<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 5, 1997
REGISTRATION NO. 333-40383
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
MILLER EXPLORATION COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 1311 38-3379776
(State or other (Primary Standard Industrial (I.R.S.
jurisdiction of Classification Code Number) Employer
incorporation or Identification
organization) No.)
3104 LOGAN VALLEY ROAD
TRAVERSE CITY, MICHIGAN 49685-0348
(616) 941-0004
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
KELLY E. MILLER
PRESIDENT
MILLER EXPLORATION COMPANY
3104 LOGAN VALLEY ROAD
TRAVERSE CITY, MICHIGAN 49685-0348
(616) 941-0004
(Name, address, including zip code, and telephone number, including area code,
of Registrant's agent for service)
COPIES OF COMMUNICATION TO:
STEPHEN C. WATERBURY, ESQ. ALAN P. BADEN, ESQ.
WARNER NORCROSS & JUDD LLP VINSON & ELKINS L.L.P.
111 LYON STREET, N.W. 2300 FIRST CITY TOWER, 1001 FANNIN
GRAND RAPIDS, MICHIGAN 49503 HOUSTON, TEXAS 77002
(616) 752-2137 (713) 758-2222
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Section 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
==================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(1) OFFERING PRICE(2)(3) REGISTRATION FEE(4)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share....... -- -- $86,250,000 $25,859.32
==================================================================================================
</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act, the number of
shares being registered and the proposed maximum offering price per share
are not included in this table.
(2) Estimated for purposes of calculating registration fee.
(3) Includes shares of Common Stock being offered by the Selling Stockholders
and shares issuable upon exercise of the Underwriters' over-allotment
option.
(4) $15,681.82 of such registration fee was paid concurrently with the initial
filing of this Registration Statement.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
==============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 5, 1997
PROSPECTUS
[LOGO OF MILLER EXPLORATION COMPANY APPEARS HERE]
SHARES
MILLER EXPLORATION COMPANY
COMMON STOCK
Of the shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby, shares are being sold by
Miller Exploration Company ("Miller" or the "Company"), and shares
are being sold by the Selling Stockholders named herein. See "Principal and
Selling Stockholders." The Company will not receive any part of the proceeds
from the sale of Common Stock by the Selling Stockholders. Prior to the
offering made hereby (the "Offering"), there has been no public market for the
Common Stock. It currently is estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. Application has been made to include the Common Stock on
the Nasdaq National Market under the symbol "MEXP."
----------------
ANY INVESTMENT IN THE SECURITIES OFFERED HEREIN INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 11.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM- MISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)....................... $ $ $ $
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders named herein have agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ .
(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to additional shares of Common Stock
on the same terms and conditions as set forth above to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
total Price to Public will be $ , the total Underwriting Discounts
and Commissions will be $ , the total Proceeds to Company will be
$ and the total Proceeds to Selling Stockholders will be $ .
See "Underwriting."
-----------
The shares of Common Stock are offered, subject to prior sale, when, as and
if delivered to and accepted by the Underwriters and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made against payment therefor,
on or about , 199 at the offices of Bear, Stearns & Co. Inc., 245
Park Avenue, New York, New York 10167.
BEAR, STEARNS & CO. INC.
RAYMOND JAMES & ASSOCIATES, INC.
STEPHENS INC.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[MAP OR CHART]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised. Unless otherwise
indicated, references herein to the "Company" or "Miller" are to Miller
Exploration Company, a Delaware corporation, and its subsidiaries and
predecessors, and give pro forma effect to the Combination Transaction (defined
below) as if it had already occurred. Certain terms used herein relating to the
oil and gas industry are defined in the Glossary of Certain Oil and Gas Terms
included elsewhere in this Prospectus.
THE COMPANY
Miller is an independent oil and gas exploration and production company with
established exploration efforts concentrated primarily in three regions: the
Mississippi Salt Basin, the onshore Gulf Coast region of Texas and Louisiana
and the Michigan Basin. Miller emphasizes the use of seismic data analysis and
imaging, as well as other emerging technologies, to explore for and develop oil
and natural gas in its core exploration areas. Miller is the successor to the
independent oil and natural gas exploration and production business first
established in Michigan by members of the Miller family in 1925.
The Company was organized in connection with the combination (the
"Combination Transaction") of Miller Oil Corporation ("MOC") and interests in
oil and gas properties owned by certain affiliated entities and interests in
such properties owned by certain business partners and investors (collectively,
the "Combined Assets"). Estimated proved reserves attributable to the Combined
Assets have increased 172%, from 19.6 Bcfe as of December 31, 1994 to 53.4 Bcfe
as of September 30, 1997. This increase is primarily attributable to active
exploration, development and acquisition efforts in recent years in
Mississippi, Louisiana and Texas. The Company has budgeted a significant
increase in drilling activity and plans to drill 50 wells in 1998, the majority
of which are exploratory wells in the Mississippi Salt Basin. The Company's
capital expenditure budget for both exploration and development activity in all
of its areas of concentration is $46.2 million for 1998. Miller incurred
expenditures for exploration and development activity of $21.1 million with
respect to the Company's interest in 25 gross wells for the year ended December
31, 1996 and $17.1 million with respect to the Company's interest in 27 gross
wells for the nine months ended September 30, 1997.
The Company's primary exploration effort is currently focused on the
Mississippi Salt Basin, which contains one of the largest onshore
concentrations of salt domes in North America. The Company owns interests in
approximately 63,000 gross leasehold acres (41,000 net to the Company) in the
Mississippi Salt Basin in prospective areas around 20 salt domes, which the
Company believes is one of the largest strategic lease positions around the
salt domes in the basin. Due to innovations over the last few years, seismic
technology now enables geoscientists to generate improved imaging of the flanks
of salt structures and associated faulting, the primary hydrocarbon trapping
mechanisms in this area. The Company commenced its exploration activities in
Mississippi in 1993 and has participated in the drilling of 21 wells, 11 of
which (52%) have been completed, establishing commercial production around six
salt domes. As of September 30, 1997, these wells had produced 29.2 Bcfe gross
(18.8 Bcfe net to the Company) and had established estimated gross proved
reserves of 78.4 Bcfe (36.1 Bcfe net to the Company). In the Mississippi Salt
Basin, the Company has used technologically advanced seismic data processing
methods to reinterpret existing regional 2-D seismic data and analyze and
interpret newly acquired 2-D seismic data. In addition, the Company is
currently participating in multiple 3-D seismic acquisition projects in this
region, which the Company believes will improve the identification of potential
hydrocarbon traps.
3
<PAGE>
The Company's prospects in the Gulf Coast region of Texas and Louisiana also
lend themselves to 3-D seismic-aided exploration due to the geological
complexity prevalent in this region. Since 1994, the Company has participated
in approximately 300 square miles of 3-D seismic surveys and the drilling of 50
gross wells within the boundaries of these surveys. Twenty-seven of the wells
drilled have been completed as commercially productive. As of September 30,
1997, these wells had established estimated proved reserves of 79.6 Bcfe (9.3
Bcfe net to the Company). The Company expects to participate in nine gross
wells (2.3 net to the Company) in this area in 1998, all of which are supported
by 3-D seismic data.
The Company's current operations in Michigan were developed after 1988, when
the Company sold all of its producing properties to Conoco, Inc. In the
Michigan Basin, the Company has an interest in over 300 producing wells within
a leasehold position that is the result of prior successful exploration efforts
in the Niagaran Reef Trend. Miller's current Michigan Basin production is
predominantly long-lived, lower volume Antrim Shale production, as compared to
the higher volume wells of the onshore Gulf Coast and Mississippi Salt Basin.
The Company is continuing to pursue additional exploration opportunities in the
Michigan Basin.
The Combined Assets consist of MOC, interests in oil and gas properties from
oil and gas exploration companies beneficially owned by members of the Miller
family (the "Affiliated Entities") and interests in such properties owned by
certain business partners and investors, including Amerada Hess Corporation
("AHC"), Dan A. Hughes, Jr. ("Hughes"), and SASI Minerals Company ("SASI"). No
assets other than those in which MOC or the Affiliated Entities currently have
an interest will be part of the Combined Assets. The Company and the owners of
the Combined Assets have entered into separate agreements that provide for the
issuance of an estimated 6,930,000 shares of Common Stock and the payment of an
estimated $50.5 million in cash to certain participants in the Combination
Transaction in exchange for the Combined Assets. The Combination Transaction is
expected to occur concurrently with the closing of the Offering.
In this Prospectus, reference to historical combined financial information of
the Company means the historical combined results of the Company and the
Affiliated Entities. Reference to pro forma financial information of the
Company means the historical combined information, plus the contribution or
acquisition of the Combined Assets from the non-affiliated participants in the
Combination Transaction.
The Company's principal office is located at 3104 Logan Valley Road, Traverse
City, Michigan 49685-0348 and its telephone number is (616) 941-0004. The
Company also maintains offices in Houston, Texas and Jackson and Columbia,
Mississippi.
BUSINESS STRATEGY
The key elements of the Company's business strategy are as follows:
Focused Exploration Effort. The Company seeks to concentrate its
exploration activities in areas which provide the potential for the
discovery of significant reserves where a strategic leasehold position can
be acquired, where there has been limited application of advanced seismic
data interpretation techniques and where there are multiple potential pay
zones. The Company has assembled an extensive database in the Mississippi
Salt Basin, including basin-wide geologic studies, production data and well
data. The Company has an identified inventory of 22 prospects in the
Mississippi Salt Basin and seven prospects in the Texas and Louisiana Gulf
Coast region. The majority of these prospects have multiple drilling
locations. The Company's prospects in the Mississippi Salt Basin have been
delineated primarily with computer-enhanced analysis of 2-D seismic data,
while the Gulf Coast prospects have been identified primarily with 3-D
seismic data. The Company plans to conduct selected 3-D seismic surveys in
the Mississippi Salt Basin with respect to certain of these prospects to
further delineate drilling objectives.
4
<PAGE>
Exploit Prospect Inventory. The Company has an identified inventory of
over 32 exploration and development prospects, all of which it plans to
drill in 1998 and 1999. Based on the initial success of its salt dome
drilling, the Company intends to retain larger working interests in its
undrilled prospects. This Offering will enable the Company to retain a
larger working interest in its prospects, conduct an aggressive seismic
data acquisition program and accelerate its drilling activities.
Extensive Data Base. The Company has a significant library of technical
and proprietary data. The Company's current inventory includes over 1,900
miles of 2-D seismic data and 309 square miles of 3-D seismic data in the
three regions in which it currently operates. The acquisition of 3-D
seismic data on a large scale is often not cost effective. The Company
attempts to target the acquisition and application of 3-D seismic data by
applying its technical expertise to reprocessed 2-D seismic data. The
Company believes this approach allows it to more effectively target 3-D
seismic surveys, reducing overall finding and development costs.
Utilize Advanced Technology. The Company utilizes advanced technology in
analyzing, interpreting and visualizing seismic data to assemble and
develop its inventory of exploration and development drilling prospects.
This strategy has been pursued in proven geological regions that have
historically produced significant amounts of hydrocarbons. The Company has
focused its 3-D seismic efforts on areas that exhibit geological complexity
where 2-D seismic has been effective in increasing drilling success rates,
but has limitations in locating subtle trapping structures.
Experienced Technical Team. The Company has assembled a technical team
with an average of over 18 years of experience, the majority of which has
been in the Company's areas of current operations. This multi-disciplined
technical team has extensive experience with the acquisition, processing
and interpretation of both 2-D and 3-D seismic data and the use of 3-D work
stations to evaluate and develop drilling prospects.
SUMMARY DRILLING AND BUDGET DATA
The following table sets forth certain summary drilling and budget
information with respect to the Company's activities in its core regions for
the periods indicated. The final determination with respect to the drilling of
any well, including those currently budgeted, will depend on a number of
factors, including (i) the results of exploration efforts and the review and
analysis of the seismic data, (ii) the availability of sufficient capital
resources by the Company and other participants for drilling prospects, (iii)
economic and industry conditions at the time of drilling, including prevailing
and anticipated prices for oil and natural gas and the availability of drilling
rigs and crews, (iv) the financial results of the Company, (v) the availability
of leases on reasonable terms and (vi) the availability of permits for the
potential drilling location. There can be no assurance that the budgeted wells
will, if drilled, encounter reservoirs of commercial quantities of oil or
natural gas. For a description of the Company's drilling results, see "Business
and Properties--Drilling Activities."
<TABLE>
<CAPTION>
WELLS
DRILLED
DECEMBER
31, 1994 CAPITAL EXPENDITURES
THROUGH 1998 DECEMBER 31, 1994 BUDGETED CAPITAL
SEPTEMBER BUDGETED THROUGH EXPENDITURES FOR
30, 1997 WELLS SEPTEMBER 30, 1997 1998
---------- ---------- --------------------- --------------------
SEISMIC
LEASE SEISMIC & LEASE &
GROSS NET GROSS NET ACQUISITION DRILLING ACQUISITION DRILLING
----- ---- ----- ---- ----------- --------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mississippi Salt Basin.. 14 11.3 28 14.7 $17,219 $26,885 $866 $40,130
Onshore Gulf Coast
Texas................. 50 14.2 6 1.5 3,126 5,312 24 913
Louisiana............. 6 1.3 3 0.8 651 1,117 8 807
Michigan Basin/Other.... 21 4.8 13 11.3 862 2,349 78 3,400
--- ---- --- ---- ------- ------- ---- -------
Total............... 91 31.6 50 28.3 $21,858 $35,663 $976 $45,250
=== ==== === ==== ======= ======= ==== =======
</TABLE>
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered
By the Company.................. shares
By the Selling Stockholders..... shares
Common Stock to be Outstanding
after the Offering................ shares(1)
Use of Proceeds.................... The net proceeds of the Offering will be
used for repayment of all outstanding
indebtedness of approximately $8.3 million,
to fund a portion of the purchase price for
the Combined Assets, to fund capital
expenditures relating to exploration and
development activities, to increase working
capital and for other general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol............................ "MEXP"
</TABLE>
- --------
(1) Includes an estimated 6,930,000 shares of Common Stock to be issued in
connection with the Combination Transaction. Does not include 711,500
shares of Common Stock issuable pursuant to employee stock options at an
exercise price per share equal to the initial public offering price and
107,500 shares of restricted Common Stock that are expected to be granted
to directors, officers and certain employees of the Company in connection
with the consummation of the Offering. See "Management--Executive
Compensation--Employee Benefit Plans--Stock Option and Restricted Stock
Plan of 1997."
RISK FACTORS
Any investment in the Common Stock involves a high degree of risk. For a
discussion of certain risks that a potential investor should evaluate carefully
prior to making an investment in the Common Stock, see "Risk Factors."
6
<PAGE>
SUMMARY HISTORICAL COMBINED AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables set forth summary historical combined data and pro forma
data of the Company as of the dates and for the periods indicated. The
historical combined financial data for the three years ended December 31, 1996
are derived from the combined financial statements of the Company which have
been audited by Arthur Andersen LLP, independent public accountants. The
historical combined financial data as of and for the nine months ended
September 30, 1996 and 1997 are derived from unaudited combined financial
statements of the Company, included elsewhere in this Prospectus, which, in the
opinion of management, contain all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation thereof. These audited and
unaudited combined financial statements of the Company and the related notes
thereto, included elsewhere in this Prospectus, are collectively referred to in
this Prospectus as the "Combined Financial Statements." Pro forma data are
based on assumptions and include adjustments as explained in the notes to the
unaudited pro forma financial data. The unaudited pro forma financial
statements are not necessarily indicative of the results of future operations
of the Company and should be read in conjunction with the Combined Financial
Statements. For a description of the Combination Transaction, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview." The following financial information should be read in conjunction
with "Capitalization," "Selected Historical Combined Financial and Operating
Data," "Selected Unaudited Pro Forma Combined Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Combined Financial Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- ---------------------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1997 1997
------ ------ ------ ----------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Natural gas.......... $2,424 $2,748 $5,614 $20,690 $3,719 $4,329 $15,565
Crude oil and
condensate.......... 672 715 1,101 5,045 854 710 2,783
Other operating
revenues............ 167 296 395 395 355 492 492
------ ------ ------ ------- ------ ------ -------
Total operating
revenue........... 3,263 3,759 7,110 26,130 4,928 5,531 18,840
------ ------ ------ ------- ------ ------ -------
Operating expenses:
Lease operating
expenses and
production taxes.... 811 777 1,123 2,185 753 917 1,517
Depreciation,
depletion and
amortization........ 1,009 1,666 2,629 9,099 1,826 2,019 7,747
General and
administrative...... 1,200 1,270 1,591 2,366 1,002 1,335 1,985
------ ------ ------ ------- ------ ------ -------
Total operating
expenses.......... 3,020 3,713 5,343 13,650 3,581 4,271 11,249
------ ------ ------ ------- ------ ------ -------
Operating income....... 243 46 1,767 12,480 1,347 1,260 7,591
------ ------ ------ ------- ------ ------ -------
Interest expense....... (810) (1,017) (1,139) (4,391) (789) (922) (3,356)
Lawsuit settlement..... -- 3,521 -- -- -- -- --
------ ------ ------ ------- ------ ------ -------
Income (loss) before
income taxes.......... (567) 2,550 628 8,089 558 338 4,235
Provision for income
taxes(1).............. -- -- -- 2,168 -- -- 952
------ ------ ------ ------- ------ ------ -------
Net income (loss)(1)... $ (567) $2,550 $ 628 $ 5,921 $ 558 $ 338 $ 3,283
====== ====== ====== ======= ====== ====== =======
Pro forma net income
per share(1)(2)....... $ 0.85 $ 0.47
======= =======
Pro forma weighted
average shares
outstanding(2)........ 6,930 6,930
======= =======
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- -------------------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1997 1997
------- ------- ------- ----------- ----------- ----------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS
DATA:
Net cash provided by
operating activities.. $ 1,720 $ 511 $ 2,162 $14,294 $ 1,912 $ 2,201 $11,149
Net cash used in
investing activities.. (1,150) (151) (4,743) (54,736) (3,839) (2,487) (52,480)
Net cash provided by
(used in) financing
activities............ (395) (377) 2,811 40,672 1,835 (17) 41,028
OTHER OPERATING DATA:
EBITDA(3)(5)........... $ 1,252 $ 1,712 $ 4,396 $21,579 $ 3,173 $ 3,279 $15,338
Operating cash
flow(4)(5)............ 442 674 3,230 15,087 2,365 2,315 10,988
Capital expenditures... 4,528 6,323 6,184 21,111 4,614 5,166 17,120
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $(1,769) $(1,980) $(2,682) $(2,957) $(2,688) $(3,466) $(3,741)
Oil and gas properties,
net................... 14,257 17,731 20,732 90,238 20,462 21,163 90,669
Total assets........... 16,444 20,005 24,050 93,556 22,883 23,993 93,499
Long-term debt,
including notes
payable............... 9,442 9,801 12,881 52,388 11,661 12,939 52,796
Equity................. 5,596 7,410 7,769 25,147 7,943 8,032 25,060
</TABLE>
- --------
(1) Gives pro forma effect to the application of federal and state income taxes
to the Company as if it were a taxable corporation for the periods
presented. Upon the consummation of the Combination Transaction, the
Company will be required to record a one-time non-cash charge to earnings
in connection with establishing a deferred tax liability on the balance
sheet in accordance with SFAS No. 109, "Accounting for Income Taxes." If
the Combination Transaction had been consummated for the periods presented,
such charge would have been approximately $5.5 million. The ultimate amount
of the charge that will be recorded is dependent upon a number of factors
and cannot be determined until consummation of the Combination Transaction.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
(2) Pro forma net income per share has been computed assuming that an estimated
6,930,000 shares of Common Stock to be issued in connection with the
Combination Transaction have been outstanding since January 1, 1996.
(3) EBITDA represents earnings before interest expense, income taxes, a non-
operating gain on a lawsuit settlement and depreciation, depletion and
amortization.
(4) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities.
(5) The Company believes that EBITDA and operating cash flow may provide
additional information about the Company's ability to meet its future
requirements for debt service, capital expenditures and working capital.
EBITDA and operating cash flow are financial measures commonly used in the
oil and gas industry and should not be considered in isolation or as a
substitute for net income, operating income, cash flows from operating
activities or any other measure of financial performance presented in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity. Because EBITDA excludes some, but
not all, items that affect net income and because operating cash flow
excludes changes in assets and liabilities and these measures may vary
among companies, the EBITDA and operating cash flow data presented above
may not be comparable to similarly titled measures of other companies.
8
<PAGE>
The following table sets forth historical combined information and pro forma
information of the Company with respect to production volumes, average sale
prices, average costs and number of wells drilled for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1997 1997
------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Crude oil and
condensate (MBbls).... 39.5 31.6 46.5 243.0 35.0 33.4 151.8
Natural gas (MMcf)..... 1,228.4 1,324.0 2,030.0 8,668.8 1,555.3 1,713.0 6,295.4
Natural gas equivalent
(MMcfe)............... 1,465.7 1,513.3 2,309.1 10,126.8 1,765.0 1,913.3 7,206.2
AVERAGE SALE PRICES:
Crude oil and
condensate ($ per
Bbl).................. $ 17.00 $ 22.68 $ 23.66 $ 20.76 $ 24.44 $ 21.26 $ 18.33
Natural gas ($ per
Mcf).................. 1.97 2.08 2.77 2.39 2.39 2.53 2.47
Natural gas equivalent
($ per Mcfe).......... 2.11 2.29 2.91 2.54 2.59 2.63 2.55
AVERAGE COSTS ($ PER
MCFE):
Lease operating
expenses and
production taxes...... $ 0.55 $ 0.51 $ 0.49 $ 0.22 $ 0.43 $ 0.48 $ 0.21
Depreciation, depletion
and amortization...... 0.69 1.10 1.14 0.90 1.03 1.06 1.08
General and
administrative........ 0.82 0.84 0.69 0.23 0.57 0.70 0.28
NUMBER OF WELLS
DRILLED(1):
Gross.................. 27 39 25 25 18 27 27
Net(2)................. 2.5 5.2 2.7 8.8 1.6 2.5 5.8
</TABLE>
- --------
(1) For a description of the Company's drilling results, see "Business and
Properties--Drilling Activities."
(2) Wells in which the Company holds an after-payout working interest are not
included because such interests had not been earned at the time of
drilling.
9
<PAGE>
SUMMARY OIL AND NATURAL GAS RESERVE DATA
The following table sets forth summary data with respect to the Company's
estimated proved oil and natural gas reserves as of the dates indicated and the
estimated future net cash flows attributable thereto. Information in this
Prospectus relating to estimated net proved oil and natural gas reserves at
December 31, 1996 and September 30, 1997, and the estimated future net revenues
attributable thereto, is based upon the reserve reports (the "Reserve Reports")
prepared by S.A. Holditch & Associates (as to Michigan Basin reserves) and
Miller and Lents, Ltd. (as to non-Michigan Basin reserves), independent
petroleum engineers (the "Independent Engineers"). Summaries of such Reserve
Reports as of September 30, 1997 are attached as Appendices A and B to this
Prospectus. See "Experts." All calculations of estimated net proved reserves
have been made in accordance with the rules and regulations of the Securities
and Exchange Commission (the "SEC") and, except as otherwise indicated, give no
effect to federal or state income taxes otherwise attributable to estimated
future net revenues from the sale of oil and natural gas. In accordance with
such regulations, the Reserve Reports used oil and natural gas prices in effect
at the respective dates of the Reserve Reports. There are numerous
uncertainties inherent in estimating quantities of proved reserves and in
projecting future rates of production and timing of development expenditures,
including many factors beyond the control of the Company. See "Risk Factors--
Uncertainty of Estimates of Oil and Natural Gas Reserves" and "Business and
Properties--Oil and Natural Gas Reserves."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
1996 1997
------------------ -------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT DATA)
<S> <C> <C>
Net Proved Reserves:
Crude oil (MBbl)...................... 1,353.9 1,174.0
Natural gas (MMcf).................... 56,394.2 46,378.3
Natural gas equivalent (MMcfe)........ 64,517.6 53,422.3
Net Proved Developed Reserves:
Crude oil (MBbl)...................... 534.6 421.7
Natural gas (MMcf).................... 37,489.9 29,563.7
Natural gas equivalent (MMcfe)........ 40,697.5 32,093.9
Estimated future net revenues before
income taxes(1)........................ $ 160,820 $ 118,313
Present value of estimated future net
revenues before income taxes(2)........ $ 117,144 $ 87,484
</TABLE>
- --------
(1) The average prices for crude oil were $25.23 per Bbl at December 31, 1996
and $21.74 per Bbl at September 30, 1997. The average prices for natural
gas were $3.27 per Mcf at December 31, 1996 and $3.12 per Mcf at September
30, 1997. Includes income from Section 29 tax credits of $808 and $706, as
of December 31, 1996 and September 30, 1997, respectively.
(2) The present value of estimated future net revenues attributable to the
Company's reserves was prepared using constant prices as of the calculation
date, discounted at 10% per annum on a pre-tax basis.
10
<PAGE>
RISK FACTORS
Any investment in the Common Stock involves a high degree of risk.
Prospective purchasers of the Common Stock carefully should consider the risk
factors set forth below, as well as the other information contained in this
Prospectus. This Prospectus contains forward-looking statements. See "--
Forward-Looking Information." Actual results may differ materially from those
projected in the forward-looking statements as a result of any number of
factors, including risk factors set forth below.
DEPENDENCE ON EXPLORATORY DRILLING ACTIVITIES
The Company's revenues, operating results and future rate of growth are
substantially dependent upon the success of its exploratory drilling program,
which will be funded in part with the proceeds of the Offering. See "Use of
Proceeds." Exploratory drilling involves numerous risks, including the risk
that no commercially productive oil or natural gas reservoirs will be
encountered. The cost of drilling, completing and operating wells is often
uncertain, and drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors, including unexpected drilling conditions,
pressure or irregularities in formations, equipment failures or accidents,
adverse weather conditions, compliance with governmental requirements and
shortages or delays in the availability of drilling rigs and the delivery of
equipment. Despite the use of 2-D and 3-D seismic data and other advanced
technologies, exploratory drilling remains a speculative activity. Even when
fully utilized and properly interpreted, 2-D and 3-D seismic data and other
advanced technologies only assist geoscientists in identifying subsurface
structures and do not enable the interpreter to know whether hydrocarbons are
in fact present in those structures. In addition, the use of 2-D and 3-D
seismic data and other advanced technologies requires greater predrilling
expenditures than traditional drilling strategies, and the Company could incur
losses as a result of such expenditures. The Company's future drilling
activities may not be successful. There can be no assurance that the Company's
overall drilling success rate or its drilling success rate for activity within
a particular region will not decline. Unsuccessful drilling activities could
have a material adverse effect on the Company's business, results of
operations and financial condition. The Company may not have any option or
lease rights in potential drilling locations it identifies. Although the
Company has identified numerous potential drilling locations, there can be no
assurance that they will ever be leased or drilled or that oil or natural gas
will be produced from these or any other potential drilling locations. In
addition, drilling locations initially may be identified through a number of
methods, some of which do not include interpretation of 3-D or other seismic
data. Wells that currently are included in the Company's capital budget may be
based upon statistical results of drilling activities in other areas that the
Company believes are geologically similar, rather than on analysis of seismic
or other data. Actual drilling results are likely to vary from such
statistical results and such variance may be material. Similarly, the
Company's drilling schedule may vary from its capital budget, and there is
increased risk of such variance from the 1998 capital budget because of future
uncertainties, including those described above. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenues, operating results and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. Historically, the markets for oil and natural gas have been
volatile and are likely to continue to be volatile in the future. Prices for
oil and natural gas are subject to wide fluctuation in response to relatively
minor changes in the supply of and demand for oil and natural gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. These factors include worldwide and domestic supplies of oil and
natural gas, the ability of the members of the Organization of Petroleum
Exporting Countries to agree to and maintain oil price and production
controls, political instability or armed conflict in oil-producing regions,
the price and level of foreign imports, the level of consumer demand, the
price and availability of alternative fuels, the availability of pipeline
capacity, weather conditions, domestic and foreign governmental regulations
and taxes and the overall economic environment. It is impossible to predict
future oil and natural gas price movements with certainty. Declines in oil and
natural gas prices may have a material adverse affect on the Company's
financial condition, liquidity, ability to finance planned capital
expenditures and results of operations. Lower oil and natural gas prices also
may reduce the amount of oil and natural gas that the Company can produce
economically. See "--Uncertainty of Estimates of Oil and Natural
11
<PAGE>
Gas Reserves," "Business and Properties--Competition," "--Governmental
Regulation" and "--Environmental Matters."
The Company periodically reviews the carrying value of its oil and natural
gas properties under the full cost accounting rules of the SEC. Under these
rules, capitalized costs of proved oil and natural gas properties may not
exceed the present value of estimated future net revenues from proved
reserves, discounted at 10%. Application of the "ceiling" test generally
requires pricing future revenue at the unescalated prices in effect as of the
end of each fiscal quarter and requires a write-down for accounting purposes
if the ceiling is exceeded, even if prices were depressed for only a short
period of time. The Company may be required to write-down the carrying value
of its oil and natural gas properties when oil and natural gas prices are
depressed or unusually volatile. If a write-down is required, it would result
in a charge to earnings, but would not impact cash flow from operating
activities. Once incurred, a write-down of oil and natural gas properties is
not reversible at a later date.
UNCERTAINTY OF ESTIMATES OF OIL AND NATURAL GAS RESERVES
This Prospectus contains estimates of the Company's proved oil and natural
gas reserves and the estimated future net revenues therefrom based upon the
Company's own estimates or on Reserve Reports that rely upon various
assumptions, including assumptions required by the SEC as to oil and natural
gas prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. The process of estimating oil and natural gas reserves
is complex, requiring significant decisions and assumptions in the evaluation
of available geological, geophysical, engineering and economic data for each
reservoir. As a result, such estimates are inherently imprecise. Actual future
production, oil and natural gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and natural
gas reserves may vary substantially from those estimated by the Company or
contained in the Reserve Reports. Any significant variance in these
assumptions could materially affect the estimated quantity and value of
reserves set forth in this Prospectus. The Company's properties also may be
susceptible to hydrocarbon drainage from production by other operators on
adjacent properties. In addition, the Company's proved reserves may be subject
to downward or upward revision based upon production history, results of
future exploration and development, prevailing oil and natural gas prices,
mechanical difficulties, government regulation and other factors, many of
which are beyond the Company's control. Actual production, revenues, taxes,
development expenditures and operating expenses with respect to the Company's
reserves likely will vary from the estimates used, and such variances may be
material.
Data included in this Prospectus regarding the Company's reserves as of
December 31, 1994 and 1995 have not been reported upon by the Independent
Engineers. Approximately 40% of the Company's total proved reserves at
September 30, 1997 were undeveloped, which are by their nature less certain.
Recovery of such reserves will require significant capital expenditures and
successful drilling operations. The Company's Reserve Reports assume that
substantial capital expenditures by the Company will be required to develop
such reserves. Although cost and reserve estimates attributable to the
Company's oil and natural gas reserves have been prepared in accordance with
industry standards, no assurance can be given that the estimated costs are
accurate, that development will occur as scheduled or that the results will be
as estimated. See "Business and Properties--Oil and Natural Gas Reserves."
The present value of future net revenues referred to in this Prospectus
should not be construed as the current market value of the estimated oil and
natural gas reserves attributable to the Company's properties. In accordance
with applicable requirements of the SEC, the estimated discounted future net
cash flows from proved reserves generally are based on prices and costs as of
the date of the estimate, whereas actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by increases in consumption by oil and natural gas purchasers and changes in
governmental regulations or taxation. The timing of actual future net cash
flows from proved reserves, and thus their actual present value, will be
affected by the timing of both the production and the incurrence of expenses
in connection with development and production of oil and natural gas
properties. In addition, the 10% discount factor, which is required by the SEC
to be used in calculating discounted future net cash flows for reporting
purposes, is not necessarily the most appropriate discount factor based on
interest rates in effect from time to time and risks associated with the
Company or the oil and natural gas industry in general.
12
<PAGE>
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND IMPLEMENTATION OF GROWTH
STRATEGY
The Company's rapid growth has placed, and is expected to continue to place,
a significant strain on the Company's financial, technical, operational and
administrative resources. As the Company increases the number of projects it
is evaluating or in which it is participating, there will be additional
demands on the Company's financial, technical, operational and administrative
resources. Any increase in the Company's activities as an operator will
increase its exposure to operating hazards. See "--Operating Hazards and
Uninsured Risks." The Company has relied in the past and expects to continue
to rely on project partners and independent contractors, including geologists,
geophysicists and engineers, that have provided the Company with seismic
survey planning and management, project and prospect generation, land
acquisition, drilling and other services. Upon consummation of the Combination
Transaction, the Company will have 23 full-time employees. Due to the
competitive nature of the markets in which the Company operates, the Company
currently believes that the demand for qualified geologists, geophysicists and
engineers is increasing. See "--Dependence on Key Personnel." As the Company
increases the number of projects it is evaluating or in which it is
participating, there will be additional demands on the Company's financial,
technical, operational and administrative resources and continued reliance by
the Company on project partners and independent contractors, and these strains
on resources, additional demands and continued reliance may negatively affect
the Company. The Company's ability to continue its growth will depend upon a
number of factors, including its ability to obtain leases or options on
properties, its ability to acquire additional 3-D seismic data, its ability to
identify and acquire new exploratory sites, its ability to develop existing
sites, its ability to continue to retain and attract skilled personnel, its
ability to maintain or enter into new relationships with project partners and
independent contractors, the results of its drilling program, hydrocarbon
prices, access to capital and other factors. Although the Company intends to
upgrade its technical, operational and administrative resources following the
Offering and to increase its ability to provide internally certain of the
services previously provided by outside sources, there can be no assurance
that it will be successful in doing so or that it will be able to continue to
maintain or enter into new relationships with project partners and independent
contractors. The failure to continue to upgrade the Company's technical,
administrative, operating and financial resources and control systems or the
occurrence of unexpected expansion difficulties, including difficulties in
recruiting or engaging and retaining geophysicists, geologists, engineers and
sufficient numbers of qualified personnel and independent contractors to
enable the Company to expand its role in the drilling and production phase, or
the reduced availability of seismic gathering, drilling or other services in
the face of growing demand, could have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will be successful in achieving growth or any
other aspect of its business strategy.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes and will continue to make substantial capital expenditures
in its exploration and development projects. The Company intends to finance
these capital expenditures with the net proceeds from the Offering, cash flow
from operations and its existing financing arrangements. Additional financing
may be required in the future to fund the Company's developmental and
exploratory drilling and seismic activities. No assurance can be given as to
the availability or terms of any such additional financing that may be
required or that financing will continue to be available under the existing or
new financing arrangements. If additional capital resources are not available
to the Company, its drilling, seismic and other activities may be curtailed
and its business, financial condition and results of operations could be
materially adversely affected. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
HISTORICAL OPERATING LOSSES AND VARIABILITY OF OPERATING RESULTS
Excluding unusual, one-time transactions, the Company incurred net losses in
1994 and 1995 of $0.6 million and $1.0 million, respectively, and net income
in 1996 and for the nine months ended September 30, 1997 of $0.6 million and
$0.3 million, respectively, on an historical combined basis. There can be no
assurance that the Company will be profitable in the future. The development
of the Company's business and its participation in an
13
<PAGE>
increasingly larger number of projects have required and will continue to
require substantial expenditures. The Company's future operating results may
fluctuate significantly depending upon a number of factors, including industry
conditions, prices of oil and natural gas, rates of drilling success, rates of
production from completed wells and the timing of capital expenditures. This
variability could have a material adverse effect on the Company's business,
financial condition and results of operations. There also may be other factors
that significantly affect the Company's quarterly operating results which are
difficult to predict and which could result in earnings falling short, for a
particular period, of either a prior fiscal period or investors' expectations.
In addition, any failure or delay in the realization of expected cash flows
from operating activities could limit the Company's ability to invest and
participate in economically attractive projects. See "Selected Historical
Combined Financial and Operating Data," "Selected Unaudited Pro Forma Combined
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Combined Financial Statements.
RESERVE REPLACEMENT RISK
In general, production from oil and natural gas properties declines as
reserves are depleted, with the rate of decline depending on reservoir
characteristics. Except to the extent that the Company conducts successful
exploration and development activities or acquires properties containing
proved reserves, or both, the proved reserves of the Company will decline as
reserves are produced. The Company's future oil and natural gas production is
highly dependent upon its ability to economically find, develop or acquire
reserves in commercial quantities. The business of exploring for or developing
reserves is capital intensive. To the extent cash flow from operations is
reduced and external sources of capital become limited or unavailable, the
Company's ability to make the necessary capital investment to maintain or
expand its asset base of oil and natural gas reserves would be impaired. The
Company participates in a substantial percentage of its wells as non-operator.
The failure of an operator of the Company's wells to adequately perform
operations, or an operator's breach of the applicable agreements, could
adversely impact the Company. In addition, there can be no assurance that the
Company's future exploration and development activities will result in
additional proved reserves or that the Company will be able to drill
productive wells at acceptable costs. Furthermore, although the Company's
revenues could increase if prevailing prices for oil and natural gas increase
significantly, the Company's finding and development costs also could
increase. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
OPERATING HAZARDS AND UNINSURED RISKS
The oil and natural gas business involves certain operating hazards such as
well blowouts, craterings, explosions, uncontrollable flows of oil, natural
gas or well fluids, fires, formations with abnormal pressures, pipeline
ruptures or spills, pollution, releases of toxic gas and other environmental
hazards and risks, any of which could result in substantial losses to the
Company. The availability of a ready market for the Company's oil and natural
gas production also depends on the proximity of reserves to, and the capacity
of, oil and natural gas gathering systems, pipelines and trucking or terminal
facilities. The Company delivers natural gas through gas gathering systems and
gas pipelines that it does not own. Federal and state regulation of oil and
natural gas production and transportation, tax and energy policies, changes in
supply and demand and general economic conditions all could adversely affect
the Company's ability to produce and market its oil and natural gas. In
addition, the Company may be liable for environmental damage caused by
previous owners of property purchased and leased by the Company. As a result,
substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could reduce or eliminate the funds available
for exploration, development or acquisitions or result in the loss to the
Company's properties. In accordance with customary industry practices, the
Company maintains insurance against some, but not all, of such risks and
losses. The Company carries only certain limited types of business
interruption insurance. The Company may elect to self-insure if management
believes that the cost of insurance, although available, is excessive relative
to the risks presented. The occurrence of an event that is not covered, or not
fully covered, by insurance could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, pollution and environmental risks generally are not fully insurable.
The Company participates in a substantial percentage of its wells on a non-
14
<PAGE>
operated basis, which may limit the Company's ability to control the risks
associated with oil and natural gas operations. See "Business and Properties--
Operating Hazards and Uninsured Risks."
COMPETITION
The Company operates in the highly competitive areas of oil and natural gas
exploration, exploitation, acquisition and production. In seeking to acquire
desirable producing properties or new leases for future exploration and in
marketing its oil and natural gas production, as well as in seeking to acquire
the equipment and expertise necessary to operate and develop those properties,
the Company faces intense competition from a large number of independent,
technology-driven companies as well as both major and other independent oil
and natural gas companies. Many of these competitors have financial and other
resources substantially in excess of those available to the Company. Such
companies may be able to pay more for exploratory prospects and productive oil
and natural gas properties and may be able to define, evaluate, bid for and
purchase a greater number of properties and prospects than the Company's
financial or human resources merit. The Company's ability to explore for oil
and natural gas prospects and to acquire additional properties in the future
will depend upon its ability to conduct its operations, to evaluate and select
suitable properties and to consummate transactions in this highly competitive
environment. See "Business and Properties--Competition."
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Oil and natural gas operations are subject to various federal, state and
local government laws and regulations which may be changed from time to time
in response to economic or political conditions. Matters subject to regulation
include discharge permits for drilling operations, drilling bonds, reports
concerning operations, spacing of wells, unitization and pooling of
properties, environmental protection and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production
by restricting the rate of flow of oil and natural gas wells below actual
production capacity to conserve supplies of oil and natural gas. The Company
also is subject to changing and extensive tax laws, the effects of which
cannot be predicted. The development, production, handling, storage,
transportation and disposal of oil and natural gas, by-products thereof and
other substances and materials produced or used in connection with oil and
natural gas operations are subject to laws and regulations primarily relating
to protection of human health and the environment. The discharge of oil,
natural gas or pollutants into the air, soil or water may give rise to
significant liabilities on the part of the Company to the government and third
parties and may result in the assessment of civil or criminal penalties or
require the Company to incur substantial costs of remediation. Legal
requirements frequently are 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. No assurance can be given that
existing laws or regulations, as currently interpreted or reinterpreted in the
future, or future laws or regulations will not materially adversely affect the
Company's business, results of operations and financial condition. See
"Business and Properties--Governmental Regulation" and "--Environmental
Matters" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Environmental and Other Regulatory Matters."
RISKS OF HEDGING TRANSACTIONS
To manage its exposure to price risks in the marketing of its oil and
natural gas, the Company has in the past and expects to continue to enter into
oil and natural gas price hedging arrangements with respect to a portion of
its expected production. The Company's hedging policy provides that, without
the prior approval of the Company's Board of Directors, generally not more
than 50% of its production quantities can be hedged, and that any such hedges
shall not be longer than one year in duration. These arrangements may include
future contracts on the New York Mercantile Exchange ("NYMEX"). While intended
to reduce the effects of volatility of the price of oil and natural gas, such
transactions may limit potential gains by the Company if oil and natural gas
prices were to rise substantially over the price established by the hedge. In
addition, such transactions may expose the Company to the risk of financial
loss in certain circumstances, including instances in which (i) production is
less than expected, (ii) there is a widening of price differentials between
delivery points for the Company's production and the delivery point assumed in
the hedge arrangement, (iii) the counterparties to the Company's future
contracts fail to perform the contract or (iv) a sudden, unexpected event
materially impacts oil or natural gas prices. During 1994, 1995 and 1996, the
Company did not hedge any of its oil and natural gas
15
<PAGE>
production, and as of September 30, 1997, the Company had hedged 13% of its
natural gas production for the nine months then ended on an historical
combined basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Hedging."
MARKETABILITY OF PRODUCTION
The marketability of the Company's production depends in part upon the
availability, proximity and capacity of natural gas gathering systems,
pipelines and processing facilities. The Company delivers natural gas through
gas gathering systems and gas pipelines that it does not own. Federal and
state regulation of oil and natural gas production and transportation, tax and
energy policies, changes in supply and demand and general economic conditions
all could adversely affect the Company's ability to produce and market its oil
and natural gas. See "Business and Properties--Governmental Regulation." Any
dramatic change in market factors could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company has assembled a team of geologists, geophysicists and engineers,
some of whom are non-employee consultants and independent contractors, having
considerable experience in oil and natural gas exploration and production,
including applying 2-D and 3-D imaging technology. The Company is dependent
upon the knowledge, skills and experience of these experts to provide 2-D and
3-D imaging and to assist the Company in reducing the risks associated with
its participation in oil and natural gas exploration projects. In addition,
the success of the Company's business also depends to a significant extent
upon the abilities and continued efforts of its management. The Company
expects to enter into employment agreements prior to consummation of the
Offering with four key management employees. See "Management--Executive
Compensation--Employment Agreements." The Company does not maintain key-man
life insurance with respect to any of its employees. Competition among oil and
gas companies for qualified geologists, geophysicists and engineers and other
technical experts and consultants is intense. The loss of services of key
management personnel or the Company's technical experts and consultants, or
the inability to attract additional qualified personnel, experts or
consultants, could have a material adverse effect on the Company's business,
financial condition, results of operations, development efforts and ability to
grow. There can be no assurance that the Company will be successful in
attracting and/or retaining its key management personnel or technical experts
or consultants. See "--Risks Associated with Management of Growth and
Implementation of Growth Strategy," "Management--Directors and Executive
Officers" and "Business and Properties--Employees."
TECHNOLOGICAL CHANGES
The oil and gas industry is characterized by rapid and significant
technological advancements and introductions of new products and services
utilizing new technologies. As others use or develop new technologies, the
Company may be placed at a competitive disadvantage, and competitive pressures
may force the Company to implement such new technologies at substantial costs.
In addition, other oil and gas companies may have greater financial, technical
and personnel resources that allow them to enjoy technological advantages and
may in the future allow them to implement new technologies before the Company.
There can be no assurance that the Company will be able to respond to such
competitive pressures and implement such technologies on a timely basis or at
an acceptable cost. One or more of the technologies currently utilized by the
Company or implemented in the future may become obsolete. In such cases, the
Company's business, financial condition and results of operations could be
materially adversely affected. If the Company is unable to utilize the most
advanced commercially available technology, the Company's business, financial
condition and results of operations could be materially and adversely
affected. See "Business and Properties--Competition."
SHORTAGES OF DRILLING RIGS, EQUIPMENT, SUPPLIES AND PERSONNEL
There is a general shortage of drilling rigs, equipment and supplies, which
the Company believes may intensify. The costs and delivery times of rigs,
equipment and supplies are substantially greater than in prior periods and
currently are escalating. Shortages of drilling rigs, equipment or supplies
could delay and adversely affect the Company's exploration and development
operations, which could have a material adverse effect on its business,
financial condition and results of operations.
16
<PAGE>
The demand for, and wage rates of, qualified rig crews have begun to rise in
the drilling industry in response to the increasing number of active drilling
rigs in service. Such shortages have in the past occurred in the industry in
times of increasing demand for drilling services. If the number of active
drilling rigs continues to increase, the oil and gas industry may experience
shortages of qualified personnel to operate drilling rigs, which could delay
the Company's drilling operations and adversely affect the Company's business,
financial condition and results of operations.
CONTROL BY CERTAIN STOCKHOLDERS
Upon consummation of the Offering and the Combination Transaction,
directors, executive officers and principal stockholders of the Company, and
certain of their affiliates, will beneficially own approximately % of the
Company's outstanding Common Stock (approximately % if the Underwriters
exercise the over-allotment option in full). Accordingly, these stockholders,
as a group, will be able to control the outcome of stockholder votes,
including votes concerning the election of directors, the adoption or
amendment of provisions in the Company's Certificate of Incorporation or
Bylaws and the approval of mergers and other significant corporate
transactions. The existence of these levels of ownership concentrated in a few
persons makes it unlikely that any other holder of Common Stock will be able
to affect the management or direction of the Company. These factors also may
have the effect of delaying or preventing a change in the management or voting
control of the Company. See "Principal and Selling Stockholders" and
"Description of Capital Stock."
CERTAIN ANTITAKEOVER CONSIDERATIONS
The Company's Certificate of Incorporation and Bylaws include certain
provisions that may have the effect of delaying, deterring or preventing a
future takeover or change in control of the Company without the approval of
the Company's Board of Directors. Such provisions also may render the removal
of directors and management more difficult. Among other things, the Company's
Certificate of Incorporation and/or Bylaws: (i) provide for a classified Board
of Directors serving staggered three-year terms; (ii) impose restrictions on
who may call a special meeting of stockholders; (iii) include a requirement
that stockholder action be taken only by unanimous written consent or at
stockholder meetings; (iv) specify certain advance notice requirements for
stockholder nominations of candidates for election to the Board of Directors
and certain other stockholder proposals; and (v) impose certain restrictions
and supermajority voting requirements in connection with specified business
combinations not approved in advance by the Company's Board of Directors. In
addition, the Company's Board of Directors, without further action by the
stockholders, may cause the Company to issue up to 2,000,000 shares of
preferred stock, $0.01 par value ("Preferred Stock"), on such terms and with
such rights, preferences and designations as the Board of Directors may
determine. Issuance of such Preferred Stock, depending upon the rights,
preferences and designations thereof, may have the effect of delaying,
deterring or preventing a change in control of the Company. Further, certain
provisions of the Delaware General Corporation Law (the "Delaware Law") impose
restrictions on the ability of a third party to effect a change in control and
may be considered disadvantageous by a stockholder. See "Description of
Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the Offering could adversely affect the market price for the Common Stock. An
estimated 6,930,000 shares to be issued in the Combination Transaction will
not, at the time of issuance, be registered under the Securities Act of 1933,
as amended (the "Securities Act"), and, therefore, are not freely tradeable
unless subsequently registered under the Securities Act or exempted from such
registration. The Company has agreed that upon consummation of the Combination
Transaction it will enter into a Registration Rights Agreement with each
person receiving shares of Common Stock in the Combination Transaction.
Pursuant to the Registration Rights Agreement, such persons collectively will
receive piggyback registration rights that provide for the registration of the
resale of such shares at the Company's expense. Beginning one year after the
consummation of the Offering, all of such shares to be issued in the
Combination Transaction (other than the shares being offered hereby by the
Selling Stockholders) may be sold pursuant to the requirements of Rule 144
promulgated under the Securities Act ("Rule 144"), subject to certain volume
limitations, manner of sale and other requirements relating to the sale of
such securities. Up to
17
<PAGE>
711,500 shares of Common Stock issuable pursuant to stock options and 107,500
shares of restricted Common Stock are expected to be granted to directors,
officers and certain employees of the Company in connection with the Offering.
The Company anticipates that shares of Common Stock issuable upon exercise of
such options and the restricted stock awards will become available for future
sale in the public market pursuant to a subsequently filed registration
statement on Form S-8. The Company and its current stockholders, executive
officers and directors have agreed not to offer for sale, sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of Bear, Stearns & Co.
Inc., subject to certain exceptions. Such consent may be given at any time and
without public notice. See "Management--Executive Compensation--Employee
Benefit Plans--Stock Option and Restricted Stock Plan of 1997," "Description
of Capital Stock--Registration Rights of Certain Stockholders," "Shares
Eligible for Future Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock in the Offering will experience an immediate
and substantial dilution in pro forma net tangible book value per share. See
"Dilution."
ABSENCE OF DIVIDENDS ON COMMON STOCK
The Company currently intends to retain any earnings for the future
operation and development of its business and currently does not anticipate
paying any cash dividends with respect to the Common Stock in the foreseeable
future. Any future dividends also may be restricted by agreements with the
Company's lenders. See "Dividend Policy."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Before the Offering, there has been no public market for the Common Stock,
and an active public market for the Common Stock may not develop or, if
developed, may not be sustained. The initial public offering price will be
determined through negotiation between the Company and the Underwriters based
on several factors that may not be indicative of future market prices. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The consummation of the Offering provides
no assurance that an active trading market for the Common Stock will develop
or, if developed, that it will be sustained. The trading price of the Common
Stock and the price at which the Company may sell securities in the future
could be subject to large fluctuations in response to changes in government
regulations, quarterly variations in operating results, litigation, general
market conditions, the prices of oil and natural gas, announcements by the
Company and its competitors, the liquidity of the Company, the Company's
ability to raise additional funds and other events.
FORWARD-LOOKING INFORMATION
All statements other than statements of historical fact contained in this
Prospectus, including statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business and Properties,"
are forward-looking statements. Forward-looking statements in this Prospectus
generally are accompanied by words such as "anticipate," "believe,"
"estimate," "project," "expect" or similar statements. Such forward-looking
information involves important known and unknown risks and uncertainties and
other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, no assurance can be given that such
expectations will prove correct. Factors that could cause the Company's
results to differ materially from the results discussed in such forward-
looking statements include the risks described under "Risk Factors," such as
the fluctuations of the prices received or demand for the Company's oil and
natural gas, the uncertainty of drilling results and reserve estimates,
operating hazards, acquisition risks, requirements for capital, general
economic conditions, the competition from other exploration, development and
production companies and the effects of governmental and environmental
regulation. All forward-looking statements in this Prospectus are expressly
qualified in their entirety by the cautionary statements in this paragraph and
potential investors are cautioned not to place undue reliance on the forward-
looking statements made in this Prospectus.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company are estimated to be approximately $ ($ if
the Underwriters exercise their over-allotment option in full), and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses. The Company will not receive any of the proceeds from the
sale of the shares of Common Stock by the Selling Stockholders in the
Offering.
The Company intends to use a portion of the net proceeds to repay all
borrowings under the Credit Facility (defined below) and to fund a portion of
the purchase price for the Combined Assets, including repayment of a $2.5
million loan made to the Company by the C.E. Miller Trust (as described below)
to fund a down payment made in connection with the Combination Transaction.
The Company currently expects to pay management bonuses in the aggregate
amount of $275,000 upon consummation of the Offering. See "Management--
Executive Compensation--Certain Other Arrangements." The remainder of the
proceeds will be used to fund future capital expenditures relating to
exploration and development activities, to increase working capital and for
other general corporate purposes. While the Company believes that the net
proceeds from the Offering, cash flow from operations and borrowings under its
Credit Facility should allow the Company to finance its operations through at
least 1998 based on current conditions, additional financing may be required
in the future to fund the Company's drilling and 3-D seismic acquisition
programs. To the extent that the net proceeds of the Offering are not used
immediately, they will be invested in short-term, interest-bearing
obligations.
