-----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, D3gKa0CvilZfek2DKzHSvksPCveyNUaOp5aOMA0OMXpKjU2+TvkQitCCOTyzGzRf BaoyGKfmP9GY2YFQWfbs3g== 0001015402-01-503272.txt : 20020410 0001015402-01-503272.hdr.sgml : 20020410 ACCESSION NUMBER: 0001015402-01-503272 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRIGHAM EXPLORATION CO CENTRAL INDEX KEY: 0001034755 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 752692967 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22433 FILM NUMBER: 1778676 BUSINESS ADDRESS: STREET 1: 6300 BRIDGE POINT PARKWAY STREET 2: BLDG 2 SUITE 500 CITY: AUSTIN STATE: TX ZIP: 78730 BUSINESS PHONE: 5124273300 MAIL ADDRESS: STREET 1: 6300 BRIDGE POINT PARKWAY STREET 2: BLDG 2 SUITE 500 CITY: AUSTIN STATE: TX ZIP: 78730 10-Q 1 doc1.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 000-22433 BRIGHAM EXPLORATION COMPANY (Exact name of registrant as specified in its charter) DELAWARE 1311 75-2692967 (State of other jurisdiction (Primary Standard (I.R.S. Employer of incorporation or Industrial Classification Identification organization) Code Number) Number) 6300 BRIDGEPOINT PARKWAY BUILDING TWO, SUITE 500 AUSTIN, TEXAS 78730 (512) 427-3300 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or 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 . --- --- As of November 5, 2001, 16,015,618 shares of Common Stock, $.01 per share, were outstanding. ================================================================================ BRIGHAM EXPLORATION COMPANY THIRD QUARTER 2001 FORM 10-Q REPORT TABLE OF CONTENTS ----------------- PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - September 30, 2001 and December 31, 2000. . . . . . . . . . . . . . . . . . 1 Consolidated Statements of Operations - Three and nine months ended September 30, 2001 and 2000. . . . . . 2 Consolidated Statement of Changes in Stockholders' Equity - Nine months ended September 30, 2001. . . . . . 3 Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and 2000. . . . . . . . . . . . 4 Notes to Consolidated Financial Statements. . . . . . . . . . 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . 17 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 18 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART I. FINANCIAL INFORMATION Item 1. Financial Statements BRIGHAM EXPLORATION COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited) September 30, December 31, 2001 2000 --------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 7,316 $ 837 Accounts receivable 13,128 9,277 Other current assets 2,011 559 --------------- -------------- Total current assets 22,455 10,673 --------------- -------------- Oil and gas properties, at cost, net 149,174 129,490 Other property and equipment, at cost, net 1,295 1,341 Drilling advances paid 1 960 Deferred loan fees 3,309 4,338 Other noncurrent assets 96 109 --------------- -------------- $ 176,330 $ 146,911 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,996 $ 9,211 Accrued drilling costs 2,279 792 Participant advances received 1,181 136 Other current liabilities 5,553 7,760 --------------- -------------- Total current liabilities 18,009 17,899 --------------- -------------- Notes payable 75,000 75,000 Senior subordinated notes 16,498 7,000 Other noncurrent liabilities 253 3,697 Commitments and contingencies Series A Preferred Stock, mandatorily redeemable, $.01 par value, $20 stated value, 2,250,000 shares authorized, 1,566,858 and 1,000,000 shares issued and outstanding at September 30, 2001 and December 31, 2000, redemption value $20 per share 15,308 8,558 Stockholders' equity: Preferred stock, $.01 par value, 10 million shares authorized, of which 2,250,000 shares are designated as Series A - - Common stock, $.01 par value, 50 million shares authorized, 17,097,250 and 17,030,176 shares issued and 16,006,218 and 15,977,544 shares outstanding at September 30, 2001 and December 31, 2000, respectively 171 170 Additional paid-in capital 81,067 78,274 Unearned stock compensation (912) (1,321) Accumulated deficit (24,942) (38,416) Treasury stock, at cost; 1,091,032 and 1,052,632 shares at September 30, 2001 and December 31, 2000 (4,098) (3,950) Accumulated other comprehensive income (loss) (24) - --------------- -------------- Total stockholders' equity 51,262 34,757 --------------- -------------- $ 176,330 $ 146,911 =============== ============== Oil and gas properties are accounted for using the full cost method.
See accompanying notes to the consolidated financial statements. 1
BRIGHAM EXPLORATION COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 2001 2000 2001 2000 -------- -------- -------- --------- Revenues: Oil and gas sales $ 8,848 $ 5,362 $26,220 $ 14,502 Other 23 3 198 52 -------- -------- -------- --------- 8,871 5,365 26,418 14,554 -------- -------- -------- --------- Costs and expenses: Lease operating 842 541 2,332 1,502 Production taxes 415 554 1,503 1,253 General and administrative 934 718 2,708 2,166 Depletion of oil and gas properties 3,244 2,207 8,903 5,791 Depreciation and amortization 140 147 375 430 -------- -------- -------- --------- 5,575 4,167 15,821 11,142 -------- -------- -------- --------- Operating income 3,296 1,198 10,597 3,412 -------- -------- -------- --------- Other income (expense): Interest income 63 24 230 80 Interest expense, net (1,595) (3,291) (5,180) (9,097) Other income (expense) 1,842 (3,276) 7,827 (6,266) -------- -------- -------- --------- 310 (6,543) 2,877 (15,283) -------- -------- -------- --------- Income (loss) before income taxes 3,606 (5,345) 13,474 (11,871) Income tax benefit (expense) - - - - -------- -------- -------- --------- Net income (loss) 3,606 (5,345) 13,474 (11,871) Less accretion and dividends on redeemable preferred stock 659 - 1,776 - -------- -------- -------- --------- Net income (loss) available to common stockholders $ 2,947 $(5,345) $11,698 $(11,871) ======== ======== ======== ========= Net income (loss) per share available to common stockholders: Basic $ 0.18 $ (0.32) $ 0.73 $ (0.73) Diluted $ 0.17 $ (0.32) $ 0.67 $ (0.73)
See accompanying notes to the consolidated financial statements. 2
BRIGHAM EXPLORATION COMPANY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) (unaudited) Accumulated Other Compre- Total Common Stock Additional Unearned Accum- Treasury Stock hensive Stock ----------------- Paid-in Stock ulated ------------------ Income holders' Shares Amounts Capital Compensation Deficit Shares Amounts (Loss) Equity ------- -------- --------- -------------- --------- ------- --------- --------- --------- Balance, December 31, 2000 17,030 $ 170 $ 78,274 $ (1,321) $(38,416) (1,053) $ (3,950) $ - $ 34,757 Exercise of employee stock options 67 1 179 - - - - - 180 Forfeitures of employee stock options - - (116) 31 - - - - (85) Forfeitures of restricted stock - - 6 121 - (38) (148) - (21) Issuance of warrants - - 4,500 - - - - - 4,500 Dividends on mandatorily redeemable Series A Preferred Stock - - (1,702) - - - - - (1,702) Accretion on mandatorily redeemable Series A Preferred Stock - - (74) - - - - - (74) Amortization of unearned stock compensation - - - 257 - - - - 257 Net income - - - - 13,474 - - - 13,474 Other comprehensive income (loss): Cumulative effect (loss) on the adoption of FAS 133 - - - - - - - (11,800) (11,800) Change in fair value of cash flow hedges - - - - - - - 11,776 11,776 Comprehensive loss ------- -------- --------- -------------- --------- ------- --------- --------- --------- Balance, September 30, 2001 17,097 $ 171 $ 81,067 $ (912) $(24,942) (1,091) $ (4,098) $ (24) $ 51,262 ======= ======== ========= ============== ========= ======= ========= ========= ========= Compre- hensive Income (Loss) --------- Balance, December 31, 2000 Exercise of employee stock options Forfeitures of employee stock options Forfeitures of restricted stock Issuance of warrants Dividends on mandatorily redeemable Series A Preferred Stock Accretion on mandatorily redeemable Series A Preferred Stock Amortization of unearned stock compensation Net income $ 13,474 Other comprehensive income (loss): Cumulative effect (loss) on the adoption of FAS 133 (11,800) Change in fair value of cash flow hedges 11,776 --------- Comprehensive loss $ 13,450 ========= Balance, September 30, 2001
