-----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, HpOnaRtCjN73ZPMtEg/mzmWrTBPM8CYDIUOzzbsc2COoi81IrQRbrLLON8mU+KXr lUkLeiY4U61RoG4Z0ZtcXA== /in/edgar/work/20000811/0001104659-00-000416/0001104659-00-000416.txt : 20000921 0001104659-00-000416.hdr.sgml : 20000921 ACCESSION NUMBER: 0001104659-00-000416 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRIGHAM EXPLORATION CO CENTRAL INDEX KEY: 0001034755 STANDARD INDUSTRIAL CLASSIFICATION: [1311 ] IRS NUMBER: 752692967 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22433 FILM NUMBER: 695204 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 0001.txt QUARTERLY REPORT ================================================================================ 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 June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 000-22433 Brigham Exploration Company (Exact name of registrant as specified in its charter) DELAWARE 1311 75-2692967 (State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number)
6300 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 August 11, 2000, 16,712,908 shares of Common Stock, $.01 per share, were outstanding. ================================================================================ BRIGHAM EXPLORATION COMPANY SECOND QUARTER 2000 FORM 10-Q REPORT TABLE OF CONTENTS
PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Financial Statements of Brigham Exploration Company Balance Sheets - December 31, 1999 and June 30, 2000 ..........................................1 Statements of Operations - Three and six months ended June 30, 1999 and 2000 ..................2 Statements of Cash Flows - Six months ended June 30, 1999 and 2000 ............................3 Statement of Changes in Stockholders' Equity - Six months ended June 30, 2000 .................4 Notes to Condensed Consolidated Financial Statements ..........................................5 Condensed Financial Statements of Certain Brigham Exploration Company Subsidiaries Balance Sheets - June 30, 2000.................................................................9 Balance Sheets - December 31, 1999............................................................10 Statements of Operations - Three months ended June 30, 2000...................................11 Statements of Operations - Three months ended June 30, 1999...................................12 Statements of Operations - Six months ended June 30, 2000.....................................13 Statements of Operations - Six months ended June 30, 1999.....................................14 Statements of Cash Flows - Six months ended June 30, 2000.....................................15 Statements of Cash Flows - Six months ended June 30, 1999.....................................16 Statements of Changes in Equity - Six months ended June 30, 2000..............................17 Notes to Condensed Financial Statements.......................................................18 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.................................................................21 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................................................................31 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...................................................................32 SIGNATURES..................................................................................................33
PART I . FINANCIAL INFORMATION Item 1. Financial Statements BRIGHAM EXPLORATION COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, June 30, 1999 2000 ---------------- ---------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,742 $ 73 Accounts receivable 4,945 6,808 Other current assets 577 427 ---------------- ---------------- Total current assets 8,264 7,308 ---------------- ---------------- Natural gas and oil properties, at cost, net 112,066 120,320 Other property and equipment, at cost, net 1,686 1,487 Drilling advances paid 23 39 Deferred loan fees 3,481 3,241 Other noncurrent assets 163 263 ---------------- ---------------- $ 125,683 $ 132,658 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 14,851 $ 7,035 Accrued drilling costs 541 729 Participant advances received 850 215 Other current liabilities 1,502 2,727 ---------------- ---------------- Total current liabilities 17,744 10,706 ---------------- ---------------- Notes payable 56,000 65,000 Senior subordinated notes, net 41,341 44,437 Other noncurrent liabilities 1,600 5,523 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 10 million shares authorized, none issued and outstanding - - Common stock, $.01 par value, 50 million shares authorized, 14,517,786 and 16,712,908 issued and outstanding at December 31, 1999 and June 30, 2000, respectively 145 167 Additional paid-in capital 64,171 68,721 Unearned stock compensation (290) (342) Accumulated deficit (55,028) (61,554) ---------------- ---------------- Total stockholders' equity 8,998 6,992 ---------------- ---------------- $ 125,683 $ 132,658 ================ ================
Natural gas and oil properties are accounted for using the full cost method. See accompanying notes to the consolidated financial statements. 1 BRIGHAM EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months Six Months Ended June 30, Ended June 30, ------------------------------- ------------------------------- 1999 2000 1999 2000 -------------- -------------- -------------- -------------- Revenues: Natural gas and oil sales $ 3,553 $ 4,635 $ 6,744 $ 9,140 Workstation revenue 71 16 161 49 -------------- -------------- -------------- -------------- 3,624 4,651 6,905 9,189 -------------- -------------- -------------- -------------- Costs and expenses: Lease operating 619 502 1,154 961 Production taxes 216 395 385 699 General and administrative 891 708 1,809 1,448 Depletion of natural gas and oil properties 1,514 1,820 2,875 3,584 Depreciation and amortization 139 124 266 247 Amortization of stock compensation 55 24 113 36 -------------- -------------- -------------- -------------- 3,434 3,573 6,602 6,975 -------------- -------------- -------------- -------------- Operating income 190 1,078 303 2,214 -------------- -------------- -------------- -------------- Other income (expense): Interest income 70 19 94 56 Interest expense, net (2,377) (3,031) (4,458) (5,806) Loss on sale of natural gas and oil properties (12,195) - (12,195) - Other expense (527) (2,394) (527) (2,990) -------------- -------------- -------------- -------------- (15,029) (5,406) (17,086) (8,740) -------------- -------------- -------------- -------------- Net loss before income taxes (14,839) (4,328) (16,783) (6,526) Income tax expense - - - - -------------- -------------- -------------- -------------- Net loss $ (14,839) $ (4,328) $ (16,783) $ (6,526) ============== ============== ============== ============== Net loss per share: Basic/Diluted $ (1.04) $ (0.26) $ (1.21) $ (0.41) Weighted average common shares outstanding: Basic/Diluted 14,309 16,713 13,816 15,996
See accompanying notes to the condensed consolidated financial statements. 2 BRIGHAM EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended June 30, ---------------------- 1999 2000 ---------- ---------- Cash flows from operating activities: Net loss $ (16,783) $ (6,526) Adjustments to reconcile net loss to cash provided (used) by operating activities: Depletion of natural gas and oil properties 2,875 3,584 Depreciation and amortization 266 247 Amortization of stock compensation 113 36 Interest paid through issuance of additional senior subordinated notes 2,642 3,003 Amortization of deferred loan fees and debt issuance costs 628 689 Amortization of discount on senior subordinated notes 228 417 Loss on sale of natural gas and oil properties 12,195 - Amortization of deferred loss on derivatives instruments - 280 Market value adjustment for derivatives instruments 527 2,367 Changes in working capital and other items: (Increase) decrease in accounts receivable 4,879 (1,863) (Increase) decrease in prepaid expenses (90) (130) Increase (decrease) in accounts payable (2,001) (7,816) Increase (decrease) in participant advances received (305) (635) Increase (decrease) in other current liabilities (76) 292 Other noncurrent assets (111) (100) Other noncurrent liabilities (4,655) 2,388 ---------- ---------- Net cash provided (used) by operating activities 332 (3,767) ---------- ---------- Cash flows from investing activities: Additions to natural gas and oil properties (15,280) (11,612) Proceeds from sale of natural gas and oil properties 26,700 - Additions to other property and equipment (89) (48) Increase in drilling advances paid (122) (16) ---------- ---------- Net cash provided (used) by investing activities 11,209 (11,676) ---------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock - 4,187 Proceeds from issuance of warrants - 260 Increase in notes payable 6,000 9,000 Repayment of notes payable (16,750) (109) Principal payments on capital lease obligations (130) (114) Deferred loan fees paid (478) (450) ---------- ---------- Net cash provided (used) by financing activities (11,358) 12,774 ---------- ---------- Net increase (decrease) in cash and cash equivalents 183 (2,669) Cash and cash equivalents, beginning of period 2,569 2,742 ---------- ---------- Cash and cash equivalents, end of period $ 2,752 $ 73 ========== ========== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 2,457 $ 1,646 ========== ========== Supplemental disclosure of noncash investing and financing activities: Capital lease asset additions $ 51 $ - ========== ========== Decrease in accounts payable and other noncurrent liabilities in exchange for issuance of common stock $ 3,510 $ - ========== ========== Increase in accounts payable for deferred loan fees to be paid in future periods $ 300 $ - ========== ==========
See accompanying notes to the condensed consolidated financial statements. 3 BRIGHAM EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) (unaudited)
Common Stock Additional Deferred ---------------------------- Paid-in Stock Accumulated Shares Amounts Capital Compensation Deficit Total -------------- ----------- ------------ ---------------- --------------- ---------- Balance, December 31, 1999 14,517,786 $ 145 $64,171 $ (290) $ (55,028) $ 8,998 Net loss - - - - (6,526) (6,526) Issuance of common stock 2,195,122 22 4,165 - - 4,187 Issuance of stock options - - 185 (185) - - Forfeiture of stock options - - (60) 10 - (50) Issuance of warrants - - 260 - - 260 Amortization of unearned stock compensation - - - 123 - 123 -------------- ----------- ------------ ---------------- --------------- ---------- Balance, June 30, 2000 16,712,908 $ 167 $68,721 $ (342) $ (61,554) $ 6,992 ============== =========== ============ ================ =============== ==========