MOC obtained a $5.0 million revolving line of credit (the "Original Line of
Credit") and a $1.0 million term loan (the "Term Loan") pursuant to a Business
Loan Agreement dated September 10, 1996 with First of America-Michigan, N.A.
("FOA"). FOA has made available an additional $1.0 million revolving line of
credit (the "Additional Line of Credit" and, together with the Original Line
of Credit and Term Loan, the "Credit Facility"). At September 30, 1997, $4.5
million was outstanding under the Original Line of Credit, no amount was
outstanding under the Additional Line of Credit, and $0.8 million was
outstanding under the Term Loan. Interest accrues under the Original Line of
Credit and Term Loan at a variable annual rate equal to the New York Consensus
Prime Rate, which was 8.5% at September 30, 1997, and under the Additional
Line of Credit at a variable annual rate equal to the New York Consensus Prime
Rate plus one-quarter of 1%. Indebtedness under the Original Line of Credit
and the Additional Line of Credit matures January 13, 1998, and indebtedness
under the Term Loan matures September 10, 2000. MOC borrowed $2.5 million from
the C.E. Miller Trust for the purpose of funding a down payment made in
connection with the Combination Transaction. Interest accrues on this loan at
the New York Consensus Prime Rate. This loan is scheduled to mature June 1,
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company currently intends to retain its earnings for future growth and,
therefore, does not anticipate paying cash dividends with respect to the
Common Stock in the foreseeable future. Under Delaware law, the Company is
permitted to pay dividends only out of surplus, or, if there is no surplus,
out of its net profits. Payments of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account
various factors, including the Company's financial condition, operating
results and current and anticipated cash needs.
19
<PAGE>
DILUTION
As of September 30, 1997, the Company's pro forma net tangible book value
would have been approximately $25.1 million, or approximately $3.62 per share
of Common Stock, after giving pro forma effect to the Combination Transaction,
the contribution of existing MOC shareholder notes and the termination of
MOC's S corporation status as if all such transactions had been completed at
such date. Net tangible book value per share represents the total book value
of the Company's tangible assets reduced by the amount of the Company's total
liabilities, divided by the number of shares of Common Stock outstanding.
After giving further effect to the sale by the Company of shares of Common
Stock at an assumed initial public offering price of $ per share and the
application of such net proceeds as described under "Use of Proceeds," the
adjusted pro forma net tangible book value of the Common Stock as of September
30, 1997 would have been $ per share. This represents an immediate increase
in pro forma net tangible book value of $ per share to the Company's
existing stockholders and an immediate dilution in pro forma net tangible book
value of $ per share to new investors purchasing shares of Common Stock in
the Offering at the initial public offering price. The following table
illustrates the per share dilution in pro forma net tangible book value to new
investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $
Pro forma net tangible book value per share at September 30,
1997........................................................... $3.62
Increase in pro forma net tangible book value per share
attributable to the sale of Common Stock in the Offering.......
Adjusted pro forma net tangible book value per share after giving
effect to the Offering...........................................
---
Dilution in net tangible book value to the purchasers of Common
Stock in the Offering............................................ $
===
</TABLE>
The following table sets forth, on a pro forma basis to give effect to the
Combination Transaction as of September 30, 1997, differences between (i) the
number of shares of Common Stock acquired from the Company by existing
stockholders and to be acquired from the Company by new investors purchasing
shares in the Offering and (ii) the total and average prices paid by existing
stockholders and to be paid by new investors purchasing shares in the Offering
(in each case based on an assumed initial public offering price of $ per
share):
<TABLE>
<CAPTION>
SHARES TOTAL AVERAGE
PURCHASED(1) CONSIDERATION(2) PRICE
----------------- ------------------ PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
------ ---------- ------- ---------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 6,930 % $25,060 % $3.62
New investors...................
----- ----- ------- ----- -----
Total....................... 100.0% $ 100.0%
===== ===== ======= =====
</TABLE>
- --------
(1) These numbers do not include 711,500 shares of Common Stock issuable
pursuant to employee stock options at an exercise price per share equal to
the initial public offering price and 107,500 shares of restricted Common
Stock that are expected to be granted to directors, officers and certain
employees of the Company in connection with the Offering. See
"Management--Executive Compensation--Employee Benefit Plans--Stock Option
and Restricted Stock Plan of 1997."
(2) The existing stockholders of the Company, after giving effect to the
Combination Transaction, will have acquired all of their shares of Common
Stock in exchange for the Combined Assets; therefore, such stockholders
will have no direct cash cost with respect to the acquisition of such
shares.
20
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical combined capitalization of
the Company as of September 30, 1997, (ii) the pro forma capitalization of the
Company as of September 30, 1997 after giving effect to the Combination
Transaction, the contribution of existing MOC shareholder notes and the
termination of MOC's S corporation status and (iii) the pro forma
capitalization of the Company as of September 30, 1997, as adjusted to give
effect to the sale of shares of Common Stock in the Offering at an assumed
initial public offering price of $ per share and the application of the
estimated net proceeds therefrom as described under "Use of Proceeds." This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Combined Financial
Statements.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
HISTORICAL PRO PRO FORMA
COMBINED FORMA AS ADJUSTED
---------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of notes payable and long-term
debt(1)........................................ $ 4,753 $ 4,753 $ --
Long-term debt(1)............................... 8,186 48,043 --
Equity(2):
Preferred Stock, $0.01 par value, 2,000,000
shares authorized; none issued and
outstanding.................................. -- -- --
Common Stock, $0.01 par value, 20,000,000
shares authorized; none issued and
outstanding; 6,930,000 issued and outstanding
pro forma; issued and outstanding pro
forma, as adjusted........................... -- 69
Additional paid-in capital.................... -- 24,991
Retained earnings............................. 7,835 -- --
Combined equity............................... 197 -- --
------- ------- -----
Total equity................................ 8,032 25,060
------- ------- -----
Total capitalization........................ $20,971 $77,856 $
======= ======= =====
</TABLE>
- --------
(1) See note 6 to the Combined Financial Statements.
(2) These numbers do not include 711,500 shares of Common Stock issuable
pursuant to employee stock options at an exercise price per share equal to
the initial public offering price in the Offering and 107,500 shares of
restricted Common Stock that are expected to be granted to directors,
officers and certain employees of the Company in connection with the
Offering. See "Management--Executive Compensation--Employee Benefit
Plans--Stock Option and Restricted Stock Plan of 1997."
21
<PAGE>
SELECTED HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
The following table presents selected historical combined financial data of
the Company as of the dates and for the periods indicated. The historical
combined financial data as of and for each of the three years in the period
ended December 31, 1996 are derived from the Combined Financial Statements
which have been audited by Arthur Andersen LLP, independent public
accountants. The historical combined financial data as of and for the years
ended December 31, 1992 and 1993 are unaudited. The historical combined
financial data as of and for the nine months ended September 30, 1996 and 1997
are derived from the Combined Financial Statements of the Company which, in
the opinion of management, contain all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation thereof. The results
for the nine months ended September 30, 1997 are not necessarily indicative of
the results that may be achieved for the full year ending December 31, 1997.
The following table also sets forth certain pro forma income tax, net income
and net income per share information. Pro forma data are based on assumptions
and include adjustments as explained in the notes to the unaudited pro forma
financial data. The unaudited pro forma financial statements are not
necessarily indicative of the results of future operations of the Company and
should be read in conjunction with the Combined Financial Statements.
Historical net income (loss) per share has been omitted since such information
is not meaningful and the historically combined Company is not a separate
legal entity with a single capital structure. The following data should be
read in conjunction with "Capitalization," "Selected Unaudited Pro Forma
Combined Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined Financial Statements.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Natural gas.......... $ 3,302 $ 3,749 $ 2,424 $ 2,748 $ 5,614 $ 3,719 $ 4,329
Crude oil and
condensate.......... 835 817 672 715 1,101 854 710
Other operating
income.............. 258 268 167 296 395 355 492
------- ------- ------- ------- ------- ------- -------
Total operating
income............ 4,395 4,834 3,263 3,759 7,110 4,928 5,531
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Lease operating
expenses and
production taxes.... 781 539 811 777 1,123 753 917
Depreciation,
depletion and
amortization........ 1,313 1,300 1,009 1,666 2,629 1,826 2,019
General and
administrative...... 1,121 1,086 1,200 1,270 1,591 1,002 1,335
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.......... 3,215 2,925 3,020 3,713 5,343 3,581 4,271
------- ------- ------- ------- ------- ------- -------
Operating income....... 1,180 1,909 243 46 1,767 1,347 1,260
------- ------- ------- ------- ------- ------- -------
Interest expense....... (753) (634) (810) (1,017) (1,139) (789) (922)
Lawsuit settlement..... -- -- -- 3,521 -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)...... $ 427 $ 1,275 $ (567) $ 2,550 $ 628 $ 558 $ 338
======= ======= ======= ======= ======= ======= =======
Pro forma income
before taxes(1)....... $ 8,089 $ 4,235
Pro forma provision
for income taxes(1)... 2,168 952
------- -------
Pro forma net
income(1)............. $ 5,921 $ 3,283
======= =======
Pro forma net income
per share(1)(2)....... $ 0.85 $ 0.47
======= =======
Pro forma weighted
average shares
outstanding(2)........ 6,930 6,930
======= =======
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (at
end of period):
Working capital........ $ 927 $ (434) $(1,769) $(1,980) $(2,682) $(2,688) $(3,466)
Oil and gas
properties, net....... 12,520 14,150 14,257 17,731 20,732 20,462 21,163
Total assets........... 15,610 17,702 16,444 20,005 24,050 22,883 23,993
Long-term debt,
including notes
payable............... 7,643 9,213 9,442 9,801 12,881 11,661 12,939
Equity................. 6,508 6,787 5,596 7,410 7,769 7,943 8,032
</TABLE>
22
<PAGE>
- --------
(1) Gives pro forma effect to the application of federal and state income
taxes to the Company as if it were a taxable corporation for the periods
presented. Upon the consummation of the Combination Transaction, the
Company will be required to record a one-time non-cash charge to earnings
in connection with establishing a deferred tax liability on the balance
sheet in accordance with SFAS No. 109, "Accounting for Income Taxes." If
the Combination Transaction had been consummated for the periods
presented, such charge would have been approximately $5.5 million. The
ultimate amount of the charge that will be recorded is dependent upon a
number of factors and cannot be determined until consummation of the
Combination Transaction. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
(2) Pro forma net income per share has been computed assuming that an
estimated 6,930,000 shares of Common Stock to be issued in connection with
the Combination Transaction have been outstanding since January 1, 1996.
23
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The pro forma unaudited combined financial data set forth below has been
prepared to give effect to the Combination Transaction. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview." The pro forma unaudited statements of operations for the year ended
December 31, 1996 and for the nine months ended September 30, 1997 were
prepared on the basis that the Combination Transaction occurred on January 1,
1996 and January 1, 1997, respectively. The pro forma unaudited balance sheet
as of September 30, 1997 was prepared on the basis that the Combination
Transaction occurred on September 30, 1997. Pro forma data give effect to the
revenues and direct operating expenses of the properties acquired from the
non-affiliated participants in the Combination Transaction (the "Acquired
Properties"). In addition, the pro forma data are based on assumptions and
include adjustments as explained in the notes to the unaudited pro forma
combined financial statements and are not necessarily indicative of the
results of future operations of the Company. The following financial
information should be read in conjunction with "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Combined Financial Statements.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO
COMBINED ACQUIRED PRO FORMA FORMA
COMPANY PROPERTIES ADJUSTMENTS COMBINED
-------- ---------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Natural gas................... $ 5,614 $15,232 $ (156)(a) $20,690
Crude oil and condensate...... 1,101 4,037 (93)(a) 5,045
Other operating revenues...... 395 395
------- ------- -------- -------
7,110 19,269 (249) 26,130
Operating Expenses:
Lease operating expenses and
production taxes............. 1,123 1,153 (91)(a) 2,185
Depreciation, depletion and
amortization................. 2,629 6,470 (b) 9,099
General and administrative.... 1,591 775 (c) 2,366
------- ------- -------- -------
5,343 1,153 7,154 13,650
Operating income................ 1,767 18,116 (7,403) 12,480
Interest expense................ (1,139) (3,252)(d) (4,391)
------- ------- -------- -------
Income before income taxes...... 628 18,116 (10,665) 8,089
Provision for income taxes...... -- -- 2,168 (e) 2,168
------- ------- -------- -------
Net income...................... $ 628 $18,116 $(12,823) $ 5,921
======= ======= ======== =======
Net income per common share..... $ 0.85
=======
Weighted average common shares
outstanding.................... 6,930 (f) 6,930
======== =======
</TABLE>
24
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO
COMBINED ACQUIRED PRO FORMA FORMA
COMPANY PROPERTIES ADJUSTMENTS COMBINED
-------- ---------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Natural gas................... $4,329 $11,357 $ (121)(a) $15,565
Crude oil and condensate...... 710 2,140 (67)(a) 2,783
Other operating revenues...... 492 492
------ ------- ------- -------
5,531 13,497 (188) 18,840
Operating Expenses:
Lease operating expenses and
production taxes............. 917 664 (64)(a) 1,517
Depreciation, depletion and
amortization................. 2,019 5,728 (b) 7,747
General and administrative.... 1,335 650 (c) 1,985
------ ------- ------- -------
4,271 664 6,314 11,249
Operating income................ 1,260 12,833 (6,502) 7,591
Interest expense................ (922) (2,434)(d) (3,356)
------ ------- ------- -------
Income before income taxes...... 338 12,833 (8,936) 4,235
Provision for income taxes...... -- -- 952 (e) 952
------ ------- ------- -------
Net income...................... $ 338 $12,833 $(9,888) $ 3,283
====== ======= ======= =======
Net income per common share..... $ 0.47
=======
Weighted average common shares
outstanding.................... 6,930 (f) 6,930
======= =======
</TABLE>
25
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMBINED PRO FORMA PRO FORMA
ASSETS COMPANY ADJUSTMENTS COMBINED
------ -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current Assets:
Cash........................................ $ 107 $ $ 107
Accounts receivable......................... 2,253 2,253
Inventories................................. 47 47
Prepaid expenses............................ 36 36
Other current assets........................ 186 186
------- ------- -------
2,629 2,629
Oil and gas properties, net................... 21,163 19,513 (g) 90,669
(507)(h)
50,500 (i)
Property and equipment, net................... 201 201
------- ------- -------
Total assets.............................. $23,993 $69,506 $93,499
======= ======= =======
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
Current Liabilities:
Notes payable............................... $ 4,515 $ $ 4,515
Current portion of long-term debt........... 238 238
Accounts payable and joint interest
advances................................... 1,134 1,134
Accrued interest............................ 202 202
Other accrued expenses...................... 6 275 (c) 281
------- ------- -------
6,095 275 6,370
Long-term debt................................ 8,186 (7,643)(j) 48,043
47,500 (i)
Deferred revenue.............................. 1,680 1,680
Other non-current liabilities................. -- 3,000 (i) 3,000
Deferred income taxes......................... -- 9,346 (k) 9,346
Equity:
Preferred Stock............................. -- --
Common Stock................................ -- 69 (g) 69
Additional paid-in capital.................. -- (275)(c) 24,991
19,444 (g)
(507)(h)
7,643 (j)
(9,346)(k)
8,032 (l)
Combined equity............................. 197 (197)(l) --
Retained earnings........................... 7,835 (7,835)(l) --
------- ------- -------
Total equity................................ 8,032 17,028 25,060
------- ------- -------
Total liabilities and equity.............. $23,993 $69,506 $93,499
======= ======= =======
</TABLE>
- --------
Notes to unaudited pro forma combined financial data:
- ----------------------------------------------------
(a) To reflect the elimination of operating results from certain non-strategic
oil and natural gas assets that will be sold by the Company prior to the
Combination Transaction.
26
<PAGE>
(b) To reflect the estimated additional depreciation, depletion and
amortization expense resulting from the acquisition of the Acquired
Properties and the sale of certain non-strategic assets using the unit-of-
production method applied to the basis of the properties acquired and
sold.
(c) To reflect a bonus to be paid to certain employees upon consummation of
the Combination Transaction and estimated incremental general and
administrative expenses expected to be incurred as a result of increased
operations and by becoming a public company.
(d) To reflect the increase in interest expense attributable to the additional
long-term debt necessary to finance the cash portion of the Combination
Transaction (see (i) below) and to reflect the reduction in interest
expense attributable to MOC shareholder notes being contributed in
connection with the Combination Transaction, resulting in the cancellation
of the indebtedness (see (j) below).
(e) Gives pro forma effect to the application of federal and state income
taxes to the Company as if it were a taxable corporation for the periods
presented. Upon the consummation of the Combination Transaction, the
Company will be required to record a one-time non-cash charge to earnings
in connection with establishing a deferred tax liability on the balance
sheet in accordance with SFAS No. 109, "Accounting for Income Taxes." If
the Combination Transaction had been consummated for the periods
presented, such charge would have been approximately $5.5 million. The
ultimate amount of the charge that will be recorded is dependent upon a
number of factors and cannot be determined until consummation of the
Combination Transaction. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
(f) To reflect the issuance of Common Stock in exchange for certain of the
Combined Assets in the Combination Transaction.
(g) To reflect the fair value of the Combined Assets being contributed in the
Combination Transaction and the exchange of Common Stock for certain of
these assets.
(h) To reflect the reduction in the cost basis of the non-strategic properties
sold prior to consummation of the Combination Transaction, and the payment
of these proceeds to MOC's existing shareholders.
(i) To reflect the purchase price for the cash portion of the Combination
Transaction and associated additional long-term debt and other non-current
liabilities necessary to finance this portion of the Combination
Transaction. See "Business and Properties--Core Exploration and
Development Regions--Mississippi Salt Basin."
(j) To reflect the contribution of the MOC shareholder notes in connection
with the Combination Transaction, resulting in the cancellation of the
indebtedness.
(k) To reflect a deferred tax liability in accordance with SFAS No. 109,
"Accounting for Income Taxes," for the difference between the financial
reporting basis and the tax basis of the Company, after consummation of
the Combination Transaction.
(l) To reflect the reclassification of combined equity and the
reclassification of retained earnings as additional paid-in capital, upon
MOC's termination of its S corporation status.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Unless otherwise indicated, the historical information contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations refers to the historical combined operations of the Company without
giving effect to the Combination Transaction.
OVERVIEW
Miller is an independent oil and gas company with its current exploration
effort concentrated in the Mississippi Salt Basin, the onshore Gulf Coast
region of Texas and Louisiana and the Michigan Basin. The Company has an
established production base in each area.
In 1972, the Miller family began to acquire a substantial and strategic
leasehold position and apply emerging seismic technology to discover oil and
natural gas reserves in the Northern Michigan Niagaran Reef Trend. The Company
also explored and had production in Texas, Wyoming, North Dakota and Montana.
In 1988, the Miller family and their affiliated companies sold their producing
properties to Conoco, Inc., reserving the undeveloped acreage in the Michigan
Basin. After the Conoco, Inc. sale, the Company shifted its focus to
development of the Antrim Shale formation in its Northern Michigan leases.
Since 1988, the Company has participated in drilling over 600 commercially
productive Antrim Shale wells. Since 1993, the Company has developed its base
of properties and inventory of prospects in Mississippi, Louisiana and Texas.
The Company uses the full-cost method of accounting for its oil and natural
gas properties. Under this method, all acquisition, exploration and
development costs, including any general and administrative costs that are
directly attributable to the Company's acquisition, exploration and
development activities, are capitalized in a "full-cost pool" as incurred. The
Company records depletion of its full-cost pool using the unit-of-production
method. To the extent that such capitalized costs in the full-cost pool (net
of depreciation, depletion and amortization and related deferred taxes) exceed
the present value (using a 10% discount rate) of estimated future net after-
tax cash flows from proved oil and natural gas reserves, such excess costs are
charged to operations. The Company has not been required to make any such
write-downs. Once incurred, a write-down of oil and natural gas properties is
not reversible at a later date.
The Company recently was organized as a Delaware corporation to serve as the
surviving company in the Combination Transaction. Pursuant to the agreements
among the Company and the owners of the Combined Assets, the Company has
agreed to issue to those owners an estimated 6,930,000 shares of Common Stock
and an estimated $50.5 million in cash in exchange for the Combined Assets.
Certain of the owners of the Combined Assets will receive a number of shares
of Common Stock proportionate to the value of their ownership interests in the
Combined Assets calculated on the basis of the initial public offering price
of the Common Stock.
Because the Company, MOC and the Affiliated Entities share common ownership
and management, the combination of those particular Combined Assets will be
accounted for as a reorganization of entities as prescribed by SEC Staff
Accounting Bulletin ("SAB") No. 47. The unaffiliated entities participating in
the Combination Transaction are not under the common ownership and management
of the Company. Consequently, the Company will account for the acquisition of
those unaffiliated assets under the purchase method of accounting, under which
the properties will be recorded at their estimated fair value at the date on
which the Combination Transaction is consummated.
The Company is not currently subject to federal income taxation because MOC
and the Affiliated Entities were not tax reporting entities but, instead,
taxes relating to the operations of MOC and the Affiliated Entities were
required to be paid by the owners thereof as S corporations. As a result, the
Company did not pay any taxes for any of these periods nor do the Combined
Financial Statements include any deferred tax liability, on a historical
basis. This tax treatment will continue until consummation of the Combination
Transaction, which will occur upon the consummation of the Offering, at which
time the Company will become subject to taxation as a C corporation.
For the reasons described above, the Combined Financial Statements do not
include a provision for deferred tax liabilities. At September 30, 1997, the
estimated tax basis of the Company's net assets was approximately $16.0
million less than the basis for financial accounting purposes. The difference
is primarily the result of deductions for oil and gas property costs for tax
purposes in excess of the recorded expense for
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<PAGE>
financial accounting purposes. As a result, upon the consummation of the
Combination Transaction, the Company will be required to record a one-time
non-cash charge to earnings for the deferred tax liability in accordance with
SFAS No. 109, "Accounting for Income Taxes." If the Combination Transaction
had been consummated at September 30, 1997, such charge would have been
approximately $5.5 million. The difference between the tax basis and the
financial accounting basis of the Company's net assets, and, therefore, the
ultimate amount of the charge that will be recorded, will continue to change
until the consummation of the Combination Transaction (which will be
contemporaneous with the consummation of the Offering) as a result of ongoing
differences between the amount of tax deductions and corresponding expenses
for financial accounting purposes. Accordingly, the ultimate amount of the
non-cash charge that will be recorded cannot be determined until consummation
of the Combination Transaction and such amount may vary significantly from the
estimate at September 30, 1997.
RESULTS OF OPERATIONS
The following table summarizes production volumes, average sales prices,
operating revenues and average costs for the Company's oil and natural gas
operations for the periods presented. For pro forma information with respect
to production volumes, average sale prices and average costs, see "Business
and Properties--Volumes, Prices and Production Costs."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C> <C> <C> <C>
Production volumes:
Crude oil and condensate (MBbls)... 39.5 31.6 46.5 35.0 33.4
Natural gas (MMcf)................. 1,228.4 1,324.0 2,030.0 1,555.3 1,713.0
Natural gas equivalent (MMcfe)..... 1,465.7 1,513.3 2,309.1 1,765.0 1,913.3
Average sales prices:
Crude oil and condensate ($ per
Bbl).............................. $ 17.00 $ 22.68 $ 23.66 $ 24.44 $ 21.26
Natural gas ($ per Mcf)............ 1.97 2.08 2.77 2.39 2.53
Natural gas equivalent ($ per
Mcfe)............................. 2.11 2.29 2.91 2.59 2.63
Operating revenues:
Crude oil and condensate........... $ 672 $ 715 $ 1,101 $ 854 $ 710
Natural gas........................ 2,424 2,748 5,614 3,719 4,329
Average Costs ($ per Mcfe):
Lease operating expenses and
production taxes.................. $ 0.55 $ 0.51 $ 0.49 $ 0.43 $ 0.48
Depletion, depreciation and
amortization...................... 0.69 1.10 1.14 1.03 1.06
General and administrative......... 0.82 0.84 0.69 0.57 0.70
</TABLE>
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996
Oil and natural gas revenues for the nine months ended September 30, 1997
increased 10% to $5.0 million from $4.6 million for the same period in 1996.
Production volumes for natural gas during the nine months ended September 30,
1997 increased 10% to 1,713.0 MMcf from 1,555.3 MMcf for the same period in
1996. Average natural gas prices increased 6% to $2.53 per Mcf for the nine
months ended September 30, 1997 from $2.39 per Mcf in the same period in 1996.
Production volumes for oil during the nine months ended September 30, 1997
decreased 4% to 33.4 MBbls from 35.0 MBbls for the same period in 1996.
Average oil prices decreased 13% to $21.26 per barrel during the nine months
ended September 30, 1997 from $24.44 per barrel in the same period in 1996.
This decrease in oil prices is primarily attributable to cyclical fluctuations
in the spot market for oil.
Lease operating expenses and production taxes for the nine months ended
September 30, 1997 increased 22% to $0.9 million from $0.8 million for the
same period in 1996. Lease operating expenses and production taxes increased
primarily due to increased production as described above, and an increase in
operating expenses per equivalent unit to $0.48 per Mcfe for the nine months
ended September 30, 1997 from $0.43 per Mcfe in the same period in 1996.
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<PAGE>
Depreciation, depletion and amortization ("DD&A") expense for the nine
months ended September 30, 1997 increased 11% to $2.0 million from $1.8
million for the same period in 1996. This increase was due to increased
production and a 3% increase in the 1997 depletion rate to $1.06 per Mcfe from
$1.03 per Mcfe in the nine months ended September 30, 1996, which was the
result of increased drilling and related seismic costs.
General and administrative expense for the nine months ended September 30,
1997 increased 33% to $1.3 million from $1.0 million for the same period in
1996, as a result of increases in the number of employees and related
benefits, plus increased office rent.
Interest expense for the nine months ended September 30, 1997 increased 17%
to $0.9 million from $0.8 million in the same period in 1996. Increases in
interest expense were due to increased debt levels in late 1996 and 1997
incurred to finance substantial leasehold acquisition activities in the
Mississippi Salt Basin area.
Net income for the nine months ended September 30, 1997 decreased to $0.3
million from $0.6 million for the same period in 1996, as a result of the
factors described above.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Oil and natural gas revenues for 1996 increased 94% to $6.7 million from
$3.5 million in 1995. Production volumes for natural gas in 1996 increased 53%
to 2,030.0 MMcf from 1,324.0 MMcf in 1995. Average natural gas prices
increased 33% to $2.77 per Mcf in 1996 from $2.08 per Mcf in 1995. Production
volumes for oil in 1996 increased 47% to 46.5 MBbls from 31.6 MBbls in 1995.
Average oil prices increased 4% to $23.66 per Bbl in 1996 from $22.68 per Bbl
in 1995. The increase in oil and natural gas production was due primarily to
new wells being successfully drilled and completed during 1996, along with
recompletions of existing wells.
Lease operating expenses and production taxes for 1996 increased 45% to $1.1
million from $0.8 million in 1995. Lease operating expenses and production
taxes increased due to increased production generated from new oil and natural
gas wells drilled and completed since December 31, 1995. Operating expenses
per equivalent unit in 1996 decreased to $0.49 per Mcfe from $0.51 per Mcfe in
1995. The per unit cost decreased as a result of increased production of
natural gas which had lower per unit operating costs.
DD&A expense for 1996 increased 58% to $2.6 million from $1.7 million in
1995. This increase was due to the increase in oil and natural gas production
as well as a 4% increase in the depletion rate ($1.14 per Mcfe in 1996 from
$1.10 per Mcfe in 1995).
General and administrative expense for 1996 increased 25% to $1.6 million
from $1.3 million for 1995 due primarily to an increase in directors' fees,
salaries and wages and office rent.
Interest expense for 1996 increased 12% to $1.1 million from $1.0 million in
1995 due to increased debt levels in 1996.
Net income for 1996 decreased to $0.6 million from $2.5 million in 1995 as a
result of the factors described above, plus a $3.5 million favorable lawsuit
settlement received by the Company in 1995.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Oil and natural gas revenues for 1995 increased 12% to $3.5 million from
$3.1 million in 1994. Production volumes for natural gas for 1995 increased 8%
to 1,324.0 MMcf from 1,228.4 MMcf in 1994. Average natural gas prices
increased 6% to $2.08 per Mcf in 1995 from $1.97 per Mcf in 1994. Production
volumes for oil for 1995 decreased 20% to 31.6 MBbls from 39.5 MBbls in 1994.
Average oil prices increased 33% to $22.68 per Bbl in 1995 from $17.00 per Bbl
in 1994.
Lease operating expenses and production taxes remained relatively stable at
approximately $0.8 million in 1995 and 1994. Lease operating expenses and
production taxes per equivalent unit in 1995 decreased to $0.51 per Mcfe from
$0.55 per Mcfe in 1994. The per unit cost decreased as a result of increased
production of natural gas which had lower per unit operating costs.
30
<PAGE>
DD&A expense for 1995 increased 65% to $1.7 million from $1.0 million in
1994 as a result of increased production as well as a 59% increase in the
depletion rate ($1.10 per Mcfe in 1995 from $0.69 per Mcfe in 1994). The
increased depletion rate was caused primarily by increased exploration
expenditures attributable to 3-D seismic surveys performed for new wells
drilled and completed since December 31, 1994 and downward revisions in
reserve estimates in 1995.
General and administrative expense for 1995 increased 6% to $1.3 million
from $1.2 million in 1994, primarily as a result of the hiring of additional
staff as well as salary increases and bonuses for existing employees.
Interest expense for 1995 increased to $1.0 million from $0.8 million in
1994. This increase in 1995 was due to the additional debt incurred to finance
operations.
Net income for 1995 was $2.5 million, compared to a net loss of $0.6 million
in 1994, as a result of the factors described above, plus a $3.5 million
favorable lawsuit settlement received by the Company in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of capital have been funds
generated by operations, equity capital contributions and borrowings,
primarily from MOC's shareholders and under the Credit Facility. The Company
had working capital deficits of $2.7 million at December 31, 1996 and $3.5
million at September 30, 1997.
The Credit Facility includes the $5.0 million Original Line of Credit, the
$1.0 million Additional Line of Credit and the $1.0 million Term Loan.
Principal outstanding under the Original Line of Credit and the Additional
Line of Credit matures January 13, 1998. Interest is payable monthly under the
Original Line of Credit at a variable annual rate equal to the New York
Consensus Prime Rate, which was 8.5% on September 30, 1997. Interest is
payable monthly under the Additional Line of Credit at a variable annual rate
equal to the New York Consensus Prime Rate plus one-quarter of 1%. Principal
outstanding under the Term Loan is payable in equal monthly installments of
$24,477 and matures September 10, 2000. Interest on the Term Loan is payable
monthly at the New York Consensus Prime Rate. At September 30, 1997,
borrowings under the Credit Facility were $5.3 million, consisting of $4.5
million under the Original Line of Credit and $0.8 million under the Term
Loan. As security for its obligations under the Credit Facility, MOC granted
to FOA a security interest in certain of its oil and natural gas interests and
other properties. A portion of the proceeds from this Offering will be used to
repay the amounts outstanding under the Credit Facility. The Company is
currently discussing alternative credit facilities with various lenders. See
"Use of Proceeds."
Pursuant to a promissory note dated November 26, 1997, the C.E. Miller Trust
loaned $2.5 million to MOC, which MOC used to fund a down payment made in
connection with the Combination Transaction. The loan is unsecured and
subordinated to the Credit Facility. Interest accrues on the loan at a
variable rate equal to the New York Consensus Prime Rate and is payable
monthly, and principal is payable in full on June 1, 1998. A portion of the
proceeds from this Offering will be used to repay the loan. See "Use of
Proceeds" and "Certain Transactions--Transactions with C.E. Miller and
Affiliates."
In 1991, the shareholders of MOC loaned to MOC an aggregate of $7.6 million
pursuant to separate loan agreements. Principal on the indebtedness is payable
in full on October 18, 2006. Interest is payable within 30 days after the end
of each quarter at the New York City Prime Rate, which was 8.5% per annum as
of September 30, 1997, plus 2%. As of September 30, 1997, no principal
payments had been made on the indebtedness, and all interest due and payable
by that date had been paid. The shareholders of MOC have agreed to contribute
the indebtedness to MOC as capital pursuant to the Combination Agreement,
resulting in cancellation of the indebtedness. Such cancellation is not
expected to result in income to the Company for federal income tax purposes.
See "--Overview."
The Company has budgeted capital expenditures of approximately $4.7 million
for the fourth quarter of 1997 and $46.2 million for 1998. Substantially all
of the capital expenditures will be used to fund 3-D seismic
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<PAGE>
surveys, drilling and development activities and leasehold acquisitions in the
Company's project areas. The actual amounts of capital expenditures and number
of wells drilled may differ significantly from such estimates.
The Company intends to fund its budgeted capital expenditures through the
end of 1998 from cash flow from operations, borrowings under the Credit
Facility and the net proceeds of this Offering.
The Company's revenues, profitability, future growth and ability to borrow
funds or obtain additional capital, and the carrying value of its properties,
substantially are dependent on prevailing prices of oil and natural gas. The
Company cannot predict future oil and natural gas price movements with
certainty. Declines in prices received for oil and natural gas may have an
adverse effect on the Company's financial condition, liquidity, ability to
finance capital expenditures and results of operations. Lower prices also may
impact the amount of reserves that can be produced economically by the
Company.
The Company has experienced and expects to continue to experience
substantial working capital requirements primarily due to the Company's active
exploration and development programs and its increased participation
percentages and its technology enhancement programs. While the Company
believes that the net proceeds from this Offering, cash flow from operations
and borrowings under the Credit Facility should allow the Company to implement
its present business strategy through 1998, additional financing may be
required in the future to fund the Company's growth, development and
exploration program and continued technological enhancement. In the event such
capital resources are not available to the Company, its exploration and other
activities may be curtailed.
HEDGING
Beginning in 1997, the Company began using certain hedging instruments
(e.g., NYMEX futures contracts) for a portion of its natural gas production to
achieve a more predictable cash flow, as well as to reduce the exposure to
price fluctuations. The Company's hedging arrangements apply to only a portion
of its production (primarily in the Michigan Antrim Shale), provide only
partial price protection against declines in oil and natural gas prices and
limit potential gains from future increases in prices. See "Risk Factors--
Risks of Hedging Transactions." Such hedging arrangements may expose the
Company to risk of financial loss in certain circumstances, including
instances where production is less than expected, the Company's customers fail
to purchase contracted quantities of oil or natural gas or a sudden unexpected
event materially impacts oil or natural gas prices. For financial reporting
purposes, gains and losses related to hedging are recognized as oil and
natural gas revenues during the period the hedged transactions occur.
Following the consummation of the Offering and the Combination Transaction,
the Company expects that the amount of hedges that it has in place will vary
from time to time but at no time does it expect that hedging activities will
be of material significance.
Beginning in 1997, the Company began to follow a strategy of striving to
maximize return on investment through hedging a portion of its activities
relating to natural gas price volatility. While this strategy should help the
Company reduce its exposure to price risks, it also limits the Company's
potential gains from increases in market prices for natural gas. The Company
intends to continue to hedge up to 50% of its natural gas production to retain
a portion of the potential for greater upside from increase in natural gas
prices, while limiting to some extent the Company's exposure to declines in
natural gas prices. The Company does not believe that its current level of oil
production warrants a hedging policy. See "Risk Factors--Volatility of Oil and
Natural Gas Prices." During 1994, 1995 and 1996, the Company did not hedge any
of its oil or natural gas production, and as of September 30, 1997, the
Company had hedged 13% of its natural gas production for the nine months then
ended.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by changing
oil and natural gas prices. If the price of oil and natural gas increases
(decreases), there could be a corresponding increase (decrease) in the
operating cost that the Company is required to bear for operations, as well as
an increase (decrease) in revenues. Recent rates of inflation have had a
minimal effect on the Company.
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<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings per Share" and SFAS No. 129, "Disclosure Information about
Capital Structure," which are effective for the Company's year-end 1997
financial statements. In 1997, FASB also issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," each of which will require expanded
disclosures effective for 1998. The Company does not expect the application of
these statements to have a material effect on its financial position,
liquidity or results of operations.
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 transportation of, oil and natural gas, as well as
environmental and safety matters. Many of these laws and regulations have
become more stringent in recent years, often imposing greater liability on a
larger number of potentially responsible parties. Although the Company
believes it is in substantial compliance with all applicable laws and
regulations, the requirements imposed by laws and regulations frequently are
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 business,
financial condition and results of operations. Although significant
expenditures may be required to comply with governmental laws and regulations
applicable to the Company, compliance has not had a material adverse effect on
the earnings or competitive position of the Company. Future regulations may
add to the cost of, or significantly limit, drilling activity. See "Risk
Factors--Governmental Regulation and Environmental Matters," "Business and
Properties--Governmental Regulation" and "--Environmental Matters."
33
<PAGE>
BUSINESS AND PROPERTIES
THE COMPANY
Miller is an independent oil and gas exploration and production company with
established exploration efforts concentrated primarily in three regions: the
Mississippi Salt Basin, the onshore Gulf Coast region of Texas and Louisiana
and the Michigan Basin. Miller emphasizes the use of seismic data analysis and
imaging, as well as other emerging technologies, to explore for and develop
oil and natural gas in its core exploration areas. Miller is the successor to
the independent oil and natural gas exploration and production business first
established in Michigan by members of the Miller family in 1925.
The Company was organized in connection with the combination of MOC and
interests in oil and gas properties owned by the Affiliated Entities and
interests in such properties owned by certain business partners and investors,
including AHC, Hughes and SASI. Estimated proved reserves attributable to the
Combined Assets have increased 172%, from 19.6 Bcfe as of December 31, 1994 to
53.4 Bcfe as of September 30, 1997. This increase is primarily attributable to
active exploration, development and acquisition efforts in recent years in
Mississippi, Louisiana and Texas. The Company has budgeted a significant
increase in drilling activity and plans to drill 50 wells in 1998, the
majority of which are exploratory wells in the Mississippi Salt Basin. The
Company's capital expenditure budget for both exploration and development
activity in all of its areas of concentration is $46.2 million for 1998.
Miller incurred expenditures for exploration and development activity of $21.1
million with respect to the Company's interest in 25 gross wells for the year
ended December 31, 1996 and $17.1 million with respect to the Company's
interest in 27 gross wells for the nine months ended September 30, 1997.
The Company's primary exploration effort is currently focused on the
Mississippi Salt Basin, which contains one of the largest onshore
concentrations of salt domes in North America. The Company owns interests in
approximately 63,000 gross leasehold acres (41,000 net to the Company) in the
Mississippi Salt Basin in prospective areas around 20 salt domes, which the
Company believes is one of the largest strategic lease positions around the
salt domes in the basin. Due to innovations over the last few years, seismic
technology now enables geoscientists to generate improved imaging of the
flanks of salt structures and associated faulting, the primary hydrocarbon
trapping mechanisms in this area. The Company commenced its exploration
activities in Mississippi in 1993 and has participated in the drilling of 21
wells, 11 of which (52%) have been completed, establishing commercial
production around six salt domes. As of September 30, 1997, these wells had
produced 29.2 Bcfe gross (18.8 Bcfe net to the Company) and had established
estimated gross proved reserves of 78.4 Bcfe (36.1 Bcfe net to the Company).
In the Mississippi Salt Basin, the Company has used technologically advanced
seismic data processing methods to reinterpret existing regional 2-D seismic
data and analyze and interpret newly acquired 2-D seismic data. In addition,
the Company is currently participating in multiple 3-D seismic acquisition
projects in this region, which the Company believes will improve the
identification of potential hydrocarbon traps.
The Company's prospects in the Gulf Coast region of Texas and Louisiana also
lend themselves to 3-D seismic-aided exploration due to the geological
complexity prevalent in this region. Since 1994, the Company has participated
in approximately 300 square miles of 3-D seismic surveys and the drilling of
50 gross wells within the boundaries of these surveys. Twenty-seven of the
wells drilled have been completed as commercially productive. As of September
30, 1997, these wells had established estimated proved reserves of 79.6 Bcfe
(9.3 Bcfe net to the Company). The Company expects to participate in nine
gross wells (2.3 net to the Company) in this area in 1998, all of which are
supported by 3-D seismic data.
The Company's current operations in Michigan were developed after 1988, when
the Company sold all of its producing properties to Conoco, Inc. In the
Michigan Basin, the Company has an interest in over 300 producing wells within
a leasehold position that is the result of prior successful exploration
efforts in the Niagaran Reef Trend. Miller's current Michigan Basin production
is predominantly long-lived, lower volume Antrim Shale production, as compared
to the higher volume wells of the onshore Gulf Coast and Mississippi Salt
Basin. The Company is continuing to pursue additional exploration
opportunities in the Michigan Basin.
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<PAGE>
The Combined Assets consist of MOC, interests in oil and gas properties from
the Affiliated Entities and interests in such properties owned by certain
business partners and investors, including AHC, Hughes and SASI. The Company
and the owners of the Combined Assets have entered into separate agreements
that provide for the issuance of an estimated 6,930,000 shares of Common Stock
and the payment of an estimated $50.5 million in cash to certain participants
in the Combination Transaction in exchange for the Combined Assets. Certain
owners of the Combined Assets. will receive a number of shares of Common Stock
proportionate to the value of their ownership interests in the Combined Assets
calculated on the basis of the initial public offering price of the Common
Stock.
BUSINESS STRATEGY
The key elements of the Company's business strategy are as follows:
Focused Exploration Effort. The Company seeks to concentrate its
exploration activities in areas which provide the potential for the
discovery of significant reserves where a strategic leasehold position can
be acquired, where there has been limited application of advanced seismic
data interpretation techniques and where there are multiple potential pay
zones. The Company has assembled an extensive database in the Mississippi
Salt Basin, including basin-wide geologic studies, production data and well
data. The Company has an identified inventory of 22 prospects in the
Mississippi Salt Basin and seven prospects in the Texas and Louisiana Gulf
Coast region. The majority of these prospects have multiple drilling
locations. The Company's prospects in the Mississippi Salt Basin have been
delineated primarily with computer-enhanced analysis of 2-D seismic data,
while the Gulf Coast prospects have been identified primarily with 3-D
seismic data. The Company plans to conduct selected 3-D seismic surveys in
the Mississippi Salt Basin with respect to certain of these prospects to
further delineate drilling objectives.
Exploit Prospect Inventory. The Company has an identified inventory of
over 32 exploration and development prospects, all of which it plans to
drill in 1998 and 1999. Based on the initial success of its salt dome
drilling, the Company intends to retain larger working interests in its
undrilled prospects. This Offering will enable the Company to retain a
larger working interest in its prospects, conduct an aggressive seismic
data acquisition program and accelerate its drilling activities.
Extensive Data Base. The Company has a significant library of technical
and proprietary data. The Company's current inventory includes over 1,900
miles of 2-D seismic data and 309 square miles of 3-D seismic data in the
three regions in which it currently operates. The acquisition of 3-D
seismic data on a large scale is often not cost effective. The Company
attempts to target the acquisition and application of 3-D seismic data by
applying its technical expertise to reprocessed 2-D seismic data. The
Company believes this approach allows it to more effectively target 3-D
seismic surveys, reducing overall finding and development costs.
Utilize Advanced Technology. The Company utilizes advanced technology in
analyzing, interpreting and visualizing seismic data to assemble and
develop its inventory of exploration and development drilling prospects.
This strategy has been pursued in proven geological regions that have
historically produced significant amounts of hydrocarbons. The Company has
focused its 3-D seismic efforts on areas that exhibit geological complexity
where 2-D seismic has been effective in increasing drilling success rates,
but has limitations in locating subtle trapping structures.
Experienced Technical Team. The Company has assembled a technical team
with an average of over 18 years of experience, the majority of which has
been in the Company's areas of current operations. This multi-disciplined
technical team has extensive experience with the acquisition, processing
and interpretation of both 2-D and 3-D seismic data and the use of 3-D work
stations to evaluate and develop drilling prospects.
35
<PAGE>
CORE EXPLORATION AND DEVELOPMENT REGIONS
Mississippi Salt Basin
The Company believes that the Mississippi Salt Basin, which extends from
Southwestern Alabama across central Mississippi into Northeastern Louisiana,
has a significant number of under-developed salt domes. This basin has
produced substantial amounts of oil and natural gas and continues to be a very
active exploration region. Oil and natural gas discovered in the Mississippi
Salt Basin have been produced from reservoirs with various stratigraphic and
structural characteristics, and may be found in multiple horizons from
approximately 3,500 feet to 19,000 feet in depth. Oil and natural gas reserves
around salt domes have been encountered in the Eutaw, Lower Tuscaloosa,
Washita-Fredericksburg, Paluxy, Rodessa, Sligo, Hosston and Cotton Valley
formations, all of which are normally pressured. The Company owns leasehold
interests in 63,000 gross acres (41,000 net to the Company) covering 20 known
salt domes. The Company's working interest partner in this basin is Key
Production Company, Inc. ("Key").
Salt domes are geologic structures formed by the upward thrusting of
subsurface salt accumulations towards the surface. Such structures are
generally found in groups in geologic basins that provided the necessary
conditions for their formation. Salt domes are typically subsurface structures
that are easily identified with seismic surveys, but are occasionally visible
as surface expressions. The salt domes of the Mississippi Salt Basin were
formed in the Cretaceous period. These salt domes range in diameter from 1/2
mile to 3 miles and vertically extend from 2,000 feet in depth to near 20,000
feet. The development of the salt domes resulted in the formation of oil and
gas traps. Salt domes similar to those of the Mississippi Salt Basin are a
significant cause for major oil and gas accumulations in the Texas and
Louisiana Gulf Coast, Northern Louisiana, East Texas, and the offshore Gulf of
Mexico.
Until the late 1980s, geological models of the salt domes in the Mississippi
Salt Basin generally assumed that either the extreme and rapid growth of the
salt structure breeched the seals of any formations trapping hydrocarbons
against the domes or that the growth of the salt domes occurred after
hydrocarbons had migrated through the region, in either case, leaving the
formations around the salt domes nonproductive. From 1987 to 1991, Oryx Energy
Corporation ("Oryx") drilled three successful wells on Mississippi salt dome
structures, proving that the flanks of these salt domes were productive. AHC
purchased Oryx's entire interest in this area, and in 1993 MOC acquired a
12.5% working interest from AHC in approximately 35,000 gross acres
surrounding seven domes. As part of the Combination Transaction, the Company
will acquire all of AHC's reserves and leasehold interests in these
properties, comprising an approximate 87.5% working interest in the aggregate.
The Company selectively reprocessed an extensive 2-D seismic database that had
been acquired over these salt dome prospects, and further acquired new 2-D
seismic to improve the selection of the drillsites along the flanks of the
salt domes. Based on the positive results of the first several prospects
drilled, MOC acquired leasehold interests around 13 additional salt domes that
it considered to be prospective.
The Company believes that the key to exploiting salt dome prospects
effectively is the accurate delineation of a salt dome's flanks, with the
recognition of fault patterns and the location of fault blocks with large
reserve potential. While the reinterpreted 2-D seismic data provided the
Company's explorationists with better imaging of a salt dome's subsurface
structures, it proved to have limitations in defining the exact locations of
the flanks of a salt dome. The Company believes that all of its unsuccessful
salt dome wells have either encountered the interior of the salt dome or were
too far off structure to encounter the anticipated hydrocarbon trap. The
Company believes that 3-D seismic imaging will allow it to more effectively
image such traps and better define the size and location of its drilling
targets. The Company believes that 3-D seismic imaging will improve its
ability to resolve and interpret such complex geologic structures based on its
effective use on similar onshore salt domes in Texas and Louisiana, as well as
offshore salt domes in the Gulf of Mexico. The Company intends to utilize its
reprocessed 2-D seismic database to more effectively manage its 3-D seismic
acquisition program. The Company currently is acquiring or making arrangements
to acquire approximately 120 square miles of proprietary 3-D seismic data over
and around three of its salt dome prospects. Additionally, the Company is
participating in a 270 square mile multi-party 3-D seismic survey, a portion
of which will cover prospective acreage around four of the Company's salt dome
prospects.
36
<PAGE>
The Company owns an interest in eight producing wells in the Mississippi
Salt Basin that had aggregate average production in September 1997 of 29.1
MMcfe/d gross (15.4 MMcfe/d net to the Company) at depths ranging from 14,500
to 17,300 feet. Since the Company began its exploration activity in
Mississippi in 1993, it has participated in 21 wells drilled around six salt
dome structures, 11 of which (52%) established commercial production. The
Company has 28 wells (14.7 net wells) budgeted in 1998 for the Mississippi
Salt Basin with a capital expenditure budget of $41.0 million, including $4.8
million for the acquisition of 3-D seismic around seven salt domes in 1998.
This will provide 3-D seismic data on 11 of 28 Mississippi Salt Basin wells
budgeted for 1998. As of September 30, 1997, the Company's Mississippi Salt
Basin wells had produced 29.2 Bcfe gross (18.8 Bcfe net to the Company) and
had established 78.4 Bcfe gross (36.1 Bcfe net to the Company) of estimated
proved reserves.
In the Combination Transaction, the Company is acquiring AHC's entire
leasehold interest in six producing wells and 19,634 net undeveloped acres
located around eleven salt domes. Prior to the Combination Transaction, MOC
owned a 12.5% working interest in these properties. As of September 30, 1997,
these properties had 50.6 Bcfe gross (32.8 Bcfe net to the Company) of
estimated proved reserves and had an aggregate present value of future net
revenues of $60.1 million. The aggregate purchase price of $50.5 million is
payable as follows: $47.5 million (subject to certain adjustments) at closing
which is expected to occur concurrently with the consummation of this
Offering, and $0.5 million, $1.0 million and $1.5 million, respectively, on
the first, second and third anniversaries of the closing. AHC has agreed to
retain liability for certain events and conditions affecting the AHC
properties that arose before the effective date of September 1, 1997, and the
Company has agreed to assume liabilities relating to certain events and
conditions affecting these properties after September 1, 1997.
The following is a description of the Company's two most significant
projects to date in the Mississippi Salt Basin:
Midway Dome. The Company currently has two wells producing around the Midway
Dome structure in Lamar County, Mississippi, the Allar #1 which was drilled in
July 1995 and the Patterson #1 drilled in February 1996. In September 1997,
these two wells produced an average of approximately 17.4 MMcfe/d gross on a
combined basis, (11.1 MMcfe/d net to the Company). As of September 30, 1997,
these wells had produced a combined total 9.8 Bcfe gross (6.3 Bcfe net to the
Company). The wells have estimated proved reserves of 35.6 Bcfe gross (22.6
Bcfe net to the Company). These wells produce from the Hosston formation at a
depth of approximately 15,500 feet and encountered net pay columns of 48 feet
on the Allar #1 and 40 feet on the Patterson #1. In 1998, the Company's
capital expenditure budget net to its interest is approximately $6.7 million
for the drilling of three additional wells in this prospect area.
Dry Creek Dome. The Company currently has two producing wells on the Dry
Creek Dome structure in Covington County, Mississippi, the Mineral Management
#2 which was drilled in December 1994 and the McRaney #1 which was drilled in
February 1995. In September 1997, these two wells produced at an average
combined rate of 5.7 MMcfe/d gross (3.7 MMcfe/d net to the Company), and have
jointly produced a total of 15.5 Bcfe gross (10.1 Bcfe net to the Company). As
of September 30, 1997, these wells had estimated proved reserves of 9.0 Bcfe
gross (5.8 Bcfe net to the Company). The Mineral Management #2 and the McRaney
#1 both produce from the Hosston formation at a depth of approximately 14,500
to 15,000 feet, and encountered net pay columns of 148 feet and 244 feet,
respectively. The Company has budgeted the drilling of two additional Hosston
wells on Dry Creek Dome in 1998, and the Company's capital expenditure budget
net to its interest is approximately $4.4 million for these wells.
