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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to
____________________
Commission File Number: 0-23431
MILLER EXPLORATION COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 38-3379776
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3104 LOGAN VALLEY ROAD, TRAVERSE CITY, MICHIGAN 49685-0348
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (616) 941-0004
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, $0.01 Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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Number of shares outstanding of the registrant's Common Stock, $0.01 par
value (excluding shares of treasury stock) as of March 30, 1998: 12,492,597.
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of March 30, 1998: $128,049,119.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference.
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PART I
ITEM 1. BUSINESS.
Miller Exploration Company ("Miller" or the "Company") 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 Miller Oil Corporation ("MOC"), an independent
oil and natural gas exploration and production business first established
in Michigan by members of the Miller family in 1925. 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). Certain terms related to the oil and gas industry
are defined in "Glossary of Certain Oil and Gas Terms" below.
The Company was organized in connection with the combination (the
"Combination Transaction") of MOC and interests in oil and natural gas
properties owned by certain affiliated entities and interests in such
properties owned by certain business partners and investors (collectively,
the "Combined Assets").
The Combined Assets consist of MOC, interests in oil and natural gas
properties from oil and natural 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. and SASI Minerals
Company. No assets other than those in which MOC or the Affiliated
Entities had an interest were part of the Combined Assets. The Company and
the owners of the Combined Assets entered into separate agreements that
provided for the issuance of approximately 6.9 million shares of the
Company's 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 issuance of the shares and the cash payment
were completed upon consummation of the Company's initial public offering.
In this filing, 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 Combination Transaction closed on February 9, 1998 in connection
with the closing of the Company's initial public offering of 5,500,000
shares of Common Stock (the "Offering"). The Offering, including the sale
of an additional 62,500 shares of Common Stock by the Company on March 9,
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1998 pursuant to the exercise of the underwriters' over-allotment option,
resulted in net proceeds to the Company of approximately $40.4 million
after expenses.
The Company has budgeted a significant increase in drilling activity
and plans to drill 42 wells (19.4 net to the Company) 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 an unrisked $44.3 million for
1998. Miller incurred expenditures for exploration and development activity of
$27.0 million with respect to the Company's interest in 31 gross wells (6.6
net to the Company) for the year ended December 31, 1997 and $21.1 million
with respect to the Company's interest in 25 gross wells (8.8 net to the
Company) for the year ended December 31, 1996. Estimated proved reserves
attributable to the Combined Assets have increased 189%, from 19.9 Bcfe as
of January 1, 1994 to 57.6 Bcfe as of December 31, 1997.
The Company's primary exploration effort currently is 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 68,000 gross leasehold acres (44,000 net to the Company)
in the Mississippi Salt Basin in prospective areas around 22 salt domes and
related salt structures, 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. At December 31, 1997,
the Company also was in the process of drilling and/or completing five gross
(2.9 to the Company) wells. As of December 31, 1997, these wells had produced
33.6 Bcfe gross (21.8 Bcfe net to the Company) and had stablished estimated
gross proved reserves of 92.3 Bcfe (41.1 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
currently is 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 54 gross wells within the boundaries of these surveys.
Twenty-eight of the wells drilled have been completed as commercially
productive. As of December 31, 1997, the Company had 21 3-D supported wells
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with established estimated gross proved reserves of 35.1 Bcfe (5.8 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.
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 68,000 gross acres (44,000 net to the
Company) covering 22 known salt domes and related salt structures. 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
generally are found in groups in geologic basins that provided the
necessary conditions for their formation. Salt domes are typically
subsurface structures that easily are identified with seismic surveys, but
occasionally are 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 three miles and vertically extend
from 2,000 feet in depth to nearly 20,000 feet in depth. 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.
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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 acquired 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 currently 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 140 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.
The Company owns an interest in eight producing wells in the
Mississippi Salt Basin that had aggregate average production as of December
31, 1997 of 31.7 MMcfe/d gross (20.2 MMcfe/d net to the Company) at depths
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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. At December 31, 1997, the Company also
was in the process of drilling and/or completing five (2.9 net to the Company
wells. The Company has 25 gross wells (14.1 net wells) budgeted in 1998 for the
Mississippi Salt Basin with a capital expenditure budget of $36.3 million,
including $9.3 million for the acquisition of 3-D seismic around seven salt
domes in 1998. This will provide 3-D seismic data on 11 of 25 Mississippi Salt
Basin wells budgeted for 1998. As of December 31, 1997, the Company's
Mississippi Salt Basin wells had produced 33.6 Bcfe gross (21.8 Bcfe net to the
Company) and had established 92.3 Bcfe gross (41.1 Bcfe net to the Company) of
estimated proved reserves.
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, 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 33 wells in Texas that had
aggregate average production as of December 31, 1997 of 54.6 MMcfe/d gross
(5.8 MMcfe/d net to the Company) 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 70 wells, of
which 33 (47%) established commercial production. The Company has nine
gross wells (1.4 net wells) budgeted for 1998 in the Texas Gulf Coast
region with a 1998 capital expenditure budget of approximately $2.4
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million. The wells that the Company currently intends to drill in 1998 are
3-D seismic-supported and these exploratory tests are expected to be drilled
on geologic structures where the Company has established commercial production
in its previous drilling attempts. As of December 31, 1997, the Company's
Texas wells had produced 8.8 Bcfe net to the Company and had established
estimated proved reserves of 3.0 Bcfe.
LOUISIANA
The Company owns working interests in producing properties in Cameron
and Terrebonne Parish, Louisiana that had aggregate average production as
of December 31, 1997 of 7.5 MMcfe/d gross (1.4 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 18 gross wells,
eight of which were completed as commercially productive, four of which
currently are producing. The Company has budgeted five wells (0.9 net to the
Company) for 1998 in the Louisiana area, with a 1998 capital expenditure
budget of approximately $0.9 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 December 31, 1997, the Company's Louisiana wells had
produced a total of 7.8 Bcfe (1.0 Bcfe net to the Company) and had
established estimated gross proved reserves of 12.9 Bcfe (2.5 Bcfe net to
the Company).
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 (in which it owns an average 12.5%
working interest), some of which have been assigned to third parties for
the purpose of monetizing the Section 29 tax credits available for
production from the assigned interests. The balance of the wells were 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, continues 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
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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 following joint venture exploration,
participation, farm-out and other agreements:
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
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
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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 ("MSLP") 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 MSLP for the purpose of selling part of the reversionary interest
retained by MOC under the prior Purchase and Sale Agreement. MSLP 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 Agreements, MOC has assigned its
interest in the wells, leases, equipment and other property to MSLP,
reserving three separate production payments, an additional contingent
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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 December 31, 1997, the estimated remaining production
volume was 8.5 Bcfe, the estimated remaining dollar amount was $4.7
million and the volumetric threshhold was 4.7 Bcfe. The third production
payment and the additional contingent payment generally entitle MOC to
receive 96% of the net cash flow from additional specified volumes of
production attributable to the assigned interests. The reversionary
interest entitles MOC to a reassignment of 90% of the interests after a
larger specified volume of natural gas has been produced from the assigned
interests. MSLP also is obligated to make quarterly payments to MOC
equivalent to a percentage of the tax credits available under Section 29
with respect to natural gas produced and sold from the interests assigned.
MOC also has an option to repurchase the assigned interests for fair
market value after December 31, 2002, the expiration date of the Section
29 tax credits.
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth the historical combined information and
pro forma information of the Company with respect to production volumes,
average prices received and average production costs for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
PRO FORMA
1997 1997 1996 1995
-------- -------- -------- --------
(Dollars in thousands, except per unit amounts)
<S> <C> <C> <C> <C>
Production:
Crude oil and condensate (Mbbls) . . . . . 206.8 47.4 46.5 31.6
Natural gas (Mmcf) . . . . . . . . . . . . 8,298.2 2,241.2 2,030.0 1,324.0
Natural gas equivalent (Mmcfe) . . . . . . 9,539.2 2,525.9 2,309.1 1,513.3
Average sales prices:
Crude oil and condensate ($ per Bbl) . . . $ 17.94 $ 20.33 $ 23.66 $ 22.68
Natural gas ($ per Mcfe) . . . . . . . . . 2.50 2.60 2.77 2.08
Natural gas equivalent ($ per Mcfe). . . . 2.57 2.69 2.91 2.29
Average Costs ($ per Mcfe):
Lease operating expenses and . . . . . . .
production taxes . . . . . . . . . . . $ 0.25 $ 0.58 $ 0.49 $ 0.51
Depreciation, depletion and amortization . 0.82 1.00 1.14 1.10
General and administrative . . . . . . . . 0.27 0.87 0.69 0.84
</TABLE>
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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, 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. For the
year ended December 31, 1997, sales to the Company's three largest
customers on an historical combined basis were approximately 39%, 30% and
27%, 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
or financial condition.
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 explore for oil and natural gas prospects, to acquire
additional properties and to discover reserves in the future will depend
upon its ability to conduct its operations, to evaluate and select suitable
properties and to consummate transactions in a highly competitive
environment.
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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.
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, craterings, pipeline ruptures and spills,
uncontrollable flows of oil, natural gas or well fluids, any of which can
result in the loss of hydrocarbons, environmental pollution, personal
injury claims and other damage to properties of the Company and others.
The Company maintains insurance against some but not all of the risks
described above. In particular, the insurance maintained by the Company
does not cover claims relating to failure of title to oil and natural gas
leases, trespass during 2-D and 3-D survey acquisition or surface change
attributable to seismic operations and, except in limited circumstances,
losses due to business interruption. The Company may elect to self-insure
if management believes that the cost of insurance, although available, is
excessive relative to the risks presented. In addition, pollution and
environmental risks generally are not fully insurable. The Company
participates in a substantial percentage of its wells on a non-operated
basis, which may limit the Company's ability to control the risks
associated with oil and natural gas operations. 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.
-11-
<PAGE>
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. To the extent title
opinions or other investigations reflect title defects, the Company, rather
than the seller of undeveloped property, typically is responsible to cure
any such title defects at the Company's expense. If the Company were
unable to remedy or cure title defect of a nature such that it would not be
prudent to commence drilling operations on the property, the Company could
suffer a loss of its entire investment in such property. 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 Company's credit facility is secured by certain oil and
natural gas interests and other properties of the Company.
SECTION 29 TAX CREDIT
The natural gas production from wells drilled on certain of the
Company's properties in Otsego, Montmorency and Manistee Counties, Michigan
qualifies for the Section 29 tax credit. The Section 29 tax credit is an
income tax credit against regular federal income tax liability with respect
to sales of the Company's production of natural gas produced from tight gas
sand formations, subject to a number of limitations. Fuels qualifying for
the Section 29 tax credit must be produced from a well drilled or a
facility placed in service after November 5, 1990 and before January 1,
1993, and be sold before January 1, 2003.
The basic credit, which currently is approximately $1.03 per MMBtu of
natural gas produced from Antrim Shale, is computed by reference to the
price of crude oil and is phased out as the price of oil exceeds $23.50 in
1979 dollars (as adjusted for inflation) with complete phaseout if such
price exceeds $29.50 in 1979 dollars (as adjusted for inflation). Under
this formula, the commencement of phaseout would be triggered if the
-12-
<PAGE>
average price for crude oil rose above approximately $48.00 per Bbl in
current dollars. The Company generated approximately $232,495 of Section
29 tax credits in 1997. The Section 29 tax credit may not be credited
against the alternative minimum tax, but under certain circumstances may be
carried over and applied against regular tax liability in future years.
Therefore, no assurances can be given that the Company's Section 29 tax
credits will reduce its federal income tax liability in any particular
year.
MISSISSIPPI TAX ABATEMENT
The State of Mississippi currently has a production tax abatement
program that exempts certain oil and natural gas production from state
severance taxes. The exemption as it relates to the Company applies to
discovery wells and wells developed as a result of 3-D seismic surveys.
The exemption is phased out if the sales price for oil exceeds $25.00 Bbl
or $3.50 per Mcf. The applicable production is exempt for up to five
years and expires July 1, 1999.
LOUISIANA TAX ABATEMENT
The State of Louisiana provides for an exemption from production taxes
for up to two years or until the well reaches payment (as defined by the
State of Louisiana's Department of Revenue and Taxation) and generally
applies to horizontal wells and to vertical wells over 15,000 feet. There
is also an exemption for discovery wells completed between September 30,
1994 and September 30, 1996, which lasts for two years or until the well
reaches payout.
GOVERNMENTAL REGULATION
The Company's oil and natural gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by
federal, state and local 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
-13-
<PAGE>
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 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 largely has 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
-14-
<PAGE>
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.
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, 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
-15-
<PAGE>
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
costs 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 oil and natural gas. 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
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<PAGE>
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 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.
EMPLOYEES
As of March 31, 1998, the Company had 32 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.
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 Form 10-K:
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
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6.0 Mcf of natural gas to 1.0 Bbl of oil, condensate of natural gas
liquids.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees
Fahrenheit.
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.
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<PAGE>
Mcfe. One thousand cubic feet of natural gas equivalent.
MMBtu. One million Btus.
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.
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.
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<PAGE>
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.
ITEM 2. PROPERTIES.
OIL AND NATURAL GAS RESERVES
The Company's estimated total proved reserves of oil and natural gas
as of December 31, 1997 and 1996, and the present values of estimated
future net revenues attributable to these reserves as of those dates were
as follows:
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<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
1997 1996
--------- ---------
(Dollars in thousands,
except per unit data)
<S> <C> <C>
Net Proved Reserves:
Crude oil (Mbbl) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,169.7 1,353.9
Natural gas (Mmcf) . . . . . . . . . . . . . . . . . . . . . . . . . 50,553.4 56,394.2
Natural gas equivalent (Mmcfe) . . . . . . . . . . . . . . . . . . . 57,571.6 64,517.6
Net Proved Developed Reserves:
Crude oil (Mbbl) . . . . . . . . . . . . . . . . . . . . . . . . . . 452.1 534.6
Natural gas (Mmcf) . . . . . . . . . . . . . . . . . . . . . . . . . 37,744.1 37,489.6
Natural gas equivalent (Mmcfe) . . . . . . . . . . . . . . . . . . . 40,456.7 40,697.5
Estimated future net revenues before income taxes<F1> . . . . . . . . . $ 87,970 $ 159,778
Present value of estimated future net revenues before income taxes<F2> $ 63,201 $ 116,336
Standardized measure of discounted estimated future net cash flows<F3> $ 46,618 $ 97,185
- ---------------------
<FN>
<F1> The average prices for crude oil were $17.67 per Bbl at December 31,
1997 and $25.23 per Bbl at December 31, 1996. The average prices for
natural gas were $2.26 per Mcf at December 31, 1997 and $3.27 per Mcf
at December 31, 1996.
<F2> 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.
<F3> The standardized measure of discounted estimated future net cash flows
represents discounted estimated future net cash flows attributable to
the Company's reserves after income taxes, calculated in accordance
with Statement of Financial Accounting Standards No. 69.
</FN>
</TABLE>
The reserve estimates reflected above were 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, and are
part of their reserve reports on the Company's oil and natural gas
properties.
In accordance with applicable requirements of the SEC, estimates of
the Company's proved reserves and future net revenues are made using sales
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<PAGE>
prices estimated to be in effect as of the date of such reserve estimates
and are held constant throughout the life of the properties (except to the
extent a contract specifically provides for escalation). Estimated
quantities of proved reserves and future net revenues therefrom are
affected by oil and natural gas prices, which have fluctuated widely in
recent years. There are numerous uncertainties inherent in estimating oil
and natural gas reserves and their estimated values, including many factors
beyond the control of the Company. The reserve data set forth in this Form
10-K represents only estimates. Reservoir engineering is a subjective
process of estimating underground accumulations of oil and natural gas that
cannot be measured in an exact manner. The accuracy of any reserve
estimate is a function of the quality of available data and of engineering
and geologic interpretation and judgment. As a result, estimates of
different engineers, including those used by the Company, may vary. In
addition, estimates of reserves are subject to revision based upon actual
production, results of future development and exploration activities,
prevailing oil and natural gas prices, operating costs and other factors.
The revisions may be material. Accordingly, reserve estimates often are
different from the quantities of oil and natural gas 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.
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:
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
------------ ------------- --------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells<F1>:
Oil . . . . . . . . . . . . . . . 2 0.3 -- -- 4 1.7
Natural gas . . . . . . . . . . . 2 0.6 4 0.8 8 5.3
Non-productive. . . . . . . . . . 8 1.8 13 6.4 15 5.2
--- ---- ---- ---- ----- -----
Total. . . . . . . . . . . . . 12 2.7 17 7.2 27 12.2
=== ==== ==== ==== ===== =====
Development Wells<F2>:
Oil . . . . . . . . . . . . . . . 3 0.6 6 1.2 3 1.7
Natural gas . . . . . . . . . . . 11 2.3 -- -- 8 2.6
Non-productive. . . . . . . . . . 5 1.0 2 0.4 1 .5
--- ---- ---- ---- ----- -----
Total. . . . . . . . . . . . . 19 3.9 8 1.6 12 4.8
=== ==== ==== ==== ===== =====
- ---------------
<FN>
<F1> Includes 2 gross (2.0 net to the Company) Antrim Shale wells for the
year ended December 31, 1995.
<F2> Includes 5 gross (0.7 net to the Company) Antrim Shale wells for the
year ended December 31, 1995 and 9 gross (1.3 net to the Company)
Antrim Shale wells for the year ended December 31, 1997.
</FN>
</TABLE>
At December 31, 1997, the Company was in the process of drilling
and/or completing 5 gross (2.9 net to the Company) wells that are not
reflected in the table.
PRODUCTIVE WELLS AND ACREAGE
PRODUCTIVE WELLS
The following table sets forth the Company's ownership interest as of
December 31, 1997 in productive oil and natural gas wells in the areas
indicated:
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<PAGE>
<TABLE>
<CAPTION>
REGION OIL NATURAL GAS TOTAL
------ ------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Mississippi Salt Basin . . . . . . -- -- 8 6.9 8 6.9
Onshore Gulf Coast
Texas . . . . . . . . . . . . . 11 2.0 22 3.0 33 5.0
Louisiana . . . . . . . . . . . -- -- 4 0.6 4 0.6
Michigan Basin/Other . . . . . . . 1 0.1 308 34.3 309 34.4
--- --- --- ---- --- ----
Total . . . . . . . . . . . . 12 2.1 342 44.8 354 46.9
=== === === ==== === ====
</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 December 31, 1997:
<TABLE>
<CAPTION>
REGION DEVELOPED UNDEVELOPED TOTAL
------ ---------------- ---------------- ----------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Mississippi Salt Basin . . . . . . . . . 5,280 4,480 63,134 39,897 68,414 44,377
Onshore Gulf Coast
Texas. . . . . . . . . . . . . . . 9,308 1,286 22,967 6,461 32,275 7,747
Louisiana. . . . . . . . . . . . . 687 162 18,658 2,427 19,345 2,589
Michigan Basin/Other. . . . . . . . . 20,414 1,318 40,374 21,720 60,788 23,038
------ ----- ------- ------ ------- ------
Total. . . . . . . . . . . . . . 35,689 7,246 145,133 70,505 180,822 77,751
====== ===== ======= ====== ======= ======
</TABLE>
-24-
<PAGE>
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 before 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 December 31, 1997:
<TABLE>
<CAPTION>
ACRES EXPIRING
-----------------------
GROSS NET
------- ------
<S> <C> <C> <C>
Twelve Months Ending:
December 31, 1998 . . . . . . . . . . . . . . . . . . 3,241 405
December 31, 1999 . . . . . . . . . . . . . . . . . . 40,579 11,532
December 31, 2000 . . . . . . . . . . . . . . . . . . 23,186 12,420
Thereafter. . . . . . . . . . . . . . . . . . . . . . 113,816 53,394
------- ------
Total. . . . . . . . . . . . . . . . . . . . . . . 180,822 77,751
======= ======
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently named as a defendant in any lawsuits
and/or administrative proceedings arising in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of 1997, and before consummation of the
Offering, one matter was submitted to a vote of security holders. On
November 17, 1997, the Company's sole stockholder approved the Company's
Stock Option and Restricted Stock Plan of 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of March 31, 1998, the Company estimates that there were
approximately 2,253 beneficial holders of its Common Stock. The Company
consummated the Offering on February 9, 1998. Before that time, there was
no public market for the Company's Common Stock.
-25-
<PAGE>
The Company's Common Stock is traded on The Nasdaq Stock Market under
the symbol "MEXP." From February 9, 1998 until March 27, 1998, the high
and low sales prices for the Company's Common Stock were $7 5/8 and
$10 3/8, respectively.
The Company has not in the past, and does not intend to pay cash
dividends on its Common Stock in the foreseeable future. The Company
currently intends to retain earnings, if any, for the future operation and
development of its business. The Company has entered into a credit
facility that contains provisions that may have the effect of limiting or
prohibiting the payment of dividends.
In connection with its formation, on November 17, 1997 the Company
issued 100 shares of Common Stock to Kelly E. Miller as sole trustee of the
Kelly E. Miller Trust. The Company issued such shares to Mr. Miller upon
his payment of $100 in a transaction exempt under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
The Company entered into an 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, certain
affiliated oil and gas exploration companies and certain oil and gas
exploration companies who are business partners and investors with MOC, the
Company's predecessor.
The assets contributed to the Company under the Combination Agreement
included the capital stock of MOC and interests in oil and gas properties
in which MOC also had an interest. In exchange for these assets, the
individuals and entities received a number of shares of Common Stock of the
Company proportionate to the value of their ownership interests in the
assets. The percentage interest of each person's interest in the assets
being contributed was established in the Combination Agreement.
The shares of Common Stock issued in connection with the Combination
Transaction were offered and sold by the Company without registration, in
reliance upon the exemption from registration made available under
Section 4(2) of the Securities Act and Rules 501-503 and 506-508 of
Regulation D promulgated thereunder. On December 1, 1997, the Registrant
filed with the SEC a Form D with respect to the exempt offering, in
accordance with the requirements of Rule 503.
USE OF PROCEEDS FROM THE COMPANY'S OFFERING
The Company's Registration Statement on Form S-1 (Registration No.
333-40383), as amended, with respect to the Offering of shares of the
Company's Common Stock, par value $0.01 per share, was declared effective
by the SEC on February 4, 1998. The Offering commenced on February 5,
1998, and has since terminated, resulting in (i) the sale by the Company of
5,500,000 shares of Common Stock on February 9, 1998; (ii) the sale by
-26-
<PAGE>
certain stockholders of the Company (the "Selling Stockholders") of 250,000
shares of Common Stock on February 9, 1998; (iii) the sale by the Company
of 62,500 shares of Common Stock on March 9, 1998 pursuant to the exercise
of the underwriters' over-allotment option on March 4, 1998; and (iv) the
sale by the Selling Stockholders of 200,000 shares of Common Stock on March
9, 1998 pursuant to the exercise of the underwriters' over-allotment option
on March 4, 1998. The shares sold constitute all of the shares of Common
Stock covered by the Registration Statement other than 600,000 shares with
respect to which the underwriters did not exercise their over-allotment
option. The managing underwriters for the offering were Bear, Stearns &
Co. Inc., Raymond James & Associates, Inc. and Stephens Inc.
The aggregate price to the public for the shares sold by the Company
in the Offering, including the over-allotment, was $44.5 million. The
expenses incurred by the Company with respect to the Offering were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Underwriter Discounts and Commissions. . . . . . . . . . . . $3.1 million
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . 1.0 million
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . $4.1 million
============
</TABLE>
The amount of other expenses set forth above is a reasonable estimate of
such amount. None of such payments were direct or indirect payments to the
Company's directors or officers or their associates, to persons owning 10%
or more of any class of equity securities of the Company or to affiliates
of the Company.
The net proceeds to the Company from the Offering were $40.4 million.
As of March 31, 1998, the Company used such net proceeds as follows:
(i) to repay $8.3 million of indebtedness outstanding under the Company's
prior revolving credit facilities, and (ii) to fund a portion of the
$50.5 million purchase price for assets acquired in the Combination
Transaction, including repayment of a $2.5 million loan made to the Company
by the C.E. Miller Trust to fund a down payment made in connection with the
Combination Transaction. Except as set forth in clause (ii), none of such
payments were direct or indirect payments to the Company's directors or
officers or their associates, to persons owning 10% or more of any class of
equity securities of the Company or to affiliates of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected historical combined financial
data of the Company as of the dates and for the periods indicated. The
-27-
<PAGE>
historical combined financial data as of and for each of the four years in
the period ended December 31, 1997 is 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 year ended December 31, 1993 is unaudited. The following table also
sets forth certain pro forma income tax, net income and earnings per share
information. Pro forma data is based on numerous assumptions and is not
necessarily indicative of the results of future operations of the Company.
Historical earnings 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the combined financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues:
Crude oil and condensate . . . . . . . . . $ 964 $ 1,101 $ 715 $ 672 $ 817
Natural gas. . . . . . . . . . . . . . . . 5,819 5,614 2,748 2,424 3,749
Other operating income . . . . . . . . . . 629 395 296 167 268
------- ------- ------- ------- -------
Total operating income . . . . . . . . 7,412 7,110 3,759 3,263 4,834
Operating expenses:
Lease operating expenses and
production taxes . . . . . . . . . . . 1,478 1,123 777 811 539
Depreciation, depletion and
amortization . . . . . . . . . . . . . 2,520 2,629 1,666 1,009 1,300
General and administrative . . . . . . . . 2,186 1,591 1,270 1,200 1,086
------- ------- ------- ------- -------
Total operating expenses . . . . . . . 6,184 5,343 3,713 3,020 2,925
------- ------- ------- ------- -------
Operating income. . . . . . . . . . . . . . . 1,228 1,767 46 243 1,909
Interest expense. . . . . . . . . . . . . . . (1,200) (1,139) (1,017) (810) (634)
Lawsuit settlement. . . . . . . . . . . . . . -- -- 3,521 -- --
------- ------- ------- ------- -------
Net income (loss) . . . . . . . . . . . . . . $ 28 $ 628 $ 2,550 $ (567) $ 1,275
======= ======= ======= ======= =======
Pro forma income before taxes<F1> . . . . . . $11,148
Pro forma provision for income taxes<F1>. . . 2,710
-------
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<PAGE>
Pro forma net income<F1>. . . . . . . . . . . $ 8,438
=======
Pro forma basic and diluted earnings per
share<F1><F2>. . . . . . . . . . . . . . . $ 0.68
=======
Pro forma weighted average shares
outstanding<F2>. . . . . . . . . . . . . . 12,493
=======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (at end of period):
Working capital . . . . . . . . . . . . . . . $(5,985) $(2,682) $(1,980) $(1,769) $ (434)
Oil and gas properties, net . . . . . . . . . 23,968 20,732 17,731 14,257 14,150
Total assets. . . . . . . . . . . . . . . . . 30,428 24,050 20,005 16,444 17,702
Long-term debt, including notes payable . . . 8,178 12,881 9,801 9,442 9,213
Equity. . . . . . . . . . . . . . . . . . . . 16,113 7,769 7,410 5,596 6,787
- --------------------
<FN>
<F1> 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 consummation of the Combination Transaction,
the Company was 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
$5.4 million.