See accompanying notes to the condensed consolidated financial statements. 4 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION AND NATURE OF OPERATIONS Brigham Exploration Company (the "Company") is a Delaware corporation formed on February 25, 1997 for the purpose of exchanging its common stock for the common stock of Brigham, Inc. and the partnership interests of Brigham Oil & Gas, L.P. The Company explores and develops onshore domestic natural gas and oil properties using 3-D seismic imaging and other advanced technologies. The Company focuses its exploration and development of onshore natural gas and oil 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 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. The accompanying condensed consolidated financial statements are unaudited, and in the opinion of management, reflect all adjustments that are necessary for a fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the entire year. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's 1999 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. 3. AMENDMENT TO REVOLVING CREDIT FACILITY AND SENIOR SUBORDINATED NOTES In February 2000, the Company entered into an amended and restated Credit Facility with its existing lenders and a new lender. This amended and restated Credit Facility provides the Company with $70 million in borrowing availability for a three-year term. If the Company exceeds certain asset value and interest coverage tests in the third quarter of 2000, the total borrowing availability under the Credit Facility will increase to $75 million. The Company expects to meet these tests. The Credit Facility includes a provision whereby certain amounts held by one of the lenders, not to exceed $30 million of the outstanding borrowings, are convertible into shares of the Company's common stock ("Convertible Notes") to the extent total borrowings exceed $45 million. As of June 30 and August 11, 2000, the Convertible Notes approximate $20 million and $25 million, respectively. The Credit Facility provides that the Convertible Notes will be convertible as follows: (i) the first $10 million of borrowings is convertible at $3.90 per share, (ii) the second $10 million is convertible at $6.00 per share, and (iii) the final $10 million is convertible at $8.00 per share. The Convertible Notes could result in a beneficial conversion feature based on the relationship between the Company's stock price at the time of a borrowing and the strike price of the relative portion of the convertible debt. The value assigned to the beneficial conversion feature would be recorded as a component of interest expense to the extent the Convertible Notes are immediately convertible. Due to the fact that the strike prices of the Convertible Notes at February 17, 2000 and at each subsequent draw date were in excess of the market prices of the Company's common stock at those respective dates, no beneficial conversion feature was recorded. If the Credit Facility is repaid at maturity or is prepaid prior to maturity without payments of cash premiums, the warrants issued to the new participant in the Credit Facility to purchase Brigham common stock become exercisable. Further, to the extent the Company prepays any of the Convertible Notes, it will be required to pay a premium above the face value of the Convertible Notes to the lender. Such premium amounts range from 150% to 110%, depending on the timing of the prepayment. Such prepayment, however, would require the prior approval of the original lenders to the Credit Facility. In addition, certain financial covenants of the Credit Facility were amended or added. In 5 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) connection with this most recent amendment, the Company reset the price of the warrants previously issued to its existing senior lenders to purchase one million shares of the Company's common stock from an exercise price of $2.25 per share to $2.02 per share. In February 2000, the indenture governing the Subordinated Notes was amended. In this amendment, the holders of the Subordinated Notes waived the minimum consolidated interest coverage ratio covenant through June 30, 2000, and adjusted subsequent levels under this test. In addition, the amendment provides the Company with an extension of its right to pay interest through the issuance of additional Subordinated Notes in lieu of cash (or "in kind") through the third quarter of 2000 and potentially through the fourth quarter of 2000 if certain conditions are met. In exchange for granting these amendments, the Company (i) reset the price of the warrants previously issued to the holders of the Subordinated Notes to purchase one million shares of the Company's common stock from an exercise price of $3.50 per share to $2.43 per share, and (ii) granted to the holders of the Subordinated Notes a term overriding royalty interest that provides for the limited right to receive 4%, or 3% if certain conditions are met, of the Company's net production revenue to reduce any outstanding Subordinated Notes issued as interest paid in kind. As payments are made pursuant to the term overriding royalty interest, they will be recorded by the Company as a reduction of the balance payable pursuant to the Subordinated Notes. The modification of these agreements did not result in any material adjustment to debt issuance costs. 4. NET INCOME (LOSS) PER SHARE Net loss per share is presented in the consolidated financial statements based on a basic loss per share calculation as well as a diluted loss per share calculation. Basic loss per share is computed by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding during each period. Diluted loss per share is computed by dividing net 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. At June 30, 2000 and December 31, 1999, options and warrants to purchase 8,767,624 and 3,519,726 shares of common stock, respectively, were outstanding but were not included in the computation of diluted loss per share because they were anti-dilutive. 5. ISSUANCE OF COMMON STOCK In February 2000, the Company issued 2,195,122 shares of common stock and 731,707 warrants to purchase the Company's common stock for total net proceeds of $4.2 million in a private placement to a group of institutional investors led by affiliates of two members of the Company's board of directors. The equity sale consisted of units that included one share of common stock and one-third of a warrant to purchase the Company's common stock at an exercise price of $2.5625 per share. 6. HEDGING ACTIVITIES The Company 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. In the first six months of 2000 the Company recognized losses of $2.3 million ($0.72 per Mcfe) from hedging contracts as a component of oil and gas sales. Derivative instruments that do not qualify as hedging contracts are recorded at fair market value and recorded on the balance sheet as deferred gain or loss. Each balance sheet 6 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) date the market value of these derivative instruments is adjusted to current value and any deferred gains or losses are recognized as a component of other income or expense. In the first six months of 2000 the Company recognized other losses of $3.0 million related to derivative instruments not qualifying as hedging contracts, including $2.4 million in non-cash losses related to the changes in fair market values of certain hedging contracts. The following tables summarize the Company's outstanding natural gas and oil hedging arrangements as of July 1, 2000:
NATURAL GAS HEDGES 2000 2001 2002 ------------------- --------------------- ----------------------- Average Average Average Volumes Contract Volumes Contract Volumes Contract Monthly Hedged Price Hedged Price Hedged Price Pricing Basis Contract Term (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu) ------------- ------------- ------- --------- ------- --------- ------- --------- Fixed Price Swaps: Contract #1 ANR July 2000 - 920,000 $2.0650 600,000 $2.0650 -- -- Oklahoma April 2001 Contract #2 Houston July 2000 - 920,000 $2.1500 600,000 $2.1500 -- -- Ship Channel April 2001 Contract #3 TETCO July 2000 - 920,000 $2.0575 600,000 $2.0575 -- -- South Texas April 2001 Fixed Price Cap ANR May 2001 - -- -- 2,450,000 $2.5498 1,810,000 $2.6326 Oklahoma June 2002 Fixed Price Floor ANR May 2001 - -- -- 765,000 $1.8000 -- -- Oklahoma December 2001 CRUDE OIL HEDGES 2000 2001 2002 -------------------- -------------------- ------------------ Average Average Average Volumes Contract Volumes Contract Volumes Contract Monthly Hedged Price Hedged Price Hedged Price Pricing Basis Contract Term (Bbls) ($/Bbl) (Bbls) ($/Bbl) (Bbls) ($/Bbl) ------------- ------------- ------ ------- ------ ------- ------ ------- Fixed Price Cap NYMEX July 2000 - 110,400 $31.75 109,200 $26.15 -- -- December 2001 Fixed Price Floor NYMEX July 2000 - 110,400 $18.00 109,200 $17.36 -- -- December 2001
7. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement, as amended in June 2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133" establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires enterprises to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The requisite accounting for changes in the fair value of a derivative will depend on the intended use of the derivative and the resulting designation. The Company must adopt SFAS No. 133 and No. 138, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB 7 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Statement No. 133", effective January 1, 2001. The Company is currently assessing the impact adoption of this standard will have on its financial statement presentation. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 ("FIN 44") ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB OPINION NO. 25. FIN 44 clarifies the application of opinion No. 25 for (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. The Company believes that the impact of FIN 44 will not have a material effect on its financial position or results of operations. 8 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED BALANCE SHEETS AS OF JUNE 30, 2000 (in thousands) (unaudited)
BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC ASSETS Current assets: Cash and cash equivalents $ 67 $ 73 $ 1 $ 1 Accounts receivable 6,808 6,808 - - Other current assets 427 427 - - ------------- ------------- ------------ ------------- Total current assets 7,302 7,308 1 1 ------------- ------------- ------------ ------------- Natural gas and oil properties, at cost, net 120,320 120,320 - - Other property and equipment, at cost, net 1,487 1,487 - - Investment in subsidiaries and intercompany advances 141 27 305 50,296 Drilling advances paid 39 39 - - Deferred loan fees 1,979 1,979 - - Other noncurrent assets 263 263 - - ------------- ------------- ------------ ------------- $ 131,531 $ 131,423 $ 306 $ 50,297 ============= ============= ============ ============= LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 7,035 $ 7,035 $ - $ - Accrued drilling costs 729 729 - - Participant advances received 215 215 - - Other current liabilities 2,400 2,400 - - ------------- ------------- ------------ ------------- Total current liabilities 10,379 10,379 - - ------------- ------------- ------------ ------------- Notes payable 65,000 65,000 - - Other noncurrent liabilities 5,523 5,523 - - Intercompany accounts payable 2,007 1,923 - 2,034 Intercompany notes payable 48,138 48,138 - 48,138 Commitments and contingencies Minority interest - 332 - - Equity Partners' capital 484 - 306 125 Common stock, $1.00 par value, 1,000 shares authorized, issued and outstanding - 1 - - Additional paid-in capital - 19,233 - - Accumulated deficit - (19,106) - - ------------- ------------- ------------ ------------- Total equity 484 128 306 125 ------------- ------------- ------------ ------------- $ 131,531 $ 131,423 $ 306 $ 50,297 ============= ============= ============ =============
Natural gas and oil properties are accounted for using the full cost method. See accompanying notes to the condensed financial statements. 9 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1999 (in thousands) (unaudited)
BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC I, LLC II, LLC ASSETS Current assets: Cash and cash equivalents $ 2,718 $ 2,736 $ 6 $ 6 Accounts receivable 4,945 4,945 - - Other current assets 577 577 - - ------------- ------------- ------------ ------------- Total current assets 8,240 8,258 6 6 ------------- ------------- ------------ ------------- Natural gas and oil properties, at cost, net 112,066 112,066 - - Other property and equipment, at cost, net 1,686 1,686 - - Investment in subsidiaries and intercompany advances 130 26 1,299 47,802 Drilling advances paid 23 23 - - Deferred loan fees 2,108 2,108 - - Other noncurrent assets 164 164 - - ------------- ------------- ------------ ------------- $ 124,417 $ 124,331 $ 1,305 $ 47,808 ============= ============= ============ ============= LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 14,851 $ 14,851 $ - $ - Accrued drilling costs 541 541 - - Participant advances received 850 850 - - Other current liabilities 1,429 1,429 - - ------------- ------------- ------------ ------------- Total current liabilities 17,671 17,671 - - ------------- ------------- ------------ ------------- Notes payable 56,000 56,000 - - Other noncurrent liabilities 1,600 1,600 - - Intercompany accounts payable 1,752 1,687 - 1,779 Intercompany notes payable 45,459 45,459 - 45,459 Commitments and contingencies Minority interest - 1,325 - - Equity Partners' capital 1,935 - 1,305 570 Common stock, $1.00 par value, 1,000 shares authorized, issued and outstanding - 1 - - Additional paid-in capital - 17,832 - - Accumulated deficit - (17,244) - - ------------- ------------- ------------ ------------- Total equity 1,935 589 1,305 570 ------------- ------------- ------------ ------------- $ 124,417 $ 124,331 $ 1,305 $ 47,808 ============= ============= ============ =============
Natural gas and oil properties are accounted for using the full cost method. See accompanying notes to the condensed financial statements. 10 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 (in thousands) (unaudited)
BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC Revenues: Natural gas and oil sales $ 4,635 $ 4,635 $ - $ - Workstation revenue 16 16 - - ------------- --------------- ------------- --------------- 4,651 4,651 - - ------------- --------------- ------------- --------------- Costs and expenses: Lease operating 502 502 - - Production taxes 395 395 - - General and administrative 704 706 3 2 Depletion of natural gas and oil properties 1,820 1,820 - - Depreciation and amortization 124 124 - - Amortization of stock compensation 24 24 - - ------------- --------------- ------------- --------------- 3,569 3,571 3 2 ------------- --------------- ------------- --------------- Operating income (loss) 1,082 1,080 (3) (2) ------------- --------------- ------------- --------------- Other income (expense): Interest income 19 19 - - Interest expense, net (1,145) (1,145) - - Interest expense - intercompany (1,545) (1,545) - (1,545) Other expense (2,394) (2,394) - - ------------- --------------- ------------- --------------- (5,065) (5,065) - (1,545) ------------- --------------- ------------- --------------- Minority interest in net loss - (2,728) - - ------------- --------------- ------------- --------------- Net loss before income taxes (3,983) (1,257) (3) (1,547) Income tax benefit - - - - Equity in net income (loss) of investee - - (2,728) 330 ------------- --------------- ------------- --------------- Net loss $ (3,983) $ (1,257) $ (2,731) $ (1,217) ============= =============== ============= ===============
See accompanying notes to the condensed financial statements. 11 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 (in thousands) (unaudited)
BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC Revenues: Natural gas and oil sales $ 3,553 $ 3,553 $ - $ - Workstation revenue 71 71 - - ------------- --------------- ------------- --------------- 3,624 3,624 - - ------------- --------------- ------------- --------------- Costs and expenses: Lease operating 619 619 - - Production taxes 216 216 - - General and administrative 881 886 5 5 Depletion of natural gas and oil properties 1,514 1,514 - - Depreciation and amortization 139 139 - - Amortization of stock compensation 55 55 - - ------------- --------------- ------------- --------------- 3,424 3,429 5 5 ------------- --------------- ------------- --------------- Operating income (loss) 200 195 (5) (5) ------------- --------------- ------------- --------------- Other income (expense): Interest income 70 70 - - Interest expense, net (1,563) (786) - - Interest expense - intercompany (584) (1,361) - (1,361) Loss on sale of natural gas and oil properties (12,195) (12,195) - - Other expense (527) (527) - - ------------- --------------- ------------- --------------- (14,799) (14,799) - (1,361) ------------- --------------- ------------- --------------- Minority interest in net loss - (10,000) - - ------------- --------------- ------------- --------------- Net loss before income taxes (14,599) (4,604) (5) (1,366) Income tax benefit - - - - Equity in net income (loss) of investee - - (10,000) (3,091) ------------- --------------- ------------- --------------- Net loss $ (14,599) $ (4,604) $ (10,005) $ (4,457) ============= =============== ============= ===============
See accompanying notes to the condensed financial statements. 12 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (in thousands) (unaudited)
BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC Revenues: Natural gas and oil sales $ 9,140 $ 9,140 $ - $ - Workstation revenue 49 49 - - ------------- ------------- ------------- ------------ 9,189 9,189 - - ------------- ------------- ------------- ------------ Costs and expenses: Lease operating 961 961 - - Production taxes 699 699 - - General and administrative 1,439 1,443 5 4 Depletion of natural gas and oil properties 3,584 3,584 - - Depreciation and amortization 247 247 - - Amortization of stock compensation 36 36 - - ------------- ------------- ------------- ------------ 6,966 6,970 5 4 ------------- ------------- ------------- ------------ Operating income (loss) 2,223 2,219 (5) (4) ------------- ------------- ------------- ------------ Other income (expense): Interest income 56 56 - - Interest expense, net (2,145) (2,145) - - Interest expense - intercompany (3,042) (3,042) - (3,042) Other expense (2,990) (2,990) - - ------------- ------------- ------------- ------------ (8,121) (8,121) - (3,042) ------------- ------------- ------------- ------------ Minority interest in net loss - (4,040) - - ------------- ------------- ------------- ------------ Net loss before income taxes (5,898) (1,862) (5) (3,046) Income tax benefit - - - - Equity in net income (loss) of investee - - (4,040) 1,243 ------------- ------------- ------------- ------------ Net loss $ (5,898) $ (1,862) $ (4,045) $ (1,803) ============= ============= ============= ============
See accompanying notes to the condensed financial statements. 13 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (in thousands) (unaudited)
BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC Revenues: Natural gas and oil sales $ 6,744 $ 6,744 $ - $ - Workstation revenue 161 161 - - ------------- ------------- ------------- ------------ 6,905 6,905 - - ------------- ------------- ------------- ------------ Costs and expenses: Lease operating 1,154 1,154 - - Production taxes 385 385 - - General and administrative 1,799 1,804 5 5 Depletion of natural gas and oil properties 2,875 2,875 - - Depreciation and amortization 266 266 - - Amortization of stock compensation 113 113 - - ------------- ------------- ------------- ------------ 6,592 6,597 5 5 ------------- ------------- ------------- ------------ Operating income 313 308 (5) (5) ------------- ------------- ------------- ------------ Other income (expense): Interest income 94 94 - - Interest expense, net (2,878) (2,101) - - Interest expense - intercompany (1,165) (1,942) - (2,678) Loss on sale of natural gas and oil properties (12,195) (12,195) - - Other expense (527) (527) - - ------------- ------------- ------------- ------------ (16,671) (16,671) - (2,678) ------------- ------------- ------------- ------------ Minority interest in net loss - (11,205) - - ------------- ------------- ------------- ------------ Net loss before income taxes (16,358) (5,158) (5) (2,683) Income tax benefit - - - - Equity in net income (loss) of investee - - (11,205) (2,311) ------------- ------------- ------------- ------------ Net loss $ (16,358) $ (5,158) $ (11,210) $ (4,994) ============= ============= ============= ============
See accompanying notes to the condensed financial statements. 14 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2000 (in thousands) (unaudited)
BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC Cash flows from operating activities: Net loss $(5,898) $(1,862) $(4,045) $(1,803) Adjustments to reconcile net loss to cash provided (used) by operating activities: Depletion of natural gas and oil properties 3,584 3,584 - - Depreciation and amortization 247 247 - - Amortization of stock compensation 36 36 - - Amortization of deferred loan fees and debt issuance costs 488 488 - - Amortization of deferred loss on derivatives instruments 280 280 - - Market value adjustment for derivatives instruments 2,367 2,367 - - Minority interest in net loss - (4,040) - - Equity in net (income) loss of investee - - 4,040 (1,243) Changes in working capital and other items: (Increase) decrease in accounts receivable (1,863) (1,863) - - (Increase) decrease in prepaid expenses (130) (130) - - Increase (decrease) in accounts payable (7,816) (7,816) - - Increase (decrease) in participant advances received (635) (635) - - Increase (decrease) in other current liabilities 77 77 - - Increase (decrease) in intercompany accounts payable 107 88 - 38 Other noncurrent assets (100) (100) - - Other noncurrent liabilities 2,388 2,388 - - ------------ ------------ ----------- ------------ Net cash provided (used) by operating activities (6,868) (6,891) (5) (3,008) ------------ ------------ ----------- ------------ Cash flows from investing activities: Additions to natural gas and oil properties (11,612) (11,612) - - Additions to other property and equipment (48) (48) - - Investment in subsidiaries and intercompany advances 4,454 4,465 - - Increase in drilling advances paid (16) (16) - - ------------ ------------ ----------- ------------ Net cash provided (used) by investing activities (7,222) (7,211) - - ------------ ------------ ----------- ------------ Cash flows from financing activities: Increase in notes payable 9,000 9,000 - - Increase in intercompany notes payable 3,003 3,003 - 3,003 Principal payments on capital lease obligations (114) (114) - - Deferred loan fees paid (450) (450) - - ------------ ------------ ----------- ------------ Net cash provided (used) by financing activities 11,439 11,439 - 3,003 ------------ ------------ ----------- ------------ Net decrease in cash and cash equivalents (2,651) (2,663) (5) (5) Cash and cash equivalents, beginning of year 2,718 2,736 6 6 ------------ ------------ ----------- ------------ Cash and cash equivalents, end of period $ 67 $ 73 $ 1 $ 1 ============ ============ =========== ============ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 1,646 $ 1,646 $ - $ - Supplemental disclosure of cash flow information: Intercompany capital contributions $ - $ 1,406 $ 3,058 $ 1,364
See accompanying notes to the condensed financial statements. 15 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (in thousands) (unaudited)
BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC Cash flows from operating activities: Net loss $ (16,358) $ (5,158) $ (11,210) $ (4,994) Adjustments to reconcile net loss to cash provided (used) by operating activities: Depletion of natural gas and oil properties 2,875 2,875 - - Depreciation and amortization 266 266 - - Amortization of stock compensation 113 113 - - Amortization of deferred loan fees and debt issuance costs 440 440 - - Loss on sale of natural gas and oil properties 12,195 12,195 Market value adjustment for derivative instruments 527 527 Minority interest in net loss - (11,205) - - Equity in net (income) loss of investee - - 11,205 2,311 Changes in working capital and other items: (Increase) decrease in accounts receivable 4,879 4,879 - - (Increase) decrease in prepaid expenses (90) (90) - - Increase (decrease) in accounts payable (2,001) (2,001) - - Increase (decrease) in participant advances received (305) (305) - - Increase (decrease) in other current liabilities (111) (111) - - Increase (decrease) in intercompany accounts payable 29 125 - 35 Other noncurrent assets (109) (109) - - Other noncurrent liabilities (4,655) (4,655) - - ------------ ------------ ----------- ------------ Net cash provided (used) by operating activities (2,305) (2,214) (5) (2,648) ------------ ------------ ----------- ------------ Cash flows from investing activities: Additions to natural gas and oil properties (15,280) (15,280) - - Proceeds from sale of natural gas and oil properties 26,700 26,700 - - Additions to other property and equipment (89) (89) - - Change in investment insubsidiaries and intercompany advances (4) (95) 5 6 Increase in drilling advances paid (122) (122) - - ------------ ------------ ----------- ------------ Net cash provided (used) by investing activities 11,205 11,114 5 6 ------------ ------------ ----------- ------------ Cash flows from financing activities: Increase in notes payable 6,000 6,000 - - Repayment of notes payable (16,750) (16,750) - - Increase in intercompany notes payable 2,642 2,642 - 2,642 Principal payments on capital lease obligations (130) (130) - - Deferred loan fees paid (478) (478) - - ------------ ------------ ----------- ------------ Net cash provided (used) by financing activities (8,716) (8,716) - 2,642 ------------ ------------ ----------- ------------ Net increase in cash and cash equivalents 184 184 - - Cash and cash equivalents, beginning of year 2,549 2,563 5 6 ------------ ------------ ----------- ------------ Cash and cash equivalents, end of year $ 2,733 $ 2,747 $ 5 $ 6 ============ ============ =========== ============ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 2,897 $ 2,897 $ - $ - Supplemental disclosure of noncash investing and financing activities: Capital lease asset additions $ 51 $ 51 $ - $ - Increase in accounts payable for deferred loan fees to be paid in future periods $ 300 $ 300 $ - $ - Capital contributions received in exchange for accounts payable and other noncurrent liabilities $ 3,510 $ - $ - $ - Intercompany capital contributions $ - $ 1,106 $ 2,404 $ 1,071
See accompanying notes to the condensed financial statements. 16 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF CHANGES IN EQUITY (in thousands, except shares) (unaudited)
Retained Additional Earnings/ Common Stock Paid-In Accumulated Partners' ----------------------- Shares Amounts Capital Deficit Capital Total --------- ------------ ------------ ------------- ---------- ---------- BRIGHAM OIL & GAS, L.P. Balance, December 31, 1999 $ - $ - $ - $ - $ 1,935 $ 1,935 Capital contribution - - - - 14,907 14,907 Net loss - - - - (16,358) (16,358) --------- ------------ ------------ ------------- ---------- ---------- Balance, June 30, 2000 - $ - $ - $ - $ 484 $ 484 ========= ============ ============ ============= ========== ========== BRIGHAM INC. Balance, December 31, 1999 1,000 $ 1 $ 17,832 $ (17,244) $ - $ 589 Capital contribution - - 4,697 - - 4,697 Net loss - - - (5,158) - (5,158) --------- ------------ ------------ ------------- ---------- ---------- Balance, June 30, 2000 1,000 $ 1 $ 22,529 $ (22,402) $ - $ 128 ========= ============ ============ ============= ========== ========== BRIGHAM HOLDING I, LLC Balance, December 31, 1999 - $ - $ - $ - $ 1,305 $ 1,305 Capital contribution - - - - 10,211 10,211 Net loss - - - - (11,210) (11,210) --------- ------------ ------------ ------------- ---------- ---------- Balance, June 30, 2000 - $ - $ - $ - $ 306 $ 306 ========= ============ ============ ============= ========== ========== BRIGHAM HOLDINGS II, LLC Balance, December 31, 1999 - $ - $ - $ - $ 570 $ 570 Capital contribution - - - - 4,549 4,549 Net loss - - - - (4,994) (4,994) --------- ------------ ------------ ------------- ---------- ---------- Balance, June 30, 2000 - $ - $ - $ - $ 125 $ 125 ========= ============ ============ ============= ========== ==========
See accompanying notes to the condensed financial statements. 17 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES NOTES TO THE CONDENSED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION AND BACKGROUND In August 1998, upon the filing of a registration statement with the SEC, Brigham Exploration Company, a Delaware corporation, (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"). The Notes are fully and unconditionally guaranteed, on a joint and several basis, by each of the Company's directly or indirectly wholly-owned subsidiaries which are Brigham Oil & Gas, L.P. (the "Partnership"), Brigham Inc., Brigham Holdings I LLC ("Holdings I"), and Brigham Holdings II LLC ("Holdings II"). Furthermore, these subsidiaries have pledged their respective stock and partnership interests as collateral for the Notes. These financial statements include the financial statements for the wholly owned subsidiaries whose securities and partnership interests comprise substantially all of the collateral pledged for the Notes. The Partnership explores and develops onshore domestic natural gas and oil properties using 3-D seismic imaging and other advanced technologies. The Company focuses its exploration and development of onshore natural gas and oil properties primarily in the Anadarko Basin, the Texas Gulf Coast and West Texas. Brigham, Inc. is a Nevada corporation whose only asset prior to the Exchange was it's less than 1% ownership interest in the Partnership. Brigham, Inc. is the managing general partner of the Partnership. The Company is a Delaware corporation formed on February 25, 1997 for the purpose of exchanging its common stock for the common stock of Brigham, Inc. and the partnership interests of Brigham Oil & Gas, L.P. Subsequent to this exchange, the Company owned a 68.5% interest in the Partnership and Brigham, Inc. owned a 31.50% interest in the Partnership. Effective January 1, 1998, Brigham, Inc. contributed 30.5% of its 31.5% interest in the Partnership to Holdings II, a newly formed Nevada LLC and wholly owned subsidiary of Brigham, Inc., whose only asset is its investment in the Partnership. Also effective January 1, 1998 the Company contributed its 68.5% interest in the Partnership to Brigham Holdings I, a newly formed Nevada LLC and wholly owned subsidiary of the Company whose only asset is its investment in the Partnership. 2. BASIS OF PRESENTATION The accompanying financial condensed financial statements are unaudited, and in the opinion of management, reflect all adjustments that are necessary for a fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the entire year. The unaudited condensed financial statements should be read in conjunction with the Company's 1999 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934. 