Onshore Gulf Coast of Texas and Louisiana
The Company believes that the onshore Gulf Coast area of Texas and Louisiana
is a high potential, multi-pay region that lends itself to 3-D seismic-
supported exploration due to its substantial structural and stratigraphic
complexity. The Company's current and anticipated 1998 drilling activities are
expected to be as an active working interest partner in select projects
proposed by Dan A. Hughes Company (the "Hughes Company") in Zapata, Webb,
Duval, Karnes and McMullen Counties, Texas and Cameron and Terrebonne
Parishes, Louisiana, under an exploration agreement to which the Company has
been a party since 1994. Before accepting a proposed prospect under the
agreement, the Company undertakes a thorough evaluation, considering
geographic location,
37
<PAGE>
scale, geological and geophysical model, anticipated drilling prospects, number
of pay zones, trend potential, expected project economics and access to market.
The Company incorporates its digital database, including geophysical,
geological and production data, and the opinions of regional geologists and
geophysicists in its participation decisions. Except within areas of mutual
interest ("AMI") formed around prospects offered under the exploration
agreement with the Hughes Company, the Company is free to acquire leases,
develop its own prospects and explore in the onshore Gulf Coast region. The
Company currently expects to continue its joint venture relationships in the
future, in addition to generating its own prospects in the onshore Gulf Coast
region.
Texas
The Company owns working interests in 30 wells in Texas that had aggregate
average production in September 1997 of 40.0 MMcfe/d gross (2.4 MMcfe/d net)
from depths ranging from 3,500 to 14,500 feet. Since the Company began its
exploration in Texas in 1987, it has participated in 263 square miles of 3-D
seismic surveys and 68 wells, of which 31 (46%) established commercial
production. The Company has six gross wells (1.5 net wells) budgeted for 1998
in the Texas Gulf Coast region with a 1998 capital expenditure budget of
approximately $0.9 million. The wells that the Company intends to drill in 1998
are 3-D seismic-supported and these exploratory tests would be drilled on
geologic structures where the Company has established commercial production in
its previous drilling attempts. As of September 30, 1997, the Company's Texas
wells had produced 5.8 Bcfe net to the Company and had established estimated
proved reserves of 5.7 Bcfe.
The following is a description of three of the Company's significant current
projects in the onshore Gulf Coast area of Texas:
Dilworth Dome Project. The Dilworth Dome is a salt dome located in McMullen
County that was evaluated with 3-D seismic in 1996. Three oil sands were
developed in the Upper Wilcox (Carizzo Sand) at a depth of approximately 3,500
feet, with estimated total reserves of 613 MBbl and remaining reserves of 456
MBbl. The Company has a 25% working interest in this project. The Company has
participated in the drilling of 17 gross wells in this field, of which 11 wells
have established commercial production. As of September 30, 1997, total
production from the 11 producing wells was 430 Bbl/d gross (75 Bbl/d net to the
Company). The Company is a participant in approximately 4,100 acres under lease
and/or farm-in, of which the Company owns approximately 1,025 net acres. It is
anticipated that two Carrizo test wells will be drilled in this project in the
fourth quarter of 1997.
Mirando Hondo Project. The Mirando Hondo project located in Zapata and Webb
Counties involves exploring the Berry R. Cox and South Aviators Fields, which
recently have been surveyed with 3-D seismic. The Company intends to
participate in the drilling of 2.0 gross wells (0.7 net) in 1998 that have
multiple objectives with the primary objective of the Upper Hinnant Sand. These
wells are expected to be drilled to depths of approximately 13,000 feet. The
Company recently participated in two Upper Hinnant Sand exploratory discoveries
which were developed as a result of 3-D seismic data. The Company is a
participant in approximately 5,450 gross acres under lease and/or farm-in, and
has a 1998 capital expenditure budget of approximately $1.0 million for further
development in this area.
McCaskill Project. The McCaskill Project is a Middle Wilcox objective located
in Karnes County. The Company participated in the drilling of the B.P. Green #2
in 1993 and as of September 30, 1997, this well had produced 7.1 Bcfe (0.5 Bcfe
net to the Company) from the Middle Wilcox Green Sand located at a depth of
approximately 12,500 feet. After the drilling of the B.P. Green #2, a 3-D
seismic study was undertaken in the area that resulted in the discovery of the
Goehring Wilbern #1. This well commenced production in October 1996, and as of
September 30, 1997 had produced 1.0 Bcfe (0.1 Bcfe net to the Company). In
1998, the Company anticipates drilling one exploratory well in this project
based on 3-D seismic with an estimated cost of $0.2 million.
Louisiana
The Company owns working interests in producing properties in Cameron and
Terrebonne Parish, Louisiana that had aggregate average production for
September 1997 of 17.1 MMcfe/d gross (2.4 MMcfe/d net to the Company). Since
the Company began its exploration in Louisiana in 1995, it has participated in
21 square miles of 3-D seismic surveys and 14 gross wells, seven of which were
completed as commercially productive, four of
38
<PAGE>
which are currently producing. The Company has five wells (1.0 net to the
Company) budgeted for 1997 and three wells for 1998 in the Louisiana area,
with a 1998 capital expenditure budget of approximately $0.8 million. The
exploratory wells that are budgeted for drilling in 1998 are 3-D seismic-
supported and are in the immediate area where the Company previously had
established commercial production. As of September 30, 1997, the Company's
Louisiana wells had produced 4.1 Bcfe (0.3 Bcfe net to the Company) and had
established estimated gross proved reserves of 24.8 Bcfe (3.5 Bcfe net to the
Company).
The Company's most significant exploration project in the Louisiana region
to date is the Lapeyrouse Prospect in Terrebonne Parish, approximately three
miles southwest of the Bay Baptiste Field, which has produced over 120 Bcfe.
The Company participated in the LL&E #157 discovery well in 1994 in this area.
This well was drilled in transition zone waters of approximately 20 feet in
depth and commenced production in June 1996. As of September 30, 1997, the
well had produced a total of 2.4 Bcfe (0.5 Bcfe net to the Company). The
Company and its joint venture partners have approximately 1,500 gross acres
under lease in this project, and have 3-D seismic over the prospective area.
This 3-D seismic has confirmed three separate prospective locations. These
wells are expected to be drilled in depths ranging between 11,500 and 15,500
feet. The LL&E production platform was designed with facilities in place to
accommodate the future drilling. The Company has five wells budgeted for
drilling in 1997 and three wells budgeted for 1998 in this project, with a
total 1997-1998 capital expenditure budget of approximately $2.1 million.
Michigan Basin
The Company has been involved in oil and natural gas exploration and
production activities in the Michigan Basin since 1925. These activities
include operations in the Northern and Western Niagaran Reef Trend (Silurian)
and the Antrim Shale (Devonian) in Otsego, Montmorency and Manistee Counties.
Beginning in 1988 the Company participated in the drilling of over 600 Antrim
Shale wells. The Company currently has an interest in over 300 Antrim Shale
wells, some of which have been assigned to third parties for the purpose of
monitizing the Section 29 tax credits available for production from the
assigned interests. See "--Joint Venture Exploration, Participation and Farm-
out Agreements." The balance of the wells was sold to fund the Company's
exploration program. The majority of these Antrim Shale wells are in Otsego
County and produce from depths of approximately 1,300 to 1,600 feet.
Production from the Antrim Shale, including the Section 29 tax credits
available from such production, continue to be the Company's primary producing
property base in this region. As a result of its shallow production in the
Antrim Shale, the Company has an interest in approximately 14,000 acres held
by production in Otsego County, with its deep rights being of interest,
primarily for the Niagaran Reef Trend located at depths of approximately 6,500
feet. The Company has an active drilling program anticipated for the Antrim
Shale in Montmorency County and Manistee County at depths of approximately
1,400 feet. The Company has approximately 8,700 gross acres leased in Manistee
County, which is expected to provide sufficient acreage for development of a
field if the drilling is deemed successful. The Company has a 100% working
interest in this project. The Company also has an active lease program in an
area of the Niagaran Reef Trend that the Company believes has been under-
explored. In addition, the Company is pursuing other on-going leasing efforts
in areas in the Michigan Basin. In 1998, the Company plans to evaluate a
4,500-acre lease block in Hillsdale County, with a 10 square mile 3-D seismic
survey. The project is located approximately 12 miles southwest of the Albion-
Scipio Field which has produced over 125 MBbl of oil and 200 Bcfe of natural
gas. These wells are expected to be drilled to a depth of approximately 3,500
feet to test the primary objective of the Trenton formation (Ordovician).
JOINT VENTURE EXPLORATION, PARTICIPATION AND FARM-OUT AGREEMENTS
The Company is a party to the joint venture exploration, participation,
farm-out and other agreements described below.
Mississippi Salt Basin Agreements
Since March 1993, the Company has entered into a series of joint venture
exploration agreements and farm-out agreements with AHC, Liberty Energy
Corporation, Bonray, Inc. and Key. These agreements govern the
39
<PAGE>
rights and obligations of the Company and the other working-interest owners
with respect to lease acquisition, seismic surveys, drilling and development
of specified geographic AMIs over and around 20 salt domes in Southern
Mississippi within the Mississippi Salt Basin. Pursuant to these agreements,
the Company has acquired and will have the right to acquire a portion of the
working interest in leases owned or acquired by the parties within the AMIs.
The agreements expire between March 1, 1998 and January 1, 2000, except with
respect to AMIs where a joint operating agreement has been executed, in which
case the term extends as long as any lease within that AMI remains in effect.
Under the joint venture agreement between MOC and Key, if either party
elects not to participate on a proposed 3-D seismic program proposed by the
other party, the non-participating party will farm-out its non-producing
leasehold interest in that dome, retaining an option to participate after
payout of the seismic expenses and the drilling and completion expenses of the
exploratory well, for a proportionally reduced 25% working interest in the
exploratory well. The non-participating party will retain 25% of its original
leasehold interest outside the initial well but within the identified dome
area. Without mutual agreement, no more than two 3-D seismic surveys will be
committed to and/or conducted concurrently. Either party may propose an
Initial Exploratory Well, defined as the first exploratory well proposed and
drilled on each dome after a 3-D program has been conducted. A party electing
not to participate in an Initial Exploratory Well is obligated to assign to
the proposing party its interest in leases within that dome area to the depth
drilled by the Initial Exploratory Well. For wells drilled without conducting
a 3-D survey, a non-participating party is subject to a 400% non-consent
penalty. MOC is generally the operator for leasehold acquisition and
production operations, and Key is generally the operator for 3-D seismic,
drilling and completion operations.
Onshore Gulf Coast Agreements
MOC and the Hughes Company executed a Participation Agreement dated January
1, 1994. Pursuant to the provisions of the Participation Agreement, as
extended for the years 1995 and 1996, MOC had the option to participate with
Hughes for a 25% of 8/8ths working interest in prospects offered by the Hughes
Company during calendar years 1994, 1995 and 1996. Pursuant to participation
letters, MOC elected to participate in a number of prospects including the
Destino Prospect in Duval County, Texas, the Dilworth Prospect in McMullen
County, Texas, the South Aviators Prospect in Zapata County, Texas, the
McCaskill Prospect in Karnes County, Texas, the Mirando Hondo Prospect in Webb
County, Texas, the Lapeyrouse Prospect in Terrebonne Parish, Louisiana and the
Northwest Kings Bayou Prospect in Cameron Parish, Louisiana. Each of the
participation letters identifies the prospect, county and area covered
therein. The Participation Agreement requires MOC to pay its proportionate
share of actual costs, an overhead fee, prospect bonuses and certain back-in
working interests at prospect payout and program payout. The Participation
Agreement provides a form of Joint Operating Agreement which is to be executed
as to each prospect. The Joint Operating Agreement generally provides that the
Hughes Company will be the operator, that any party may propose to drill a
well or other operation subject to limitations with respect to concurrent
wells and that parties electing not to participate in a proposed operation are
subject to a 400% non-consent penalty. MOC is entitled to the benefit of any
special marketing arrangements or price structures that the Hughes Company is
able to negotiate in regard to the sale but may elect to market its share of
oil or natural gas in kind.
Michigan Basin Agreements
MOC entered into a Purchase and Sale Agreement dated as of January 1, 1995
with Miller Shale Limited Partnership for the purpose of monetizing the
Section 29 tax credits available from most of its Antrim gas wells in
Michigan, and a Purchase and Sale Agreement dated as of November 1, 1996 with
Miller Shale Limited Partnership for the purpose of selling part of the
reversionary interest retained by MOC under the prior Purchase and Sale
Agreement. Miller Shale Limited Partnership is a Michigan limited partnership
owned 1% by the general partner, Miller Shale S.V., L.L.C., an affiliate of
MOC, and 99% by the limited partner, Far Gas Acquisitions Corporation, an
unrelated party. As a result, pursuant to the terms of the two Purchase and
Sale
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<PAGE>
Agreements, MOC has assigned its interest in the wells, leases, equipment and
other property to Miller Shale Limited Partnership, reserving three separate
production payments, an additional contingent payment and a reversionary
interest. The first and second production payments generally entitle MOC to
receive 97% of the net cash flow from the assigned properties until a
specified dollar amount or specified volume is achieved from production
attributable to the assigned interests. As of September 30, 1997, the
estimated remaining production volume was 9.0 Bcfe and the estimated remaining
dollar amount was $4.8 million. The third production payment and the
additional contingent payment generally entitle MOC to receive 96% of the net
cash flow from additional specified volumes of production attributable to the
assigned interests. The reversionary interest entitles MOC to a reassignment
of 90% of the interests after a larger specified volume of natural gas has
been produced from the assigned interests. Miller Shale Limited Partnership
also is obligated to make quarterly payments to MOC equivalent to a percentage
of the tax credits available under Code Section 29 with respect to natural gas
produced and sold from the interests assigned. MOC also has an option to
repurchase the assigned interests for fair market value after December 31,
2002, the expiration date of the Section 29 tax credits.
OIL AND NATURAL GAS RESERVES
The Company's estimated total proved reserves of oil and natural gas as of
December 31, 1996, and September 30, 1997, and the present values of estimated
future net revenues attributable to these reserves as of those dates were as
follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
1996 1997
------------------ -------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT DATA)
<S> <C> <C>
Net Proved Reserves:
Crude oil (MBbl)...................... 1,353.9 1,174.0
Natural gas (MMcf).................... 56,394.2 46,378.3
Natural gas equivalent (MMcfe)........ 64,517.6 53,422.3
Net Proved Developed Reserves:
Crude oil (MBbl)...................... 534.6 421.7
Natural gas (MMcf).................... 37,489.6 29,563.7
Natural gas equivalent (MMcfe)........ 40,697.5 32,093.9
Estimated future net revenues before
income taxes(1)........................ $160,820 $118,313
Present value of estimated future net
revenues before income taxes(2)........ $117,144 $ 87,484
</TABLE>
- --------
(1) The average prices for crude oil were $25.23 per Bbl at December 31, 1996
and $21.74 per Bbl at September 30, 1997. The average prices for natural
gas were $3.27 per Mcf at December 31, 1996 and $3.12 per Mcf at September
30, 1997. Includes income from Section 29 tax credits of $808 and $706, as
of December 31, 1996 and September 30, 1997, respectively.
(2) The present value of estimated future net revenues attributable to the
Company's reserves was prepared using constant prices as of the
calculation date, discounted at 10% per annum on a pre-tax basis.
The reserve estimates reflected above were prepared by the Independent
Engineers and are part of their Reserve Reports on the Company's natural gas
and oil properties. Summaries of such Reserve Reports as of September 30, 1997
are attached as Appendices A and B to this Prospectus.
In accordance with applicable requirements of the SEC, estimates of the
Company's proved reserves and future net revenues are made using sales prices
estimated to be in effect as of the date of such reserve estimates and are
held constant throughout the life of the properties (except to the extent a
contract specifically provides for escalation). Estimated quantities of proved
reserves and future net revenues therefrom are affected by natural gas and oil
prices, which have fluctuated widely in recent years. There are numerous
uncertainties inherent in estimating oil and natural gas reserves and their
estimated values, including many factors beyond the control of the Company.
The reserve data set forth in this Prospectus represents only estimates.
Reservoir engineering is a
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<PAGE>
subjective process of estimating underground accumulations of natural gas and
oil that cannot be measured in an exact manner. The accuracy of any reserve
estimate is a function of the quality of available data and of engineering and
geologic interpretation and judgment. As a result, estimates of different
engineers, including those used by the Company, may vary. In addition,
estimates of reserves are subject to revision based upon actual production,
results of future development and exploration activities, prevailing natural
gas and oil prices, operating costs and other factors. The revisions may be
material. Accordingly, reserve estimates often are different from the
quantities of natural gas and oil that ultimately are recovered and are highly
dependent upon the accuracy of the assumptions upon which they are based. The
Company's estimated proved reserves have not been filed with or included in
reports to any federal agency. See "Risk Factors--Uncertainty of Estimates of
Oil and Natural Gas Reserves."
Estimates with respect to proved reserves that may be developed and produced
in the future often are based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Estimates
based on these methods generally are less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variations in the estimated reserves and the
variations may be substantial.
DRILLING ACTIVITIES
The Company drilled, or participated in the drilling of, the following
number of wells during the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------ SEPTEMBER 30,
1994 1995 1996 1997
--------- ---------- --------- --------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- ---- ----- --- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory Wells(1):
Natural gas................. 10 2.9 8 5.3 4 0.8 2 0.6
Oil......................... 1 0.1 4 1.7 -- -- 2 0.3
Non-productive.............. 14 4.0 15 5.2 13 6.4 5 1.2
--- --- --- ---- --- --- ------ ------
Total..................... 25 7.0 27 12.2 17 7.2 9 2.1
=== === === ==== === === ====== ======
Development Wells(2):
Natural gas................. 2 0.3 8 2.6 -- -- 11 2.3
Oil......................... -- -- 3 1.7 6 1.2 3 0.6
Non-productive.............. -- -- 1 0.5 2 0.4 4 0.8
--- --- --- ---- --- --- ------ ------
Total..................... 2 0.3 12 4.8 8 1.6 18 3.7
=== === === ==== === === ====== ======
</TABLE>
- --------
(1) Includes 2.0 gross (2.0 net to the Company) Antrim Shale wells for the
year ended December 31, 1995.
(2) Includes 2.0 gross (0.3 net to the Company) Antrim Shale wells for the
year ended December 31, 1994 and 5.0 gross (0.7 net to the Company) Antrim
Shale wells for the year ended December 31, 1995 and 9.0 gross (1.3 net to
the Company) Antrim Shale wells for the nine months ended September 30,
1997.
At September 30, 1997, the Company was in the process of drilling and/or
completing one gross (0.3 net to the Company) well that is not reflected in
the table.
PRODUCTIVE WELLS AND ACREAGE
Productive Wells
The following table sets forth the Company's ownership interest as of
September 30, 1997 in productive oil and natural gas wells in the areas
indicated:
42
<PAGE>
<TABLE>
<CAPTION>
OIL NATURAL GAS TOTAL
--------- ------------- ----------
REGION GROSS NET GROSS NET GROSS NET
------ ----- --- ----- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C>
Mississippi Salt Basin.................... -- -- 7 6.1 7 6.1
Onshore Gulf Coast
Texas................................... 15 2.7 10 1.5 25 4.2
Louisiana............................... -- -- 4 0.6 4 0.6
Michigan Basin/Other...................... 1 0.1 308 34.3 309 34.4
--- --- ----- ------ --- ----
Total................................. 16 2.8 329 42.5 345 45.3
=== === ===== ====== === ====
</TABLE>
Productive wells consist of producing wells and wells capable of production,
including wells waiting on pipeline connection. Wells that are completed in
more than one producing horizon are counted as one well. Of the gross wells
reported above, none had multiple completions.
Acreage
Undeveloped acreage includes leased acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and natural gas, regardless of whether such acreage contains
proved reserves. A gross acre is an acre in which an interest is owned. A net
acre is deemed to exist when the sum of fractional ownership interests in
gross acres equals one. The number of net acres is the sum of the fractional
interests owned in gross acres expressed as whole numbers and fractions
thereof. The following table sets forth the approximate developed and
undeveloped acreage in which the Company held a leasehold mineral or other
interest at September 30, 1997:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
------------ -------------- --------------
REGION GROSS NET GROSS NET GROSS NET
------ ------ ----- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Mississippi Salt Basin............ 4,800 4,505 57,796 36,625 62,596 41,130
Onshore Gulf Coast
Texas........................... 9,308 1,286 22,961 6,461 32,269 7,747
Louisiana....................... 687 162 18,658 2,427 19,345 2,589
Michigan Basin/Other.............. 20,414 1,318 39,374 20,760 59,789 22,078
------ ----- ------- ------ ------- ------
Total......................... 35,209 7,271 138,789 66,273 173,999 73,544
====== ===== ======= ====== ======= ======
</TABLE>
In addition, the Company has pre-seismic lease options to acquire an
additional 741 acres, substantially all of which expire within one year.
All of the leases for the undeveloped acreage summarized in the preceding
table will expire at the end of their respective primary terms unless the
existing leases are renewed or production has been obtained from the acreage
subject to the lease prior to that date, in which event the lease will remain
in effect until the cessation of production. To this end, the Company's
forecasted drilling schedule takes into consideration not only the
attractiveness of individual prospects, but the lease expirations as well. The
following table sets forth the minimum remaining terms of leases for the gross
and net undeveloped acreage at September 30, 1997:
<TABLE>
<CAPTION>
ACRES EXPIRING
--------------
GROSS NET
------- ------
<S> <C> <C>
Twelve Months Ending:
December 31, 1997........................................ 3,241 405
December 31, 1998........................................ 44,819 14,405
December 31, 1999........................................ 23,186 12,420
Thereafter............................................... 102,753 46,314
------- ------
Total.................................................. 173,999 73,544
======= ======
</TABLE>
43
<PAGE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth the historical combined information and pro
forma information of the Company with respect to production volumes, average
prices received and average production costs for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- --------------------------
PRO PRO
FORMA FORMA
1994 1995 1996 1996 1996 1997 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Production:
Crude oil and
condensate (MBbls)... 39.5 31.6 46.5 243.0 35.0 33.4 151.8
Natural gas (MMcf).... 1,228.4 1,324.0 2,030.0 8,668.0 1,555.3 1,713.0 6,295.4
Natural gas equivalent
(MMcfe).............. 1,465.7 1,513.3 2,309.1 10,126.8 1,765.0 1,913.3 7,206.2
Average sales prices:
Crude oil and
condensate ($ per
Bbl)................. $ 17.00 $ 22.68 $ 23.66 $ 20.76 $ 24.44 $ 21.26 $ 18.33
Natural gas ($ per
Mcf)................. 1.97 2.08 2.77 2.39 2.39 2.53 2.47
Natural gas equivalent
($ per Mcfe)......... 2.11 2.29 2.91 2.54 2.59 2.63 2.55
Average Costs ($ per
Mcfe):
Lease operating
expenses and
production taxes..... $ 0.55 $ 0.51 $ 0.49 $ 0.22 $ 0.43 $ 0.48 $ 0.21
Depreciation,
depletion and
amortization......... 0.69 1.10 1.14 0.90 1.03 1.06 1.08
General and adminis-
trative.............. 0.82 0.84 0.69 0.23 0.57 0.70 0.28
</TABLE>
COSTS INCURRED IN OIL AND NATURAL GAS ACTIVITIES
The following table sets forth the historical combined information and pro
forma information with respect to costs incurred by the Company in oil and
natural gas acquisition, exploration and development activities for the
periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- --------------
PRO PRO
FORMA FORMA
1994 1995 1996(1) 1996(1) 1997 1997
------ ------ ------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Costs incurred for the year:
Property acquisition............ $ 872 $1,123 $2,264 $ 8,335 $3,033 $ 7,550
Exploration..................... 2,003 2,130 2,340 8,078 609 4,460
Development..................... 1,653 3,070 1,580 4,698 1,524 5,110
------ ------ ------ ------- ------ -------
Total......................... $4,528 $6,323 $6,184 $21,111 $5,166 $17,120
====== ====== ====== ======= ====== =======
</TABLE>
- --------
(1) Includes $757 for the acquisition of proved producing properties.
Costs incurred represent amounts incurred by the Company for exploration,
property acquisition and development activities. Periodically, the Company
will receive proceeds from participants subsequent to project initiation for
an assignment of an interest in the project. These payments are represented by
proceeds from participants.
OIL AND NATURAL GAS MARKETING AND MAJOR CUSTOMERS
Most of the Company's oil and natural gas production is sold by its
operators under price sensitive or spot market contracts. The revenues
generated by the Company's operations are highly dependent upon the prices of
and demand for oil and natural gas. The price received by the Company for its
oil and natural gas production depends on numerous factors beyond the
Company's control, including seasonality, the condition of the United States
economy, foreign imports, political conditions in other oil-producing and
natural gas-producing countries,
44
<PAGE>
the actions of the Organization of Petroleum Exporting Countries and domestic
government regulation, legislation and policies. Decreases in the prices of
oil and natural gas could have an adverse effect on the carrying value of the
Company's proved reserves and the Company's revenues, profitability and cash
flow. Although the Company currently is not experiencing any significant
involuntary curtailment of its oil or natural gas production, market, economic
and regulatory factors in the future may materially affect the Company's
ability to sell its oil or natural gas production. See "Risk Factors--
Volatility of Oil and Natural Gas Prices" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." For the year ended
December 31, 1996, sales to the Company's three largest customers on an
historical combined basis were approximately 51%, 24% and 19%, respectively,
of the Company's oil and natural gas revenues. Due to the availability of
other markets and pipeline connections, the Company does not believe that the
loss of any single oil or natural gas customer would have a material adverse
effect on the Company's results of operations.
COMPETITION
The oil and gas industry is highly competitive in all of its phases. The
Company encounters competition from other oil and natural gas companies in all
areas of its operations, including the acquisition of seismic options and
lease options on properties. The Company's competitors include major
integrated oil and natural gas companies and numerous independent oil and
natural gas companies, individuals and drilling and income programs. Many of
the Company's competitors are large, well established companies with
substantially larger operating staffs and greater capital resources than the
Company's and which, in many instances, have been engaged in the exploration
and production business for a much longer time than the Company. Such
companies may be able to pay more for seismic and lease options on oil and
natural gas properties and exploratory prospects and to define, evaluate, bid
for and purchase a greater number of properties and prospects than the
Company's financial or human resources permit. The Company's ability to
acquire additional properties and to discover reserves in the future will be
dependent upon its ability to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment. See "Risk
Factors--Competition" and "--Substantial Capital Requirements."
OPERATING HAZARDS AND UNINSURED RISKS
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil
and natural gas may involve unprofitable efforts, not only from dry wells, but
from wells that are productive but do not produce sufficient net revenues to
return a profit after drilling, operating and other costs. The cost of
drilling, completing and operating wells is often uncertain. The Company's
drilling operations may be curtailed, delayed or canceled as a result of
numerous factors, many of which are beyond the Company's control, including
title problems, weather conditions, compliance with governmental requirements
and shortages or delays in the delivery of equipment and services. The
Company's future drilling activities may not be successful and, if
unsuccessful, such failure may have a material adverse effect on the Company's
future results of operations and financial condition. See "Risk Factors--
Dependence on Exploratory Drilling Activities" and "--Shortages of Rigs,
Equipment, Supplies and Personnel."
In addition, the Company's use of 3-D seismic technology requires greater
pre-drilling expenditures than traditional drilling strategies. Although the
Company believes that its use of 3-D seismic technology will increase the
probability of success, unsuccessful wells are likely to occur. There can be
no assurance that the Company's drilling program will be successful or that
unsuccessful drilling efforts will not have a material adverse effect on the
Company.
The Company's operations are subject to hazards and risks inherent in
drilling for and producing and transporting oil and natural gas, such as
fires, natural disasters, explosions, encountering formations with abnormal
pressures, blowouts, cratering, pipeline ruptures and spills, any of which can
result in the loss of hydrocarbons, environmental pollution, personal injury
claims and other damage to properties of the Company and others. The Company
maintains insurance against some but not all of the risks described above. In
particular,
45
<PAGE>
the insurance maintained by the Company does not cover claims relating to
failure of title to oil and natural gas leases, trespass during 2-D and 3-D
survey acquisition or surface change attributable to seismic operations, and,
except in limited circumstances, losses due to business interruption. In
certain circumstances in which insurance is available the Company may not
purchase it. The occurrence of an event that is not covered, or not fully
covered, by insurance could have a material adverse effect on the Company's
financial condition and results of operations. See "Risk Factors--Operating
Hazards and Uninsured Risks."
EMPLOYEES
Upon consummation of the Combination Transaction, the Company will have 23
full-time employees, including three geologists and one engineer. As drilling
production activities increase, the Company intends to hire additional
technical, operational and administrative personnel as appropriate. None of
the Company's employees are represented by any labor union. The Company
believes its relations with its employees are good. To optimize prospect
generation and development, the Company uses the services of independent
consultants and contractors to perform various professional services,
particularly in the area of seismic data mapping, acquisition leases and lease
options, construction, design, well-site surveillance, permitting and
environmental assessment. Field and on-site productions operation services,
such as pumping, maintenance, dispatching, inspection and testing, generally
are provided by independent contractors. The Company believes that this use of
third-party service providers enhances its ability to contain general and
administrative expenses.
FACILITIES
The Company currently leases approximately 8,000 square feet of office space
for its principal offices in Traverse City, Michigan. The Company also leases
approximately 3,300 square feet of office space in Houston, Texas,
approximately 1,300 square feet of office space in Jackson, Mississippi, and
approximately 2,000 square feet of office space and 3,600 square feet of
warehouse space in Columbia, Mississippi.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and gas
industry. As is customary in the industry in the case of undeveloped
properties, little investigation of record title is made at the time of
acquisition (other than a preliminary review of local records).
Investigations, including a title opinion of legal counsel, generally are made
before commencement of drilling operations. The Company's properties are
subject to customary royalty, overriding royalty, carried, net profits,
working and other similar interests, liens incident to operating agreements,
liens for current taxes and other burdens. In addition, the Credit Facility is
secured by certain oil and natural gas interests and other properties of MOC.
GOVERNMENTAL REGULATION
The Company's oil and natural gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by
federal and state agencies. Failure to comply with such rules and regulations
can result in substantial penalties. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business and affects its
profitability. Although the Company believes it is in substantial compliance
with all applicable laws and regulations, the Company is unable to predict the
future cost or impact of complying with such laws because those laws and
regulations frequently are amended or reinterpreted.
State Regulation
The states in which the Company operates require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and natural
gas. These states also have statutes or regulations addressing conservation
matters, including provisions for the unitization or pooling of oil and
natural gas properties, the establishment of maximum rates of production from
wells and the regulation of spacing, plugging and abandonment of such wells.
In addition, state laws generally
46
<PAGE>
prohibit the venting or flaring of natural gas, regulate the disposal of
fluids used in connection with operations and impose certain requirements
regarding the ratability of production.
Federal Regulation
The Company's sales of natural gas are affected by the availability, terms
and cost of transportation. The price and terms for access to pipeline
transportation are subject to extensive regulation. The Federal Energy
Regulatory Commission ("FERC") regulates the transportation and sale for
resale of natural gas in interstate commerce pursuant to the Natural Gas Act
of 1938 and the Natural Gas Policy Act of 1978. In the past, the federal
government has regulated the prices at which oil and natural gas can be sold.
While sales by producers of natural gas, and all sales of oil and natural gas
liquids currently can be made at uncontrolled market prices, Congress could
reenact price controls in the future.
In recent years, FERC has undertaken various initiatives to increase
competition within the natural gas industry. As a result of initiatives like
FERC Order 636, issued in April 1992 and its progeny, the interstate natural
gas transportation and marketing system has been substantially restructured to
remove various barriers and practices that historically limited non-pipeline
natural gas sellers, including producers, from effectively competing with
interstate pipelines for sales to local distribution companies and large
industrial and commercial customers. The most significant provisions of Order
No. 636 require that interstate pipelines provide transportation separate or
"unbundled" from their sales service, and require that pipelines provide firm
and interruptible transportation service on an open access basis that is equal
for all natural gas supplies. In many instances, the result of Order No. 636
and related initiatives has been to substantially reduce or eliminate the
interstate pipelines' traditional role as wholesalers of natural gas in favor
of providing only storage and transportation services. Although Order No. 636
has largely been upheld on appeal, several appeals remain pending in related
restructuring proceedings. It is difficult to predict when these remaining
appeals will be completed or their impact on the Company.
FERC has announced several important transportation-related policy
statements and proposed rule changes, including a statement of policy and a
request for comments concerning alternatives to its traditional cost-of-
service ratemaking methodology to establish the rates interstate pipelines may
charge for their services. A number of pipelines have obtained FERC
authorization to charge negotiated rates as one such alternative. In February
1997, FERC announced a broad inquiry into issues facing the natural gas
industry to assist FERC in establishing regulatory goals and priorities in the
post-Order No. 636 environment. Similarly, the Texas Railroad Commission
recently has changed its regulations governing transportation and gathering
services provided by intrastate pipelines and gatherers to prohibit undue
discrimination in favor of affiliates. While the changes being considered by
these federal and state regulators would affect the Company only indirectly,
they are intended to further enhance competition in natural gas markets.
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, FERC, state commissions and the courts.
The natural gas industry historically has been very heavily regulated;
therefore, there is no assurance that the less stringent regulatory approach
recently pursued by FERC and Congress will continue.
The price the Company receives from the sale of oil and natural gas liquids
is affected by the cost of transporting products to markets. Effective January
1, 1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such
rates to inflation, subject to certain conditions and limitations. The Company
is not able to predict with certainty the effect, if any, of these regulations
on its operations. However, the regulations may increase transportation costs
or reduce well head prices for oil and natural gas liquids. See "Risk
Factors--Governmental Regulation and Environmental Matters" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Environmental and Other Regulatory Matters."
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to extensive and
changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling,
emission,
47
<PAGE>
transportation and discharge of materials into the environment, and relating
to safety and health. The recent trend in environmental legislation and
regulation generally is toward stricter standards, and this trend likely will
continue. These laws and regulations may require the acquisition of a permit
or other authorization before construction or drilling commences; restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities;
limit or prohibit construction, drilling and other activities on certain lands
lying within wilderness, wetlands and other protected areas; require remedial
measures to mitigate pollution from former operations such as plugging
abandoned wells; and impose substantial liabilities for pollution resulting
from the Company's operations. The permits required for various of the
Company's operations are subject to revocation, modification and renewal by
issuing authorities. Governmental authorities have the power to enforce
compliance with their regulations, and violators are subject to civil and
criminal penalties or injunction. Management believes that the Company is in
substantial compliance with current applicable environmental laws and
regulations, and that the Company has no material commitments for capital
expenditures to comply with existing environmental requirements. Nevertheless,
changes in existing environmental laws and regulations or in interpretations
thereof could have a significant impact on the Company, as well as the oil and
gas industry in general and thus the Company is unable to predict the ultimate
cost and effects of such continued compliance in the future.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") and comparable state statutes impose strict, joint and several
liability on certain classes of persons who are considered to have contributed
to the release of a "hazardous substance" into the environment. These persons
include the owner or operator of a disposal site or sites where a release
occurred and companies that disposed or arranged for the disposal of the
hazardous substances released at the site. Under CERCLA such persons or
companies may be liable for the costs of cleaning up the hazardous substances
that have been released into the environment and for damages to natural
resources, and it is not uncommon for the neighboring land owners and other
third parties to file claims for personal injury, property damage and recovery
of response costs allegedly caused by the hazardous substances released into
the environment. The Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes govern the disposal of "solid waste" and "hazardous
waste" and authorize imposition of substantial civil and criminal penalties
for noncompliance. Although CERCLA currently excludes petroleum from its
definition of "hazardous substance," state laws affecting the Company's
operations impose clean-up liability relating to petroleum and petroleum-
related products. In addition, although RCRA classifies certain oil field
wastes as "non-hazardous," such exploration and production wastes could be
reclassified as hazardous wastes thereby making such wastes subject to more
stringent handling and disposal requirements.
The Company has acquired leasehold interests in numerous properties that for
many years have produced natural gas and oil. Although the Company believes
that the previous owners of these interests used operating and disposal
practices that were standard in the industry at the time, hydrocarbons or
other wastes may have been disposed of or released on or under the properties.
In addition, most of the Company's properties are operated by third parties
whose treatment and disposal or release of hydrocarbons or other wastes is not
under the Company's control. These properties and the wastes disposed thereon
may be subject to CERCLA, RCRA and analogous state laws. Notwithstanding the
Company's lack of control over properties operated by others, the failure of
the operator to comply with applicable environmental regulations may, in
certain circumstances, adversely impact the Company.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as the Company, to prepare and implement
spill prevention, control countermeasure and response plans relating to the
possible discharge of oil into surface waters. The Oil Pollution Act of 1990,
as amended ("OPA"), contains numerous requirements relating to the prevention
of and response to oil spills into waters of the United States. For onshore
facilities that may affect waters of the United States, OPA requires an
operator to demonstrate $10.0 million in financial responsibility, and for
offshore facilities the financial responsibility requirement is at least $35.0
million. Regulations currently are being developed under federal and state
laws concerning oil pollution prevention and other matters that may impose
additional regulatory burdens on the Company. In addition, the federal Clean
Water Act and analogous state laws require permits to be obtained to authorize
48
<PAGE>
discharge into surface waters or to construct facilities in wetland areas.
With respect to certain of its operations, the Company is required to maintain
such permits or meet general permit requirements. The Environmental Protection
Agency ("EPA") has adopted regulations concerning discharges of storm water
runoff. This program requires covered facilities to obtain individual permits,
participate in a group or seek coverage under an EPA general permit. The
Company believes that it will be able to obtain, or be included under, such
permits, where necessary, and to make minor modifications to existing
facilities and operations that would not have a material effect on the
Company. See "Risk Factors--Governmental Regulation and Environmental Matters"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Environmental and Other Regulatory Matters."
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors,
nominees for director, executive officers and certain key employees of the
Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
DIRECTORS--TERM EXPIRING IN
1998
C.E. "Gene" Miller.......... 67 Chairman of the Board and Director
Frank M. Burke, Jr.......... 57 Director*
DIRECTORS--TERM EXPIRING IN
1999
Kelly E. Miller............. 42 President, Chief Executive Officer
and Director
Dan A. Hughes, Jr........... 39 Director*
DIRECTORS--TERM EXPIRING IN
2000
William J. Baumgartner...... 42 Vice President-Finance, Chief Financial
Officer, Secretary and Director
William Casey McManemin..... 36 Director*
EXECUTIVE OFFICERS WHO ARE
NOT DIRECTORS
Douglas A. Bell............. 38 Vice President-Production
Lew P. Murray............... 41 Vice President-Exploration
CERTAIN KEY EMPLOYEES
Charles A. Morrison......... 48 Exploration Manager
Curtiss R. Yeiter........... 41 Treasurer
</TABLE>
- --------
*These individuals are expected to be appointed as directors of the Company
on or before consummation of the Offering.
49
<PAGE>
Set forth below is a description of the backgrounds of the directors,
nominees for director, executive officers and certain key employees of the
Company.
C.E. "GENE" MILLER has served as the Chairman of the Board and a director of
the Company since its founding in 1997 and of MOC since MOC's founding in
1986. Since 1982, Mr. Miller has served as President, Secretary and Treasurer
of Eagle Investments, Inc. ("Eagle"), an oil and gas investment company
affiliated with the Company, and since 1990 has served as President, Secretary
and Treasurer of Eagle International, Inc., ("Eagle International"), an
international oil and gas development company also affiliated with the
Company. Mr. Miller has been involved in the domestic oil and gas industry for
over 35 years, primarily in Michigan and Texas. Mr. Miller is a past president
of the Michigan Oil and Gas Association and also served as a director of that
organization. Mr. Miller previously served as a vice president and director
and on the Executive Committee of the Independent Petroleum Association of
America, and as a director of the National Stripper Well Association. In
addition, Mr. Miller has been involved in a number of civic activities and is
a member of several boards of directors.
KELLY E. MILLER has served as the President and Chief Executive Officer of
the Company since its founding in 1997 and as President and a director of MOC
since MOC's founding in 1986. Since 1982, Mr. Miller has served as a Vice
President of Eagle. Mr. Miller serves on the Board of Governors of the
Independent Petroleum Association of America and the Boards of Directors of
the Michigan Oil and Gas Association and Republic Bancorp, Inc. (NASDAQ). Mr.
Miller has been involved in the oil and gas industry since 1978, focusing his
efforts in the areas of strategic planning, prospect development, acquisition
and administration. Mr. Miller received a B.S. degree with a major in
Petroleum Geology and a B.B.A. degree with a major in Petroleum Land
Management from the University of Oklahoma. Mr. Miller also completed the
Owner/President Management Program (OPM) through the Harvard University
Graduate School of Business. Mr. Miller is a Certified Petroleum Geologist
with the American Association of Petroleum Geologists, an international
geological organization.
WILLIAM J. BAUMGARTNER has served as the Vice President-Finance, Chief
Financial Officer and Secretary and as a director of the Company since its
founding in 1997 and as Vice President--Finance and Chief Financial Officer of
MOC since 1991. Mr. Baumgartner previously held the positions of Controller,
Treasurer and Secretary of MOC. Mr. Baumgartner was employed in public
accounting and with various independent oil and gas exploration entities prior
to joining MOC in 1985. Mr. Baumgartner graduated from Ferris State College in
1979 with a B.S. degree in Accounting. Mr. Baumgartner is a member of the
Michigan Oil and Gas Association as well as various committees of the
Independent Petroleum Association of America.
FRANK M. BURKE, JR. has served as Chairman, Chief Executive Officer and
Managing General Partner of Burke, Mayborn Company, Ltd., a private investment
and consulting company located in Dallas, Texas, since 1984. Burke, Mayborn
Company Ltd. provides strategic and financial consulting to selected
individuals and entities. From 1960 to 1984, Mr. Burke was associated with
Peat, Marwick, Mitchell & Co., an international firm of certified public
accountants. Mr. Burke was elected partner in 1968, and served as a member of
the Peat Marwick Board of Directors from 1978 to 1984. During the same period
Mr. Burke served as Chairman, Energy Group for Peat Marwick International and
National Director of Energy and Natural Resources for Peat Marwick in the
United States. Mr. Burke presently serves as a director of Kaneb Services,
Inc. (NYSE), Kaneb Pipe Line Partners, L.P. (NYSE) and CMS NOMECO Oil & Gas
Co., a wholly owned subsidiary of CMS Energy Corporation (NYSE). In addition,
Mr. Burke serves on the board of directors of numerous private corporations.
DAN A. HUGHES JR. is a partner in Dan A. Hughes Company, an oil and gas
exploration company located in Beeville, Texas, and has served as Exploration
Manager of Dan A. Hughes Company since 1985. Mr. Hughes currently serves on
the Regional Board of Trustees for the Independent Petroleum Association of
America and as Vice President for the Lower Gulf Coast District for Texas Mid-
Continent Oil & Gas Association. Mr. Hughes has been active in the oil and gas
industry for more than 20 years, overseeing exploration and development
activities in Texas and Louisiana, as well as internationally. Mr. Hughes
received a B.B.A. degree from Texas
50
<PAGE>
A&M University and attended Texas A&M University for post graduate studies in
geology. Mr. Hughes is involved in a number of civic activities and is a
member of several boards of directors and executive committees.
WILLIAM CASEY MCMANEMIN is a Registered Professional Engineer in the state
of Texas and received a B.S. degree in Petroleum Engineering from Texas A&M
University. Since 1988 Mr. McManemin has served as an officer, shareholder and
director of the Manager of SASI Minerals Company and the General Partner of
Spinnaker Royalty Company, L.P. In addition, since September 1993, Mr.
McManemin has served as an officer, shareholder and director of the General
Partner of Republic Royalty Company. All of such companies are engaged in oil
and gas property acquisition, exploration and development. In addition to
membership in numerous oil and gas industry associations, Mr. McManemin is a
member of the Executive Committee of the Board of Trustees of The St. Mark's
School of Texas.
LEW P. MURRAY has served as Vice President-Exploration of the Company since
its founding in 1997 and of MOC since January 1996. Mr. Murray holds a B.S.
degree with a major in Geology from the University of Oklahoma. Mr. Murray is
a Certified Petroleum Geologist with the American Association of Petroleum
Geologists. Mr. Murray served as Exploration Manager of MOC from 1992 until
1996 and has been involved in the exploration program of MOC and its
affiliates since 1981. Mr. Murray's primary responsibilities involve the
review and recommendations of all domestic and international prospects.
DOUGLAS A. BELL has served as Vice President-Production of the Company since
its founding and of MOC since January 1996. In addition, Mr. Bell has served
in various production-related capacities with affiliates of MOC since his
graduation from Lake Superior State University in 1981. Mr. Bell's primary
responsibilities include production operations, well completions and reserve
analysis.
CURTISS R. YEITER, C.P.A. has served as Treasurer of the Company since its
founding in 1997 and Controller of MOC since 1993. Mr. Yeiter graduated from
Northern Michigan University with a B.S. degree in Accounting and became a
Certified Public Accountant in 1982. Mr. Yeiter was employed by the public
accounting firm of BDO Seidman, LLP from 1979 until 1989 at which time he
began employment with MOC. Mr. Yeiter's primary responsibilities involve
financial reporting, management of accounting and information systems and
personnel management.
CHARLES A. MORRISON will serve as Exploration Manager of the Company
effective December 1, 1997. Since 1981 Mr. Morrison has been the President of
Charles A. Morrison Consulting Geophysicist, Inc. located in Jackson,
Mississippi. Mr. Morrison graduated from Louisiana Tech University with a B.S.
degree in Geology. Prior to forming Charles A. Morrison Consulting
Geophysicist, Inc., Mr. Morrison served in a geophysical capacity with several
companies, including Western Geophysical Company, Cities Service Oil Company
and T.H. Clements and Associates. Mr. Morrison has been responsible for the
acquisition of over 30 3-D seismic surveys in the Upper Gulf Coast region and
has been involved in the interpretation of over 60 3-D seismic surveys in a
consulting capacity.
The Company's Board of Directors is divided into three classes with
staggered terms of office, initially ending as set forth above. Thereafter,
the term for each class will expire on the date of the third annual
stockholders' meeting for the election of directors following the most recent
election of directors for that class. Each director holds office until the
next annual meeting of stockholders for the election of directors of his class
and until his successor has been duly elected and qualified. Executive
officers generally are elected annually by the Board of Directors to serve,
subject to the discretion of the Board of Directors, until their successors
are elected or appointed. The Board of Directors of the Company has adopted a
policy providing that directors are expected to maintain, directly or
indirectly, a minimum investment in the Company of approximately $100,000.
There is no family relationship between any of the directors or between any
director and any executive officer of the Company except that C.E. Miller and
Kelly Miller are father and son and Douglas Bell is the son-in-law of C.E.
Miller and the brother-in-law of Kelly Miller. For information regarding
certain business
51
<PAGE>
relationships between the Company and certain of its directors and executive
officers, see "Certain Transactions."
COMMITTEES OF THE BOARD
On or before consummation of the Offering, the Company will establish two
standing committees of the Board of Directors: an Audit Committee and a
Compensation Committee. Messrs. Burke (Chairman), Hughes and McManemin are
expected to be members of the Audit Committee and Messrs. McManemin
(Chairman), Burke, Hughes, C.E. Miller and Kelly Miller are expected to be
members of the Compensation Committee. The Audit Committee will review the
functions of the Company's management and independent accountants pertaining
to the Company's financial statements and perform such other related duties
and functions as are deemed appropriate by the Audit Committee or the Board of
Directors. The Compensation Committee will recommend to the Board of Directors
the base salaries, bonuses and other incentive compensation for the Company's
officers. The Board of Directors will designate the Compensation Committee as
the administrator of the Company's Stock Option and Restricted Stock Plan of
1997 (the "1997 Stock Option Plan"). See "--Executive Compensation--Employee
Benefit Plans--Stock Option and Restricted Stock Plan of 1997."
DIRECTOR COMPENSATION
Directors who are also employees of the Company are not separately
compensated for serving on the Board of Directors. Directors who are not
employees of the Company and who attend a minimum number of three meetings per
year receive an annual retainer fee of $15,000 per year. In addition, each
non-employee director receives $1,000 for attendance at each meeting of the
Board of Directors and $500 for attendance at each committee meeting. The
Chairman of each committee receives $750 for each committee meeting attended.
All fees will be paid in shares of Common Stock. In addition, the Company
reimburses directors for the reasonable expenses incurred in connection with
attending meetings of the Board of Directors and its committees. Each non-
employee director is granted an option on the date of each annual meeting of
stockholders to purchase 3,000 shares of Common Stock. The per share exercise
price of options granted to directors is 100% of the fair market value of the
Common Stock on the date each option is granted. In addition, each non-
employee director nominee is expected to receive upon the consummation of the
Combination Transaction and this Offering an option to purchase 10,000 shares
of Common Stock at an exercise price per share equal to the initial public
offering price. See "--Executive Compensation--Employee Benefit Plans--Stock
Option and Restricted Stock Plan of 1997."
INDEMNIFICATION AND LIMITATION OF LIABILITY
Delaware Law Provisions
Limitation of Liability. The Delaware Law permits corporations to adopt a
provision in their certificate of incorporation eliminating, with certain
exceptions, the personal liability of a director of the corporation or its
stockholders for monetary damages for breach of the director's fiduciary duty
as a director. Under the Delaware Law, a corporation may not eliminate or
limit director monetary liability for (i) breaches of the director's duty of
loyalty to the corporation or its stockholders, (ii) acts or omissions not in
good faith or involving intentional misconduct or a knowing violation of law,
(iii) unlawful dividends, stock repurchases or redemptions or (iv)
transactions from which the director received an improper personal benefit.
This provision also may not limit a director's liability for violation of, or
otherwise relieve a corporation or its directors from the necessity of
complying with, federal or state securities laws, or affect the availability
of non-monetary remedies such as injunctive relief or rescission. The
Company's Certificate of Incorporation contains a provision stating that
directors shall not be personally liable for monetary damage to the Company,
except to the extent required by the Delaware Law.
Indemnification. The Delaware Law generally permits indemnification of
expenses incurred in the defense or settlement of a derivative or third-party
action, provided that there is a determination that indemnification is proper
because the person seeking indemnification acted in good faith and in a manner
the person reasonably
52
<PAGE>
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal proceeding, the person had no reasonable cause to
believe the person's conduct was unlawful. Such indemnification shall be made
(i) by a majority vote of disinterested directors (even though less than a
quorum), (ii) by a committee of such directors designated by majority vote of
such directors (even though less than a quorum), (iii) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion or (iv) by the stockholders. Without court approval, however,
no indemnification may be made in respect of any derivative action in which
the person is adjudged liable to the corporation. The Delaware Law requires
indemnification of expenses when the individual being indemnified successfully
has defended the action on the merits or otherwise.
The Company's Certificate of Incorporation provides that directors and
executive officers shall be indemnified to the full extent provided by the
Delaware Law. As to other persons who are not directors or executive officers
but who may be eligible for indemnification, the Certificate of Incorporation
provides that such persons may be indemnified by the Company to the extent
permissible by law and the Certificate of Incorporation and as authorized by
the Board of Directors. The Certificate of Incorporation further provides that
the Company may purchase and maintain insurance to cover such expenses,
whether or not indemnification would be permissible under the Delaware Law in
the absence of insurance.
The Company intends to enter into an Indemnity Agreement with each of its
directors and executive officers which provides rights additional to those
available under the Delaware Law or the Company's Certificate of Incorporation
or Bylaws. The Indemnity Agreements provide for indemnification in certain
instances against liability and expenses incurred in connection with
proceedings brought by or in the right of the Company or by third parties by
reason of a person acting as an officer or director of the Company or of
another company at the request of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On or before the consummation of the Offering, the Company will establish a
Compensation Committee. Messrs. McManemin, Burke, Hughes, C.E. Miller and
Kelly Miller are expected to be members of the Compensation Committee. C.E.
Miller, the Chairman and a director of the Company, serves as President,
Secretary, Treasurer and a director of, and Kelly E. Miller, the President,
Chief Executive Officer and a director of the Company, serves as Vice
President of, Eagle and Eagle International. No executive officer of the
Company serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of
the Company's Board of Directors or Compensation Committee. In the past,
matters with respect to the compensation of executive officers of MOC were
determined by its Board of Directors, which currently includes Kelly E.
Miller, David A. Miller, Daniel R. Miller and Sue Ellen Bell.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation paid by MOC to its President and each of the other persons who
will serve as executive officers of the Company whose annual salary and bonus
exceeded $100,000 for the fiscal year ended December 31, 1996. The table does
not include perquisites and other personal benefits for individuals for whom
the aggregate amount of such compensation does not exceed the lesser of (i)
$50,000 or (ii) 10% of individual combined salary and bonus for the named
executive officers in that year.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(A) COMPENSATION
--------------------------- -------- ------- --------------- ------------
<S> <C> <C> <C> <C>
Kelly E. Miller, President and
Chief Executive Officer......... $200,000 -- $9,500 $86,550(b)
William J. Baumgartner, Vice
President-Finance, Chief
Financial Officer and Secretary. $100,000 $30,000 $2,700 $ 618(c)
Lew P. Murray, Vice President-
Exploration..................... $ 80,000 $25,000 $7,800 $30,384(d)
</TABLE>
- --------
(a) Includes contributions made by MOC to its 401(k) Savings Plan on behalf of
the individuals listed.