<F2> Pro forma basic and diluted earnings per share has been computed
assuming that the shares of Common Stock issued in connection with the
Combination Transaction and with the Offering have been outstanding
since January 1, 1997.
</FN>
</TABLE>
ITEM 7. 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.
-29-
<PAGE>
OVERVIEW
Miller is an independent oil and gas company with its current
exploration efforts 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
directly are 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 was organized as a Delaware corporation in November 1997
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 issued to those owners approximately 6.3 million shares of
Common Stock and an estimated $50.5 million in cash in exchange for the
contributed assets.
Because the Company, MOC and the Affiliated Entities share common
ownership and management, the combination of those particular Combined
Assets was 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 were not under the common
ownership and management of the Company. Consequently, the Company
accounted for the acquisition of those unaffiliated assets under the
purchase method of accounting, under which the properties were recorded at
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<PAGE>
their estimated fair value on February 9, 1998, the date on which the
Combination Transaction was consummated.
Before the Offering, the Company was not 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. Upon consummation of the Offering,
the Company became 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 December 31,
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 natural gas
property costs for tax purposes in excess of the recorded expense for
financial accounting purposes. As a result, upon consummation of the
Combination Transaction, the Company was 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 December 31, 1997, such charge would have been
approximately $5.4 million.
RESULTS OF OPERATIONS
The following table summarizes production volumes, average sales
prices, operating revenues and average costs for the Company's oil and
natural gas operations for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands,
except per unit amounts)
<S> <C> <C> <C>
Production volumes:
Crude oil and condensate (Mbbls). . . . . . . . . . . . . 47.4 46.5 31.6
Natural gas (Mmcf). . . . . . . . . . . . . . . . . . . . 2,241.2 2,030.0 1,324.0
Natural gas equivalent (Mmcfe). . . . . . . . . . . . . . 2,525.9 2,309.1 1,513.3
Average sales prices:
Crude oil and condensate ($ per Bbl). . . . . . . . . . . $ 20.33 $ 23.66 $ 22.68
Natural gas ($ per Mcf) . . . . . . . . . . . . . . . . . 2.60 2.77 2.08
Natural gas equivalent ($ per Mcfe) . . . . . . . . . . . 2.69 2.91 2.29
-31-
<PAGE>
Operating revenues:
Crude oil and condensate . . . . . . . . . . . . . . . . $ 964 $ 1,101 $ 715
Natural gas . . . . . . . . . . . . . . . . . . . . . . . 5,819 5,614 2,748
Average Costs ($ per Mcfe):
Lease operating expenses and production taxes . . . . . . $ 0.58 $ 0.49 $ 0.51
Depletion, depreciation and amortization. . . . . . . . . 1.00 1.14 1.10
General and administrative 0.87 0.69 0.84
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Oil and natural gas revenues for the year ended December 31, 1997
increased 1% to $6.8 million from $6.7 million for the same period in 1996.
Production volumes for natural gas during the year ended December 31, 1997
increased 10% to 2,241.2 MMcf from 2,030.0 MMcf for the same period in
1996. Average natural gas prices decreased 6% to $2.60 per Mcf for the
year ended December 31, 1997 from $2.77 per Mcf in the same period in 1996.
Production volumes for oil during the year ended December 31, 1997
increased 2% to 47.4 MBbls from 46.5 MBbls for the same period in 1996.
Average oil prices decreased 14% to $20.33 per barrel during the year ended
December 31, 1997 from $23.66 per barrel in the same period in 1996. This
decrease in oil prices primarily is attributable to cyclical fluctuations
in the spot market for oil.
Lease operating expenses and production taxes for the year ended
December 31, 1997 increased 32% to $1.5 million from $1.1 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 $0.58 per Mcfe for
the year ended December 31, 1997 from $0.49 per Mcfe in the same period in
1996.
Depreciation, depletion and amortization ("DD&A") expense for the year
ended December 31, 1997 decreased 4% to $2.5 million from $2.6 million for
the same period in 1996. This decrease was due to increased production,
offset by a 12% decrease in the 1997 depletion rate to $1.00 per Mcfe from
$1.14 per Mcfe for the year ended December 31, 1996. This decrease in the
depletion rate was the result of a reduction in costs subject to DD&A
because of property sales.
General and administrative expense for the year ended December 31,
1997 increased 37% to $2.2 million from $1.6 million for the same period in
1996, as a result of increases in the number of employees and related
salaries, benefits and employee bonuses.
Interest expense for the year ended December 31, 1997 increased 5% to
$1.2 million from $1.1 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.
-32-
<PAGE>
Net income for the year ended December 31, 1997 decreased to $0.03
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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of capital have been funds
generated by operations, capital contributions and borrowings, primarily
from MOC's shareholders and under bank credit facilities. The Company had
working capital deficits of $6.0 million at December 31, 1997 and $2.7
million at December 31, 1996.
-33-
<PAGE>
The Company has entered into a credit facility with Bank of Montreal,
Houston Agency ("BOM"). The credit facility consists of a three-year
revolving line of credit converting to a three-year term loan. The amount
of credit available during the revolving period and the debt allowed during
the term period may not exceed the Company's "borrowing base," or the
amount of debt that BOM and the other lenders under the credit facility
agree can be supported by the cash flow generated by the Company's
producing and non-producing proved oil and natural gas reserves. Under the
credit facility the initial borrowing base is $23.0 million and may not
exceed $75.0 million. Amounts advanced under the credit facility bear
interest, payable quarterly, at either (i) BOM's announced prime rate or
(ii) the London Inter-Bank Offered Rate plus a margin rate ranging from
0.75% to 1.625%, as selected by the Company. In addition, the Company is
assessed a commitment fee equal to 0.375% of the unused portion of the
borrowing base, payable quarterly in arrears, until the termination of the
revolving period. At the termination of the revolving period, the
revolving line of credit will convert to a three-year term loan with
principal payable in 12 equal quarterly installments. The credit facility
includes certain negative covenants that impose limitations on the Company
and its subsidiaries with respect to, among other things, distributions
with respect to its capital stock, the creation or incurrence of liens, the
incurrence of additional indebtedness, making loans and investments and
mergers and consolidations. The obligations of the Company under the
credit facility are secured by a lien on all real and personal property of
the Company, including its oil and natural gas properties. The Company
borrowed $15.0 million under the credit facility to complete the
Combination Transaction and to repay all other outstanding indebtedness.
Pursuant to a promissory note dated November 26, 1997, the C.E. Miller
Trust loaned on an unsecured basis $2.5 million to MOC, with interest at
the prime rate, which MOC used to fund a down payment made in connection
with the Combination Transaction. A portion of the proceeds from the
Offering were used to repay the loan.
In 1991, the shareholders of MOC loaned to MOC an aggregate of $7.6
million, with interest at 2% over the prime rate, pursuant to separate loan
agreements. On December 1, 1997, the shareholders of MOC contributed 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.
At December 31, 1997 and 1996, the Company had an approximate notes
payable balance of $5.0 million and $4.0 million, respectively, which
represented a borrowing against a $5.0 million bank line-of-credit bearing
interest at the bank's prime rate and another $1.0 million line-of-credit,
which bore interest at the bank's prime rate plus 0.25%. These notes were
paid in full during February 1998 from the proceeds of the Offering.
-34-
<PAGE>
During 1996, the Company also entered into a $1.0 million term loan
payable to a bank, with interest at the prime rate, maturing September
2000. At December 31, 1997 and 1996 the balance of the term loan was $0.7
million and $0.9 million, respectively. The term loan was paid in full
during February 1998 from the proceeds of the Offering.
The Company has budgeted unrisked capital expenditures of approximately
$44.3 million for 1998. Substantially all of the capital expenditures will be
used to fund 3-D seismic 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 and borrowings under the
credit facility.
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 technology enhancement programs. While the Company
believes that 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
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, provide only partial price protection against
declines in oil and natural gas prices and limit potential gains from
future increases in prices. 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
-35-
<PAGE>
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. 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.
The Company's hedging strategy is to maximize its 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 increases in natural gas
prices, while limiting to some extent the Company's exposure to declines in
natural gas prices. During 1995 and 1996, the Company did not hedge any of
its oil or natural gas production, and for the year ended December 31,
1997, the Company had hedged 5.5% of its natural gas production.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") 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 any 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
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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.
COMPUTER MODIFICATIONS FOR YEAR 2000
The Year 2000 issue exists because many computer systems and
applications abbreviate dates by eliminating the first two digits of the
year, assuming that these two digits would always be "19." Unless
corrected, this shortcut is expected to cause problems when the century
date occurs. On that date, some computer programs may recognize the date
as January 1, 1900 instead of January 1, 2000. This may cause the
Company's systems to incorrectly process critical financial and operational
information, or stop processing altogether. Additionally, computer
applications may be affected before January 1, 2000, if calculations into
the year 2000 are involved.
The Company has a plan to address the Year 2000 issue and will
continue to assess the impact of the Year 2000 issue on the remainder of
its computer-based systems and applications throughout 1998. If the
Company's plans are not successful, there could be a significant disruption
of the Company's ability to bill customers and pay suppliers, as well as a
possible slowdown of certain computer-dependent processes. Based on
currently available information, management presently does not anticipate
that the costs to address the Year 2000 issues or potential operating
disruptions will have an adverse impact on the Company's financial
conditions, results of operations or liquidity.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of
operations, and other sections of this Form 10-K, contain forward-looking
statements that are based on management's beliefs, assumptions, current
expectations, estimates and projections about the oil and gas industry, the
economy and about the Company itself. Words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "predicts," "projects," variations of such words and similar
expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions ("Future Factors") that are
difficult to predict with regard to timing, extent, likelihood and degree
of occurrence. Therefore, actual results and outcomes may differ materially
from what may be expressed or forecasted in such forward-looking
statements. Furthermore, the Company undertakes no obligation to update,
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amend or clarify forward-looking statements, whether as a result of new
information, future events or otherwise.
Future Factors include, but are not limited to the results of the
Company's exploratory drilling activities, volatility of oil and natural
gas prices, uncertainty of estimates of oil and natural gas reserves,
implementation of the Company's growth strategy and its management of
future growth, substantial capital requirements associated with the
Company's operations, risks related to replacement of oil and natural gas
reserves, operating hazards and uninsured risks, competition, government
regulation and environmental matters, the Company's hedging policies and
transactions, marketability of production, dependence on key personnel,
technological changes and shortages of drilling rigs, equipment, supplies
and personnel. These are representative of the Future Factors that could
cause a difference between an ultimate actual outcome and a preceding
forward-looking statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for fiscal year 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required hereunder is included in this report as set
forth in the "Index to Financial Statements" on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the
directors, executive officers and certain key employees of the Company:
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<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
DIRECTORS TERM EXPIRING IN 1999
C.E. "Gene" Miller . . . . . . . . . . . . . . . . 68 Chairman of the Board and Director
Frank M. Burke, Jr.. . . . . . . . . . . . . . . . 58 Director
DIRECTORS TERM EXPIRING IN 2000
Kelly E. Miller. . . . . . . . . . . . . . . . . . 43 President, Chief Executive Officer
and Director
Dan A. Hughes, Jr. . . . . . . . . . . . . . . . . 40 Director
DIRECTORS TERM EXPIRING IN 2001
William J. Baumgartner . . . . . . . . . . . . . . 42 Vice President-Finance, Chief Financial
Officer, Secretary and Director
William Casey McManemin. . . . . . . . . . . . . . 37 Director
Kenneth J. Foote . . . . . . . . . . . . . . . . . 41 Director
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Douglas A. Bell. . . . . . . . . . . . . . . . . . 38 Vice President-Production
Michael L. Calhoun . . . . . . . . . . . . . . . . 38 Vice President-Operations
Lew P. Murray. . . . . . . . . . . . . . . . . . . 41 Vice President-Exploration
CERTAIN KEY EMPLOYEES
Charles A. Morrison. . . . . . . . . . . . . . . . 48 Exploration Manager
Curtiss R. Yeiter. . . . . . . . . . . . . . . . . 41 Treasurer
</TABLE>
Set forth below is a description of the backgrounds of the directors,
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
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several boards of directors. Mr. Miller is the father of Kelly E. Miller,
the Company's President and Chief Executive Officer, and the father-in-law
of Douglas A. Bell, the Company's Vice President-Production.
KELLY E. MILLER has served as the President, Chief Executive Officer
and a director 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. Mr. Miller
is the son of C.E. Miller, the Company's Chairman of the Board, and the
brother-in-law of Douglas A. Bell, the Company's Vice President-Production.
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 before 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 and the Independent Petroleum
Association of America.
FRANK M. BURKE, JR. has served as a director of the Company since
February 2, 1998. Mr. Burke 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.
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<PAGE>
DAN A. HUGHES JR. has served as a director of the Company since
February 2, 1998. Mr. Hughes 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
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 has served as a director of the Company since
February 2, 1998. Mr. 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, including activities in several of the same regions and areas
in which the Company's present and past activities are located. 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.
KENNETH J. FOOTE has served as a director of the Company since
February 2, 1998. Mr. Foote has served as a managing director of First
National Acceptance Company, a private financial services company, since
1987. Mr. Foote's primary responsibilities are in the areas of financial
analysis, taxation and strategic planning. Additionally, Mr. Foote is a
director of First National Bank of Michigan. From 1979 to 1982, Mr. Foote
worked for the public accounting firm of Arthur Andersen LLP and became a
Certified Public Accountant during that time. From 1982 to 1987, Mr. Foote
was a principal in two real estate ventures before joining First National
Acceptance Company. Mr. Foote has a A.B. in economics from Princeton
University and received his masters in accounting from New York University.
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.
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<PAGE>
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. Mr. Bell is the son-in-law of C.E.
Miller, the Company's Chairman of the Board, and the brother-in-law of
Kelly E. Miller, the Company's President and Chief Executive Officer.
MICHAEL L. CALHOUN has served as Vice President-Operations of the
Company since January 12, 1998. Mr. Calhoun is a Registered Professional
Engineer in the state of Texas and received a B.S. degree in Petroleum
Engineering and a B.A. degree in Business Administration from the
University of Texas. In addition Mr. Calhoun received a Masters in
Business Administration from Southern Methodist University. Since 1989,
Mr. Calhoun has served in several capacities for Amerada Hess Corporation,
including as a Financial Analyst, Manager of Production, Planning and
Control, District Superintendent and, most recently, as Operations Manager
for the Gulf Coast District. From 1987 to 1989, Mr. Calhoun served as an
engineer for Greenwich Oil Corporation in Dallas, Texas, and from 1985 to
1987 as a field engineer for the Texas Railroad Commission.
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 has served as Exploration Manager of the Company
since 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. Before 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
officers, and persons who own more than 10% of the Company's Common Stock,
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to file with the SEC reports of ownership and changes in ownership of
shares of Common Stock of the Company. Directors, officers and greater
than 10% holders are required by Securities and Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms
they files. To the Company's knowledge, based solely on its review of the
copies of such reports furnished to the Company or written representations
from certain reporting persons that no reports on Form 5 were required for
those persons during the fiscal year ended December 31, 1997, the Company
believes that its officers and directors complied with all applicable
filing requirements during the Company's last fiscal year, except that the
initial Form 3s for the Company's officers and directors were filed on
February 12, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain summary information concerning
the compensation paid by MOC to its Chief Executive Officer and each of the
other persons who serve as executive officers of the Company whose annual
salary and bonus exceeded $100,000 (the "named executive officers") for the
fiscal year ended December 31, 1997. 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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION<FA> COMPENSATION
- ------------------------------ ---- ------ ----- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Kelly E. Miller, President and
Chief Executive Officer 1997 $ 275,000 $ 207,708 $ 9,500 $ 91,374<Fb>
William J. Baumgartner, Vice
President-Finance, Chief
Financial Officer and
Secretary 1997 125,000 30,000 9,295 15,233<Fc>
Lew P. Murray, Vice
President-Exploration 1997 100,000 25,000 7,800 29,580<Fd>
- ------------
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<PAGE>
<FN>
<Fa> Includes contributions made by MOC to its 401(k) Savings Plan on
behalf of the individuals listed.
<Fb> Includes $168 for travel accident insurance and $91,206 for royalty
program participation.
<Fc> Includes $168 for travel accident life insurance, $421 for life
insurance, $5,721 for royalty program participation and $8,923 for
tax credit participation.
<Fd> Includes $168 for travel accident insurance, $391 for life insurance
and $29,021 for royalty program participation.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of
Messrs. Kelly Miller, Baumgartner, Calhoun, 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, $135,000 for Mr. Calhoun,
$140,000 for Mr. Murray and $150,000 for Mr. Morrison. Messrs. Miller,
Baumgartner, Calhoun, Murray and Morrison also have received option grants,
pursuant to the Stock Option and Restricted Stock Plan of 1997 (the "1997
Stock Option Plan") to purchase 60,000, 97,500, 25,000, 100,000 and 55,000
shares, respectively, of Common Stock. The exercise price of the options
is $8.00 per share, except that for 11,350 of Mr. Miller's 60,000 shares,
the exercise price is $8.80. The options vest at the rate of one-fifth per
year beginning on the first anniversary of the grant date. Pursuant to the
1997 Stock Option Plan, the Company also granted to Messrs. Kelly Miller,
Baumgartner, Calhoun, Murray and Morrison 60,000, 22,500, 2,000, 15,000 and
10,000 shares of restricted Common Stock, respectively, which begin to vest
at cumulative annual increments of one-half of the total number of
restricted shares beginning on the first anniversary of the grant date.
The Company made a one-time grant of 270,000 and 2,500 stock options
to Messrs. Kelly Miller and Baumgartner, respectively, pursuant to the
terms of stock option agreements entered into between the Company and the
named individuals. The exercise price of the options is $8.00 per share
and the options vest at the rate of one-fifth per year beginning on the
first anniversary of the grant date.
Each of the employment agreements of Messrs. Miller, Baumgartner,
Calhoun, Murray and Morrison has 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
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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 contains certain confidentiality
obligations. In addition, in each agreement the employee agrees not to
compete against the Company for a period of six months following
termination in any county or parish in which the Company has a leasehold
interest or active or pending seismic programs.
CERTAIN OTHER ARRANGEMENTS
The Company paid a cash bonus upon 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.
EMPLOYEE BENEFIT PLANS
STOCK OPTION AND RESTRICTED STOCK PLAN OF 1997
GENERAL. On November 17, 1997, the Company and its stockholder
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 Form 10-K, 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) are available for Incentive Awards under the 1997
Stock Option Plan. The 1997 Stock Option Plan is not qualified under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), and is not subject to the Employee Retirement Income Security Act
of 1974.
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The 1997 Stock Option Plan is administered by the Stock Plan Committee
of the Board of Directors. The 1997 Stock Option Plan requires the Stock
Plan Committee to consist of at least two members, all of whom qualify as
"non-employee directors" as defined in Rule 16b-3 under the Securities
Exchange Act of 1934, as amended. The Board of Directors, in its
discretion, also may require that the members of the Stock Plan Committee
be "outside directors" as defined in the rules issued pursuant to Section
162(m) of the Code. The Stock Plan Committee makes 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 Stock Plan
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 before
the termination of the 1997 Stock Option Plan according to its terms or by
action of the Stock Plan Committee.
The Stock Plan 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 Stock Plan 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
Stock Plan 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.
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Although the term of each stock option will be determined by the Stock
Plan 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 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 Stock Plan 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 Stock Plan Committee
("Normal Retirement"), (ii) the option holder voluntarily terminates
employment with the written consent of the Stock Plan 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 Stock Plan Committee determines the
termination to be in the best interests of the Company ("Consensual
Severance").
Following consummation of the Offering, options under the 1997 Stock
Option Plan were granted to directors, officers and certain employees of
the Company to purchase a total of 566,500 shares of Common Stock at $8.00
per share and 11,350 at $8.80 per share. These awards included options to
Messrs. Kelly Miller, Baumgartner, Calhoun, Murray, Bell and Morrison to
purchase 60,000, 97,500, 25,000, 100,000, 40,000 and 55,000 shares of
Common Stock, respectively. All such options 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 consummation of the Offering, each non-employee director of the
Company was granted an option to purchase 10,000 shares of Common Stock.
Any person who first becomes a non-employee director 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 ($8.00 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.
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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 allows the
Stock Option Committee to award restricted stock. Restricted stock is
subject to such terms and conditions, consistent with the provisions of the
1997 Stock Option Plan, as the Stock Plan Committee from time to time may
determine. As with stock option grants, the Stock Plan 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 Stock Plan
Committee for any reason other than death or disability, or any additional
reason as may be permitted by the Stock Plan Committee, then any shares of
restricted stock still subject to restrictions will be forfeited. Unless
the Stock Plan 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 Stock Plan 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 Stock Plan 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 descent
or distribution. In addition, the Stock Plan 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 Stock Plan 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 Stock Plan Committee may provide in the restricted stock
agreement that the number of shares that automatically will vest will be
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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.
Following consummation of the Offering, Messrs. Kelly Miller,
Baumgartner, Calhoun, Murray and Morrison were awarded 60,000, 22,500,
2,000, 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 begin to vest
at cumulative annual increments of one-half of the total number of
restricted shares of Common Stock subject thereto, beginning on the first
anniversary of the date of grant. At the time of issuance of the
restricted shares, compensation expense of $0.9 million was deferred.
Because the restricted shares are subject to the risk of forfeiture during
the vesting period, compensation expense (equivalent to $8.00, the Offering
price per share) will be recognized ratably over the two-year vesting
period as the risk of forfeiture passes.
TAX BENEFIT RIGHTS. The Stock Plan Committee also may grant tax
benefit rights under the 1997 Stock Option Plan. As with options and
restricted stock, the Stock Plan 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 were received by certain individuals under the
1997 Stock Option Plan:
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<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME OPTIONS<F1><F2> RESTRICTED STOCK<F3>
---- --------------- --------------------
<S> <C> <C> <C>
Kelly E. Miller . . . . . . . . . . . . . . . . . . . . 60,000 60,000
William J. Baumgartner. . . . . . . . . . . . . . . . . 97,500 22,500
Lew P. Murray . . . . . . . . . . . . . . . . . . . . . 100,000 15,000
Douglas A. Bell . . . . . . . . . . . . . . . . . . . . 40,000 --
Michael L. Calhoun. . . . . . . . . . . . . . . . . . . 25,000 2,000
Frank M. Burke, Jr. . . . . . . . . . . . . . . . . . . 10,000 --
Kenneth J. Foote. . . . . . . . . . . . . . . . . . . . 10,000 --
Dan A. Hughes, Jr.. . . . . . . . . . . . . . . . . . . 10,000 --
William Casey McManemin . . . . . . . . . . . . . . . . 10,000 --
Directors and executive officers as a group . . . . . . 362,500 99,500
All employees as a group (other than directors and
executive officers). . . . . . . . . . . . . . . . . 215,350 10,000
- ------------------------
<FN>
<F1> The exercise price for options granted was $8.00, the Offering price,
except that the exercise price for 11,350 of the options granted to
Mr. Miller was $8.80, 110% of the Offering price.
<F2> 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.
<F3> Shares of restricted stock will begin to vest at cumulative annual
increments of one-half of the total number of shares subject thereto,
beginning on the first anniversary of the date of the grant.
</FN>
</TABLE>
ONE-TIME STOCK OPTION GRANT
The Company made a one-time grant of 270,000 and 2,500 stock options
to Messrs. Kelly Miller and Baumgartner, respectively, pursuant to the
terms of stock option agreements entered into between the Company and the
named individuals. The exercise price of the options is $8.00 per share
and the options vest at the rate of one-fifth per year beginning on the
first anniversary of the grant date.
401(K) SAVINGS PLAN
In connection with the Combination Transaction, the Company adopted
MOC's 401(k) Savings Plan (the "Savings Plan"). The Savings Plan is
available to all full-time employees upon commencement of their employment
and provides for discretionary matching contributions by the Company. The
funds in the Savings Plan are invested in equity and bond funds at the
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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 an employee's termination of employment 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 1997, 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, Calhoun, 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 1997, 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 was designed to
reward, recognize and retain key employees of MOC who participated in an
instrumental manner in the acquisition, sale and/or brokerage of production
of oil and natural gas from non-conventional sources that qualified for
certain tax credits under Section 29 of the Code. Under the terms of the
Tax Program, participants were 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
was 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 acquired properties for the purpose of
the acquisition of Section 29 Credits and MOC sold all or any part of the
properties to which such credits applied, the distribution of the proceeds
for the Tax Program was net of the total invested capital plus a 10%
return. If a participant's employment was terminated, any distributions
pursuant to the Tax Program terminated and the balance of current and
future distributions to the participant remained in the Tax Program to be
allocated and distributed by MOC in its discretion.
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<PAGE>
As of December 31, 1997, Mr. Baumgartner was the only participant in
the Tax Program. Payments made to Mr. Baumgartner in 1997 amounted to
$8,923. The Tax Program was terminated concurrently with consummation of
the Offering.
ROYALTY PARTICIPATION PROGRAM. On December 31, 1992, MOC established
the Employee Participation Program (the "Royalty Program"), which was
designed to provide an incentive for certain key employees to contribute to
the success of MOC. Under the terms of the Royalty Program, participants
received 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 was reserved for the Royalty Program on all
prospects generated by MOC. If less than a 1/32nd of 8/8ths overriding
royalty was reserved on such prospects, participants were assigned a
proportionate share of the overriding royalty that MOC retained. A sliding
scale overriding royalty was reserved against MOC's retained net revenue
interest, proportionately adjusted to MOC's working interest in any
specific property. The net revenue scale was used whether MOC retained an
overriding royalty on its prospects, acquired a working interest from a
third party or sold or distributed working interests to an entity owned by
a shareholder of MOC. The Royalty Program was limited to those properties
that MOC had an initial working interest in and the overriding royalty was
not applied to farm-outs by MOC, sale of lease positions, purchase of
reserves or recovery from lawsuits. If a participant's employment
terminated, any overriding royalties previously assigned to the participant
reverted to MOC. In the event of a participant's death, any royalties due
to the participant were allocated to a beneficiary or trust designated by
the participant.
As of December 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; and
Mr. Murray had a 15% interest in the royalty interest. The stated
percentages for Messrs. Miller and Murray applied to prospects of MOC as of
January 1, 1996. To the extent that a prospect was included in the Royalty
Program before January 1, 1996, with respect to those properties, Messrs.
Miller and Murray had a 32% and 8% interest in such royalties,
respectively, as of December 31, 1997. During 1997 Messrs. Miller,
Baumgartner and Murray received $91,206, $5,721 and $29,021, respectively,
under the Royalty Program. The Royalty Program was terminated concurrently
with consummation of the Offering.
COMPENSATION OF DIRECTORS. Directors who are not employees of the
Company receive a $15,000 annual retainer fee plus $500 for attendance at
each regular meeting of the Board of Directors and $1,000 for attendance at
each committee meeting. Directors who also are employees of the Company
receive no annual retainer and are not compensated for attendance at Board
or committee meetings. The Company also reimburses directors for expenses
associated with attending Board and committee meetings.
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<PAGE>
Upon consummation of the Offering, each non-employee director of the
Company was granted an option to purchase 10,000 shares of Common Stock.
