity of any of the Liabilities is accelerated by bankruptcy or otherwise, such maturity shall also be deemed accelerated for the purpose of this Guaranty Agreement without demand or notice to Guarantor. Guarantor will, forthwith upon notice from the Trustee, pay to the Trustee the amount due and unpaid by Borrower and guaranteed hereby. The failure of the Trustee to give this notice shall not in any way release Guarantor hereunder. Section 2.6 Trustee's, Agent's and Noteholders' Expenses. If Guarantor fails to pay the Liabilities after notice from Trustee of Borrower's failure to pay any Liabilities at maturity, and if the Trustee, Agent or any Noteholder obtains the services of an attorney for collection of amounts owing by Guarantor hereunder, or obtaining advice of counsel in respect of any of their rights under this Guaranty Agreement, or if suit is filed to enforce this Guaranty Agreement, or if proceedings are had in any bankruptcy, probate, receivership or other judicial proceedings for the establishment or collection of any amount owing by Guarantor hereunder, or if any amount owing by Guarantor hereunder is collected through such proceedings, Guarantor agrees to pay to the Trustee, Agent and Noteholder, the Trustee's, Agent's and Noteholder's respective reasonable attorneys' fees. Section 2.7 Liability. It is expressly agreed that the liability of the Guarantor for the payment of the Liabilities guaranteed hereby shall be primary and not secondary. Section 2.8 Events and Circumstances Not Reducing or Discharging Guarantor's Obligations. Guarantor hereby consents and agrees to each of the following to the fullest extent permitted by law, and agrees that Guarantor's obligations under this Guaranty Agreement shall not -5- 8 be released, diminished, impaired, reduced or adversely affected by any of the following, and waives any rights (including without limitation rights to notice) which Guarantor might otherwise have as a result of or in connection with any of the following: (a) Modifications, etc. Any renewal, extension, modification, increase, decrease, alteration or rearrangement of all or any part of the Liabilities, the Notes, the Indenture or the Basic Documents or any instrument executed in connection therewith, or any contract or understanding between Borrower and the Trustee, the Agent or any of the Noteholders, or any other Person, pertaining to the Liabilities; (b) Adjustment, etc. Any adjustment, indulgence, forbearance or compromise that might be granted or given by any Trustee, Agent or any Noteholder to Borrower or Guarantor or any Person liable on the Liabilities; (c) Condition of Borrower or Guarantor. The insolvency, bankruptcy arrangement, adjustment, composition, liquidation, disability, dissolution, death or lack of power of Borrower or Guarantor or any other Person at any time liable for the payment of all or part of the Liabilities; or any dissolution of Borrower or Guarantor, or any sale, lease or transfer of any or all of the assets of Borrower or Guarantor, or any changes in the shareholders, partners, or members of Borrower or Guarantor; or any reorganization of Borrower or Guarantor; (d) Invalidity of Liabilities. The invalidity, illegality or unenforceability of all or any part of the Liabilities, or any document or agreement executed in connection with the Liabilities, for any reason whatsoever, including without limitation the fact that the Liabilities, or any part thereof, exceed the amount permitted by law, the act of creating the Liabilities or any part thereof is ultra vires, the officers or representatives executing the documents or otherwise creating the Liabilities acted in excess of their authority, the Liabilities violate applicable usury laws, the Borrower has valid defenses, claims or offsets (whether at law, in equity or by agreement) which render the Liabilities wholly or partially uncollectible from Borrower, the creation, performance or repayment of the Liabilities (or the execution, delivery and performance of any document or instrument representing part of the Liabilities or executed in connection with the Liabilities, or given to secure the repayment of the Liabilities) is illegal, uncollectible, legally impossible or unenforceable, or the Indenture, the Basic Documents or other documents or instruments pertaining to the Liabilities have been forged or otherwise are irregular or not genuine or authentic; (e) Release of Obligors. Any full or partial release of the liability of Borrower on the Liabilities or any part thereof, of any co-guarantors, or any other Person now or hereafter liable, whether directly or indirectly, jointly, severally, or jointly and severally, to pay, perform, guarantee or assure the payment of the Liabilities or any part thereof, it being recognized, acknowledged and agreed by Guarantor that Guarantor may be required to pay the Liabilities in full without assistance or support of any other Person, and Guarantor has not been induced to enter into this Guaranty Agreement on the basis of a contemplation, belief, understanding or agreement that other parties -6- 9 other than the Borrower will be liable to perform the Liabilities, or the Trustee, Agent or any of the Noteholders will look to other parties to perform the Liabilities. (f) Other Security. The taking or accepting of any other security, collateral or guaranty, or other assurance of payment, for all or any part of the Liabilities; (g) Release of Collateral, etc. Any