See accompanying notes to the consolidated financial statements. 3
BRIGHAM EXPLORATION COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine Months Ended September 30, -------------------- 2001 2000 --------- --------- Cash flows from operating activities: Net income (loss) $ 13,474 $(11,871) Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: Depletion of oil and gas properties 8,903 5,791 Depreciation and amortization 375 430 Interest paid through the issuance of additional senior subordinated notes 498 4,575 Amortization of deferred loan fee and debt issuance costs 1,029 987 Amortization of discount on senior subordinated notes - 673 Amortization of deferred loss on derivative instruments - 280 Market value adjustment for derivative instruments (9,217) 5,683 Changes in working capital and other items: Accounts receivable (3,851) (3,323) Other current assets (1,452) (243) Accounts payable (215) (7,550) Participant advances received 1,045 99 Other current liabilities 3,286 179 Other noncurrent assets 13 (58) Other noncurrent liabilities (23) 2,214 --------- --------- Net cash provided (used) by operating activities 13,865 (2,134) --------- --------- Cash flows from investing activities: Additions to oil and natural gas properties (27,020) (19,024) Additions to other property and equipment (257) (83) Decrease in drilling advances paid 959 19 --------- --------- Net cash used by investing activities (26,318) (19,088) --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock - 4,202 Proceeds from exercise of employee stock options 180 - Proceeds from issuance of preferred stock and warrants, net 9,838 - Proceeds from issuance of senior subordinated notes and warrants - 260 Increase in notes payable 9,000 15,000 Principal payments on notes payable - (354) Principal payments on capital lease obligations (86) (168) Deferred loan fees paid - (400) --------- --------- Net cash provided by financing activities 18,932 18,540 --------- --------- Net increase (decrease) in cash and cash equivalents 6,479 (2,682) Cash and cash equivalents, beginning of period 837 2,742 --------- --------- Cash and cash equivalents, end of period $ 7,316 $ 60 ========= =========
See accompanying notes to the consolidated financial statements. 4 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION AND NATURE OF OPERATIONS Brigham Exploration Company ("Brigham"), a Delaware corporation formed on February 25, 1997, explores and develops onshore domestic oil and natural gas properties using 3-D seismic imaging and other advanced technologies. Brigham focuses its exploration and development of onshore oil and natural gas properties primarily in the Anadarko Basin, the Texas Gulf Coast and West Texas. 2. BASIS OF PRESENTATION The accompanying financial statements include the accounts of Brigham and its wholly owned subsidiaries, and its proportionate share of assets, liabilities and income and expenses of the limited partnerships in which Brigham, or any of its subsidiaries, has a participating interest. All significant intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements are unaudited, and in the opinion of management, reflect all adjustments that are necessary for a fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the entire year. The unaudited consolidated financial statements should be read in conjunction with Brigham's 2000 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. 3. PRIVATE PLACEMENT OF PREFERRED STOCK In March 2001, Brigham issued 500,000 additional shares of mandatorily redeemable Series A Preferred Stock and 2,105,263 additional warrants (the "Additional Series A Warrants") to purchase Brigham's common stock for $10 million. The Additional Series A Warrants have a term of ten years, an exercise price of $4.75 per share and must be exercised, if Brigham so requires, in the event that the market price of Brigham's common stock averages at least 150% of the exercise price ($7.125 per share) for 60 consecutive trading days. The exercise price of the Additional Series A Warrants is payable either in cash or in shares of Series A Preferred Stock, valued at liquidation value plus accrued dividends. If Brigham requires exercise of the Additional Series A Warrants, proceeds will be used to fund the redemption of a similar value of then outstanding Series A Preferred Stock. The Additional Series A Warrants were valued at approximately $4.5 million using the Black-Scholes valuation model and were recorded as additional paid-in capital. 4. NET INCOME (LOSS) PER SHARE Basic earnings per common share ("EPS") are computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities were exercised for or converted into common stock. 5 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The following table reconciles the numerators and denominators of the basic and diluted earnings per common share computations for net income (loss) available to common stockholders for the three and nine months ended September 30, 2001 and 2000:
Three Months Ended Nine Months Ended September 30, September 30, ----------------- ------------------ 2001 2000 2001 2000 ------- -------- ------- --------- Basic EPS: Income (loss) available to common stockholders $ 2,947 $(5,345) $11,698 $(11,871) ======= ======== ======= ========= Common shares outstanding 15,984 16,713 15,983 16,237 ======= ======== ======= ========= Basic EPS $ 0.18 $ (0.32) $ 0.73 $ (0.73) ======= ======== ======= ========= Diluted EPS: Income (loss) available to common stockholders - basic $ 2,947 $(5,345) $11,698 $(11,871) Effect of assumed conversions: Amortization of compensation expense on stock options 2 - 11 - ------- -------- ------- --------- Income (loss) available to common stockholders - diluted $ 2,949 $(5,345) $11,709 $(11,871) ======= ======== ======= ========= Common shares outstanding 15,984 16,713 15,983 16,237 Effect of dilutive securities: Warrants 788 - 1,071 - Stock options 264 - 415 - ------- -------- ------- --------- Potentially dilutive common shares 1,052 - 1,486 - ------- -------- ------- --------- Adjusted common shares outstanding - diluted 17,036 16,713 17,469 16,237 ======= ======== ======= ========= Diluted EPS $ 0.17 $ (0.32) $ 0.67 $ (0.73) ======= ======== ======= =========