(b) Includes $168 for travel accident insurance and $86,382 for royalty
program participation.
(c) Includes $421 for life insurance and $168 for travel accident insurance.
(d) Includes $391 for life insurance, $168 for travel accident insurance and
$29,825 for royalty program participation.
Employment Agreements
The Company intends to enter into employment agreements with each of Messrs.
Kelly Miller, Baumgartner, Murray and Morrison that provide for an annual base
salary in an amount not less than $250,000 for Mr. Miller, $150,000 for Mr.
Baumgartner, $140,000 for Mr. Murray and $150,000 for Mr. Morrison. Upon
consummation of this Offering, Messrs. Miller, Baumgartner, Murray and
Morrison also are expected to receive option grants, pursuant to the 1997
Stock Plan, to purchase 300,000, 100,000, 100,000 and 55,000 shares,
respectively, of Common Stock at the initial public offering price set forth
on the cover page of this Prospectus, which vest at the rate of one-fifth per
year beginning on the first anniversary of the grant date, and 60,000, 22,500,
15,000 and 10,000 shares of restricted Common Stock, respectively, which vest
at the rate of one-third per year beginning on the first anniversary of the
grant date. See "--Employee Benefit Plans--Stock Option and Restricted Stock
Plan of 1997."
Each of the employment agreements of Messrs. Miller, Baumgartner, Murray and
Morrison will have an initial three-year term. At the end of the first year of
such initial term and on every anniversary thereafter, the term of each
employment agreement automatically will be extended for one year, so that the
remaining term of the agreement will never be less than two years. Under each
agreement, the officer's employment may be terminated upon his death or
"disability," for "cause" or "good reason," (as those terms are defined in the
employment agreement) or for any reason upon 60 days' notice by the employee
or at will by the Company. Upon discretionary termination of employment by the
Company or termination by the employee for good reason, the employee's salary
and benefits will be continued for a period to be determined by the Company's
Board of Directors. Upon death, disability, discretionary termination by the
employee or termination for cause, no severance pay will be paid.
Each of the employment agreements provides that the employee is eligible to
participate in the Company's employee benefit plans, including the Company's
matching 401(k) Savings Plan and the 1997 Stock Option Plan.
Each of the employment agreements contain certain confidentiality
obligations. In addition, in each agreement the employee will agree not to
compete against the Company for a period of three months following termination
in any county or parish in which the Company is engaged (or is planning to
engage) in business in the oil and gas industry.
Certain Other Arrangements
The Company currently expects to pay a cash bonus upon the consummation of
the Offering to Messrs. Kelly Miller, Baumgartner, Murray, Yeiter, Bell and
C.W. Measley, Jr. of $100,000, $60,000, $40,000, $50,000, $10,000 and $15,000,
respectively.
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<PAGE>
Employee Benefit Plans
Stock Option and Restricted Stock Plan of 1997
General. On November 17, 1997, the Company adopted the 1997 Stock Option
Plan. The Board of Directors contemplates that the 1997 Stock Option Plan
primarily will be used to grant stock options. However, the 1997 Stock Option
Plan permits grants of restricted stock and tax benefit rights if determined
to be desirable to advance the purposes of the 1997 Stock Option Plan. In this
Prospectus, stock options, restricted stock and tax benefit rights are
referred to as "Incentive Awards."
Persons eligible to receive Incentive Awards under the 1997 Stock Option
Plan (with certain limitations discussed below) are directors, corporate
officers and other full-time employees of the Company and its subsidiaries.
A maximum of 1,200,000 shares of Common Stock (subject to certain
antidilution adjustments) will be available for Incentive Awards under the
1997 Stock Option Plan. The 1997 Stock Option Plan will not be qualified under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and will not be subject to the Employee Retirement Income Security Act of
1974.
The 1997 Stock Option Plan will be administered by the Compensation
Committee of the Board of Directors. The Board of Directors, in its
discretion, also may require that the members of the Compensation Committee be
"outside directors" as defined in the rules issued pursuant to Section 162(m)
of the Code. The Compensation Committee will make determinations, subject to
the terms of the 1997 Stock Option Plan, as to the persons to receive
Incentive Awards, the amount of Incentive Awards to be granted to each person,
the terms of each grant and all other determinations necessary or advisable
for administration of the 1997 Stock Option Plan. The Compensation Committee
may amend the terms of Incentive Awards granted under the 1997 Stock Option
Plan from time to time in a manner consistent with the 1997 Stock Option Plan;
provided, that no amendment may be effective relating to a particular
Incentive Award without the consent of the relevant participant, except to the
extent the amendment operates solely to the benefit of the participant.
The 1997 Stock Option Plan took effect on November 17, 1997 and, unless
earlier terminated by the Board of Directors, the 1997 Stock Option Plan will
terminate on November 16, 2007. No award may be made under the 1997 Stock
Option Plan after that date. The Company intends to register shares covered by
the 1997 Stock Option Plan under the Securities Act.
Stock Options. Under the 1997 Stock Option Plan, participants may be granted
stock options. Certain stock options that may be granted to employees under
the 1997 Stock Option Plan may qualify as incentive stock options as defined
in Section 422(b) of the Code ("Incentive Stock Options"). Other stock options
will not be Incentive Stock Options within the meaning of the Code. Stock
options may be granted at any time prior to the termination of the 1997 Stock
Option Plan according to its terms or by action of the Compensation Committee.
The Compensation Committee will set forth the terms of individual grants of
stock options in stock option agreements that will contain such terms and
conditions, consistent with the provisions of the 1997 Stock Option Plan, as
the Compensation Committee determines to be appropriate. These restrictions
may include vesting requirements to encourage long-term ownership of shares.
The Company will receive no consideration upon the award of options. The
option price per share will be determined by the Compensation Committee;
provided, that the option price for an Incentive Stock Option will be a price
equal to or higher than the "market value" of the Company's Common Stock on
the date of grant. Each non-employee director automatically is granted an
option on the date of each annual meeting of stockholders to purchase 3,000
shares of Common Stock at an exercise price per share equal to 100% of the
fair market value of the Common Stock on the date each option is granted.
Although the term of each stock option will be determined by the
Compensation Committee, no Incentive Stock Option will be exercisable under
the 1997 Stock Option Plan after 10 years from the date it was granted.
Options generally will be exercisable for limited periods of time if an option
holder is terminated from
55
<PAGE>
employment with the Company or its subsidiaries without cause, dies or becomes
disabled. If an option holder is terminated for cause, the option holder will
forfeit all rights to exercise any outstanding options. No individual
participant may be granted, during any calendar year, options to purchase more
than 10% of the total number of shares of Common Stock available under the
1997 Stock Option Plan. The Compensation Committee may permit an option holder
to exercise an option for an extended period, which may not extend beyond the
earlier of either three years from the date of termination or the date on
which the options expire by their terms, if (i) the option holder retires
after age 62 or upon any other age determined by the Compensation Committee
("Normal Retirement"), (ii) the option holder voluntarily terminates
employment with the written consent of the Compensation Committee after the
option holder has attained 55 years of age and completed 15 years of service
("Early Retirement") or (iii) the option holder voluntarily terminates
employment and the Compensation Committee determines the termination to be in
the best interests of the Company ("Consensual Severance").
Upon the consummation of the Offering, options under the 1997 Stock Option
Plan are expected to be granted to directors, officers and certain employees
of the Company to purchase a total of 711,500 shares of Common Stock at an
exercise price per share equal to the initial public offering price per share
set forth on the cover page of this Prospectus. These awards include options
to be granted to Messrs. Kelly Miller, Baumgartner, Murray, Bell and Morrison
to purchase 300,000, 100,000, 100,000, 40,000 and 55,000 shares of Common
Stock, respectively. All such options will have a term of 10 years and become
exercisable in cumulative annual increments of one-fifth of the total number
of shares of Common Stock subject thereto, beginning on the first anniversary
of the date of grant.
Upon the consummation of the Offering, each non-employee director of the
Company is expected to be granted an option to purchase 10,000 shares of
Common Stock. Any person who first becomes a non-employee director on or after
the consummation of the Offering automatically will be granted, on the date of
his or her election, an option to purchase 10,000 shares of Common Stock. In
addition, on the first business day following the date on which each annual
meeting of the Company's stockholders is held, each non-employee director then
serving automatically will be granted an option to purchase 3,000 shares of
Common Stock. Each option granted to non-employee directors will (i) have a
10-year term, (ii) have an exercise price per share equal to the fair market
value of a Common Stock share on the date of grant (the initial public
offering price in the case of options granted upon consummation of the
Offering) and (iii) become exercisable in cumulative annual increments of one-
fifth of the total number of shares of Common Stock subject thereto, beginning
on the first anniversary of the date of grant. If a non-employee director
resigns from the Board without the consent of a majority of the other
directors, such director's options may be exercised only to the extent they
were exercisable on the resignation date. The Board of Directors of the
Company has adopted a policy providing that directors are expected to
maintain, directly or indirectly, a minimum investment in the Company of
approximately $100,000.
Restricted Stock. In addition to the authority to grant stock options under
the 1997 Stock Option Plan, the 1997 Stock Option Plan will allow the
Compensation Committee to award restricted stock. Restricted stock will be
subject to such terms and conditions, consistent with the provisions of the
1997 Stock Option Plan, as the Compensation Committee from time to time may
determine. As with stock option grants, the Compensation Committee will set
forth the terms of individual awards of restricted stock in restricted stock
agreements. If a participant's employment or director or officer status is
terminated during the restricted period set by the Compensation Committee for
any reason other than death or disability, or any additional reason as may be
permitted by the Compensation Committee, then any shares of restricted stock
still subject to restrictions will be forfeited. Unless the Compensation
Committee provides otherwise in a restricted stock agreement, if a
participant's employment or director or officer status is terminated during
the restricted period by reason of death or disability, the restrictions on
the participant's shares will terminate automatically as of the date of death
or disability. The Compensation Committee, in its discretion, may provide that
all or part of the restrictions on the restricted stock will lapse upon
termination if the termination is by reason of Consensual Severance, Normal
Retirement or Early Retirement.
Without Compensation Committee authorization, a recipient of restricted
stock may not sell, exchange, transfer, pledge, assign or otherwise dispose of
such stock other than to the Company or by will or the laws of
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<PAGE>
descent or distribution. In addition, the Compensation Committee may impose
other restrictions on shares of restricted stock. However, holders of
restricted stock will enjoy all other rights of stockholders with respect to
restricted stock, including the right to vote restricted shares at
stockholders' meetings and the right to receive all dividends paid with respect
to restricted stock. Any securities received by a holder of restricted stock
pursuant to a stock dividend, stock split, recapitalization or reorganization
will be subject to the same terms, conditions and restrictions that are
applicable to the restricted stock for which such shares are received.
The Compensation Committee may provide that upon the occurrence of a "change
in control" of the Company (as defined in the 1997 Stock Option Plan), all
restricted stock or other Incentive Awards immediately would become fully
vested, nonforfeitable or otherwise no longer subject to any restriction. The
Compensation Committee may provide in the restricted stock agreement that the
number of shares that automatically will vest will be limited in value to the
extent that any payments that are deemed "parachute payments" as defined in
Section 280G9(b)(2) of the Code would not be subject to the excise tax imposed
by Section 4999 of the Code.
Upon the consummation of the Offering, Messrs. Kelly Miller, Baumgartner,
Murray and Morrison are expected to receive 60,000, 22,500, 15,000 and 10,000
shares of restricted Common Stock, respectively. As described above, an
individual's restricted stock agreement may provide that shares automatically
will vest upon a change in control and that such shares so vested will be
limited in value to the extent deemed parachute payments, as defined in the
Code. The restricted shares will vest at cumulative annual increments of one-
third of the total number of restricted shares of Common Stock subject thereto,
beginning on the first anniversary of the date of grant.
Tax Benefit Rights. The Compensation Committee also may grant tax benefit
rights under the 1997 Stock Option Plan. As with options and restricted stock,
the Compensation Committee will set forth the terms and conditions of tax
benefit rights granted and the participants to receive tax benefit rights in
written agreements. A tax benefit right entitles a participant to receive a
cash payment from the Company or its subsidiaries to encourage the participant
to exercise his or her options. The amount of the payment may not exceed the
amount calculated by multiplying the ordinary income, if any, realized by the
participant for federal tax purposes as a result of the exercise of a non-
Incentive Stock Option, or as a result of the disqualifying disposition of
shares acquired under an Incentive Stock Option, by the maximum federal income
tax rate (including any surtax or similar charge or assessment) for
corporations, plus the applicable state and local tax imposed on the exercise
of the option or disqualifying disposition. Tax benefit rights may be granted
only with respect to a stock option issued and outstanding or to be issued
under the 1997 Stock Option Plan or any prior plans. A participant may refuse
the issuance of a tax benefit right if the effect of the tax benefit right
would disqualify an Incentive Stock Option, change the date of the grant or
exercise price or impair the participant's existing stock options.
The following table summarizes the number of stock options and restricted
stock grants that are expected to be received by certain individuals under the
1997 Stock Option Plan upon the consummation of the Offering:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME OPTIONS(1)(2) RESTRICTED STOCK(3)
---- ------------- -------------------
<S> <C> <C>
Kelly E. Miller........................ 300,000 60,000
William J. Baumgartner................. 100,000 22,500
Lew P. Murray.......................... 100,000 15,000
Douglas A. Bell........................ 40,000 --
Directors and executive officers as a
group................................. 580,000 97,500
All employees as a group (other than
directors and executive officers)..... 131,500 10,000
</TABLE>
- --------
(1) The exercise price for options granted will be equal to the initial public
offering price.
(2) Options become exercisable in cumulative annual increments of one-fifth of
the total number of shares of Common Stock subject thereto, beginning on
the first anniversary of the date of grant.
(3) Shares of restricted stock will vest at cumulative annual increments of
one-third of the total number of shares subject thereto, beginning on the
first anniversary of the date of the grant.
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401(k) Savings Plan
In connection with the Combination Transaction, the Company will adopt MOC's
401(k) Savings Plan (the "Savings Plan"). The Savings Plan will be available
to all full-time employees after they have completed one year of service and
provides for discretionary matching contributions by the Company. The funds in
the Savings Plan are invested in equity (including the Company's stock) and
bond funds at the election of the participant. The Company-paid matching
contributions under the Savings Plan vest at a rate of 20% per year, beginning
after three years of service. The Savings Plan balances that have vested
generally are paid at termination or retirement.
Life Insurance Program
The Company provides, at its sole cost, life insurance in the face amount of
$150,000 on each of the lives of Messrs. Baumgartner and Murray, each of whom
is entitled to designate the beneficiary of the insurance proceeds. Upon their
death, $150,000 will be paid to the beneficiary designated by Messrs.
Baumgartner or Murray. During 1996, the Company paid $421 and $391 in premiums
for Messrs. Baumgartner's and Murray's respective policies.
Travel Insurance Program
The Company provides to each of Messrs. Kelly Miller, C.E. Miller,
Baumgartner, Murray and Bell, as well as to C.W. Measley, Jr., Land Manager of
the Company and MOC, travel accident insurance in the face amount of $100,000
at no cost. The insurance covers accidental death and disability in the course
of business or personal travel anywhere in the world. Each covered person is
entitled to designate the beneficiary of the insurance proceeds. During 1996,
the Company paid $168 in premiums for each of the policies.
Tax Credit and Royalty Participation Programs
Tax Credit Participation Program. On April 14, 1995, MOC established the
Credit Participation Program (the "Tax Program"), which is designed to reward,
recognize and retain key employees of MOC who participate in an instrumental
manner in the acquisition, sale and/or brokerage of production of oil and
natural gas from non-conventional sources that qualify for certain tax credits
under Section 29 of the Code. Under the terms of the Tax Program, participants
may be entitled to a percentage of any money received by the Tax Program,
including fees, reimbursements, down-payments and credits from brokerage
transactions. After payment of expenses, money is allocated among and
distributed to participants, pursuant to a participant's annual allocation
percentages, as determined by a majority vote of MOC's shareholders. If MOC
acquires properties for the purpose of the acquisition of Section 29 Credits
and MOC sells all or any part of the properties to which such credits apply,
the distribution of the proceeds for the Tax Program will be net of the total
invested capital plus a 10% return. If a participant's employment is
terminated, any distributions pursuant to the Tax Program will terminate and
the balance of current and future distributions to the participant will remain
in the Tax Program to be allocated and distributed by MOC in its discretion.
As of October 31, 1997, Mr. Baumgartner was the only participant in the Tax
Program. No payments were made under the Tax Program during 1996. On or before
consummation of the Offering, Mr. Baumgartner's right to participate in the
Tax Program will terminate.
Royalty Participation Program. On December 31, 1992, MOC established the
Employee Participation Program (the "Royalty Program"), which is designed to
provide an incentive for certain key employees to contribute to the success of
MOC. Under the terms of the Royalty Program, participants receive a percentage
of the overriding royalty working interest on all prospects generated by MOC.
A maximum of 1/32nd of 8/8ths overriding royalty working interest is reserved
for the Royalty Program on all prospects generated by MOC. If less than a
1/32nd of 8/8ths overriding royalty is reserved on such prospects,
participants are assigned a proportionate share of the overriding royalty that
MOC retains. A sliding scale overriding royalty is reserved against MOC's
retained net revenue interest, proportionately adjusted to MOC's working
interest in any specific property. The net revenue scale is used whether MOC
retains an overriding royalty on its prospects, acquires a
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<PAGE>
working interest from a third party or sells or distributes working interests
to an entity owned by a shareholder of MOC. The Royalty Program is limited to
those properties that MOC has an initial working interest in and the
overriding royalty is not applied to farm-outs by MOC, sale of lease
positions, purchase of reserves or recovery from lawsuits. If a participant's
employment is terminated, any overriding royalties previously assigned to the
participant will revert to MOC. In the event of a participant's death, any
royalties due to the participant will be allocated to a beneficiary or trust
designated by the participant.
As of October 31, 1997, the following individuals participated in the
Royalty Program: Mr. Kelly Miller had a 40% interest in the royalty interest;
Mr. Baumgartner had a 7.5% interest in the royalty interest; Mr. Murray had a
15% interest in the royalty interest; and Kevin J. Sullivan had a 3% interest
in the royalty interest. The stated percentages for Messrs. Miller and Murray
apply to prospects of MOC as of January 1, 1996. To the extent that a prospect
was included in the Royalty Program prior to January 1, 1996, with respect to
those properties, Messrs. Miller and Murray had a 32% and 8% interest in such
royalties, respectively, as of October 31, 1997. During 1996 Messrs. Miller,
Baumgartner and Murray received $86,382, $29 and $29,825, respectively, under
the Royalty Program. Mr. Sullivan did not receive any amount under the Royalty
Program in 1996. On or before the consummation of the Offering, the
participants' rights to participate in the Royalty Program will terminate.
CERTAIN TRANSACTIONS
THE COMBINATION TRANSACTION
The Company was recently formed as a Delaware corporation as part of the
combination of MOC with certain oil and natural gas interests owned by
companies beneficially owned by individual members of the Miller family and
certain oil and natural gas interests owned by certain business partners and
investors. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview," "Business and Properties--The Company,"
and the Combined Financial Statements.
REGISTRATION RIGHTS AGREEMENT
The Company has agreed that upon the consummation of the Combination
Transaction it will enter into a Registration Rights Agreement with each
person who will become a stockholder of the Company upon the consummation of
the Combination Transaction. The Registration Rights Agreement will provide
each such person certain piggyback registration rights with respect to their
shares of Common Stock. See "Description of Capital Stock--Registration Rights
of Certain Stockholders."
TRANSACTIONS WITH C.E. MILLER AND AFFILIATES
The following information describes agreements or transactions between MOC
and C.E. Miller, Chairman of MOC and Chairman and a director of the Company,
or his affiliates:
Service Agreement. MOC has entered into an Amended Service Agreement dated
January 1, 1997, amending a prior service agreement, with Eagle, an oil and
gas exploratory company beneficially owned by C.E. Miller. Under the amended
agreement, MOC provides Eagle with administrative, technical, consulting and
other services required by Eagle to operate its business in the ordinary
course. These services include, among others, developing prospects,
coordinating, permitting, drilling and facility construction and operation,
maintaining joint venture relationships and providing accounting, financial,
tax and budget-preparation services. As compensation for its services, Eagle
has agreed to pay MOC a fixed fee of $50,000 per calendar quarter, subject to
annual adjustments to be negotiated by MOC and Eagle, as well as additional
fees for specialized services as agreed by the parties. Eagle also agreed to
reimburse MOC its out-of-pocket expenses incurred in providing the services.
Either party may terminate the agreement at any time upon 60 days' prior
notice. Eagle paid MOC $100,000, $50,000 and $100,000 under the service
arrangement in 1996, 1995 and 1994, respectively, which the Company believes
is adequate compensation for the services provided to Eagle.
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<PAGE>
1997 Drilling Program. MOC has entered into a 1997 Drilling Program
Exploration and Participation Agreement dated August 15, 1997 with Eagle and
certain companies affiliated with MOC who are participating in the Combination
Transaction. Under the agreement, MOC and the affiliated companies contributed
certain drilling inventory consisting of 13 prospects that had a high
probability of drilling operations beginning by December 31, 1997, and that
had pipelines and facilities in place, acreage and rights of way acquired and
drilling units or unitization agreements secured. As consideration for the
contribution of the wells, Eagle agreed to pay 100% of the actual acreage,
seismic, dry hole cost and cost of completion and facilities through the tanks
of the working interest represented by MOC and the affiliated companies. Eagle
will receive a proportionate 50% of MOC's and the affiliated companies' rights
to all depths that exist within the drilling unit or unitized area. In
addition, MOC and the affiliated companies agreed to contribute the use of
their existing facilities used for any common operations, such as production
platforms, flowlines, pipelines or rights of way. MOC and the affiliated
companies have the option to contribute additional prospects to Eagle, but
only upon the consent of C.E. Miller. The parties will terminate the agreement
upon the consummation of the Offering.
Sale of Non-strategic Assets. In an effort to divest certain non-strategic
assets before consummation of the Combination Transaction and the Offering,
MOC has agreed to sell to Eagle working and royalty interests in certain oil
and gas properties located in Michigan and Texas, as well as MOC's interests
in all wells, facilities and equipment associated with such properties. The
properties are located in areas where the Company does not intend to focus its
exploration and production activities. No part of the Company's 1997 or 1998
capital budgets is allocated to the properties. The purchase price is
$507,411, payable in cash at closing and will be distributed to the
shareholders of MOC. The Company believes that the purchase price is
representative of the fair market value of the interests being sold.
Sale and Lease of Principal Offices. In July 1996 MOC sold its principal
offices located at 3104 Logan Valley Road, Traverse City, Michigan to C.E.
Miller and Betty Miller for $700,000. Mr. Miller is Chairman of the Board and
a director of the Company and MOC. The Company is leasing the premises from
Mr. and Mrs. Miller under a five-year lease expiring in August 2001. The lease
provides that the rent on the premises is $6,058 a month for the first full 11
months of the lease and thereafter increases by 4% each year. The Company
believes that the rental rate is representative of the fair market rental rate
for the premises and that the purchase price was representative of the fair
market value of the property at the time of sale.
Loan to MOC. Pursuant to a promissory note dated November 26, 1997, C.E.
Miller,as trustee of the C.E. Miller Trust, loaned $2.5 million to MOC, which
MOC used to fund a down payment made in connection with the Combination
Transaction. The loan is unsecured and subordinated to the Credit Facility.
Interest accrues on the loan at a variable rate equal to the New York
Consensus Prime Rate and is payable monthly, and principal is payable in full
on June 1, 1998. A portion of the proceeds from this Offering will be used to
repay the loan. See "Use of Proceeds."
SHAREHOLDER NOTES
In 1991, the shareholders of MOC loaned to MOC an aggregate of $7.6 million
pursuant to separate loan agreements. Principal on the indebtedness is payable
in full on October 18, 2006. Interest is payable within 30 days after the end
of each quarter at the New York City Prime Rate, which was 8.5% per annum as
of September 30, 1997, plus 2%. As of September 30, 1997, no principal
payments had been made on the indebtedness, and all interest due and payable
by that date had been paid. The shareholders of MOC have agreed to contribute
the indebtedness to the Company as capital in connection with the Combination
Transaction, resulting in cancellation of the indebtedness. Such cancellation
is not expected to result in income to the Company for federal income tax
purposes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and "--Liquidity and Capital Resources."
TAX CREDIT AND ROYALTY PARTICIPATION PROGRAMS
The Company has established the Tax Program and the Royalty Program under
which certain key employees are entitled to receive a stated percentage of tax
credits received by the Tax Program and/or royalties
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<PAGE>
paid on certain prospects generated by the Company. The participants' rights
to participate in the Tax Program and the Royalty Program will be terminated
upon consummation of the Offering. See "Management--Executive Compensation--
Tax Credit and Royalty Participation Programs."
CONSULTING AGREEMENT
MOC and Frank M. Burke, Jr., a nominee for director of the Company, entered
into a Consulting Agreement dated June 1, 1996, as subsequently amended.
Pursuant to the Consulting Agreement, Mr. Burke provides MOC, as an
independent contractor, certain financial, tax, strategic, marketing and other
consulting services as requested by MOC. As compensation for these services,
MOC has agreed to pay Mr. Burke a fee of $275 per hour. This fee is scheduled
to increase to $325 per hour for services provided during 1998 and to $375 per
hour for services provided during and after 1999. MOC also has agreed to
reimburse Mr. Burke reasonable travel and other out-of-pocket expenses. The
initial term of the Consulting Agreement was 12 months and automatically is
renewed for successive 12-month periods unless terminated by either party upon
30 days' prior notice. As of September 30, 1997, MOC had paid Mr. Burke a
total of $44,867 in fees and expenses.
CERTAIN EXPLORATION PROGRAMS
A portion of the Company's exploration activities have been, and are
expected to continue to be, conducted as an active working interest partner in
select projects proposed in Texas and Louisiana by Hughes under an exploration
agreement in effect since 1994. Dan A. Hughes, Jr., a nominee for director of
the Company, is a partner in and Exploration Manager of Hughes. See "Business
and Properties--Core Exploration and Development Regions" and "--Joint Venture
Exploration, Participation and Farm-out Agreements."
In addition, the Company has provided to its affiliated oil and natural gas
exploration companies opportunities to invest in certain oil and natural gas
exploration and development projects in which the Company already has an
interest. In exchange for their interests in a project, the affiliated
companies, which are under common ownership with MOC, are required to pay
their proportionate share of a $50,000 prospect fee charged by the Company,
110% of the associated drilling costs and their proportionate share of the
royalty interests allocated to the Royalty Program. See "Management--Executive
Compensation--Tax Credit and Royalty Participation Programs." This program
will terminate upon the consummation of the Offering.
Any future material transactions between the Company and its affiliates will
be negotiated on an arms' length basis and approved by a majority of the
disinterested directors of the Company.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock on the date of this Prospectus and as
adjusted to reflect the sale of the Common Stock offered hereby of (i) each
stockholder of the Company selling Common Stock in this Offering (a "Selling
Stockholder"), (ii) each person the Company knows to be the beneficial owner
of 5% or more of the outstanding shares of Common Stock, (iii) each executive
officer listed in the Summary Compensation Table, (iv) each director and
nominee for director of the Company and (v) all executive officers, directors
and nominees for director of the Company as a group, assuming, in each case,
the issuance of an estimated aggregate of 6,930,000 shares of Common Stock to
all participants in the Combination Transaction. Except as indicated in the
footnotes to this table and pursuant to applicable community property laws,
the Company believes that each stockholder named in this table has sole
investment and voting power with respect to the shares set forth opposite such
stockholder's name.
<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY
BENEFICIALLY SHARES OWNED AFTER
OWNED BEFORE THE BEING THE
OFFERING(1) OFFERED OFFERING(1)(2)
----------------- ------- ---------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER PERCENT
- ---------------- --------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
C.E. Miller(3)........................ 1,415,234 20.42%
Kelly E. Miller(4).................... 998,219 14.40% (5)
David A. Miller(6).................... 883,945 12.76%
3104 Logan Valley Road
Traverse City, Michigan 49685
Daniel R. Miller(7)................... 988,829 14.27%
3104 Logan Valley Road
Traverse City, Michigan 49685
Sue Ellen Bell(8)..................... 998,219 14.40%
3104 Logan Valley Road
Traverse City, Michigan 49685
William J. Baumgartner................ -- -- -- (5) --
Lew P. Murray......................... -- -- -- (5) --
Douglas A. Bell....................... -- -- -- (5) --
Frank M. Burke, Jr.................... -- -- -- (5) --
Dan A. Hughes, Jr.(9)................. 26,541 0.38% --
William Casey McManemin(10)........... 1,042,480 15.04% --
SASI Minerals Company................. 1,042,480 15.04% --
1201 Market Street, Suite 1402
Wilmington, Delaware 19801
Executive Officers and Directors as a
group................................ 3,482,474 50.25%
</TABLE>
- --------
(1) The number of shares of Common Stock beneficially owned and percentage of
ownership are based on 6,930,000 shares outstanding as of the date of this
Prospectus, which represents an estimate of the number of shares of Common
Stock that is expected to be issued in the Combination Transaction.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes the sole or shared power to vote or dispose of
securities, regardless of having an economic interest in such securities.
(2) Assumes the issuance of shares of Common Stock in the Offering
and no exercise of the Underwriters' over-allotment option. If the
Underwriters exercise their over-allotment option to purchase shares
of Common Stock from the Selling Stockholders in full, the number of
shares (and percentages
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<PAGE>
of ownership) of Kelly E. Miller, David A. Miller, Daniel R. Miller and Sue
E. Bell will be ( %), ( %), ( %) and ( %), respectively,
and all other stockholders will beneficially own the same share amounts as
shown above.
(3) Includes 228,549 shares held by the Kelly E. Miller Retained Annuity Trust
#1, 228,549 shares held by the Daniel R. Miller Retained Annuity Trust #1,
342,823 shares held by the David A. Miller Retained Annuity Trust #1 and
228,549 shares held by the Sue Ellen Bell Retained Annuity Trust #1, with
respect to each of which C.E. Miller is the sole trustee. Also includes
264,199 shares held by Eagle and 122,565 shares held by Eagle
International, each of which is owned by a revocable trust of which C.E.
Miller is the sole trustee.
(4) Includes 914,195 shares held by the Kelly E. Miller Trust, a revocable
trust of which Kelly E. Miller is the sole trustee, and 84,024 shares held
by Miller and Miller, Inc., which is owned by a revocable trust of which
Kelly E. Miller is the sole trustee. Excludes 228,549 shares held by the
Kelly E. Miller Retained Annuity Trust #1, of which Kelly E. Miller's
father, C.E. Miller, is the sole trustee and of which Kelly E. Miller and
trusts for the benefit of his children are the beneficiaries.
(5) Excludes the following employee stock options and shares of restricted
stock expected to be issued concurrently with the consummation of the
Offering. See "Management--Executive Compensation--Employee Benefit
Plans."
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME OPTIONS RESTRICTED STOCK
---- --------- ----------------
<S> <C> <C>
Kelly E. Miller................................. 300,000 60,000
William J. Baumgartner.......................... 100,000 22,500
Lew P. Murray................................... 100,000 15,000
Douglas A. Bell ................................ 40,000 --
</TABLE>
(6) Includes 799,921 shares held by the David A. Miller Trust, a revocable
trust of which David A. Miller is the sole trustee, and 84,024 shares held
by Oak Shores Investments, Inc., which is owned by a revocable trust of
which David A. Miller is the sole trustee. Excludes 342,823 shares held by
the David A. Miller Retained Annuity Trust #1, of which David A. Miller's
father, C.E. Miller, is the sole trustee and of which David A. Miller and
trusts for the benefit of his children are the beneficiaries.
(7) Includes 914,195 shares held by the Daniel R. Miller Trust, a revocable
trust of which Daniel R. Miller is the sole trustee, and 74,634 shares
held by Double Diamond Enterprises, Inc., which is owned by a revocable
trust of which Daniel R. Miller is the sole trustee. Excludes 228,549
shares held by the Daniel R. Miller Retained Annuity Trust #1, of which
Daniel R. Miller's father, C.E. Miller, is the sole trustee and of which
Daniel R. Miller and trusts for the benefit of his children are the
beneficiaries.
(8) Includes 914,195 shares held by the Sue E. Bell Trust, a revocable trust
of which Sue E. Bell is the sole trustee, and 84,024 shares held by
Frontier Investments, Inc., which is owned by a revocable trust of which
Sue E. Bell is the sole trustee. Excludes 228,549 shares held by the Sue
Ellen Bell Retained Annuity Trust #1, of which Sue E. Bell's father, C.E.
Miller, is the sole trustee and of which Sue E. Bell and trusts for the
benefit of her children are the beneficiaries.
(9) Includes only those shares held by Hughes, of which Dan A. Hughes Jr. is
Exploration Manager and in which Mr. Hughes is a partner.
(10) Includes only those shares held by SASI Minerals Company. William
McManemin is an officer, director and shareholder of the Manager of SASI
Minerals Company and disclaims beneficial ownership of these shares.
Kelly Miller, David Miller, Daniel Miller and Sue Bell, who are the sons and
daughter of C.E. Miller, the Chairman of the Board and a director of the
Company, have advised the Company that they have included a portion of their
shares of Common Stock in the shares being sold in this Offering to pay income
taxes and to repay certain business loans to C.E. Miller.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, par value $0.01 per share, and 2,000,000 shares of Preferred
Stock, $0.01 par value per share, issuable in one or more series by the Board
of Directors of the Company. Upon consummation of the Combination Transaction
and the Offering, shares of Common Stock will be issued and outstanding
( shares if the Underwriters exercise their over-allotment option in
full), not including stock options for an aggregate of 711,500 shares of
Common Stock and 107,500 restricted shares of Common Stock that are expected
to be granted to directors, officers and certain employees of the Company in
connection with the Offering.
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<PAGE>
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to the stockholders. The Certificate of
Incorporation of the Company does not allow the stockholders to take written
action without a meeting by less than unanimous consent. Each share of Common
Stock is entitled to participate equally in dividends, if, as and when
declared by the Company's Board of Directors, and in the distribution of
assets in the event of liquidation, subject in all cases to any prior rights
of outstanding shares of Preferred Stock. In addition, the Delaware Law limits
the circumstances under which the Company can pay dividends or make other
distributions to its stockholders. The Company has never paid cash dividends
on its Common Stock. The shares of Common Stock have no preemptive or
conversion rights, redemption rights or sinking fund provisions. The shares of
Common Stock that will be issued upon the consummation of the Combination
Transaction and the Offering will be duly authorized, validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The Board of Directors of the Company is authorized to issue, without
further stockholder approval, up to 2,000,000 shares of Preferred Stock from
time to time in one or more series and to fix such designations, powers,
preferences and relative voting, distribution, dividend, liquidation,
transfer, redemption, conversion and other rights, preferences,
qualifications, limitations or restrictions thereon. Any such Preferred Stock
could have priority over Common Stock as to dividends and as to the
distribution of the Company's assets upon any liquidation, dissolution or
winding up of the Company.
PROVISIONS AFFECTING CONTROL OF THE COMPANY
In addition to the control that will be vested in the existing stockholders
of the Company upon consummation of the Offering, the Company's Certificate of
Incorporation, Bylaws and other plans may affect control of the Company. See
"Risk Factors--Certain Antitakeover Considerations" and "--Control by Certain
Stockholders." The following provisions may have an antitakeover impact and
may make tender offers, proxy contests and certain mergers more difficult to
consummate.
Provisions Regarding the Board of Directors
Classified Board. The Company's Certificate of Incorporation classifies the
Company's Board of Directors into three classes serving staggered, three-year
terms. Classification of the Board of Director's could have the effect of
extending the time during which the existing Board of Directors could control
the operating policies of the Company even though opposed by the holders of a
majority of the outstanding shares of the Common Stock.
Nomination of Directors. Under the Company's Certificate of Incorporation,
all nominations for directors by stockholders are required to be delivered to
the Company in writing at least 120 days prior to the date of an annual
meeting of stockholders or, in the case of a special meeting of stockholders
at which a director or directors would be elected, at least seven days after
the date of notice of the special meeting. A nomination that is not received
prior to these deadlines would not be placed on the ballot. The Board of
Directors believes that advance notice of nominations by stockholders would
afford a meaningful opportunity to consider the qualifications of the proposed
nominees and, to the extent deemed necessary or desirable by the Board of
Directors, would provide an opportunity to inform stockholders about such
qualifications. Although this nomination procedure would not give the Board of
Directors any power to approve or disapprove stockholder nominations for the
election of directors, the nomination procedure could have the effect of
precluding a nomination for the election of directors at a particular meeting
if the proper procedures were not followed. The Board of Directors of the
Company has adopted a policy providing that directors are expected to
maintain, directly or indirectly, a minimum investment in the Company of
approximately $100,000.
Removal of Directors. Under the Delaware Law, a director of a corporation
generally may be removed, with or without cause, by the holders of a majority
of the shares entitled to vote at an election of directors. However, unless
the corporation's certificate of incorporation provides otherwise, if the
corporation's board of directors is classified, directors may be removed only
for cause. Also, in the case of a corporation having cumulative voting, if
less than the entire board is to be removed, no director may be removed
without cause if the votes cast against the director's removal would be
sufficient to elect the director if then cumulatively voted at an election of
the entire board of directors, or, if there are classes of directors, at any
election of the class of directors of which the director is a part. The
Company's Certificate of Incorporation provides that directors may be removed
only for cause. The Company's Certificate of Incorporation does not provide
for cumulative voting.
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<PAGE>
Under the Company's Certificate of Incorporation, subject to the rights of
any series of Preferred Stock then outstanding, any director could be removed
from office, but only for cause, and only by stockholder action. Generally,
the vote for removal would require the affirmative vote of a majority of
shares entitled to vote at an election of directors. "Cause" for removal could
only be present in the circumstances specified in the Company's Certificate of
Incorporation. "Cause" is present when: (i) the director whose removal is
proposed has been convicted of a felony by a court of competent jurisdiction
and such conviction is no longer subject to direct appeal; (ii) the director
has been adjudicated by a court of competent jurisdiction to be liable for
negligence, or misconduct, in the performance of such person's duty to the
Company in a matter of substantial importance to the Company and such
adjudication is no longer subject to a direct appeal; (iii) the director has
become mentally incompetent, whether or not so adjudicated, which mental
incompetency directly affects such person's ability as a director of the
Company; or (iv) the director's actions or failure to act have been in
derogation of the director's duties, as provided in the Company's Bylaws or
otherwise provided by law. Any proposal for removal pursuant to clauses (iii)
or (iv) above that is initiated by the Board of Directors for submission to
the stockholders would require the affirmative vote of at least two-thirds of
the total number of directors then in office, excluding the director who is
the subject of the removal action and who shall not be entitled to vote
thereon.
Qualification of Directors. Under Article VIII of the Company's Certificate
of Incorporation, no person who has asserted or asserts any "Claim" (defined
below) against the Company or any subsidiary (a "Plaintiff"), and no person
who is or becomes associated or affiliated with any Plaintiff (a "Related
Person"), would be eligible to be elected or to serve as a director until the
Claim is "Finally Resolved" (defined below). A director who is validly
nominated and elected as a director and who thereafter becomes a Plaintiff or
Related Person would continue as a director for the remainder of the term for
which the director was elected or until the director's resignation or removal.
A director who is or becomes a Plaintiff or a Related Person would be required
to either (i) promptly take all steps necessary to cause the director to be
neither a Plaintiff nor Related Person or (ii) if the director cannot do so
and the Claim has not been Finally Resolved within the "Resolution Period"
(defined below), resign as a director, effective immediately, at or before the
end of such Resolution Period.
A "Claim" means any claim, cross-claim, counterclaim or third-party claim
pled in any action, suit or proceeding before any court, governmental agency
or instrumentality, arbitrator or similar body or authority. However, certain
claims are excluded, including: (i) one which, when aggregated with all other
claims asserted by the Plaintiff or any Related Person of such Plaintiff
against the Company or any subsidiary that have not been Finally Resolved,
could not, if decided adversely to the Company or a subsidiary, along with all
other aggregated claims, cross-claims, counterclaims and third-party claims,
result in liability in excess of 10% of the consolidated current assets of the
Company as of the most recent quarter or render the Company insolvent; (ii)
one arising pursuant to a contract between the Company and the pertinent
Plaintiff or Related Person that was approved by a majority of the Continuing
Directors (as defined below), including without limitation, claims arising
under any indemnity or employment contract; and (iii) claims asserted in the
right of the Company (i.e., derivative actions).
The term "Finally Resolved" means that a final order has been rendered with
respect to the Claim and all available appeals from such order have been
exhausted or the time for seeking such review has expired. The term
"Resolution Period" means the 30-day period beginning on the earlier of (i)
the date on which a director of the Company notifies the Board that the
director has become a Plaintiff or Related Person or (ii) the date on which
the Board determines that a director has become a Plaintiff or Related Person.
However, the Board could (but would not be required to) extend a Resolution
Period by up to 15 days if the director establishes to the Board's
satisfaction a reasonable likelihood that the Claim would be Finally Resolved
or such director would cease to be both a Plaintiff and a Related Person
during that extra 15-day period.
The Board of Directors of the Company would not nominate any person for
election as a director unless (i) the prospective nominee has provided the
Board of Directors with (x) all information necessary or appropriate to enable
the Board to determine whether the nominee is a Plaintiff or a Related Person
and (y) a signed statement that the prospective nominee is not aware of any
reason not disclosed to the Board of Directors why the prospective nominee
would or might be considered a Plaintiff or Related Person and (ii) after
receipt of the items the Board determines that the prospective nominee is not
a Plaintiff or Related Person.
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Any stockholder who is uncertain whether any person the stockholder desires
to nominate for election as a director is a Plaintiff or Related Person could
request a determination from the Board concerning that matter, upon delivering
to the Board of Directors certain information and other items and complying
with certain deadlines. Within 10 days after receiving a properly submitted
request (or, if it is impossible or impracticable to do so during such period,
as soon as practicable thereafter), the Board of Directors would be required
to consider the request and determine whether or not the candidate is a
Plaintiff or Related Person who could not be nominated for election to the
Board of Directors.
If a candidate who was the subject of a proper and timely submitted request
was determined not to be a Plaintiff or Related Person and the request was
submitted at least five days in advance of the last date on which the
requesting stockholder otherwise would have been entitled to give notice of
intent to nominate the candidate, then the Board of Director's determination
would operate as a waiver of the time limits otherwise applicable to the
giving of such notice of intent to the extent, if any, necessary to afford the
stockholder a period of five days after receipt of the Board of Director's
notice within which to give notice of intent to nominate the candidate.
If the Board of Directors determined that the candidate was a Plaintiff or
Related Person and the request was submitted at least five days in advance of
the last date on which the requesting stockholder otherwise would have been
entitled to give notice of intent to nominate, then the Board of Director's
determination would operate as a waiver of the time limits otherwise
applicable to the giving of notice of intent to nominate to the extent, if
any, necessary to afford the requesting stockholder a period of 15 days after
receipt of the Board of Director's notice within which to give notice of
intent to nominate another person in lieu of the ineligible candidate.
Whenever any stockholder was afforded an additional time period within which
to give notice of intention to nominate, the Board of Directors may afford the
other stockholders of the Company a comparable additional period of time
within which to give such notice.
While the Board of Directors believes that Article VIII of the Company's
Certificate of Incorporation ensures that directors and nominees for election
as directors will not have significant conflicts of interest with the Company,
Article VIII also may have the effect of making stockholder nominations of
director candidates more difficult.
Board Evaluation of Certain Offers
Article XI of the Company's Certificate of Incorporation provides that the
Board of Directors will not initiate, approve, adopt or recommend any offer of
any person or entity (other than the Company) to make a tender or exchange
offer for any Common Stock or Preferred Stock, to merge or consolidate the
Company with any other entity or to purchase or acquire all or substantially
all of the Company's assets, unless and until the Board of Directors of the
Company has evaluated the offer and determined that it would be in compliance
with all applicable laws and that the offer is in the best interests of the
Company and its stockholders. In doing so, the Board of Directors could rely
on an opinion of legal counsel who is independent from the offeror, and/or may
test the legality of the proposed offer before any court or agency that may
have appropriate jurisdiction over the matter.
In making its determination as to whether the transaction would be in the
best interests of the Company and its stockholders, the Board of Directors
would be required to consider all factors it deemed relevant, including but
not limited to: (i) the adequacy and fairness of the consideration to be
received by the Company and/or its stockholders, considering historical
trading prices of Common Stock, the price that could be achieved in a
negotiated sale of the Company as a whole, past offers to other corporations
and the future prospects of the Company; (ii) the possible social and economic
impact of the proposed transaction on the Company, its employees, customers
and suppliers; (iii) the potential social and economic impact of the proposed
transaction on the communities in which the Company and its subsidiaries
operate or are located; (iv) the business and financial condition and earnings
prospects of the offering party; (v) the competence, experience and integrity
of the offering party and its management; and (vi) the intentions of the
offering party regarding the use of the assets of the Company to finance the
transaction.
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Supermajority Vote Provisions
The Company's Certificate of Incorporation contains "supermajority" vote
requirements for certain business combinations. Article X of the Certificate
of Incorporation provides that, in addition to any vote required by law or
other provisions of the Certificate of Incorporation, the affirmative vote of
not less than 80% of the outstanding shares of "voting stock" (which is
defined as all shares of the Company stock that are entitled to vote generally
in the election of directors, voting as a single class) would be required for
the approval of certain "business combinations" between the Company or a
subsidiary and any "interested stockholder."
A "business combination" is generally defined for purposes of Article X as
including mergers, sales of all or substantially all of the assets of the
Company and certain other transactions. An "interested stockholder" is defined
as a person (other than the Company, its majority-owned subsidiaries or their
employee benefit plans), who, alone or together with affiliated persons,
beneficially owns 10% or more of the voting stock of the Company, as well as
certain other persons that are affiliated with an interested stockholder.
These requirements would not apply when the transaction was approved by a
majority of the "continuing directors," which are directors who are not
affiliated with an interested stockholder and who were either (i) elected to
the Board of Directors of the Company prior to the time that the interested
stockholder became an interested stockholder or (ii) designated, before their
initial election as directors, as continuing directors by a majority of the
then-continuing directors. The term excludes, however, certain persons who
became directors as a result of election contests within the meaning of Rule
14a-11 under the Securities Exchange Act of 1934, as amended, or other types
of proxy solicitations.
In addition, Article XII of the Certificate of Incorporation provides that,
in addition to any vote required by law or other provisions of the Certificate
of Incorporation, the affirmative vote of at least 80% of the shares held by
persons who are not interested stockholders (as defined in Article X) would be
required to approve business combinations (as defined in Article X) of the
Company or a majority owned subsidiary with any interested stockholder. This
requirement would not apply if (i) the business combination was approved by a
majority of the continuing directors (as defined in Article X) or (ii) certain
other detailed conditions are satisfied.
Restrictions on Amendments to Certificate of Incorporation and Bylaws of the
Company
Several provisions of the Company's Certificate of Incorporation require a
greater-than-majority vote to be amended. Specifically, Article XV(A) provides
that no amendment to the Certificate of Incorporation may alter, modify or
repeal any or all of the provisions of Article XII (supermajority vote/fair
price requirement for certain business combinations) or Article XV(A), unless
the amendment is adopted by the affirmative vote of not less than 80% of the
outstanding shares of voting stock held by stockholders who are not interested
stockholders.
Also, Article XV(B) of the Company's Certificate of Incorporation provides
that no amendment may alter, modify or repeal any or all of the provisions of
Articles VII (powers of the Board of Directors), VIII (Board of Directors
classification, nomination, qualification, etc.), X (supermajority vote
required for certain business combinations), XI (non-stockholder constituency
provision) or XIII (limitation of certain director liability), and the
stockholders would not have the right to alter, modify or repeal any or all
provisions of the Company's Bylaws, unless such amendment, alteration,
modification or repeal is adopted by the affirmative vote of the holders of
not less than 80% of the outstanding shares of voting stock. However, the
provisions of Article XV(B) would not apply to, and such 80% vote would not be
required for, any amendment, alteration, modification or repeal which has
first been approved by (i) the affirmative vote of 80% of the entire Board of
Directors, including the affirmative vote of at least one director of each
class of the Board of Directors and (ii) the affirmative vote of two-thirds of
the continuing directors.
Delaware Law Provisions
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware Law. Generally, Section 203 prohibits the Company from engaging in a
"business combination" (as defined in Section 203 of
67
<PAGE>
the Delaware Law) with an "interested stockholder" (defined generally as a
person owning 15% or more of the Company's outstanding voting stock) for three
years following the date that person becomes an interested stockholder, unless
(i) before that person became an interested stockholder, the Company's Board
of Directors either approved the transaction which resulted in the stockholder
becoming an interested stockholder or approved the business combination; (ii)
upon completion of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of
the voting stock outstanding at the time the transaction commenced (excluding
stock held by directors who are also officers of the Company and by employee
stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (iii) following the transaction in which that
person became an interested stockholder, the business combination is approved
by the Company's Board of Directors and authorized at a meeting of
stockholders by the affirmative vote of the holders of at least two-thirds of
the outstanding voting stock not owned by the interested stockholder.
Section 203 restrictions also do not apply to certain business combinations
proposed prior to the consummation or abandonment of and subsequent to the
announcement or notification of one of certain extraordinary transactions
involving the Company and a person who was either not an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of the Company's Board of Directors. The
extraordinary transaction must be approved or not opposed by a majority of the
Board of Directors who were directors before any person became an interested
stockholder in the previous three years or who were recommended for election
or elected to succeed such directors by a majority of such directors then in
office.
REGISTRATION RIGHTS OF CERTAIN STOCKHOLDERS
The Company has agreed that upon consummation of the Combination Transaction
it will enter into a Registration Rights Agreement with the persons receiving
shares of Common Stock in such transaction. The Company expects approximately
6,930,000 shares of Common Stock to be issued in the Combination Transaction.
The actual number of shares of Common Stock issued to the participants in the
Combination Transaction will be determined on the basis of the initial public
offering price of the Common Stock. The Registration Rights Agreement will
provide these persons piggyback registration rights with respect to such
shares ("Registrable Securities"). As a result, in the event that the Company
proposes to register under the Securities Act any of its securities for its
own account, these stockholders, subject to certain exceptions, will have the
right to require the Company to include their Registrable Securities in the
registration.
In an underwritten offering, the Company may exclude a portion of the
Registrable Securities to be registered pursuant to the piggyback registration
rights on the written advice of the managing underwriter that marketing
factors require a limitation on the number of such shares to be included in
the offering. However, in no event may the value of the Registrable Securities
to be included in such registration be reduced to less than 10% of the total
value of securities included in the registration.
The Registration Rights Agreement contains customary indemnity by the
Company in favor of persons selling securities in a registration governed by
the Registration Rights Agreement, and by those persons in favor of the
Company and the underwriters, if any, relating to the information included in
or omitted from the applicable registration statement. The registration rights
will terminate as to any holder of Registrable Securities at the later of (i)
one year after the closing of the Offering or (ii) at such time as such holder
may sell under Rule 144 in a three-month period all Registrable Securities
then held by such holder.
Registration of shares under the Securities Act would result in such shares
becoming freely tradeable without restriction under the Securities Act (except
for shares purchased by affiliates of the Company) immediately upon the
effectiveness of such registration.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
68
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Combination Transaction and the Offering, the
Company will have shares of Common Stock outstanding (
shares if the Underwriters exercise their over-allotment option in full),
assuming that 6,930,000 shares are issued in the Combination Transaction. The
actual number of shares of Common Stock issued to the participants in the
Combination Transaction will be determined on the basis of the initial public
offering price of the Common Stock. Of the shares expected to be
outstanding, the shares of Common Stock offered hereby will be freely
transferable without restriction under the Securities Act unless they are held
by the Company's affiliates, as that term is used in Rule 144 under the
Securities Act. The Company issued the remaining outstanding shares of Common
Stock in reliance on exemptions from the registration requirements of the
Securities Act, and these shares are "restricted" securities under Rule 144.