release, surrender, exchange, subordination, deterioration, waste, loss or impairment (including without limitation negligent, willful, unreasonable or unjustifiable impairment) of any collateral, property or security, at any time existing in connection with, or assuring or securing payment of, all or any part of the Liabilities; (h) Care and Diligence. The failure of the Trustee, Agent, Noteholders or any other Person to exercise diligence or reasonable care in the preservation, protection, enforcement, sale or other handling or treatment of all or any part of such collateral, property or security; (i) Status of Liens. The fact that any collateral, security, security interest or lien contemplated or intended to be given, created or granted as security for the repayment of the Liabilities shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other security interest or lien, it being recognized and agreed by Guarantor that Guarantor is not entering into this Guaranty Agreement in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectibility or value of any of the collateral for the Liabilities; (j) Payments Rescinded. Any payment by Borrower to the Trustee, Agent or the Noteholders is held to constitute a preference under the bankruptcy laws, or for any reason the Trustee, Agent or the Noteholders are required to refund such payment or pay such amount to Borrower or someone else; or (k) Other Actions Taken or Omitted. Any other action taken or omitted to be taken with respect to the Basic Documents, the Liabilities, or the security and collateral therefor, whether or not such action or omission prejudices Guarantor or increases the likelihood that Guarantor will be required to pay the Liabilities pursuant to the terms hereof; it being the unambiguous and unequivocal intention of Guarantor that Guarantor shall be obligated to pay the Liabilities when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether contemplated or uncontemplated, and whether or not otherwise or particularly described herein, except for the full and final payment and satisfaction of the Liabilities. Section 2.9 Right of Subrogation and Contribution. If Guarantor makes a payment in respect of the Liabilities, it shall be subrogated to the rights of the Trustee against the Borrower with respect to such payment and shall have the rights of contribution against the other Subsidiary Guarantors set forth in Section 2.9 of the Subsidiary Guarantors' Guaranty Agreements; provided that Guarantor shall not enforce its rights to any payment by way of subrogation or by exercising its rights of contribution or reimbursement or the right to participate in any security now or hereafter held by or for the benefit of the Trustee, Agent or any of the Noteholders until the Liabilities have been paid -7- 10 in full. The Guarantor agrees that after all the Liabilities have been paid in full that if its then current Net Payments are less than the amount of its then current Contribution Obligation, Guarantor shall pay to the other Subsidiary Guarantors an amount (together with any payments required of the other Subsidiary Guarantors by Section 2.9 of each other Guaranty Agreement) such that the Net Payments made by all Subsidiary Guarantors in respect of the Liabilities shall be shared among all of the Subsidiary Guarantors in proportion to their respective Contribution Percentage. ARTICLE 3 REPRESENTATIONS AND WARRANTIES Section 3.1 By Guarantor. In order to induce the Trustee, Agent and the Noteholders to accept this Guaranty Agreement, Guarantor represents and warrants to the Trustee, Agent and the Noteholders (which representations and warranties will survive the creation of the Liabilities and any extension of credit thereunder) that: (a) Benefit to Guarantor. Guarantor's guaranty pursuant to this Guaranty Agreement reasonably may be expected to benefit, directly or indirectly, Guarantor. (b) Existence. Guarantor is duly organized, legally existing and in good standing under the laws of the state of its formation and is duly qualified as a foreign entity in all jurisdictions wherein the property owned or the business transacted by it makes such qualification necessary. (c) Power and Authorization. Guarantor is duly authorized and empowered to execute, deliver and perform this Guaranty Agreement and all corporate or other organizational action on Guarantor's part requisite for the due execution, delivery and performance of this Guaranty Agreement has been duly and effectively taken. (d) Binding Obligations. This Guaranty Agreement constitutes valid and binding obligations of Guarantor, enforceable in accordance with its terms (except that enforcement may be subject to any applicable bankruptcy, insolvency or similar laws generally affecting the enforcement of creditors' rights or by general principles of equity). (e) No Consent. Guarantor's execution, delivery and performance of this Guaranty Agreement does not require the consent or approval of any other Person, including without limitation any regulatory authority or governmental body of the United States or any state thereof or any political subdivision of the United States or any state thereof. (f) Solvency. The Guarantor hereby represents that (i) it is not insolvent as of the date hereof and will not be rendered insolvent as a result of this Guaranty Agreement, (ii) it is not engaged in business or a transaction, or about to engage in a business or a transaction, for which any property or assets