3. AMENDMENT TO REVOLVING CREDIT FACILITY In February 2000, the Partnership entered into an amended and restated Credit Facility with its existing lenders and a new lender. This amended and restated Credit Facility provides the Partnership with $70 million in borrowing availability for a three-year term. If the Company exceeds certain asset value and interest coverage tests in the third quarter of 2000, the total borrowing availability under the Credit Facility will increase to $75 million. The Company expects to meet these tests. The Credit Facility includes a provision whereby certain amounts held by one of the lenders, not to exceed $30 million of the outstanding borrowings, are convertible into shares of the Company's common stock ("Convertible Notes") to the extent total borrowings exceed $45 18 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES NOTES TO THE CONDENSED FINANCIAL STATEMENTS (unaudited) million. As of June 30 and August 11, 2000, the Convertible Notes approximate $20 million and $25 million, respectively. The Credit Facility provides that the Convertible Notes will be convertible as follows: (i) the first $10 million of borrowings is convertible at $3.90 per share, (ii) the second $10 million is convertible at $6.00 per share, and (iii) the final $10 million is convertible at $8.00 per share. The Convertible Notes could result in a beneficial conversion feature based on the relationship between the Company's stock price at the time of a borrowing and the strike price of the relative portion of the convertible debt. The value assigned to the beneficial conversion feature would be recorded as a component of interest expense to the extent the Convertible Notes are immediately convertible. Due to the fact that the strike prices of the Convertible Notes at February 17, 2000 and at each subsequent draw date were in excess of the market prices of the Company's common stock at those respective dates, no beneficial conversion feature was recorded. If the Credit Facility is repaid at maturity or is prepaid prior to maturity without payments of cash premiums, the warrants issued to the new participant in the Credit Facility to purchase Brigham common stock become exercisable. Further, to the extent the Partnership prepays any of the Convertible Notes, it will be required to pay a premium above the face value of the Convertible Notes to the lender. Such premium amounts range from 150% to 110%, depending on the timing of the prepayment. Such prepayment, however, would require the prior approval of the original lenders to the Credit Facility. In addition, certain financial covenants of the Credit Facility were amended or added. In connection with this most recent amendment, the Partnership reset the price of the warrants previously issued to its existing senior lenders to purchase one million shares of the Company's common stock from an exercise price of $2.25 per share to $2.02 per share. The modification of this agreement did not result in any material adjustment to debt issuance costs. 4. HEDGING ACTIVITIES The Company 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. In the first six months of 2000 the Company recognized losses of $2.3 million ($0.72 per Mcfe) from hedging contracts as a component of oil and gas sales. Derivative instruments that do not qualify as hedging contracts are recorded at fair market value and recorded on the balance sheet as deferred gain or loss. Each balance sheet date the market value of these derivative instruments is adjusted to current and any deferred gains or losses are recognized as a component of other income or expense. In the first six months of 2000 the Company recognized other losses of $3.0 million related to derivative instruments not qualifying as hedging contracts, including $2.4 million in non-cash losses related to the changes in fair market values of certain hedging contracts. 19 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES NOTES TO THE CONDENSED FINANCIAL STATEMENTS (unaudited) The following tables summarize the Company's outstanding natural gas and oil hedging arrangements as of July 1, 2000:
NATURAL GAS HEDGES 2000 2001 2002 ------------------- ------------------ ------------------ Average Average Average Volumes Contract Volumes Contract Volumes Contract Monthly Hedged Price Hedged Price Hedged Price Pricing Basis Contract Term (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu) ------------- ------------- ------- --------- ------- --------- ------- --------- Fixed Price Swaps: Contract #1 ANR July 2000 - 920,000 $2.0650 600,000 $2.0650 -- -- Oklahoma April 2001 Contract #2 Houston July 2000 - 920,000 $2.1500 600,000 $2.1500 -- -- Ship Channel April 2001 Contract #3 TETCO July 2000 - 920,000 $2.0575 600,000 $2.0575 -- -- South Texas April 2001 Fixed Price Cap ANR May 2001 - -- -- 2,450,000 $2.5498 1,810,000 $2.6326 Oklahoma June 2002 Fixed Price Floor ANR May 2001 - -- -- 765,000 $1.8000 -- -- Oklahoma December 2001 CRUDE OIL HEDGES 2000 2001 2002 -------------------- -------------------- -------------------- Average Average Average Volumes Contract Volumes Contract Volumes Contract Monthly Hedged Price Hedged Price Hedged Price Pricing Basis Contract Term (Bbls) ($/Bbl) (Bbls) ($/Bbl) (Bbls) ($/Bbl) ------------- ------------- ------ ------- ------ ------- ------ ------- Fixed Price Cap NYMEX July 2000 - 110,400 $31.75 109,200 $26.15 -- -- December 2001 Fixed Price Floor NYMEX July 2000 - 110,400 $18.00 109,200 $17.36 -- -- December 2001
5. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement, as amended in June 2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133" establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires enterprises to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The requisite accounting for changes in the fair value of a derivative will depend on the intended use of the derivative and the resulting designation. The Company must adopt SFAS No. 133 and No. 138, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", effective January 1, 2001. The Company is currently assessing the impact adoption of this standard will have on its financial statement presentation. 20 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS COMPARISON OF THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 2000 NATURAL GAS AND OIL SALES. Natural gas and oil sales increased 30% from $3.6 million in the second quarter of 1999 to $4.6 million in the second quarter of 2000. Of this net increase, $1.0 million was attributable to a 28% increase in the average realized equivalent oil and natural gas sales price and $78,000 was attributable to a 2% increase in net equivalent production volumes. Net natural gas production volumes increased 4% from 1,005 MMcf in the second quarter of 1999 to 1,047 MMcf in the second quarter of 2000. Net natural gas volumes for the second quarter of 1999 included approximately 213 MMcf attributable to properties sold by Brigham in June 1999. Excluding production attributable to these divested properties, net natural gas volumes increased 32% in the second quarter of 2000, compared to adjusted volumes produced during the same period in 1999. This increase was principally due to the completion of wells drilled over the past twelve months and recompletion and workover projects performed on certain producing wells. The average price received for natural gas decreased 5% from $2.07 per Mcf in the second quarter of 1999 to $1.98 per Mcf in the second quarter of 2000. Included in these realized prices were natural gas hedging gains of $7,000 ($0.01 per Mcf) in the second quarter of 1999, and natural gas hedging losses of $1.7 million ($1.66 per Mcf) in the second quarter of 2000. Net oil production volumes decreased 1% from 90 MBbls in the second quarter of 1999 to 89 MBbls in the second quarter of 2000. Excluding 11 MBbls of net oil production attributable to properties divested in June 1999, net oil volumes increased 12% in the second quarter of 2000 as compared to the adjusted volumes produced during the same period in 1999. This increase was principally due to the completion of wells drilled over the past twelve months and recompletion and workover projects performed on certain producing wells. The average price received for oil increased 77% from $16.24 per Bbl in the second quarter of 1999 to $28.71 per Bbl in the second quarter of 2000. WORKSTATION REVENUE. Workstation revenue decreased 77% from $71,000 in the second quarter of 1999 to $16,000 in the second quarter of 2000. Brigham recognizes workstation revenue as industry participants in the Company's seismic programs are charged an hourly rate for the work performed by Brigham on its 3-D seismic interpretation workstations. The decrease in the second quarter 2000 is primarily attributable to a reduction in the volume of 3-D seismic interpretation activity billable to industry participants as compared with the prior year period. LEASE OPERATING EXPENSES. Lease operating expenses decreased 19% from $619,000 for the second quarter of 1999 to $502,000 for the second quarter of 2000 and, on a per unit of production basis, lease operating expenses for the same periods decreased 21% from $0.40 per Mcfe to $0.32 per Mcfe. The decrease in lease operating expenses was primarily due to a decrease in the number of producing wells in the second quarter of 2000, as compared with the same period in 1999, as a result of Brigham's June 1999 property divestitures and the plugging and abandonment of certain uneconomic wells. PRODUCTION TAXES. Production taxes increased 83% from $216,000 ($0.14 per Mcfe) for the second quarter of 1999 to $395,000 ($0.25 per Mcfe) for the second quarter of 2000, primarily as a result of a 76% increase in the average equivalent price received for natural gas and oil sales before the effects of hedging gains and losses. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased 21% from $891,000 for the second quarter of 1999 to $708,000 for the second quarter of 2000 primarily due to the reduction of various administrative costs, including reduced employee payroll and benefits expenses and lower office rent. On a per unit of production basis, general and administrative expenses decreased from $0.58 per Mcfe for the second quarter of 1999 to $0.45 per Mcfe for the second quarter of 2000. DEPLETION OF NATURAL GAS AND OIL PROPERTIES. Depletion of natural gas and oil properties increased 20% from $1.5 million ($0.98 per Mcfe) in the second quarter of 1999 to $1.8 million ($1.15 per Mcfe) in the second quarter of 2000. Of this net increase, $273,000 was due to an increase in the depletion rate per unit of production and $33,000 was due to an increase in production volumes. The increased depletion rate was 21 principally the result of estimated additions of proved natural gas and oil reserves at higher average capital costs during the second quarter of 2000 as compared with estimated amounts for the second quarter of 1999. NET INTEREST EXPENSE. Net interest expense increased 28% from $2.4 million in the second quarter of 1999 to $3.0 million in the second quarter of 2000. This increase was due to a higher average debt balance with a higher average interest rate in the second quarter of 2000 compared with the second quarter of 1999. The weighted average outstanding debt balance increased from $104.1 million in the second quarter of 1999 to $112.5 million in the second quarter of 2000. The average effective annual interest rate on borrowings outstanding during the second quarter of 1999 was 12.0% compared to 12.6% for the second quarter of 2000. Interest expense in the second quarter of 2000 included $2 million of non-cash charges, including (i) $1.5 million of interest expense related to the Subordinated Notes that was paid through the issuance of additional