Any person who first becomes a non-employee director 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 ($8.00 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of March 9, 1998 of
(i) each person the Company knows to be the beneficial owner of 5% or more
of the outstanding shares of Common Stock, (ii) each executive officer
listed in the Summary Compensation Table, (iii) each director of the
Company and (iv) all executive officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP OF COMMON STOCK <F1>
-----------------------------------------------
SOLE VOTING SHARED VOTING TOTAL
AND DISPOSITIVE OR DISPOSITIVE BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNER POWER<F2> POWER<F3> OWNERSHIP<F2> OF CLASS
------------------------ --------------- -------------- ------------- --------
<S> <C> <C> <C> <C>
C.E. Miller<F4> . . . . . . . . . . . . . . 1,415,234 -- 1,415,234 11.33%
Kelly E. Miller<F5> . . . . . . . . . . . . 1,008,319 400 1,008,719 8.07%
David A. Miller<F6> . . . . . . . . . . . . 718,945 -- 718,945 5.75%
3104 Logan Valley Road
Traverse City, Michigan 49685
Daniel R. Miller<F7>. . . . . . . . . . . . 868,840 -- 868,840 6.96%
3104 Logan Valley Road
Traverse City, Michigan 49685
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<PAGE>
Sue Ellen Bell<F8>. . . . . . . . . . . . . 833,218 -- 833,218 6.67%
3104 Logan Valley Road
Traverse City, Michigan 49685
William J. Baumgartner. . . . . . . . . . . 9,300 -- 9,300 <F*>
Lew P. Murray . . . . . . . . . . . . . . . -- 200 200 <F*>
Douglas A. Bell<F9> . . . . . . . . . . . . -- 833,218 833,218 6.67%
Frank M. Burke, Jr.<F10>. . . . . . . . . . 12,500 -- 12,500 <F*>
Kenneth J. Foote. . . . . . . . . . . . . . 43,390 43,390 <F*>
Dan A. Hughes, Jr.<F11> . . . . . . . . . . 26,541 26,541 <F*>
William Casey McManemin<F12>. . . . . . . . 12,500 1,042,480 1,054,980 8.34%
SASI Minerals Company . . . . . . . . . . . 1,042,480 -- 1,042,480 8.34%
1201 Market Street, Suite 1402
Wilmington, Delaware 19801
Executive Officers and Directors
as a group. . . . . . . . . . . . . . . . 2,527,784 1,876,298 4,404,082 35.25%
- -------------------------
<FN>
<F*> Less than 1%.
<F1> The number of shares stated are based on information provided by
each person listed and include shares personally owned of record by
the person and shares which, under applicable regulations, are
considered to be otherwise beneficially owned by the person.
<F2> Excludes the following shares that may be acquired through the
exercise of stock options and restricted stock granted under the
1997 Stock Option Plan and pursuant to the one-time grant to Messrs.
Miller and Baumgartner described above:
NUMBER OF SHARES OF
NAME OPTIONS RESTRICTED STOCK
---- ------- ----------------
Kelly E. Miller. . . . . . . . . . 330,000 60,000
William J. Baumgartner . . . . . . 100,000 22,500
Lew P. Murray. . . . . . . . . . . 100,000 15,000
Douglas A. Bell. . . . . . . . . . 40,000 --
Frank M. Burke, Jr.. . . . . . . . 10,000 --
Kenneth J. Foote . . . . . . . . . 10,000 --
Dan A. Hughes, Jr. . . . . . . . . 10,000 --
William Casey McManemin. . . . . . 10,000 --
<F3> These numbers include shares over which the listed person is legally
entitled to share voting or dispositive power by reason of joint
ownership, trust or other contract right, and shares held by
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<PAGE>
spouses, children or other relatives over whom the listed person may
have substantial influence by reason of relationship.
<F4> 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.
<F5> Includes 924,195 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.
<F6> Includes 634,921 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.
<F7> Includes 794,196 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.
<F8> Includes 749,194 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.
<F9> Includes only those shares held by Mr. Bell's spouse, Sue Ellen
Bell. Mr. Bell disclaims beneficial ownership of these shares.
<F10> Includes 6,500 shares held by Burke, Mayhorn Company, Ltd. and 3,000
shares held by TTC Burke, Ltd., which are private consulting and
investment companies controlled by Mr. Burke.
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<PAGE>
<F11> Includes only those shares held by the Hughes Company, of which Mr.
Hughes is Exploration Manager and in which Mr. Hughes is a partner.
<F12> 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.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE COMBINATION TRANSACTION
The Company was 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. William Casey McManemin, a director of the Company, is an
officer, shareholder and director of the Manager of SASI Minerals Company,
which exchanged interests in oil and natural gas properties for shares of
Common Stock in the Combination Transaction. Kenneth J. Foote, a director
of the Company, also exchanged interests in oil and natural gas properties
for shares of Common Stock in the Combination Transaction.
REGISTRATION RIGHTS AGREEMENT
The Company entered into a Registration Rights Agreement with each
person who became a stockholder of the Company upon consummation of the
Combination Transaction. The Registration Rights Agreement provides each
such person certain piggyback registration rights with respect to their
shares of Common Stock.
TRANSACTIONS WITH C.E. MILLER AND AFFILIATES
The following information describes agreements or transactions between
MOC and C.E. Miller, Chairman of the Board and a director of the Company
and MOC, 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
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<PAGE>
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 $200,000, $100,000 and $50,000
under the service arrangement in 1997, 1996 and 1995, respectively, which the
Company believes is adequate compensation for the services provided to
Eagle.
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 participated 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 terminated the agreement
upon 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 sold to Eagle working and royalty interests in certain oil
and natural 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 was $507,411, payable in cash and was distributed to the
shareholders of MOC. The Company believes that the purchase price was
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. 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
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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 was paid in full during February 1998
from the proceeds received in the Offering.
SHAREHOLDER NOTES
In 1991, the shareholders of MOC loaned to MOC an aggregate of $7.6
million pursuant to separate loan agreements. As of December 31, 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
contributed the indebtedness to the Company as capital in connection with
the Combination Transaction, which resulted in cancellation of the
indebtedness. Such cancellation is not expected to result in income to the
Company for federal income tax purposes.
TAX CREDIT AND ROYALTY PARTICIPATION PROGRAMS
The Company established the Tax Program and the Royalty Program under
which certain key employees were entitled to receive a stated percentage of
tax credits received by the Tax Program and/or royalties paid on certain
prospects generated by the Company. The participants' rights to
participate in the Tax Program and the Royalty Program terminated upon
consummation of the Offering.
CONSULTING AGREEMENT
MOC and Frank M. Burke, Jr., a 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. For the year ended December
31, 1997, MOC had paid Mr. Burke a total of $30,738 in fees and expenses.
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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 the Hughes Company
under an exploration agreement in effect since 1994. Dan A. Hughes, Jr., a
director of the Company, is a partner in and Exploration Manager of the
Hughes Company. At the time the exploration agreement was entered into,
Mr. Hughes was not a director of the Company. Revenues attributable to
these properties were approximately $2.0 million and $1.3 million as of
December 31, 1997 and December 31, 1996, respectively. The Company
currently projects capital expenditures with respect to these properties of
approximately $2.9 million in 1998.
In addition, the Company had 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 had an interest. In exchange for their interests in a project, the
affiliated companies, which were under common ownership with MOC, were
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. This program terminated upon consummation of the Offering.
Any future material transactions between the Company and its
affiliates will be approved by a majority of the disinterested directors of
the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM
8-K.
ITEM 14(a)(1). FINANCIAL STATEMENTS. See "Index to Financial
Statements" set forth on page F-1.
ITEM 14(a)(2). FINANCIAL STATEMENT SCHEDULES. Financial statement
schedules have been omitted because they are either not required, not
applicable or the information required to be presented is included in the
Company's financial statements and related notes.
-59-
<PAGE>
ITEM 14(a)(3). EXHIBITS.
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
2.1 Exchange and Combination Agreement dated November 12,
1997. Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (333-40383), and here
incorporated by reference.
2.2(a) Letter Agreement amending Exchange and Combination
Agreement. Previously filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-40383),
and here incorporated by reference.
2.2(b) Letter Agreement amending Exchange and Combination
Agreement. Previously filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-40383),
and here incorporated by reference.
2.2(c) Letter Agreement amending Exchange and Combination
Agreement. Previously filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-40383),
and here incorporated by reference.
2.3(a) Agreement for Purchase and Sale dated November 25, 1997
between Amerada Hess Corporation and Miller Oil
Corporation. Previously filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-40383),
and here incorporated by reference.
2.3(b) First Amendment to Agreement for Purchase and Sale dated
January 7, 1998. Previously filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-40383),
and here incorporated by reference.
3.1 Certificate of Incorporation of the Registrant.
Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (333-40383), and here
incorporated by reference.
3.2 Bylaws of the Registrant. Previously filed as an
exhibit to the Company's Registration Statement on Form
S-1 (333-40383), and here incorporated by reference.
4.1 Certificate of Incorporation. See Exhibit 3.1.
4.2 Bylaws. See Exhibit 3.2.
-60-
<PAGE>
4.3 Form of Specimen Stock Certificate. Previously filed as
an exhibit to the Company's Registration Statement on
Form S-1 (333-40383), and here incorporated by
reference.
10.1(a) Stock Option and Restricted Stock Plan of 1997.<F+><F*>
10.1(b) Form of Stock Option Agreement.<F+><F*>
10.1(c) Form of Restricted Stock Agreement.<F+><F*>
10.2 Form of Director and Officer Indemnity Agreement.
Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (333-40383), and here
incorporated by reference.<F+>
10.3 Form of Employment Agreement for Kelly E. Miller,
William J. Baumgartner, Lew P. Murray and Charles A.
Morrison. Previously filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-40383),
and here incorporated by reference.<F+>
10.4 Lease Agreement between Miller Oil Corporation and C.E.
and Betty Miller, dated July 24, 1996. Previously filed
as an exhibit to the Company's Registration Statement on
Form S-1 (333-40383), and here incorporated by
reference.
10.5 Letter Agreement dated November 10, 1997, between Miller
Oil Corporation and C.E. Miller, regarding sale of
certain assets. Previously filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-40383),
and here incorporated by reference.
10.6 Amended Service Agreement dated January 1, 1997, between
Miller Oil Corporation and Eagle Investments, Inc.
Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (333-40383), and here
incorporated by reference.
10.7 Form of Registration Rights Agreement (included as
Exhibit E to Exhibit 2.1). Previously filed as an
exhibit to the Company's Registration Statement on Form
S-1 (333-40383), and here incorporated by reference.
10.8 Consulting Agreement dated June 1, 1996 between Miller
Oil Corporation and Frank M. Burke, Jr., with amendment.
Previously filed as an exhibit to the Company's
-61-
<PAGE>
Registration Statement on Form S-1 (333-40383), and here
incorporated by reference.
10.9 $2,500,000 Promissory Note dated November 26, 1997
between Miller Oil Corporation and the C.E. Miller
Trust. Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (333-40383), and here
incorporated by reference.
10.10 Form of Indemnification and Contribution Agreement among
the Registrant and the Selling Stockholders. Previously
filed as an exhibit to the Company's Registration
Statement on Form S-1 (333-40383), and here incorporated
by reference.
10.11 Credit Agreement between Miller Oil Corporation and Bank
of Montreal dated February 9, 1998.<F*>
10.12 Guaranty Agreement by Miller Exploration Company in
favor of Bank of Montreal dated February 9, 1998.<F*>
10.13 $75,000,000 Promissory Note of Miller Oil Corporation to
Bank of Montreal dated February 9, 1998.<F*>
10.14 Mortgage (Michigan) between Miller Oil Corporation and
James Whitmore, as trustee for the benefit of Bank of
Montreal, dated February 9, 1998.<F*>
10.15 Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement (Mississippi)
between Miller Oil Corporation and James Whitmore, as
trustee for the benefit of Bank of Montreal, dated
February 9, 1998.<F*>
10.16 Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement (Texas)
between Miller Oil Corporation and James Whitmore, as
trustee for the benefit of Bank of Montreal, dated
February 9, 1998.<F*>
11.1 Computation of Earnings per Share.<F*>
21.1 Subsidiaries of the Registrant. Previously filed as an
exhibit to the Company's Registration Statement on Form
S-1 (333-40383), and here incorporated by reference.
23.1 Consent of S.A. Holditch & Associates.<F*>
23.2 Consent of Miller and Lents, Ltd.<F*>
-62-
<PAGE>
24.1 Limited Power of Attorney.<F*>
27.1 Financial Data Schedule.<F*>
____________________
<F*> Filed herewith.
<F+> Management contract or compensatory plan or arrangement.
-63-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MILLER EXPLORATION COMPANY
By */s/Kelly E. Miller
Kelly E. Miller
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 31, 1998 By */s/C. E. Miller
C. E. Miller
Chairman of the Board
March 31, 1998 By */s/Kelly E. Miller
Kelly E. Miller, Director
(Principal Executive Officer)
March 31, 1998 By */s/William J. Baumgartner
William J. Baumgartner, Director
(Principal Financial and Accounting
Officer)
March 31, 1998 By */s/Frank M. Burke, Jr.
Frank M. Burke, Jr., Director
March 31, 1998 By */s/Dan A. Hughes, Jr.
Dan A. Hughes, Jr., Director
-64-
<PAGE>
March 31, 1998 By */s/William Casey McManemin
William Casey McManemin, Director
March 31, 1998 By */s/Kenneth J. Foote
Kenneth J. Foote, Director
*By /s/William J. Baumgartner
William J. Baumgartner, Director
Attorney-in-Fact
-65-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
COMBINED FINANCIAL STATEMENTS OF MILLER EXPLORATION COMPANY AND
AFFILIATED ENTITIES
Report of Independent Public Accountants . . . . . . . . . . . . . . . F-2
Combined Balance Sheets as of December 31, 1997 and 1996 . . . . . . . F-3
Combined Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . F-4
Combined Statements of Equity for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . F-5
Combined Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . F-6
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . F-7
Supplemental Quarterly Financial Data (unaudited). . . . . . . . . . . F-20
STATEMENTS OF THE MILLER EXPLORATION COMPANY ACQUIRED PROPERTIES:
Report of Independent Public Accountants . . . . . . . . . . . . . . . F-21
Historical Statements of Revenues and Direct Operating
Expenses for the Years Ended December 31, 1997, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
Notes to Historical Statements of Revenues and Direct
Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . F-23
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA:
Pro Forma Statement of Operations for the Year Ended
December 31, 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . F-26
Pro Forma Balance Sheet as of December 31, 1997 (unaudited). . . . . . F-27
F-1
<PAGE>
ARTHUR ANDERSEN LLP
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, 1997
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,
1997. 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, 1997 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, 1997, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
March 13, 1998
F-2
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
<TABLE>
COMBINED BALANCE SHEETS
<CAPTION>
AS OF DECEMBER 31,
-----------------
1997 1996
-------- -------
(IN THOUSANDS)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 146 $ 410
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . 2,109 2,246
Inventories and prepaid expenses. . . . . . . . . . . . . . . . . 87 113
Advances to operators . . . . . . . . . . . . . . . . . . . . . . 907 385
Other current assets (Note 2) . . . . . . . . . . . . . . . . . . 2,936 --
-------- -------
Total current assets. . . . . . . . . . . . . . . . . . . . . . 6,185 3,154
-------- -------
OIL AND GAS PROPERTIES at cost (full cost method):
Proved oil and gas properties . . . . . . . . . . . . . . . . . . 29,324 27,883
Unproved oil and gas properties . . . . . . . . . . . . . . . . . 7,069 2,811
Less-Accumulated depreciation, depletion and amortization . . . . (12,425) (9,962)
-------- -------
Net oil and gas properties. . . . . . . . . . . . . . . . . . 23,968 20,732
-------- -------
PROPERTY AND EQUIPMENT NET . . . . . . . . . . . . . . . . . . . . . . 275 164
-------- -------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 30,428 $24,050
======== =======
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,454 $ 3,942
Current portion of long-term debt . . . . . . . . . . . . . . . . 243 216
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 3,831 891
Accounts payable related parties. . . . . . . . . . . . . . . . . 39 218
Oil and gas distributions payable . . . . . . . . . . . . . . . . 289 307
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . 50 223
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . 264 39
-------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . 12,170 5,836
-------- -------
F-3
<PAGE>
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481 8,723
DEFERRED REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,664 1,722
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; 100
shares outstanding. . . . . . . . . . . . . . . . . . . . . . -- --
Combined equity . . . . . . . . . . . . . . . . . . . . . . . . . 8,588 72
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 7,525 7,697
-------- -------
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . 16,113 7,769
-------- -------
Total liabilities and equity. . . . . . . . . . . . . . . . . $ 30,428 $24,050
======== =======
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
F-4
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
<TABLE>
COMBINED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Natural gas. . . . . . . . . . . . . . . . . . . . $5,819 $5,614 $2,748
Crude oil and condensate . . . . . . . . . . . . . 964 1,101 715
Other operating revenues . . . . . . . . . . . . . 629 395 296
------ ------ ------
Total operating revenues . . . . . . . . . . . 7,412 7,110 3,759
------ ------ ------
OPERATING EXPENSES:
Lease operating expenses and production taxes. . . 1,478 1,123 777
Depreciation, depletion and amortization . . . . . 2,520 2,629 1,666
General and administrative . . . . . . . . . . . . 2,186 1,591 1,270
------ ------ ------
Total operating expenses . . . . . . . . . . . 6,184 5,343 3,713
------ ------ ------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . 1,228 1,767 46
------ ------ ------
INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . (1,200) (1,139) (1,017)
------ ------ ------
LAWSUIT SETTLEMENT . . . . . . . . . . . . . . . . . . -- -- 3,521
------ ------ ------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . $ 28 $ 628 $2,550
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
F-5
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
<TABLE>
COMBINED STATEMENTS OF EQUITY
<CAPTION>
COMBINED RETAINED TOTAL
EQUITY EARNINGS EQUITY
-------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
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. . . . . . . . . . . . 8,516 -- 8,516
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 28 28
Dividends declared. . . . . . . . . . . . . . . . . . . . . . . -- (200) (200)
------ ------ -------
BALANCE December 31, 1997 . . . . . . . . . . . . . . . . . . . . . $8,588 $7,525 $16,113
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
F-6
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
<TABLE>
COMBINED STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 28 $ 628 $ 2,550
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion and amortization . . . . . . . 2,520 2,629 1,666
Deferred revenue . . . . . . . . . . . . . . . . . . . (58) (27) (21)
Lawsuit settlement . . . . . . . . . . . . . . . . . . -- -- (3,521)
Changes in assets and liabilities
Accounts receivable. . . . . . . . . . . . . . . . . 137 (1,010) (200)
Other current assets . . . . . . . . . . . . . . . . (3,432) (360) 67
Accounts payable . . . . . . . . . . . . . . . . . . 2,761 252 (60)
Oil and gas distributions payable. . . . . . . . . . (18) 74 20
Other accrued expenses . . . . . . . . . . . . . . . 52 (24) 10
------- ------- -------
Net cash flows provided by operating activities . 1,990 2,162 511
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures. . . . . . . . . . . (8,822) (6,184) (6,323)
Advance payment of natural gas sales. . . . . . . . . . . . . -- 185 1,439
Proceeds from sale of oil and gas properties and purchases
of equipment, net. . . . . . . . . . . . . . . . . . . . . 2,955 1,256 1,212
Proceeds from lawsuit settlement. . . . . . . . . . . . . . . -- -- 3,521
------- ------- -------
Net cash flows used in investing activities. . . . . (5,867) (4,743) (151)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal . . . . . . . . . . . . . . . . . . . . (572) (55) --
Net borrowing on notes payable. . . . . . . . . . . . . . . . 3,512 2,785 359
Long-term debt borrowing. . . . . . . . . . . . . . . . . . . -- 350 --
Contributions and return of capital, net. . . . . . . . . . . 873 (69) (136)
Payments of dividends . . . . . . . . . . . . . . . . . . . . (200) (200) (600)
------- ------- -------
Net cash flows provided by (used in) financing
activities. . . . . . . . . . . . . . . . . . . . 3,613 2,811 (377)
------- ------- -------
F-7
<PAGE>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . (264) 230 (17)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . 410 180 197
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD. . . . . . . . . . $ 146 $ 410 $ 180
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,373 $ 1,122 $ 1,005
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
F-8
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION, COMBINATION AND NATURE OF OPERATIONS
THE COMBINATION TRANSACTION
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 Transaction").
The first part of the Combination Transaction included the following
activities: Miller acquired all of the outstanding capital stock of Miller
Oil Corporation ("MOC"), the Company's predecessor, 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"). 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. Miller completed the Combination Transaction concurrently with the
consummation of an initial public offering (the "Offering") of its Common
Stock in February 1998 (see Note 15).
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"). The
Combination Transaction was 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. All
intercompany balances have been eliminated.
OTHER TRANSACTIONS COMPLETED CONCURRENTLY WITH THE OFFERING
In addition to the above combined activities of the Company, the
second part of the Combination Transaction that was consummated
concurrently with the Offering was the exchange by the Company of an
aggregate of approximately 1.6 million shares of Common Stock for interests
F-9
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
in certain other oil and gas properties that were owned by non-affiliated
parties. Because these interests were acquired from individuals who were
not under the common ownership and management of the Company, these
exchanges were accounted for under the purchase method of accounting. Under
that method, the properties were recorded at their estimated fair value at
the date on which the exchange was consummated. The combined financial
statements do not include the activities of these non-affiliated interests.
In November 1997, the Company entered into a Purchase and Sale
Agreement (the "Agreement"), whereby the Company acquired 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. This purchase, contemplated by the
Agreement, was consummated concurrently with the Company's Offering. This
acquisition was accounted for under the purchase method of accounting. The
acquisition was financed with the use of proceeds from the Offering and
with new bank borrowings. The combined financial statements do not include
the activities of these AHC 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 and development activities. Under this method, the proceeds
from the sale of oil and gas properties are accounted for as reductions to
capitalized costs, and gains and losses are not recognized. The
capitalized costs are amortized on an overall unit-of-production method
based on total estimated proved oil and gas reserves. Additionally, certain
F-10
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
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, 1997, 1996 or 1995.
INCOME TAXES
Before consummation of the Offering, the Company and the combined
affiliated entities either elected to be treated as S corporations under
the Internal Revenue Code or were otherwise not taxed as entities for
federal income tax purposes. The taxable income or loss has therefore been
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 before consummation of the Offering, a deferred tax liability of
approximately $5.4 million, $5.8 million and $5.9 million at December 31,
1997, 1996 and 1995 respectively, would have been recorded for this
difference, with a corresponding reduction in retained earnings.
Additionally, had the Company been a taxpaying entity before consummation
of the Offering, an income tax provision (credit) of approximately
$(310,000), $(10,000) and $830,000 would have been recorded for the years
ended December 31, 1997, 1996 and 1995, 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-11
<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, tubing and related equipment
for wells. 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
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 1995 and 1996, the Company did
not hedge any of its crude oil or natural gas production. As of December
31, 1997, the Company had the following volumes of open natural gas
contracts:
F-12
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
VOLUME
PRODUCTION PERIOD (MMcf) PRICE/Mcf
----------------- ------ ---------
<S> <C> <C> <C>
January 1998 . . . . . . . . . . . 0.9 $ 3.23
February 1998. . . . . . . . . . . 0.9 2.89
March 1998 . . . . . . . . . . . . 0.9 2.59
</TABLE>
EARNINGS PER SHARE
Earnings 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 earnings per share is presented in the "Pro Forma Data
(unaudited)" section using the weighted average number of common shares
outstanding after giving effect to the Combination Transaction and the
Offering.
OTHER CURRENT ASSETS
At December 31, 1997, other current assets included a $2.5 million
down payment of the purchase price to AHC at the time of the signing of the
Agreement. Additionally, $0.4 million of costs directly attributable to
the Offering have been deferred, and will be charged against the gross
proceeds of the Offering.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform with the 1997 presentation.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." In general, SFAS No. 123
recommends that all stock-based compensation given to employees in exchange
for their services be expensed based on the fair value of the options
granted. During 1997, 1996 and 1995, the Company did not offer any stock-
based compensation to employees, therefore, this standard does not have an
impact on the Company's combined financial statements (see Note 7).
F-13
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
PRO FORMA DATA (UNAUDITED)
The pro forma unaudited combined financial data set forth below has
been prepared to give effect to the Combination Transaction and the
Offering and the application of the estimated net proceeds therefrom as if
the Combination Transaction and the Offering occurred on January 1, 1997.
The pro forma unaudited combined financial data is based on numerous
assumptions and is not necessarily indicative of future results of
operations. Pro forma basic and diluted earnings per share has been
computed assuming that the 100 shares issued in connection with the
organization of the Company, 6,929,997 shares issued in connection with the
Combination Transaction and 5,562,500 shares issued in connection with the
Offering have been outstanding since January 1, 1997.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
1997
--------------------
(In thousands, except
per share data)
<S> <C> <C>
Total operating revenues. . . . . . . . . $25,114
Operating income. . . . . . . . . . . . . 12,273
Net income before income taxes. . . . . . 11,148
Net income. . . . . . . . . . . . . . . . 8,438
Pro forma basic and diluted earnings
per share. . . . . . . . . . . . . . . . $ 0.68
Weighted average number of shares
outstanding. . . . . . . . . . . . . . . 12,493
</TABLE>
There were no reconciliation items required between basic and
diluted earnings per share.
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
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expense during
F-14
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
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,
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Joint interest receivable . . . . . . $1,318 $1,227
Oil and gas revenue receivable. . . . 791 1,003
Advance billings receivable . . . . . -- 16
------ ------
Total accounts receivable . . . . . . $2,109 $2,246
====== ======
</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, 1997 and 1996, the joint
interest receivable balance due from related parties total $957,802 and
$655,263, 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.
F-15
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(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 $57,355,
$54,259 and $58,827 for the years ended December 31, 1997, 1996 and 1995,
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 also are 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 approximately $1.4 million 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.
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, 1997 and 1996, the Company had a notes payable balance
of approximately $4.9 million and approximately $3.9 million, respectively,
which represented a borrowing against a $5.0 million bank line-of-credit
bearing interest at the bank's prime rate and another $1.0 million line-
of-credit, which bore interest at the bank's prime rate plus 0.25%. These
notes were collateralized by the Company's reserved interest in the
F-16
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
natural gas properties discussed in Note 5. These notes were paid in
full during February 1998 from the proceeds of the Offering.
In November 1997, the Chairman of the Company loaned to MOC $2.5
million, pursuant to a promissory note with interest at the prime rate, for
the purpose of making a down payment in connection with the AHC
acquisition. This note was paid in full during February 1998 from the
proceeds of the Offering.
During 1996, the Company also entered into a $1.0 million term loan
payable to a bank, with interest at the prime rate, maturing September
2000. At December 31, 1997 and 1996 the balance of the term-loan was
approximately $0.7 million and approximately $0.9 million, respectively.
The term loan was paid in full during February 1998 from the proceeds of
the Offering.