remaining with such Guarantor is unreasonably small capital, and (iii) it does not intend to incur, or believe it will incur, debts that will be beyond its ability to pay as such debts mature. -8- 11 (g) Litigation. Except as disclosed to the Noteholders in Schedule 4.03 of the Securities Purchase Agreement, at the Closing Date there is no litigation, legal, administrative or arbitral proceeding, investigation or other action of any nature pending or, to the knowledge of the Guarantor threatened against the Guarantor or any of its Subsidiaries which involves the possibility of any judgment or liability against the Guarantor or any of its Subsidiaries not fully covered by insurance (except for normal deductibles), and which would be more likely than not to have a Material Adverse Effect. (h) No Breach. Neither the execution and delivery of this Guaranty Agreement, nor compliance with the terms and provisions hereof will conflict with or result in a breach of, or require any consent which has not been obtained as of the Closing Date under, the respective charter or by-laws or other constituent documents of the Guarantor or any of its Subsidiaries or any Governmental Requirement or any material agreement or instrument to which the Guarantor or any of its Subsidiaries is a party or by which it is bound or to which it or its Properties are subject, or constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien upon any of the material revenues or assets of the Guarantor or any of its Subsidiaries pursuant to the terms of any such agreement or instrument other than the Liens created by the Basic Documents. Section 3.2 No Representation by Noteholders. Neither the Trustee, the Agent or the Noteholders nor any other Person has made any representation, warranty or statement to the Guarantor in order to induce the Guarantor to execute this Guaranty Agreement. ARTICLE 4 SUBORDINATION OF INDEBTEDNESS Section 4.1 Subordination of All Guarantor Claims. As used herein, the term "Guarantor Claims" shall mean all debts and liabilities of Borrower to Guarantor, whether such debts and liabilities now exist or are hereafter incurred or arise, or whether the obligation of Borrower thereon be direct, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such debts or liabilities be evidenced by note, contract, open account, or otherwise, and irrespective of the person or persons in whose favor such debts or liabilities may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by Guarantor. The Guarantor Claims shall include without limitation all rights and claims of Guarantor against Borrower arising as a result of subrogation or otherwise as a result of Guarantor's payment of all or a portion of the Liabilities. If any Default exists and is continuing, and if the Trustee gives notice thereof to the Guarantor requiring the Guarantor Claims not be paid, then, for so long as any Default continues to exist, Guarantor shall not receive or collect, directly or indirectly, from Borrower or any other party any amount upon the Guarantor Claims. Section 4.2 Claims in Bankruptcy. In the event of receivership, bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency proceedings involving Borrower as debtor, the Trustee, Agent and/or the Noteholders shall have the right to prove their claim in any -9- 12 proceeding, so as to establish its rights hereunder and receive directly from the receiver, trustee or other court custodian, dividends and payments which would otherwise be payable upon Guarantor Claims. Guarantor hereby assigns such dividends and payments to the Trustee, as trustee under the Indenture. Should the Trustee, Agent or any Noteholder receive, for application upon the Liabilities, any such dividend or payment which is otherwise payable to Guarantor, and which, as between Borrower and Guarantor, shall constitute a credit upon the Guarantor Claims, then upon payment in full of the Liabilities, Guarantor shall become subrogated to the rights of the Trustee, Agent or the Noteholders, as applicable, to the extent that such payments to the Trustee, Agent or the Noteholders, as applicable, on the Guarantor Claims have contributed toward the liquidation of the Liabilities, and such subrogation shall be with respect to that proportion of the Liabilities which would have been unpaid if the Trustee, Agent or Noteholders, as applicable, had not received dividends or payments upon the Guarantor Claims. Section 4.3 Payments Held in Trust. In the event that notwithstanding Sections 4.1 and 4.2 above, Guarantor should receive any funds, payments, claims or distributions which are prohibited by such Sections, Guarantor agrees to hold in trust for the Trustee, as trustee under the Indenture, an amount equal to the amount of all funds, payments, claims or distributions so received, and agrees that it shall have absolutely no dominion over the amount of such funds, payments, claims or distributions except to pay them promptly to the Trustee, and Guarantor covenants promptly to pay the same to the Trustee. Section 4.4 Liens Subordinate. Guarantor agrees that any liens, security interests, judgment liens, charges or other encumbrances upon Borrower's assets securing payment of the Guarantor Claims shall be and remain inferior and subordinate to any liens, security interests, judgment liens, charges or other encumbrances upon Borrower's assets securing payment of the Liabilities, regardless of whether such encumbrances in favor of Guarantor, the