These restricted shares may not be sold publicly unless they are registered
under the Securities Act, sold in compliance with Rule 144 or sold in a
transaction that is exempt from registration. The Company believes that the
earliest date on which these restricted shares will be eligible for sale under
Rule 144 is one year after the consummation of the Combination Transaction.
Therefore, no such shares will be eligible for immediate sale in the public
market without registration, and no shares will be eligible for sale under the
volume and other limitations of Rule 144 until the expiration of that one-year
period, at which time all of the shares of Common Stock currently outstanding
will become eligible for sale under Rule 144, based on current SEC rules and
subject to compliance with the volume limitations, manner of sale and other
requirements of Rule 144. Beginning two years after the consummation of the
Combination Transaction, all of those shares of Common Stock will become
eligible for sale under Rule 144(k) without regard to volume limitations,
manner of sale and other requirements of Rule 144, if they are not held by
affiliates of the Company. Shares of Common Stock received by the Selling
Stockholders in the Combination Transaction being offered hereby will not be
restricted securities under Rule 144.
In general, under Rule 144 a person (or persons whose sales are aggregated),
including an affiliate, who beneficially owns shares that have been
outstanding for at least one year is entitled to sell in broker transactions,
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding Common Stock (approximately
shares immediately after the Offering, assuming that 6,930,000
shares are issued in the Combination Transaction) or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
the sale, subject to the filing of a Form 144 with respect to the sale and
other limitations. In addition, except for affiliates and persons who acquired
shares from affiliates within the two preceding years, a person who
beneficially owns shares that have been outstanding for at least two years is
entitled to sell such shares under Rule 144(k) without regard to the manner-
of-sale, volume and other limitations of Rule 144. All shares of Common Stock,
other than those offered hereby, are subject to lock-up agreements with the
Underwriters for 180 days after the date of this Prospectus. See
"Underwriting."
Persons receiving shares of Common Stock in the Combination Transaction will
be entitled to certain piggyback registration rights with respect to such
shares under the Registration Rights Agreement. See "Description of Capital
Stock--Registration Rights of Certain Stockholders."
Prior to the Offering, there has been no public market for the securities of
the Company. No prediction can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial numbers
of shares by persons acquiring shares in the Combination Transaction or the
Offering could have a negative effect on the market price of the Common Stock.
69
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representatives,
Bear, Stearns & Co. Inc., Raymond James & Associates, Inc. and Stephens Inc.
(the "Representatives"), severally have agreed to purchase from the Company
and the Selling Stockholders the aggregate number of shares of Common Stock
set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
----------- ------
<S> <C>
Bear, Stearns & Co. Inc...........................................
Raymond James & Associates, Inc...................................
Stephens Inc......................................................
-------
Total.........................................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
thereunder are subject to the approval of certain legal matters by their
counsel and to various other conditions. The nature of the obligations of the
Underwriters is such that they are committed to purchase all of the shares of
Common Stock offered hereby if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and at such price less a concession not in excess of $ per share
of Common Stock to certain other dealers who are members of the National
Association of Securities Dealers, Inc. The Underwriters may allow, and such
dealers may reallow, concessions not in excess of $ per share to certain
other dealers. After the Offering, the offering price, concessions and other
selling terms may be changed by the Underwriters. The Common Stock is offered
subject to receipt and acceptance by the Underwriters and to certain other
conditions, including the right to reject orders in whole or in part.
The Company and the Selling Stockholders have granted a 30-day over-
allotment option to the Underwriters to purchase up to an aggregate of
additional shares of Common Stock of the Company exercisable at the public
offering price less the underwriting discount. If the Underwriters exercise
such over-allotment option, then each of the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. All Common
Stock sold to the Underwriters upon exercise of their over-allotment option
will be sold by the Company and the Selling Stockholders. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of Common Stock offered hereby. The underwriting agreement
provides that the Company and the Selling Stockholders will indemnify the
Underwriters against certain liabilities under the Securities Act or will
contribute to payments that the Underwriters may be required to make in
respect thereof.
The Company's current stockholders holding an aggregate of shares of
Common Stock have agreed pursuant to lock-up agreements not to sell or offer
to sell or otherwise dispose of any shares of Common Stock currently held by
them, any right to acquire any shares of Common Stock or any securities
exercisable for or convertible into any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent
of Bear, Stearns & Co. Inc., other than as gifts or transfers by will or the
laws of descent and distribution, sales to the Company or pursuant to the
Underwriters' over-allotment option.
In addition, the Company has agreed that for a period of 180 days after the
date of this Prospectus it will not, without the prior written consent of
Bear, Stearns & Co. Inc., offer, sell or otherwise dispose of any shares of
Common Stock except for shares of Common Stock offered hereby, shares issued
and options granted pursuant to the 1997 Stock Option Plan and shares issued
or to be issued in acquisitions, if any.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial offering price for the Common Stock
will be determined by negotiations between the Company and the Representatives
of the Underwriters. Among the factors to be considered in such negotiations
are the results of
70
<PAGE>
operations of the Company in recent periods, estimates of the prospects of the
Company and the industry in which the Company competes, an assessment of the
Company's management, the general state of the securities markets at the time
of the offering and the prices of similar securities of generally comparable
companies. The Company has submitted an application for approval of its Common
Stock for quotation on the Nasdaq Stock Market's National Market under the
symbol "MEXP." There can be no assurance, however, that an active or orderly
trading market will develop for the Common Stock or that the Common Stock will
trade in the public markets subsequent to the offering at or above the initial
offering price.
In order to facilitate the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock during and after the Offering. Specifically, the Underwriters may
over-allot or otherwise create a short position in the Common Stock for their
own account by selling more shares of Common Stock than have been sold to them
by the Company. The Underwriters may elect to cover any such short position by
purchasing shares of Common Stock in the open market or by exercising the
over-allotment option granted to the Underwriters. In addition, the
Underwriters may stabilize or maintain the price of the Common Stock by
bidding for or purchasing shares of Common Stock in the open market and may
impose penalty bids, under which selling concessions allowed to syndicate
members or other broker-dealers participating in the Offering are reclaimed if
shares of Common Stock previously distributed in the Offering are repurchased
in connection with stabilization transactions or otherwise. The effect of
these transactions may be to stabilize or maintain the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid also may affect the price of the
Common Stock to the extent that it discourages resales thereof. No
representation is made as to the magnitude or effect of any such stabilization
or other transactions. Such transactions may be effected on the NASDAQ
National Market or otherwise and, if commenced, may be discontinued at any
time.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by Warner Norcross & Judd LLP,
Grand Rapids, Michigan. Certain legal matters will be passed upon for the
Underwriters by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The Combined Financial Statements as of December 31, 1995 and 1996 and for
each of the three years in the period ended December 31, 1996 and the
historical statements of revenues and direct operating expenses of the
Acquired Properties for each of the three years in the period ended December
31, 1996, all included in this Prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as stated in their reports with respect
thereto and are all included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said reports.
Summaries of the reserve reports of S.A. Holditch & Associates, independent
oil and gas consultants, with respect to the Company's Michigan oil and
natural gas reserves at December 31, 1996 and September 30, 1997, and of the
reserve reports of Miller and Lents, Ltd., independent oil and gas
consultants, with respect to the Company's non-Michigan oil and natural gas
reserves at December 31, 1996 and September 30, 1997, and certain information
with respect to the Company's oil and natural gas reserves derived from such
reports have been included in this Prospectus in reliance upon those firms as
experts with respect to the matters contained in those reports.
71
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-1 (as
amended and together with all exhibits thereto, the "Registration Statement")
under the Securities Act, with respect to the shares of Common Stock offered
by this Prospectus. This Prospectus constitutes a part of the Registration
Statement and does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted from this
Prospectus as permitted by the rules and regulations of the SEC. Statements in
this Prospectus about the contents of any contract or other document are not
necessarily complete; reference is made in each instance to the copy of the
contract or other document filed as an exhibit to the Registration Statement.
Each such statement is qualified in all respects by such reference. The
Registration Statement and accompanying exhibits and schedules may by
inspected and copies may be obtained (at prescribed rates) at the public
reference facilities of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Copies of the Registration Statement also
may be inspected at the SEC's regional offices at 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. In addition, the Common Stock will
be listed on the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C.
20006-1500, where such material also may be inspected and copied.
As a result of the Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, will file periodic reports,
proxy statements and other information with the SEC. Such periodic reports,
proxy statements and other information will be available for inspection and
copying at the public reference facilities and regional offices referred to
above. In addition, these reports, proxy statements and other information also
may be obtained from the web site that the SEC maintains at
http://www.sec.gov.
The Company intends to furnish its stockholders annual reports containing
consolidated financial statements certified by its independent auditors and
quarterly reports for each of the first three quarters of each fiscal year
containing unaudited financial information.
72
<PAGE>
GLOSSARY OF CERTAIN OIL AND GAS TERMS
The following are abbreviations and definitions of certain terms commonly
used in the oil and gas industry and this Prospectus:
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in
reference to oil or other liquid hydrocarbons.
Bbl/d. One stock tank barrel of oil or other liquid hydrocarbons per day.
Bcfe. One billion cubic feet of natural gas equivalent. In reference to
natural gas, natural gas equivalents are determined using the ratio of 6.0 Mcf
of natural gas to 1.0 Bbl of oil, condensate of natural gas liquids.
Completion. The installation of permanent equipment for the production of
oil or natural gas.
Developed Acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Development Well. A well drilled within the proved area of an oil or natural
gas reservoir to the depth of a stratigraphic horizon known to be productive.
Drilling Costs. The costs associated with drilling and completing a well
(exclusive of seismic and land acquisition costs for that well and future
development costs associated with proved undeveloped reserves added by the
well) divided by total proved reserve additions.
Dry Well. A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion of an oil or natural gas
well.
Exploratory Well. A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir or to extend a known
reservoir.
Farm-in or Farm-out. An agreement under which the owner of a working
interest in an oil and natural gas lease assigns the working interest or a
portion thereof to another party who desires to drill on the leased acreage.
The assignor usually retains a royalty or reversionary interest in the lease.
The interest received by an assignee is a "farm-in" while the interest in the
lease transferred by the assignor is a "farm-out."
Finding and Development Costs. Capital costs incurred in the acquisition,
exploration and development of proved oil and natural gas reserves divided by
proved reserve additions.
Gross Acres or Gross Wells. The total acres or wells, as the case may be, in
which the Company has a working interest.
MBbl. One thousand barrels of oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet of natural gas.
Mcfe. One thousand cubic feet of natural gas equivalent.
MMcf. One million cubic feet of natural gas.
MMcf/d. One million cubic feet of natural gas per day.
MMcfe. One million cubic feet of natural gas equivalent.
MMcfe/d. One million cubic feet of natural gas equivalent per day.
Net Acres or Net Wells. Gross acres or wells multiplied, in each case, by
the percentage working interest owned by the Company.
73
<PAGE>
Net Production. Production that is owned by the Company less royalties and
production due others.
Oil. Crude oil or condensate.
Operating Income. Gross oil and natural gas revenue less applicable
production taxes and lease operating expenses.
Operator. The individual or company responsible for the exploration,
development and production of an oil or natural gas well or lease.
Present Value of Future Net Revenues or PV-10. The pretax present value of
estimated future revenues to be generated from the production of proved
reserves calculated in accordance with SEC guidelines, net of estimated
production and future development costs, using prices and costs as of the date
of estimation without future escalation, without giving effect to non-property
related expenses such as general and administrative expenses, debt service and
depreciation, depletion and amortization, and discounted using an annual
discount rate of 10%.
Proved Developed Reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves. The estimated quantities of oil, natural gas and natural
gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions.
Proved Undeveloped Reserves. Reserves that are expected to be recovered from
new wells on undrilled acreage or from existing wells where a relatively major
expenditure is required for recompletion.
Royalty. An interest in an oil and natural gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not
require the owner to pay any portion of the costs of drilling or operating the
wells on the leased acreage. Royalties may be either landowner's royalties,
which are reserved by the owner of the leased acreage at the time the lease is
granted, or overriding royalties, which are usually reserved by an owner of
the leasehold in connection with a transfer to a subsequent owner.
Salt Dome. A generally dome-shaped intrusion into sedimentary rock that has
a mass of salt as its core. The impermeable nature of the salt structure may
act as a mechanism to trap hydrocarbons migrating through surrounding rock
formations.
Success Rate. The number of wells completed as a percentage of the number of
wells drilled.
2-D Seismic. The method by which a cross-section of the earth's subsurface
is created through the interpretation of reflecting seismic data collected
along a single source profile.
3-D Seismic. The method by which a three dimensional image of the earth's
subsurface is created through the interpretation of reflection seismic data
collected over a surface grid. 3-D seismic surveys allow for a more detailed
understanding of the subsurface than do conventional surveys and contribute
significantly to field appraisal, development and production.
Working Interest. An interest in an oil and natural gas lease that gives the
owner of the interest the right to drill for and produce oil and natural gas
on the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMBINED FINANCIAL STATEMENTS OF MILLER EXPLORATION COMPANY AND AFFILIATED
ENTITIES
Report of Independent Public Accountants................................ F-2
Combined Balance Sheets as of December 31, 1995 and 1996, and September
30, 1997 (Unaudited)................................................... F-3
Combined Statements of Operations for the Years Ended December 31, 1994,
1995 and 1996 and for the Nine Months Ended September 30, 1996
(unaudited) and 1997 (unaudited)....................................... F-4
Combined Statements of Equity for the Years Ended December 31, 1994,
1995 and 1996 and for the Nine Months Ended September 30, 1997
(unaudited)............................................................ F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1994,
1995 and 1996 and for the Nine Months Ended September 30, 1996
(unaudited) and 1997 (unaudited)....................................... F-6
Notes to Combined Financial Statements.................................. F-7
STATEMENTS OF THE MILLER EXPLORATION COMPANY ACQUIRED PROPERTIES:
Report of Independent Public Accountants................................ F-18
Historical Statements of Revenues and Direct Operating Expenses for the
Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months
Ended September 30, 1996 (unaudited) and 1997 (unaudited).............. F-19
Notes to Historical Statements of Revenues and Direct Operating
Expenses............................................................... F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Miller Exploration Company:
We have audited the accompanying combined balance sheets of MILLER
EXPLORATION COMPANY (a Delaware corporation) and affiliated entities
identified in Note 1 (collectively, the "Company") as of December 31, 1995 and
1996, and the related combined statements of operations, equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Company as of
December 31, 1995 and 1996, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
October 10, 1997 (except
with respect to certain
matters discussed in Note 15
to the combined financial
statements as to which the
date is December 4, 1997)
F-2
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................ $ 180 $ 410 $ 107
Accounts receivable...................... 1,236 2,246 2,253
Inventories.............................. 55 47 47
Prepaid expenses......................... 56 66 36
Other current assets..................... 27 385 186
--------- --------- -------
Total current assets................... 1,554 3,154 2,629
--------- --------- -------
OIL AND GAS PROPERTIES--at cost (full cost
method):
Proved oil and gas properties............ 23,666 27,883 30,720
Unproved oil and gas properties.......... 1,453 2,811 2,284
Less-Accumulated depreciation, depletion
and amortization........................ (7,388) (9,962) (11,841)
--------- --------- -------
Net oil and gas properties............. 17,731 20,732 21,163
--------- --------- -------
PROPERTY AND EQUIPMENT--NET................ 720 164 201
--------- --------- -------
Total assets........................... $ 20,005 $ 24,050 $23,993
========= ========= =======
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable............................ $ 2,158 $ 3,942 $ 4,515
Current portion of long-term debt........ -- 216 238
Accounts payable......................... 815 891 743
Accounts payable--related parties........ 42 218 135
Oil and gas distributions payable........ 233 307 256
Accrued interest......................... 206 223 202
Other accrued expenses................... 80 39 6
--------- --------- -------
Total current liabilities.............. 3,534 5,836 6,095
--------- --------- -------
LONG-TERM DEBT............................. 7,643 8,723 8,186
DEFERRED REVENUE........................... 1,418 1,722 1,680
COMMITMENTS AND CONTINGENCIES (NOTE 7)
EQUITY:
Preferred stock, $0.01 par value;
2,000,000 shares authorized; none
outstanding............................. -- -- --
Common stock, $0.01 par value; 20,000,000
shares authorized; none outstanding..... -- -- --
Combined equity.......................... 141 72 197
Retained earnings........................ 7,269 7,697 7,835
--------- --------- -------
Total equity........................... 7,410 7,769 8,032
--------- --------- -------
Total liabilities and equity........... $ 20,005 $ 24,050 $23,993
========= ========= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR MONTHS ENDED
ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ --------------
1994 1995 1996 1996 1997
------ ------- ------- ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Natural gas........................ $2,424 $ 2,748 $ 5,614 $3,719 $4,329
Crude oil and condensate........... 672 715 1,101 854 710
Other operating revenues........... 167 296 395 355 492
------ ------- ------- ------ ------
Total operating revenues......... 3,263 3,759 7,110 4,928 5,531
------ ------- ------- ------ ------
OPERATING EXPENSES:
Lease operating expenses and
production taxes.................. 811 777 1,123 753 917
Depreciation, depletion and
amortization...................... 1,009 1,666 2,629 1,826 2,019
General and administrative......... 1,200 1,270 1,591 1,002 1,335
------ ------- ------- ------ ------
Total operating expenses......... 3,020 3,713 5,343 3,581 4,271
------ ------- ------- ------ ------
OPERATING INCOME..................... 243 46 1,767 1,347 1,260
------ ------- ------- ------ ------
INTEREST EXPENSE..................... (810) (1,017) (1,139) (789) (922)
------ ------- ------- ------ ------
LAWSUIT SETTLEMENT................... -- 3,521 -- -- --
------ ------- ------- ------ ------
NET INCOME (LOSS).................... $ (567) $ 2,550 $ 628 $ 558 $ 338
====== ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
COMBINED RETAINED TOTAL
EQUITY EARNINGS EQUITY
-------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE--January 1, 1994 $ 301 $6,486 $6,787
Contributions and return of capital, net........... (24) -- (24)
Net loss........................................... -- (567) (567)
Dividends declared................................. -- (600) (600)
----- ------ ------
BALANCE--December 31, 1994........................... 277 5,319 5,596
Contributions and return of capital, net........... (136) -- (136)
Net income......................................... -- 2,550 2,550
Dividends declared................................. -- (600) (600)
----- ------ ------
BALANCE--December 31, 1995........................... 141 7,269 7,410
Contributions and return of capital, net........... (69) -- (69)
Net income......................................... -- 628 628
Dividends declared................................. -- (200) (200)
----- ------ ------
BALANCE--December 31, 1996........................... 72 7,697 7,769
Contributions and return of capital, net
(unaudited)....................................... 125 -- 125
Net income (unaudited)............................. -- 338 338
Dividends declared (unaudited)..................... -- (200) (200)
----- ------ ------
BALANCE--September 30, 1997 (Unaudited).............. $ 197 $7,835 $8,032
===== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- --------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................ $ (567) $2,550 $ 628 $ 558 $ 338
Adjustments to reconcile net
income (loss) to net cash from
operating activities--
Depreciation, depletion and
amortization.................. 1,009 1,666 2,629 1,826 2,019
Deferred revenue............... -- (21) (27) (19) (42)
Lawsuit settlement............. -- (3,521) -- -- --
Changes in assets and
liabilities--
Accounts receivable.......... 1,250 (200) (1,010) (495) (7)
Other current assets......... 324 67 (360) (304) 229
Accounts payable............. (145) (60) 252 55 (231)
Oil and gas distributions
payable..................... (113) 20 74 65 (51)
Other accrued expenses....... (38) 10 (24) 226 (54)
------ ------ ------ ------ ------
Net cash flows provided by
operating activities...... 1,720 511 2,162 1,912 2,201
------ ------ ------ ------ ------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Exploration and development
expenditures.................... (4,528) (6,323) (6,184) (4,614) (5,166)
Advance payment of natural gas
sales........................... -- 1,439 185 -- --
Proceeds from sale of oil and gas
properties and purchases of
equipment, net.................. 3,378 1,212 1,256 775 2,679
Proceeds from lawsuit settlement. -- 3,521 -- -- --
------ ------ ------ ------ ------
Net cash flows used in
investing activities...... (1,150) (151) (4,743) (3,839) (2,487)
------ ------ ------ ------ ------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments of principal............ -- -- (55) -- (514)
Net borrowing on line-of-credit.. 229 359 2,785 1,860 572
Long-term debt borrowing......... -- -- 350 -- --
Contributions and return of
capital, net.................... (24) (136) (69) 175 125
Payments of dividends............ (600) (600) (200) (200) (200)
------ ------ ------ ------ ------
Net cash flows provided by
(used in) financing
activities................ (395) (377) 2,811 1,835 (17)
------ ------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................. 175 (17) 230 (92) (303)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE PERIOD........... 22 197 180 180 410
------ ------ ------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF
THE PERIOD........................ $ 197 $ 180 $ 410 $ 88 $ 107
====== ====== ====== ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest....................... $ 770 $1,005 $1,122 $ 798 $ 943
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION, COMBINATION AND NATURE OF OPERATIONS
The Combination
Miller Exploration Company ("Miller") was recently formed as a Delaware
corporation to serve as the surviving company upon the completion of a series
of combination transactions (the "Combination"). The Combination includes the
following transactions: Miller will acquire all of the outstanding capital
stock of Miller Oil Corporation ("MOC") and certain oil and gas interests
owned by Miller & Miller, Inc., Double Diamond Enterprises, Inc., Frontier
Investments, Inc., Oak Shores Investments, Inc., Eagle Investments, Inc.
(d/b/a Victory, Inc.) and Eagle International, Inc. (all Michigan corporations
owned by the Miller family members who are beneficial owners of MOC) in
exchange for an aggregate consideration of approximately 5.3 million shares of
common stock of Miller (the "Common Stock"). Miller plans to complete the
Combination concurrently with the consummation of an initial public offering
of its Common Stock (see Note 15). The operations of all of these entities
have been managed through the same management team, and have been owned by the
same members of the Miller family.
Principles of Combination
The accompanying combined financial statements include the accounts of
Miller, MOC and the other affiliated entities described above, all of which
share common ownership and management (collectively, the Company). Upon
completion of the transactions described above, the Combination will be
accounted for as a reorganization of entities under common control in a manner
similar to a pooling-of-interests, as prescribed by Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 47 because of the high degree
of common ownership among, and the common control of, the combined entities.
Accordingly, the accompanying combined accounts have been prepared using the
historical costs and results of operations of the affiliated entities. There
were no differences in accounting methods or their application among the
combining entities.
Other Transactions Completed Concurrently With the Initial Public Offering
In addition to the above combined activities of the Company, concurrently
with the initial public offering, the Company will exchange an aggregate of
approximately 1.6 million shares of Common Stock for interests in certain
other oil and gas properties that are currently owned by non-affiliated
parties. Because these interests will be acquired from individuals who are not
under the common ownership and management of the Company, these exchanges will
be accounted for under the purchase method of accounting. Under that method,
the properties will be recorded at their estimated fair value at the date on
which the exchange is consummated. The combined financial statements do not
include the activities of these non-affiliated interests.
Nature of Operations
The Company is a domestic, independent energy company engaged in the
exploration, development and production of crude oil and natural gas. The
Company has established exploration efforts concentrated primarily in three
provinces: the Mississippi Salt Basin of central Mississippi; the onshore Gulf
Coast region of Texas and Louisiana; and the Michigan Basin.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties
The Company follows the full cost method of accounting and capitalizes all
costs related to its exploration and development program, including the cost
of nonproductive drilling and surrendered acreage. Such capitalized costs
include lease acquisition, geological and geophysical work, delay rentals,
drilling, completing and equipping oil and gas wells, together with internal
costs directly attributable to property acquisition, exploration
F-7
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
and development activities. The capitalized costs are amortized on an overall
unit-of-production method based on total estimated proved oil and gas
reserves. Additionally, certain costs associated with major development
projects and all costs of unevaluated leases are excluded from the depletion
base until reserves associated with the projects are proved or until
impairment occurs.
To the extent that capitalized costs (net of accumulated depreciation,
depletion and amortization) exceed the sum of discounted estimated future net
cash flows from proved oil and gas reserves (using unescalated prices and
costs and a 10% per annum discount rate) and the lower of cost or market value
of unproved properties, such excess costs are charged against earnings. The
Company did not have any such charges against earnings during the years ended
December 31, 1994, 1995 or 1996 or during the nine months ended September 30,
1997.
Interim Financial Data (Unaudited)
The combined financial statements and related information as of and for the
nine months ended September 30, 1996 and 1997 included herein are unaudited
and, in the opinion of management, reflect all adjustments (consisting of only
recurring adjustments) necessary for a fair presentation of financial
position, results of operations and cash flows.
These unaudited combined financial statements should be read in conjunction
with the Company's combined financial statements as of and for the year ended
December 31, 1996. The results of operations for the nine months ended
September 30, 1996 and 1997 are not necessarily indicative of operating
results for a full year. Additionally, all other financial statement
information contained in the Notes to Combined Financial Statements, which
occurred subsequent to December 31, 1996, is unaudited.
Income Taxes
The Company and the combined affiliated entities have either elected to be
treated as S corporations under the Internal Revenue Code or are otherwise not
taxed as entities for federal income tax purposes. The taxable income or loss
is therefore allocated to the equity owners of the Company and the combined
affiliated entities. Accordingly, no provision was made for income taxes in
the accompanying combined financial statements.
Due to the use of different methods for tax and financial reporting purposes
in accounting for various transactions, including intangible drilling costs
and geological and geophysical costs, and for the sale of oil and gas
properties, the Company has temporary differences between its tax basis and
financial reporting basis. Had the Company been a taxpaying entity, a deferred
tax liability of approximately $5.9 million, $5.8 million and $5.5 million at
December 31, 1995 and 1996, and September 30, 1997, respectively, would have
been recorded for this difference, with a corresponding reduction in retained
earnings. Additionally, had the Company been a taxpaying entity, an income tax
provision (credit) of approximately $830,000, $(10,000) and $(60,000) would
have been recorded for the years ended December 31, 1995 and 1996 and for the
nine months ended September 30, 1997, respectively.
Financial Instruments
The fair value of short-term financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate their carrying amounts in the financial statements due to the
short maturity of such instruments.
F-8
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of notes payable and long-term debt approximate their
carrying amounts in the financial statements as the individual borrowings bear
interest at floating market interest rates.
Revenue Recognition
Crude oil and natural gas revenues are recognized as production takes place
and the sale is completed and the risk of loss transfers to a third party
purchaser.
Inventories
Inventories consist of oil field casing utilized in the Company's
exploration activities. Inventories are valued at the lower of cost (first-in,
first-out method) or market.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and U.S. Government
Securities with original maturities of three months or less.
Hedging Activities
Beginning in 1997, the Company began to periodically enter into hedging
arrangements to manage price risks related to crude oil and natural gas sales
and not for speculative purposes. The Company's hedging arrangements apply
only to a portion of its production, provide only partial price protection
against declines in crude oil and natural gas prices and limit potential gains
from future increases in prices. For financial reporting purposes, gains and
losses related to hedging are recognized as income when the hedged transaction
occurs. Historically, gains and losses from hedging activities have not been
material. During 1994, 1995 and 1996, the Company did not hedge any of its
crude oil or natural gas production. As of September 30, 1997, the Company had
the following volumes of open natural gas contracts:
<TABLE>
<CAPTION>
VOLUME
PRODUCTION PERIOD (MMCF) PRICE/MCF
----------------- ------ ---------
<S> <C> <C>
October 1997............................................. 51.0 $2.45
November 1997............................................ 44.3 2.90
December 1997............................................ 26.6 2.92
January 1998............................................. 8.9 2.98
February 1998............................................ 8.9 2.71
March 1998............................................... 8.9 2.48
</TABLE>
Net Income (Loss) Per Share
Net income (loss) per share has been omitted from the combined statements of
operations since such information is not meaningful and the historically
combined Company is not a separate legal entity with a singular capital
structure. Pro forma net income (loss) is presented elsewhere in the
Prospectus using the weighted average number of common shares outstanding
after giving effect to the Combination.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-9
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the
reporting periods. Accordingly, actual results could differ from these
estimates. Significant estimates include depreciation, depletion and
amortization of proved oil and natural gas properties. Oil and natural gas
reserve estimates, which are the basis for unit-of-production depletion and
the cost ceiling test are, inherently imprecise and are expected to change as
future information becomes available.
(3) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following components:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Joint interest receivable......... $ 730 $1,003 $1,678
Oil and gas revenue receivable.... 496 1,227 575
Advance billings receivable....... 10 16 --
------ ------ ------
Total accounts receivable..... $1,236 $2,246 $2,253
====== ====== ======
</TABLE>
Joint interest receivable represents exploration, development and production
costs paid by the Company on behalf of joint owners in excess of amounts
collected from them. At December 31, 1995 and 1996, and September 30, 1997,
the joint interest receivable balance due from related parties total $362,508,
$655,263 and $713,482, respectively.
Oil and gas revenue receivable represents the Company's portion of revenue
attributable to production that was uncollected at year end.
Advance billings receivable represents the uncollected portion of amounts
billed by the Company to joint owners in advance of when the related well
costs have been incurred.
(4) PROPERTY AND EQUIPMENT - NET
Property and equipment - net consists primarily of office furniture,
equipment and computer software and hardware. Depreciation and amortization
are calculated using straight-line and accelerated methods over the estimated
useful lives of the related assets, which typically range from 5 to 20 years.
Depreciation expense for property and equipment totaled $36,081, $58,827,
$54,259 and $39,391 for the years ended December 31, 1994, 1995, 1996 and for
the nine months ended September 30, 1997, respectively.
(5) NET PRODUCTION PAYMENTS
During 1995, the Company transferred a limited-term working interest, based
on specified volumes, in certain natural gas producing properties to Miller
Shale Limited Partnership ("MSLP"), an affiliated entity. Under the terms of
the agreement, the Company will receive payments equal to 97% of the net
profits from MSLP, as defined in the agreement, arising from the production of
those properties.
The payments received by the Company are reflected on a gross basis in the
accompanying combined financial statements and the associated proved reserves
are also reflected in the accompanying supplemental oil and gas disclosures to
the combined financial statements.
During 1995 and 1996, the Company also received advance cash payments from
MSLP of $1,439,394 and $185,000, respectively. These proceeds have been
recorded as deferred revenue, which will be recognized in income as the
natural gas volumes under the agreement are delivered.
F-10
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The payments to be received by the Company, arising from this agreement, are
collateralized by a mortgage on the respective natural gas properties.
(6) NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 1995, 1996 and September 30, 1997, the Company had a notes
payable balance of $2,158,446, $3,942,661 and $4,514,991, respectively, which
represent a borrowing against a $5,000,000 bank line-of-credit which bears
interest at the bank's prime rate. In October 1997, the Company extended this
line-of-credit until January 1998. In 1997, the Company also signed into
another $1,000,000 line-of-credit, which expires in January 1998 and bears
interest at the bank's prime rate plus one-quarter of 1%. These notes are
collateralized by the Company's reserved interest in the natural gas
properties discussed in Note 5.
During 1996, the Company also signed into a $1,000,000 term-loan payable to
a bank, with interest at the prime rate, maturing September 2000. This term-
loan requires quarterly payments of $24,477 and is collateralized by the
Company's reserved interest in the natural gas properties discussed in Note 5.
At December 31, 1996 and September 30, 1997, the balance of the term-loan was
$945,662 and $781,162, respectively.
The Company also has unsecured notes payable to stockholders, with interest
payable quarterly at 2% over the prime rate. The notes are due in October 2006
and are subordinate to the two notes payable and the term-loan. At December
31, 1995, 1996 and September 30, 1997, the balance of the notes payable to
stockholders were $7,643,000, $7,993,000 and $7,643,000, respectively. Minimum
principal payments on notes payable and long-term debt as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997...................... $ 4,158
1998...................... 233
1999...................... 253
2000...................... 244
2001...................... --
Thereafter................ 7,993
--------
$ 12,881
========
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
Leasing Arrangements
The Company leases its office building in Traverse City, Michigan from a
related party. The lease term is for five years beginning in 1996 and contains
an annual 4% escalation clause. The Company also leases office space in
Houston, Texas. Terms of the Houston lease agreement, which expires in
February 1998, provide for monthly rent of $1,663. In September 1997, the
Company signed into a new lease agreement in Houston for five additional
years.
Future minimum lease payments required of the Company for years ending
December 31, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997...................... $ 98
1998...................... 128
1999...................... 132
2000...................... 135
2001...................... 110
Thereafter................ 62
----
$665
====
</TABLE>
F-11
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Total net rent expense under these lease arrangements was $12,495, $18,009,
$59,735 and $72,894 for the years ended December 31, 1994, 1995 and 1996 and
for the nine months ended September 30, 1997, respectively.
Employee Benefit Plan
The Company has a qualified 401(k) savings plan (the Plan) covering
substantially all eligible employees. The Plan provides for discretionary
matching contributions by the Company. Contributions charged against
operations totaled $52,753, $38,714, $42,278 and $44,958 for the years ended
December 31, 1994, 1995 and 1996, and for the nine months ended September 30,
1997, respectively.
Tax Credit and Royalty Participation Programs
Various employees are eligible to participate in the Company's Tax Credit
and Royalty Participation Programs, which are designed to provide incentive
for certain key employees of the Company. Under the programs, the employees
will receive cash payments from the Company, based on overriding royalty
working interests, fees, reimbursements and other financial items. These
payments to the employees, which have been charged against operations, totaled
$257,301, $139,365, $116,236 and $100,113 for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended September 30, 1997,
respectively. These programs will be terminated on or before the consummation
of the initial public offering (see Note 15).
Other
In the normal course of business, the Company may be a party to certain
lawsuits and administrative proceedings. Management cannot predict the
ultimate outcome of any pending or threatened litigation or of actual or
possible claims; however, management believes resulting liabilities, if any,
will not have a material adverse impact upon the Company's financial position
or results of operations.
(8) RELATED PARTY TRANSACTIONS
In July 1996, the Company sold the building it occupies to a related party
and subsequently leased a substantial portion of the building under the terms
of a five-year lease agreement (see Note 7). The Company realized a gain on
the sale of the property of approximately $160,000. This gain was deferred and
is being amortized in proportion to the gross rental charges under the
operating lease.
The Company provides technical and administrative services to a corporation
controlled by a related party. In connection with this arrangement $100,000,
$50,000, $100,000 and $150,000 were recognized as management fee income (See
Note 12) for the years ended December 31, 1994, 1995 and 1996 and for the nine
months ended September 30, 1997, respectively.
(9) LAWSUIT SETTLEMENT
In November 1995, the Company received $3,520,557 as its respective share of
an inverse condemnation lawsuit settlement which is reported in the 1995
combined statement of operations.
(10) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS TO
CREDIT RISK
Off-Balance Sheet Risk
The Company does not consider itself to have any material financial
instruments with off-balance sheet risks.
F-12
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
include cash on deposit with one financial institution in which these deposits
exceed the Federally insured amount.
The Company extends credit to various companies in the oil and gas industry
in the normal course of business. Within this industry, certain concentrations
of credit risk exist. The Company, in its role as operator of co-owned
properties, assumes responsibility for payment to vendors for goods and
services related to joint operations and extends credit to co-owners of these
properties.
This concentration of credit risk may be similarly affected by changes in
economic or other conditions and may, accordingly, impact the Company's
overall credit risk. The Company periodically monitors its customers' and co-
owners' financial conditions.
(11) NON-CASH FINANCING ACTIVITIES
During 1996, the Company transferred $1,000,000 of its outstanding note
payable balance to a five-year term-loan, as more fully discussed in Note 6.
This non-cash financing activity has been excluded from the combined statement
of cash flows.
(12) OTHER OPERATING REVENUES
The majority of the other operating revenues are reimbursements for general
and administrative activities that the Company performs on behalf of other
companies in the oil and gas industry. All other management fees that were
earned for exploration and development activities have been credited to oil
and gas property costs.
(13) SIGNIFICANT CUSTOMERS
Revenues from certain customers accounted for more than 10% of total crude
oil and natural gas sales as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED FOR THE NINE
DECEMBER 31, MONTHS ENDED
---------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Amerada Hess Corporation................. 29% 44% 51% 41%
Muskegon Development Co. ................ 51% 37% 24% 25%
Dan A. Hughes Company ................... 4% 7% 19% 29%
</TABLE>
(14) NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," and
SFAS No. 129, "Disclosure Information about Capital Structure," which are
effective for the Company's year-end 1997 financial statements. In 1997, the
FASB also issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
each of which will require expanded disclosures effective for 1998. The
Company does not expect the application of these statements to have a material
effect on its financial position, liquidity or results of operations.
F-13
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(15) SUBSEQUENT EVENTS
In November 1997, the Company filed a Registration Statement on Form S-1
with the SEC for an underwritten initial public offering (the "Offering") of
shares of common stock.
In November 1997, the Company signed into a Purchase and Sale Agreement (the
"Agreement"), whereas, the Company will acquire interests in certain crude oil
and natural gas producing properties and undeveloped properties from Amerada
Hess Corporation ("AHC") for approximately $50.5 million, subject to
adjustment. The acquisition is anticipated to close concurrent with the
Company's Offering, subject to certain contingent stipulations in the
Agreement. The acquisition is anticipated to be primarily financed with the
use of proceeds from the Offering and with new bank borrowings.
The Company made a $2.5 million down payment to AHC at the time of the
signing of the Agreement. This down payment could be retained by AHC in the
event this acquisition does not get completed. In association with the down
payment, the Chairman of the Company loaned to MOC $2,500,000, pursuant to a
promissory note which is payable on June 1, 1998. The loan is unsecured and
subordinated to the notes payable and long-term debt described in Note 6.
Interest accrues on the promissory note at the prime rate and is payable
monthly. The Company anticipates that a portion of the proceeds from the
Offering will be used to repay the loan.
(16) SUPPLEMENTAL FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)
The following information was prepared in accordance with the Supplemental
Disclosure Requirements of SFAS No. 69, "Disclosures About Oil and Gas
Producing Activities."
Users of this information should be aware that the process of estimating
quantities of "proved" and "proved developed" crude oil and natural gas
reserves is very complex, requiring significant subjective decisions in the
evaluation of all available geological, engineering and economic data for each
reservoir. The data for a given reservoir also may change substantially over
time as a result of numerous factors including, but not limited to, additional
development activity, evolving production history and continual reassessment
of the viability of production under varying economic conditions.
Consequently, material revisions to existing reserve estimates occur from time
to time. Although every reasonable effort is made to ensure that reserve
estimates reported represent the most accurate assessments possible, the
significance of the subjective decisions required and variances in available
data for various reservoirs make these estimates generally less precise than
other estimates presented in connection with financial statement disclosures.
Proved reserves represent estimated quantities of natural gas and crude oil
that geological and engineering data demonstrate, with reasonable certainty,
to be recoverable in future years from known reservoirs under economic and
operating conditions existing at the time the estimates were made.
Proved developed reserves are proved reserves expected to be recovered,
through wells and equipment in place and under operating methods being
utilized at the time the estimates were made.
The following estimates of proved reserves and future net cash flows as of
December 31, 1996 have been prepared by S.A. Holditch and Associates (as to
Michigan reserves) and Miller and Lents, Ltd. (as to non-Michigan reserves),
independent petroleum engineers. Estimates as of December 31, 1994 and 1995
have been prepared by the Company's petroleum engineers. All of the Company's
reserves are located in the United States.
F-14
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Estimated Quantities of Proved Oil and Gas Reserves
The following table sets forth the Company's net proved and proved developed
reserves at December 31 for each of the three years in the period ended
December 31, 1996, and the changes in the net proved reserves for each of the
three years in the period then ended as estimated by the Company's petroleum
engineers:
<TABLE>
<CAPTION>
TOTAL
---------------------
OIL (MBBL) GAS (MMCF)
---------- ----------
<S> <C> <C>
Estimated Proved Reserves
December 31, 1993................................. 184.3 18,738.8
Revisions and other changes..................... (44.1) 916.5
Extensions and discoveries...................... 91.0 4,013.2
Production...................................... (39.5) (1,228.4)
Sales of reserves............................... -- (3,982.0)
------ --------
December 31, 1994................................. 191.7 18,458.1
Revisions and other changes..................... (114.5) (7,491.2)
Extensions and discoveries...................... 102.0 6,134.4
Production...................................... (31.6) (1,324.0)
Sales of reserves............................... (12.6) (15.1)
------ --------
December 31, 1995................................. 135.0 15,762.2
Revisions and other changes..................... 40.3 2,054.0
Extensions and discoveries...................... 514.9 553.7
Purchase of reserves............................ -- 1,016.1
Production...................................... (46.5) (2,030.0)
------ --------
December 31, 1996................................. 643.7 17,356.0
====== ========
Estimated Proved Developed Reserves
December 31, 1994................................. 111.4 15,173.1
====== ========
December 31, 1995................................. 55.8 12,625.5
====== ========
December 31, 1996................................. 121.0 15,221.2
====== ========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating To Proved
Oil and Gas Reserves
The following information has been developed utilizing procedures prescribed
by SFAS No. 69 and based on crude oil and natural gas reserve and production
volumes estimated by the Company's petroleum engineers. It may be useful for
certain comparison purposes, but should not be solely relied upon in
evaluating the Company or its performance. Further, information contained in
the following table should not be considered as representative of realistic
assessments of future cash flows, nor should the Standardized Measure of
Discounted Future Net Cash Flows be viewed as representative of the current
value of the Company.
The future cash flows presented below are based on sales prices and cost
rates in existence as of the date of the projections. It is expected that
material revisions to some estimates of crude oil and natural gas reserves may
occur in the future, development and production of the reserves may occur in
periods other than those assumed and actual prices realized and costs incurred
may vary significantly from those used.
Management does not rely upon the following information in making investment
and operating decisions. Such decisions are based upon a wide range of
factors, including estimates of probable as well as proved reserves, and
varying price and cost assumptions considered more representative of a range
of possible economic conditions that may be anticipated.
F-15
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the Standardized Measure of Discounted Future
Net Cash Flows from projected production of the Company's crude oil and
natural gas reserves at December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future revenues (a)........................ $ 44,878 $ 56,792 $ 74,300
Future production costs (b)................ (19,266) (18,278) (21,326)
Future development costs (b)............... (387) (1,711) (4,348)
-------- -------- --------
Future net cash flows...................... 25,225 36,803 48,626
Discount to present value at 10% annual
rate...................................... (9,036) (14,449) (18,561)
-------- -------- --------
Standardized measure of discounted future
net cash flows (c)........................ $ 16,189 $ 22,354 $ 30,065
======== ======== ========
</TABLE>
- --------
(a) Crude oil and natural gas revenues are based on year-end prices with
adjustments for changes reflected in existing contracts. There is no
consideration for future discoveries or risks associated with future
production of proved reserves.
(b) Based on economic conditions at year-end. Does not include administrative,
general or financing costs. Does not consider future changes in
development or production costs.
(c) Does not include income taxes as the Company is not currently subject to
federal income taxes.
Changes in Standardized Measure of Discounted Future Net Cash Flows
The following table sets forth the changes in the Standardized Measure of
Discounted Future Net Cash Flows at December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
New discoveries............................... $ 4,427 $ 11,786 $ 6,318
Purchase of reserves.......................... -- -- 1,102
Sales of reserves in place.................... (3,868) (127) --
Revisions to reserves......................... (684) (16,759) 7,887
Sales, net of production costs................ (2,285) (2,685) (5,592)
Changes in prices............................. (3,961) 27,251 (184)
Accretion of discount......................... (2,359) (1,619) (2,235)
Changes in timing of production and other..... 1,662 (11,682) 415
------- -------- -------
Net change during the year.................... $(7,068) $ 6,165 $ 7,711
======= ======== =======
</TABLE>
Capitalized Cost Related to Oil and Gas Producing Activities
The following table sets forth the capitalized costs relating to the
Company's natural gas and crude oil producing activities at December 31, 1995
and 1996:
<TABLE>
<CAPTION>
1995 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Proved properties..................................... $ 23,666 $27,883
Unproved properties................................... 1,453 2,811
-------- -------
25,119 30,694
Less--Accumulated depreciation, depletion and
amortization......................................... (7,388) (9,962)
-------- -------
$ 17,731 $20,732
======== =======
</TABLE>
F-16
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Cost Incurred In Oil and Gas Producing Activities
The acquisition, exploration and development costs disclosed in the
following tables are in accordance with definitions in SFAS No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies."
Acquisition costs include costs incurred to purchase, lease or otherwise
acquire property.
Exploration costs include exploration expenses, additions to exploration
wells in progress and depreciation of support equipment used in exploration
activities.
Development costs include additions to production facilities and equipment,
additions to development wells in progress and related facilities and
depreciation of support equipment and related facilities used in development
activities.
The following table sets forth costs incurred related to the Company's oil
and gas activities for the years ended December 31:
<TABLE>
<CAPTION>
1994 1995 1996(A)
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Property acquisition costs.......................... $ 872 $1,123 $2,264
Exploration costs................................... 2,003 2,130 2,340
Development costs................................... 1,653 3,070 1,580
------ ------ ------
Total............................................. $4,528 $6,323 $6,184
====== ====== ======
</TABLE>
- --------
(a) Includes $757 for the acquisition of proved producing properties.
Results Of Operations From Oil and Gas Producing Activities
The following table sets forth the Company's results of operations from oil
and gas producing activities for the years ended December 31, 1994, 1995 and
1996. The results of operations below do not include general and
administrative expenses, general taxes and interest expense.
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Revenues--
Natural gas........................................ $2,424 $2,747 $5,614
Crude oil and condensate........................... 672 715 1,101
------ ------ ------
Total operating revenues......................... 3,096 3,462 6,715
------ ------ ------
Operating expenses--
Lease operating expenses and production taxes...... 811 777 1,123
Depreciation, depletion and amortization........... 1,009 1,666 2,629
------ ------ ------
Total operating expenses......................... 1,820 2,443 3,752
------ ------ ------
Results of operations................................ $1,276 $1,019 $2,963
====== ====== ======
</TABLE>
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Miller Exploration Company:
We have audited the accompanying historical statements of revenues and
direct operating expenses of the Miller Exploration Company Acquired
Properties identified in Note 1 ("Historical Summaries") for each of the three
years in the period ended December 31, 1996. The Historical Summaries are the
responsibility of Miller Exploration Company's management. Our responsibility
is to express an opinion on the Historical Summaries based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Historical Summaries are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the Historical Summaries. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation
of the Historical Summaries. We believe that our audits provide a reasonable
basis for our opinion.
The accompanying Historical Summaries were prepared for the purpose of
complying with the Securities and Exchange Commission's rules for inclusion in
the Registration Statement on Form S-1 as described in Note 1 and is not
intended to be a complete presentation of the Miller Exploration Company
Acquired Properties' revenues and expenses.
In our opinion, the Historical Summaries present fairly, in all material
respects, the revenues and direct operating expenses of the Miller Exploration
Company Acquired Properties for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
November 26, 1997
F-18
<PAGE>
MILLER EXPLORATION COMPANY ACQUIRED PROPERTIES
HISTORICAL STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------- -------------------
1994 1995 1996 1996 1997
---- ------ ------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Natural gas.......................... $ 4 $3,810 $15,232 $ 11,269 $ 11,357
Crude oil and condensate............. 65 2,274 4,037 2,809 2,140
--- ------ ------- --------- ---------
Total revenues......................... 69 6,084 19,269 14,078 13,497
DIRECT OPERATING EXPENSES:
Lease operating expenses and
severance taxes..................... 7 388 1,153 746 664
--- ------ ------- --------- ---------
REVENUES IN EXCESS OF DIRECT OPERATING
EXPENSES.............................. $62 $5,696 $18,116 $ 13,332 $ 12,833
=== ====== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
MILLER EXPLORATION COMPANY ACQUIRED PROPERTIES
NOTES TO HISTORICAL STATEMENTS OF
REVENUES AND DIRECT OPERATING EXPENSES--(CONTINUED)
(1) BASIS OF PRESENTATION
The accompanying statements of revenues and direct operating expenses of the
natural gas and oil producing properties represent the interests in certain
producing properties currently owned by several unrelated investors and by the
Amerada Hess Corporation ("AHC") (collectively, the "Acquired Properties").
The interests in the unrelated investors properties are to be exchanged for
shares of common stock of the Company concurrently with the Company's initial
public offering. The interests in the AHC properties are to be acquired by the
Company for $50.5 million, as part of a Purchase and Sale Agreement between
the Company and AHC. All of these Acquired Properties will be part of the
Company's Combination Transaction, as defined elsewhere in this Prospectus.
The accompanying statements of revenues and direct operating expenses for
each of the three years in the period ended December 31, 1996, and for the
nine months ended September 30, 1996 and 1997 do not include general and
administrative expenses, interest income or expense, a provision for
depreciation, depletion and amortization or any provision for income taxes.
This is because these types of indirect operating costs are not available for
these properties as the properties have not been maintained as a separate pool
or business. In addition, historical expenses are not necessarily indicative
of the costs to be incurred by the Company since these Acquired Properties
will be recorded using a new cost basis (under the purchase method of
accounting).
Historical financial information reflecting the financial position, results
of operations and cash flows of the Acquired Properties are not presented
because the entire acquisition cost will be assigned to the oil and gas
property interests. Accordingly, the historical statements of revenues and
direct operating expenses have been presented in lieu of the financial
statements required under Rule 3-05 and Staff Accounting Bulletin No. 80 of
the Securities and Exchange Commission Regulations S-X.
The statements of revenues and direct operating expenses and related
information for the nine months ended September 30, 1996 and 1997 included
herein are unaudited and, in the opinion of management, reflect all
adjustments (consisting of only recurring adjustments) necessary for a fair
presentation of the revenues and direct operating expenses.
The results of operations for the nine months ended September 30, 1996 and
1997 are not necessarily indicative of revenues and direct operating expenses
for a full year. Additionally, all other financial statement information
contained in these Notes, which occurred subsequent to December 31, 1996, is
unaudited.
F-20
<PAGE>
,MILLER EXPLORATION COMPANY ACQUIRED PROPERTIES
NOTES TO HISTORICAL STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES--(CONTINUED)
(2) SUPPLEMENTAL FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
Estimated Quantities of Proved Oil and Gas Reserves (Unaudited)
Reserve information and future net cash flows as of December 31, 1996 are
based on reports prepared by Miller and Lents, Ltd., independent petroleum
engineers for the Company, using prices and costs in effect at December 31,
1996. Estimates as of December 31, 1994 and 1995 have been presented by the
Company's petroleum engineers. All of the Company's reserves are located in
the United States.
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those which are expected
to be recovered through existing wells with existing equipment and operating
methods. Below are the net quantities of proved reserves and proved developed
reserves for the Acquired Properties.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF)
----------- ----------
<S> <C> <C>
Proved reserves at January 1, 1994................. 0.6 24.6
Extensions and discoveries......................... 156.1 9,325.9
Revisions and other changes........................ 369.1 3,627.8
Production......................................... (4.2) (165.0)
------ --------
Proved reserves at December 31, 1994............... 521.6 12,813.3
Extensions and discoveries......................... 814.4 35,467.1
Revisions and other changes........................ (392.7) (5,927.4)
Production......................................... (132.8) (2,789.7)
------ --------
Proved reserves at December 31, 1995............... 810.5 39,563.3
Extensions and discoveries......................... 173.8 1,640.7
Revisions and other changes........................ (84.9) 4,156.3
Production......................................... (189.1) (6,322.5)
------ --------
Proved reserves at December 31, 1996............... 710.3 39,037.8
====== ========
Proved developed reserves at December 31, 1994..... 321.9 3,100.1
====== ========
Proved developed reserves at December 31, 1995..... 693.7 29,996.3
====== ========
Proved developed reserves at December 31, 1996..... 413.6 22,268.7
====== ========
</TABLE>
F-21
<PAGE>
MILLER EXPLORATION COMPANY ACQUIRED PROPERTIES
NOTES TO HISTORICAL STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES--(CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves (Unaudited)
The "Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves" (Standardized Measure) is a disclosure
requirement under SFAS No. 69. The Standardized Measure does not purport to
present the fair market value of the proved oil and natural gas reserves. This
would require consideration of expected future economic and operating
conditions, which are not taken into account in calculating the Standardized
Measure.
Under the Standardized Measure, future cash inflows were estimated by
applying year-end prices, adjusted for fixed and determinable escalations, to
the estimated future production of year-end proved reserves. Future cash
inflows were reduced by estimated future production and development costs
based on year-end costs to determine pre-tax cash inflows. Future net cash
inflows were discounted using a 10% annual discount rate to arrive at the
Standardized Measure. The following Standardized Measure and changes in the
Standardized Measure are based on the reserve estimates done at December 31,
1994, 1995 and 1996 on the basis of prices and costs at those respective
dates.