The Company also had unsecured notes payable to stockholders, with
interest payable quarterly at 2% over the prime rate. The notes were due in
October 2006 and were subordinate to the two notes payable and the term-
loan. On December 1, 1997, these stockholders contributed the indebtedness
to MOC as capital, resulting in the cancellation of the indebtedness. At
December 31, 1996, the balance of the notes payable to stockholders was
approximately $8.0 million. The weighted average interest rate for all of
the Company's borrowings was 9.6% and 10.0% as of December 31, 1997 and
1996, respectively.
Minimum principal payments on notes payable and long-term debt as of
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
1998. . . . . . . . . . . . . . $7,697
1999. . . . . . . . . . . . . . 264
2000. . . . . . . . . . . . . . 217
------
$8,178
======
</TABLE>
In connection with the Offering, in February 1998, the Company entered
into a credit facility (the "New Credit Facility") with Bank of Montreal,
F-17
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Houston Agency ("BOM"). The New Credit Facility consists of a three-year
revolving line of credit converting to a three-year term loan. The amount
of credit available during the revolving period and the debt allowed during
the term period may not exceed the Company's "borrowing base," or the
amount of debt that BOM and the other lenders under the New Credit Facility
agree can be supported by the cash flow generated by the Company's
producing and non-producing proved oil and gas reserves. The initial
borrowing base is $23.0 million and may not exceed $75.0 million. Amounts
advanced under the New Credit Facility bear interest, payable quarterly, at
either (i) BOM's announced prime rate or (ii) the London Inter-Bank Offered
Rate plus a margin rate ranging from 0.75% to 1.625%, as selected by the
Company. In addition, the Company is assessed a commitment fee equal to
0.375% of the unused portion of the borrowing base, payable quarterly in
arrears, until the termination of the revolving period. At the termination
of the revolving period, the revolving line of credit will convert to a
three-year term loan with principal payable in 12 equal quarterly
installments. The New Credit Facility includes certain negative covenants
that impose limitations on the Company and its subsidiaries with respect
to, among other things, distributions with respect to its capital stock,
the creation or incurrence of liens, the incurrence of additional
indebtedness, making loans and investments, and mergers and consolidations.
The obligations of the Company under the New Credit Facility are secured by
a lien on all real and personal property of the Company, including its oil
and gas properties. The Company borrowed $15.0 million under the New
Credit Facility to complete the Combination Transaction, and to repay all
other outstanding indebtedness described above.
(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. 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:
F-18
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
1998 . . . . . . . . . . . . . . . $128
1999 . . . . . . . . . . . . . . . 132
2000 . . . . . . . . . . . . . . . 135
2001 . . . . . . . . . . . . . . . 103
2002 . . . . . . . . . . . . . . . 53
Thereafter . . . . . . . . . . . . 9
----
$560
====
</TABLE>
Total net rent expense under these lease arrangements was $103,464,
$59,735 and $18,009 for the years ended December 31, 1997, 1996 and 1995,
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 $64,348, $42,278 and $38,714 for the years ended
December 31, 1997, 1996 and 1995, respectively.
TAX CREDIT AND ROYALTY PARTICIPATION PROGRAMS
Various employees were eligible to participate in the Company's Tax
Credit and Royalty Participation Programs, which were designed to provide
incentive for certain key employees of the Company. Under the programs, the
employees were entitled to 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 $134,916, $116,236 and $139,365 for the years
ended December 31, 1997, 1996 and 1995, respectively. These programs were
terminated upon the consummation of the Offering (see Note 15).
STOCK OPTIONS AND RESTRICTED STOCK
During 1997, the Company adopted the 1997 Stock Option Plan. The Board
of Directors contemplates that the 1997 Stock Option Plan primarily will be
F-19
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
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. These
stock options, restricted stock and tax benefit rights are collectively
referred to as "Incentive Awards." Persons eligible to receive Incentive
Awards under the 1997 Stock Option Plan 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) are available for Incentive Awards under the 1997
Stock Option Plan. Upon consummation of the Offering in February 1998, a
total of 577,850 Incentive Awards were granted by the Company to directors,
corporate officers and other full-time employees of the Company.
Additionally, upon consummation of the Offering, 109,500 restricted shares
were transferred to certain employees. At the time of the issuance of the
restricted shares, compensation expense of approximately $0.9 million was
deferred. The restricted shares will begin to vest at cumulative increments
of one-half of the total number of restricted shares of Common Stock
subject thereto, beginning on the first anniversary of the date of grant.
Because the restricted shares are subject to the risk of forfeiture during
the vesting period, compensation expense (equivalent to the Offering price
per share of $8.00) will be recognized ratably over the two-year vesting
period as the risk of forfeiture passes.
Also in February 1998, the Company made a one-time grant of an
aggregate of 272,500 stock options to certain officers pursuant to the
terms of stock option agreements entered into between the Company and the
officers.
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
F-20
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
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, $200,000, $100,000 and $50,000 were recognized as management
fee income (see Note 12) for the years ended December 31, 1997, 1996 and
1995, respectively.
(9) LAWSUIT SETTLEMENT
In November 1995, the Company received approximately $3.5 million 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.
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.
F-21
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(11) NON-CASH FINANCING ACTIVITIES
During 1996, the Company transferred $1.0 million 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.
During 1997, the stockholders contributed approximately $7.6 million
of notes payable to MOC as capital, as more fully disclosed 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
DECEMBER 31,
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Amerada Hess Corporation . . . . 39% 51% 44%
Dan A. Hughes Company . . . . . 30% 19% 7%
Muskegon Development Co. . . . . 27% 24% 37%
</TABLE>
F-22
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(14) NEW ACCOUNTING STANDARDS
In 1997, the FASB 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 any effect on its financial position, liquidity or
results of operations.
(15) SUBSEQUENT EVENTS
On February 9, 1998, the Company completed the Offering of its Common
Stock and concurrently completed the Combination Transaction. On that
date, the Company sold 5,500,000 shares of its Common Stock for an
aggregate purchase price of $44.0 million. On March 9, 1998, the Company
sold an additional 62,500 shares of its Common Stock for an aggregate
purchase price of $0.5 million, pursuant to the exercise of the
underwriters' over-allotment option.
(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.
F-23
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
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, 1997 and 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, 1995 and 1994 have been prepared by the Company's petroleum
engineers. All of the Company's reserves are located in the United States.
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, 1997, and the changes in the net proved reserves for
each of the three years in the period then ended as estimated by petroleum
engineers for the respective periods as described in the preceding
paragraph:
F-24
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
TOTAL
------------------------
OIL (MBbl) GAS (MMcf)
---------- ----------
<S> <C> <C> <C>
Estimated Proved Reserves
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
Revisions and other changes. . . . . . . . . . . . 161.6 (1,129.5)
Extensions and discoveries . . . . . . . . . . . . 10.6 3,629.8
Production . . . . . . . . . . . . . . . . . . . . (47.4) (2,241.2)
------ --------
December 31, 1997. . . . . . . . . . . . . . . . . . . 768.5 17,615.1
Estimated Proved Developed Reserves
December 31, 1995. . . . . . . . . . . . . . . . . 55.8 12,625.5
====== ========
December 31, 1996. . . . . . . . . . . . . . . . . 121.0 15,221.2
====== ========
December 31, 1997. . . . . . . . . . . . . . . . . 130.2 13,964.4
====== ========
</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
F-25
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
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.
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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Future revenues <Fa> . . . . . . . . . . . . . . . $ 54,896 $ 74,300 $ 56,792
Future production costs <Fb> . . . . . . . . . . . (19,091) (21,326) (18,278)
Future development costs <Fb>. . . . . . . . . . . (5,300) (4,348) (1,711)
-------- -------- --------
Future net cash flows. . . . . . . . . . . . . . . 30,505 48,626 36,803
Discount to present value at 10% annual rate . . . (10,571) (18,561) (14,449)
-------- -------- --------
Standardized measure of discounted future net
cash flows <Fc>. . . . . . . . . . . . . . . . . $ 19,934 $ 30,065 $ 22,354
======== ======== ========
- -------------
F-26
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
<FN>
<Fa> 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.
<Fb> 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.
<Fc> Does not include income taxes as the Company was not subject to
federal income taxes until consummation of the Offering in
February 1998. Had the Company been subject to federal income taxes,
the pro forma Standardized Measure of Discounted Future Net Cash Flows
at December 31, 1997 would have been $13,977.
</FN>
</TABLE>
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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
New discoveries. . . . . . . . . . . . . . . . . . $ 4,059 $ 6,318 $ 11,786
Purchase of reserves . . . . . . . . . . . . . . . -- 1,102 --
Sales of reserves in place . . . . . . . . . . . . -- -- (127)
Revisions to reserves. . . . . . . . . . . . . . . 350 7,887 (16,759)
Sales, net of production costs . . . . . . . . . . (5,305) (5,592) (2,685)
Changes in prices. . . . . . . . . . . . . . . . . (22,280) (184) 27,251
Accretion of discount. . . . . . . . . . . . . . . 3,006 2,235 1,619
Changes in timing of production and other. . . . . 10,039 (4,055) (14,920)
-------- ------- --------
Net change during the year . . . . . . . . . . . . $(10,131) $ 7,711 $ 6,165
======== ======= ========
</TABLE>
F-27
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
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,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Proved properties . . . . . . . . . . . . . . . . . $ 29,324 $ 27,883
Unproved properties . . . . . . . . . . . . . . . . 7,069 2,811
-------- --------
36,393 30,694
Less Accumulated depreciation, depletion
and amortization. . . . . . . . . . . . . . . . . (12,425) (9,962)
-------- --------
$ 23,968 $ 20,732
======== ========
</TABLE>
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:
F-28
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1997 1996<Fa> 1995
---- -------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Property acquisition costs. . . . . . . . . . . . $4,577 $2,264 $1,123
Exploration costs . . . . . . . . . . . . . . . . 2,226 2,340 2,130
Development costs . . . . . . . . . . . . . . . . 2,019 1,580 3,070
------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . $8,822 $6,184 $6,323
====== ====== ======
- ----------
<FN>
<Fa> Includes $757 for the acquisition of proved producing properties.
</FN>
</TABLE>
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,
1997, 1996 and 1995. The results of operations below do not include general
and administrative expenses, general taxes and interest expense.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Revenues-
Natural gas . . . . . . . . . . . . . . . . . . $5,819 $5,614 $2,748
Crude oil and condensate. . . . . . . . . . . . 964 1,101 715
------ ------ ------
Total operating revenues . . . . . . . . . . 6,783 6,715 3,463
------ ------ ------
Operating expenses-
Lease operating expenses and production taxes . 1,478 1,123 777
Depreciation, depletion and amortization. . . . 2,520 2,629 1,666
------ ------ ------
Total operating expenses . . . . . . . . . . 3,998 3,752 2,443
------ ------ ------
Results of operations . . . . . . . . . . . . . . . $2,785 $2,963 $1,020
====== ====== ======
</TABLE>
F-29
<PAGE>
MILLER EXPLORATION COMPANY AND AFFILIATED ENTITIES
SUPPLEMENTAL QUARTERLY FINANCIAL DATA - (CONTINUED)
<TABLE>
UNAUDITED QUARTERLY FINANCIAL INFORMATION
<CAPTION>
QUARTER ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C>
1997
Total Operating Revenues . . . . . $2,308 $1,539 $1,572 $1,993
Operating Income (Loss). . . . . . 903 115 259 (49)
Net Income (Loss). . . . . . . . . 721 (93) (253) (347)
1996
Total Operating Revenues . . . . . $1,440 $1,622 $1,868 $2,180
Operating Income . . . . . . . . . 288 382 677 420
Net Income . . . . . . . . . . . . 81 125 352 70
</TABLE>
F-30
<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, 1997. 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 Form 10-K 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, 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
March 13, 1998
F-31
<PAGE>
MILLER EXPLORATION COMPANY ACQUIRED PROPERTIES
<TABLE>
HISTORICAL STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Natural gas. . . . . . . . . . . . . . . . . . . . . . . $15,086 $15,232 $3,810
Crude oil and condensate . . . . . . . . . . . . . . . . 2,822 4,037 2,274
------- ------- ------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . 17,908 19,269 6,084
DIRECT OPERATING EXPENSES:
Lease operating expenses and severance taxes . . . . . . 1,024 1,153 388
------- ------- ------
REVENUES IN EXCESS OF DIRECT OPERATING
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . $16,884 $18,116 $5,696
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
MILLER EXPLORATION COMPANY ACQUIRED PROPERTIES
NOTES TO HISTORICAL STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES
(1) BASIS OF PRESENTATION
The accompanying statements of revenues and direct operating expenses
of the oil and natural gas producing properties represent the interests in
certain producing properties historically owned by several unrelated
investors and by the Amerada Hess Corporation ("AHC") (collectively, the
"Acquired Properties"). The interests in the unrelated investors'
properties were exchanged for shares of common stock of Miller Exploration
Company (the "Company") concurrently with the Company's initial public
offering. The interests in the AHC properties were acquired by the Company
for approximately $50.5 million, subject to adjustment, as part of a
Purchase and Sale Agreement between the Company and AHC. All of these
Acquired Properties are part of the Company's Combination Transaction, as
defined elsewhere in this filing.
The accompanying statements of revenues and direct operating expenses
for each of the three years in the period ended December 31, 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.
(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, 1997
and 1996 are based on reports prepared by Miller and Lents, Ltd.,
independent petroleum engineers for the Company, using prices and costs in
effect at each year-end. Estimates as of December 31, 1995 and 1994 have
been presented by the Company's petroleum engineers. All of the Acquired
Properties' reserves are located in the United States.
F-33
<PAGE>
MILLER EXPLORATION COMPANY ACQUIRED PROPERTIES
NOTES TO HISTORICAL STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES-(CONTINUED)
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. Listed 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> <C>
Proved reserve 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
Extensions and discoveries . . . . . . . . . . . . . . . . 21.5 1,326.6
Revisions and other changes. . . . . . . . . . . . . . . . (171.2) (1,369.1)
Production . . . . . . . . . . . . . . . . . . . . . . . . (159.4) (6,057.0)
------ --------
Proved reserves at December 31, 1997 . . . . . . . . . . . 401.2 32,938.3
====== ========
Proved developed reserves at December 31, 1995 . . . . . . 693.7 29,996.3
====== ========
Proved developed reserves at December 31, 1996 . . . . . . 413.6 22,268.7
====== ========
Proved developed reserves at December 31, 1997 . . . . . . 321.9 23,779.6
====== ========
</TABLE>
F-34
<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, 1997, 1996 and 1995 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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Future revenues <Fa>. . . . . . . . . . . . . . . . . . . . . . $ 80,277 $141,946 $132,785
Future production costs <Fb>. . . . . . . . . . . . . . . . . . (16,739) (23,164) (19,874)
Future development costs <Fb> . . . . . . . . . . . . . . . . . (6,073) (7,631) (7,588)
-------- -------- --------
Future net cash flows . . . . . . . . . . . . . . . . . . . . . 57,465 111,151 105,323
Discount to present value at 10% annual rate. . . . . . . . . . (14,198) (24,880) (24,976)
-------- -------- --------
Standardized measure of discounted future net cash flows <Fc> . $ 43,267 $ 86,271 $ 80,347
======== ======== ========
- ------------
F-35
<PAGE>
MILLER EXPLORATION COMPANY ACQUIRED PROPERTIES
NOTES TO HISTORICAL STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES-(CONTINUED)
<FN>
<Fa> 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.
<Fb> 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.
<Fc> Does not include income taxes as the Company was not subject to
federal income taxes until consummation of the Offering in
February 1998. Had the Company been subject to federal income taxes,
the pro forma Standardized Measure at December 31, 1997 would have
been $32,641.
</FN>
</TABLE>
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 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
New discoveries . . . . . . . . . . . . . . . . . . . . . . . $ 1,938 $ 3,656 $ 34,965
Revisions to reserves . . . . . . . . . . . . . . . . . . . . (8,762) 12,315 (17,945)
Sales, net of production costs. . . . . . . . . . . . . . . . (16,884) (18,116) (5,696)
Changes in prices . . . . . . . . . . . . . . . . . . . . . . (42,094) (6,626) 21,400
Accretion of discount . . . . . . . . . . . . . . . . . . . . 8,627 8,035 2,178
Changes in timing and other . . . . . . . . . . . . . . . . . 14,171 6,660 23,667
-------- -------- --------
Net change during the year. . . . . . . . . . . . . . . . . . $(43,004) $ 5,924 $ 58,569
======== ======== ========
</TABLE>
F-36
<PAGE>
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 and the
Offering and the application of the estimated net proceeds therefrom. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Overview." The pro forma unaudited statement of operations for
the year ended December 31, 1997 was prepared on the basis that the
Combination Transaction and the Offering occurred on January 1, 1997. The
pro forma unaudited balance sheet as of December 31, 1997 was prepared on
the basis that the Combination Transaction and the Offering occurred on
December 31, 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the combined financial
statements.
<TABLE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<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. . . . . . . . . . $ 5,819 $15,086 $ (131) <Fa> $20,774
Crude oil and condensate . . . 964 2,822 (75) <Fa> 3,711
Other operating expenses . . . 629 629
------- ------- ------- -------
7,412 17,908 (206) 25,114
Operating Expenses:
Lease operating expenses and
production taxes. . . . . . 1,478 1,024 (79) <Fa> 2,423
Depreciation, depletion and
amortization. . . . . . . . 2,520 5,292 <Fb> 7,812
General and administrative . . 2,186 420 <Fc> 2,606
------- ------- ------- -------
6,184 1,024 5,633 12,841
------- ------- ------- -------
Operating income . . . . . . . . . . . 1,228 16,884 (5,839) 12,273
------- ------- ------- -------
F-37
<PAGE>
Interest expense . . . . . . . . . . . (1,200) 75 <Fd> (1,125)
------- ------- ------- -------
Income before income taxes . . . . . . 28 16,884 (5,764) 11,148
Provision for income taxes . . . . . . -- -- (2,710) <Fe> 2,710
------- ------- ------- -------
Net income . . . . . . . . . . . . . . $ 28 $16,884 $(8,474) $ 8,438
======= ======= ======= =======
Basic and diluted earnings per
common share . . . . . . . . . . . . $ 0.68
=======
Weighed average common shares
outstanding. . . . . . . . . . . . . 12,493 <Ff> 12,493
======= =======
</TABLE>
F-38
<PAGE>
<TABLE>
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1997
<CAPTION>
COMBINED PRO FORMA PRO FORMA
ASSETS COMPANY ADJUSTMENTS COMBINED
-------- ----------- ---------
(In thousands)
<S> <C> <C> <C>
Current Assets:
Cash. . . . . . . . . . . . . . . . . . . $ 146 $ 41,385 <Fg> $ 3,353
15,000 <Fh>
(8,178) <Fi>
(45,000) <Fj>
Accounts receivable . . . . . . . . . . . 2,109 2,109
Inventories and prepaid expenses. . . . . 87 87
Advances to operators . . . . . . . . . . 907 907
Other current assets. . . . . . . . . . . 2,936 (436) <Fg> --
(2,500) <Fj>
-------- -------- --------
6,185 271 6,456
-------- -------- --------
Oil and gas properties, net . . . . . . . . . . . 23,968 50,500 <Fj> 86,731
12,770 <Fk>
(507) <Fl>
Property and equipment, net . . . . . . . . . . . 275 275
-------- -------- --------
Total assets. . . . . . . . . . . . . . . $ 30,428 $ 63,034 $ 93,462
======== ======== ========
LIABILITIES AND EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . $ 7,454 $ (7,454) <Fi> $ --
Current portion of long-term debt . . . . 243 (243) <Fi> --
Accounts payable. . . . . . . . . . . . . 4,159 564 <Fg> 4,723
Accrued interest. . . . . . . . . . . . . 50 50
Other accrued expenses. . . . . . . . . . 264 264
-------- -------- --------
. . . . . . . . . . . . . . . . 12,170 (7,133) 5,037
-------- -------- --------
Long-term debt . . . . . . . . . . . . . . . . . 481 (481) <Fi> --
New credit facility . . . . . . . . . . . . . . . -- 15,000 <Fh> 15,000
Deferred revenue. . . . . . . . . . . . . . . . . 1,664 1,664
Other non-current liabilities . . . . . . . . . . -- 3,000 <Fj> 3,000
Deferred income taxes . . . . . . . . . . . . . . -- 2,030 <Fk> 7,465
5,435 <Fm>
F-39
<PAGE>
Equity:
Preferred stock . . . . . . . . . . . . . -- --
Common stock. . . . . . . . . . . . . . . -- 55 <Fg> 124
69 <Fk>
Additional paid-in capital. . . . . . . . -- 40,330 <Fg> 61,172
10,671 <Fk>
(507) <Fl>
(5,435) <Fm>
16,113 <FN>
Combined equity . . . . . . . . . . . . . 8,588 (8,588) <FN> --
Retained earnings . . . . . . . . . . . . 7,525 (7,525) <FN> --
-------- -------- --------
Total equity. . . . . . . . . . . . . . . 16,113 45,183 61,296
-------- -------- --------
Total liabilities and equity. . . $ 30,428 $ 63,034 $ 93,462
======== ======== ========
- ----------
<FN>
Notes to unaudited pro forma combined financial data:
<Fa> To reflect the elimination of operating results from certain non-
strategic oil and natural gas assets that were sold by the Company
prior to the Combination Transaction.
<Fb> 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.
<Fc> To reflect estimated incremental general and administrative expenses
expected to be incurred as a direct result of increased operations
after the Combination Transaction. Such expenses are primarily from
increased salaries and additional new employees to perform
administrative and operational activities ($0.5 million per year) and
the elimination of the Royalty Participation Program ($0.1 million per
year). Excluded from this amount is $275,000 of non-recurring bonuses
paid to certain employees of the Company in connection with the
consummation of the Offering.
<Fd> 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, the
cancellation of other indebtedness with the use of proceeds from the
Offering (see (i) below) and the increase in interest expense from the
new borrowing under the New Credit Facility (see (h) below).
<Fe> 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 was 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,
F-40
<PAGE>
"Accounting for Income Taxes." If the Combination Transaction had been
consummated for the periods presented, such charge would have been
approximately $5.4 million. The ultimate amount of the recorded charge
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."
<Ff> To reflect the issuance of Common Stock in exchange for certain of the
Combined Assets in the Combination Transaction and the issuance of
Common Stock in the Offering.
<Fg> To reflect the estimated net proceeds of the Offering.
<Fh> To reflect borrowings under the New Credit Facility to fund the
purchase price for the cash portion of the Combination Transaction.
<Fi> To reflect the use of proceeds to repay certain outstanding
indebtedness.
<Fj> To reflect the purchase price for the cash portion of the Combination
Transaction and the associated cash payment due at the time of the
Combination Transaction and other non-current liabilities necessary to
finance this portion of the Combination Transaction.
<Fk> To reflect the fair value of the Combined Assets contributed by the
unaffiliated entities in the Combination Transaction, 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 Combined Assets contributed and the exchange of
Common Stock for certain of these assets.
<Fl> 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.
<Fm> 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.
<FN> 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.
F-41
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
2.1 Exchange and Combination Agreement dated November 12, 1997.
Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (333-40383), and here incorporated by
reference.
2.2(a) Letter Agreement amending Exchange and Combination Agreement.
Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (333-40383), and here incorporated by
reference.
2.2(b) Letter Agreement amending Exchange and Combination Agreement.
Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (333-40383), and here incorporated by
reference.
2.2(c) Letter Agreement amending Exchange and Combination Agreement.
Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (333-40383), and here incorporated by
reference.
2.3(a) Agreement for Purchase and Sale dated November 25, 1997
between Amerada Hess Corporation and Miller Oil Corporation.
Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (333-40383), and here incorporated by
reference.
2.3(b) First Amendment to Agreement for Purchase and Sale dated
January 7, 1998. Previously filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-40383), and
here incorporated by reference.
3.1 Certificate of Incorporation of the Registrant. Previously
filed as an exhibit to the Company's Registration Statement on
Form S-1 (333-40383), and here incorporated by reference.
3.2 Bylaws of the Registrant. Previously filed as an exhibit to
the Company's Registration Statement on Form S-1 (333-40383),
and here incorporated by reference.
4.1 Certificate of Incorporation. See Exhibit 3.1.
4.2 Bylaws. See Exhibit 3.2.
<PAGE>
4.3 Form of Specimen Stock Certificate. Previously filed as an
exhibit to the Company's Registration Statement on Form S-1
(333-40383), and here incorporated by reference.
10.1(a) Stock Option and Restricted Stock Plan of 1997.<F+><F*>
10.1(b) Form of Stock Option Agreement.<F+><F*>
10.1(c) Form of Restricted Stock Agreement.<F+><F*>
10.2 Form of Director and Officer Indemnity Agreement. Previously
filed as an exhibit to the Company's Registration Statement on
Form S-1 (333-40383), and here incorporated by reference.<F+>
10.3 Form of Employment Agreement for Kelly E. Miller, William J.
Baumgartner, Lew P. Murray and Charles A. Morrison.
Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (333-40383), and here incorporated by
reference.<F+>
10.4 Lease Agreement between Miller Oil Corporation and C.E. and
Betty Miller, dated July 24, 1996. Previously filed as an
exhibit to the Company's Registration Statement on Form S-1
(333-40383), and here incorporated by reference.
10.5 Letter Agreement dated November 10, 1997, between Miller Oil
Corporation and C.E. Miller, regarding sale of certain assets.
Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (333-40383), and here incorporated by
reference.
10.6 Amended Service Agreement dated January 1, 1997, between
Miller Oil Corporation and Eagle Investments, Inc. Previously
filed as an exhibit to the Company's Registration Statement on
Form S-1 (333-40383), and here incorporated by reference.
10.7 Form of Registration Rights Agreement (included as Exhibit E
to Exhibit 2.1). Previously filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-40383), and
here incorporated by reference.
10.8 Consulting Agreement dated June 1, 1996 between Miller Oil
Corporation and Frank M. Burke, Jr., with amendment.
Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (333-40383), and here incorporated by
reference.
-2-
<PAGE>
10.9 $2,500,000 Promissory Note dated November 26, 1997 between
Miller Oil Corporation and the C.E. Miller Trust. Previously
filed as an exhibit to the Company's Registration Statement on
Form S-1 (333-40383), and here incorporated by reference.
10.10 Form of Indemnification and Contribution Agreement among the
Registrant and the Selling Stockholders. Previously filed as
an exhibit to the Company's Registration Statement on Form S-1
(333-40383), and here incorporated by reference.
10.11 Credit Agreement between Miller Oil Corporation and Bank of
Montreal dated February 9, 1998.<F*>
10.12 Guaranty Agreement by Miller Exploration Company in favor of
Bank of Montreal dated February 9, 1998.<F*>
10.13 $75,000,000 Promissory Note of Miller Oil Corporation to Bank
of Montreal dated February 9, 1998.<F*>
10.14 Mortgage (Michigan) between Miller Oil Corporation and James
Whitmore, as trustee for the benefit of Bank of Montreal,
dated February 9, 1998.<F*>
10.15 Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement (Mississippi) between Miller
Oil Corporation and James Whitmore, as trustee for the benefit
of Bank of Montreal, dated February 9, 1998.<F*>
10.16 Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement (Texas) between Miller Oil
Corporation and James Whitmore, as trustee for the benefit of
Bank of Montreal, dated February 9, 1998.<F*>
11.1 Computation of Earnings per Share.<F*>
21.1 Subsidiaries of the Registrant. Previously filed as an
exhibit to the Company's Registration Statement on Form S-1
(333-40383), and here incorporated by reference.