At September 30, 2001 and 2000, options and warrants to purchase 14.3 million and 9.9 million shares of common stock, respectively, were outstanding but were not included in the computation of diluted EPS because the effects would have been antidilutive. 5. DERIVATIVE INSTRUMENTS Brigham utilizes various commodity swap and option contracts to (i) reduce the effects of volatility in price changes on the oil and natural gas commodities it produces and sells, (ii) support its capital budgeting plans, and (iii) lock-in prices to protect the economics related to certain capital projects. On January 1, 2001, Brigham adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") which establishes accounting and reporting standards for derivative instruments and for hedging activities. In accordance with FAS 133, all derivative instruments are recorded on the balance sheet at fair value and 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. Brigham's hedge contracts consist primarily of cash flow hedge transactions in which Brigham is hedging the variability of cash flows related to forecasted transactions. Changes in the fair value of these derivative instruments are reported in other comprehensive income and are recognized 6 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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 is recognized in current period earnings. On January 1, 2001, Brigham recorded a net of tax cumulative effect adjustment of $(11.8) million to other comprehensive income (loss) to recognize the fair value (liability) of all derivative instruments that qualify for hedge accounting treatment in accordance with FAS 133. In the three and nine months ended September 30, 2001, Brigham recognized losses of $28,000 and $8.2 million, respectively, from hedging contracts, which were recorded as a reduction of oil and gas sales, and $60,000 and $11.8 million, respectively, of gains related to changes in the fair value, which were recorded as a reduction of the liability with a corresponding offset recorded in other comprehensive income. Derivative instruments that do not qualify as hedging contracts are recorded at fair value on the balance sheet. At each balance sheet date, the value of these derivative instruments is adjusted to reflect current fair value and any gains or losses are recognized as other income or expense. At September 30, 2001 and December 31, 2000, the fair value of these derivative instruments included in other liabilities was $833,000 and $10.1 million, respectively. In the three and nine months ended September 30, 2001, Brigham recognized $2.2 million and $9.2 million, respectively, in non-cash gains related to changes in the fair values of these derivative contracts and $347,000 and $1.4 million, respectively, in cash losses related to the cash settlement payments made by the Company to the counterparty. The following tables summarize Brigham's outstanding oil and natural gas derivative instruments as of September 30, 2001:
NATURAL GAS DERIVATIVE CONTRACTS 2001 2002 --------------------- ---------------------- AVERAGE AVERAGE CONTRACT CONTRACT CONTRACT CONTRACT PRICING CONTRACT VOLUMES PRICE VOLUMES PRICE BASIS TERM (MMBTU) ($/MMBTU) (MMBTU) ($/MMBTU) -------- -------------- --------- ---------- ---------- ---------- Fixed Price Cap ANR October 2001 - 920,000 $ 2.63 1,810,000 $ 2.63 Oklahoma June 2002 Fixed Price Floor ANR October 2001 - 230,000 $ 1.80 - - Oklahoma December 2001 CRUDE OIL DERIVATIVE CONTRACTS 2001 2002 --------------------- ---------------------- AVERAGE AVERAGE CONTRACT CONTRACT CONTRACT CONTRACT PRICING CONTRACT VOLUMES PRICE VOLUMES PRICE BASIS TERM (BBLS) ($/BBLS) (BBLS) ($/BBLS) -------- -------------- --------- ---------- ---------- ---------- Fixed Price Cap NYMEX October 2001 - 18,400 $ 25.25 - - December 2001 Fixed Price Floor NYMEX October 2001 - 18,400 $ 16.10 - - December 2001
7 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) In October 2001, Brigham entered into three natural gas fixed price swap agreements whereby Brigham exchanged a floating market price for a fixed contract price of $2.80 per MMBtu for 2,500 MMBtu per day for the period from January 2002 to June 2002, $2.90 per MMBtu on 2,500 MMBtu per day for the period from January 2002 to December 2002, and $3.00 per MMBtu on 2,500 MMBtu per day for the period from January 2002 to June 2003. These derivative instruments qualify for hedge accounting in accordance with FAS 133 and will be accounted for as cash flow hedges. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Comparison of the three-month periods ended September 30, 2001 and 2000 Oil and natural gas sales. Oil and natural gas sales increased 65% from $5.4 million for the third quarter of 2000 to $8.8 million for the third quarter of 2001. Of this net increase, $1.1 million was attributable to a 16% increase in the average realized equivalent oil and natural gas sales price and $2.3 million was attributable to a 42% increase in production volumes. Natural gas production volumes increased 41% from 1,270 MMcf for the third quarter of 2000 to 1,790 MMcf for the third quarter of 2001. This increase was principally due to the completion of wells drilled during 2001 and recompletion and workover projects performed on certain producing wells. The average realized price for natural gas increased 53% from $1.99 per Mcf for the third quarter of 2000 to $3.05 per Mcf for the third quarter of 2001. Natural gas hedging losses reduced natural gas revenues by $2.9 million ($2.27 per Mcf) for the third quarter of 2000. Oil production volumes increased 45% from 92 MBbls for the third quarter of 2000 to 134 MBbls for the third quarter of 2001. This increase was principally due to the completion of wells drilled during 2001 and recompletion and workover projects performed on certain producing wells. The average realized price for oil decreased 18% from $30.62 per Bbl for the third quarter of 2000 to $25.26 per Bbl for the third quarter of 2001. Oil hedging reduced oil revenues by $28,000 ($.21 per Bbl) and $38,000 ($.41 per Bbl) for the third quarter of 2001 and 2000, respectively. Lease operating expenses. Lease operating expenses increased 56% from $541,000 for the third quarter of 2000 to $842,000 for the third quarter of 2001, and, on a per unit of production basis, lease operating expenses for the same period increased 7% from $0.30 per Mcfe to $0.32 per Mcfe. The increase in lease operating expenses for third quarter of 2001 is primarily due to an increase in the number of producing wells and an increase in well repair and maintenance cost. Production taxes. Production taxes decreased 25% from $554,000 for the third quarter of 2000 to $415,000 for the third quarter of 2001.On a per unit of production basis, production taxes for the same period decreased 47% from $0.30 per Mcfe to $0.16 per Mcfe primarily as a result of a 25% decrease in the average pre-hedge equivalent price for oil and natural gas sales and the recording of a $53,000 refund of production taxes related to certain wells that qualify for reduced production tax rates. General and administrative expenses. General and administrative expenses increased 30% from $718,000 for the third quarter of 2000 to $934,000 for the third quarter of 2001 primarily due to higher employee payroll and benefits expenses. On a per unit of production basis, general and administrative expenses decreased 8% from $0.39 per Mcfe for the third quarter of 2000 to $0.36 per Mcfe for the third quarter of 2001 as increased production volumes more than offset higher aggregate general and administrative expenses. Depletion of oil and natural gas properties. Depletion of oil and natural properties increased 47% from $2.2 million ($1.21 per Mcfe) for the