Subordinated Notes (or "paid-in-kind"), (ii) $298,000 for amortization of deferred financing fees, and (iii) $237,000 for amortization of debt discounts related to the issuance of the Subordinated Notes. See "Liquidity and Capital Resources - Credit Facility; - Subordinated Notes". OTHER EXPENSE. Other expense increased from $527,000 in the second quarter of 1999 to $2.4 million in the second quarter of 2000. The Company recognizes other income or expense primarily related to the changes in the fair market values and the related cash flows of certain oil and natural gas hedging contracts that do not qualify for hedge accounting treatment. Other expense in the second quarter 2000 included (i) $1.9 million of non-cash expenses related to the changes in the fair market values of these hedging contracts during the period, and (ii) $471,000 of expenses related to cash settlements incurred during the period pursuant to these hedging contracts. LOSS ON SALE OF NATURAL GAS AND OIL PROPERTIES. In June 1999, the Company sold all of its interests in certain producing and non-producing natural gas and oil properties for a total sales price of $17.1 million. Due to the magnitude of the reserve volumes that were attributable to these properties relative to the Company's remaining net reserve volumes, the Company recognized a $12.2 million non-cash loss in the second quarter of 1999 to reflect the difference between the sales price received (after adjustment for transaction costs) and the $28.9 million basis allocated to the divested properties in accordance with the full-cost method of accounting for oil and gas properties. COMPARISON OF SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 2000 NATURAL GAS AND OIL SALES. Natural gas and oil sales increased 36% from $6.7 million in the first six months of 1999 to $9.1 million in the first six months of 2000. This increase was attributable to a 36% increase in the average realized equivalent oil and natural gas sales price. Net natural gas production volumes decreased 3% from 2,053 MMcf for the first six months of 1999 to 1,987 MMcf for the first six months of 2000. Net natural gas volumes for the first six months of 1999 included approximately 442 MMcf attributable to properties sold by Brigham in June 1999. Excluding production attributable to these divested properties, net natural gas volumes increased 23% in the first six months of 2000, compared to adjusted volumes produced during the same period in 1999. This increase was principally due to the completion of wells drilled over the past twelve months and recompletion and workover projects performed on certain producing wells. The average price received for natural gas decreased 6% from $2.08 per Mcf in the first six months of 1999 to $1.96 per Mcf in the first six months of 2000. Included in these realized prices were natural gas hedging gains of $566,000 ($0.28 per Mcf) in the first six months of 1999, and natural gas hedging losses of $2.3 million ($1.13 per Mcf) in the first six months of 2000. Net oil production volumes increased 5% from 178 MBbls in the first six months of 1999 to 188 MBbls in the first quarter of 2000. Excluding 22 MBbls of net oil production attributable to properties divested in June 1999, net oil volumes increased 20% in the first six of 2000 as compared to the adjusted volumes produced during the same period in 1999. This increase was principally due to the completion of wells drilled over the past twelve months and recompletion and workover projects performed on certain producing wells. The average price received for oil increased from $13.85 per Bbl in the first six months of 1999 to $27.89 per Bbl in the first six months of 2000. Oil hedging losses reduced realized average oil prices received in the first six months of 2000 by $2,000 ($.01 per Bbl). Brigham did not have any oil hedges in place during the first six months of 1999. WORKSTATION REVENUE. Workstation revenue decreased 70% from $161,000 in the first six months of 1999 to $49,000 in the first six months of 2000. Brigham recognizes workstation revenue as industry participants in the 22 Company's seismic programs are charged an hourly rate for the work performed by Brigham on its 3-D seismic interpretation workstations. The decrease in the first six months of 2000 is primarily attributable to a reduction in the volume of 3-D seismic interpretation activity billable to industry participants as compared with the prior year period. LEASE OPERATING EXPENSES. Lease operating expenses decreased 17% from $1.2 million for the first six months of 1999 to $961,000 for the first six months of 2000 and, on a per unit of production basis, lease operating expenses for the same periods decreased 17% from $0.37 per Mcfe to $0.31 per Mcfe. The decrease in lease operating expenses was primarily due to a decrease in the number of producing wells in the first six months of 2000, as compared with the same period in 1999, as a result of Brigham's June 1999 property divestitures and the plugging and abandonment of certain uneconomic wells. PRODUCTION TAXES. Production taxes increased 82% from $385,000 ($0.12 per Mcfe) for the first six months of 1999 to $699,000 ($0.22 per Mcfe) for the first six months of 2000, as a result of a 85% increase in the average equivalent price received for natural gas and oil sales before the effects of hedging gains and losses. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased 20% from $1.8 million for the first six months of 1999 to $1.5 million for the first six months of 2000 primarily due to the reduction of various administrative costs, including reduced employee payroll and benefits expenses, lower office rent and reduced equipment rental and maintenance expenses. On a per unit of production basis, general and administrative expenses decreased from $0.58 per Mcfe for the first six months of 1999 to $0.47 per Mcfe for the first six months of 2000. DEPLETION OF NATURAL GAS AND OIL PROPERTIES. Depletion of natural gas and oil properties increased 25% from $2.9 million ($0.92 per Mcfe) in the first six of 1999 to $3.6 million ($1.15 per Mcfe) in the first six months of 2000. The increase was due to an increase in the depletion rate per unit of production. The increased depletion rate was principally the result of estimated additions of proved natural gas and oil reserves at higher average capital costs during the first six months of 2000 as compared with estimated amounts for the first six months of 1999. NET INTEREST EXPENSE. Net interest expense increased 30% from $4.5 million in the first six months of 1999 to $5.8 million in the first six months of 2000. This increase was due to a higher average debt balance with a higher average interest rate in the first six months of 2000 compared with the first six months of 1999. The weighted average outstanding debt balance increased from $101.8 million in the first six months of 1999 to $108.8 million in the first six months of 2000. The average effective annual interest rate on borrowings outstanding during the first six months of 1999 was 11.7% compared to 12.8% for the first six months of 2000. Interest expense in the first six months of 2000 included $4.1 million of non-cash charges, including (i) $3.0 million of interest expense related to the Subordinated Notes that was paid through the issuance of additional Subordinated Notes (or "paid-in-kind"), (ii) $689,000 for amortization of deferred financing fees, and (iii) $417,000 for amortization of debt discounts related to the issuance of the Subordinated Notes. See "Liquidity and Capital Resources - Credit Facility; - Subordinated Notes". OTHER EXPENSE. Other expense increased from $527,000 in the first six months of 1999 to $3.0 million in the first six months of 2000. The Company recognizes other income or expense primarily related to the changes in the fair market values and the related cash flows of certain oil and natural gas hedging contracts that do not qualify for hedge accounting treatment. Other expense in the first six months of 2000 included (i) $2.4 million of non-cash expenses related to the changes in the fair market values of these hedging contracts during the period, and (ii) $620,000 of expenses related to cash settlements incurred during the period pursuant to these hedging contracts. LOSS ON SALE OF NATURAL GAS AND OIL PROPERTIES. In June 1999, the Company sold all of its interests in certain producing and non-producing natural gas and oil properties for a total sales price of $17.1 million. Due to the magnitude of the reserve volumes that were attributable to these properties relative to the Company's remaining net reserve volumes, the Company recognized a $12.2 million non-cash loss in the second quarter of 1999 to reflect the difference between the sales price received (after adjustment for transaction costs) and the $28.9 million basis allocated to the divested properties in accordance with the full-cost method of accounting for oil and gas properties. 23 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital have been credit facility and other debt borrowings, public and private equity financings, the sale of interests in projects and properties 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. CREDIT FACILITY In January 1998, the Company entered into a revolving credit agreement (the "Credit Facility"), which provided for an initial borrowing availability of $75 million. The Credit Facility was amended in March 1999 to reduce the borrowing availability, extend the date of borrowing base redetermination, modify certain financial covenants, include certain additional covenants that place significant restrictions on the Company's ability to incur certain capital expenditures, and to increase the interest rate on outstanding borrowings. As a result of the completion of the majority of the Company's strategic initiatives to improve its capital resources, including its June 1999 property divestitures and the application of the net sales proceeds to reduce borrowings outstanding under the Credit Facility, the Company and its senior lenders entered into an amendment to the Credit Facility in July 1999. This amendment provided the Company with borrowing availability of $56 million principally to fund its planned drilling activities and anticipated working capital requirements through the end of 1999. As consideration for this amendment to the Credit Facility, in July 1999 the Company issued to its senior lenders one million warrants to purchase the Company's common stock at an exercise price of $2.25 per share. The warrants have a seven-year term from the date of issuance and are exercisable at the holders' option at any time. An estimated value of $1.2 million was attributed to these warrants by the Company and was recognized as additional deferred