23.1 Consent of S.A. Holditch & Associates.<F*>
23.2 Consent of Miller and Lents, Ltd.<F*>
24.1 Limited Power of Attorney.<F*>
27.1 Financial Data Schedule.<F*>
____________________
<F*> Filed herewith.
<F+> Management contract or compensatory plan or arrangement.
-3-
</TABLE>
<PAGE>
EXHIBIT 10.1(a)
MILLER EXPLORATION COMPANY
STOCK OPTION AND RESTRICTED STOCK PLAN OF 1997
SECTION 1
ESTABLISHMENT OF PLAN; PURPOSE OF PLAN
1.1 ESTABLISHMENT OF PLAN. The Company hereby establishes the Stock
Option and Restricted Stock Plan of 1997 (the "Plan") for its directors,
corporate and Subsidiary officers and other employees. The Plan permits
the grant or award of Options, Restricted Stock, and Tax Benefit Rights.
1.2 PURPOSE OF PLAN. The purpose of the Plan is to provide
directors, officers and employees of the Company and its Subsidiaries with
an increased incentive to make significant contributions to the long-term
performance and growth of the Company and its Subsidiaries, to join the
interests of directors, officers and employees with the interests of the
Company's stockholders through the opportunity for increased stock
ownership, and to attract and retain officers and employees. The Plan is
further intended to provide flexibility to the Company in structuring long-
term incentive compensation to best promote the foregoing objectives.
SECTION 2
DEFINITIONS
The following words have the following meanings unless a different
meaning is plainly required by the context:
2.1 "Act" means the Securities Exchange Act of 1934, as amended.
2.2 "Board" means the Board of Directors of the Company.
2.3 Unless otherwise defined in the grant or agreement applicable to
an Incentive Award, "Change in Control" means:
(a) the sale, lease, exchange, or other transfer of
substantially all the assets of the Company (in one transaction
or in a series of related transactions) to, or the merger or
consolidation of the Company with, a corporation that is not
controlled by the Company; or
(b) a change in control of the Company of a nature that
would be required to be reported in a response to Item 6(e) of
Schedule 14A of Regulation 14A issued under the Act, provided
that, without limitation, such change in control shall be deemed
<PAGE>
to have occurred if (i) any "person" (as such term is used in
Section 13(d) and 14(d)(2) of the Act) is or becomes the
beneficial owner, directly or indirectly, of securities of the
Company representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding
securities, or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the
Board cease for any reason to constitute at least a majority of
the Board (unless the election or nomination for election by the
Company's stockholders of each new director was approved by a
vote of at least two-thirds (2/3) of the directors then still in
office who were directors at the beginning of the period).
2.4 "Code" means the Internal Revenue Code of 1986, as amended.
2.5 "Committee" means a committee the Board shall designate to
administer the Plan. The Committee shall consist of at least two members
of the Board appointed by the Board, all of whom shall be "Non-Employee
Directors" (as defined below). The Board, in its discretion, may also
require that members of the Committee be "outside directors" as defined in
the rules issued under Section 162(m) of the Code.
2.6 "Common Stock" means the Common Stock of the Company.
2.7 "Company" means Miller Exploration Company, a Delaware
corporation, and its predecessors.
2.8 "Competition" means participation, directly or indirectly, in the
ownership, management, financing or control of any business that is the
same as or similar to the present or future businesses of the Company or
any Subsidiary. Such participation may be by way of employment, consulting
services, directorship, or officership. Ownership of less than three
percent (3%) of the shares of any corporation whose shares are traded
publicly on any national or regional stock exchange or over the counter
shall not be deemed Competition.
2.9 "Consensual Severance" means the voluntary termination of all
employment by the Participant with the Company or any of its Subsidiaries
that the Committee determines to be in the best interests of the Company.
2.10 "Early Retirement" means the voluntary termination of all
employment by a Participant with the written consent of the Committee after
the Participant has attained 55 years of age and completed 10 years of
service with the Company or any of its Subsidiaries.
2.11 "Incentive Award" means the award or grant of an Option,
Restricted Stock, or Tax Benefit Right to a Participant under the Plan.
-2-
<PAGE>
2.12 "Market Value" of any security on any given date means if the
security is listed for trading on The Nasdaq Stock Market or one or more
national securities exchanges, the last reported sales price on the date in
question, or if such security shall not have been traded on such principal
exchange on such date, the last reported sales price on the first day prior
thereto on which such security was so traded; or if that is not applicable,
the value as determined by any means deemed fair and reasonable by the
Committee, which determination shall be final and binding on all parties.
2.13 "Non-Employee Director" shall have the meaning set forth in Rule
16b-3 under the Act as in effect from time to time.
2.14 "Normal Retirement" means the voluntary termination of all
employment by a Participant after the Participant has attained 62 years of
age, or such other age as shall be determined by the Committee in its sole
discretion or as otherwise may be set forth in the Incentive Award
agreement or other grant document with respect to a Participant and a
particular Incentive Award.
2.15 "Option" means the right to purchase Common Stock at a stated
price for a specified period of time.
2.16 "Participant" means the directors, officers and other employees
of the Company and its Subsidiaries who are granted an Incentive Award
under the Plan.
2.17 "Restricted Period" means the period of time during which
Restricted Stock awarded under the Plan is subject to restrictions. The
Restricted Period may differ among Participants and may have different
expiration dates with respect to shares of Common Stock covered by the same
Incentive Award.
2.18 "Restricted Stock" means Common Stock awarded to a Participant
under Section 6 of the Plan.
2.19 "Subsidiary" means any corporation or other entity of which fifty
percent (50%) or more of the outstanding voting stock or voting ownership
interest is directly or indirectly owned or controlled by the Company, or
by one or more Subsidiaries of the Company.
2.20 "Tax Benefit Right" means any right granted to a Participant
under Section 7 of the Plan.
2.21 "Total Disability" means that the Participant, for physical or
mental reasons, is unable to perform the essential functions of his or her
duties for the Company for 120 consecutive days, or 180 days during any
twelve month period.
-3-
<PAGE>
SECTION 3
ADMINISTRATION
3.1 POWER AND AUTHORITY. The Committee shall administer the Plan.
Except as limited in this Plan, the Committee shall have full power and
authority to interpret the provisions of the Plan and Incentive Awards
granted under the Plan, to supervise the administration of the Plan and
the Incentive Awards granted under the Plan and to make all other
determinations considered necessary or advisable under the Plan. All
determinations, interpretations and selections made by the Committee
regarding the Plan shall be final and conclusive. The Committee shall hold
its meetings at such times and places as it deems advisable. Action may be
taken by a written instrument signed by all of the members of the
Committee, and any action so taken shall be fully as effective as if it had
been taken at a meeting duly called and held. The Committee may delegate
recordkeeping, calculation, payment, and other ministerial administrative
functions to individuals designated by the Committee, who may be employees
of the Company or its Subsidiaries.
3.2 GRANTS OR AWARDS TO PARTICIPANTS. In accordance with and subject
to the provisions of the Plan, the Committee shall have the authority to
determine all provisions of Incentive Awards as the Committee may deem
necessary or desirable and as are consistent with the terms of the Plan,
including, without limitation, the authority to: (a) determine whether and
when Incentive Awards will be granted, the persons to be granted Incentive
Awards, the amount of Incentive Awards to be granted to each person and the
terms of the Incentive Awards to be granted; (b) determine and amend
vesting schedules, if any; (c) permit delivery or withholding of stock in
payment of the exercise price or to satisfy tax withholding obligations;
and (d) waive any restrictions or conditions applicable to any Incentive
Award. Incentive Awards shall be granted or awarded by the Committee, and
Incentive Awards may be amended by the Committee consistent with the Plan,
provided that no such amendment may become effective without the consent of
the Participant, except to the extent that the amendment operates solely to
the benefit of the Participant.
3.3 INDEMNIFICATION OF COMMITTEE MEMBERS. Neither any member or
former member of the Committee nor any individual to whom authority is or
has been delegated shall be personally responsible or liable for any act or
omission in connection with the performance of powers or duties or the
exercise of discretion or judgment in the administration and implementation
of the Plan. Each person who is or shall have been a member of the
Committee shall be indemnified and held harmless by the Company from and
against any cost, liability or expense imposed or incurred in connection
with such person's or the Committee's taking or failing to take any action
under the Plan. Each such person shall be justified in relying on
information furnished in connection with the Plan's administration by any
appropriate person or persons.
-4-
<PAGE>
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section
4.3 of the Plan, a maximum of 1,200,000 shares of Common Stock shall be
available for Incentive Awards under the Plan. Such shares may be
authorized but unissued shares.
4.2 LIMITATION UPON INCENTIVE AWARDS. No Participant shall be
granted, during any calendar year, Incentive Awards with respect to more
than 10% of the total number of shares of Common Stock available for
Incentive Awards under the Plan set forth in Section 4.1 of the Plan,
subject to adjustment as provided in Section 4.3 of the Plan.
4.3 ADJUSTMENTS. If the number of shares of Common Stock outstanding
changes by reason of a stock dividend, stock split, recapitalization,
merger, consolidation, combination, exchange of shares or any other change
in the corporate structure or shares of the Company, the aggregate number
and class of shares available for grants or awards under the Plan, together
with the Option prices, award limits and other appropriate terms of this
Plan, shall be appropriately adjusted. No fractional shares shall be
issued pursuant to the Plan, and any fractional shares resulting from
adjustments shall be eliminated from the respective Incentive Award, with
an appropriate cash adjustment for the value of any Incentive Awards
eliminated. If an Incentive Award is canceled, surrendered, modified,
expires or is terminated during the term of the Plan but prior to the
exercise or vesting of the Incentive Award in full, the shares subject to
but not purchased or retained by the Participant under such Incentive Award
shall be available for other Incentive Awards. If shares subject to and
otherwise deliverable upon the exercise of an Incentive Award are
surrendered to the Company in connection with the exercise or vesting of an
Incentive Award, the surrendered shares subject to the Incentive Award
shall be available for other Incentive Awards.
SECTION 5
OPTIONS
5.1 GRANT.
(a) OFFICERS AND EMPLOYEES. Except as set forth below for Non-
Employee Directors, a Participant may be granted one or more Options
under the Plan. Options shall be subject to such terms and
conditions, consistent with the other provisions of the Plan, as shall
be determined by the Committee in its sole discretion. The Committee
may vary, among Participants and among Options granted to the same
-5-
<PAGE>
Participant, any and all of the terms and conditions of the Options
granted under the Plan. Subject to the limitation imposed by
Section 4.2 of the Plan, the Committee shall have complete discretion
in determining the number of Options granted to each Participant. The
Committee may designate whether or not an Option is to be considered
an incentive stock option as defined in Section 422(b) of the Code.
(b) NON-EMPLOYEE DIRECTORS. Subject to the limitation imposed
by Section 4.2 and the adjustments imposed by Section 4.3, an Option
to purchase 3,000 shares of Common Stock shall be granted
automatically on the date of the Company's 1998 Annual Meeting of
Stockholders and the date of each annual meeting thereafter to each
director of the Company who is, at the close of each such annual
meeting, a Non-Employee Director. In addition, each Non-Employee
Director shall at the time of his or her initial election or
appointment be granted a Stock Option to purchase 10,000 shares of
Common Stock. The Options shall be granted at an option price equal
to the fair market value of the Common Stock at the date of grant of
the option and shall be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined
by the Committee in its sole discretion. Options granted to Non-
Employee Directors shall not be treated as incentive stock options
under Section 422(b) of the Code.
5.2 OPTION AGREEMENTS. Each Option shall be evidenced by an Option
agreement containing such terms and conditions, consistent with the
provisions of the Plan, as the Committee from time to time determines. To
the extent not covered by the Option agreement, the terms and conditions of
this Section 5 shall govern.
5.3 OPTION PRICE. The per share Option price shall be determined by
the Committee. The per Share Option Price of any Option intended to qualify
as an incentive stock option under Section 422(b) of the Code shall be
equal to or greater than 100% of the Market Value on the date of grant.
The date of grant of an Option shall be the date the Option is authorized
by the Committee or a future date specified by the Committee as the date
for issuing the Option.
5.4 MEDIUM AND TIME OF PAYMENT. The exercise price for each share
purchased pursuant to an Option granted under the Plan shall be payable in
cash or, if the Committee consents, in shares of Common Stock (including
Common Stock to be received upon a simultaneous exercise). The time and
terms of payment may be amended before or after exercise of an Option (a)
by the Committee in its sole discretion, if the terms of such amendment are
more favorable to the Participant, or (b) in all other cases, by the
Committee with the consent of the Participant. The Committee may from time
to time authorize payment of all or a portion of the Option price in the
form of a promissory note or installments according to such terms as the
-6-
<PAGE>
Committee may approve. The Board may restrict or suspend the power of the
Committee to permit such loans and may require that adequate security be
provided.
5.5 OPTIONS GRANTED TO TEN PERCENT STOCKHOLDERS. No Option granted
to any Participant who at the time of such grant owns, together with stock
attributed to such Participant under Section 424(d) of the Code, more than
ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any of its Subsidiaries may be designated as an
incentive stock option, unless such Option provides an exercise price equal
to at least one hundred ten percent (110%) of the Market Value of the
Common Stock, and the exercise of the Option after the expiration of five
years from the date of grant of the Option is prohibited by its terms.
5.6 LIMITS ON EXERCISABILITY. Options shall be exercisable for such
periods as may be fixed by the Committee. Options intended to qualify as
incentive stock options shall have terms not to exceed ten years from the
grant date. The Committee may in its discretion require a Participant to
continue service with the Company and its Subsidiaries for a certain length
of time prior to an Option becoming exercisable and may eliminate such
delayed vesting provisions. The Committee may also vary, among
Participants and among Options granted to the same Participant, any and
all of the terms and conditions of Options granted under the Plan.
5.7 TRANSFERABILITY.
(a) GENERAL. Unless the Committee otherwise consents or
unless the terms of the Option agreement provide otherwise, no
Option granted under the Plan may be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated, other than by
will or by the laws of descent and distribution.
(b) OTHER RESTRICTIONS. The Committee may impose such
restrictions on any shares of Common Stock acquired pursuant to
the exercise of an Option under the Plan as it deems advisable,
including, without limitation, restrictions intended to assure
compliance with applicable federal or state securities laws.
5.8 TERMINATION OF EMPLOYMENT OR DIRECTORSHIP.
(a) GENERAL. If a Participant ceases to be employed by or a
director of the Company or one of its Subsidiaries for any reason
other than the Participant's death, Total Disability, termination
for cause, or any additional provision as determined by the
Committee, the Participant may exercise an Option for a period of
90 days after such termination of employment or directorship, but
only to the extent the Participant was entitled to exercise the
Option on the date of termination and would be entitled to
-7-
<PAGE>
exercise the Option if employed at the date of exercise, unless
the Committee otherwise consents or the terms of the Option
agreement provide otherwise. For purposes of the Plan, the
following shall not be deemed a termination of employment: (i) a
transfer of employment among the Company and its Subsidiaries;
(ii) a leave of absence, duly authorized in writing by the
Company, for military service or for any other purpose approved
by the Company if the period of such leave does not exceed 90
days; (iii) a leave of absence in excess of 90 days, duly
authorized in writing by the Company, provided the employee's
right to reemployment is guaranteed either by statute or
contract; or (iv) a termination of employment with continued
service as an officer or director. For purposes of the Plan,
termination of employment shall be considered to occur on the
date on which the employee is no longer obligated to perform
services for the Company or any of its Subsidiaries and the
employee's right to reemployment is not guaranteed either by
statute or contract, regardless of whether the employee continues
to receive compensation from the Company or any of its
Subsidiaries after such date.
(b) DEATH. If a Participant dies either while an employee
or director of the Company or one of its Subsidiaries, or dies
after termination of employment or directorship other than for
cause and other than as a result of voluntary termination but
during the time when the Participant could have exercised an
Option under the Plan, the Option issued to such Participant
shall be exercisable by the personal representative of such
Participant or other successor to the interest of the Participant
for a period of one year after the Participant's death, but only
to the extent that the Participant was entitled to exercise the
Option on the date of death or termination of employment or
directorship, whichever first occurred, and would be entitled to
exercise the Option if employed at the date of exercise, unless
the Committee otherwise consents or the terms of the Option
agreement provide otherwise.
(c) TOTAL DISABILITY. If a Participant ceases to be an
employee or a director of the Company or one of its Subsidiaries
due to the Participant's Total Disability, the Participant may
exercise an Option for a period of one year following such
termination of employment, but only to the extent the Participant
was entitled to exercise the Option on the date of such event,
unless the Committee otherwise consents or the terms of the
Option agreement provide otherwise.
(d) ADDITIONAL PROVISIONS IN OPTION AGREEMENTS. The
Committee may, in its sole discretion, provide by resolution or
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<PAGE>
by including provisions in any Option agreement entered into with
a Participant that the Participant may exercise any outstanding
options upon termination due to Early Retirement, Normal
Retirement or Consensual Severance for a period of time after
such termination as may be determined by the Committee, PROVIDED
that (i) such period may not extend beyond the earlier of three
(3) years after the date of termination or the date on which the
Options expire by their terms, (ii) the Participant may exercise
the Option only to the extent the Participant was entitled to
exercise the Option on the date of termination, and (iii) the
Participant shall have no further right to exercise any Options
after termination due to Early Retirement, Normal Retirement or
Consensual Severance if the Committee determines the Participant
has entered into Competition with the Company.
(e) VOLUNTARY TERMINATION. Except as provided in Section
5.8(d), if a Participant voluntarily terminates employment with
the Company or one of its Subsidiaries, the Participant shall
have no further right to exercise any Option previously granted
him, unless the terms of the Option Agreement provide otherwise.
(f) TERMINATION FOR CAUSE. If a Participant is terminated
for cause, the Participant shall have no further right to
exercise any outstanding unexercised Option issued under the
Plan.
(g) SUSPENSION OF EXERCISABILITY. If the Participant
receives notice from the Company that the Participant may be
terminated for cause, the Participant shall have no right to
exercise any Options previously granted for a period of sixty
days from the receipt of such notice. If the Participant is
terminated for cause within such sixty-day period, the
Participant shall have no further right to exercise any Option
previously granted. If the Participant is not terminated for
cause within the sixty-day period, the provisions of the Option
agreement and the Plan shall continue to apply to the
exercisability of the Participant's Options.
SECTION 6
RESTRICTED STOCK
6.1 GRANT. A Participant may be granted Restricted Stock under the
Plan. Restricted Stock shall be subject to such terms and conditions,
consistent with the other provisions of the Plan, as shall be determined by
the Committee in its sole discretion. Restricted Stock shall be awarded on
the condition that the Participant remain in the employ of the Company or
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<PAGE>
one of its Subsidiaries during the Restricted Period. Such condition shall
have no effect on the right of the Company or any Subsidiary to terminate
the Participant's employment at any time. No payment is required from a
Participant for an award of Restricted Stock.
6.2 RESTRICTED STOCK AGREEMENTS. Each award of Restricted Stock
shall be evidenced by a Restricted Stock agreement containing such terms
and conditions, consistent with the provisions of the Plan, as the
Committee from time to time determines.
6.3 TERMINATION OF EMPLOYMENT OR DIRECTORSHIP.
(a) GENERAL. If a Participant ceases to be employed by or
a director of the Company or one of its Subsidiaries for any
reason other than the Participant's death, Total Disability, or
any other additional provisions as determined by the Committee
pursuant to Section 6.3(c), then any shares of Restricted Stock
still subject to restrictions on the date of such termination
shall automatically be forfeited and returned to the Company.
For purposes of the Plan, the following shall not be deemed a
termination of employment: (i) a transfer of employment among
the Company and its Subsidiaries; (ii) a leave of absence, duly
authorized in writing by the Company, for military service or for
any other purpose approved by the Company if the period of such
leave does not exceed 90 days; (iii) a leave of absence in excess
of 90 days, duly authorized in writing by the Company, provided
the employee's right to reemployment is guaranteed either by
statute or contract; or (iv) a termination of employment with
continued service as an officer or director. For purposes of the
Plan, termination of employment shall be considered to occur on
the date on which the employee is no longer obligated to perform
services for the Company or any of its Subsidiaries and the
employee's right to reemployment is not guaranteed either by
statute or contract, regardless of whether the employee continues
to receive compensation from the Company or any of its
Subsidiaries after such date.
(b) DEATH OR TOTAL DISABILITY. Unless the terms of the
Restricted Stock agreement or grant provide otherwise, in the
event a Participant terminates employment or directorship with
the Company or one of its Subsidiaries because of death or Total
Disability during the Restricted Period, the restrictions
applicable to the shares of Restricted Stock shall automatically
terminate and the Restricted Stock shall vest as of the date of
termination.
(c) ADDITIONAL PROVISIONS AS DETERMINED BY COMMITTEE. The
Committee may, in its sole discretion, provide provisions in any
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<PAGE>
Restricted Stock agreement permitting, or by resolution approve,
vesting of all or part of any Restricted Stock awarded to a
Participant upon termination due to Early Retirement, Normal
Retirement, Consensual Severance or a Change in Control.
6.4 RESTRICTIONS ON TRANSFERABILITY.
(a) GENERAL. Unless the Committee otherwise consents or
unless the terms of the Restricted Stock agreement provide
otherwise, shares of Restricted Stock shall not be sold,
exchanged, transferred, pledged or otherwise disposed of by a
Participant during the Restricted Period other than to the
Company pursuant to subsection 6.3 or 6.4(b) or by will or the
laws of descent and distribution.
(b) SURRENDER TO THE COMPANY. If any sale, exchange,
transfer, pledge or other disposition, voluntary or involuntary,
of Restricted Stock that has not vested shall be made or
attempted during the Restricted Period, except as provided above
in subsections 6.3 and 6.4(a), the Participant's right to the
Restricted Stock shall immediately cease and terminate, and the
Participant shall promptly forfeit and surrender to the Company
all such Restricted Stock.
(c) OTHER RESTRICTIONS. The Committee may impose other
restrictions on any Restricted Stock as the Committee deems
advisable.
6.5 RIGHTS AS A STOCKHOLDER. During the Restricted Period, a
Participant shall have all rights of a stockholder with respect to his
Restricted Stock, including (a) the right to vote any shares at
stockholders' meetings; (b) the right to receive, without restriction, all
cash dividends paid with respect to such Restricted Stock; and (c) the
right to participate with respect to such Restricted Stock in any stock
dividend, stock split, recapitalization or other adjustment in the Common
Stock of the Company or any merger, consolidation or other reorganization
involving an increase or decrease or adjustment in the Common Stock of the
Company. Any new, additional or different shares or other security
received by the Participant pursuant to any such stock dividend, stock
split, recapitalization or reorganization shall be subject to the same
terms, conditions and restrictions as those relating to the Restricted
Stock for which such shares were received.
6.6 DEPOSIT OF CERTIFICATES; LEGENDING OF RESTRICTED STOCK.
(a) DEPOSIT OF CERTIFICATES. Any certificates evidencing
shares of Restricted Stock awarded pursuant to the Plan shall be
registered in the name of the relevant Participant and deposited,
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together with a stock power endorsed in blank, with the Company.
In the discretion of the Committee, any such certificates may be
deposited in a bank designated by the Committee or delivered to
the Participant. Certificates for shares of Restricted Stock
that have vested shall be delivered to the Participant upon
request within a reasonable period of time. The Participant
shall sign all documents necessary or appropriate to facilitate
such delivery.
(b) LEGEND. Any certificates evidencing shares of
Restricted Stock awarded pursuant to the Plan shall bear the
following legend:
This certificate is held subject to the terms and
conditions contained in a restricted stock agreement
that includes a prohibition against the sale or
transfer of the stock represented by this certificate
except in compliance with that agreement, and that
provides for forfeiture upon certain events. A copy of
that agreement is on file in the office of the
Corporation.
6.7 RESALE. The Participant shall agree not to resell or
redistribute such Restricted Stock after the Restricted Period except upon
such conditions as the Company may reasonably specify to ensure compliance
with federal and state securities laws.
SECTION 7
TAX BENEFIT RIGHTS
7.1 GRANT. A Participant may be granted Tax Benefit Rights under the
Plan to encourage a Participant to exercise Options and provide certain tax
benefits to the Company. A Tax Benefit Right entitles a Participant to
receive from the Company or a Subsidiary a cash payment not to 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-qualified stock option, or 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 any other applicable state and local tax against which
the Company is entitled to a deduction or credit by reason of exercise of
the Option or the disqualifying disposition.
7.2 RESTRICTIONS. A Tax Benefit Right may be granted only with
respect to an Option issued and outstanding or to be issued under the Plan
or any other Plan of the Company or its Subsidiaries that has been approved
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by the stockholders as of the effective date of the Plan and may be granted
concurrently with or after the grant of the Option. Such rights with
respect to outstanding Options shall be issued only with the consent of the
Participant if the effect would be to disqualify an incentive stock option,
change the date of grant or the exercise price, or otherwise impair the
Participant's existing Options.
7.3 TERMS AND CONDITIONS. The Committee shall determine the terms
and conditions of any Tax Benefit Rights granted and the Participants to
whom such rights will be granted with respect to Options under the Plan or
any other plan of the Company and those terms and conditions shall be set
forth in written agreements. The Committee may amend, cancel, limit the
term of, or limit the amount payable under a Tax Benefit Right at any time
prior to the exercise of the related stock option, unless otherwise
provided under the terms of the Tax Benefit Right. The net amount of a Tax
Benefit Right, subject to withholding, may be used to pay a portion of the
Option price, unless otherwise provided by the Committee.
SECTION 8
CHANGE IN CONTROL
Without in any way limiting the Committee's discretion, the Committee
may include in any Incentive Award provisions for acceleration of any
vesting or other similar requirements or for the elimination of any
restrictions upon Incentive Awards upon a Change in Control of the Company.
The Committee may also include provisions for Participants to receive cash
in lieu of outstanding Options upon a Change in Control of the Company.
SECTION 9
GENERAL PROVISIONS
9.1 NO RIGHTS TO AWARDS. No Participant or other person shall have
any claim to be granted any Incentive Award, and there is no obligation of
uniformity of treatment of employees, Participants or holders or
beneficiaries of Incentive Awards. The terms and conditions of the
Incentive Awards of the same type and the determination of the Committee to
grant a waiver or modification of any Incentive Award and the terms and
conditions thereof need not be the same with respect to each Participant.
9.2 WITHHOLDING. The Company or a Subsidiary shall be entitled to
(a) withhold and deduct from future wages of a Participant (or from other
amounts that may be due and owing to a Participant from the Company or a
Subsidiary), or make other arrangements for the collection of, all amounts
deemed necessary to satisfy any and all federal, state and local
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withholding and employment-related tax requirements attributable to an
Incentive Award, including, without limitation, the grant, exercise or
vesting of, or payment of dividends with respect to, an Incentive Award or
a disqualifying disposition of Common Stock received upon exercise of an
incentive stock option; or (b) require a Participant promptly to remit the
amount of such withholding to the Company before taking any action with
respect to an Incentive Award. Unless the Committee determines otherwise,
withholding may be satisfied by withholding Common Stock to be received
upon exercise or by delivery to the Company of previously owned Common
Stock.