third quarter of 2000 to $3.2 million ($1.25 per Mcfe) for the third quarter of 2001. Of this increase, $964,000 was due to higher production volumes and $73,000 was due to an increase in the depletion rate per unit of production. The increase in the per unit depletion rate resulted primarily from the estimated additions of proved oil and natural gas reserves at higher average capital costs during the third quarter of 2001 as compared with estimated amounts for the third quarter of 2000. Net interest expense. Net interest expense decreased 52% from $3.3 million for the third quarter of 2000 to $1.6 million for the third quarter of 2001. This decrease was due to a lower average debt balance and lower interest rates on outstanding borrowings for the third quarter of 2001 compared to the third quarter of 2000. These reductions were principally due to Brigham's debt refinancing transactions that were completed during the fourth quarter of 2000 (see "Liquidity and Capital Resources - Refinancing Transactions"). The weighted average outstanding debt balance decreased from $101.2 million for the third quarter of 2000 to $91.4 million for the third quarter of 2001. The average effective annual interest rate on borrowings outstanding during the third quarter of 2000 was 12.8% compared to 9.0% for the third quarter of 2001. Net interest expense is reflected net of capitalized interest of $718,000 and $492,000 for the third quarter 2000 and 2001, respectively. See "Liquidity and Capital Resources - Credit Facility; - Subordinated Notes". 9 Other income (expense). Other income (expense) increased $5.1 million from an expense of $3.3 million for the third quarter of 2000 to income of $1.8 million for the third quarter of 2001. Brigham recognizes other income or expense associated with changes in the fair market values and the related cash flows of certain oil and natural gas derivative contracts that do not qualify for hedge accounting treatment. For the third quarter of 2000, other income (expense) included $3.3 million of non-cash expenses related to the changes in the fair market values of these derivative contracts. For the third quarter of 2001, other income (expense) included (i) $2.2 million of non-cash income related to the changes in the fair market values of these derivative contracts, and (ii) $347,000 of expenses related to cash settlements incurred during the period pursuant to these derivative contracts. Comparison of the nine-month periods ended September 30, 2001 and 2000 Oil and natural gas sales. Oil and natural gas sales increased 81% from $14.5 million for the first nine months of 2000 to $26.2 million for the first nine months of 2001. Of this net increase, $6.0 million was attributable to a 22% increase in the average realized equivalent oil and natural gas sales price and $5.7 million was attributable to a 48% increase in equivalent production volumes. Natural gas production volumes increased 62% from 3,257 MMcf for the first nine months of 2000 to 5,266 MMcf for the first nine months of 2001. This increase was principally due to the completion of wells drilled during 2001 and recompletion and workover projects performed on certain producing wells. The average realized price for natural gas increased 67% from $1.97 per Mcf for the first nine months of 2000 to $3.30 per Mcf for the first nine months of 2001. Included in these realized prices are $8.0 million ($1.52 per Mcf) in natural gas hedging losses for the first nine months of 2001, and $5.1 million ($1.58 per Mcf) in natural gas hedging losses for the first nine months of 2000. Oil production volumes increased 21% from 281 MBbls for the first nine months of 2000 to 341 MBbls for the first nine months of 2001. This increase was principally due to the completion of wells drilled during 2001 and recompletion and workover projects performed on certain producing wells. The average realized price for oil decreased from $28.79 per Bbl for the first nine months of 2000 to $25.91 per Bbl for the first nine months of 2001. Oil hedging losses reduced oil revenues for the first nine months of 2001 by $153,000 ($.45 per Bbl) versus a reduction of $40,000 ($.14 per Bbl) for the first nine months of 2000. Lease operating expenses. Lease operating expenses increased 55% from $1.5 million for the first nine months of 2000 to $2.3 million for the first nine months of 2001 and, on a per unit of production basis, lease operating expenses for the same periods increased 7% from $.30 per Mcfe to $.32 per Mcfe. The overall increase in lease operating expenses was primarily due to an increase in the number of producing wells as compared with the same period in 2000. The increase in lease operating expenses per unit of production volume for the first nine months of 2001 relative to the first nine months of 2000 was primarily due to increased well maintenance and repair cost for the first nine months of 2001. Production taxes. Production taxes increased 20% from $1.3 million ($.25 per Mcfe) for the first nine months of 2000 to $1.5 million ($.21 per Mcfe) for the first nine months of 2001, primarily as a result of (i) a 18% increase in the average equivalent price received for oil and natural gas sales before the effects of hedging gains and losses, and (ii) a 48% increase in net equivalent production volumes, each of which was offset by the recording of a $762,000 reimbursement of production taxes related to certain wells that qualify for production tax refunds. Of the $762,000 total production tax reimbursements recorded for the first nine months of 2001, $427,000 related to volumes produced during the first nine months of 2001 and $335,000 related to volumes produced during prior periods in 1999 and 2000. General and administrative expenses. General and administrative expenses increased 25% from $2.2 million for the first nine months of 2000 to $2.7 million for the first nine months of 2001 primarily due to higher employee payroll and benefits expenses. On a per unit of production basis, general and administrative decreased 16% from $0.44 per Mcfe for the first nine months of 2000 to $0.37 per Mcfe for the first nine months of 2001 as increased production volumes more than offset higher aggregate general and administrative expenses. Depletion of oil and natural gas properties. Depletion of oil and natural gas properties increased 54% from $5.8 million ($1.17 per Mcfe) for the first nine months of 2000 to $8.9 million ($1.22 per Mcfe) for the first nine months of 2001. Of this increase, $2.9 million was due to higher production volumes and $247,000 was due to an increase in the depletion rate per unit of production. The increase in the per unit depletion rate was principally the result of estimated additions of proved natural gas and oil reserves at higher average capital costs during the first nine months of 2001 as compared with estimated amounts for the first nine months of 2000. Net interest expense. Net interest expense decreased 43% from $9.1 million for the first nine months of 2000 to $5.2 million for the first nine months of 2001. This decrease was due to a lower average debt balance and lower interest 10 rates on outstanding borrowings during the first nine months of 2001 compared with the same period in 2000. These reductions were principally due to Brigham's debt refinancing transactions that were completed during the fourth quarter of 2000 (see "Liquidity