Trustee, Agent or the Noteholders presently exist or are hereafter created or attach. Without the prior written consent of the Trustee, Guarantor shall not (a) exercise or enforce any creditor's right it may have against the Borrower, or (b) foreclose, repossess, sequester or otherwise take steps or institute any action or proceeding (judicial or otherwise, including without limitation the commencement of or joinder in any liquidation, bankruptcy, rearrangement, debtor's relief or insolvency proceeding) to enforce any lien, mortgages, deeds of trust, security interest, collateral rights, judgments or other encumbrances on assets of Borrower held by Guarantor. ARTICLE 5 MISCELLANEOUS Section 5.1 Successors and Assigns. This Guaranty Agreement is and shall be in every particular available to the successors and assigns of Trustee, Agent and the Noteholders and is and shall always be fully binding upon the legal representatives, heirs, successors and assigns of Guarantor, notwithstanding that some or all of the monies, the repayment of which this Guaranty Agreement applies, may be actually advanced after any bankruptcy, receivership, reorganization, death, disability or other event affecting Guarantor. The Trustee may resign, withdraw or be replaced -10- 13 as trustee under the Indenture, and upon any such event a new trustee may be appointed under the Indenture. In such event, Trustee shall be fully discharged thereafter from all liability therefor, and any new trustee under the Indenture shall be vested with all rights, powers and remedies of Trustee hereunder. In connection therewith, Guarantor will take whatever action is reasonably required in order to reaffirm its obligations under this Guaranty Agreement Section 5.2 Notices. Any notice or demand to Guarantor under or in connection with this Guaranty Agreement may be given and shall conclusively be deemed and considered to have been given and received in accordance with Section 13.05 of the Indenture, addressed to Guarantor at the address on the signature page hereof or at such other address provided to Trustee and Agent in writing. Section 5.3 Business and Financial Information. Subject to any applicable confidentiality agreements, the Guarantor will promptly furnish to Trustee, Agent and the Noteholders from time to time upon request such information regarding the business and affairs and financial condition of the Guarantor and its subsidiaries as the Trustee, Agent or the Noteholders may reasonably request. Section 5.4 Construction. This Guaranty Agreement is a contract made under and shall be construed in accordance with and governed by the laws of the State of Texas. Section 5.5 Invalidity. In the event that any one or more of the provisions contained in this Guaranty Agreement shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Guaranty Agreement. Section 5.6 Subordination Agreement. This Guaranty Agreement and the rights and remedies of Agent and the Noteholders under this Guaranty Agreement are subject to the terms and conditions of the Subordination Agreement. Section 5.7 ENTIRE AGREEMENT. THIS WRITTEN GUARANTY AGREEMENT EMBODIES THE ENTIRE AGREEMENT AND UNDERSTANDING AMONG THE AGENT, THE NOTEHOLDERS AND THE GUARANTOR AND SUPERSEDES ALL OTHER AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THIS WRITTEN GUARANTY AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -11- 14 WITNESS THE EXECUTION HEREOF, as of this the 20th day of August, 1998. [See Schedule I hereto] By: ------------------------------------ Name: Title: Address: ------------------------------- ------------------------------- ------------------------------- Telecopier No.: ------------------------ Telephone No.: ------------------------- Attention: ----------------------------- -12- 15 Schedule I Subsidiary Guarantors Brigham Oil & Gas, L.P. Brigham, Inc. Brigham Holdings I, LLC Brigham Holdings II, LLC Sooner Production, LLC DND Oil & Gas, L.P. -13- EX-21 9 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Subsidiaries Brigham Oil & Gas, L.P., a Delaware limited partnership Brigham, Inc., a Nevada corporation Brigham Holdings I, LLC, a Nevada limited liability company Brigham Holdings II, LLC, a Nevada limited liability company EX-23.1 10 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333- 56961) of Brigham Exploration Company and in the Registration Statement on Form S-8 (No. 333-70137) of Brigham Exploration Company of our report dated March 30, 1999, which appears on page F-1 of this Form 10-K of Brigham Exploration Company. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Houston, Texas March 30, 1999 EX-23.2 11 CONSENT OF INDPENDENT PETROLEUM CONSULTANTS 1 Exhibit 23.2 CONSENT OF INDEPENDENT PETROLEUM CONSULTANTS As independent petroleum consultants, we hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-56961) of Brigham Exploration Company and in the Registration Statement on Form S-8 (No. 333-70137) of Brigham Exploration Company of our estimates of reserves, included in this Annual Report on Form 10-K, and to all references to our firm included in this Annual Report. /s/ Cawley, Gillespie & Associates, Inc. CAWLEY, GILLESPIE & ASSOCIATES, INC. Fort Worth, Texas March 26, 1999 EX-27 12 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 2,569 0 7,938 0 0 10,797 1,336,331 0 150,516 23,513 0 0 0 133 24,548 150,516 13,799 14,189 0 3,022 38,714 0 6,984 (34,531) (1,186) (33,345) 0 0 0 (33,345) 2.64 2.64
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