9.3 COMPLIANCE WITH LAWS; LISTING AND REGISTRATION OF SHARES. All
Incentive Awards granted under the Plan (and all issuances of Common Stock
or other securities under the Plan) shall be subject to applicable laws,
rules and regulations, and to the requirement that if at any time the
Committee determines, in its sole discretion, that the listing,
registration or qualification of the shares covered thereby upon any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body, is necessary or desirable as
a condition of, or in connection with, the granting of such Incentive Award
or the issue or purchase of shares thereunder, such Incentive Award may not
be exercised in whole or in part, or the restrictions on such Incentive
Award shall not lapse, unless and until such listing, registration,
qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Committee.
9.4 NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained
in the Plan shall prevent the Company or any Subsidiary from adopting or
continuing in effect other or additional compensation arrangements,
including the grant of options and other stock-based awards, and such
arrangements may be either generally applicable or applicable only in
specific cases.
9.5 NO RIGHT TO EMPLOYMENT. The grant of an Incentive Award shall
not be construed as giving a Participant the right to be retained in the
employ or directorship of the Company or any Subsidiary. The Company or
any Subsidiary may at any time dismiss a Participant from employment, free
from any liability or any claim under the Plan, unless otherwise expressly
provided in the Plan or in any written agreement with a Participant.
9.6 GOVERNING LAW. The validity, construction and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of Delaware and applicable federal
law.
9.7 SEVERABILITY. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining parts of the Plan, and the Plan shall be construed
and enforced as if the illegal or invalid provision had not been included.
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SECTION 10
EFFECTIVE DATE AND DURATION OF THE PLAN
This Plan shall take effect November 17, 1997, which is the day of
approval by the Company's stockholders. Unless earlier terminated by the
Board of Directors, no Incentive Award shall be granted under this Plan
after November 16, 2007.
SECTION 11
TERMINATION AND AMENDMENT
The Board may terminate the Plan at any time, or may from time to time
amend the Plan, provided that no such amendment may impair any outstanding
Incentive Award without the consent of the Participant, except according to
the terms of the Incentive Award. No termination, amendment or
modification of the Plan shall become effective with respect to any
Incentive Award previously granted under the Plan without the prior written
consent of the Participant holding such Incentive Award unless such
amendment or modification operates solely to the benefit of the
Participant.
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EXHIBIT 10.1(b)
FORM OF STOCK OPTION AGREEMENT
Grantee:__________________________ Grant Date:_______________________
Address:__________________________ Expiration Date:__________________
__________________________
Option Number:____________________
Number of Shares:_________________
Exercise Price Per Share: $_______
MILLER EXPLORATION COMPANY
STOCK OPTION AND RESTRICTED STOCK PLAN OF 1997
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "AGREEMENT") is made
as of the Grant Date set forth above between MILLER EXPLORATION
COMPANY, a Delaware corporation (the "COMPANY"), and the grantee
named above ("GRANTEE").
The Miller Exploration Company Stock Option and
Restricted Stock Plan of 1997 (the "PLAN") is administered by the
Stock Plan Committee of the Company's Board of Directors or such
other committee (the "COMMITTEE") as the Board of Directors shall
designate to administer the Plan, which shall consist of at least
two members of the Board, all of who are Non-Employee Directors,
as defined in Rule 16b-3 under the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"). The Committee has
determined that Grantee [, a[n] [officer] [and] [director] of the
Company,] is eligible to participate in the Plan. The Committee
has granted stock options to Grantee, subject to the terms and
conditions contained in this Agreement and in the Plan.
Grantee acknowledges receipt of a copy of the Plan and
accepts these options subject to all of the terms, conditions,
and provisions of this Agreement and the Plan.
1. GRANT. The Company grants to Grantee an option to
purchase shares of the Company's Common Stock, $.01 par value
("COMMON STOCK"), as set forth above, to be issued upon exercise
of this option in accordance with the terms and conditions set
forth in this Agreement. This option is [not] an incentive stock
option as defined in Section 422(b) of the Internal Revenue Code
of 1986, as amended.
<PAGE>
2. TERM AND DELAYED VESTING. Grantee's conditional right
to exercise this option shall vest at a rate of one-fifth per
year beginning on the first anniversary of the Grant Date set
forth above, in each case appropriately rounded to the closest
whole share except that the total shall be as set forth above.
The Committee may, in its sole discretion, accelerate the vesting
of the option at any time before full vesting. Grantee's right to
exercise this option shall terminate on the Expiration Date set
forth above, unless earlier terminated as set forth in the Plan
or this Agreement.
3. PAYMENT BY GRANTEE. The Exercise Price per share shall
be the amount set forth above, which shall not be less than the
Market Value on the date of the grant (as defined in the Plan),
subject to adjustment as provided in the Plan and this Agreement.
Grantee may pay the purchase price in cash or, if the Committee
consents, in shares of the Company's Common Stock (including
Common Stock to be received upon a simultaneous exercise). With
Grantee's consent, the Committee may amend the time and terms of
payment before or after the exercise of the option, but any such
amendment shall not reduce the option price. The Committee may
authorize payment of all or a portion of the option price in the
form of a promissory note or installments according to such terms
as the Committee may approve. The Board of Directors may
restrict or suspend the power of the Committee to permit such
loans and may require that adequate security be provided.
4. REGISTRATION AND LISTING. The stock options granted
under this Agreement are conditional upon the effective
registration or exemption of the Plan and the options granted
under the Plan and the stock to be received upon exercise of
options pursuant to the Plan under the Securities Act of 1933, as
amended (the "SECURITIES ACT") and applicable state or foreign
securities laws.
5. EXERCISE OF OPTION. Grantee may exercise this option
by giving the Company written notice of the exercise of this
option. The notice shall set forth the number of shares to be
purchased, and shall be effective when received by the corporate
Secretary at the Company's main office, accompanied by full
payment of the option price. The Company will deliver to Grantee
a certificate or certificates for such shares out of previously
authorized but unissued shares or reacquired shares of its Common
Stock, as it may elect; PROVIDED, HOWEVER, that the time of
delivery shall be postponed for such period as may be required
for the Company with reasonable diligence to comply with any
registration requirements under the Securities Act, the Exchange
Act, and any requirements under any other law, regulation, or
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<PAGE>
agreement applicable to the issuance, listing, or transfer of
such shares. If Grantee fails to accept delivery of and pay for
all or any part of the number of shares specified in the notice
upon tender or delivery of the shares, Grantee's right to
exercise the option with respect to such undelivered shares shall
terminate. In such event, Grantee's remaining options not yet
exercised or terminated shall continue in force.
6. TERMINATION OF EMPLOYEE STATUS.
(a) TERMINATION FOR GOOD REASON. If Grantee
ceases to be an employee of the Company or a subsidiary
for good reason (as defined in any agreement between
the Company and Grantee), all of Grantee's unvested
options immediately will vest. Grantee may exercise
the option for a period of 90 days after the date
Grantee ceases to be an employee, but only to the
extent that Grantee was entitled to exercise the option
on the date Grantee ceased to be an employee unless the
Committee otherwise consents. If Grantee terminates
employment with the Company for good reason (as defined
in any agreement between Grantee and the Company), all
of Grantee's unvested options will be deemed to have
vested on the day immediately preceding such
termination.
(b) DISABILITY OR DEATH. If Grantee dies or
becomes disabled, Grantee or his or her personal
representative may exercise the option for a period of
one year after the date Grantee ceases to be an
employee, but only to the extent that Grantee was
entitled to exercise the option on the date Grantee
ceased to be an employee unless the Committee otherwise
consents.
(c) TERMINATION FOR CAUSE. If the Committee
determines that Grantee has entered into competition
with the Company or any of its subsidiaries, Grantee's
right to exercise any outstanding options shall
terminate as of the date of entry into competition.
The Committee shall have sole discretion in making such
determination.
7. ADJUSTMENT PROVISIONS. If the number of shares of
Common Stock outstanding changes by reason of any stock dividend,
stock split, recapitalization, merger, consolidation,
combination, exchange of shares, or any other change in the
corporate structure or shares of the Company, the aggregate
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number and class of shares available under this Agreement and
subject to each option, together with the exercise price, shall
be adjusted appropriately by the Committee. No fractional shares
shall be issued pursuant to the Plan, and any fractional shares
resulting from adjustments shall be eliminated from the
respective option award, with an appropriate cash adjustment for
the value of any option eliminated. If an option is canceled,
surrendered, modified, expired, or terminated during the term of
the Plan but prior to the exercise or vesting of the option in
full, the shares subject to but not delivered under the option
shall be available for other option awards.
8. STOCKHOLDER RIGHTS. Grantee shall have no rights as a
stockholder with respect to any shares covered by this option
until exercise of the option and payment for such shares.
Grantee shall have no claim to be granted any stock option, and
there is no obligation of uniformity of treatment among Grantees
or holders or beneficiaries of options.
9. TRANSFERABILITY. Unless the Committee otherwise
consents, no option granted under the Plan and this Agreement may
be sold, transferred, pledged, assigned, or otherwise alienated
or hypothecated, other than by will or by the laws of descent and
distribution. All options granted to Grantee during Grantee's
lifetime shall be exercisable during Grantee's lifetime only by
such Grantee, his or her guardian, or legal representative. The
Committee may impose such other restrictions on any shares
acquired pursuant to this option as it may deem advisable,
including, without limitation, restrictions under applicable
federal and state securities laws.
10. CERTIFICATIONS. Grantee hereby represents and warrants
that Grantee is acquiring the option granted under this Agreement
for Grantee's own account and investment and without any intent
to resell or distribute the shares upon exercise of the option.
Grantee shall not resell or distribute the shares received upon
exercise of the option except in compliance with such conditions
as the Company reasonably may specify to ensure compliance with
federal and state securities laws.
11. EFFECTIVE DATE. This option shall be effective as of
the Grant Date set forth above.
12. BINDING EFFECT; AMENDMENT. This Agreement shall be
binding upon, and shall inure to the benefit of, the parties to
this Agreement and their respective heirs, successors, and
permitted assigns. This option shall not be modified except in a
writing executed by the parties to this Agreement.
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13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
14. PLAN CONTROLS. The Plan is incorporated by reference
into this Agreement. Capitalized terms not defined in this
Agreement shall have those meanings provided in the Plan. In the
event of any conflict between the terms of this Agreement and the
terms of the Plan, the provisions of the Plan shall control.
MILLER EXPLORATION COMPANY
By________________________________
Its_____________________________
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I have received a copy of the Stock Option Agreement
concerning the grant of_______________________________ shares on
________________, 19__ and agree to receive stock options
according to the terms of such agreement.
____________________________________
Signature
____________________________________
Print name
(Please detach this page after signing and return to Miller
Exploration Company)
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EXHIBIT 10.1(c)
FORM OF RESTRICTED STOCK AGREEMENT
Grantee:_______________________ Grant Date: _______________________
Address:_______________________
_______________________
Number of Shares:______________
MILLER EXPLORATION COMPANY
STOCK OPTION AND RESTRICTED STOCK PLAN OF 1997
RESTRICTED STOCK AGREEMENT
This Restricted Stock Agreement (the "AGREEMENT"), is made as of
the Grant Date set forth above between MILLER EXPLORATION COMPANY, a
Delaware corporation (the "COMPANY"), and the grantee named above
("GRANTEE").
The Miller Exploration Company Stock Option and Restricted Stock
Plan of 1997 (the "PLAN") is administered by the Stock Plan Committee of
the Company's Board of Directors or such other committee (the "COMMITTEE")
as the Board of Directors shall designate to administer the Plan, which
shall consist of at least two members of the Board, all of who are Non-Employee
Directors, as defined in Rule 16b-3 under the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"). The Committee has determined
that Grantee [, a[n] [officer] [and] [director] of the Company,] is
eligible to participate in the Plan. The Committee has granted restricted
stock to Grantee, subject to the terms and conditions contained in this
Agreement and in the Plan.
Grantee acknowledges receipt of a copy of the Plan and accepts
these shares of restricted stock subject to all of the terms, conditions,
and provisions of this Agreement and the Plan.
1. GRANT OF RESTRICTED STOCK. The Company grants to Grantee, and
Grantee accepts, the number of shares of common stock set forth above,
subject to the terms and conditions of this Agreement (the "RESTRICTED
STOCK").
2. EMPLOYMENT BY THE COMPANY. The Company awards the Restricted
Stock to Grantee on the condition that Grantee remains employed by the
Company or a subsidiary (as defined in the Plan) of the Company and
complies with the terms of this Agreement. If Grantee breaches the terms
of this Agreement or ceases to be employed by the Company or any of its
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subsidiaries for any reason, Grantee promptly will surrender to the Company
those shares of Restricted Stock in which Grantee's interest has not vested
pursuant to this Agreement as set forth below.
3. VESTING OF RESTRICTED STOCK. So long as Grantee is employed by
the Company or a subsidiary of the Company and has not breached the terms
of this Agreement, Grantee's conditional right to the specified shares of
the Restricted Stock (or all lesser remaining number of shares of
Restricted Stock) will vest at cumulative annual increments of one-half of
the total number of Restricted Stock subject to this Agreement, beginning
on the first anniversary of the Grant Date set forth above, in each case
appropriately rounded to the closest whole share except that the total
shall be as set forth above. The Committee may, in its sole discretion,
accelerate the vesting of the Restricted Stock at any time before full
vesting.
4. TRANSFERABILITY. Unless the Committee otherwise consents,
Grantee will not sell, exchange, transfer, pledge, or otherwise dispose of
the Restricted Stock at any time, whether voluntarily or involuntarily, by
operation of law or otherwise, except that the provisions of this paragraph
will not apply to Restricted Stock that has vested pursuant to this
Agreement and Restricted Stock that is sold, exchanged, transferred,
pledged, or otherwise disposed of to the Company or by will or the laws of
descent and distribution. If Grantee violates the restrictions in this
Paragraph, Grantee's right to unvested shares of Restricted Stock
immediately will cease and terminate and Grantee promptly will forfeit and
surrender all shares of Restricted Stock that are still subject to
restrictions to the Company.
5. RIGHTS AS A STOCKHOLDER. Grantee will have all rights as a
stockholder with respect to the Restricted Stock, including (a) the right
to vote the Restricted Stock at stockholders' meetings, (b) the right to
receive, without restriction, all cash dividends paid with respect to the
Restricted Stock, and (c) the right to participate with respect to the
Restricted Stock in any stock dividend, stock split, recapitalization, or
other adjustment in the capital stock of the Company, or any merger,
consolidation, or other reorganization involving an increase, decrease, or
adjustment in the capital stock of the Company. Any shares or other
security received as a result of any stock dividend, stock split, or
reorganization will be subject to the same terms, conditions, and
restrictions as those relating to the Restricted Stock granted under this
Agreement.
6. TERMINATION OF EMPLOYEE STATUS.
(a) TERMINATION FOR GOOD REASON. If Grantee ceases to be
an employee of the Company or a subsidiary for good reason (as
defined in any agreement between the Company and Grantee), the
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restrictions applicable to the shares of Restricted Stock
automatically shall terminate. If Grantee terminates employment
with the Company for good reason (as defined in any agreement
between Grantee and the Company), the Restricted Stock shall be
deemed to have vested on the day immediately preceding such
termination.
(b) DISABILITY OR DEATH. If Grantee dies or becomes
totally disabled (as defined in the Plan), the restrictions
applicable to the shares of Restricted Stock automatically shall
terminate and the Restricted Stock shall vest as of the date of
termination.
(c) TERMINATION FOR CAUSE. If the Committee determines
that Grantee has entered into competition with the Company or any
of its subsidiaries, any shares of Restricted Stock still subject
to restrictions as of the date of entry into competition
automatically shall be forfeited and returned to the Company.
The Committee shall have sole discretion in making such
determination.
7. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF GRANTEE. Grantee
represents, warrants, and covenants to the Company as follows:
a. INVESTMENT ONLY. Grantee is acquiring the Restricted
Stock for Grantee's own account for investment and Grantee has no
present intention of distributing or selling any portion of the
Restricted Stock. Grantee understands and acknowledges that the
Company will have no obligation to recognize the ownership,
beneficial or otherwise, of the Restricted Stock by anyone but
Grantee.
b. NO TRANSFER. Grantee will not sell or transfer any
Restricted Stock except upon conditions that the Company may
reasonably specify to insure compliance with the federal and
applicable state securities laws. The Company may refuse to
transfer any Restricted Stock unless the Company is reasonably
satisfied that Grantee has complied with the federal and
applicable state securities laws and Grantee's other promises in
this Agreement.
c. LEGEND. The Company may place a legend on the
certificates evidencing the Restricted Stock noting restrictions
on transferability.
8. EMPLOYMENT BY THE COMPANY. Nothing in this Agreement will
impose, or be deemed to impose, upon the Company any obligation to retain
Grantee in the employ of the Company for any given period or upon any
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specific terms of employment. Grantee acknowledges that, except as
otherwise agreed by the Company in a signed written agreement, Grantee's
employment is "at will" and terminable by Grantee or the Company at any
time and for any reason.
9. TAX WITHHOLDING. Grantee authorizes the Company or a subsidiary
of the Company to (a) withhold and deduct from future wages of Grantee (or
from other amounts that may be due and owing to Grantee from the Company or
a subsidiary of the Company), or make other arrangements for the collection
of, all amounts deemed necessary to satisfy any and all federal, state, and
local withholding and employment-related tax requirements attributable to
an award of Restricted Stock, or (b) require Grantee promptly to remit the
amount of such withholding to the Company before taking any action with
respect to the Restricted Stock. Upon Grantee's request, the Company will
withhold taxes, if any, arising from the vesting of any Restricted Stock by
accepting from Grantee the return of a sufficient number of shares of
unrestricted common stock equal in value to the amount of taxes to be
withheld.
10. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
11. BINDING EFFECT AND AMENDMENT. This Agreement is the entire
agreement between the parties and will be binding upon, and will inure to
the benefit of, the parties to this Agreement and their respective heirs,
successors, and assigns, and may be modified only by a writing signed by
the parties.
12. REMEDIES. Grantee acknowledges that any breach of the promises
in Paragraph 7 of this Agreement would cause the Company irreparable damage
and therefore agrees that, in the event of a breach of one or more of those
promises, the Company shall be entitled to preliminary and permanent
injunction relief in addition to any direct, incidental, and consequential
damages, including lost profits, arising from that breach.
13. EFFECTIVE DATE. The grant of the Restricted Stock under this
Agreement will be effective as of the Grant Date set forth above.
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14. PLAN CONTROLS. The Plan is incorporated by reference into this
Agreement. Capitalized terms not defined in this Agreement shall have
those meanings provided in the Plan. In the event of any conflict between
the terms of this Agreement and the terms of the Plan, the provisions of
the Plan shall control.
MILLER EXPLORATION COMPANY
By________________________________ _____________________________
Its__________________________
"Company" "Grantee"
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EXHIBIT 10.11
CREDIT AGREEMENT
Dated as of February 9, 1998
Among
MILLER OIL CORPORATION
as Borrower,
BANK OF MONTREAL,
as Agent,
and
THE LENDERS SIGNATORY HERETO
$75,000,000 REVOLVING CREDIT FACILITY
CONVERTING TO TERM LOAN
<PAGE>
TABLE OF CONTENTS
PAGE
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ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 TERMS DEFINED ABOVE. . . . . . . . . . . . . . . . . . .1
Section 1.02 CERTAIN DEFINED TERMS. . . . . . . . . . . . . . . . . .1
Section 1.03 ACCOUNTING TERMS AND DETERMINATIONS. . . . . . . . . . 16
ARTICLE II
COMMITMENTS
Section 2.01 LOANS AND LETTERS OF CREDIT. . . . . . . . . . . . . . 16
Section 2.02 BORROWINGS, CONTINUATIONS AND CONVERSIONS,
LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . 17
Section 2.03 CHANGES OF COMMITMENTS . . . . . . . . . . . . . . . . 19
Section 2.04 FEES . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 2.05 SEVERAL OBLIGATIONS. . . . . . . . . . . . . . . . . . 20
Section 2.06 NOTES. . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 2.07 PREPAYMENTS. . . . . . . . . . . . . . . . . . . . . . 21
Section 2.08 BORROWING BASE . . . . . . . . . . . . . . . . . . . . 22
Section 2.09 ASSUMPTION OF RISKS. . . . . . . . . . . . . . . . . . 23
Section 2.10 OBLIGATION TO REIMBURSE AND TO PREPAY. . . . . . . . . 24
Section 2.11 LENDING OFFICES. . . . . . . . . . . . . . . . . . . . 26
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 REPAYMENT OF LOANS . . . . . . . . . . . . . . . . . . 26
Section 3.02 INTEREST . . . . . . . . . . . . . . . . . . . . . . . 26
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<PAGE>
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.01 PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . 27
Section 4.02 PRO RATA TREATMENT . . . . . . . . . . . . . . . . . . 28
Section 4.03 COMPUTATIONS . . . . . . . . . . . . . . . . . . . . . 28
Section 4.04 NON-RECEIPT OF FUNDS BY THE AGENT. . . . . . . . . . . 28
Section 4.05 SET-OFF, SHARING OF PAYMENTS, ETC. . . . . . . . . . . 29
Section 4.06 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 4.07 DISPOSITION OF PROCEEDS. . . . . . . . . . . . . . . . 33
ARTICLE V
CAPITAL ADEQUACY
Section 5.01 ADDITIONAL COSTS. . . . . . . . . . . . . . . . . . . . 33
Section 5.02 LIMITATION ON EURODOLLAR LOANS . . . . . . . . . . . . 35
Section 5.03 ILLEGALITY . . . . . . . . . . . . . . . . . . . . . . 35
Section 5.04 BASE RATE LOANS PURSUANT TO SECTIONS 5.01, 5.02 AND
5.03 . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 5.05 COMPENSATION . . . . . . . . . . . . . . . . . . . . . 36
Section 5.06 REPLACEMENT LENDERS. . . . . . . . . . . . . . . . . . 36
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 INITIAL FUNDING. . . . . . . . . . . . . . . . . . . . 38
Section 6.02 INITIAL AND SUBSEQUENT LOANS AND LETTERS OF CREDIT . . 39
Section 6.03 CONDITIONS PRECEDENT FOR THE BENEFIT OF LENDERS. . . . 40
Section 6.04 NO WAIVER. . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.01 CORPORATE EXISTENCE. . . . . . . . . . . . . . . . . . 40
Section 7.02 FINANCIAL CONDITION. . . . . . . . . . . . . . . . . . 40
Section 7.03 LITIGATION . . . . . . . . . . . . . . . . . . . . . . 41
Section 7.04 NO BREACH. . . . . . . . . . . . . . . . . . . . . . . 41
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<PAGE>
Section 7.05 AUTHORITY. . . . . . . . . . . . . . . . . . . . . . . 41
Section 7.06 APPROVALS. . . . . . . . . . . . . . . . . . . . . . . 42
Section 7.07 USE OF LOANS . . . . . . . . . . . . . . . . . . . . . 42
Section 7.08 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 7.09 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 7.10 TITLES, ETC. . . . . . . . . . . . . . . . . . . . . . 43
Section 7.11 NO MATERIAL MISSTATEMENTS. . . . . . . . . . . . . . . 44
Section 7.12 INVESTMENT COMPANY ACT . . . . . . . . . . . . . . . . 44
Section 7.13 PUBLIC UTILITY HOLDING COMPANY ACT . . . . . . . . . . 44
Section 7.14 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . 44
Section 7.15 LOCATION OF BUSINESS AND OFFICES . . . . . . . . . . . 44
Section 7.16 DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . 45
Section 7.17 ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . 45
Section 7.18 COMPLIANCE WITH THE LAW. . . . . . . . . . . . . . . . 46
Section 7.19 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . 46
Section 7.20 HEDGING AGREEMENTS . . . . . . . . . . . . . . . . . . 47
Section 7.21 RESTRICTION ON LIENS . . . . . . . . . . . . . . . . . 47
Section 7.22 MATERIAL AGREEMENTS. . . . . . . . . . . . . . . . . . 47
Section 7.23 GAS IMBALANCES . . . . . . . . . . . . . . . . . . . . 48
ARTICLE VIII
Affirmative Covenants
Section 8.01 REPORTING REQUIREMENTS . . . . . . . . . . . . . . . . 48
Section 8.02 LITIGATION . . . . . . . . . . . . . . . . . . . . . . 50
Section 8.03 MAINTENANCE, ETC.. . . . . . . . . . . . . . . . . . . 51
Section 8.04 ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . 52
Section 8.05 FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . 53
Section 8.06 PERFORMANCE OF OBLIGATIONS . . . . . . . . . . . . . . 53
Section 8.07 ENGINEERING REPORTS. . . . . . . . . . . . . . . . . . 53
Section 8.08 TITLE INFORMATION. . . . . . . . . . . . . . . . . . . 54
Section 8.09 ADDITIONAL COLLATERAL. . . . . . . . . . . . . . . . . 55
Section 8.10 MORTGAGE TITLE INFORMATION/OPINIONS. . . . . . . . . . 56
Section 8.11 ERISA INFORMATION AND COMPLIANCE . . . . . . . . . . . 56
Section 8.12 HEDGING ACTIVITIES . . . . . . . . . . . . . . . . . . 56
Section 8.13 PAYMENT OF TRADE PAYABLES. . . . . . . . . . . . . . . 57
Section 8.14 SUBSIDIARY SECURITY. . . . . . . . . . . . . . . . . . 57
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<PAGE>
ARTICLE IX
NEGATIVE COVENANTS
Section 9.01 DEBT . . . . . . . . . . . . . . . . . . . . . . . . . 57
Section 9.02 LIENS. . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 9.03 INVESTMENTS, LOANS AND ADVANCES. . . . . . . . . . . . 58
Section 9.04 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS . . . . . . . 59
Section 9.05 SALES AND LEASEBACKS . . . . . . . . . . . . . . . . . 59
Section 9.06 NATURE OF BUSINESS . . . . . . . . . . . . . . . . . . 59
Section 9.07 LIMITATION ON LEASES . . . . . . . . . . . . . . . . . 59
Section 9.08 MERGERS, ETC.. . . . . . . . . . . . . . . . . . . . . 60
Section 9.09 PROCEEDS OF NOTES AND LETTERS OF CREDIT. . . . . . . . 60
Section 9.10 ERISA COMPLIANCE . . . . . . . . . . . . . . . . . . . 60
Section 9.11 SALE OR DISCOUNT OF RECEIVABLES. . . . . . . . . . . . 61
Section 9.12 CURRENT RATIO. . . . . . . . . . . . . . . . . . . . . 62
Section 9.13 RATIO OF DEBT TO CAPITALIZATION. . . . . . . . . . . . 62
Section 9.14 TANGIBLE NET WORTH . . . . . . . . . . . . . . . . . . 62
Section 9.15 DEBT TO EBITDA COVERAGE RATIO. . . . . . . . . . . . . 62
Section 9.16 SALE OF PROPERTIES. . . . . . . . . . . . . . . . . . 62
Section 9.17 ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . 62
Section 9.18 TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . 62
Section 9.19 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . 62
Section 9.20 NEGATIVE PLEDGE AGREEMENTS . . . . . . . . . . . . . . 63
Section 9.21 GAS IMBALANCES, TAKE-OR-PAY OR OTHER PREPAYMENTS . . . 63
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . 63
Section 10.02 REMEDIES. . . . . . . . . . . . . . . . . . . . . . . 65
ARTICLE XI
THE AGENT
Section 11.01 APPOINTMENT, POWERS AND IMMUNITIES. . . . . . . . . . 66
Section 11.02 RELIANCE BY AGENT . . . . . . . . . . . . . . . . . . 66
Section 11.03 DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . 67
Section 11.04 RIGHTS AS A LENDER. . . . . . . . . . . . . . . . . . 67
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<PAGE>
Section 11.05 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . 67
Section 11.06 NON-RELIANCE ON AGENT AND OTHER LENDERS . . . . . . . 68
Section 11.07 ACTION BY AGENT . . . . . . . . . . . . . . . . . . . 68
Section 11.08 RESIGNATION OR REMOVAL OF AGENT . . . . . . . . . . . 68
ARTICLE XII
MISCELLANEOUS
Section 12.01 WAIVER. . . . . . . . . . . . . . . . . . . . . . . . 69
Section 12.02 NOTICES . . . . . . . . . . . . . . . . . . . . . . . 69
Section 12.03 PAYMENT OF EXPENSES, INDEMNITIES, ETC . . . . . . . . 69
Section 12.04 AMENDMENTS, ETC.. . . . . . . . . . . . . . . . . . . 72
Section 12.05 SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . 72
Section 12.06 ASSIGNMENTS AND PARTICIPATIONS. . . . . . . . . . . . 72
Section 12.07 INVALIDITY. . . . . . . . . . . . . . . . . . . . . . 74
Section 12.08 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . 74
Section 12.09 REFERENCES. . . . . . . . . . . . . . . . . . . . . . 74
Section 12.10 SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . 74
Section 12.11 CAPTIONS. . . . . . . . . . . . . . . . . . . . . . . 75
Section 12.12 NO ORAL AGREEMENTS. . . . . . . . . . . . . . . . . . 75
Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION . . . . . . 75
Section 12.14 INTEREST. . . . . . . . . . . . . . . . . . . . . . . 76
Section 12.15 CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . 77
Section 12.16 EFFECTIVENESS . . . . . . . . . . . . . . . . . . . . 78
Section 12.17 EXCULPATION PROVISIONS. . . . . . . . . . . . . . . . 78
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<PAGE>
ANNEXES, EXHIBITS AND SCHEDULES
Annex I - List of Percentage Shares and Maximum Credit Amounts
Exhibit A - Form of Note
Exhibit B - Form of Borrowing, Continuation and Conversion Request
Exhibit C - Form of Compliance Certificate
Exhibit D - List of Security Instruments
Exhibit E - Form of Assignment Agreement
Exhibit F - Form of Letter of Credit Application and Reimbursement
Agreement
Schedule 7.02 - Liabilities
Schedule 7.03 - Litigation
Schedule 7.09 - Taxes
Schedule 7.10 - Titles, etc.