loan fees that will be amortized and included in interest expense over the remaining period to maturity of the Credit Facility. In February 2000, Brigham entered into an amended and restated Credit Facility with its existing lenders and a new lender. This amended and restated Credit Facility provides the Company with $70 million in borrowing availability for a three-year term, an increase from the $56 million previously available. If the Company exceeds certain asset value and interest coverage tests in the third quarter of 2000, the total borrowing availability under the Credit Facility will increase to $75 million. The Company expects to meet these tests. In this amendment, the Company's lenders indicated that the borrowing availability provided under the amended Credit Facility exceeded that which would otherwise have been made available under a more traditional conforming borrowing base calculation based on the estimated value of the Company's then current net proved reserves and cash flow. The Credit Facility includes a provision whereby certain amounts held by one lender, not to exceed $30 million, are convertible into shares of Brigham common stock (the "Convertible Notes") to the extent total borrowings under the Credit Facility exceed $45 million. The Credit Facility provides that any outstanding Convertible Notes will be convertible into shares of Brigham common stock in the following amounts: (i) the first $10 million of borrowings is convertible at $3.90 per share, (ii) the second $10 million is convertible at $6.00 per share and (iii) the final $10 million is convertible at $8.00 per share. As of June 30, 2000, the Company had $65 million in borrowings outstanding under the Credit Facility, of which the Convertible Notes approximate $20 million. The Convertible Notes could result in a beneficial conversion feature based on the relationship between Brigham's stock price at the time of a borrowing and the strike price of the relative portion of the Convertible Notes. The value assigned to the beneficial conversion feature would be recorded as a component of interest expense to the extent the applicable Convertible Notes are immediately convertible. Due to the fact that the strike price of the Convertible Notes at June 30, 2000 was in excess of the market price of Brigham's common stock at each draw date since the amendment of the Credit Facility, no beneficial conversion feature was recorded. If the Credit Facility is repaid at maturity or is prepaid prior to maturity without payment of cash premiums, the warrants issued to the new participant in the Credit Facility to purchase Brigham common stock become 24 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, the Company 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 Credit Facility. In addition, certain financial covenants of the Credit Facility were amended or added. In connection with this most recent amendment, the Company reset the 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 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 Credit Facility is either the lender's base rate or LIBOR plus 3.00%, at the Company's option. The Company's obligations under the Credit Facility are secured by substantially all of the natural gas and oil properties and other tangible assets of the Company. At August 11, 2000, the Company had $69 million in borrowings outstanding under the Credit Facility, which currently bear interest at an annual rate of approximately 9.6%. The Credit Facility has certain financial covenants, including current and interest coverage ratios, as defined. The Company and its lenders effected the amendments to the Credit Facility in March 1999, July 1999 and February 2000, in part to enable the Company to comply with certain financial covenants of the 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 the Company 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, 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. Securities issued by the Company in connection with this financing transaction included: (i) $40 million of Subordinated Notes, (ii) warrants to purchase one million shares of the Company's common stock at a price of $10.45 per share (the "Subordinated Note 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 senior credit facility, which at the time increased the Company's borrowing availability under its credit facility to fund capital expenditures. 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 governing the Subordinated Notes. This amendment provided 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 provided for a reduction in the exercise price per share of the Subordinated Note Warrants from $10.45 per share to $3.50 per share and extended the term of the Subordinated Note Warrants from seven to ten years. In February 2000, Brigham entered into another amendment to the terms of the indenture governing the Subordinated Notes. In this amendment, the holders of the Subordinated Notes waived the minimum consolidated interest coverage ratio covenant through June 30, 2000 and adjusted subsequent levels under this test. In addition, the amendment provides the Company with an extension of its right to pay interest in kind through the issuance of additional Subordinated Notes in lieu of cash through the third quarter of 2000 and potentially through the fourth quarter of 2000 if certain conditions are met. The Company currently does not expect to meet these conditions and therefore will be obligated to make quarterly interest payments on outstanding subordinated notes beginning in the fourth quarter 2000 (approximately $1.5 million due November 20, 2000) in cash. 25 In exchange for granting the February 2000 amendments, the Company (i) reset the price of the Subordinated Note Warrants from a then current exercise price of $3.50 per share to $2.43 per share, and (ii) granted to the holders of the Subordinated Notes a term overriding royalty interest that provides for the limited right to receive 4%, or 3% if certain conditions are met, of the Company's net production revenue to reduce any outstanding Subordinated Notes issued as interest paid in-kind. Payments made pursuant to the term overriding royalty interest will be recorded as a reduction of the balance payable pursuant to the Subordinated Notes. 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. Interest is payable 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 the Company may pay interest in kind for a cumulative total of seven quarterly interest payments (potentially increasing to eight if certain conditions are met) 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 Subordinated Notes. As of August 11, 2000, the Company had made a cumulative total of six quarterly interest payments in kind and expects to make the next quarterly interest payment (due August 20, 2000) in kind and cash payments thereafter. The Subordinated Notes (other than amounts payable pursuant to the term overriding royalty interest) 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 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, reborrow funds utilized to prepay the Senior Indebtedness and engage in most types of mergers and consolidations. 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 March 1999 and February 2000 amendments to the indenture to enable the Company to comply with certain financial covenants of the indenture, including the minimum current ratio and the minimum interest coverage ratio, as defined. 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. At June 30, 2000 and August 11, 2000, the Company had $48.4 million, respectively, principal amount of Subordinated Notes outstanding. SALES OF INTERESTS IN PROJECTS AND NATURAL GAS AND OIL PROPERTIES 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 Anadarko Basin 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 (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 94% working interest in any wells (and their allocable drilling and spacing units) drilled after payout within the 26 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 fund the drilling of the first six wells within these projects. MID-1999 PROPERTY SALES. In June 1999, Brigham sold certain producing and non-producing natural gas and oil properties located in its Anadarko Basin province to two separate parties for a total of $17.1 million. The divested properties were located in two fields operated by third parties - the Chitwood Field in Grady County, Oklahoma (originally acquired by the Company for $13.4 million in the Chitwood Acquisition in November 1997), and the Red Deer Creek Field in Roberts County, Texas. Brigham's independent reservoir engineers estimated net proved reserve volumes attributable to the properties as of June 1, 1999 of approximately 36 Bcfe, of which 33% were classified as proved developed producing reserves and 59% were natural gas. The Company estimated that net production volumes from the divested properties were 2.8 MMcfe per day at the time of the sales. The Company used the proceeds from these transactions to reduce borrowings under its credit facility, which contributed to provide the Company with $8 million in borrowing availability under its then existing credit facility that was used to fund working capital needs and capital expenditures during the second half of 1999. The effective date of each transaction was June 30, 1999. EQUITY PLACEMENTS Veritas Equity Issuances. On March 30, 1999, the Company entered into an agreement with Veritas DGC Land, Inc. 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 provided 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 did not elect to pay for such services in cash. The settlement of these future seismic processing services was determined on a quarterly basis through September 30, 1999. Pursuant to this agreement, Brigham issued a total of 1,211,580 shares of common stock to Veritas to satisfy $4.2 million in aggregate payment obligations due to Veritas for seismic acquisition and processing services performed prior to 1999 and certain seismic processing services performed during 1999. PRIVATE EQUITY PLACEMENT. 