Set forth below is the Standardized Measure relating to proved oil and gas
reserves at December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future revenues (a)............................... $33,076 $132,785 $141,946
Future production costs (b)....................... (4,096) (19,874) (23,164)
Future development costs (b)...................... (48) (7,588) (7,631)
------- -------- --------
Future net cash flows............................. 28,932 105,323 111,151
Discount to present value at 10% annual rate...... (7,154) (24,976) (24,880)
------- -------- --------
Standardized Measure of discounted future net cash
flows (c)........................................ $21,778 $ 80,347 $ 86,271
======= ======== ========
</TABLE>
- --------
(a) Crude oil and natural gas revenues are based on year-end prices with
adjustments for changes reflected in existing contracts. There is no
consideration for future discoveries or risks associated with future
production of proved reserves.
(b) Based on economic conditions at year-end. Does not include administrative,
general or financing costs. Does not consider future changes in
development or production costs.
(c) Does not include income taxes as the Company is not currently subject to
federal income taxes.
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating
to Proved Oil and Gas Reserves (Unaudited)
The following is an analysis of the changes in the Standardized Measure
during 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
New discoveries...................................... $11,751 $34,965 $ 3,656
Revisions to reserves................................ 16,100 (17,945) 12,315
Sales, net of production costs....................... (62) (5,696) (18,116)
Changes in prices.................................... (6) 21,400 (6,626)
Accretion of discount................................ (55) (2,178) (8,035)
Changes in timing and other.......................... (6,830) 28,023 22,730
------- ------- -------
Net change during the year........................... $20,898 $58,569 $ 5,924
======= ======= =======
</TABLE>
F-22
<PAGE>
[LETTERHEAD]
October 24, 1997
Miller Oil Corporation
3104 Logan Valley Road
Traverse City, MI 49685-0348
Attention: Mr. W.J. Baumgartner
Gentlemen:
At the request of Miller Oil Corporation (Miller), S.A. Holditch &
Associates, Inc. (Holditch) has prepared a reserve and economic evaluation of
certain oil and gas interests in nineteen Antrim Shale gas projects as of
September 30, 1997. The nineteen Antrim Shale projects evaluated are: Bass
Lake, Big Bass Lake, Caulkins Lake, Dover, East Heart Lake, Emerald Lake,
Gingell Lake, Heart Lake, Lower Chubb Lake, No Lake, Opal Lake, Perch Lake,
Round Lake, Shupac Lake, State Chester 31, Sturgeon River, Traverse Lake,
Viking Lake, and Mitchell Lake II. The results of this study are summarized in
the table below.
ESTIMATED NET RESERVES & INCOME
CERTAIN OIL AND GAS INTERESTS
EVALUATED FOR
MILLER OIL CORPORATION
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PROVED
PRODUCING
REMAINING RESERVES RESERVES
------------------ ----------
<S> <C>
Gas--MMscf 8,761.580
INCOME DATA (M$)
Future Net Revenue 31,055.610
Deductions
Severance Tax 1,667.384
Operating Expense 11,425.430
Investment 36.090
Future Net Income 17,926.710
Discounted FNI @ 10% 9,066.293
</TABLE>
The working interests were evaluated with the Internal Revenue Service
Section 29 Unconventional Fuel Tax Credit (Section 29 Tax Credit) where
appropriate. The Section 29 Tax Credit was included in the economic analysis
as if it were actual revenue and income to the particular interest being
evaluated. We only show the actual tax credit which will be available to the
interests if the owners of the interests can use it. The actual tax
implications of the tax credit were not considered.
Section 29 Tax Credit was included for the gas used for lease fuel on all
projects except Mitchell Lake II. Miller gets 30% of the tax credit gas from
the sales gas volume and 50% of the tax credit gas from the lease fuel volume.
The lease fuel gas volume is included in the gross and net tax credit gas
volumes shown in the report.
A-1
<PAGE>
However, the lease fuel gas volume is not included in the gross and net gas
production volume shown in the report.
Section 29 Tax Credits are included where appropriate in the revenue and
income values shown above.
RESERVE ESTIMATES
Production data analysis methods were used to generate the performance of
the Antrim Shale wells included in this report. Gas and water production data
were evaluated for the nineteen Antrim Shale projects in Michigan. The primary
tool used in our analysis was SHALEGAS(TM), a three-dimensional, two-phase,
finite-difference reservoir simulation model developed by S.A. Holditch &
Associates, Inc. SHALEGAS(TM) was created specifically to study
unconventional, naturally fractured gas shales, such as the Antrim Shale in
the Michigan basin, the Eastern Devonian Shales in the Appalachian basin, and
the Barnett Shale in the Fort Worth basin.
Basic formation properties, such as relative permeability, desorption
isotherm, free gas porosity, and gas gravity, were used which Holditch had
previously developed through evaluation of historical production data in the
Michigan Antrim Shale play. Specific properties which were estimated for this
evaluation included initial pressure, calculated based on the depth of the
producing intervals; and net pay thickness, based on well log data; from wells
within the projects analyzed and nearby offset projects. Other estimated
average well properties, such as permeability, natural fracture spacing,
porosity, and initial free gas saturation, were based on an analysis of
production data from the projects.
The actual production forecast and reserves estimates were shrunk to account
for the removal of non-hydrocarbon gases, particularly CO/2/, from the well
stream. The gas volumes shown in the economics summaries are plant sales
volumes at 14.73 psi. The plant sales volumes have been shrunk for CO/2/
content. The produced volumes for all projects were shrunk for CO/2/ content
from their present CO/2/ content to a 28% CO/2/ content over the 30 year life
of the projected reserves. All gas production volumes presented on the
economic summaries are estimated plant sales volumes.
Reserve estimates are strictly technical judgments. The accuracy of any
reserve estimate is a function of the quality of data available and of
engineering and geological interpretations. The reserve estimates presented in
this report are believed reasonable; however, they are estimates only and
should be accepted with the understanding that reservoir performance
subsequent to the date of the estimate may justify their revision.
RESERVE CATEGORIES
Reserves were assigned to the proved producing reserve category. Oil and gas
reserves by definition fall into one of the following categories: proved,
probable, and possible. These categories are further divided into appropriate
reserve status categories: developed and undeveloped. The developed reserve
category is even further divided into the appropriate reserve status
subcategories: producing and nonproducing. Nonproducing reserves include shut-
in and behind-pipe reserves. The reserve categories used in this report
conform to the definitions approved by the Society of Petroleum Engineers,
Inc. Board of Directors, March 7, 1997. These definitions are presented in
Exhibit No. 1.
ECONOMIC TERMS
Net revenue (sales) is defined as the total proceeds from the sale of oil,
condensate, and gas before any deductions. Net revenue (sales) also includes
the Section 29 Tax Credit. Future net income (cashflow) is future net revenue
less net lease operating expenses and state severance or production taxes.
Future net income (cashflow) includes only those deductions for general and
administrative expenses charged by the operator to each particular well on a
monthly basis. No provisions for State or Federal income taxes are made in
this evaluation. The present worth (discounted cashflow) at various discount
rates is calculated monthly.
A-2
<PAGE>
PRICES, EXPENSES, AND ESCALATION PARAMETERS
All oil and gas product prices, expenses, and escalation parameters used in
this report were supplied by Miller. Data from Miller were accepted as
presented. A summary of the price, expense, and escalation parameters used is
shown below.
Gas--A gas price of $3.39 per MMBtu was used. The gas prices were held
constant for the life of the project. Gas prices were not escalated.
Oil--No oil price was used since no oil reserves were assigned in this
report.
Section 29 Tax Credit--A $1.026 per MMBtu Section 29 Tax Credit was used.
The Section 29 Tax Credit was escalated 3% per year starting in 1997 until
January 1, 2003, when the tax credit is scheduled to expire.
Monthly Operating Costs--The initial monthly operating costs range from
$402 per well per month to $1,439 per well per month. Monthly operating
costs were held constant for the life of the project. Monthly operating
costs were not escalated.
Variable Operating Costs--The variable operating costs range from $0.105
to $0.977 per Mscf. The variable operating costs were held constant for the
entire life of the project. The variable operating costs were not
escalated. The variable operating costs are paid by the working interest
owners and are calculated using the shrunk gas volume.
Post Production Costs--The post production costs (PPC) net of the PPC
credit range from $-0.29 per Mscf to $0.38 per Mscf. The PPC were held
constant for the entire life of the project. The PPC were not escalated.
The post production costs net of the PPC credit are paid by the working
interest owners and are calculated using the shrunk gas volume.
Capital Costs--Capital costs were included in this report at the
estimated time of expenditure. Capital costs were held constant for the
life of the project. Capital costs were not escalated.
Severance Tax--The gas severance tax was adjusted for the variable
operating costs. The Gross Gas Revenue was reduced by the variable
operating costs before the 6% severance tax was applied.
OWNERSHIP
The leasehold interests were supplied by Miller and were accepted as
presented. No attempt was made by the undersigned to verify the title or
ownership of the interests evaluated.
GENERAL
All data used in this study were obtained from Miller, public industry
information sources, or the non-confidential files of Holditch. A field
inspection of the properties was not made in connection with the preparation of
this report.
The potential environmental liabilities attendant to ownership and/or
operation of the properties have not been addressed in this report. Abandonment
costs, clean-up costs, and possible salvage value of the equipment were not
considered in this report.
In evaluating the information at our disposal related to this report, we have
excluded from our consideration all matters which require a legal or accounting
interpretation or any interpretation other than those of an engineering or
geological nature. In assessing the conclusions expressed in this report
pertaining to all aspects of oil and gas evaluations, especially pertaining to
reserve evaluations, there are uncertainties inherent in the interpretation of
engineering data, and such conclusions represent only informed professional
judgments.
Data and worksheets used in the preparation of this evaluation will be
maintained in our files in Pittsburgh and New Orleans and will be available for
inspection by anyone having proper authorization by Miller.
A-3
<PAGE>
This report was prepared solely for the use of the party to whom it is
addressed and any disclosure made by said party of this report and/or the
contents thereof shall be solely the responsibility of said party, and shall in
no way constitute any representation of any kind whatsoever of the undersigned
with respect to the matters being addressed.
We appreciate the opportunity to serve you and are available should you need
further assistance in this matter.
Very truly yours,
S.A. Holditch & Associates, Inc.
/s/ W. Denton Copeland, P.E.
W. Denton Copeland, P.E.
Vice President
A-4
<PAGE>
EXHIBIT NO. 1
PETROLEUM RESERVES DEFINITIONS
SOCIETY OF PETROLEUM ENGINEERS (SPE)
AND
WORLD PETROLEUM CONGRESSES (WPC)
RESERVES
Reserves are those quantities of petroleum/1/ which are anticipated to be
commercially recovered from known accumulations from a given date forward. All
reserve estimates involve some degree of uncertainty. The uncertainty depends
chiefly on the amount of reliable geologic and engineering data available at
the time of the estimate and the interpretation of these data. The relative
degree of uncertainty may be conveyed by placing reserves into one of two
principal classifications, either proved or unproved. Unproved reserves are
less certain to be recovered than proved reserves and may be further sub-
classified as probable and possible reserves to denote progressively
increasing uncertainty in their recoverability.
The intent of the Society of Petroleum Engineers (SPE) and the World
Petroleum Congresses (WPC) in approving additional classifications beyond
proved reserves is to facilitate consistency among professionals using such
terms. In presenting these definitions, neither organization is recommending
public disclosure of reserves classified as unproved. Public disclosure of the
quantities classified as unproved reserves is left to the discretion of the
countries or companies involved.
Estimation of reserves is done under conditions of uncertainty. The method
of estimation is called deterministic if a single best estimate of reserves is
made based on known geological, engineering, and economic data. The method of
estimation is called probabilistic when the known geological, engineering, and
economic data are used to generate a range of estimates and their associated
probabilities. Identifying reserves as proved, probable, and possible has been
the most frequent classification method and gives an indication of the
probability of recovery. Because of potential differences in uncertainty,
caution should be exercised when aggregating reserves of different
classifications.
Reserves estimates will generally be revised as additional geologic or
engineering data becomes available or as economic conditions change. Reserves
do not include quantities of petroleum being held in inventory, and may be
reduced for usage or processing losses if required for financial reporting.
Reserves may be attributed to either natural energy or improved recovery
methods. Improved recovery methods include all methods for supplementing
natural energy or altering natural forces in the reservoir to increase
ultimate recovery. Examples of such methods are pressure maintenance, cycling,
waterflooding, thermal methods, chemical flooding, and the use of miscible and
immiscible displacement fluids. Other improved recovery methods may be
developed in the future as petroleum technology continues to evolve.
PROVED RESERVES
Proved reserves are those quantities of petroleum which, by analysis of
geological and engineering data, can be estimated with reasonable certainty to
be commercially recoverable, from a given date forward, from known reservoirs
and under current economic conditions, operating methods, and government
regulations. Proved reserves can be categorized as developed or undeveloped.
- --------
/1/ PETROLEUM: For/the purpose of these definitions, the term petroleum refers
to naturally occurring liquids and gases which are predominately comprised
of hydrocarbon compounds. Petroleum may also contain non-hydrocarbon
compounds in which sulfur, oxygen, and/or nitrogen atoms are combined with
carbon and hydrogen. Common examples of non-hydrocarbons found in petroleum
are nitrogen, carbon dioxide, and hydrogen sulfide.
A-5
<PAGE>
If deterministic methods are used, the term reasonable certainty is intended
to express a high degree of confidence that the quantities will be recovered.
If probabilistic methods are used, there should be at least a 90% probability
that the quantities actually recovered will equal or exceed the estimate.
Establishment of current economic conditions should include relevant
historical petroleum prices and associated costs and may involve an averaging
period that is consistent with the purpose of the reserve estimate,
appropriate contract obligations, corporate procedures, and government
regulations involved in reporting these reserves.
In general, reserves are considered proved if the commercial producibility
of the reservoir is supported by actual production or formation tests. In this
context, the term proved refers to the actual quantities of petroleum reserves
and not just the productivity of the well or reservoir. In certain cases,
proved reserves may be assigned on the basis of well logs and/or core analysis
that indicate the subject reservoir is hydrocarbon bearing and is analogous to
reservoirs in the same area that are producing or have demonstrated the
ability to produce on formation tests.
The area of the reservoir considered as proved includes (1) the area
delineated by drilling and defined by fluid contacts, if any, and (2) the
undrilled portions of the reservoir that can reasonably be judged as
commercially productive on the basis of available geological and engineering
data. In the absence of data on fluid contacts, the lowest known occurrence of
hydrocarbons controls the proved limit unless otherwise indicated by
definitive geological, engineering or performance data.
Reserves may be classified as proved if facilities to process and transport
those reserves to market are operational at the time of the estimate or there
is a reasonable expectation that such facilities will be installed. Reserves
in undeveloped locations may be classified as proved undeveloped provided (1)
the locations are direct offsets to wells that have indicated commercial
production in the objective formation, (2) it is reasonably certain such
locations are within the known proved productive limits of the objective
formation, (3) the locations conform to existing well spacing regulations
where applicable, and (4) it is reasonably certain the locations will be
developed. Reserves from other locations are categorized as proved undeveloped
only where interpretations of geological and engineering data from wells
indicate with reasonable certainty that the objective formation is laterally
continuous and contains commercially recoverable petroleum at locations beyond
direct offsets.
Reserves which are to be produced through the application of established
improved recovery methods are included in the proved classification when (1)
successful testing by a pilot project or favorable response of an installed
program in the same or an analogous reservoir with similar rock and fluid
properties provides support for the analysis on which the project was based,
and, (2) it is reasonably certain that the project will proceed. Reserves to
be recovered by improved recovery methods that have yet to be established
through commercially successful applications are included in the proved
classification only (1) after a favorable production response from the subject
reservoir from either (a) a representative pilot or (b) an installed program
where the response provides support for the analysis on which the project is
based and (2) it is reasonably certain the project will proceed.
UNPROVED RESERVES
Unproved reserves are based on geologic and/or engineering data similar to
that used in estimates of proved reserves; but technical, contractual,
economic, or regulatory uncertainties preclude such reserves being classified
as proved. Unproved reserves may be further classified as probable reserves
and possible reserves.
Unproved reserves may be estimated assuming future economic conditions
different from those prevailing at the time of the estimate. The effect of
possible future improvements in economic conditions and technological
developments can be expressed by allocating appropriate quantities of reserves
to the probable and possible classifications.
A-6
<PAGE>
PROBABLE RESERVES
Probable reserves are those unproved reserves which analysis of geological
and engineering data suggests are more likely than not to be recoverable. In
this context, when probabilistic methods are used, there should be at least a
50% probability that the quantities actually recovered will equal or exceed
the sum of estimated proved plus probable reserves.
In general, probable reserves may include (1) reserves anticipated to be
proved by normal step-out drilling where sub-surface control is inadequate to
classify these reserves as proved, (2) reserves in formations that appear to
be productive based on well log characteristics but lack core data or
definitive tests and which are not analogous to producing or proved reservoirs
in the area, (3) incremental reserves attributable to infill drilling that
could have been classified as proved if closer statutory spacing had been
approved at the time of the estimate, (4) reserves attributable to improved
recovery methods that have been established by repeated commercially
successful applications when (a) a project or pilot is planned but not in
operation and (b) rock, fluid, and reservoir characteristics appear favorable
for commercial application, (5) reserves in an area of the formation that
appears to be separated from the proved area by faulting and the geologic
interpretation indicates the subject area is structurally higher than the
proved area, (6) reserves attributable to a future workover, treatment, re-
treatment, change of equipment, or other mechanical procedures, where such
procedure has not been proved successful in wells which exhibit similar
behavior in analogous reservoirs, and (7) incremental reserves in proved
reservoirs where an alternative interpretation of performance or volumetric
data indicates more reserves than can be classified as proved.
POSSIBLE RESERVES
Possible reserves are those unproved reserves which analysis of geological
and engineering data suggests are less likely to be recoverable than probable
reserves. In this context, when probabilistic methods are used, there should
be at least a 10% probability that the quantities actually recovered will
equal or exceed the sum of estimated proved plus probable plus possible
reserves.
In general, possible reserves may include (1) reserves which, based on
geological interpretations, could possibly exist beyond areas classified as
probable, (2) reserves in formations that appear to be petroleum bearing based
on log and core analysis but may not be productive at commercial rates, (3)
incremental reserves attributed to infill drilling that are subject to
technical uncertainty, (4) reserves attributed to improved recovery methods
when (a) a project or pilot is planned but not in operation and (b) rock,
fluid, and reservoir characteristics are such that a reasonable doubt exists
that the project will be commercial, and (5) reserves in an area of the
formation that appears to be separated from the proved area by faulting and
geological interpretation indicates the subject area is structurally lower
than the proved area.
RESERVE STATUS CATEGORIES
Reserve status categories define the development and producing status of
wells and reservoirs.
DEVELOPED: Developed reserves are expected to be recovered from existing
wells including reserves behind pipe. Improved recovery reserves are
considered developed only after the necessary equipment has been installed, or
when the costs to do so are relatively minor. Developed reserves may be
subcategorized as producing or non-producing.
PRODUCING: Reserves subcategorized as producing are expected to be
recovered from completion intervals which are open and producing at the
time of the estimate. Improved recovery reserves are considered producing
only after the improved recovery project is in operation.
NON-PRODUCING: Reserves subcategorized as non-producing include shut-in
and behind-pipe reserves. Shut-in reserves are expected to be recovered
from (1) completion intervals which are open at the time of the estimate
but which have not started producing, (2) wells which were shut-in for
market conditions or pipeline connections, or (3) wells not capable of
production for mechanical reasons. Behind-pipe reserves
A-7
<PAGE>
are expected to be recovered from zones in existing wells, which will
require additional completion work or future recompletion prior to the
start of production.
UNDEVELOPED RESERVES: Undeveloped reserves are expected to be recovered: (1)
from new wells on undrilled acreage, (2) from deepening existing wells to a
different reservoir, or (3) where a relatively large expenditure is required
to (a) recomplete an existing well or (b) install production or transportation
facilities for primary or improved recovery projects.
A-8
<PAGE>
APPENDIX B
[LETTERHEAD]
December 4, 1997
Mr. Doug Bell
Miller Oil Corporation
3104 Logan Valley Road
Traverse City, Michigan 49684
Re: Miller Oil Corporation
Proved Reserves and Future Net
Revenues
As of September 30, 1997
SEC Price Case
MOC2 Revised Interests
Amerada Hess Acquisition
Dear Mr. Bell:
At your request, we estimated the proved oil, condensate, and natural gas
reserves and projected the future net revenue from these reserves attributable
to the net revised combined interests including the Amerada Hess acquisition
interests (MOC2AH) in the Miller Oil Corporation properties as of September
30, 1997. The forecast of future net revenues is based on constant prices and
costs. The results of our evaluation are as follows:
<TABLE>
<CAPTION>
NET RESERVES FUTURE NET REVENUE
-------------------- ---------------------------
OIL AND DISCOUNTED AT
CONDENSATE, GAS, UNDISCOUNTED, 10% PER YEAR,
RESERVE CATEGORY MBBLS. MMCF M$ M$
---------------- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Proved Producing 334.8 18,555.5 51,736.1 41,905.9
Proved Nonproducing 86.9 2,246.7 4,957.6 2,680.4
Proved Undeveloped 752.3 16,814.5 43,692.2 33,831.6
------- -------- --------- --------
Total Proved 1,174.0 37,616.7 100,385.9 78,417.9
</TABLE>
Proved reserves and future net revenue were determined in accordance with
the definitions contained in the Securities and Exchange Commission Regulation
S-X, Rule 4-10(a) as shown in the Appendix.
Future net revenue is defined as the leasehold revenue attributable to the
evaluated working interests less operating expenses, royalties, overhead
charges, production and ad valorem taxes, and future capital expenditures. The
effects of depreciation, depletion, or Federal Income Tax are not considered.
For the forecast of future net revenue, the costs to abandon these properties
were assumed to be equal to the salvage values. Therefore, neither capital
costs to abandon nor salvage values for the production facilities or wells are
included in the projections. Future costs of restoration of all properties
evaluated herein to satisfy environmental standards are not deducted from the
estimates of future net revenue as such estimates are beyond the scope of this
assignment. Estimates of future net revenue and discounted future net revenue
are not intended and should not be construed to represent fair market value
for these properties.
Proved reserves were based on decline curve analysis, material balance
calculations, volumetric estimates, and analogous well performance. Reserve
estimates from volumetric estimates and from analogy comparisons are often
less certain than reserve estimates based on well performance obtained over a
period during which a substantial portion of the reserves was produced. No
provisions for the possible consequences of adjustments, if any, to projected
volumes and future net revenue for the purposes of production balancing are
included in this study.
B-1
<PAGE>
In conducting this evaluation, we relied upon production histories,
accounting and cost data, and other engineering and geological data supplied
by Miller Oil Corporation, various operators, and public information. We
relied upon representations by Miller Oil Corporation of the ownership
interests and have accepted them as presented with no independent verification
of their accuracy as such is not with the scope of this report.
The prices of the oil and condensate and natural gas for each property were
provided by Miller Oil Corporation and were represented as those prices
received for oil, condensate, and natural gas for September 1997. The gas
prices were represented to be net of gathering, transportation, and basis
adjustments. Adjustments to the gas price for Btu content were included in the
forecast of future net revenues. Both the oil and gas prices were projected to
remain constant for the life of each property.
Operating expenses and capital expenditures were based on information
provided by Miller Oil Corporation and were held constant for the life of the
property.
The evaluations presented in this report, with the exceptions of those
parameters specified by others, reflect our informed judgments based on
accepted standards of professional investigation but are subject to those
generally recognized uncertainties associated with interpretation of
geological, geophysical, and engineering information. Government policies and
market conditions different from those employed in this study may cause the
total quantity of oil or gas to be recovered, actual production rates, prices
received, or operating and capital costs to vary from those presented in this
report.
The details of this investigation are available in our office should you
require additional information. Please call us if you have questions
concerning this matter.
Very truly yours,
Miller and Lents, Ltd.
By /s/ Larry M. Gring
-----------------------------------
Larry M. Gring
Senior Vice President
LMG/psh
Enclosures
B-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Dilution.................................................................. 20
Capitalization............................................................ 21
Selected Historical Combined Financial and Operating Data................. 22
Selected Unaudited Pro Forma Combined Financial Data...................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 28
Business and Properties................................................... 34
Management................................................................ 49
Certain Transactions...................................................... 59
Principal and Selling Stockholders........................................ 62
Description of Capital Stock.............................................. 63
Shares Eligible for Future Sale........................................... 69
Underwriting.............................................................. 70
Legal Matters............................................................. 71
Experts................................................................... 71
Available Information..................................................... 72
Glossary of Certain Oil and Natural Gas Terms............................. 73
Index to Financial Statements............................................. F-1
Engineers' Reports........................................................
Report of S.A. Holditch & Associates..................................... A-1
Report of Miller and Lents, Ltd.......................................... B-1
</TABLE>
----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES OF THE COMMON STOCK, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[LOGO OF MILLER EXPLORATION COMPANY APPEARS HERE]
MILLER EXPLORATION
COMPANY
COMMON STOCK
----------------
PROSPECTUS
----------------
BEAR, STEARNS & CO. INC.
RAYMOND JAMES & ASSOCIATES, INC.
STEPHENS INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All the amounts shown are estimated
except the Securities and Exchange Commission (the "SEC") registration fee,
the National Association of Securities Dealers, Inc. (the "NASD") filing fee
and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $25,860
NASD filing fee................................................... 9,125
Nasdaq National Market listing application fee.................... 50,000
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Engineering fees and expenses..................................... *
Miscellaneous..................................................... *
-------
Total......................................................... $ *
=======
</TABLE>
- --------
*To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (a "proceeding") (other than an action by or in the right of
the corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. A Delaware corporation
may indemnify any person under such Section in connection with a proceeding by
or in the right of the corporation to procure judgment in its favor, as
provided in the preceding sentence, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense
or settlement of such action, except that no indemnification shall be made in
respect thereof unless, and then only to the extent that, a court of competent
jurisdiction shall determine upon application that such person is fairly and
reasonably entitled to indemnity for such expenses as the court shall deem
proper. A Delaware corporation must indemnify a present or former director or
officer of a corporation who was successful on the merits or otherwise in
defense of any action, suit or proceeding or in defense of any claim, issue or
matter in any proceeding, by reason of the fact that he is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith. A Delaware
corporation may pay for the expenses (including attorneys' fees) incurred by
an officer or director in defending a proceeding in advance of the final
disposition upon receipt of an undertaking by or on behalf of such officer or
director to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the corporation.
Section 102(b)(7) of the Delaware Law permits a corporation to provide in
its certificate of incorporation that a director shall not be personally
liable to the corporation or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to
II-1
<PAGE>
the corporation or its stockholders, (ii) for any acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock
redemptions or repurchases, or (iv) for any transaction from which the
director derived an improper personal benefit. Article XIII of the
Registrant's Certificate of Incorporation eliminates the liability of
directors to the fullest extent permitted by Section 102(b)(7) of the Delaware
Law. The Delaware Law permits the purchase of insurance on behalf of directors
and officers against any liability asserted against directors and officers and
incurred by such persons in such capacity, or arising out of their status as
such, whether or not the corporation would have the power to indemnify
directors and officers against such liability.
Before or immediately after the consummation of the Offering, the Registrant
intends to acquire officers' and directors' liability insurance for members of
its Board of Directors and executive officers. In addition, before or
immediately after the consummation of the Offering, the Registrant expects to
enter into agreements to indemnify its directors and officers. A form of such
indemnity agreement is filed as Exhibit 10.2 to this Registration Statement.
At present, there is no pending litigation or other proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought, nor is the Registrant aware of any threatened litigation that may
result in claims for indemnification by any officer or director.
Reference is made to the form of Underwriting Agreement, to be filed as
Exhibit 1.1 to this Registration Statement, that provides for indemnification
of the directors and officers signing this Registration Statement and certain
controlling persons of the Registrant against certain liabilities, including
those arising under the Securities Act, in certain instances by the
Underwriters.
Articles XIII and XIV of the Registrant's Certificate of Incorporation and
Article VI of the Registrant's Bylaws provide for indemnification of directors
and officers to the fullest extent permitted by Section 145 of the Delaware
Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its formation, on November 14, 1997 the Registrant issued
100 shares of Common Stock to Kelly E. Miller as sole trustee of the Kelly E.
Miller Trust. The Registrant issued such shares to Mr. Miller upon his payment
of $100 therefor in a transaction exempt under Section 4(2) of the Securities
Act. The Registrant entered into the Exchange and Combination Agreement
effective November 12, 1997 (the "Combination Agreement") with certain trusts
for the benefit of Mr. Miller and members of his family, with certain
affiliated oil and gas exploration companies, and with certain oil and gas
exploration companies that have been long-time partners and investors in MOC,
the Registrant's predecessor. Pursuant to the Combination Agreement, persons
owning shares of certain common stock and certain interests in oil and natural
gas properties (in which the Registrant's predecessor also has an interest)
have agreed to exchange such shares and interests for a number of shares of
Common Stock of the Registrant proportionate to the value of their ownership
interests in the assets being contributed calculated on the basis of the
initial public offering price of the Common Stock. The transaction
contemplated by the Combination Agreement is subject to the consummation of
the Offering and certain other conditions. A copy of the Combination Agreement
is attached to this Registration Statement as Exhibit 2.1.
No brokers or underwriters have been or will be involved in the issuance of
Common Stock in the transaction contemplated by the Combination Agreement. All
certificates for the shares of Common Stock so issued will bear restrictive
legends. In connection with the offering and sale described above, the
Registrant relied on Section 4(2) of the Securities Act and Rule 506 of
Regulation D thereunder for an exemption from the registration requirements of
the Securities Act. The Common Stock was offered only to "accredited
investors" (as defined in Regulation D) or to purchasers who, in the
reasonable belief of the Registrant, either alone or with his or her purchaser
representative, had such knowledge and experience in financial and business
matters that he or she was capable of evaluating the merits and risks of the
investment. Such shares were also offered and sold in reliance upon exemptions
from registration or qualification under certain state securities laws. Except
with
II-2
<PAGE>
respect to the stock to be sold by the Selling Stockholders pursuant to this
Registration Statement, the persons acquiring shares of Common Stock
represented in the Combination Agreement that they were purchasing such shares
for investment only and without a view towards resale.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement among the Registrant, the
Selling Stockholders and the Underwriters*
2.1 Exchange and Combination Agreement dated November 12,
1997
2.2(a) Letter Agreement amending Exchange and Combination
Agreement**
2.2(b) Letter Agreement amending Exchange and Combination
Agreement**
2.2(c) Letter Agreement amending Exchange and Combination
Agreement**
2.3 Agreement for Purchase and Sale dated November 25, 1997
between Amerada Hess Corporation and Miller Oil Corpora-
tion**
3.1 Certificate of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1 Certificate of Incorporation. See Exhibit 3.1.
4.2 Bylaws. See Exhibit 3.2.
4.3 Form of Specimen Stock Certificate**
5.1 Form of Opinion of Warner Norcross & Judd LLP (including
the consent of such firm) as to the validity of the se-
curities being offered. Executed opinion to be filed by
amendment.
10.1 Stock Option and Restricted Stock Plan of 1997***
10.2 Form of Director and Officer Indemnity Agreement
10.3 Form of Employment Agreement for Kelly E. Miller, Wil-
liam J. Baumgartner, Lew P. Murray and Charles A. Morri-
son***
10.4 Lease Agreement between Miller Oil Corporation and C.E.
and Betty Miller, dated July 24, 1996
10.5(a) Business Loan Agreement between First of America Bank-
Michigan and Miller Oil Corporation dated September 10,
1996
10.5(b)(i) Mortgage, Security Agreement and Assignment between
First of America Bank-Michigan and Miller Oil Corpora-
tion dated May 1, 1995**
10.5(b)(ii) Mortgage, Security Agreement and Assignment between
First of America Bank-Michigan and Miller Oil Corpora-
tion dated September 10, 1996
10.5(c) $5,000,000 Promissory Note of Miller Oil Corporation
payable to First of America Bank-Michigan dated Septem-
ber 10, 1996, with amendment
10.5(d) $1,000,000 Promissory Note of Miller Oil Corporation
payable to First of America Bank-Michigan dated Septem-
ber 10, 1996
10.5(e) $500,000 Promissory Note of Miller Oil Corporation pay-
able to First of America Bank-Michigan dated March 21,
1997, with amendment
10.5(f) Subordination Agreement among First of America Bank-
Michigan, Miller Oil Corporation, Kelly E. Miller, David
A. Miller, Daniel R. Miller and Sue Ellen Bell dated Oc-
tober 6, 1995**
10.5(g) $500,000 Promissory Note of Miller Oil Corporation pay-
able to First of America-Michigan dated November 17,
1997**
10.6 Letter Agreement dated November 10, 1997, between Miller
Oil Corporation and C.E. Miller, regarding sale of cer-
tain assets
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.7 Amended Service Agreement dated January 1, 1997, between
Miller Oil Corporation and Eagle Investments, Inc.
10.8 Form of Registration Rights Agreement (included as Exhibit
E to Exhibit 2.1)
10.9 Consulting Agreement dated June 1, 1996 between Miller Oil
Corporation and Frank M. Burke, Jr., with amendment
10.10 $2,500,000 Promissory Note dated November 26, 1997 between
Miller Oil Corporation and the C.E. Miller Trust**
11.1 Computation of Earnings per Share**
21.1 Subsidiaries of the Registrant
23.1 Consent of Warner Norcross & Judd LLP (included in Exhibit
5.1)
23.2 Consent of Arthur Andersen LLP**
23.3 Consent of S.A. Holditch & Associates**
23.4 Consent of Miller and Lents, Ltd.**
23.5 Consents of Director Nominees
24.1 Limited Power of Attorney
27.1 Financial Data Schedule**
</TABLE>
- --------
* To be filed by amendment.
** Filed herewith.
*** Management contract or compensatory plan or arrangement.
Except as noted, all exhibits have been previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are inapplicable or the requested
information is shown in the financial statements or related notes.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes: (i) that for purposes of determining any
liability under the Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective; (ii) that for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and (iii) to
provide to the Underwriters at the closing specified in the Underwriting
Agreement, certificates in such denominations and registered in such names as
required by the Underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Traverse City, State of Michigan, on December 5, 1997.
Miller Exploration Company
(Registrant)
By /s/ William J. Baumgartner
-----------------------------------
William J. Baumgartner
Vice President--Finance and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ C. E. Miller* Chairman of the Board and December 5, 1997
- ------------------------------------ Director
C. E. Miller
/s/ Kelly E. Miller* President, Chief Executive December 5, 1997
- ------------------------------------ Officer and Director
Kelly E. Miller (Principal Executive
Officer)
/s/ William J. Baumgartner Vice President-Finance, December 5, 1997
- ------------------------------------ Chief Financial Officer and
William J. Baumgartner Director (Principal
Financial Officer)
*By /s/ William J. Baumgartner
-----------------------
William J. Baumgartner
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement among the Registrant, the
Selling Stockholders and the Underwriters*
2.1 Exchange and Combination Agreement dated November 12,
1997
2.2(a) Letter Agreement amending Exchange and Combination
Agreement**
2.2(b) Letter Agreement amending Exchange and Combination
Agreement**
2.2(c) Letter Agreement amending Exchange and Combination
Agreement**
2.3 Agreement for Purchase and Sale dated November 25, 1997
between Amerada Hess Corporation and Miller Oil Corpora-
tion**
3.1 Certificate of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1 Certificate of Incorporation. See Exhibit 3.1.
4.2 Bylaws. See Exhibit 3.2.
4.3 Form of Specimen Stock Certificate**
5.1 Form of Opinion of Warner Norcross & Judd LLP (including
the consent of such firm) as to the validity of the se-
curities being offered. Executed opinion to be filed by
amendment.
10.1 Stock Option and Restricted Stock Plan of 1997***
10.2 Form of Director and Officer Indemnity Agreement
10.3 Form of Employment Agreement for Kelly E. Miller, Wil-
liam J. Baumgartner, Lew P. Murray and Charles A. Morri-
son***
10.4 Lease Agreement between Miller Oil Corporation and C.E.
and Betty Miller, dated July 24, 1996
10.5(a) Business Loan Agreement between First of America Bank-
Michigan and Miller Oil Corporation dated September 10,
1996
10.5(b)(i) Mortgage, Security Agreement and Assignment between
First of America Bank-Michigan and Miller Oil Corpora-
tion dated May 1, 1995**
10.5(b)(ii) Mortgage, Security Agreement and Assignment between
First of America Bank-Michigan and Miller Oil Corpora-
tion dated September 10, 1996
10.5(c) $5,000,000 Promissory Note of Miller Oil Corporation
payable to First of America Bank-Michigan dated Septem-
ber 10, 1996, with amendment
10.5(d) $1,000,000 Promissory Note of Miller Oil Corporation
payable to First of America Bank-Michigan dated Septem-
ber 10, 1996
10.5(e) $500,000 Promissory Note of Miller Oil Corporation pay-
able to First of America Bank-Michigan dated March 21,
1997, with amendment
10.5(f) Subordination Agreement among First of America Bank-
Michigan, Miller Oil Corporation, Kelly E. Miller, David
A. Miller, Daniel R. Miller and Sue Ellen Bell dated Oc-
tober 6, 1995**
10.5(g) $500,000 Promissory Note of Miller Oil Corporation pay-
able to First of America-Michigan dated November 17,
1997**
10.6 Letter Agreement dated November 10, 1997, between Miller
Oil Corporation and C.E. Miller, regarding sale of cer-
tain assets
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ----------- ---
<C> <S> <C>
10.7 Amended Service Agreement dated January 1, 1997, between
Miller Oil Corporation and Eagle Investments, Inc.
10.8 Form of Registration Rights Agreement (included as Exhibit
E to Exhibit 2.1)
10.9 Consulting Agreement dated June 1, 1996 between Miller Oil
Corporation and Frank M. Burke, Jr., with amendment
10.10 $2,500,000 Promissory Note dated November 26, 1997 between
Miller Oil Corporation and the C.E. Miller Trust**
11.1 Computation of Earnings per Share**
21.1 Subsidiaries of the Registrant
23.1 Consent of Warner Norcross & Judd LLP (included in Exhibit
5.1)
23.2 Consent of Arthur Andersen LLP**
23.3 Consent of S.A. Holditch & Associates**
23.4 Consent of Miller and Lents, Ltd.**
23.5 Consents of Director Nominees
24.1 Limited Power of Attorney
27.1 Financial Data Schedule**
</TABLE>
- --------
* To be filed by amendment.
** Filed herewith.
*** Management contract or compensatory plan or arrangement.
Except as noted, all exhibits have been previously filed.
<PAGE>
Exhibit 2.2(a)
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ David A. Miller
-----------------------------------
David A. Miller
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Giorgio Vozza
-----------------------------------
Giorgio Vozza
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Ken Foote
-----------------------------------
Ken Foote
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted: SASI Minerals Company
By: /s/ William Casey McManemin
-----------------------------------
William Casey McManemin
Attorney-In-Fact
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ L.H. Hardy
-----------------------------------
L.H. Hardy
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Dan A. Hughes
-----------------------------------
Dan A. Hughes
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Sue Ellen Bell
-----------------------------------
Sue Ellen Bell
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Albert F. Stevens/Joanna R. Stephens
-----------------------------------------
Albert F. Stevens/Joanna R. Stephens
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Charles F. Knight
-----------------------------------------
Charles F. Knight
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ G. O. Brueckner
-----------------------------------------
G. O. Brueckner
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Tom M. Ostergard
-----------------------------------------
Tom M. Ostergard
Date: November 13, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ C. E. Miller
-----------------------------------------
C. E. Miller
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Kelly E. Miller
-----------------------------------------
Kelly E. Miller
Date: November 12, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Howard Holsman
-----------------------------------------
Howard Holsman
Date: November 14, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Jerry D. Campbell
-----------------------------------------
Jerry D. Campbell
Date: November 13, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Daniel R. Miller
-----------------------------------------
Daniel R. Miller
Date: November __, 1997
<PAGE>
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participants:
In reference to the Clarification of Registration Rights Agreement please
----------------------------------------------
note the following change:
The first portion of Section 1.7 of the registration Rights Agreement
should read as follows (italicized language inserted):
1.7 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the company to register securities granted to a Holder by the company
under this Section1 may be transferred or assigned by a Holder only
to a transferee or assignee of not less than one half of the Shares
held by such Holder on the date hereof (as presently constituted and
proportionately adjusted....
Please sign in the space provided below and fax to me as soon as possible
in Dallas at 214-443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
Agreed and Accepted:
By: /s/ Dennis LeJeune
-----------------------------------------
Dennis LeJeune
Date: November __, 1997
<PAGE>
Exhibit 2.2(b)
[LETTERHEAD APPEARS HERE]
November 12, 1997
Facsimile Transmission
- ----------------------
To: Combination Transaction Participants
Identified on the Attached Revised Exhibit B
Dear Participant:
Thank you for promptly reviewing the various documents and for your
expeditious reply. I apologize that the documents needed to be modified. Timing
is everything, and I hope you can appreciate all that we have to do in the
window of time available. I am currently at the printer finalizing the
Registration Statement before filing with the Securities and Exchange
Commission.
There are two additional matters requiring your immediate attention,
which need to be cared for prior to our filing.
IPO Valuation Error
-------------------
Much to my embarrassment, we were advised of a mathematical error in the
IPO valuation worksheet (Exhibit E to the Private Placement Memorandum). On page
2, under Undeveloped Prospects - Mirando Hondo (Hinnant 114#1), the value of
SASI's interest was not considered, and value was attributed to other parties
who have no interest in that prospect. It is important and fair to all parties
that this adjustment be proportionally applied to all parties. A corrected IPO
valuation worksheet and a revised Exhibit B to the Exchange and Combination
Agreement showing the recomputed Applicable Percentage of Exchange Stock
allocated to each Contributor are attached.
Clarification of Indemnity Language
-----------------------------------
Without limiting the provisions of Section 6.1 and Section 7.4 of the
Exchange and Combination Agreement, the Company and the Contributors hereby
acknowledge and agree that where the Company's indemnification obligations under
Section 6.1(c) and Section 7.4(a) of the Exchange and Combination Agreement run
in favor of the "Contributors", those obligations shall be deemed to run in
favor of the Contributors and their respective officers, directors, partners,
authorized agents, legal counsel and accountants.
Without limiting the provisions of Section 1.4(a) of the Registration
Rights Agreement, the Company and the Holders hereby acknowledge and agree that
where the Company's indemnification obligations under Section 1.4(a) of the
Registration Rights Agreement run in favor of the "Holders", those obligations
shall be deemed to run in favor of the Holders and their respective officers,
directors, authorized agents, legal counsel and accountants.
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ David A. Miller
-----------------------
David A. Miller
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 3
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Giorgio Vozza
-----------------------
Giorgio Vozza
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 4
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Ken Foote
-----------------------
Ken Foote
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 5
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
SASI Minerals Company
By: /s/ William Casey McManemin
---------------------------
William Casey McManemin
Attorney-In-Fact
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 6
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ L.H. Hardy
-----------------------
L.H. Hardy
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 7
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Dan A. Hughes
-----------------------
Dan A. Hughes
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 8
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Sue Ellen Bell
-----------------------
Sue Ellen Bell
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 9
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Albert F. Stevens/Joanna R. Stevens
---------------------------------------
Albert F. Stevens/Joanna R. Stevens
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 10
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Charles F. Knight
---------------------------------------
Charles F. Knight
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 11
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ G. O. Brueckner
---------------------------------------
G. O. Brueckner
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 12
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Jerry D. Campbell
---------------------------------------
Jerry D. Campbell
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 13
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ C.E. Miller
---------------------------------------
C.E. Miller
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 14
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Kelly E. Miller
---------------------------------------
Kelly E. Miller
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 15
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Howard Holsman
---------------------------------------
Howard Holsman
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 16
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Dennis LeJeune
---------------------------------------
Dennis LeJeune
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 17
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Tom M. Ostergard
---------------------------------------
Tom M. Ostergard
Date: November 12, 1997
----------------------
<PAGE>
Combination Transaction Participants
Page 17
November 12, 1997
Please feel free to call me at (214) 521-4767, ext. 134, if you have any
questions concerning this letter or any other matter regarding the Combination
Transaction.
If you agree to the foregoing proposal, please sign in the space below
and fax a copy of the signed version to me at (214)443-1180.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
/sc
Enclosure
Agreed and accepted:
By: /s/ Daniel R. Miller
---------------------------------------
Daniel R. Miller
Date: November 12, 1997
----------------------
<PAGE>
Exhibit 2.2(c)
[LOGO OF MILLER OIL
CORPORATION APPEARS HERE]
November 12, 1997
Fascimile Transmission
- ----------------------
To: Combination Transaction Participants
Dear Participant:
As you are aware, we have been discussing a possible acquisition by Miller
Exploration Company ("MEC") of a significant additional interest in the
Mississippi Salt Dome properties to be owned by MEC after consummation of the
Combination Transaction.
We are contemplating a transaction in which the closing would be
conditioned upon closing of the initial public offering. We may be required,
however, to make a non-refundable down payment of at least 5% of the purchase
price with the seller. The down payment will be made by Miller Oil Corporation
("MOC") on behalf of the participants in the Combination Transaction.
To summarize the proposed transaction, upon closing of the initial public
offering, MEC would acquire all of Amerada Hess Corporation's ("AHC") interests
in the Mississippi Salt Dome basin properties.
The interests acquired from AHC would include a 75% working interest in the
AMIs over seven (7) salt domes, a 50% working interest in the AMIs over two (2)
salt domes, AHC's interest (subject to farmout agreements) in two (2) other
domes, field office, equipment, facilities, flow lines, seismic data, computer
mapping database, joint venture agreements, and gas purchase, transportation and
processing contracts. MEC may also employ some of AHC's personnel.
The terms of the proposed transaction are as follows: The purchase price
would be approximately $50 million, payable $2.5 million as a non-refundable
down payment upon execution of a purchase and sale agreement, $42.5 million upon
closing within a short period after the closing of the initial public offering
and $5 million from a percentage of the revenue stream of and when MEC has
recovered $45 million, its capital expenditures for exploration and development
attributable to the acquired interest and a return on its investment. The
effective date would be approximately November 1, 1997.
This acquisition would require the issuance of additional stock and, as a
result your proportionate ownership in MEC would be reduced. It should be
recognized that, although your percentage of ownership would be less, you would
own your proportionate share of a company with a higher valuation.
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Albert F. Stevens/Joanna R. Stevens
----------------------------------------
Albert F. Stevens/Joanna R. Stevens
Date: November 12, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Charles F. Knight
----------------------------------------
Charles F. Knight
Date: November 12, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ L. H. Hardy
----------------------------------------
L. H. Hardy
Date: November 14, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ G. O. Brueckner
----------------------------------------
G. O. Brueckner
Date: November 12, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
SASI Minerals Company
By: /s/ William Casey McManemin
----------------------------------------
William Casey McManemin
Attorney-in-fact
Date: November 13, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ David A. Miller
----------------------------------------
David A. Miller
Date: November 13, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Giorgio Vozza
----------------------------------------
Giorgio Vozza
Date: November 14, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Tom Ostergard
----------------------------------------
Tom Ostergard
Date: November 13, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Jerry D. Campbell
----------------------------------------
Jerry D. Campbell
Date: November 14, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Dan A. Hughes Jr.
----------------------------------------
Dan A. Hughes Jr.
Date: November 13, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ C. E. Miller
----------------------------------------
C. E. Miller
Date: November 12, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Kelly E. Miller
----------------------------------------
Kelly E. Miller
Date: November 12, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Howard Holsman
----------------------------------------
Howard Holsman
Date: November 12, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Dennis LeJeune
----------------------------------------
Dennis LeJeune
Date: November 14, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my invesment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Sue Ellen Bell
----------------------------------------
Sue Ellen Bell
Date: November 14, 1997
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my investment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Daniel R. Miller
----------------------------------------
Daniel R. Miller
Date: 11/18/97
--------------------------
<PAGE>
Combination Transaction Participants
Page 2
November 12, 1997
No assurance can be given as to whether the proposed transaction will be
consummated or that the terms would be the same as discussed above.
Sincerely,
MILLER OIL CORPORATION
/s/ Kelly E. Miller
Kelly E. Miller
President
KEM/sc
I hereby confirm receipt of this letter and my investment decision evidenced in
the Exchange and Combination Agreement.
By: /s/ Ken Foote
----------------------------------------
Ken Foote
Date: November 12, 1997
--------------------------
<PAGE>
EXHIBIT 2.3
AGREEMENT FOR PURCHASE AND SALE
THIS AGREEMENT dated this 25th day of November, 1997, between AMERADA
HESS CORPORATION, a Delaware corporation (hereinafter referred to as
"Seller"), and MILLER OIL CORPORATION, a Michigan corporation (hereinafter
referred to as "Buyer").
W I T N E S S E T H:
WHEREAS, Seller owns certain oil and gas properties in eleven (11)
areas of mutual interest ("AMI") in the Mississippi Salt Basin in
Covington, Jefferson Davis, Jones, Lamar and Lawrence Counties,
Mississippi, established pursuant to a certain Mississippi/Louisiana Salt
Dome Joint Venture Agreement dated March 1, 1993 between Seller and Buyer,
a certain Joint Venture Agreement dated June 1, 1996 between Seller and
Buyer, and a certain Joint Venture Agreement dated June 1, 1996 among
Seller, Buyer, Key Production Company, Liberty Energy Corporation and
Bonray, Inc., all as amended; and
WHEREAS, Seller desires to sell and Buyer desires to acquire all of
Seller's oil and gas interests, both producing and non-producing, and
related assets in said AMIs; and
WHEREAS, Seller is the operator of the oil and gas properties included
within the Assets to be sold by Seller to Buyer;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties hereby agree as follows:
-1-
<PAGE>
ARTICLE I
PURCHASE AND SALE
1.1 PURCHASE AND SALE. Subject to the terms and conditions of this
Agreement, Seller shall sell and Buyer shall purchase at Closing (as
hereinafter defined) the following assets of Seller (except those items on
the list of excluded property set forth on Exhibit 1.1 attached hereto),
hereinafter referred to as the "Assets:"
(a) All oil, gas and/or mineral leases, leasehold estates, mineral
fees, royalty and overriding royalty interests, and all other interests of any
nature whatsoever in the eleven (11) AMIs described in the Recitals hereto and
outlined on the exhibit attached hereto as Exhibit 1.1(a), whether currently
owned by Seller or acquired by Seller prior to Closing, regardless of whether
Seller owns record title or a beneficial or contractual interest (all of said
interests being hereinafter collectively referred to as "Mineral Interests"),
together with each and every kind and character of right, title, claim or
interest which Seller has in and to the Mineral Interests and the lands covered
by the Mineral Interests;
(b) Present and future participation in any wells, units,
fields, or additional oil and gas interests, which participation is derived
from and limited to the Mineral Interests, including, but not limited to,
all right, title and interest of Seller derived from any unitization,
pooling, operating, area of mutual interest, communitization or other
agreement, or from any declaration or order of any governmental authority;
(c) All wells, equipment, facilities, improvements, salt water
disposal wells, compressors, compressor stations, dehydration facilities,
-2-
<PAGE>
treating facilities and plants (including desulfurization facilities),
pipelines, gathering systems, flow lines, transportation lines, field
offices and yards (both owned and leased), valves, meters, separators,
tanks, tank batteries, and other fixtures and appurtenances pertaining to
the Mineral Interests;
(d) Oil, gas and other hydrocarbons (including all components thereof)
produced from, or attributable to the Mineral Interests subsequent to the
Effective Date (as hereinafter defined), including "line fill" and inventory
below the pipeline connection in tanks;
(e) Personal property located on or used in connection with the
development, operation, maintenance, and/or safeguarding of any of the Mineral
Interests, including, but not limited to, cores, cuttings, supplies, inventory,
pipe, equipment, compressors, tools and contents of the field offices
(including, but not limited to, computers utilized for Scadix monitoring of
wells, furniture, fixtures and supplies);
(f) Contracts and contractual rights, obligations and interests
including, but not limited to, unit agreements, farmout agreements, farmin
agreements, drilling contracts, operating agreements, well service contracts,
seismic licenses, software licenses, storage or warehouse agreements, supplier
contracts, service contracts, marketing contracts, construction agreements,
division orders and transfer orders, relating to the Mineral Interests; except
licenses which Seller is prohibited from selling or assigning under the terms of
a contract existing on the Effective Date;
-3-
<PAGE>
(g) All lease files, land files, well files, well data and records,
engineering studies, gas and oil sales contract files, gas processing files,
division order files, abstracts, title opinions, geophysical data, files, tapes,
maps, and licenses, and all other books, files and records, information and data
(including, but not limited to, engineering and geological data, files and maps)
of Seller, insofar as the same relate to the Mineral Interests, except for
licenses and data which Seller is prohibited from selling or assigning under the
terms of a contract existing on the Effective Date;
(h) Hydrocarbon sales, purchase, exchange and processing contracts and
agreements, and all other contracts and agreements, insofar as the same affect
or relate to the production from the Mineral Interests, including, but not
limited to, any rights Seller has to market the production of other current
working interest owners who are subject to Joint Operating Agreements among
Seller, as Operator, and Buyer et al., as Non-Operators, covering the Mineral
Interests;
(i) All claims of Seller against gas purchasers for "take-or-pay"
obligations and similar obligations, with respect to the Mineral Interests to
the extent such claims have not been paid to or settled by Seller as of the
Effective Date, all obligations and benefits with respect to gas production or
processing imbalances which are to be assumed or received by Buyer pursuant to
this Agreement, and all obligations and benefits with respect to severance tax
abatements with respect to the Mineral Rights attributable to periods of time
after the Effective Date;
-4-
<PAGE>
(j) Easements, licenses, authorizations, permits, and similar rights
and interests applicable to, used or useful in connection with, any or all of
the Mineral Interests; and
(k) Accounts receivable under joint interest billings with respect to
expenses incurred after the Effective Date, and subject to Section 1.6 and to
the extent transferable, Seller's right to act as operator under all agreements
relating to the Assets, and all funds held by Seller in suspense with respect to
the Assets.