and Capital Resources - Refinancing Transactions"). The weighted average outstanding debt balance decreased from $104.5 million for the first nine months of 2000 to $90.3 million for the first nine months 2001. The average effective annual interest rate on borrowings outstanding during the first nine months of 2000 was 13.0% compared to 9.8% for the first nine months of 2001. Net interest expense is reflected net of capitalized interest of $2.0 million and $1.5 million for the first nine months of 2000 and 2001, respectively. See "Liquidity and Capital Resources - Credit Facility; - Subordinated Notes". Other income (expense). Other income (expense) increased $14.1 million from an expense of $6.3 million for the nine months of 2000 to income of $7.8 million for the first nine months of 2001. Brigham recognizes other income or expense associated with changes in the fair market values and the related cash flows of certain oil and natural gas derivative contracts that do not qualify for hedge accounting treatment. For the first nine months of 2000, other income (expense) included (i) $5.7 million of non-cash expenses related to the changes in the fair market values of these derivative contracts, and (ii) $620,000 of expenses related to cash settlements incurred during the period pursuant to these derivative contracts. For the first nine months of 2001, other income (expense) included (i) $9.2 million of non-cash income related to the changes in the fair market values of these derivative contracts, and (ii) $1.4 million of expenses related to cash settlements incurred during the period pursuant to these derivative contracts. LIQUIDITY AND CAPITAL RESOURCES Brigham's primary sources of capital are its Senior Credit Facility and its Subordinated Notes Facility, public and private equity financings, the sale of interests in projects and properties and funds generated by operations. Brigham's primary capital requirements are 3-D seismic acquisition, processing and interpretation costs, land acquisition costs and drilling expenditures. Credit Facility In January 1998, Brigham entered into a revolving credit agreement (as amended, the "Senior Credit Facility"), which provided for an initial borrowing availability of $75 million. The Senior Credit Facility was amended in March 1999, July 1999, February 2000 and October 2000. The amended and restated Senior Credit Facility provides Brigham with $75 million in borrowing availability for a three-year term that expires on December 31, 2002. As a result of the February 2000 amendments, $30 million of the Senior Credit Facility held by one of the lenders is convertible into shares of Brigham common stock (the "Convertible Notes") in the following amounts and prices: (i) $10 million is convertible at $3.90 per share, (ii) $10 million is convertible at $6.00 per share and (iii) $10 million is convertible at $8.00 per share. At September 30, 2001 and November 5, 2001, Brigham had $75 million in borrowings outstanding under the Senior Credit Facility, of which the Convertible Notes are $30 million. In connection with Brigham's refinancing of its subordinated notes due 2003 (see "- Subordinated Notes" and "- Refinancing Transactions") in October 2000, Brigham entered into an amendment to the Senior Credit Facility that, among other things, permitted the issuance of new subordinated notes and new preferred stock to provide funding for the repurchase of the subordinated notes due 2003 and equity interests in Brigham held by affiliates of Enron Corp. In addition, the minimum interest coverage ratio (as defined) tests of the Senior Credit Facility were amended to reflect Brigham's expected cash flow and interest expense beginning in the fourth quarter of 2000 subsequent to the Refinancing Transactions (as defined), and Brigham conditionally waived certain rights to force conversion of the portion of the borrowings under the Senior Credit Facility that are convertible at $3.90 per share. If the Senior Credit Facility is repaid at maturity or is prepaid prior to maturity without payment of cash premiums, the warrants to purchase Brigham common stock issued to the new participant in the Senior Credit Facility become exercisable. Further, to the extent Brigham chooses to prepay any of the Convertible Notes without the warrants becoming exercisable, and also assuming the lender chooses not to convert to equity upon notice of such prepayment, Brigham will be required to a pay a premium above the face value of the Convertible Notes to the lender. Such premium amounts would range from 150% to 110%, depending upon the timing of the prepayment. Such prepayment, however, would require prior approval of the original lenders to the Senior Credit Facility. In addition, certain financial covenants of the Senior Credit Facility were amended or added in the July 1999, February 2000 and October 2000 amendments. In connection with the February 2000 amendment, Brigham reset the 11 price of the warrants previously issued to its existing senior lenders to purchase one million shares of Brigham common stock from the then current exercise price of $2.25 per share to $2.02 per share. Principal outstanding under the Senior Credit Facility is due at maturity on December 31, 2002, with interest due monthly for base rate tranches or periodically as LIBOR tranches mature. The annual interest rate for borrowings under the Senior Credit Facility is either the lender's base rate or LIBOR plus 3.00%, at Brigham's option. Obligations under the Senior Credit Facility are secured by substantially all of Brigham's oil and natural gas properties and other tangible assets. At November 5, 2001, Brigham had $75 million in borrowings outstanding under the Senior Credit Facility, which bear interest at an annual rate of approximately 5.4%. The Senior Credit Facility has certain financial covenants, including current and interest coverage ratios, (as defined). Brigham and its senior lenders effected the amendments to the Senior Credit Facility described above in part to enable Brigham to comply with certain financial covenants of the Senior Credit Facility, including the minimum current ratio (as defined), minimum interest coverage ratio (as defined), and the limitation on capital expenditures related to seismic and land activities. Should Brigham be unable to comply with certain of the financial or other covenants, its senior lenders may be unwilling to waive compliance or amend the covenants in the future. In such instance, Brigham's liquidity may be adversely affected, which could in turn have an adverse impact on its future financial position and results of operations. At September 30, 2001, Brigham was in compliance with its financial covenants. Subordinated Notes In August 1998, Brigham issued $50 million of debt and equity securities to affiliates of Enron Corp. The securities issued by Brigham in connection with this financing transaction included: (i) $40 million of subordinated notes due 2003, (ii) warrants to purchase an aggregate of one million shares of Brigham common stock at a price of $10.45 per share, and (iii) 1,052,632 shares of Brigham common stock at a price of $9.50 per share. As described below, Brigham repurchased the subordinated notes due 2003, together with all equity interests in Brigham held by the affiliates of Enron Corp., for $20 million in cash in November 2000 (see " Refinancing Transactions"). Refinancing