Schedule 7.17 - Environmental Matters
Schedule 7.19 - Insurance
Schedule 7.20 - Hedging Agreements
Schedule 7.22 - Material Agreements
Schedule 7.23 - Gas Imbalances
Schedule 9.01 - Debt
Schedule 9.02 - Liens
Schedule 9.03 - Investments, Loans and Advances
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<PAGE>
THIS CREDIT AGREEMENT dated as of February 9, 1998 is among:
MILLER OIL CORPORATION, a corporation formed under the laws of the State of
Michigan (the "BORROWER"); each of the lenders that is a signatory hereto
or which becomes a signatory hereto as provided in Section 12.06
(individually, together with its successors and assigns, a "LENDER" and,
collectively, the "LENDERS"); and BANK OF MONTREAL, a foreign bank formed
under the laws of Canada (in its individual capacity, "BMO"), as agent for
the Lenders (in such capacity, together with its successors in such
capacity, the "AGENT").
R E C I T A L S
A. The Borrower has requested that the Lenders provide certain loans
to and extensions of credit on behalf of the Borrower; and
B. The Lenders have agreed to make such loans and extensions of
credit subject to the terms and conditions of this Agreement.
C. In consideration of the mutual covenants and agreements herein
contained and of the loans, extensions of credit and commitments
hereinafter referred to, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 TERMS DEFINED ABOVE. As used in this Agreement,
the terms "AGENT," "BORROWER," "LENDER," "LENDERS," and "BMO" shall have
the meanings indicated above.
Section 1.02 CERTAIN DEFINED TERMS. As used herein, the
following terms shall have the following meanings (all terms defined in
this Article I or in other provisions of this Agreement in the singular to
have equivalent meanings when used in the plural and VICE VERSA):
"ADDITIONAL COSTS" shall have the meaning assigned such term in
Section 5.01(a).
"AFFECTED LOANS" shall have the meaning assigned such term in
Section 5.04.
"AFFILIATE" of any Person shall mean (i) any Person directly or
indirectly controlled by, controlling or under common control with such
first Person, (ii) any director or officer of such first Person or of any
Person referred to in clause (i) above and (iii) if any Person in clause
(i) above is an individual, any member of the immediate family (including
parents, spouse and children) of such individual and any trust whose
principal beneficiary is such individual or one or more members of such
immediate family and any Person who is controlled by any such member or
trust. For purposes of this definition, any Person which owns directly or
indirectly 10% or more of the securities having ordinary voting power for
<PAGE>
the election of directors or other governing body of a corporation or 10%
or more of the partnership or other ownership interests of any other Person
(other than as a limited partner of such other Person) will be deemed to
"CONTROL" (including, with its correlative meanings, "CONTROLLED BY" and
"UNDER COMMON CONTROL WITH") such corporation or other Person.
"AGREEMENT" shall mean this Credit Agreement, as the same may from
time to time be amended or supplemented.
"AGGREGATE COMMITMENTS" at any time shall equal the amount calculated
in accordance with Section 2.03.
"AGGREGATE MAXIMUM CREDIT AMOUNTS" at any time shall equal the sum of
the Maximum Credit Amounts of the Lenders ($75,000,000), as the same may be
reduced pursuant to Section 2.03(b).
"APPLICABLE LENDING OFFICE" shall mean, for each Lender and for each
Type of Loan, the lending office of such Lender (or an Affiliate of such
Lender) designated for such Type of Loan on the signature pages hereof or
such other offices of such Lender (or of an Affiliate of such Lender) as
such Lender may from time to time specify to the Agent and the Borrower as
the office by which its Loans of such Type are to be made and maintained.
"APPLICABLE MARGIN" shall mean the applicable per annum percentage set
forth at the appropriate intersection in the table shown below, based on
the Borrowing Base Utilization as in effect from time to time:
<TABLE>
<CAPTION>
APPLICABLE MARGIN
-----------------
BORROWING BASE UTILIZATION EURODOLLAR LOANS BASE RATE LOANS
- -------------------------- ---------------- ---------------
<S> <C> <C>
Less than or equal to 30% 0.750% 0.000%
Greater than 30%, but less 1.125% 0.000%
than or equal to 60%
Greater than 60% 1.620% 0.000%
</TABLE>
Each change in the Applicable Margin resulting from a change in the
Borrowing Base Utilization shall take effect at the time of such change in
the Borrowing Base Utilization.
"ASSIGNMENT" shall have the meaning assigned such term in
Section 12.06(b).
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<PAGE>
"BASE RATE" shall mean, with respect to any Base Rate Loan, for any
day, the higher of (i) the Federal Funds Rate for any such day plus 1/2 of
1% or (ii) the Prime Rate for such day. Each change in any interest rate
provided for herein based upon the Base Rate resulting from a change in the
Base Rate shall take effect at the time of such change in the Base Rate.
"BASE RATE LOANS" shall mean Loans that bear interest at rates based
upon the Base Rate.
"BORROWING BASE" shall mean at any time an amount equal to the amount
determined in accordance with Section 2.08.
"BORROWING BASE DEFICIENCY" shall occur and be continuing at any time
that, and relate to the amount by which, the sum of the aggregate
outstanding principal amount of the Loans, plus the LC Exposure, exceeds
the Borrowing Base.
"BORROWING BASE UTILIZATION" shall mean as of any date, the ratio of
(i) the aggregate principal amount of all Loans outstanding, plus LC
Exposure to (ii) the Borrowing Base on such date.
"BUSINESS DAY" shall mean any day other than a day on which commercial
banks are authorized or required to close in Chicago, Illinois and, where
such term is used in the definition of "Quarterly Date" or if such day
relates to a borrowing or continuation of, a payment or prepayment of
principal of or interest on, or a conversion of or into, or the Interest
Period for, a Eurodollar Loan or a notice by the Borrower with respect to
any such borrowing or continuation, payment, prepayment, conversion or
Interest Period, any day which is also a day on which dealings in Dollar
deposits are carried out in the London interbank market.
"CHANGE OF CONTROL" shall mean either (i) a change resulting when any
Unrelated Person or any Unrelated Persons acting together which would
constitute a Group together with any Affiliates thereof (in each case also
constituting Unrelated Persons) shall at any time Beneficially Own more
than 70% of the aggregate voting power of all classes of Voting Stock of
the Parent. As used herein (a) "BENEFICIALLY OWN" means "beneficially own"
as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as
amended, or any successor provision thereto; PROVIDED, HOWEVER, that, for
purposes of this definition, (a) a Person shall not be deemed to
Beneficially Own securities tendered pursuant to a tender or exchange offer
made by or on behalf of such Person or any of such Person's Affiliates
until such tendered securities are accepted for purchase or exchange;
(b) "GROUP" means a "group" for purposes of Section 13(d) of the Securities
Exchange Act of 1934, as amended; (c) "UNRELATED PERSON" means at any time
any Person other than (A) C.E. Miller, Kelly E. Miller, David A. Miller,
Daniel R. Miller, Sue Ellen Bell, (B) their respective spouses, lineal
descendants, and spouses of their lineal descendants, (C) the estates of the
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<PAGE>
Persons described in clauses (A) and (B), and (D) trusts established solely
for the benefit of any Person or Persons described in clauses (A) and (B);
and (d) "VOTING STOCK" of any Person shall mean capital stock of such
Person which ordinarily has voting power for the election of directors (or
persons performing similar functions) of such Person, whether at all times
or only so long as no senior class of securities has such voting power by
reason of any contingency or (ii) the Parent shall cease to own 100% of the
outstanding shares of capital stock of the Borrower on a fully-diluted
basis.
"CLOSING DATE" shall mean February 9, 1998.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time and any successor statute.
"COMMITMENT" shall mean, for any Lender, its obligation to make Loans
and to participate in the Letters of Credit as provided in Section 2.01(b)
up to the lesser of (i) such Lender's Maximum Credit Amount and (ii) the
Lender's Percentage Share of the amount equal to the then effective
Borrowing Base.
"CONSOLIDATED NET INCOME" shall mean with respect to the Parent and
its Consolidated Subsidiaries, for any period, the aggregate of the net
income (or loss) of the Parent and its Consolidated Subsidiaries after
allowances for taxes for such period, determined on a consolidated basis in
accordance with GAAP; PROVIDED that there shall be excluded from such net
income (to the extent otherwise included therein) the following: (i) the
net income of any Person in which the Parent or any Consolidated Subsidiary
has an interest (which interest does not cause the net income of such other
Person to be consolidated with the net income of the Parent and its
Consolidated Subsidiaries in accordance with GAAP), except to the extent of
the amount of dividends or distributions actually paid in such period by
such other Person to the Parent or to a Consolidated Subsidiary, as the
case may be; (ii) the net income (but not loss) of any Consolidated
Subsidiary to the extent that the declaration or payment of dividends or
similar distributions or transfers or loans by that Consolidated Subsidiary
is not at the time permitted by operation of the terms of its charter or
any agreement, instrument or Governmental Requirement applicable to such
Consolidated Subsidiary, or is otherwise restricted or prohibited in each
case determined in accordance with GAAP; (iii) the net income (or loss) of
any Person acquired in a pooling-of-interests transaction for any period
prior to the date of such transaction; (iv) any extraordinary gains or
losses, including gains or losses attributable to Property sales not in the
ordinary course of business; and (v) the cumulative effect of a change in
accounting principles and any gains or losses attributable to writeups or
write downs of assets.
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<PAGE>
"CONSOLIDATED SUBSIDIARIES" shall mean each Subsidiary of any Person
(whether now existing or hereafter created or acquired) the financial
statements of which shall be (or should have been) consolidated with the
financial statements of such Person in accordance with GAAP.
"DEBT" shall mean, for any Person the sum of the following (without
duplication): (i) all obligations of such Person for borrowed money or
evidenced by bonds, debentures, notes or other similar instruments
(including principal, interest, fees and charges); (ii) all obligations
of such Person (whether contingent or otherwise) in respect of bankers'
acceptances, letters of credit, surety or other bonds and similar
instruments; (iii) all obligations of such Person to pay the deferred
purchase price of Property or services (other than for borrowed money);
(iv) all obligations under leases which shall have been, or should have
been, in accordance with GAAP, recorded as capital leases in respect of
which such Person is liable (whether contingent or otherwise); (v) all
obligations under leases which require such Person or its Affiliate to make
payments over the term of such lease, including payments at termination,
which are substantially equal to at least eighty percent (80%) of the
purchase price of the Property subject to such lease plus interest as an
imputed rate of interest; (vi) all Debt (as described in the other clauses
of this definition) and other obligations of others secured by a Lien on
any asset of such Person, whether or not such Debt is assumed by such
Person; (vii) all Debt (as described in the other clauses of this
definition) and other obligations of others guaranteed by such Person or in
which such Person otherwise assures a creditor against loss of the debtor
or obligations of others; (viii) all obligations or undertakings of such
Person to maintain or cause to be maintained the financial position or
covenants of others or to purchase the Debt or Property of others; (ix)
obligations to deliver goods or services including Hydrocarbons in
consideration of advance payments, except as permitted by Section 9.21 and
disclosed by Section 8.07(c); (x) obligations to pay for goods or services
whether or not such goods or services are actually received or utilized by
such Person; (xi) any capital stock of such Person in which such Person has
a mandatory obligation to redeem such stock; (xii) any Debt of a Special
Entity for which such Person is liable either by agreement or because of a
Governmental Requirement; (xiii) the undischarged balance of any production
payment created by such Person or for the creation of which such Person
directly or indirectly received payment; and (xiv) all obligations of such
Person under Hedging Agreements.
"DEFAULT" shall mean an Event of Default or an event which with notice
or lapse of time or both would become an Event of Default.
"DEFICIENCY PAYMENT" shall mean, in respect of any Borrowing Base
Deficiency, any payments made by the Borrower during a Deficiency Period
for such Borrowing Base Deficiency equal to either (a) in the case of each
such payment the amount of the Borrowing Base Deficiency on the date the
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<PAGE>
Borrower notifies the Agent of its intent to initiate a Deficiency Period
divided by six (6) or (b) such other amount as the Majority Lenders may
approve, which when aggregated with the other such payments for such
Deficiency Period, are sufficient to satisfy the Borrowing Base Deficiency
on or before the final day of such Deficiency Period.
"DEFICIENCY PERIOD" shall mean any six (6) month period during which
the sum of the aggregate principal balance outstanding under the Notes,
plus the LC Exposure, exceeds the Borrowing Base.
"DOLLARS" and "$" shall mean lawful money of the United States of
America.
"EBITDA" shall mean, for any period, the sum of Consolidated Net
Income of the Parent for such period plus the following expenses or charges
to the extent deducted from Consolidated Net Income of the Parent in such
period: interest, taxes, depreciation, depletion and amortization.
"EFFECTIVE DATE" shall have the meaning assigned such term in Section
12.16.
"ENGINEERING REPORTS" shall have the meaning assigned such term in
Section 2.08.
"ENVIRONMENTAL LAWS" shall mean any and all Governmental Requirements
pertaining to health or the environment in effect in any and all
jurisdictions in which the Borrower or any Subsidiary is conducting or at
any time has conducted business, or where any Property of the Borrower or
any Subsidiary is located, including without limitation, the Oil Pollution
Act of 1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980
("CERCLA"), as amended, the Federal Water Pollution Control Act, as
amended, the Occupational Safety and Health Act of 1970, as amended, the
Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the
Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as
amended, the Superfund Amendments and Reauthorization Act of 1986, as
amended, the Hazardous Materials Transportation Act, as amended, and other
environmental conservation or protection laws. The term "oil" shall have
the meaning specified in OPA, the terms "hazardous substance" and "release"
(or "threatened release") have the meanings specified in CERCLA, and the
terms "solid waste" and "disposal" (or "disposed") have the meanings
specified in RCRA; PROVIDED, HOWEVER, that (i) in the event either OPA,
CERCLA or RCRA is amended so as to broaden the meaning of any term defined
thereby, such broader meaning shall apply subsequent to the effective date
of such amendment and (ii) to the extent the laws of the state in which any
Property of the Borrower or any Subsidiary is located establish a meaning
for "oil," "hazardous substance," "release," "solid waste" or "disposal"
which is broader than that specified in either OPA, CERCLA or RCRA, such
broader meaning shall apply.
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<PAGE>
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time and any successor statute.
"ERISA AFFILIATE" shall mean each trade or business (whether or not
incorporated) which together with the Borrower or any Subsidiary would be
deemed to be a "single employer" within the meaning of section 4001(b)(1)
of ERISA or subsections (b), (c), (m) or (o) of section 414 of the Code.
"ERISA EVENT" shall mean (i) a "Reportable Event" described in Section
4043 of ERISA and the regulations issued thereunder, (ii) the withdrawal of
the Borrower, any Subsidiary or any ERISA Affiliate from a Plan during a
plan year in which it was a "substantial employer" as defined in Section
4001(a)(2) of ERISA, (iii) the filing of a notice of intent to terminate a
Plan or the treatment of a Plan amendment as a termination under Section
4041 of ERISA, (iv) the institution of proceedings to terminate a Plan by
the PBGC or (v) any other event or condition which might constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan.
"EURODOLLAR LOANS" shall mean Loans the interest rates on which are
determined on the basis of rates referred to in the definition of
"Eurodollar Rate".
"EURODOLLAR RATE" shall mean, with respect to any Eurodollar Loan, the
rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%)
quoted by the Agent at approximately 11:00 a.m. London time (or as soon
thereafter as practicable) two (2) Business Days prior to the first day of
the Interest Period for such Loan for the offering by the Agent to leading
banks in the London interbank market of Dollar deposits having a term
comparable to such Interest Period and in an amount comparable to the
principal amount of the Eurodollar Loan to be made by the Lenders for such
Interest Period.
"EVENT OF DEFAULT" shall have the meaning assigned such term in
Section 10.01.
"EXCEPTED LIENS" shall mean: (i) Liens for taxes, assessments or
other governmental charges or levies not yet due or which are being
contested in good faith by appropriate action and for which adequate
reserves have been maintained; (ii) Liens in connection with workmen's
compensation, unemployment insurance or other social security, old age
pension or public liability obligations not yet due or which are being
contested in good faith by appropriate action and for which adequate
reserves have been maintained in accordance with GAAP; (iii) operators',
vendors', carriers', warehousemen's, repairmen's, mechanics', workmen's,
materialmen's, construction or other like Liens arising by operation of law
in the ordinary course of business or incident to the exploration,
development, operation and maintenance of Oil and Gas Properties or
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statutory landlord's liens, each of which is in respect of obligations that
have not been outstanding more than 90 days or which are being contested in
good faith by appropriate proceedings and for which adequate reserves have
been maintained in accordance with GAAP; (iv) any Liens reserved in leases
or farmout agreements for rent or royalties and for compliance with the
terms of the farmout agreements or leases in the case of leasehold estates,
to the extent that any such Lien referred to in this clause does not
materially impair the use of the Property covered by such Lien for the
purposes for which such Property is held by the Borrower, the Parent or any
Subsidiary or materially impair the value of such Property subject thereto;
(v) encumbrances (other than to secure the payment of borrowed money or the
deferred purchase price of Property or services), easements, restrictions,
servitudes, permits, conditions, covenants, exceptions or reservations in
any rights of way or other Property of the Borrower, the Parent or any
Subsidiary for the purpose of roads, pipelines, transmission lines,
transportation lines, distribution lines for the removal of gas, oil, coal
or other minerals or timber, and other like purposes, or for the joint or
common use of real estate, rights of way, facilities and equipment, and
defects, irregularities, zoning restrictions and deficiencies in title of
any rights of way or other Property which in the aggregate do not
materially impair the use of such rights of way or other Property for the
purposes of which such rights of way and other Property are held by the
Borrower, the Parent or any Subsidiary or materially impair the value of
such Property subject thereto; (vi) deposits of cash or securities to
secure the performance of bids, trade contracts, leases, statutory
obligations and other obligations of a like nature incurred in the ordinary
course of business; and (vii) Liens permitted by the Security Instruments.
"FEDERAL FUNDS RATE" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight federal funds transactions with
a member of the Federal Reserve System arranged by federal funds brokers on
such day, as published by the Federal Reserve Bank of New York on the
Business Day next succeeding such day, provided that (i) if the date for
which such rate is to be determined is not a Business Day, the Federal
Funds Rate for such day shall be such rate on such transactions on the next
preceding Business Day as so published on the next succeeding Business Day,
and (ii) if such rate is not so published for any day, the Federal Funds
Rate for such day shall be the average rate charged to the Agent on such
day on such transactions as determined by the Agent.
"FEE LETTER" shall mean that certain letter agreement from BMO to the
Borrower dated of even date with this Agreement concerning certain fees in
connection with this Agreement and any agreements or instruments executed
in connection therewith, as the same may be amended or replaced from time
to time.
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"FINAL MATURITY DATE" shall mean the earlier to occur of (i) the sixth
anniversary of the Closing Date, and (ii) the date that the Notes are
prepaid in full pursuant to Section 2.07.
"FINANCIAL STATEMENTS" shall mean the financial statement or
statements of the Borrower and its Consolidated Subsidiaries described or
referred to in Section 7.02.
"GAAP" shall mean generally accepted accounting principles in the
United States of America in effect from time to time.
"GOVERNMENTAL AUTHORITY" shall include the country, the state, county,
city and political subdivisions in which any Person or such Person's
Property is located or which exercises valid jurisdiction over any such
Person or such Person's Property, and any court, agency, department,
commission, board, bureau or instrumentality of any of them including
monetary authorities which exercises valid jurisdiction over any such
Person or such Person's Property. Unless otherwise specified, all
references to Governmental Authority herein shall mean a Governmental
Authority having jurisdiction over, where applicable, the Borrower, its
Subsidiaries or any of their Property or the Agent, any Lender or any
Applicable Lending Office.
"GOVERNMENTAL REQUIREMENT" shall mean any law, statute, code,
ordinance, order, determination, rule, regulation, judgment, decree,
injunction, franchise, permit, certificate, license, authorization or other
directive or requirement (whether or not having the force of law),
including, without limitation, Environmental Laws, energy regulations and
occupational, safety and health standards or controls, of any Governmental
Authority.
"GUARANTOR" shall mean the Parent and any Person who becomes, or
should have become, a party to a Guaranty Agreement pursuant to Section
8.14.
"GUARANTY AGREEMENT" shall mean an agreement now or hereafter executed
by the Parent and any Subsidiary in form and substance satisfactory to the
Agent guarantying, unconditionally, payment of the Indebtedness, as the
same may be amended, modified or supplemented from time to time.
"HEDGING AGREEMENTS" shall mean any commodity, interest rate or
currency swap, cap, floor, collar, forward agreement or other exchange or
protection agreements or any option with respect to any such transaction.
"HIGHEST LAWFUL RATE" shall mean, with respect to each Lender, the
maximum nonusurious interest rate, if any, that at any time or from time to
time may be contracted for, taken, reserved, charged or received on the
Notes or on other Indebtedness under laws applicable to such Lender which
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are presently in effect or, to the extent allowed by law, under such
applicable laws which may hereafter be in effect and which allow a higher
maximum nonusurious interest rate than applicable laws now allow.
"HYDROCARBON INTERESTS" shall mean all rights, titles, interests and
estates now or hereafter acquired in and to oil and gas leases, oil, gas
and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral
fee interests, overriding royalty and royalty interests, net profit
interests and production payment interests, including any reserved or
residual interests of whatever nature.
"HYDROCARBONS" shall mean oil, gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined or separated therefrom.
"INDEBTEDNESS" shall mean any and all amounts owing or to be owing by
the Borrower to the Agent, the Issuing Bank and/or the Lenders in
connection with the Loan Documents, the Letter of Credit Agreements, and
any Hedging Agreements now or hereafter arising between the Borrower and
any Lender or Affiliate of such Lender and permitted by the terms of this
Agreement and all renewals, extensions and/or rearrangements of any of the
foregoing.
"INDEMNIFIED PARTIES" shall have the meaning assigned such term in
Section 12.03(a)(ii).
"INDEMNITY MATTERS" shall mean any and all actions, suits, proceedings
(including any investigations, litigation or inquiries), claims, demands
and causes of action made or threatened against a Person and, in connection
therewith, all losses, liabilities, damages (other than consequential
damages) or reasonable costs and expenses of any kind or nature whatsoever
incurred by such Person whether caused by the sole or concurrent negligence
of such Person seeking indemnification.
"INITIAL FUNDING" shall mean the funding of the initial Loans or
issuance of the initial Letters of Credit upon satisfaction of the
conditions set forth in Sections 6.01 and 6.02.
"INITIAL RESERVE REPORT" shall mean collectively the reports of Miller
and Lents, Ltd., dated December 4, 1997 and S.A. Holditch & Associates,
Inc. dated October 24, 1997, each with respect to the Oil and Gas
Properties of the Borrower as of September 30, 1997, a copy of which has
been delivered to the Agent.
"INTEREST PERIOD" shall mean, with respect to any Eurodollar Loan, the
period commencing on the date such Eurodollar Loan is made and ending
either (i) 14 days thereafter or (ii) on the numerically corresponding day
in the first, second, third or sixth calendar month thereafter, as the
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Borrower may select as provided in Section 2.02 (or such longer period as
may be requested by the Borrower and agreed to by the Majority Lenders),
except that each Interest Period which commences on the last Business Day
of a calendar month (or on any day for which there is no numerically
corresponding day in the appropriate subsequent calendar month) shall end
on the last Business Day of the appropriate subsequent calendar month.
Notwithstanding the foregoing: (i) no Interest Period may end after
the Final Maturity Date; (ii) no Interest Period for any Eurodollar Loan
may end after the due date of any installment, if any, provided for in
Section 3.01 to the extent that such Eurodollar Loan would need to be
prepaid prior to the end of such Interest Period in order for such
installment to be paid when due; (iii) each Interest Period which would
otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day (or, if such next succeeding Business Day falls in
the next succeeding calendar month, on the next preceding Business Day);
and (iv) except for 14 day Interest Periods, no Interest Period shall have
a duration of less than one month and, if the Interest Period for any
Eurodollar Loans would otherwise be for a shorter period, such Loans shall
not be available hereunder.
"ISSUING BANK" shall mean BMO or any other Lender agreed to among the
Borrowers and the Agent to issue Letters of Credit.