1.2 PURCHASE PRICE. The purchase price ("Purchase Price") for the Assets
shall be the sum of Fifty Million Five Hundred Thousand Dollars ($50,500,000)
cash, payable as follows:
(a) Two Million Five Hundred Thousand Dollars ($2,500,000) upon
execution of this Agreement;
(b) Subject to the adjustments provided herein, Forty-five Million
Dollars ($45,000,000) at Closing;
(c) Five Hundred Thousand Dollars ($500,000) on the first anniversary
date of Closing;
(d) One Million Dollars ($1,000,000) on the second anniversary date of
Closing; and
(e) One Million Five Hundred Thousand Dollars ($1,500,000) on the third
anniversary date of Closing
All funds shall be by wire transfer of United States federal funds to
accounts designated by Seller.
1.3 PURCHASE PRICE ADJUSTMENT. For the purposes of making the
adjustments to the Purchase Price required by the provisions of this
-5-
<PAGE>
Agreement, Seller and Buyer have allocated the Purchase Price to the Assets as
set forth in Exhibit 1.3 attached hereto. Except as provided in Sections 8.1 and
8.4, in the event that any provision in this Agreement specifies a reduction or
increase in the Purchase Price, and in the event the parties hereto cannot, at
Closing, agree on the amount of such adjustment, then, in such event, either
party may submit the amount representing the disagreement to arbitration as
provided in Section 10.10 hereof. In such event the amounts eventually paid
shall bear interest from February 23, 1998, to the date of payment at a rate per
annum equal to the Prime Lending Rate (i.e., the base rate on corporate loans)
of Citibank, N.A., New York, New York, but in no event shall such rate of
interest exceed the maximum legal rate of interest. Amounts not in dispute shall
be paid at Closing as required by Section 6.2(c).
1.4 ASSUMPTION OF CERTAIN OBLIGATIONS. Subject to Closing and except as
otherwise provided herein, Buyer agrees to assume and will discharge all
obligations of Seller pertaining to the Assets which are attributable to the
ownership of the Assets, from and after the Effective Date.
1.5 CLOSING. The purchase and sale of the Assets ("Closing") shall
take place at the offices of Seller, on February 23, 1998 or such earlier
date as may be agreed upon by Buyer and Seller ("Closing Date"). Subject
to the terms and conditions of this Agreement, Buyer shall deliver to
Seller at Closing the Closing Amount calculated pursuant to Section 6.2(f),
Seller shall deliver to Buyer the executed and acknowledged Assignment and
Bill of Sale attached hereto as Exhibit 6.2(a), and Seller shall cause the
Assets to be delivered to Buyer. In the event the Closing occurs after
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February 23, 1998 as a result of a delay not caused by Seller, Buyer shall pay
Seller per diem interest on the Purchase Price computed from February 23, 1998
to the Closing Date at a rate per annum calculated at the Prime Lending Rate of
Citibank, N.A., New York, New York, but in no case in excess of the maximum
legal rate of interest. The conveyance of the Assets and assumption of
obligations shall be effective as of 7:00 a.m., Central Standard Time, on
September 1, 1997 ("Effective Date").
1.6 TRANSFER OF OPERATOR STATUS. Seller shall use its best efforts and take
all reasonable actions before and after Closing to effect election or
appointment of Buyer as Operator under all joint venture agreements and all
operating agreements to which any of the Assets are subject.
ARTICLE II
REPRESENTATIONS AND WARRANTIES BY SELLER
2.1 REPRESENTATIONS AND WARRANTIES. Seller represents and warrants
that:
2.1.1 Seller is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. The execution,
delivery and performance of this Agreement are within the corporate power, have
been duly authorized by all necessary corporate action and do not contravene or
constitute a default or require the further consent of any person under any
provision of applicable law or regulation or of Seller's certificate of
incorporation or bylaws or of any agreement, judgment, injunction, order, decree
or other instrument binding upon Seller or to which any of the Assets are
subject, other than those set forth on
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Exhibit 4.6. This Agreement has been duly executed and delivered, and
constitutes a valid and binding agreement of the Seller enforceable in
accordance with its terms.
2.1.2 There are no bankruptcy, reorganization or arrangement
proceedings pending, being contemplated by, or to the knowledge of Seller,
threatened against Seller, which could adversely affect Seller's ability to
perform its obligations hereunder.
2.1.3 No broker or finder has acted for or on behalf of Seller in
connection with this Agreement or the transactions contemplated by this
Agreement, and no broker or finder is entitled to any brokerage or finder's fee
or commission in respect thereof based in any way on agreements, arrangements or
understandings made by or on behalf of Seller.
2.1.4 Seller has not been served with any process or written demand
with respect to any suits, actions or other proceedings pending or threatened
before any court or governmental agency against Seller and pertaining to the
Assets, which might result in a material impairment or loss of title to any
material part of the Assets or the value thereof or which might materially
hinder or impede the operation of the Assets.
2.1.5 There have been no advanced, take-or-pay, take-and-pay or
other payments made to Seller or any other party which would in any way reduce
the price or value to be received for the production from the Assets after the
Effective Date, and the Mineral Interests were not subject to any gas imbalances
as of the Effective Date.
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2.1.6 To the best of its knowledge, Seller is not in default under
any agreement or obligation to which it is a party or by which it is bound and
to which the Assets may be subject.
2.1.7 Insofar as pertinent to the Assets, Seller has timely filed or
caused to be filed all federal, state, local and foreign tax and information
returns required under all applicable statutes, rules and regulations, Seller
has not received any notices of delinquency, deficiency or assessment with
respect to federal, state, local or foreign taxes, and there are no actions or
proceedings pending with respect to federal, state, local or foreign taxes.
2.1.8 To the extent that there are any contractually binding
arrangements that are applicable to the Assets and to which Buyer is not
currently a party, the contractually binding arrangements which are applicable
to the Assets and which, if the Assets are purchased by Buyer, will be assumed
(in whole or in part) by Buyer are of the type generally found in the oil and
gas industry, do not (individually or in the aggregate) contain unusual or
unduly burdensome provisions which may operate in a materially adverse manner
with respect to the Assets or to Buyer, are in form and substance considered
conventional within the oil and gas industry and do not give rise to title
defects or breaches of the representations or warranties of Seller herein.
2.1.9 To the best of its knowledge, Seller has complied in all
material respects with all applicable laws and with all applicable rules,
regulations, and orders of governmental agencies while operating the
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Assets, and has obtained all material governmental licenses and permits
required to own and operate the Assets.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
3.1 REPRESENTATIONS AND WARRANTIES. Buyer represents and warrants
that:
3.1.1 Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the State of Michigan. The execution, delivery
and performance by Buyer of this Agreement are within the corporate power, have
been duly authorized by all necessary corporate action and do not contravene or
constitute a default or require the further consent of any person under any
provision of applicable law or regulation or of Buyer's certificate of
incorporation or bylaws or of any agreement, judgment, injunction, order, decree
or other instrument binding upon Buyer. This Agreement has been duly executed
by, and constitutes a valid and binding agreement of Buyer enforceable in
accordance with its terms.
3.1.2 There are no bankruptcy, reorganization or arrangement
proceedings pending, being contemplated by, or to the knowledge of Buyer,
threatened against Buyer, which could adversely affect Buyer's ability to
perform its obligations hereunder.
3.1.3 No broker or finder has acted for or on behalf of Buyer in
connection with this Agreement or the transactions contemplated by this
Agreement, and no broker or finder is entitled to any brokerage or finder's
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fee or commission in respect thereof based in any way on agreements,
arrangements or understandings made by or on behalf of Buyer.
3.1.4 Buyer has no knowledge of any demand or suit, action or
proceeding pending or threatened before any court or governmental agency which
could adversely affect Buyer's ability to perform its obligations under or in
connection with this Agreement.
ARTICLE IV
TITLE AND ENVIRONMENTAL
4.1 TITLE TO ASSETS. Seller warrants that its ownership of the Assets
consists of good and marketable title, free and clear from all title defects, as
defined in Paragraph 4.4 below, and Seller agrees to defend title to the Assets
against every person claiming by, through and under Seller, but not otherwise,
all of which shall be set forth in the Assignment and Bill of Sale attached
hereto as Exhibit 6.2(a). In addition, Seller represents and warrants: (1) with
respect to each of the well units described in Exhibit 4.1, that Seller's title
to the Mineral Interests in such unit entitles Seller to receive not less than
the net revenue interest of Seller set forth in Exhibit 4.1 for such unit of all
oil and gas produced, saved and marketed from or attributable to the lands
within such unit and obligates Seller to bear the costs and expenses relating to
the maintenance, development and operation of such unit in an amount not greater
than the working interest of Seller set forth in Exhibit 4.1 for such unit; (2)
with respect to each undeveloped oil and gas lease set forth on Exhibit 4.1,
that Seller owns the percentage of the working
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interest in such lease set forth in Exhibit 4.1; and (3) that Seller has not
created any burdens on such leases except as disclosed in the agreements listed
on Exhibit 10.1.
4.2 TITLE FILES. Promptly after the execution of this Agreement and until
January 13, 1998, Seller shall permit Buyer and its representatives at
reasonable times during normal business hours to examine, in Seller's offices,
all abstracts of title, title opinions, title files, ownership maps, lease
files, assignments, division orders and agreements pertaining to the Assets
insofar as the same may now be in existence and in the possession of Seller and
all other records of Seller reasonably necessary for Buyer to verify Seller's
representations and warranties under Articles II and IV.
4.3 BUYER'S TITLE REVIEW.
(a) Immediately upon execution by both parties hereto of this
Agreement, Buyer shall at Buyer's sole cost and expense commence and diligently
pursue examination of title to the Mineral Interests. Seller shall fully
cooperate with Buyer and shall provide Buyer with all documents, records and
material in Seller's possession and all assistance reasonably necessary to
assist Buyer in determining the validity of Seller's title in and to the Mineral
Interests. Buyer shall conclude Buyer's title review and give notice to Seller
of asserted title defects and any other matters which could give rise to a
reduction in the Purchase Price as soon as practical, but in no event later than
January 13, 1998; provided, however, that Buyer shall give notice of title
defects as to any Oil and Gas Property only to the extent that the value of such
title
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defects exceed one percent (1%) of the value allocated to such Oil and Gas
Property pursuant to Section 1.3. For purposes of Section 4.3(a) and (b), "Oil
and Gas Property" means each well and each undeveloped lease block to which a
separate value is allocated on Exhibit 1.3.
(b) Upon receipt of the notice set forth under Section 4.3(a) Seller
shall have until ten (10) days prior to the Closing Date, but not less than five
(5) days from receipt of notice, to cure all or any portion of asserted title
defects, such curative costs to be borne solely by Seller. If Seller within the
time provided above is unable or refuses to cure such asserted title defects,
Buyer may elect (i) not to accept that portion of the Mineral Interests and
related Assets with respect to which title has failed and to reduce the Purchase
Price by the amount attributable to such Mineral Interests to which title has
failed as determined pursuant to Section 1.3, or (ii) to accept the Mineral
Interests with respect to which title has failed and reduce the Purchase Price
by the value of such title defect. Provided that there shall be no price
adjustment to an Oil and Gas Property until the title defect threshold is met as
provided in the third sentence of Section 4.3(a).
4.4 TITLE DEFECTS. For the purposes of this Agreement, a portion of the
Assets shall be deemed to have a title defect if Buyer, in good faith and using
reasonable and prudent legal standards, based upon title opinions or other title
materials which a knowledgeable purchaser of oil and gas properties would
consider conclusive in such determination, determines that any one or more of
the following statements is untrue on or after the Effective Date with respect
to such portion of the Assets:
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(i) Seller has defensible title thereto.
(ii) All royalties, (but only to the extent that failure to pay will
result in loss of working interest), delay rentals, payments in lieu of
operation of pugh clauses, shut-in gas payments and other payments in the
absence of which title failure would occur with respect to any portion of the
Mineral Interests have been properly and timely paid, except for payments held
in suspense for title or other reasons which are customary in the industry, or
which otherwise will not result in grounds for cancellation or termination of
Seller's rights in such portion of the Mineral Interests.
(iii) Seller (including any third party operating on Seller's behalf) is
not in default under the terms of any leases, farmout agreements or other
contracts or agreements respecting such portion of the Mineral Interests which
would materially reduce the value thereof.
(iv) Seller's representations and warranties in Section 4.1 are
accurate.
4.5 BEST EFFORTS TO CONVEY. Seller and Buyer each shall use its best
efforts to take or cause to be taken all such actions as may be necessary or
advisable to consummate and make effective the sale by the Seller of its
interests in the Assets and the transactions contemplated by this Agreement and
to assure that as of the Closing Date Seller will not be under any material,
legal or contractual restriction that would prohibit or delay the timely
consummation of such transactions.
4.6 PURCHASE RIGHTS AND CONSENTS. All leases and agreements affecting the
Mineral Interests containing consent to assignment
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obligations and preferential right to purchase or bid provisions that must be
complied with prior to the assignment of the Mineral Interests to Buyer are set
forth in Exhibit 4.6 attached hereto (except such agreements with respect to
which all necessary consents to assignment or waivers of preferential rights to
purchase or bid have already been obtained by Seller). Seller and Buyer each
shall use its best efforts to obtain such remaining consents to assignment and
waivers or expiration of preferential right to purchase or bid prior to Closing.
If a third party (1) exercises a preferential right to purchase any portion of
the Assets; or (2) pursuant to a preferential right to bid, submits a bid for
any portion of the Assets which is greater in amount than the Purchase Amount
allocated to such portion of the Assets pursuant to Section 1.3 and which Seller
is obligated to accept, then in either event at Buyer's sole option, either (a)
such portion of the Assets shall be excluded from the sale, and the Purchase
Price shall be reduced by the amount equal to the higher of (i) the amount of
the Purchase Price allocated to such portion of the Assets pursuant to Section
1.3 or (ii) the amount of such bid for such portion of the Assets; or (b) Buyer
may terminate this Agreement.
4.7 SELLER'S REVIEW. In the event Seller determines, in good faith and
using reasonable prudent legal standards, based upon title opinions or other
title material which a knowledgeable seller of oil and gas property would
consider conclusive in such determination, that with respect to the well units
described in Exhibit 4.1, Seller's net revenue interest in such unit is more
than that stated in Exhibit 4.1 or Seller's working interest in such unit is
less than that stated in Exhibit 4.1, Seller shall give
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notice to Buyer of such determination as soon as practical, but in no event
later than January 13, 1998. If Buyer agrees with Seller's notice, and Buyer's
agreement shall not be unreasonably withheld, the Purchase Price shall be
increased by the amount attributable to the additional interest being acquired
by Buyer as determined pursuant to Section 1.3. If Buyer does not agree with
Seller's notice, the dispute shall be submitted to arbitration pursuant to
Section 10.10.
4.8 ENVIRONMENTAL INSPECTION. Buyer will have until January 13, 1998 to
complete its environmental inspection report and notify Seller of any
Environmental Defects. Seller will have thirty (30) days after receiving the
written report from Buyer to notify Buyer in writing of its intended action for
each Environmental Defect. Buyer will have the option to allow Seller to: (a)
pay for the remediation; (b) completely indemnify Buyer from the Environmental
Defect; or (c) exclude the applicable Asset from the sale and reduce the
Purchase Price by the amount attributable to such Asset as determined pursuant
to Section 1.3. For the purposes of this Section 4.8, the Assets will only be
considered as having an Environmental Defect if (1) it is required to be
remediated under applicable environmental laws, regulations, rules, orders or
other directives of any federal, state or other governmental or judicial entity
having jurisdiction thereof ("applicable environmental laws") and (2) the cost
to remediate said Environmental Defect condition to levels required by
applicable environmental laws exceeds one percent (1%) of the Purchase Price
allocated to the affected Asset. Buyer shall treat all information regarding any
Environmental Defect as confidential.
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ARTICLE V
TAXES
5.1 SALES AND OTHER TRANSFER TAXES. Buyer shall bear the cost of all
applicable sales taxes, real property transfer taxes and other taxes
payable as a result of the transfer of the Assets.
5.2 OTHER TAXES. All other taxes on the ownership or operation of
the Assets including real estate taxes other than transfer taxes, which are
imposed with respect to periods or portions of periods prior to the
Effective Date shall be paid by Seller and all such taxes imposed with
respect to periods or portions of periods after the Effective Date shall be
paid by Buyer.
5.3 TAX PURCHASE PRICE ALLOCATIONS. Seller and Buyer agree that the
allocation of the consideration given for the transfer of the Assets among
the Assets will be in accordance with Section 8.4 and shall apply for
purposes of Section 1060 of the Internal Revenue Code of 1986, as amended,
if that section applies to this transaction. The Seller and Buyer further
agree that, if said Section 1060 applies to this transaction and if Exhibit
8.3 does not otherwise state, the total amount of that consideration has
been allocated to "Class III Assets" within the meaning of that Section
1060 and the Treasury Regulations promulgated thereunder.
ARTICLE VI
CLOSING
6.1 CONDITIONS OF CLOSING.
(a) CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of
Buyer to be performed on the Closing Date are subject to the satisfaction
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of the following conditions, any one or more of which may be waived in
whole or in part by Buyer:
(i) The representations and warranties of Seller set forth
in this Agreement (except those for which a title defect notice is given
under Article IV) shall be true and correct in all material respects as of
the Closing Date.
(ii) Seller shall have applied for and obtained all material
governmental or other required third party consents to assignment, waivers
of preferential rights to purchase or bid and other actions necessary to
the consummation of the transactions contemplated by this Agreement.
(iii) Seller shall have performed in all material
respects all agreements required to be performed by it prior to or on the
Closing Date.
(iv) There shall have been no material adverse change in the
condition of the Assets except depletion through normal production within
authorized allowables and rates of production and depreciation of equipment
through ordinary wear and tear.
(v) Buyer shall have been elected or appointed as operator
of the eleven AMI's and as operator under all operating agreements to which
the Assets are subject.
(vi) No explosion, fire, blowout, earthquake or other
catastrophic event has occurred that would materially affect the operation
or value of the property.
(b) CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of
Seller to be performed on the Closing Date are subject to the satisfaction
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of the following conditions, any one or more of which may be waived in
whole or in part by Seller.
(i) The representations and warranties of Buyer set forth
in this Agreement shall be true and correct in all material respects as of
the Closing Date.
(ii) Buyer shall have performed in all material respects all
agreements required to be performed by it under this Agreement prior to or
on the Closing Date.
6.2 CLOSING OBLIGATIONS. At the Closing, the following events shall
occur, each being a condition precedent to the others and each being deemed
to have occurred simultaneously with the others:
(a) The Seller shall execute, acknowledge and deliver an
Assignment and Bill of Sale in the form set forth in Exhibit 6.2(a) to this
Agreement and such other instruments of transfer and assignment necessary
to convey to Buyer the Assets in the manner contemplated by this Agreement.
(b) The Seller shall deliver to Buyer possession of the Assets
and Buyer shall take possession of the Assets.
(c) Buyer shall deliver to Seller the amount calculated pursuant
to Section 6.2(f) by wire transfer to Seller's account as set forth in
Section 1.2.
(d) The Seller and Buyer shall execute, acknowledge, and deliver
transfer orders or letters in lieu thereof directing all purchasers of
production to make payment of proceeds attributable to production from the
Assets to Buyer from the Effective Date.
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(e) Seller and Buyer shall execute, acknowledge and deliver such
other instruments and take such other action as may be necessary to carry
out their respective obligations under this Agreement.
(f) Seller shall prepare a settlement statement (herein called
the "Preliminary Settlement Statement") that shall set forth that portion
of the Purchase Price due at Closing pursuant to Section 1.2(b), any
adjustment to the Purchase Price, including any Post-Closing adjustments as
provided for in Section 8.1 herein to the extent that such adjustments are
known at the time the Preliminary Settlement Statement is prepared
("Closing Amount"), and the calculations used to determine the Closing
Amount. The Closing Amount shall be determined using for such adjustments
the best information then available. Seller and Buyer shall attempt to
arrive at an agreement relative to all items to be contained in such
Preliminary Settlement Statement prior to the Closing. In the event the
parties are unable to reach such agreement prior to the Closing, then
settlement at the Closing shall be based upon all undisputed amounts, with
all disputed amounts to be deferred to the final settlement. Any sums
payable to a party hereto as a result of the deferral to the final
settlement of such sums shall bear interest from the Closing Date to date
of payment at a rate per annum based on the Prime Lending Rate of Citibank,
N.A., New York, New York; but in no case in excess of the maximum legal
interest.
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ARTICLE VII
TRANSACTIONS PRIOR TO CLOSING
7.1 OPERATION OF ASSETS. Prior to the Closing Date, Seller agrees,
unless specifically waived by Buyer in writing, to:
(a) Notify Buyer of any notice or threatened notice of which
Seller becomes aware relating to any default, inquiry into any possible default,
or action to alter, terminate, rescind or procure a judicial reformation of any
Mineral Interest or any provision thereof or relating to, in the case of any
production sales contract, any intent to exercise any "market-out," "FERC-out,"
price re-negotiation or other option available to the purchaser thereunder, to
alter pricing, delivery or other material provisions thereof, or to contest or
dishonor any "take-or-pay" or other material provisions thereof;
(b) Except as permitted under subparagraph (f) of this Section 7.1, not
enter into any material new agreements or amend or terminate any material
existing agreements relating to the Assets;
(c) Not encumber, sell, or otherwise dispose of any of the Assets;
(d) Not abandon any well included in the Assets or release or
abandon any portion of the Mineral Interests included in the Assets;
(e) Not waive, compromise or settle any right or claim that would
materially adversely affect the ownership or operation of the Assets after the
Closing Date;
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(f) Participate with Buyer in acquisitions covering any and all mineral
interests in the AMIs pursuant to the joint venture agreements referenced in the
Recitals hereto; and
(g) Propose operations under the terms of a joint operating agreement
covering any of the AMIs or agreements listed in the Recitals hereto, only
pursuant to mutual agreement with Buyer.
ARTICLE VIII
OBLIGATIONS AFTER CLOSING
8.1 POST-CLOSING ADJUSTMENTS. Within ninety (90) days after the Closing, a
final settlement statement will be prepared by Seller and submitted to Buyer,
with appropriate supporting information and documentation, showing income and
expenses for the Assets between the Effective Date and Closing Date and other
charges and credits provided in this Agreement ("Settlement Statement").
Seller shall be credited with:
(a) The value of all merchantable, clean, dry oil in sales tanks at
the Effective Date that is credited to the Assets, such value to be the market
or contract price in effect as of the Effective Date, less any taxes withheld
properly by the purchaser of such.
(b) The amount of all costs and expenses, including, without
limitation, royalties, rentals and other charges, ad valorem, property,
production, excise, severance, windfall profit and other taxes based upon or
measured by the ownership of property or the production of hydrocarbons or the
receipt of proceeds therefrom, expenses paid under
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applicable operating agreements or joint venture agreements and, in the absence
of such an agreement, expenses of the sort customarily billed under such
agreements, not including income taxes, paid by or on behalf of Seller, in
connection with the operation of the Assets during the period after the
Effective Date.
(c) An amount equal to all prepaid expenses attributable to the
Assets that are paid by or on behalf of Seller prior to the Closing Date and
that are, in accordance with generally accepted accounting principles,
attributable to the period after the Effective Date, including, without
limitation, prepaid ad valorem, property, production, severance, and similar
taxes (but not including income taxes) based upon or measured by the ownership
of proceeds therefrom and equipment and related costs. Any refund of ad valorem
tax attributable to the period before the Effective Date received by Buyer shall
be paid to Seller.
Buyer shall be credited with:
(a) Proceeds received by Seller that are, in accordance with
generally accepted accounting principles, attributable to the Assets for the
period of time after the Effective Date.
(b) An amount equal to all unpaid ad valorem, property, production,
severance, and similar taxes and assessments (but not including income taxes),
based upon or measured by the ownership of property or the production of
hydrocarbons or the receipt of proceeds therefrom, accruing to the Assets prior
to the Effective Date, which amount shall be computed based upon such taxes
assessed against the applicable portion of the Assets for the preceding calendar
year or, if such taxes are assessed on other
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than a calendar year basis, for the tax related year last ended, including an
amount equal to any windfall profit tax liability attributable to any period
prior to the Effective Date.
In addition to the matters mentioned above, the Settlement Statement
shall include any other debits and credits, either cash or accrued, but
excluding income and franchise taxes, which under generally accepted accounting
principles would reflect transfer of ownership of the Assets on the Effective
Date.
The net amount to be paid by the owing party shall be paid ten (10) days
after receipt of the Settlement Statement. Buyer and Seller each shall have the
right for a period of two years following receipt of the Settlement Statement in
which to audit the other's books and records related to the matters covered by
the Settlement Statement and any other matters related to the Assets. In the
event that such audit reveals that any amounts are due and owing to any party,
that party shall have the right to recover such amounts. In the event the
parties cannot agree on the Post Closing Adjustments specified in this Section
8.1, the parties agree to submit such dispute to an accounting firm selected by
Buyer from a list of four accounting firms selected by Seller which do no
business with Seller or Buyer, and the determination made by such accounting
firm shall be final and binding. Any amount awarded in such arbitration shall
bear interest from ten (10) days after the submittal of the final Settlement
Statement in accordance with this Article VIII at a rate per annum based on the
Prime Lending Rate of Citibank N.A., but in no case in excess of the legal rate
of interest.
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8.2 FILES AND RECORDS. Within thirty (30) days after the Closing Date,
Seller shall deliver to Buyer at the locations specified by Buyer all of the
material documents in its possession pertaining to the Assets.
8.3 TAX PURCHASE PRICE ALLOCATIONS. Within one hundred twenty (120) days
after the Closing, Buyer and Seller agree that (a) Buyer shall complete Exhibit
8.3 in accordance with Section 5.3 and submit it to Seller for Seller's
approval, and (b) Buyer and Seller shall acknowledge their approval of the
completed Exhibit 8.3 in a writing executed by both parties. In the event the
parties cannot agree on the allocations, they shall submit such dispute to an
accounting firm selected in the same manner as provided in Section 8.1 and the
determination made by such accounting firm shall be final and binding.
8.4 FURTHER ASSURANCES. After Closing, Seller agrees to execute and deliver
to Buyer all such instruments, notices, division or transfer orders, and other
documents, and to do all such other acts not inconsistent with this Agreement as
may reasonably be necessary or advisable to carry out its obligations under this
Agreement or to more fully assure Buyer, its successors and assigns, of the
respective rights, title, interests and estates herein provided to be sold,
assigned and conveyed by Seller to Buyer at Closing.
ARTICLE IX
SURVIVAL; INDEMNIFICATION
9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All warranties of Seller and
Buyer contained in this Agreement shall survive the Closing and
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continue in full force and effect for a period of one (1) year after the Closing
Date, but no longer, except that the warranty by Seller under Section 4.1 shall
terminate immediately after Closing; however, the parties agree that any
warranty given under the Assignment and Bill of Sale attached hereto as Exhibit
6.2(a) shall remain applicable.
9.2 INDEMNIFICATION. After the Closing, Buyer and Seller shall indemnify
each other with respect to claims of third parties, as follows:
9.2.1 Buyer shall defend, indemnify and save and hold harmless Seller
against all claims, costs, expenses, liability and obligations with respect to
the Assets, which accrue after the Effective Date, including but not limited to
(a) the liability to properly plug and abandon all wells included in the Assets,
(b) claims by royalty owners, working interest owners and/or vendors for
improper or non-payment of royalty, revenue or invoices pertaining to production
from or operation of the Assets after the Effective Date, (c) those that are
attributable to the violation of any environmental or other law or regulation
after the Effective Date and (d) those arising from Buyer's operations of the
Assets after the Effective Date, but not including (a) those incurred by Seller
with respect to the sale of the Assets to Buyer or the negotiations leading to
such sale, (b) those that result from or are attributable to any representation
or warranty of Seller contained in this Agreement being untrue to a material
extent or a breach of any warranty or covenant of Seller contained in this
Agreement, and (c) those as to which Seller agrees to indemnify Buyer under
Section 9.2.2.
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9.2.2 Seller shall defend, indemnify and save and hold harmless
Buyer against all claims, costs, expenses and liabilities with respect to the
Assets, which accrue prior to the Effective Date, including but not limited to
(a) those which arise from any plugging and abandonment operations prior to the
Effective Date, (b) claims by royalty owners, working interest owners and/or
vendors for improper or non-payment of royalty, revenue or invoices pertaining
to production from or operation of the Assets prior to the Effective Date, (c)
those that are attributable to the violation of any environmental or other law
or regulation prior to the Effective Date (unless Buyer is reimbursed for same
under Section 4.8), and (d) those arising from Seller's operations of the Assets
prior to the Effective Date, except to the extent Buyer may be responsible for a
proportionate share of the liability as co-owner of the properties at the time
the claim accrued, but not including (a) those incurred by Buyer with respect to
the purchase of the Assets by Buyer or the negotiations leading to such
purchase, (b) those that result from or are attributable to any representation
or warranty of Buyer contained in this Agreement being untrue to the material
extent or a breach of any warranty or covenant of Buyer contained in this
Agreement, and (c) those as to which Buyer agrees to indemnify Seller under
Section 9.2.1. Seller shall also defend, indemnify and save and hold harmless
Buyer against all claims, costs, expenses and liabilities which arise from
Seller's willful misconduct or gross negligence as operator of the Assets
between the Effective Date and Closing.
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ARTICLE X
MISCELLANEOUS
10.1 APPLICABLE AGREEMENTS. This Agreement is made subject to all the terms
and conditions of those contracts and agreements to which Buyer is a party and
those set forth in the attached Exhibit 10.1 which Seller has entered into or is
subject to as a result of owning the Assets; to the best of its knowledge,
Seller represents that there are no other contracts and agreements, other than
those to which Buyer is a party, to which the Assets are subject. In addition,
Seller represents that production from the Mineral Interests is not subject to
any contract or commitment, other than those to which Buyer is a party, which
cannot be terminated by Buyer, as successor to Seller's interests, upon notice
of sixty (60) days or less, except as set forth on Exhibit 10.1.
10.2 INTEGRATION; AMENDMENT AND MODIFICATION. This Agreement constitutes the
entire understanding of the parties hereto with respect to the matters referred
to herein and supersedes all prior arrangements or understandings, written or
oral with respect thereto. Except as expressly set forth herein, neither of the
parties makes to the other party any representation or warranty, whether express
or implied, of any kind whatsoever. This Agreement may not be modified,
supplemented or changed in any respect except by a writing duly executed by
Seller and Buyer.
10.3 DESCRIPTIVE HEADINGS. The headings of the sections and subsections of
this Agreement are inserted for convenience only and shall not constitute a part
hereof.
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10.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
10.5 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and
shall inure to the benefit of and be enforceable by each of the parties, and
their successors and assigns.
10.6 NOTICES. All notices, disclosures or other communications which are
required or permitted hereunder shall be in writing and shall be delivered as
follows:
IF TO BUYER:
Miller Oil Corporation
3104 Logan Valley Road
P.O. Box 348
Traverse City, MI 49685-0348
ATTN: Kelly Miller
IF TO SELLER:
Amerada Hess Corporation
One Allen Center
500 Dallas Street
Houston, TX 77002
ATTN: R. L. Wickett
10.7 GEOLOGICAL, ENGINEERING AND OTHER TECHNICAL RECORDS. Within thirty (30)
days after the Closing Date, Seller shall deliver to Buyer all maps, logs,
cores, cuttings and other geological data and all engineering data and other
technical data in its possession pertaining to the Assets, except to the extent
Seller is contractually prohibited from doing so under the terms of any
agreement in existence on the Effective Date.
10.8 CONFIDENTIALITY. Seller agrees, for a period of three (3) years from the
Effective Date of this Agreement, to keep confidential all engineering, seismic,
geological, geophysical or other data included in the
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Assets and further agrees not to acquire any interest within one (1) mile of any
AMI during the same time. Seller shall not make any media announcement of the
transaction contemplated by this Agreement without Buyer's prior written
consent. Seller shall further take whatever prospective steps may be reasonably
necessary to ensure that Seller's employees, consultants and agents comply with
the provisions of this paragraph.
10.9 VENUE. Buyer and Seller agree that with regard to any and all matters in
any way related to this Agreement, venue shall be proper only in Harris County,
Texas.
10.10 ARBITRATION. If a dispute should arise under this Agreement, such
dispute shall, except as provided in Sections 8.1 and 8.4, be settled by
arbitration. Either party may make a demand for arbitration by filing a demand
in writing with the other.
10.10.1 APPOINTMENT OF ARBITRATORS. The parties hereto may agree upon
one arbitrator, but in the event that they cannot so agree, there shall be three
arbitrators, one named in writing by each of the parties within fifteen (15)
days after demand for arbitration is made, and a third to be chosen by the two
so named. Should either party refuse or neglect to join in the appointment of
the arbitrators, they shall be appointed in accordance with the provisions of
Article 226 of the Revised Civil Statutes of Texas.
10.10.2 HEARING. All arbitration hearings conducted hereunder, and all
judicial proceedings to enforce any of the provisions hereof, shall take place
in Harris County, Texas. The hearing(s) before the arbitrators
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of the matter to be arbitrated shall be at the time and place within said county
as is selected by the arbitrators. Notice shall be given and the hearing
conducted in accordance with the provisions of Article 228, 229, and 230 of the
Revised Civil Statutes of Texas. At the hearing any relevant evidence may be
presented by either party, and the formal rules of evidence applicable to
judicial proceedings shall not govern. Evidence may be admitted or excluded in
the sole discretion of the arbitrators. The arbitrators shall hear and determine
the matter and shall execute and acknowledge their award in writing and deliver
a copy thereof to each of the parties by registered or certified mail.
10.10.3 ARBITRATION AWARD. If there is only one arbitrator, his decision
shall be binding and conclusive on the parties. If there are three arbitrators,
the decision of any two shall be binding and conclusive.
10.10.4 NEW ARBITRATORS. If the arbitrators selected pursuant to
paragraph 10.10.1 hereof shall fail to reach an agreement within thirty (30)
days after conclusion of hearing(s), they shall be discharged, and three new
arbitrators shall be appointed and shall proceed in the same manner, and the
process shall be repeated until a decision is finally reached by two of the
three arbitrators selected.
10.10.5 COSTS OF ARBITRATION. The costs and expenses of arbitration,
including the fees of the arbitrators and the attorneys of the respective
parties, shall be borne by the parties in such proportions as the arbitrators
shall determine.
10.11 ALLAR #2 ST WELL. Seller agrees to commence production of the Allar
#2 ST Well as soon as reasonably possible and to the extent
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consistent with a reasonably prudent operator standard to produce the well at
its maximum efficient rate until Closing. At Buyer's request, Seller shall
acquire a bottom hole pressure test that accurately reflects the reservoir
pressure, and Buyer may obtain a reserve report from Miller and Lentz for the
Allar #2 ST Well using all available pressure and production data. If that
reserve report estimates ultimate economically recoverable reserves to be less
than 7.0 Bcfe as of the date of first production, then the Purchase Price
allocated to the Allar #2 ST Well shall be proportionately reduced in the ratio
that the Miller and Lentz reserve estimate bears to 7.0 Bcfe.
10.12 TERMINATION.
10.12.1 Buyer may terminate this Agreement, and Seller will refund the
deposit only in the event of one or more of the following:
(a) The total adjustments to the Purchase Price made pursuant to the
provisions hereof equal or exceed Nine Million Five Hundred Thousand Dollars
($9,500,000).
(b) Buyer's environmental report reveals the existence of
environmental conditions that require remedial action under applicable laws that
would cost in excess of Two Million Five Hundred Thousand Dollars ($2,500,000).
(c) The pre-closing conditions set forth in Section 6.1 have not been
satisfied or waived prior to Closing.
(d) As provided in Section 4.6.
10.12.2 Seller may terminate this Agreement and keep Buyer's deposit
only in the event that the conditions of Closing are satisfied and
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Buyer refuses to close on or before February 23, 1998. Retention of said deposit
by Seller shall be Seller's only remedy for Buyer's refusal or failure to close.
10.13 TRANSITION OPERATIONS. Seller and Buyer will enter into a 90-day
transition operating agreement, generally in the form attached hereto as Exhibit
10.13, providing for Seller to operate the properties and make disbursements for
a period up to ninety (90) days after Closing. In consideration for rendering
these services, Seller shall be reimbursed for its reasonable out-of-pocket
expenses, plus receiving the COPAS overhead rate applicable to the particular
property.
10.14 FILE COPIES. Subject to the confidentiality requirements of Section
10.8, Seller may retain copies of files and documents included within the Assets
which are necessary for its accounting, tax, land and operator records.
10.15 GRANGE DOME. Notwithstanding the provisions of a certain farmout
agreement dated August 20, 1997 as amended relating to the Centerville Dome,
Buyer may propose any operation it wishes in the Grange Dome AMI; however, such
operations shall be conducted only if Seller and Buyer mutually agree.
10.16 SPECIFIC PERFORMANCE. Buyer shall be entitled to specific
performance of this Agreement.
10.17 LIKE-KIND EXCHANGE: TAXES.
10.17.1 Seller desires to exchange for other property of like-kind and
qualifying use within the meaning of Section 1031 of the Internal Revenue Code
of 1986, as amended and the Regulations promulgated
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thereunder, the Assets, which are the subject of this Agreement. To effect such
an exchange, Seller reserves the right to assign its rights, but not its
obligations, hereunder to a Qualified Intermediary as provided in Treasury
Regulations Section 1.1031(k)-1(g)(4) on or before the Closing Date, and Buyer
hereby agrees to recognize any such assignment. Buyer agrees to cooperate with
Seller and with the Qualified Intermediary to ensure that the formalities of a
like-kind exchange are accomplished. Buyer shall not be obligated to pay any
additional costs or incur any additional obligations in their acquisition of the
Assets, which are the subject of this Agreement, and Seller shall indemnify
Buyer against all claims, expenses, losses and liabilities, if any, resulting
from Buyer's participation in such an exchange.
10.17.2 Buyer desires to acquire in exchange for other property of like-kind
and qualifying use within the meaning of Section 1031 of the Internal Revenue
Code of 1986, as amended, and the Regulations promulgated thereunder, the
Assets, which are the subject of this Agreement. To effect such an exchange,
Buyer reserves the right to assign its rights, but not its obligations,
hereunder to a Qualified Intermediary as provided in Treasury Regulations
Section 1.1031(k)-1(g)(4) on or before the Closing Date, and Seller hereby
agrees to recognize any such assignment. Seller agrees to cooperate with Buyer
and with the Qualified Intermediary to ensure that the formalities of a like-
kind exchange are accomplished. Seller shall not be obligated to pay any
additional costs or incur any additional obligations in its sale of the Assets,
which are the subject of this Agreement, and Buyer shall indemnify Seller
against all claims,
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<PAGE>
expenses, losses and liabilities, if any, resulting from Seller's participation
in such an exchange.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date hereof.
"BUYER"
MILLER OIL CORPORATION
By:
-----------------------------------
Kelly E. Miller
President
"SELLER"
AMERADA HESS CORPORATION
By:
-----------------------------------
D. G. Stevenson
Vice President
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<PAGE>
EXHIBIT 1.2(b)
Attached to and made a part of that Agreement for Purchase and Sale
effective as of September 1, 1997
By and Between Amerada Hess Corporation and
Miller Oil Corporation
NET PROFITS OVERRIDING ROYALTY
The following terms shall apply to determine the Net Profits Overriding
Royalty:
(a) The Net Profits Overriding Royalty does not include any right,
title or interest in and to any of the personal property, fixtures, or
equipment now (or hereafter placed) upon the Assets, and the Net Profits
Overriding Royalty excepted and reserved by Seller is exclusively an interest
in net profits, as hereinafter defined, and Seller shall look exclusively to
the proceeds attributable to the oil, gas and other hydrocarbons produced
from the Mineral Interests for the satisfaction and realization of the Net
Profits Overriding Royalty.
(b) Buyer shall have exclusive charge and control of the marketing
of all oil, gas and other hydrocarbons allocable to the Net Profits
Overriding Royalty, and shall market such production to third parties in
arm's-length transactions proportionately with and on the same terms as
Buyer's share of production from the same well, and shall collect and
receive the proceeds of the sale of all such production.
(c) Buyer shall maintain a separate payout and Net Profits Account
in accordance with the terms of this agreement and good accounting practices
for each well subject to the Net Profits Overriding Royalty Interest. The
books of account and records of the Net Profits Accounts shall at all
reasonable times be open for examination, inspection, copying, and audit by
Seller and its accredited representatives at Seller's expense. The Net
Profits Accounts shall be and remain non-interest bearing accounts.
(d) Each Net Profits Account shall be credited by the following,
insofar and to the extent the same are allocable to the Mineral Interests in
the unit for each well.
(1) an amount equal to the sale proceeds from the sale of all
oil, gas, and other hydrocarbons accruing after payout of each well and
allocable to the Mineral Interests in the unit for such well (but
excluding therefrom those proceeds attributable to all royalties and any
overriding royalty and/or production payment interests now outstanding
in third parties and burdening any of the Mineral Interests) and an
amount equal to the value of all production so allocable, but
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appropriated for Buyer's benefit or other use other than with respect to
the Mineral Interests;
(2) an amount equal to the proceeds of the sale and/or rental of
any of the interests acquired from Seller in any personal property or
equipment, hereafter charged to the Net Profits Account; an amount equal
to the market value at the time of removal of the interest acquired by
Buyer (on account of its interest in the Mineral Interests) in all
personal property and equipment removed by Buyer allocable to the
Mineral Interests; all amounts received by or for Buyer allocable to the
Mineral Interests under any unitization or operating agreement relating
to any such unit on account of the sale or removal of personal property
or equipment from such unit;
(3) an amount equal to the proceeds of all insurance collected by
Buyer (or received by or for it under any operating agreement) on
account of its ownership of the Mineral Interests as a consequence of
the loss of or damage to any one or more of the following: (a) the
Mineral Interests or any part thereof or interest therein; (b) the
personal property or equipment located thereon or used in connection
therewith; or (c) any other property if its cost has been charged to the
Net Profits Account;
(4) an amount equal to the proceeds of all judgments and claims
collected by Buyer on account of its ownership of the Mineral Interests
and involving one or more of the following: (a) the Mineral Interests or
any part thereof or interest therein; (b) the personal property or
equipment located thereon; or (c) any other property if its cost has
been charged to the Net Profits Account;
(5) an amount equal to all other moneys, credits and things of
value received by or inuring to the benefit of Buyer by virtue of its
ownership of the Mineral Interests, excluding always, however, the
proceeds of the sale of all or any part of or interest in any of such
properties should Buyer sell such property, part or interest, subject to
the Net Profits Overriding Royalty; and
(6) an amount equal to any contributions of money (whether as dry
hole or bottom hole contributions or otherwise) or value which Buyer
receives on account of the development of the Mineral Interests;
provided always, however, nothing herein set forth in this Section (d)
shall ever be interpreted or applied in any manner which will ever
require or permit any duplication of all or any part of any credit to
the Net Profits Account with respect to the same transaction or any
credit utilized in determining payout.
(e) Against each Net Profits Account shall be charged the following,
insofar and to the extent the same are properly allocable to the Mineral
Interests in the unit for such well after payout:
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(1) an amount equal to the costs to Buyer of all direct labor
(including fringe benefits), transportation, and other services
necessary for developing, equipping, operating, and maintaining the
Mineral Interests; and of all material, equipment, and supplies
purchased by Buyer and used on any of the Mineral Interests (including,
but not limited to, all costs of fluid injection, pressure maintenance,
secondary and tertiary recovery, and recycling); and any of the amounts
charged to Buyer for conformance of investment in connection with the
creation of any unit or units in which any of the Mineral Interests are
or may be included; and of that portion of any other amounts paid to any
operator, or receivable by Buyer as operator, under any operating
agreement relating to any of the Mineral Interests;
(2) an amount equal to the expenses of litigation, liens,
judgments, and liquidated liabilities and claims incurred and paid by
Buyer on account of its ownership of the Mineral Interests or incident
to the development, exploration, operation, or maintenance thereof;
(3) an amount equal to all taxes assessed against or attributable
to the Mineral Interests, except mortgage and income taxes, paid by
Buyer for the benefit of the parties subject thereto;
(4) an amount equal to insurance premiums paid by Buyer on account
of its ownership of the Mineral Interests for insurance carried with
respect to the Mineral Interests or any part thereof, together with all
expenditures incurred and paid in settlement of any and all losses,
claims, damages, judgments, and other expenses, including legal
services, relating to the Mineral Interests or their operations, or any
part thereof;
(5) an amount equal to a reasonable charge for overhead (as
defined by the most recent accounting procedure as approved by the
Council of Petroleum Accounting Society) to cover the portion properly
allocable to the Mineral Interests of compensation or salaries paid to
the managing officers of Buyer and of its employees whose time is not
allocated directly to the Mineral Interests, for the office expense of
Buyer, and for any district and camp expense not allocated directly to
the Mineral Interests;
(6) an amount equal to the expenditures incurred by Buyer in
manufacturing, processing or refining production allocable to the
Mineral Interests, together with all applicable transportation and
extraction costs; and
(7) an amount equal to all other expenditures incurred by Buyer
for the necessary or proper development, exploration, operation,
maintenance, and utilization of the Mineral Interests; provided always,
however, nothing herein set forth in this Section (e) shall ever be
interpreted or applied in any manner which will ever require or permit
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<PAGE>
any duplication of all or any part of any charge to the Net Profits
Account with respect to the same transaction or any part of any charge
included in determining payout.
(f) The net profits from the Mineral Interests for each well subject
to the Net Profits Overriding Royalty shall be determined for each calendar
month after the Effective Date by deducting the aggregate of any charge
balance existing in the Net Profits Account for such well at the first of
such month, plus the total charges properly made thereto during such month,
from the sum of any credit balance existing in such Net Profits Account for
such well at the first of such month and total credits properly made to it
during such month, and Seller shall receive net profits from such well, only
in such months when such credits exceed such charges. Credit Items (2), (3),
(4), (5), and (6) in Section (d) shall be taken into account solely for
determining whether net profits exist, and Seller shall have no right, title,
or interest therein, and all payments made to Seller on account of the Net
Profits Overriding Royalty shall be made entirely and exclusively out of the
proceeds attributable to production.
(g) On or before the last day of each calendar month, or as soon
thereafter as reasonably possible, Buyer shall furnish to Seller a detailed
statement clearly reflecting the condition of each Net Profits Account as of
the close of business on the last day of the preceding calendar month. Any
deficit or loss (that is to say, an excess of charges over credits) reflected
by any such statement shall be carried forward for the next and succeeding
months until such deficit or loss has been liquidated. In case a net profit
(that is to say, an excess of credits over charges) is reflected by any such
statement, payment to Seller of the amount of such credit balance shall be
enclosed with the statements rendered to Seller, and such Net Profits Account
shall then be charged with an amount (hereinafter called the "Payment
Charge") equal to the amount so paid to Seller. Notwithstanding the
provisions of this section, the payment herein provided to be made to Seller
with respect to a Net Profits Account for any calendar month may be limited
by the second sentence of Section (f) above so that Seller's said payment may
not exceed the credits to such Net Profits Account pursuant to Section
(d)(1). In such event, the Payment Charge shall only be an amount equal to
the Seller's said limited payment, and the remaining credit balance in such
Net Profits Account shall be carried forward to the succeeding months until
reduced to zero by permitted charges to such Net Profits Account. No change
of ownership of the Net Profits Overriding Royalty shall be binding upon
Buyer, until Buyer is furnished with certified or photocopies, satisfactory
to Buyer, of the original recorded documents evidencing such change.
Notwithstanding any change of ownership in the Net Profits Overriding
Royalty, Buyer shall never be required to make payments nor to render reports
required hereunder with respect to such Net Profits Overriding Royalty to
more than one party, and, in the event the Net Profits Overriding Royalty is
owned by more than one party, Buyer may withhold further payments and reports
with respect to such Net Profits Overriding Royalty until all of such owners
of the Net Profits Overriding Royalty have designated a single party to act
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for all of them hereunder in all respects, including, but not by way of
limitation, the giving and receiving of all notices and the receipt of all
payments and reports. If, at the expiration of two (2) years from the
rendition of a particular statement, Seller has raised no objection to the
items therein reflected nor as to debits or credits upon which such items are
based, such statement shall be conclusively deemed to be correct for all
purposes, and Buyer shall no longer be required to maintain any records in
connection therewith.
(h) Seller shall never personally be responsible for payment of any
part of the costs and expenses charged against the Net Profits Accounts, nor
for any liabilities incurred in connection with the developing, exploring,
equipping, and operating of the Mineral Interests after the Effective Date;
provided, however, all such costs and expenses shall nevertheless be charged
against the Net Profits Accounts as and to the extent herein provided.
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<PAGE>
EXHIBIT 2.1.5
Attached to and made a part of that Agreement for Purchase and Sale
effective as of September 1, 1997
By and Between Amerada Hess Corporation and
Miller Oil Corporation
GAS IMBALANCES
There are no gas imbalances.