Transactions On October 31, 2000 and November 1, 2000, Brigham entered into a series of financing agreements to provide funding (i) to repurchase all the debt and equity securities in Brigham held by affiliates of Enron Corp. at a substantial discount, and (ii) to continue and expand Brigham's planned drilling program into 2001. Financing and Repurchase Transactions. Brigham raised an aggregate of $40 million in these financing transactions through the issuance of (i) $20 million in new subordinated notes and warrants to purchase Brigham common stock to Shell Capital Inc., and (ii) $20 million in new mandatorily redeemable preferred stock and warrants to purchase Brigham common stock to affiliates of Credit Suisse First Boston (USA), Inc. (the "CSFB Affiliates"). With a portion of the proceeds from these two financing transactions, Brigham purchased all of the interests in Brigham held by affiliates of Enron Corp., which included (i) $51.2 million of outstanding subordinated notes due 2003 and associated accrued interest obligations, (ii) warrants to purchase one million shares of common stock at $2.43 per share, and (iii) 1,052,632 shares of common stock (collectively, the "Enron Securities"), for total cash consideration of $20 million. The remaining approximate $17.5 million in net capital availability raised from these financing transactions, after the repurchase of the Enron Securities and the payment of fees and expenses, was available for Brigham to fund its planned drilling program into 2001. Subordinated Notes Facility. The $20 million of new subordinated notes issued to Shell Capital Inc. (the "SCI Notes") bear an interest of 10.75% per annum and have no principal repayment obligations until maturity in 2005. The SCI Notes are issued pursuant to a multi-draw facility (the "Subordinated Notes Facility") at borrowing increments of at least $1 million, and such funds cannot be redrawn once they have been repaid. At Brigham's option, up to 50% of the interest payments on the SCI Notes during the first two years can be satisfied by payment-in-kind ("PIK") through the issuance of additional SCI Notes in lieu of cash. The SCI Notes are secured obligations ranking junior to Brigham's existing $75 million Senior Credit Facility. The SCI Notes have a five-year maturity, are redeemable at Brigham's option for face value at anytime, and have certain financial and other covenants. The warrants to purchase an aggregate of 1,250,000 shares of Brigham common stock issued to Shell Capital Inc. (the "SCI Warrants") have a term of seven years, an exercise price of $3.00 per share and 12 a cashless exercise feature. For financial reporting purposes, the SCI Warrants were valued using the Black-Scholes valuation model and the estimated value of $2.9 million was recorded as deferred loan costs that will be amortized over the five-year term of the SCI Notes. As of September 30, 2001 and November 5, 2001, Brigham had $16.5 million and $16.7 million, respectively, of borrowings outstanding under the Subordinated Notes Facility. Series A Preferred Stock. The $20 million of mandatorily redeemable preferred stock (the "Series A Preferred Stock") issued to the CSFB Affiliates bears dividends at a rate of 6% per annum if paid in cash and 8% per annum if paid-in-kind through the issuance of additional Series A Preferred Stock in lieu of cash. At Brigham's option, up to 100% of the dividend payments on the Series A Preferred Stock during the first five years can be satisfied through the issuance of PIK dividends. The Series A Preferred Stock has a ten-year maturity and is redeemable at Brigham's option at 100% or 101% of par value (depending upon certain conditions) at any time prior to maturity. The warrants to purchase an aggregate of 6,666,667 shares of Brigham common stock issued to the CSFB Affiliates (the "Series A Warrants") have a term of ten years, an exercise price of $3.00 per share and must be exercised, if Brigham so requires, in the event that Brigham common stock trades at or above $5.00 per share for 60 consecutive trading days. The exercise price of the Series A Warrants is payable either in cash or in shares of Series A Preferred Stock, valued at liquidation value plus accrued dividends. If Brigham requires exercise of the Series A Warrants, proceeds from the exercise of the Series A Warrants will be used to fund the redemption of a similar value of then outstanding Series A Preferred Stock. For financial reporting purposes, the Series A Warrants were valued at $11.5 million using the Black-Scholes valuation model and were recorded as additional paid-in capital in the year ended December 31, 2000. Pursuant to the terms of the securities purchase agreement related to the Series A Preferred Stock, Brigham agreed to nominate one representative of one of the CSFB Affiliates to serve as a member of Brigham's board of directors so long as the CSFB Affiliates or their affiliates own at least 10% of the Series A Preferred Stock issued in November 2000, or at least 5% of the outstanding shares of Brigham common stock. In March 2001, Brigham sold an additional $10 million of Series A Preferred Stock to affiliates of CSFB (see " Equity Placements Private Placement of Preferred Stock"). As of September 30, 2001 and November 5, 2001, Brigham had $31.3 million and $32.0 million (liquidation value), respectively, of Series A Preferred Stock outstanding. Sales of Interests in Projects and Oil and Natural Gas Properties Duke Project Financing. In February 1999, Brigham entered into a project financing arrangement with Duke Energy Financial Services, Inc. ("Duke") to fund the continued exploration of five Anadarko Basin projects covered by approximately 200 square miles of 3-D seismic data acquired in 1998. In this transaction, Brigham conveyed 100% of its working interest (land and seismic) in these project areas to a newly formed limited liability company (the "Brigham-Duke LLC") for total consideration of $10 million. Brigham entered into this project financing arrangement to enable it to recoup substantially all of its pre-seismic land and seismic data acquisition costs incurred in these project areas and to provide the capital to fund the drilling of the first six wells within these projects. Brigham served as the managing member of the Brigham-Duke LLC with a 1% interest, and Duke was the sole remaining member with a 99% interest. Pursuant to the terms of the Brigham-Duke LLC agreement, Brigham paid 100% of the drilling and completion costs for all wells drilled by the Brigham-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 Brigham-Duke LLC, subject in each instance to proportionate reduction by any ownership rights held by third parties. Upon 100% project payout, Brigham had the right to back-in for 80% of the Brigham-Duke LLC's working interest in all of the then producing wells (and their allocable drilling and spacing units) and a 94% working interest in any wells (and their allocable drilling and spacing units) drilled after payout within the designated project areas governed by the Brigham-Duke LLC agreement, thereby increasing Brigham's effective working interest in the Brigham-Duke LLC wells from 70% to 94%. In February 2001, Duke, as majority member of the Brigham-Duke LLC, assumed management of the Brigham-Duke LLC and initiated the process of its dissolution. As a result, any ownership of remaining