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 of the Company's board of directors. The equity sale consisted of units that included 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 will be used to fund a portion of the Company's planned 2000 capital expenditures and working capital obligations. CASH FLOW ANALYSIS CASH FLOWS FROM OPERATING ACTIVITIES. Cash flows used by operating activities were $3.8 million in the first six months of 2000, which consisted of $4.1 million in net operating cash flow (net cash used by operating activities before changes in operating assets and liabilities) and $7.9 million in cash flow used for working capital items. This compares to cash flows provided by operating activities of $332,000 in the first six months of 1999, which consisted of $2.7 million in net operating cash flow and $2.4 million in cash flow used for working capital items. CASH FLOWS FROM INVESTING ACTIVITIES. Cash flows used by investing activities were $11.7 million in the first six months of 2000 as compared with $11.2 million provided by investing activities in the first six months of 1999. Capital expenditures declined $3.8 million to $11.7 million in the first six months of 2000 compared to $15.5 million for the comparable period in 1999. However, the Company realized net proceeds of $26.7 million 27 in the first six months of 1999 from the sale of producing and non-producing properties. No oil and gas properties were sold during the first six months of 2000. CASH FLOWS FROM FINANCING ACTIVITIES. Cash flows provided by financing activities were $12.8 million in the first six months of 2000 as compared with cash flows used by financing activities of $11.4 million in first six months of 1999. This increase in cash flows provided by financing activities resulted primarily from a $9 million increase in borrowings under the Credit Facility and the February 2000 placement of common stock and warrants that generated proceeds of $4.5 million before transaction expenses. During the first six months of 1999, net borrowings under the Credit Facility decreased by $10.8 million as a portion of outstanding borrowings were repaid with proceeds received from the mid-1999 property sales. CAPITAL EXPENDITURES Continuing its strategy implemented during 1999, Brigham intends to focus substantially all of its efforts and available capital resources in 2000 to the drilling and monetization of its highest grade prospects within its over 5,000 square mile inventory of 3-D seismic data. The Company's 2000 capital expenditure budget is $25 million, which includes approximately $20 million for drilling projects and $5 million for non-drilling activities (primarily acreage acquisition and capitalized overhead costs). Brigham's 2000 drilling program consists of a balanced blend of exploration and development drilling projects with approximately 54% of budgeted drilling expenditures targeted for exploratory prospects, 28% for development locations and the remaining 18% for development locations that are contingent upon drilling success during the year. In addition, the Company's 2000 budgeted drilling expenditures have been allocated approximately 75% to its Gulf Coast province and 25% to its Anadarko Basin province, concentrated within trends where the Company has experienced exploration success to date. The Company intends to fund the majority of its budgeted capital expenditures through a combination of cash flow from operations, available borrowings under its senior credit facility and the proceeds from its February 2000 private equity placement. Additionally, the Company may supplement its available capital resources through corporate debt and/or equity financings and 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 the Company's active exploration and development activities, Brigham has experienced and expects to continue to experience substantial working capital requirements. Based on current conditions and expectations, the Company believes that cash flow from operations and borrowings under its senior credit facility are sufficient to finance approximately $20 million of its planned capital expenditures for 2000. Additional financing is expected to be required to fund the estimated remaining $5 million of the Company's 2000 capital expenditure budget and negative working capital requirements. In the event additional financing is not available, the Company will be required to curtail or delay a portion of its planned activities. 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. 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 the Company exchanges a floating market price for a fixed contract price. The Company makes payments when the floating price exceeds the fixed price for a contract month and the Company 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. The Company accounts for substantially all of these transactions as hedging activities and, accordingly, adjusts the price received for natural gas and oil production during the period the hedged transactions occurred. 28 In September 1999, Brigham sold call options on a portion of its future oil and natural gas production. The Company 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 $0.57 per MMBtu. For accounting purposes, the improvement in the Company's fixed natural gas swap price attributable to these transactions is not reflected in reported revenues. Rather, it is reflected in (i) other income (expense) on the income statement, and (ii) amortization of deferred loss on derivatives instruments and market value adjustment for derivatives instruments on the cash flow statement. In March 2000, Brigham purchased put options on a portion of its future oil and natural gas production. These transactions effectively converted a portion of its existing call options into collars, thus providing a hedge to future changes in oil and natural gas prices. Brigham also entered into costless collars on additional future oil and natural gas production thus providing further protection to the Company's exposure to potential oil and natural gas price declines. The following tables summarize the Company's outstanding natural gas and oil hedging arrangements as of July 1, 2000:
NATURAL GAS HEDGES 2000 2001 2002 ----------------------- ---------------------- ----------------------- Average Average Average Monthly Volumes Contract Volumes Contract Volumes Contract Pricing Contract Hedged Price Hedged Price Hedged Price Basis Term (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu) ----- ---- ------- --------- ------- --------- ------- --------- Fixed Price Swaps: Contract #1 ANR July 2000 - 920,000 $2.0650 600,000 $2.0650 -- -- Oklahoma April 2001 Contract #2 Houston July 2000 - 920,000 $2.1500 600,000 $2.1500 -- -- Ship April 2001 Channel Contract #3 TETCO July 2000 - 920,000 $2.0575 600,000 $2.0575 -- -- South Texas April 2001 Fixed Price Cap ANR May 2001 - -- -- 2,450,000 $2.5498 1,810,000 $2.6326 Oklahoma June 2002 Fixed Price Floor ANR May 2001 - -- -- 765,000 $1.8000 -- -- Oklahoma December 2001 CRUDE OIL HEDGES 2000 2001 2002 --------------------- ------------------- -------------------- Average Average Average Monthly Volumes Contract Volumes Contract Volumes Contract Pricing Contract Hedged Price Hedged Price Hedged Price Basis Term (Bbls) ($/Bbl) (Bbls) ($/Bbl) (Bbls) ($/Bbl) ----- ---- ------ ------- ------ ------- ------ ------- Fixed Price Cap NYMEX July 2000 - 110,400 $31.75 109,200 $26.15 -- -- December 2001 Fixed Price Floor NYMEX July 2000 - 110,400 $18.00 109,200 $17.36 -- -- December 2001
29 EFFECTS OF INFLATION AND CHANGES IN PRICES The Company's results of operations and cash flows are affected by changing oil and gas prices. If the price of oil and gas 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement, as amended in June 2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133" establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires enterprises to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The requisite accounting for changes in fair value of a derivative will depend on the intended use of the derivative and the resulting designation. The Company must adopt SFAS No. 133 and No 138, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", effective January 1, 2001. The Company is currently assessing the impact adoption of this standard will have on its financial statement presentation. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 ("FIN 44") ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB OPINION NO. 25. FIN 44 clarifies the application of opinion No. 25 for (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. The Company believes that the impact of FIN 44 will not have a material effect on its financial position or results of operations. 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 2000 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 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, availability of sufficient capital resources to the Company and its project participants, government regulations and other factors detailed herein and in the Company's 1999 Form 10-K report and other SEC filings. 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. 30 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, 1999 (see page 41 of Brigham's 1999 Form 10-K), Brigham provided a discussion of its market risk. There were no material changes during the second quarter of 2000 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's 1999 Form 10-K report. 31 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27 Financial Data Schedule (b) Reports on Form 8-K: The Company filed a report on Form 8-K on April 24, 2000, to report the announcements on April 17, 2000, that (i) it had drilled, tested and was completing a Springer channel discovery well in its Anadarko Basin core province and (ii) it provided an update on its development drilling activity at the Home Run Field in its Gulf Coast core province. The Form 8-K included copies of the Company's press release that provided these announcements. The Company filed a report on Form 8-K on May 26, 2000, to report the announcements (i) on May 11, 2000, of its quarterly overview of operational activity for the three months ended March 31, 2000, and (ii) on May 15, 2000, of its financial results for the quarter ended March 31, 2000. The Form 8-K included copies of the Company's press releases that provided these announcements. The Company filed a report on Form 8-K on July 5, 2000, to report the announcements on June 19, 2000, that (i) it had completed and brought on production a Lower Frio bright spot discovery well in its Southwest Danbury Project in Brazoria, County, Texas, and (ii) it provided an update regarding its 2000 drilling program and its daily production volumes. The Form 8-K included copies of the Company's press release that provided these announcements. 32 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 August 11, 2000. 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 Chief Financial Officer 33 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION -- 27 Financial Data Schedule EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 0001034755 Brigham Exploration Company 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 73 0 6,808 0 0 7,308 121,807 0 132,658 10,706 109,437 0 0 167 6,825 132,658 9,140 9,189 0 6,975 2,990 0 5,750 (6,526) 0 (6,526) 0 0 0 (6,526) (0.41) (0.41)
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