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<PAGE>
EXHIBIT 6.2(a)
Attached to and made a part of that Agreement for Purchase and Sale
effective as of September 1, 1997
By and Between Amerada Hess Corporation and
Miller Oil Corporation
ASSIGNMENT AND BILL OF SALE
Amerada Hess Corporation, a Delaware Corporation, whose address is One Allen
Center, 500 Dallas Street, Houston, Texas 77002, hereinafter referred to as
"Assignor", for One Hundred Dollars ($100.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
does hereby CONVEY, ASSIGN and DELIVER unto Miller Oil Corporation, a Michigan
corporation, whose address is 3104 Logan Valley Road, P.O. Box 348, Traverse
City, MI 49685-0348, hereinafter referred to as "Assignee", all of the following
described properties, rights and interests, hereinafter referred to collectively
as the "Assets":
A. All of the oil, gas and other mineral leasehold interests, royalty and
overriding royalty interests, mineral interest and oil and gas rights described
in Exhibit "A", attached hereto and made a part hereof by reference (hereinafter
collectively referred to as "Mineral Interests");
B. Present and future participation in any wells, units, fields, or
additional oil and gas interests, which participation is derived from and
limited to the Mineral Interests, including, but not limited to, all right,
title and interest of Assignor derived from any unitization, pooling, operating,
area of mutual interest, communitization or other agreement, or from any
declaration or order of any governmental authority;
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<PAGE>
C. All wells, equipment, facilities, improvements, salt water disposal wells,
compressors, compressor stations, dehydration facilities, treating facilities
and plants (including desulfurization facilities), pipelines, gathering systems,
flow lines, transportation lines, field offices and yards (both owned and
leased), valves, meters, separators, tanks, tank batteries, and other fixtures
and appurtenances pertaining to the Mineral Interests;
D. Oil, gas and other hydrocarbons (including all components thereof)
produced from, or attributable to the Mineral Interests subsequent to the
Effective Date (as hereinafter defined), including "line fill" and inventory
below the pipeline connection in tanks;
E. Personal property located on or used in connection with the development,
operation, maintenance, and/or safeguarding of any of the Mineral Interests,
including, but not limited to, cores, cuttings, supplies, inventory, pipe,
equipment, compressors, tools and contents of the field offices (including, but
not limited to, computers utilized for Scadix monitoring of wells, furniture,
fixtures and supplies);
F. Contracts and contractual rights, obligations and interests including, but
not limited to, unit agreements, farmout agreements, farmin agreements, drilling
contracts, operating agreements, well service contracts, seismic licenses,
software licenses, storage or warehouse agreements, supplier contracts, service
contracts, marketing contracts, construction agreements, division orders and
transfer orders, relating to the Mineral Interests; except licenses which
Assignor is prohibited from selling or assigning under the terms of a contract
existing on the Effective Date;
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G. All lease files, land files, well files, well data and records,
engineering studies, gas and oil sales contract files, gas processing files,
division order files, abstracts, title opinions, geophysical data, files, tapes,
maps, and licenses, and all other books, files and records, information and data
(including, but not limited to, engineering and geological data, files and maps)
of Assignor, insofar as the same relate to the Mineral Interests, except for
licenses and data which Assignor is prohibited from selling or assigning under
the terms of a contract existing on the Effective Date;
H. Hydrocarbon sales, purchase, exchange and processing contracts and
agreements, and all other contracts and agreements, insofar as the same affect
or relate to the production from the Mineral Interests, including, but not
limited to, any rights Assignor has to market the production of other current
working interest owners who are subject to Joint Operating Agreements among
Assignor, as Operator, and Assignee et al., as Non Operators, covering the
Mineral Interests;
I. All claims of Assignor against gas purchasers for "take or-pay"
obligations and similar obligations, with respect to the Mineral Interests to
the extent such claims have not been paid to or settled by Assignor as of the
Effective Date, all obligations and benefits with respect to gas production or
processing imbalances which are to be assumed or received by Assignee pursuant
to this Agreement, and all obligations and benefits with respect to severance
tax abatements with respect to the Mineral Rights attributable to periods of
time after the Effective Date; and
J. Easements, licenses, authorizations, permits, and similar rights and
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interests applicable to, used or useful in connection with, any or all of the
Mineral Interests.
TO HAVE AND TO HOLD the Assets unto Assignee, its successors and assigns,
forever, and Assignor (1) hereby binds itself, its successors and assigns, to
warrant and forever defend all and singular the Assets unto Assignee, its
successors and assigns, against every person whomsoever lawfully claiming or to
claim the same or any part thereof by, through, or under Assignor, but not
otherwise; and (2) warrants that it has not created any burdens on the Assets in
addition to those burdens which existed when Assignor acquired the Assets.
However, as to all equipment, wells and other personal property herein conveyed,
ASSIGNOR EXPRESSLY DISCLAIMS AND NEGATES (i) ANY IMPLIED OR EXPRESSED WARRANTY
OF MERCHANTABILITY, (ii) ANY IMPLIED OR EXPRESSED WARRANTY OF FITNESS FOR A
PARTICULAR PURPOSE, AND (iii) ANY IMPLIED OR EXPRESSED WARRANTY OF CONFORMITY TO
MODELS OR SAMPLES OF MATERIALS, and all such personal property is conveyed "AS
IS" and without warranty of any kind.
To the extent Assignor has received any warranty of whatever nature relating to
the Assets from Assignor's predecessors-in-title, and to the extent such
warranty may be assigned, Assignor subrogates Assignee in and to all of the
rights and actions of warranty which Assignor has or may have against its
predecessors-in-title.
This Assignment and Bill of Sale is made subject to all the terms and
conditions of that Agreement for Purchase and Sale by and between Assignor and
Assignee, dated November 25, 1997, and made a part hereof by reference. This
Assignment and Bill of Sale shall be effective as of September 1, 1997, at 7:00
a.m. ("Effective Date").
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EXECUTED THIS _____ day of ______________, 1998.
MILLER OIL CORPORATION
By:
--------------------------------------
Its:
--------------------------------------
AMERADA HESS CORPORATION
By:
--------------------------------------
Its:
--------------------------------------
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EXHIBIT 8.3
Attached to and made a part of that Agreement for Purchase and Sale
effective as of September 1, 1997
By and Between Amerada Hess Corporation and
Miller Oil Corporation
ALLOCATION OF CONSIDERATION
<TABLE>
<CAPTION>
ASSETS RELATIVE FAIR MARKET VALUE
<S> <C> <C>
Depreciable Assets $
----------------------------
Depletable Assets $
----------------------------
TOTAL VALUE $
----------------------------
</TABLE>
_____________________________
<F*> Seller and Buyer agree that Total Value is equal to the consideration paid
for the Assets in accordance with the Agreement, and acknowledge that this
is the proper allocation of that consideration in accordance with Section
1060 of the U.S. Internal Revenue Code.
-1-
<PAGE>
Miller Oil Corporation
, 1998
- ----------------
Page 1
EXHIBIT 10.13
Attached to and made a part of that Agreement for Purchase and Sale
effective as of September 1, 1997
By and Between Amerada Hess Corporation and
Miller Oil Corporation
[AMERADA HESS CORPORATION LOGO]
One Allen Center
500 Dallas Street
Houston, TX 77002
(713) 609-5000
, 1998
- ------------
Miller Oil Corporation
3104 Logan Valley Road
P.O. Box 348
Traverse City, MI 49685-0348
ATTN: Kelly Miller
Re: Letter Agreement
Mississippi Salt Dome Field
Dear Mr. Miller:
Reference for all purposes is herein made to that certain Agreement for
Purchase and Sale ("Agreement") dated November 25, 1997, by and between
Amerada Hess Corporation ("AHC") and Miller Oil Corporation ("Miller"). As
an accommodation to Miller, AHC agrees to perform the services hereinafter
specified, and Miller agrees to undertake the obligations herein set forth.
-1-
<PAGE>
Miller Oil Corporation
, 1998
- ----------------
Page 2
1. FILES
AHC will make reasonable efforts to have all of its files pertaining to the
Assets, including well files on AHC operated properties, available for Miller
to pick up on or before __________, 1998, or as soon as practical thereafter.
Files will be made available at AHC's Houston office and at its field
offices.
2. OPERATIONS
AHC and Miller agree that Transfer of Operator Forms bearing a transfer date
of ______________, 1998, will be completed on all AHC operated Assets at or
prior to Closing and same will be forwarded to the Mississippi State Oil Gas
Board ("MSOG") as appropriate by AHC. AHC will turn over operatorship of all
AHC operated properties as soon as practicable after Closing but in no event
later than 7:00 a.m. _____________, 1998. It is understood by both AHC and
Miller that the MSOG may consider their approval dates as the effective dates
for State and Federal reporting and other regulatory matters. Nevertheless,
Miller desires and agrees to assume full responsibility for operations not
later than 7:00 a.m. ______________, 1998.
3. LAND MAINTENANCE
AHC shall continue its normal land maintenance of rental and shut-in payments
through the month of __________ 1998 to allow Miller sufficient time to set
up its land and accounting records. During the months of
_____________________, AHC shall consult with Miller regarding significant
maintenance items. On _____________, 1998, AHC shall furnish a report of all
maintenance performed on behalf of Miller and shall no longer perform land
maintenance for Miller.
4. MARKETING GAS
AHC agrees to market natural gas for the months of __________ 1998. AHC
shall make all required nominations and pipeline communications for the
entire months of _________1998. On or before _____________, 1998 (or such
time as required by pipeline nominations), AHC will transfer all information
required for Miller to assume gas marketing functions effective with
_________1998 sales including:
1. Details of _________1998 sales transactions;
2. Meter numbers and other relevant information required to make
pipeline nominations; and
3. Contact list of companies to whom AHC typically sells.
-2-
<PAGE>
Miller Oil Corporation
, 1998
- ----------------
Page 3
Miller will assume all marketing functions for _________1998 sales and AHC
shall have no responsibility to market gas for Miller after _________1998.
5. ACCOUNTING
AHC shall assist Miller with accounting as set forth on the attached Schedule
I. AHC and Miller will consult with each other regarding significant
accounting items performed. Subsequent to the dates outlined on Schedule I,
AHC shall no longer perform any accounting functions for Miller. For cash
received or expended by AHC subsequent to the dates outlined on the Schedule,
AHC will remit net cash (revenue received less expenditures paid) due to
Miller, by the tenth workday, following the month the cash was received or
expended. AHC will forward original documentation or copies of original
documentation as appropriate, supporting cash receipts, expenditures or other
significant accounting activity on a timely basis.
6. COMMUNICATION EQUIPMENT
AHC shall retain voice frequency ______ MHz in ____________________________.
Miller has right to use this radio frequency until ____________, 1998, at
which time Miller will cease use of frequency ______ MHz.
7. INDEMNIFICATION
Without implying any obligation on AHC's part to continue conducting the
services set forth in this letter after the Closing, such continued services
by AHC shall be for the account of Miller, at the sole risk, cost and expense
of Miller and AHC is hereby released and indemnified by Miller from all
claims, losses, damages, costs, expenses, causes of action and judgments of
any kind or character (INCLUDING AHC'S NEGLIGENCE) arising out of such
continued services except such claims as may result from AHC's willful
misconduct. In connection with any such continued services, AHC shall be
reimbursed by Miller for all reasonable out-of-pocket costs and expenses
incurred by AHC with respect thereto, plus receiving the COPAS overhead rate
applicable to the particular property.
If you are in agreement with the above, please execute one copy of this
letter at the place designated below and return one copy to my attention at
-3-
<PAGE>
Miller Oil Corporation
, 1998
- ----------------
Page 4
the above address, whereupon this will be an amendment of the Agreement,
binding upon the parties hereto.
Respectfully,
AMERADA HESS CORPORATION
By:
------------------------------
ACCEPTED AND AGREED TO
THIS ______ DAY OF __________________, 1998
MILLER OIL CORPORATION
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
-4-
<PAGE>
EXHIBIT 4.3
CERTIFICATE NO. - -
-----------------
FOR ( )
--------------------------------------
SHARES OF
COMMON STOCK
Issued to:
-------------------------------
- ------------------------------------------
Date:
------------------------------------
FROM WHOM TRANSFERRED:
Dated:
-----------------------------------
No. Original Certificate:
----------------
No. Original Shares:
---------------------
No. of Shares Transferred:
---------------
RECEIVED CERTIFICATE NO.: ________________
FOR SHARES OF COMMON
STOCK this ___ day of _____________, ____.
By
---------------------------------------
<PAGE>
[EAGLE GRAPHIC]
COMMON STOCK
MILLER EXPLORATION COMPANY
Certificate Shares
** ** ** **
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS IS TO CERTIFY THAT ________________________ is the owner of _________
(___) fully paid and non-assessable shares of Common Stock, $.01 par value, of
MILLER EXPLORATION COMPANY
transferable only by the holder in person or by duly authorized attorney, upon
surrender of this certificate properly endorsed.
The Corporation will furnish to a stockholder upon request and without
charge a full statement of the designation, relative rights, preferences and
limitations of the shares of each class of capital stock of the Corporation
authorized for issuance, as well as the designation, relative rights,
preferences and limitations of each series of any class of capital
stock so far as the same may have been prescribed and the authority of the
board to designate and prescribe the relative rights, preferences and
limitations of other series. The shares represented hereby are issued
and shall be subject to all the provisions of the Certificate of
Incorporation and Bylaws of the Corporation, and all amendments thereto, to
all of which the holder by acceptance hereof assents.
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
Dated: _____________, 1997
- ------------------------------------ ----------------------------------
President Secretary
<PAGE>
EXHIBIT 10.5(b)(i)
FIRST OF AMERICA BANK-MICHIGAN, N.A.
MORTGAGE, SECURITY AGREEMENT AND ASSIGNMENT
THIS AGREEMENT made and entered into this 1st day of May, 1995, by and
between MILLER OIL CORPORATION, a Michigan corporation of 3104 Logan Valley
Road, Traverse City, Michigan 49684 (hereinafter referred to as "Debtor"), and
FIRST OF AMERICA BANK-MICHIGAN, N.A., a national banking association, of 901
South Garfield, Traverse City, Michigan 49686 (hereinafter referred to as
"Lender");
W I T N E S S E T H :
Lender and Debtor are parties to that certain loan transaction dated July
22, 1994 wherein Lender has agreed to lend to the Debtor the aggregate sum of
FIVE MILLION ($5,000,000.00) DOLLARS. Debtor has delivered its Promissory Note,
duly executed, in the total principal amount of FIVE MILLION ($5,000,000.00)
DOLLARS, made payable to the Lender all in accordance with the terms set forth
in said Note. The Note, Business Loan Agreement and all documents referenced
therein or executed conjunction therewith are collectively referred to herein as
the "Loan Documents."
Debtor heretofore provided Lender certain collateral to collateralize its
obligations under the Loan Documents. Debtor proposes to sell the collateral to
Miller Shale Limited Partnership (the "Limited Partnership") pursuant to that
certain Purchase and Sale Agreement dated as of January 1, 1995. Debtor has
requested of Lender that Lender release the collateral and in substitution
thereof take a mortgage and security interest in all of Debtor's right, title
and interest in the proceeds of said sale and Debtor's reserved interest in the
collateral. Lender has agreed to release the collateral and accept in
substitution thereof all of Debtor's right, title and interest in the proceeds
of said sale and Debtor's reserved interest in the collateral.
In consideration of the above and upon the conditions contained herein
and in the Loan Documents, the parties hereto AGREE:
1. MORTGAGE AND SECURITY AGREEMENT. Debtor hereby mortgages, conveys,
assigns, warrants and grants a security interest to Lender in any and all of the
property reserved and excepted to Debtor (as "Assignor") in that certain
Assignment, Bill of Sale and Conveyance dated as of January 1, 1995, from Debtor
as Assignor to Miller Shale Limited Partnership as Assignee, and recorded in
Liber 390, Page 504 of the Crawford County Register of Deeds and Liber 580, Page
024 of the Otsego County Register of Deeds (the "Assignment"), including but not
limited to the first and second production payments (the "Production Payments")
reserved by Debtor in the Assignment (herein referred to as the "Collateral"),
and any proceeds therefrom.
<PAGE>
2. ASSIGNMENT OF PAYMENT.
(a) As further security for the payment of any and all of the
Debtor's obligations to Lender, the Debtor hereby assigns to the Lender,
effective upon demand of Lender, which demand shall only be made upon
Debtor's default, the Production Payments.
(b) Upon Debtor's default, and upon receipt of a direction for
payment in the form attached hereto, the limited partnership is authorized
and directed by Debtor to deliver or pay all Production Payments to Lender,
as Assignee and Lender of Debtor. Such parties shall be fully protected and
held harmless by Debtor and shall be under no obligation to see to the
application by Lender of any proceeds or payments received by it.
(c) All payments received by the Lender shall be applied in
accordance with the terms of the Loan Documents.
3. DEBTOR'S WARRANTIES AND COVENANTS. Debtor hereby represents, warrants
and agrees that:
(a) Debtor will pay the indebtedness secured by this Mortgage,
Security Agreement and Assignment, and any and all other obligations or
liabilities to Lender in accordance with the Loan Documents.
(b) Except as described in the Assignment, Debtor (1) is now, or will
be at the time Debtor acquires possession thereof, the owner of the
Collateral free from any liens, encumbrances or security interests except
for the security interest granted hereby and assessments and restrictions
of record, (2) shall defend the Collateral against all claims and demands
of every kind and nature, and (3) shall keep the collateral free from
liens, encumbrances and other security interests.
(c) Debtor will not sell or otherwise assign the Collateral or any
interest therein without the prior written consent of Lender.
(d) At its option, Lender may discharge taxes, liens or security
interests or other encumbrances at any time levied or placed on the
Collateral, and Debtor agrees to reimburse Lender on demand for any payment
made or any expense incurred by Lender pursuant to this authorization.
(e) Except for the Assignment, no mortgage or financing statement
covering the Collateral or any part thereof or any proceeds thereof is on
file in any public office, and at the request of Lender, Debtor will join
with Lender in executing one
-2-
<PAGE>
(1) or more financing statements in form satisfactory to Lender and will
pay the cost of filing the same in all public offices wherever filing is
deemed by Lender to be necessary or desirable.
(f) Debtor has good and marketable title to all of the Collateral .
4. FURTHER ASSURANCES. The Debtor will execute and deliver to Lender such
other and further instruments and will do such other and further acts as in the
opinion of the Lender may be necessary to carry out more effectively the
purposes and intent hereof.
5. TAXES. The Debtor will promptly pay all taxes, assessments and other
governmental charges legally imposed on the Collateral, the proceeds therefrom
or the Lender's interest therein.
6. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute a default under this Mortgage and Security Agreement:
(a) Debtor's failure to observe and perform any of the terms and
conditions of the Loan Documents as modified hereby.
(b) The occurrence of any event of default specified in any of the
Loan Documents as modified hereby.
(c) The occurrence of any event which results in the acceleration of
the maturity of the obligations of Debtor under the Loan Documents.
(d) Any representation or warranty made by Debtor in any Loan
Document as modified hereby proves to be untrue in any material respect.
(e) Except as set forth in the Assignment, the mortgage lien and
security interest granted hereunder become subordinate or inferior in
priority to the lien or claim of any other person or entity.
(f) Debtor becomes insolvent; becomes the subject of bankruptcy or
reorganization proceedings under the provisions of any bankruptcy or
insolvency law; if a receiver or trustee is appointed; or if Debtor makes
an assignment for the benefit of creditors.
(g) Failure of Debtor, within thirty (30) calendar days after notice
from Lender, to cure a default in the due performance or observance of any
covenant or agreement contained in any Loan Document and not constituting a
default in the payment of principal or interest.
-3-
<PAGE>
7. LENDER'S RIGHT UPON DEFAULT.
(a) In the event of a default as provided herein, the entire
indebtedness secured by this Agreement shall become due and payable
immediately at Lender's option and Lender shall have the rights and
remedies provided by law and/or the Loan Documents, including the right to
take possession of the Collateral with demand and with or without process
of law and to sell the Collateral, at one or more sales, as an entirety or
in parts, as Lender may elect.
(b) The parties hereto agree that any requirement of reasonable
notice shall be met if Lender sends such notice to Debtor at least five (5)
days prior to the date of sale, disposition or other event giving rise to
required notice. It is further hereby agreed that public sale of the
Collateral by auction, conducted after advertisement of the time and place
thereof in a newspaper circulated in the county in which the sale is to be
held, shall be deemed to be commercially reasonable disposition of the
Collateral. Debtor shall be liable for any deficiency remaining after such
disposition and the amount required to redeem the Collateral shall include
reasonable attorney fees and costs and expenses incurred in connection with
the acquisition of the Collateral and disposition thereof.
(c) The proceeds of any sale of the Collateral or any part thereof
shall be applied as follows:
(1) To the payment of all expenses incurred by the Lender in the
performance of its duties, including but not limited to expenses or
taking possession, of any sale, of advertisement thereof, of conveying
or court costs, compensation of agents, employees and legal fees;
(2) To the payment of interest to the date of such payment on
any indebtedness of Debtor to Lender.
(3) To the payment of principal on any indebtedness of Debtor to
Lender.
(4) Any surplus thereafter remaining shall be paid to the Debtor
or Debtor's successors or assigns as their interests may appear.
8. INCORPORATION BY REFERENCE. Except as modified hereby, all of the
terms, provisions and conditions contained in the Loan Documents are hereby
incorporated by reference as if fully set forth herein.
9. INDEBTEDNESS SECURED. The indebtedness secured hereunder includes:
-4-
<PAGE>
(a) All obligations incurred under the Loan Documents.
(b) Any promissory note evidencing additional loans which the Lender
may make from time to time to Debtor, the Lender not being obligated,
however, to make such additional loans.
(c) Any sums advanced, or expenses or costs incurred by Lender which
are made or incurred pursuant to the terms of any of the Loan Documents
plus interest thereon at the rate specified in the Loan Documents or
otherwise agreed upon from the date of advances or the incurring of such
expenses or costs until reimbursed.
(d) Any extensions or renewals of all such indebtedness described in
Paragraph 9(a) through 9(c) above, whether or not the Lender executes an
extension agreement or renewal instruments.
10. INVALIDITY. In the event any term, provision or condition of this
Agreement or of the Loan Documents is invalid or unenforceable, the same shall
be deemed several from the remainder of such terms, provisions or conditions
which shall remain in full force and effect to the maximum extent permitted by
law.
11. GOVERNING LAW. This Agreement shall be governed by and interpreted and
construed in accordance with the laws of the State of Michigan.
12. REVERSION OF INTERESTS. If the indebtedness shall be fully paid and
the covenants herein contained shall be fully performed, then all interest of
the Debtor in the Collateral shall revert to the Debtor and Lender's interest in
said property shall cease; Lender shall execute and deliver such instruments as
are necessary to discharge or terminate its mortgage and security interests; and
upon request by Debtor, the Lender shall execute such instruments as are
necessary to reconvey the Collateral to Debtor.
13. RIGHTS CUMULATIVE. Each and every right, power and remedy herein given
to the Lender shall be cumulative and not exclusive; and each and every right,
power and remedy may be exercised from time to time and so often and in such
order as may be deemed expedient by Lender, and the exercise of any such right,
power or remedy shall not be deemed a waiver of any other right, power or
remedy.
14. COUNTERPARTS. This instrument may be executed in counterpart by the
parties hereto, and to facilitate recording, the signature pages of each
identical instrument may be combined into one original document.
15. BINDING EFFECT. This Agreement shall bind and inure to the benefit of
the parties hereto, their respective successors and assigns.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
Signed in the Presence of: DEBTOR:
/s/ SUSAN E. CARSCADDEN MILLER OIL CORPORATION
Susan E. Carscadden
/s/ VICKIE L. SCHUCH By: /s/ KELLY E. MILLER
Vickie L. Schuch Kelley E. Miller
Its: President
SECURED PARTY:
/s/ DEBRA J. LANE FIRST OF AMERICA BANK-
Debra J. Lane MICHIGAN, N.A.
/s/ GINA WEBER By: /s/ SCOT J. MACDONALD
Gina Weber Scot J. MacDonald
Its: Senior Vice President
-6-
<PAGE>
STATE OF MICHIGAN )
: ss.
County of Grand Traverse )
On this 1st day of May, 1995, before me a Notary Public in and for
said County, personally appeared the above-named KELLY E. MILLER, President of
MILLER OIL CORPORATION, a Michigan corporation, to me known to be the same
person in and who executed the foregoing instrument and acknoweldged the same to
be his free act and deed.
/s/ SUSAN E. CARSCADDEN
Susan E. Carscadden
(SEAL) Notary Public
County: Grand Traverse
My Commission Expires: 4/27/96
STATE OF MICHIGAN )
: ss.
County of Grand Traverse )
On this 1st day of May, 1995, before me a Notary Public in and for
said County, personally appeared the above-named SCOT J. MacDONALD, Senior Vice
President of FIRST OF AMERICA BANK-MICHIGAN, N.A., to me known to be the same
person in and who executed the foregoing instrument and acknoweledged the same
to be his free act and deed.
/s/ CHARLOTTE MARIE BOONE
Charlotte Marie Boone
(SEAL) Notary Public, Leelanau County, Michigan
Acting in Grand Traverse County
My Commission Expires: 7/24/95
Prepared in the Law Office of:
DONALD A. BRANDT, ESQ.
Smith, Johnson & Brandt, Attorneys, P.C.
603 Bay Street, P.O. Box 705
Traverse City, Michigan 49685-0705
(616) 946-0700
-7-
<PAGE>
EXHIBIT 10.5(f)
SUBORDINATION AGREEMENT
In consideration of the financial accommodations given, to be
given or continued by First of America Bank-Michigan, N.A. (herein termed
"Bank") to (herein termed "Borrower") and in order to induce the Bank to
extend or continue to extend credit to the Borrower upon such terms and
conditions as may from time to time be agreed upon by the Bank and the
Borrower, Kelly E. Miller (herein termed "Creditor"), Borrower and Bank
agree as follows:
1. Creditor subordinates all indebtedness, including interest thereon
(herein called "Subordinated Indebtedness") which is now or may at any time
hereafter be owing to the Creditor by the Borrower in favor of all indebtedness,
including interest thereon (herein called "Senior Indebtedness") which is now or
at any time be owing by the Borrower to the Bank whether now or hereafter
existing, absolute or contingent, secured or unsecured, due or not due, joint or
several, and however arising.
2. Unless paragraph 11 hereof is applicable, the Borrower agrees that no
payment of or on account of any Subordinated Indebtedness shall be made or any
security given therefor until such time as Bank has been paid in full and this
Agreement shall have been released in writing by Bank. Creditor further agrees
not to demand, receive or accept any such payment or security from Borrower.
3. If Creditor receives any payment from Borrower in contravention of
paragraph 2 hereof and fails to deliver same to Bank in the form received for
application on the Senior Indebtedness, the Creditor so receiving such payment
shall become liable to the Bank for the Senior Indebtedness.
4. Borrower agrees that should there be any violation of this Subordination
Agreement while the Senior Indebtedness remains unpaid, the maturity of the
Senior Indebtedness may, at Bank's option, be accelerated and the entire
principal sum shall become immediately due, together with interest and attorney
fees notwithstanding any provision in the documents evidencing the Senior
Indebtedness to the contrary.
5. In the event of any receivership, insolvency, bankruptcy, assignment for
the benefit of creditors, readjustment of indebtedness, composition,
reorganization, whether or not pursuant to bankruptcy laws, sale of
substantially all of the assets, dissolution, winding up, liquidation or any
other marshaling of the assets or liabilities of Borrower, any payment or
distributions of assets of Borrower of any kind or character, whether in cash,
securities for other property, which would otherwise be payable to or
deliverable upon or with respect to any or all indebtedness of Borrower to the
Creditor, shall be paid or delivered directly to the Bank for application on any
Senior Indebtedness of Borrower to Bank until such Senior Indebtedness shall
have been fully paid and satisfied. Bank shall have the right to enforce,
collect and receive every such payment or distribution and given acquittance
therefor, and Bank is hereby authorized as attorney in fact for the Creditor
to
<PAGE>
vote and approve the Subordinated Indebtedness in any of the above described
proceedings or in any meetings of creditors of Borrower relating thereto.
6. The Creditor shall not assign, transfer, hypothecate or dispose of any
claim it has or may have against Borrower while any Senior Indebtedness of
Borrower to Bank remains unpaid, without prior written consent of Bank.
7. The Creditor and Borrower represent to the Bank that the Subordinated
Indebtedness, exclusive of interest, is in the amount of $1,910,750.00 as of the
date of this Agreement without counterclaim, defense or offset. The Creditor and
Borrower represent to Bank that the Subordinated Indebtedness is not evidenced
by any notes or other negotiable instruments, except such notes or negotiable
instruments, if any, as have been endorsed and delivered by the Creditor to the
Bank simultaneously with the execution of this Agreement. To the extent that the
Subordinated Indebtedness is hereafter evidenced by a note or negotiable
instrument, Creditor agrees to promptly, upon receipt, endorse and deliver same
to Bank.
8. The Creditor agrees that so long as this Agreement is in effect each note
or negotiable instrument which evidences the Subordinated Indebtedness shall be
endorsed substantially as follows:
The indebtedness hereby evidenced has been subordinated in favor of and
assigned to First of America Bank-Michigan, by Subordination Agreement dated
October 6, 1995, to which reference is hereby made, to secure all
indebtedness now or hereafter owing by the maker or drawer hereof to said
Bank." The Borrower agrees that it will render to the Bank upon demand a
statement of borrower's account with the Creditor and that if will reflect in
its financial records the legal effect of this Agreement.
9. This Agreement shall constitute a continuing agreement of subordination,
even though at times the Borrower is not indebted to the Bank and Bank may,
without notice to the Creditor lend monies, extend credit and make other
financial accommodations to or for the account of Borrower on the faith hereof
until written notice or revocation of this Agreement as to future transactions
shall be delivered to Bank by the Creditor, and receipt thereof acknowledged by
Bank. Any such notice of revocation shall not affect this Agreement in relation
to any obligations or liabilities of Borrower then existing, or any obligations
or liabilities created thereafter pursuant to any previous commitment of the
Bank to the Borrower, or any extensions or renewals of any such obligations and
liabilities and extensions or renewals thereof.
10. Bank, at any time and from time to time either before or after such
notice of revocation, may enter into such agreement or agreements with Borrower
as Bank may deem proper, extending the time of payment or renewing or otherwise
altering the terms of all or any of the Senior Indebtedness or releasing, or
substituting or affecting any security underlying any or all of such
-2-
<PAGE>
Senior Indebtedness or may exchange, sell or surrender or otherwise deal with
any security, or may release any balance of funds of Borrower with Bank, without
notice to the Creditor and without in any way impairing or affecting this
Agreement.
11. If subparagraphs (a), (b), or (c) of this paragraph are marked and
initialed by Bank and notwithstanding anything to the contrary contained herein,
so long as Borrower is not in default under the terms hereof or of any document
executed in connection with the Senior Indebtedness, Borrower may make the
following payments to Creditor and such payments shall not be deemed to be
Subordinated Indebtedness:
(a) [_] Payments representing interest only not to exceed _____% per
annum or $__________ per ____________.
(b) [_] Payments representing principal and interest at _____% per
annum or $__________ per _____________.
(c) [_] Other (Specify): _______________________________________
If checked here [_], Bank requires payments made under this Paragraph 11
to be delivered in kind to Bank which will in turn deliver same to Creditor.
12. Bank's delay in or failure to exercise any right or remedy shall not be
deemed a waiver of any obligation of the Creditor or right of Bank. This
Agreement may be modified, and any of Banks' rights hereunder waived, only by
agreement in writing signed by Bank.
13. This Agreement shall inure to the benefit of Banks' successors and
assigns and binds the heirs, legatees, personal representatives, successors and
assigns of the Creditor.
14. Notice of acceptance by Bank of this Agreement is hereby waived by the
Creditor, and this Agreement and all of the terms and provisions hereof shall
immediately be binding upon the Creditor from the date of execution hereof.
15. This Agreement shall be construed and governed by the laws of the State
of Michigan.
Executed this 6th day of October, 1995.
CREDITOR:
Kelly E. Miller
/s/ Kelly E. Miller
-------------------------------
Kelly E. Miller
-3-
<PAGE>
The Borrower hereby consents to the foregoing Agreement and agrees to be
bound by the terms and conditions thereof.
BORROWER:
Dated: October 6, 1995 Miller Oil Corporation
By /s/ Kelly E. Miller
-----------------------------
Kelly E. Miller, President
Accepted by Bank:
BANK:
DATED: October 6, 1995 First of America
Bank-Michigan, N.A.
By /s/ Scot J. MacDonald
-----------------------------
Scot J. MacDonald
ITS Senior Vice President
-4-
<PAGE>
SCHEDULE TO
SUBORDINATION AGREEMENT
In addition to the Subordination Agreement filed as Exhibit 10.5(f),
First of America Bank-Michigan, N.A. has entered into a Subordination Agreement
dated as of October 6, 1995 with Miller Oil Corporation and each of the
following individuals:
David A. Miller
Susan E. Bell
Daniel R. Miller
Other than with respect to different parties thereto, the Subordination
Agreements with David A. Miller, Susan E. Bell, and Daniel R. Miller are
identical to the Subordination Agreement filed as Exhibit 10.5(f).
<PAGE>
#000 Exhibit 10.5(g)
PROMISSORY NOTE
$500,000.00 DATE: November 17, 1997
On January 10, 1998, Miller Oil Corporation, (herein termed "Borrower"), for
value received, promises to pay to the order of First of America Bank, N.A.,
(herein termed "Bank") at its offices in Traverse City, Michigan, the principal
sum of *Five Hundred Thousand and no/00* Dollars (U.S.) ($500,000.00), or such
------------------------------- -----------
other amount as is reflected upon the books and records of the Bank, with
interest thereon, until paid, plus all of the Bank's expenses (including
reasonable attorney's fees and court costs) incurred in the enforcement and
collection of this Note.
Borrower agrees to pay a variable rate of interest on the unpaid principal
balance at an annual rate equal to:
NYCP Rate from time to time in effect plus One-Quarter of One percent (.25%) per
------------------ ---
annum. NYCP Rate as used herein shall mean: New York Consensus Prime is defined
as "the maximum Prime Rate as published in the Wall Street Journal", but if the
rate is no longer published than a rate approved by First of America Bank, N.A.
will be substituted. This rate may not necessarily be the lowest rate of
interest charged by the Bank to any of its customers. New York Consensus Prime
Rate is an "Index" and the actual rate charged to any borrower for a specific
loan may be above or below that "Index".
Rate changes shall be effective on the day any adjustment is made to the Rate
unless otherwise noted as follows:
Interest shall be payable on the 10th day of January, 1998 and on the same day
---- ------- --
of each thereafter and shall be computed for the actual number of days elapsed
on the basis of a year consisting of 360 days. Interest hereunder shall accrue
from , 19 or from the date of the first advance made by the Bank.
Interest on all advances shall be computed from the respective dates thereof
until the same are paid in full. The principal payable hereunder at any given
date shall be equivalent to all advances made by the Bank to or at the request
of the Borrower as of that date less principal payments previously received by
the Bank. Advances hereunder shall at all times be made at the sole discretion
of the Bank, and Bank shall not have any obligation whatsoever to make any such
advances.
All payments made as scheduled on this Note shall be applied, to the extent
thereof, to accrued but unpaid interest, unpaid principal, and any other sums
due and unpaid to Bank under the Loan Documents, in such manner and order as
Bank may elect in its discretion. All prepayments on this Note shall be applied,
to the extent thereof, to accrued but unpaid interest on the amount prepaid, to
the remaining principal, and any other sums due and unpaid to Bank under the
Loan Documents, in such manner and order as Bank may elect in its discretion.
Remittances in payment of any part of the Indebtedness other than in the
required amount in immediately available U.S. funds shall not, regardless of any
receipt or credit issued therefor, constitute payment until the required amount
is actually received by the holder hereof in immediately available U.S. funds
and shall be made and accepted subject to the condition that any check or draft
may be handled for collection in accordance with the practice of the collecting
bank or banks. Acceptance by the holder hereof of any payment in an amount less
than the amount then due on any Indebtedness shall be deemed an acceptance on
account only and shall not in any way excuse the existence of a default. "Loan
Documents" means any document evidencing the Indebtedness, any document
securing the Indebtedness, any guaranty of the Indebtedness and any document
executed in connection with or referred to in any of the foregoing.
"Indebtedness" means this Note and all other liabilities, whether direct or
indirect, absolute or contingent, now or hereafter existing, due or to become
due, several or otherwise of the Borrower to the Bank.
At the Bank's option, upon occurrence of a default under this Note or any other
agreement with the Bank, the Borrower shall pay interest on the unpaid principal
balance of this Note at the annual rate equal to the Rate plus percent (%) per
annum effective from and after the date of occurrence of the default which is
not cured or waived within the appropriate grace period, if any.
Borrower does hereby pledge to the Bank all deposits and other property of the
Borrower now or hereafter in the possession, custody or control of Bank for any
purpose and does hereby grant to Bank a security interest in or lien upon the
property described in:
Business Loan Agreement November 17, 1997
Subordination Agreements dated October 6, 1995
Mortgage, Security Agreement and Assignment dated May 1, 1995
Mortgage, Security Agreement and Assignment (2) each dated September 9, 1996
or as described in any other security agreement, mortgage, document or loan
agreement executed at any time by the Borrower and delivered to the Bank (herein
collectively termed "Collateral") as security for the payment of this Note and
for the payment of all Indebtedness. Collateral securing other obligations of
Borrower to Bank may also secure this Note. The surrender of this Note upon
payment or otherwise shall not affect the right of Bank to retain the
Collateral as security for any other Indebtedness.
Upon default in payment of this Note, or default in payment of any Indebtedness,
or if there is a default under any of the Loan Documents or any security
agreement, mortgage, loan agreement, or document given in connection with the
Collateral, or if the security afforded by the Collateral at any time in the
sole opinion of the Bank becomes insufficient, or if any material representation
made by the Borrower to Bank for the purpose of obtaining credit appears to the
Bank to be untrue, or the commencement of a case under any federal or state
bankruptcy or insolvency law by or against the Borrower, or if Borrower fails
generally to pay its debts as such debts become due, or if proceedings are taken
to attach, garnishee or levy on any deposits, credits, funds or other property
of the Borrower, or the Borrower fails to notify the Bank of any material
adverse change in this financial status, this Note and Indebtedness shall, at
the option of the Bank, become immediately due and payable in full without
notice, presentation or demand for payment, all such being hereby waived by the
Borrower and in such event, it is agreed that the Bank may exercise all rights
and remedies available to it under any security agreement, mortgage, loan
agreement, or document relating to or otherwise securing any of the Indebtedness
or, which may be available to Bank under the Uniform Commercial Code as in
effect in the State of Michigan or other applicable law. Delay or forbearance by
the Bank in the exercise of any right granted hereunder shall
<PAGE>
not operate as a waiver thereof. The Borrower authorizes the Bank to correct and
cure any obvious errors or omissions in this Note.
All loan advances to the Borrower shall be evidenced by this Note. A separate
note will not be required of the Borrower upon each advance. Records prepared by
the Bank in the ordinary course of business shall be evidence of the dates and
amounts of disbursements, payments, interest rates and applicable effective
dates thereof.
Loan advances to the Borrower shall be made by the Bank upon the written
request of those officers or agents of the Borrower duly authorized by
appropriate resolution or partnership agreement of the Borrower on file with the
Bank. The Bank is also authorized and directed to accept telephonic instructions
to make further advances for credit to the Borrower's account, number.
The following is applicable if checked and initialed by Borrower:
______ [_] Interest shall be paid by the Borrower on the day of each by debiting
the Borrower's account, number.
Within days after the end of each fiscal year, Borrower will provide its annual
financial report prepared by a certified public accountant chosen by the
Borrower and acceptable to Bank.
Within days after the end of each period, Borrower will provide its interim
financial reports prepared by with the accuracy of the statements certified by
the Borrower.
Borrower and all sureties, endorsers, guarantors and any other party now or
hereafter liable for the payments of this Note in whole or in part, hereby
submit (and waive all rights to object) to non-exclusive personal jurisdiction
in the State of Michigan, and venue in the county in which payment is to be made
as specified in this Note, for the enforcement of any and all obligations under
this Note and the Loan Documents. This Note shall be governed by the laws of the
State of Michigan.
A determination that any provision of this Note is unenforceable or invalid
shall not affect the enforceability or validity of any other provision and the
determination that the application of any provision of this Note to any person
or circumstance is illegal or unenforceable shall not affect the enforceability
or validity of such provision as it may apply to other persons and
circumstances. The remaining provisions of this Note shall remain operative and
in full force and effect and shall in no way be affected prejudiced, or
disturbed thereby. This Note may not be amended except in writing specifically
intended for the purpose and executed by the party against whom enforcement of
the amendment is sought. In the event any provisions of this Note are
inconsistent with the provisions of the Loan Documents, or any other agreements
or documents executed in connection with this Note, this Note shall control.
Borrower warrants and represents to Bank and all other holders of this Note that
the loan evidenced by this Note is and will be for business or commercial
purposes and not primarily for personal, family, or household use. The terms,
provisions, covenants and conditions hereof shall be binding upon Borrower and
the heirs, devisees, representatives, sucessors and assigns of Borrower. Any
reference herein to a day or business day shall be deemed to refer to a banking
day which shall be a day on which Bank is open for the transaction of business,
excluding any national holidays, and any performance which would otherwise be
required on a day other than a banking day shall be timely performed in such
instance, if performed on the next succeeding banking day. Notwithstanding such
timely performance, interest shall continue to accrue hereunder until such
payment or performance has been made.
It is agreed that the Bank shall have the right at all times without demand or
notice of any kind, to set off, hold, appropriate, or apply any balance,
credits, deposits, accounts or monies of Borrower or any indebtedness of Bank to
Borrower, in such order of application as Bank may from time to time elect,
as security for, or in payment of this Note or the Indebtedness, either before
or after maturity.
All parties to the Loan Documents intend to comply with applicable usury law. In
no event (including but not limited to prepayment, default, demand for payment,
or acceleration of maturity) shall the interest taken, reserved, contracted for,
charged, or received under this Note or under any of the other Loan Documents or
otherwise, exceed the maximum nonusurious amount permitted by applicable law
(the "Maximum Amount"). If, from any possible construction of any document,
interest would otherwise be payable in excess of the Maximum Amount, then ipso
----
facto, such document shall be reformed and the interest payable reduced to the
- -----
Maximum Amount, without necessity of execution of any amendment or new document.
If the holder hereof ever receives interest in an amount which apart from this
provision would exceed the Maximum Amount, the excess shall, without penalty, be
refunded to the payor, or at the option of such payor, be applied to the unpaid
principal of this Note in inverse order of maturity of installments and not to
the payment of interest. The holder hereof does not intend to charge or receive
unearned interest on acceleration. All interest paid or agreed to be paid to the
holder hereof shall be spread throughout the full term (including any renewal or
extension) of the debt so that the amount of interest does not exceed the
Maximum Amount.
If more than one party shall execute this Note, the term "Borrower" as used
herein shall mean all parties signing this Note whether as maker or endorser and
each of them, and all such parties shall be jointly and severally obligated
hereunder. The Borrower hereby waives presentment, demand, protest and notice of
dishonor and agrees that each Borrower, if more than one, shall not be released
or discharged by reason of any execution, indulgence or release given to any
person, or by the Bank's release, sale or non-action with respect to the
Collateral or any guaranty or other undertaking securing this Note. If this Note
is not dated when executed by the Borrower, Bank is hereby authorized, without
notice to the Borrower, to date this Note as of the date when the principal
balance hereunder has been advanced to the Borrower in whole or in part.
Borrower acknowledges receipt of a fully completed copy of this Note.
LATE CHARGE PROVISION: If this note is not otherwise in default for any reason,
but any required payment is not paid within ten (10) days from the date same is
due, then, at the option of the Bank, a late charge of five ($.05) cents for
each dollar of the payment so overdue may be charged.
THE WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND
- --------------------------------------------------------------------------------
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
- --------------------------------------------------------------------------------
AGREEMENTS OF THE PARTIES.
- -------------------------
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
- ----------------------------------------------------------
2
<PAGE>
THE UNDERSIGNED AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING
(OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE,
KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO
TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR
ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS PROMISSORY NOTE OR THE
INDEBTEDNESS.
ADDRESS: BORROWER: Miller Oil Corporation
3104 Logan Valley
Traverse City, MI 49684 /s/ Kelly R. Miller
--------------------------------
Kelly R. Miller, President
--------------------------------
Approved by: [SIGNATURE APPEARS HERE]
--------------------------
3
<PAGE>
EXHIBIT 10.10
PROMISSORY NOTE
November 26, 1997
$2,500,000.00 Traverse City, Michigan
FOR VALUE RECEIVED, Miller Oil Corporation ("Obligor") promises to C.E.
Miller Trust and his heirs, personal representatives and permitted assigns
(collectively, "Payee"), at 3104 Logan Valley Road, Traverse City, Michigan
49684, the principal amount of Two Million Five Hundred Thousand and no/100
Dollars ($2,500,000.00) and interest (computed on the basis of a 360-day year
for the actual number of days elapsed) on the unpaid principal balance at a
variable rate equal to the New York Prime Rate as published in the Wall Street
Journal (Midwest edition).
PAYMENT SCHEDULE. The principal of this Note shall be paid in full on
June 1, 1998. Interest on this Note shall be paid monthly beginning January 2,
1998 and on the first day of each month thereafter until the principal is paid
in full. Interest shall accrue on all over due payments of principal or interest
from the date due, whether by acceleration or otherwise, at a rate which is 3%
per annum above the interest rate otherwise in effect under this Note.
PREPAYMENTS. Obligor may prepay all or part of the principal of this
Note at any time. Any partial prepayment shall be applied to the installment or
installments last falling due under this Note, and a partial prepayment shall
not affect the amount or time of payment of succeeding required installments.
At no time shall the interest rate on this Note exceed the highest rate
permitted by law. To the extent that amounts received by the holder of this
Note are attributable to an interest rate in excess of that permitted by law,
those amounts shall be deemed and applied as prepayments of principal under this
Note.
TRANSFERS. Payee may not assign or transfer this Note or any interest
in this Note, including by pledge or any other method, without the written
consent of the Obligor.
UNSECURED AND SUBORDINATED OBLIGATION. Payee acknowledges and agrees
that all indebtedness evidenced by this Note is unsecured and hereby
subordinated to all existing bank indebtedness of Obligor. Payee shall execute
and deliver any customary subordination or inter-creditor agreements requested
by Obligor and/or its lenders to further evidence such subordination.
DEFAULT AND ACCELERATION. Each of the following shall be an event of
default under this Note: (a) if default occurs in any payment of principal or
interest under this Note or of any late charge or expense at any time owing to
the holder hereof under this Note, as and when the same shall be or become due
and payable, and Obligor fails to cure such default within five days after
receipt from Payee of written notice of the default; (b) if default occurs in
the performance of any other obligation to the holder hereof under this Note
and Obligor fails to cure such default within ten days
<PAGE>
after receipt from Payee of written notice of the default; (c) if Obligor
becomes insolvent or makes an assignment for the benefit of creditors; or (d) if
a voluntary or involuntary case in bankruptcy, receivership or insolvency shall
at any time be instituted by or against Obligor.
Upon the occurrence of any event of default described in clauses (a) or
(b) above, all or any part of the indebtedness evidenced by this Note shall, at
the option of the holder, become immediately due and payable without notice or
demand. Upon the occurrence of any event of default described in clause (c) or
(d) above, all of the indebtedness shall automatically become immediately due
and payable.
PLACE AND APPLICATION OF PAYMENTS. Each payment upon this Note shall be
made at Payee's address set forth above or any other place that the holder of
this Note may direct in writing. Any payment upon this Note shall be applied
first to any expenses (including expenses of collection) then due and payable to
the holder under this Note, then to any unpaid late charges, then to any accrued
and unpaid interest, and then to the unpaid principal balance.
NO SET OFF. The holder of this Note shall have no right to set off any
indebtedness that the holder then owes to Obligor against any indebtedness
evidenced by this Note that is then due and payable.
REMEDIES. The holder of this Note shall have all rights and remedies
provided by law. Obligor agrees to pay any and all expenses, including
reasonable attorney fees and legal expenses, paid or incurred by the holder in
protecting and enforcing the rights of and obligations to the holder under any
provision of this Note.
WAIVERS. No delay by the holder of this Note in the exercise of any right
or remedy shall operate as a waiver of that or any other right or remedy. No
single or partial exercise by the holder of any right or remedy shall preclude
any future exercise of that or any other right or remedy. No waiver by the
holder of any default or of any provision of this Note shall be effective unless
in writing and signed by the holder. No waiver of any right or remedy on one
occasion shall be a waiver of that or any other right or remedy on any future
occasion.
Obligor irrevocably waives demand for payment, presentment, notice of
dishonor, and protest of this Note and consents to any extension or postponement
of time of its payment, to the addition of any party to this Note, and to the
release, discharge, waiver, modification or suspension of any rights and
remedies against any person who may be liable for the indebtedness evidenced by
this Note.
APPLICABLE LAW. This Note shall be governed by and interpreted according
to the laws of the state of Michigan.
-2-
<PAGE>
Signed as of November 26, 1997.
Obligor: Payee:
- -------- ------
MILLER OIL CORPORATION /s/ C.E. Miller
------------------------------
By /s/ Kelly E. Miller C.E. Miller Trust
---------------------------- C.E. Miller Trustee
Its President
--------------------------
-3-
<PAGE>
EXHIBIT 11.1
MILLER EXPLORATION COMPANY
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
1996 SEPTEMBER 30, 1997
----------------------- ---------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
PRIMARY INCOME PER SHARE
(in thousands, except per share data)
Net Income $ 628 $ 5,921 $ 338 $ 3,283
Shares
Weighted average shares outstanding
Combined Assets 6,930 6,930
========= =========
Primary income per share $ 0.85 $ 0.47
========= =========
FULLY DILUTED INCOME PER SHARE
(in thousands, except per share data)
Net income $ 628 $ 5,921 $ 338 $ 3,283
Shares
Weighted average shares outstanding
Combined Assets 6,930 6,930
========= =========
Fully diluted income per share $ 0.85 $ 0.47
========= =========
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
1996 SEPTEMBER 30, 1997
----------------------- ------------------
<S> <C> <C>
CALCULATION OF PRO FORMA
PRIMARY AND FULLY DILUTED
NET INCOME PER COMMON SHARE
(in thousands, except per share data)
Pro Forma Net Income Attributable
to Common Shares $ 5,921 $ 3,283
Pro Forma Weighted Average Shares 6,930 6,930
--------- ---------
Pro Forma Income per Common Share $ 0.85 $ 0.47
========= =========
</TABLE>
<PAGE>
CALCULATION OF ACTUAL
WEIGHTED AVERAGE SHARES OUTSTANDING (in thousands)
<TABLE>
<S> <C> <C>
Beginning Balance -- --
Combined Assets 6,930 6,930
----- -----
Ending Weighted Average Balance 6,930 6,930
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
registration statement of our report dated October 10, 1997 on the combined
financial statements of Miller Exploration Company and affiliated entities and
our report dated November 26, 1997 on the statements of revenues and direct
operating expenses of the Miller Exploration Company Acquired Properties, all
included herein and to all references to our Firm included in this registration
statement.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
December 4, 1997
<PAGE>
EXHIBIT 23.3
[LETTERHEAD APPEARS HERE]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to (i) the use in the Prospectus (the
"Prospectus") constituting a part of the Registration Statement on Form S-1
filed by Miller Exploration Company, a Delaware corporation (the "Company"),
under the Securities Act of 1933, as amended (the "Act"), and each amendment to
such Registration Statement, of information contained in our reserve reports
relating to the oil and gas reserves and revenue, as of December 31, 1996, and
September 30, 1997, of certain interests of the Company and the information
derived from such reports, (ii) the inclusion of a summary of such reserve
report as of September 30, 1997 as Appendix A to such Prospectus, (iii) all
references to such summary, reports, and this firm in such Prospectus, and
further consent to our being named as an expert therein, and (iv) the
incorporation of this consent in any Registration Statement and each amendment
thereto filed for the same offering pursuant to Rule 462(b) under the Act.
S. A. HOLDITCH & ASSOCIATES, INC.
/s/ W. Denton Copeland, P.E.
----------------------------
W. Denton Copeland, P.E.
Vice President
New Orleans, Louisiana
December 5, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to (i) the use in the Prospectus (the "Prospectus")
constituting a part of the Registration Statement on Form S-1 Amendment Number
1, filed by Miller Exploration Company, a Delaware corporation (the "Company"),
under the Securities Act of 1933, as amended (the "Act"), of information
contained in our reserve reports relating to the oil and gas net reserves and
future net revenue, as of December 31, 1996 that includes the Amerada Hess
acquisition as if it occurred before December 31, 1996 rather than the actual
effective acquisition date of September 1, 1997 and excluding the acquisition
cost, and September 30, 1997, of certain interests of the Company and the
information derived from such reports, (ii) the inclusion of a summary of such
reserve report as of September 30, 1997 as Appendix B to such Prospectus, (iii)
all references to such summary reports and this firm in such Prospectus, and
further consent to our being named as an expert therein, and (iv) the
incorporation of this consent in any Registration Statement filed for the same
offering pursuant to Rule 462(b) under the Act.
MILLER AND LENTS, LTD.
/s/ Larry M. Gring
Larry M. Gring
Houston, Texas Senior Vice President
December 5, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM S-1 FOR MILLER EXPLORATION COMPANY AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 410 107
<SECURITIES> 0 0
<RECEIVABLES> 2,246 2,253
<ALLOWANCES> 0 0
<INVENTORY> 47 47
<CURRENT-ASSETS> 3,154 2,629
<PP&E> 30,694 33,004
<DEPRECIATION> (9,962) (11,841)
<TOTAL-ASSETS> 24,050 23,993
<CURRENT-LIABILITIES> 5,836 6,095
<BONDS> 0 0
<COMMON> 0 0
0 0
0 0
<OTHER-SE> 7,769 8,032
<TOTAL-LIABILITY-AND-EQUITY> 24,050 23,993
<SALES> 6,715 5,039
<TOTAL-REVENUES> 7,110 5,531
<CGS> 0 0
<TOTAL-COSTS> 5,343 4,271
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,139 922
<INCOME-PRETAX> 628 338
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 628 338
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 628 338
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