undeveloped land and/or seismic data within the Brigham-Duke LLC project areas will be transferred to Duke following dissolution of the Brigham-Duke LLC. Equity Placements Private Placement of Common Stock. On February 22, 2000, Brigham entered into an agreement to issue 2,195,122 shares of common stock and 731,707 warrants to purchase common stock for total consideration of $4.5 million in a private placement to a group of institutional investors led by affiliates of two members 13 of Brigham's board of directors. The equity sale consisted of units that include one share of common stock priced at $2.0525 per share and one-third of a warrant to purchase Brigham common stock at an exercise price of $2.5625 per share with a three-year term. Pricing of this private equity placement was based on the average market price of Brigham common stock during a twenty trading day period prior to issuance. Net proceeds from this equity placement were used to fund a portion of Brigham's capital expenditures and working capital obligations during 2000. Private Placement of Preferred Stock. On March 5, 2001, Brigham sold $10 million of additional Series A Preferred Stock and warrants (the "Additional Series A Warrants") to affiliates of CSFB in a private placement transaction. The Additional Series A Warrants to purchase an aggregate of 2,105,263 shares of Brigham common stock have a term of ten years, an exercise price of $4.75 per share and must be exercised, if Brigham so requires, in the event that the market price of Brigham common stock trades averages at least 150% of the exercise price ($7.125 per share) for 60 consecutive trading days. The exercise price of the Additional Series A Warrants is payable either in cash or in shares of Series A Preferred Stock, valued at liquidation value plus accrued dividends. If Brigham requires exercise of the Additional Series A Warrants, proceeds from the exercise will be used to fund the redemption of a similar value of then outstanding Series A Preferred Stock. For financial reporting purposes, the Additional Series A Warrants were valued at approximately $4.5 million using the Black-Scholes valuation model and were recorded as additional paid-in capital in March 2001. Cash Flow Analysis Cash Flows from Operating Activities. Cash flows provided by operating activities were $13.9 million in the first nine months of 2001, which consisted of $15.1 million in net operating cash flow (net cash provided by operating activities before changes in operating assets and liabilities) and a net $1.2 million used for working capital items. This compares to cash flows used by operating activities of $2.1 million in the first nine months of 2000, which consisted of $6.5 million in net operating cash flow and a net $8.7 million used for working capital items. Cash Flows from Investing Activities. Cash flows used by investing activities were $26.3 million in the first nine months of 2001 as compared with $19.1 million used by investing activities in the first nine months of 2000 Cash Flows from Financing Activities. Cash flows provided by financing activities were $18.9 million in the first nine months of 2001 as compared with cash flows provided by financing activities of $18.5 million in the first nine months of 2000. The cash flows provided by financing activities during the first nine months of 2001 resulted primarily from $9.0 million in borrowings under the Subordinated Notes Facility and the March 2001 placement of additional Series A Preferred Stock and warrants that generated proceeds of $9.8 million after transaction expenses. The cash flows provided by financing activities during the first nine months of 2000 resulted primarily from a $15.0 million increase in borrowings under the Senior Credit Facility and the February 2000 placement of common stock and warrants that generated proceeds of $4.5 million before transaction expenses. Capital Expenditures Continuing its strategy initiated in 1999 to harvest its prior 3-D seismic project investments, Brigham intends to focus substantially all of its efforts and available capital resources in 2001 to the drilling and monetization of its highest grade prospects within its over 5,000 square mile inventory of 3-D seismic data. Brigham's original 2001 capital budget was approximately $32 million, which included approximately $22 million for drilling projects, $4 million for acreage leasing and G&G activities, and $6 million for capitalized overhead, capitalized interest costs and other property and equipment. However, given the success of its drilling program thus far in 2001, an increase in the number of wells planned for the year, and higher cost on certain wells, Brigham now expects its capital spending to approximate $38 million for 2001. Brigham's revised capital budget includes $28 million for drilling projects; $4 million for land and G&G, and $6 million for capitalized overhead, capitalized interest costs and other property and equipment. Brigham's 2001 drilling program remains balanced with a blend of higher potential exploration tests and lower risk development drilling projects, driven to a large extent by the development of several significant exploratory discoveries completed during 2000 and the first half of 2001. Approximately 48% of budgeted 2001 drilling expenditures are targeted for exploratory prospects and the remaining 52% are budgeted for development prospects. Additionally Brigham continues to focus over 80% of its budgeted drilling expenditures in five core project areas in the Springer and Hunton trends of the Anadarko Basin, the Vicksburg and Frio trends of the Texas Gulf Coast and West Texas. Brigham intends to fund its budgeted capital expenditures through a combination of cash flow from operations, available borrowings under its Subordinated Notes Facility and the net proceeds from its private placements of Series A Preferred Stock in November 2000 and March 2001. Additionally, Brigham will continue to seek opportunities to supplement its 14 available capital resources through selective sales of interests in non-producing assets, including interests in its 3-D seismic projects and promoted interests in future drilling prospects or locations. Due to its active exploration and development activities, Brigham has experienced and expects to continue to experience substantial working capital requirements. While Brigham believes that cash flow from operations, cash on its balance sheet and borrowings under its Subordinated Notes Facility should allow it to finance its planned operations through 2001 based on current conditions and expectations, additional financing may be required in the future to fund Brigham's exploration and development activities. In the event additional financing is not available, Brigham may be required to curtail or delay its planned activities. OTHER MATTERS Derivative Instruments Brigham believes that hedging, although not free of risk, allows it 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, may limit the benefit to Brigham of increases in the prices of the hedged commodity. Moreover, Brigham's hedging arrangements generally do not apply to all of its production and thus provide only partial price protection against declines in commodity prices. Brigham expects that the amount of its hedges will vary from time to time. In 1998, Brigham 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, Brigham exchanges a floating market price for a fixed contract price. Brigham makes payments when the floating price exceeds the fixed price for a contract month, and Brigham receives payments when the fixed price exceeds the floating price. Settlements of these swaps are based on the difference between regional market index prices for a contract month and the fixed contract price for the same month. In September 1999, Brigham sold call options on a portion of its future oil and natural gas production. Brigham applied the proceeds from the sale of these call options to increase the effective fixed swap price on its then existing natural gas hedging contracts during the months of October 1999 through January 2000 by an average of $0.57 per MMBtu. For accounting purposes, the improvement in Brigham's fixed natural gas swap price attributable to these transactions was not reflected in reported revenues. Rather, it was reflected in (i) other income (expense) on the income statement, and (ii) amortization of deferred loss on derivatives instruments and market value adjustment for derivatives instruments on the cash flow statement. In March 2000, Brigham purchased put options on a portion of its future oil and natural gas production. These transactions effectively converted a portion of its existing call options into collars, thus providing a hedge to future changes in oil and natural gas prices. Brigham also entered into costless collars on additional future oil and natural gas production thus providing further protection to Brigham's exposure to potential oil and natural gas price declines. The following tables summarize Brigham's outstanding oil and natural gas derivative contracts as of September 30, 2001:
NATURAL GAS DERIVATIVE CONTRACTS 2001 2002 --------------------- ---------------------- AVERAGE AVERAGE CONTRACT CONTRACT CONTRACT CONTRACT PRICING CONTRACT VOLUMES PRICE VOLUMES PRICE BASIS TERM (MMBTU) ($/MMBTU) (MMBTU) ($/MMBTU) -------- -------------- --------- ---------- ---------- ---------- Fixed Price Cap ANR October 2001 - 920,000 $ 2.63 1,810,000 $ 2.63 Oklahoma June 2002 Fixed Price Floor ANR October 2001 - 230,000 $ 1.80 - - Oklahoma December 2001 15 CRUDE OIL DERIVATIVE CONTRACTS 2001 2002 --------------------- ---------------------- AVERAGE AVERAGE CONTRACT CONTRACT CONTRACT CONTRACT PRICING CONTRACT VOLUMES PRICE VOLUMES PRICE BASIS TERM (BBLS) ($/BBLS) (BBLS) ($/BBLS) -------- -------------- --------- ---------- ---------- ---------- Fixed Price Cap NYMEX October 2001 - 18,400 $ 25.25 - - December 2001 Fixed Price Floor NYMEX October 2001 - 18,400 $ 16.10 - - December 2001
In October 2001, Brigham entered into three natural gas fixed price swap agreements whereby Brigham exchanged a floating market price for a fixed contract price of $2.80 per MMBtu for 2,500 MMBtu per day for the period from January 2002 to June 2002, $2.90 per MMBtu on 2,500 MMBtu per day for the period from January 2002 to December 2002, and $3.00 per MMBtu on 2,500 MMBtu per day for the period from January 2002 to June 2003. These derivative instruments qualify for hedge accounting in accordance with FAS 133 and will be accounted for as cash flow hedges. Effects of Inflation and Changes in Prices Brigham's results of operations and cash flows are affected by changing oil and gas prices. If the price of oil and natural gas increases (decreases), there could be a corresponding increase (decrease) in revenues as well as the operating costs that Brigham is required to bear for operations. Inflation has had a minimal effect on Brigham. Environmental and Other Regulatory Matters Brigham'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 oil and natural gas, 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 Brigham 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 Brigham 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 Brigham's financial condition and operations. Although significant expenditures may be required to comply with governmental laws and regulations applicable to Brigham, compliance has not had a material adverse effect on the earnings or competitive position of Brigham. Future regulations may add to the cost of, or significantly limit, drilling activity. 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 natural gas production, the number of wells it anticipates drilling during 2001 and Brigham's financial position, business strategy and other plans and objectives for future operations. Although Brigham 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 Brigham 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 actual results to differ materially from Brigham'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 natural gas prices, availability of sufficient capital resources to Brigham and its project participants, government regulations and other factors set forth among the risk factors noted below or in the description of Brigham's business in Item 1 of this report. All subsequent oral and written 16 forward looking statements attributable to Brigham or persons acting on its behalf are expressly qualified in their entirety by these factors. Brigham assumes no obligation to update any of these statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In Part II, Item 7A of Brigham's Form 10-K report for the year ended December 31, 2000 (see page 43 of Brigham's 2000 Form 10-K), Brigham provided a discussion of its market risk. See Note 6 to the Consolidated Financial Statements regarding Brigham's market risk associated with its derivative instruments at September 30, 2001. There were no material changes during the second quarter of 2001 in Brigham's exposures to loss from possible future changes in the prices of oil and natural gas or in interest rates, other than those described in Brigham 2000 Form 10-K report. 17 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None. (b) Reports on Form 8-K: Brigham filed a report on Form 8-K on August 1, 2001, to report the announcement that it will host a conference call on August 9, 2001 to discuss operational and financial results for the quarter ended June 30, 2001. The Form 8-K included a copy of Brigham's press release that announced this conference call. Brigham filed a report on Form 8-K on August 10, 2001, to report the announcements on August 7, 2001, of its quarterly overview of operational activity for the quarter ending June 30, 2001; estimated production for the second quarter; drilling statistics; and new discoveries in the Texas Gulf Coast, West Texas, and Anadarko Basin. The Form 8-K included a copy of Brigham's press release that provided these announcements. Brigham filed a report on Form 8-K on August 14, 2001, to report the announcements on August 9, 2001, of its financial results for the quarter ending June 30, 2001, and forecasts and estimates of third quarter 2001 results. The Form 8-K included a copy of Brigham's press release that provided these announcements. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 8, 2001. BRIGHAM EXPLORATION COMPANY By: /s/ BEN M. BRIGHAM --------------------------------- Ben M. Brigham Chief Executive Officer, President and Chairman of the Board By: /s/ CURTIS F. HARRELL --------------------------------- Curtis F. Harrell Executive Vice President and Chief Financial Officer 19 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION --- ----------- None -----END PRIVACY-ENHANCED MESSAGE-----