"LC COMMITMENT" at any time shall mean $5,000,000.
"LC EXPOSURE" at any time shall mean the difference between (i)
aggregate face amount of all undrawn and uncancelled Letters of Credit and
the aggregate of all amounts drawn under all Letters of Credit and not yet
reimbursed, minus (ii) the aggregate amount of all cash securing
outstanding Letters of Credit pursuant to Section 2.10(b).
"LETTER OF CREDIT AGREEMENTS" shall mean the written agreements with
the Issuing Bank, as issuing lender for any Letter of Credit, executed in
connection with the issuance by the Issuing Bank of the Letters of Credit,
such agreements to be on the Issuing Bank's customary form attached hereto
as EXHIBIT F or as otherwise agreed to by the Borrower and the Issuing
Bank.
"LETTERS OF CREDIT" shall mean the letters of credit issued pursuant
to Section 2.01(b) and all reimbursement obligations pertaining to any such
letters of credit, and "Letter of Credit" shall mean any one of the Letters
of Credit and the reimbursement obligations pertaining thereto.
"LIEN" shall mean any interest in Property securing an obligation owed
to, or a claim by, a Person other than the owner of the Property, whether
such interest is based on the common law, statute or contract, and whether
such obligation or claim is fixed or contingent, and including but not
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limited to (i) the lien or security interest arising from a mortgage,
encumbrance, pledge, security agreement, conditional sale or trust receipt
or a lease, consignment or bailment for security purposes or (ii)
production payments and the like payable out of Oil and Gas Properties.
The term "LIEN" shall include reservations, exceptions, encroachments,
easements, rights of way, covenants, conditions, restrictions, leases and
other title exceptions and encumbrances affecting Property. For the
purposes of this Agreement, the Borrower or any Subsidiary shall be deemed
to be the owner of any Property which it has acquired or holds subject to a
conditional sale agreement, or leases under a financing lease or other
arrangement pursuant to which title to the Property has been retained by or
vested in some other Person in a transaction intended to create a
financing.
"LOAN DOCUMENTS" shall mean this Agreement, the Notes and the Security
Instruments.
"LOANS" shall mean the loans as provided for by Section 2.01(a).
"MAJORITY LENDERS" shall mean, at any time while no Loans are
outstanding, Lenders having at least sixty-six and two-thirds percent
(66-2/3%) of the Aggregate Commitments and, at any time while Loans are
outstanding, Lenders holding at least sixty-six and two-thirds percent
(66-2/3%) of the outstanding aggregate principal amount of the Loans
(without regard to any sale by a Lender of a participation in any Loan
under Section 12.06(c)).
"MATERIAL ADVERSE EFFECT" shall mean any material and adverse effect
on (i) the assets, liabilities, financial condition, business, operations
or affairs of the Borrower, the Parent and its Subsidiaries taken as a
whole different from those reflected in the Financial Statements or from
the facts represented or warranted in any Loan Document, or (ii) the
ability of the Borrower, the Parent and its Subsidiaries taken as a whole
to carry out their business as at the Closing Date or as proposed as of the
Closing Date to be conducted or meet their obligations under the Loan
Documents on a timely basis.
"MAXIMUM CREDIT AMOUNT" shall mean, as to each Lender, the amount set
forth opposite such Lender's name on ANNEX I under the caption "Maximum
Credit Amounts" (as the same may be reduced pursuant to Section 2.03(b) pro
rata to each Lender based on its Percentage Share), as modified from time
to time to reflect any assignments permitted by Section 12.06(b).
"MORTGAGE" shall mean those certain Mortgages, Deeds of Trusts,
Assignments of Production, Security Agreements and Financing Statements
dated as of even date herewith executed by the Borrower and covering
Borrower's interest in Oil and Gas Properties in the States of Michigan,
Mississippi and Texas, together with any other mortgages, deeds of trust,
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assignments of production, security agreements and financing statements
executed at any time by any Person to secure the Indebtedness (directly or
indirectly), all as the same may from time to time be amended,
supplemented, restated or otherwise modified.
"MORTGAGED PROPERTY" shall mean the Property owned by the Borrower and
which is subject to the Liens existing and to exist under the terms of any
Mortgage.
"MULTIEMPLOYER PLAN" shall mean a Plan defined as such in
Section 3(37) or 4001(a)(3) of ERISA.
"NOTES" shall mean the Notes provided for by Section 2.06, together
with any and all renewals, extensions for any period, increases,
rearrangements, substitutions or modifications thereof.
"OIL AND GAS PROPERTIES" shall mean Hydrocarbon Interests; the
Properties now or hereafter pooled or unitized with Hydrocarbon Interests;
all presently existing or future unitization, pooling agreements and
declarations of pooled units and the units created thereby (including
without limitation all units created under orders, regulations and rules
of any Governmental Authority) which may affect all or any portion of the
Hydrocarbon Interests; all operating agreements, contracts and other
agreements which relate to any of the Hydrocarbon Interests or the
production, sale, purchase, exchange or processing of Hydrocarbons from or
attributable to such Hydrocarbon Interests; all Hydrocarbons in and under
and which may be produced and saved or attributable to the Hydrocarbon
Interests, including all oil in tanks, the lands covered thereby and all
rents, issues, profits, proceeds, products, revenues and other incomes from
or attributable to the Hydrocarbon Interests; all tenements, hereditaments,
appurtenances and Properties in any manner appertaining, belonging, affixed
or incidental to the Hydrocarbon Interests; and all Properties, rights,
titles, interests and estates described or referred to above, including any
and all Property, real or personal, now owned or hereinafter acquired and
situated upon, used, held for use or useful in connection with the
operating, working or development of any of such Hydrocarbon Interests or
Property (excluding drilling rigs, automotive equipment or other personal
property which may be on such premises for the purpose of drilling a well
or for other similar temporary uses) and including any and all oil wells,
gas wells, injection wells or other wells, buildings, structures, fuel
separators, liquid extraction plants, plant compressors, pumps, pumping
units, field gathering systems, tanks and tank batteries, fixtures, valves,
fittings, machinery and parts, engines, boilers, meters, apparatus,
equipment, appliances, tools, implements, cables, wires, towers, casing,
tubing and rods, surface leases, rights-of-way, easements and servitudes
together with all additions, substitutions, replacements, accessions and
attachments to any and all of the foregoing.
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"OTHER TAXES" shall have the meaning assigned such term in Section
4.06(b).
"PARENT" shall mean Miller Exploration Company, a Delaware
corporation.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions.
"PERCENTAGE SHARE" shall mean the percentage of the Aggregate
Commitments to be provided by a Lender under this Agreement as indicated on
ANNEX I hereto, as modified from time to time to reflect any assignments
permitted by Section 12.06(b).
"PERSON" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization
or government or any agency, instrumentality or political subdivision
thereof, or any other form of entity.
"PLAN" shall mean any employee pension benefit plan, as defined in
Section 3(2) of ERISA, which (i) is currently or hereafter sponsored,
maintained or contributed to by the Borrower, any Subsidiary or an ERISA
Affiliate or (ii) was at any time during the preceding six calendar years
sponsored, maintained or contributed to, by the Borrower, any Subsidiary or
an ERISA Affiliate.
"POST-DEFAULT RATE" shall mean, in respect of any principal of any
Loan or any other amount payable by the Borrower under this Agreement or
any other Loan Document, a rate per annum during the period commencing on
the date of occurrence of an Event of Default until such amount is paid in
full or all Events of Default are cured or waived equal to 2% per annum
above the Base Rate as in effect from time to time plus the Applicable
Margin (if any), but in no event to exceed the Highest Lawful Rate;
provided however, for a Eurodollar Loan, the "POST-DEFAULT RATE" for such
principal shall be, for the period commencing on the date of occurrence of
an Event of Default and ending on the earlier to occur of the last day of
the Interest Period therefor or the date all Events of Default are cured or
waived, 2% per annum above the interest rate for such Loan as provided in
Section 3.02(a)(ii), but in no event to exceed the Highest Lawful Rate.
"PRIME RATE" shall mean the rate of interest from time to time
announced publicly by the Agent at the Principal Office as its prime
commercial lending rate. Such rate is set by the Agent as a general
reference rate of interest, taking into account such factors as the Agent
may deem appropriate, it being understood that many of the Agent's
commercial or other loans are priced in relation to such rate, that it is
not necessarily the lowest or best rate actually charged to any customer
and that the Agent may make various commercial or other loans at rates of
interest having no relationship to such rate.
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"PRINCIPAL OFFICE" shall mean the principal office of the Agent,
presently located at 115 South LaSalle Street, Chicago, Illinois 60603.
"PROPERTY" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"QUARTERLY DATES" shall mean the last day of each March, June,
September and December, in each year, the first of which shall be March 31,
1998; PROVIDED, HOWEVER, that if any such day is not a Business Day, such
Quarterly Date shall be the next succeeding Business Day.
"REDETERMINATION DATE" shall have the meaning assigned such term in
Section 2.08(a).
"REGULATION D" shall mean Regulation D of the Board of Governors of
the Federal Reserve System (or any successor), as the same may be amended
or supplemented from time to time.
"REGULATORY CHANGE" shall mean, with respect to any Lender, any change
after the Closing Date in any Governmental Requirement (including
Regulation D) or the adoption or making after such date of any
interpretations, directives or requests applying to a class of lenders
(including such Lender or its Applicable Lending Office) of or under any
Governmental Requirement (whether or not having the force of law) by any
Governmental Authority charged with the interpretation or administration
thereof.
"REQUIRED PAYMENT" shall have the meaning assigned such term in
Section 4.04.
"RESERVE REPORT" shall mean a report, in form and substance
satisfactory to the Agent, setting forth (as of each January 1, with
respect to the report due each March 1, and as of each July 1, with respect
to the report due each September 1) pursuant to Section 8.07(a) (or such
other date in the event of an unscheduled redetermination) (i) the oil and
gas reserves attributable to the Borrower's Oil and Gas Properties together
with a projection of the rate of production and future net income, taxes,
operating expenses and capital expenditures with respect thereto as of such
date, based upon the pricing assumptions consistent with SEC reporting
requirements at the time and (ii) such other information as the Agent may
reasonably request.
"RESPONSIBLE OFFICER" shall mean, as to any Person, the Chief
Executive Officer, the President or any Vice President of such Person and,
with respect to financial matters, the term "Responsible Officer" shall
include the Chief Financial Officer of such Person. Unless otherwise
specified, all references to a Responsible Officer herein shall mean a
Responsible Officer of the Borrower.
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"REVOLVING CREDIT PERIOD" shall mean the period from the Closing Date
to and ending on the Revolving Credit Termination Date.
"REVOLVING CREDIT TERMINATION DATE" shall mean the earlier to occur of
(i) the third anniversary of the Closing Date and (ii) the date that the
Commitments are sooner terminated pursuant to Sections 2.03(b) or 10.02.
"SCHEDULED REDETERMINATION DATE" shall have the meaning assigned such
term in Section 2.08(d).
"SEC" shall mean the Securities and Exchange Commission or any
successor Governmental Authority.
"SECURITY INSTRUMENTS" shall mean the Mortgages, the Guaranty
Agreements, the Letters of Credit, the Letter of Credit Agreements, the Fee
Letter, the agreements or instruments described or referred to in EXHIBIT
D, and any and all other agreements or instruments now or hereafter
executed and delivered by the Borrower or any other Person (other than
participation or similar agreements between any Lender and any other lender
or creditor with respect to any Indebtedness pursuant to this Agreement) in
connection with, or as security for the payment or performance of the
Notes, this Agreement, or reimbursement obligations under the Letters of
Credit, as such agreements may be amended, supplemented or restated from
time to time.
"SPECIAL ENTITY" shall mean any joint venture, limited liability
company or partnership, general or limited partnership or any other type of
partnership or company other than a corporation in which the Borrower or
one or more of its other Subsidiaries is a member, owner, partner or joint
venturer and owns, directly or indirectly, at least a majority of the
equity of such entity or controls such entity, but excluding any tax
partnerships that are not classified as partnerships under state law. For
purposes of this definition, any Person which owns directly or indirectly
an equity investment in another Person which allows the first Person to
manage or elect managers who manage the normal activities of such second
Person will be deemed to "control" such second Person (E.G. a sole general
partner controls a limited partnership).
"SUBSIDIARY" shall mean (i) any corporation of which at least a
majority of the outstanding shares of stock having by the terms thereof
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether or not at the time stock of any other
class or classes of such corporation shall have or might have voting power
by reason of the happening of any contingency) is at the time directly or
indirectly owned or controlled by the Parent or one or more of its
Subsidiaries or by the Parent and one or more of its Subsidiaries and (ii)
any Special Entity. Unless otherwise indicated herein, each reference to
the term "Subsidiary" shall mean a Subsidiary of the Parent.
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"TANGIBLE NET WORTH" shall mean, as at any date, the sum of the
following for the Parent and its Consolidated Subsidiaries determined
(without duplication) in accordance with GAAP (but without regard to any
write up or write down resulting from any changes in GAAP subsequent to
September 30, 1997):
(i) the amount of preferred stock and common stock at par or stated
value plus the amount of paid in capital in excess of par or stated value
of the Parent, PLUS
(ii) the retained earnings (or, in the case of retained earnings
deficit, MINUS the amount of such deficit), MINUS
(iii) the sum of the following: cost of treasury shares and the
book value of all assets of the Parent and its Consolidated Subsidiaries
which should be classified as intangibles (without duplication of
deductions in respect of items already deducted in arriving at surplus and
retained earnings) but in any event including as such intangibles the
following: goodwill, research and development costs, trademarks, trade
names, copyrights, patents and franchises, unamortized debt discount and
expense, all reserves and any writeup in the book value of assets resulting
from a revaluation thereof.
"TAXES" shall have the meaning assigned such term in Section 4.06(a).
"TERM LOAN PERIOD" shall mean the period commencing on the next
succeeding day after the Revolving Credit Termination Date and ending on
the Final Maturity Date.
"TRANSFER" shall mean any sale, assignment, farmout, conveyance or
other transfer of any Property or any interest in any Property, except for
(i) the sale of Hydrocarbons in the ordinary course of business; (ii)
farmouts of, or participation or joint venture agreements with respect to,
undeveloped acreage for which no value has been given in the most recent
Reserve Report and assignments in connection with such farmouts or
participation or joint venture agreements; (iii) the sale or transfer of
equipment that is no longer necessary for the business of the Borrower or
any Subsidiary or is replaced by equipment of at least comparable value and
use and (iv) sales in the ordinary course of business of Oil and Gas
Properties the fair market value consideration received for which shall not
exceed $2,000,000 in the aggregate for each period between Scheduled
Redetermination Dates.
"TYPE" shall mean, with respect to any Loan, a Base Rate Loan or a
Eurodollar Loan.
Section 1.03 ACCOUNTING TERMS AND DETERMINATIONS. Unless
otherwise specified herein, all accounting terms used herein shall be
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interpreted, all determinations with respect to accounting matters
hereunder shall be made, and all financial statements and certificates and
reports as to financial matters required to be furnished to the Agent or
the Lenders hereunder shall be prepared, in accordance with GAAP, applied
on a basis consistent with the audited financial statements of the Borrower
referred to in Section 7.02 (except for changes concurred with by the
Borrower's independent public accountants).
ARTICLE II
COMMITMENTS
Section 2.01 LOANS AND LETTERS OF CREDIT.
(a) LOANS. Each Lender severally agrees, on the terms and
conditions of this Agreement, to make loans to the Borrower during the
period from and including (i) the Closing Date or (ii) such later date
that such Lender becomes a party to this Agreement as provided in
Section 12.06(b), to and up to, but excluding, the Revolving Credit
Termination Date in an aggregate principal amount at any one time
outstanding up to, but not exceeding, the amount of such Lender's
Commitment as then in effect; PROVIDED, HOWEVER, that the aggregate
principal amount of all such Loans by all Lenders hereunder at any one
time outstanding together with the LC Exposure shall not exceed the
Aggregate Commitments. Subject to the terms of this Agreement, during
the period from the Closing Date to and up to, but excluding, the
Revolving Credit Termination Date, the Borrower may borrow, repay and
reborrow the amount described in this Section 2.01(a).
(b) LETTERS OF CREDIT. During the period from and including the
Closing Date to, but excluding, the Revolving Credit Termination Date,
the Issuing Bank, as issuing bank for the Lenders, agrees to extend
credit for the account of the Borrower at any time and from time to
time by issuing, renewing, extending or reissuing Letters of Credit;
provided however, the LC Exposure at any one time outstanding shall
not exceed the lesser of (i) the LC Commitment or (ii) the Aggregate
Commitments, as then in effect, minus the aggregate principal amount
of all Loans then outstanding. The Lenders shall participate in such
Letters of Credit according to their respective Percentage Shares.
Each of the Letters of Credit shall (i) be issued by the Issuing Bank,
(ii) contain such terms and provisions as are reasonably required by
the Issuing Bank, (iii) be for the account of the Borrower and (iv)
expire not later than the earlier of (A) one (1) year from the date of
issuance or (B) two (2) days before the Revolving Credit Termination
Date.
(c) LIMITATION ON TYPES OF LOANS. Subject to the other terms
and provisions of this Agreement, at the option of the Borrower, the
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Loans may be Base Rate Loans or Eurodollar Loans; provided that,
without the prior written consent of the Majority Lenders, no more
than four (4) Eurodollar Loans may be outstanding at any time.
Section 2.02 BORROWINGS, CONTINUATIONS AND CONVERSIONS, LETTERS
OF CREDIT.
(a) BORROWINGS. The Borrower shall give the Agent (which shall
promptly notify the Lenders) advance notice as hereinafter provided of
each borrowing hereunder, which shall specify (i) the aggregate amount
of such borrowing, (ii) the Type and (iii) the date (which shall be a
Business Day) of the Loans to be borrowed, and (iv) (in the case of
Eurodollar Loans) the duration of the Interest Period therefor.
(b) MINIMUM AMOUNTS. All Base Rate Loan borrowings shall be in
amounts of at least $500,000 or the remaining balance of the Aggregate
Commitments, if less, or any whole multiple of $100,000 in excess
thereof, and all Eurodollar Loans shall be in amounts of at least
$500,000 or any whole multiple of $100,000 in excess thereof.
(c) NOTICES. All borrowings, continuations and conversions
shall require advance written notice to the Agent (which shall
promptly notify the Lenders) in the form of EXHIBIT B (or telephonic
notice promptly confirmed by such a written notice), which in each
case shall be irrevocable, from the Borrower to be received by the
Agent not later than 11:00 a.m. Houston, Texas time at least one
Business Day prior to the date of each Base Rate Loan borrowing and
three Business Days prior to the date of each Eurodollar Loan
borrowing, continuation or conversion; PROVIDED, HOWEVER, for Base
Rate Loans, the Borrower may request a same day advance of up to
$5,000,000 if the request is received by the Agent not later than
11:00 a.m. Houston, Texas time. Without in any way limiting the
Borrower's obligation to confirm in writing any telephonic notice, the
Agent may act without liability upon the basis of telephonic notice
believed by the Agent in good faith to be from the Borrower prior to
receipt of written confirmation. In each such case, the Borrower
hereby waives the right to dispute the Agent's record of the terms of
such telephonic notice except in the case of gross negligence or
willful misconduct by the Agent.
(d) CONTINUATION OPTIONS. Subject to the provisions made in
this Section 2.02(d), the Borrower may elect to continue all or any
part of any Eurodollar Loan beyond the expiration of the then current
Interest Period relating thereto by giving advance notice as provided
in Section 2.02(c) to the Agent (which shall promptly notify the
Lenders) of such election, specifying the amount of such Loan to be
continued and the Interest Period therefor. In the absence of such a
timely and proper election, the Borrower shall be deemed to have
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elected to convert such Eurodollar Loan to a Base Rate Loan pursuant
to Section 2.02(e). All or any part of any Eurodollar Loan may be
continued as provided herein, provided that (i) any continuation of
any such Loan shall be (as to each Loan as continued for an applicable
Interest Period) in amounts of at least $500,000 or any whole multiple
of $100,000 in excess thereof and (ii) no Default shall have occurred
and be continuing. If a Default shall have occurred and be
continuing, each Eurodollar Loan shall be converted to a Base Rate
Loan on the last day of the Interest Period applicable thereto.
(e) CONVERSION OPTIONS. The Borrower may elect to convert all
or any part of any Eurodollar Loan on the last day of the then current
Interest Period relating thereto to a Base Rate Loan by giving advance
notice to the Agent (which shall promptly notify the Lenders) of such
election. Subject to the provisions made in this Section 2.02(e), the
Borrower may elect to convert all or any part of any Base Rate Loan at
any time and from time to time to a Eurodollar Loan by giving advance
notice as provided in Section 2.02(c) to the Agent (which shall
promptly notify the Lenders) of such election. All or any part of any
outstanding Loan may be converted as provided herein, provided that
(i) any conversion of any Base Rate Loan into a Eurodollar Loan shall
be (as to each such Loan into which there is a conversion for an
applicable Interest Period) in amounts of at least $500,000 or any
whole multiple of $100,000 in excess thereof and (ii) no Default shall
have occurred and be continuing. If a Default shall have occurred and
be continuing, no Base Rate Loan may be converted into a Eurodollar
Loan.
(f) ADVANCES. Not later than 11:00 a.m. Houston, Texas time on
the date specified for each borrowing hereunder (or 1:00 p.m. Houston,
Texas time for same day advance Base Rate Loans), each Lender shall
make available the amount of the Loan to be made by it on such date to
the Agent, to an account which the Agent shall specify, in immediately
available funds, for the account of the Borrower. The amounts so
received by the Agent shall, subject to the terms and conditions of
this Agreement, be made available to the Borrower by depositing the
same, in immediately available funds, in an account of the Borrower,
designated by the Borrower and maintained at the Principal Office.
(g) LETTERS OF CREDIT. The Borrower shall give the Issuing Bank
(which shall promptly notify the Lenders of such request and their
Percentage Share of such Letter of Credit) advance notice to be
received by the Issuing Bank not later than 11:00 a.m. Houston, Texas
time not less than three (3) Business Days prior thereto of each
request for the issuance, and at least thirty (30) Business Days prior
to the date of the renewal or extension, of a Letter of Credit
hereunder which request shall specify (i) the amount of such Letter of
Credit, (ii) the date (which shall be a Business Day) such Letter of
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Credit is to be issued, renewed or extended, (iii) the duration
thereof, (iv) the name and address of the beneficiary thereof, (v) the
form of the Letter of Credit and (vi) such other information as the
Agent may reasonably request, all of which shall be reasonably
satisfactory to the Agent. Subject to the terms and conditions of
this Agreement, on the date specified for the issuance, renewal or
extension of a Letter of Credit, the Agent shall issue, renew or
extend such Letter of Credit to the beneficiary thereof.
In conjunction with the issuance of each Letter of Credit, the
Borrower shall execute a Letter of Credit Agreement. In the event of
any conflict between any provision of a Letter of Credit Agreement and
this Agreement, the Borrower, the Issuing Bank, the Agent and the
Lenders hereby agree that the provisions of this Agreement shall
govern.
The Issuing Bank will send to the Borrower and each Lender,
immediately upon issuance of any Letter of Credit, or an amendment
thereto, a true and complete copy of such Letter of Credit, or such
amendment thereto.
Section 2.03 CHANGES OF COMMITMENTS.
(a) The Aggregate Commitments shall at all times be equal to the
lesser of (i) the Aggregate Maximum Credit Amounts after adjustments
resulting from reductions pursuant to Section 2.03(b) or (ii) the
Borrowing Base as determined from time to time.
(b) The Borrower shall have the right to terminate or to reduce
the amount of the Aggregate Maximum Credit Amounts at any time, or
from time to time, upon not less than three (3) Business Days' prior
notice to the Agent (which shall promptly notify the Lenders) of each
such termination or reduction, which notice shall specify the
effective date thereof and the amount of any such reduction (which
shall not be less than $5,000,000 or any whole multiple of $500,000 in
excess thereof) and shall be irrevocable and effective only upon
receipt by the Agent.
(c) The Aggregate Maximum Credit Amounts once terminated or
reduced may not be reinstated.
Section 2.04 FEES.
(a) COMMITMENT FEE. The Borrower shall pay to the Agent for the
account of each Lender a commitment fee on the daily average unused
amount of the Aggregate Commitments for the period from and including
the Closing Date up to, but excluding, the earlier of the date the
Aggregate Commitments are terminated or the Revolving Credit
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Termination Date at a rate per annum equal to 3/8 of 1%. Accrued
commitment fees shall be payable quarterly in arrears on each
Quarterly Date and on the earlier of the date the Aggregate
Commitments are terminated or the Revolving Credit Termination Date.
(b) LETTER OF CREDIT FEES.
(i) The Borrower agrees to pay the Agent, for the account of
each Lender, commissions for issuing the Letters of Credit on the
daily average outstanding of the maximum liability of the Issuing Bank
existing from time to time under such Letter of Credit (calculated
separately for each Letter of Credit) at the rate per annum equal
to the Applicable Margin then in effect for Eurodollar Loans, provided
that each Letter of Credit shall bear a minimum commission of $500.
Each Letter of Credit shall be deemed to be outstanding up to the full
face amount of the Letter of Credit until the Issuing Bank has
received the canceled Letter of Credit or a written cancellation of
the Letter of Credit from the beneficiary of such Letter of Credit in
form and substance acceptable to the Issuing Bank, or for any
reductions in the amount of the Letter of Credit (other than from a
drawing), written notification from the beneficiary of such Letter of
Credit. Such commissions are payable quarterly in arrears on each
Quarterly Date and upon cancellation or expiration of each such Letter
of Credit.
(ii) The Borrower agrees to pay the Issuing Bank, for its own
account, an issuing fee for issuing Letters of Credit on the daily
average outstanding balance of the maximum liability of the Issuing
bank existing from time to time under such Letter of Credit (calculated
separately for each Letter of Credit) at the rate of 0.10% per annum,
payable quarterly in arrears on each Quarterly Date and upon
cancellation or expiration of each such Letter of Credit.
(c) The Borrower shall pay to the Agent for its account such
other fees as are set forth in the Fee Letter on the dates specified
therein to the extent not paid prior to the Closing Date.
Section 2.05 SEVERAL OBLIGATIONS. The failure of any Lender to
make any Loan to be made by it or to provide funds for disbursements or
reimbursements under Letters of Credit on the date specified therefor shall
not relieve any other Lender of its obligation to make its Loan or provide
funds on such date, but no Lender shall be responsible for the failure of
any other Lender to make a Loan to be made by such other Lender or to
provide funds to be provided by such other Lender.
Section 2.06 NOTES. The Loans made by each Lender shall be
evidenced by a single promissory note of the Borrower in substantially the
form of EXHIBIT A, dated (i) the Closing Date or (ii) the effective date of
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an Assignment pursuant to Section 12.06(b), payable to the order of such
Lender in a principal amount equal to its Maximum Credit Amount as
originally in effect and otherwise duly completed and such substitute Notes
as required by Section 12.06(b). The date, amount, Type, interest rate and
Interest Period of each Loan made by each Lender, and all payments made on
account of the principal thereof, shall be recorded by such Lender on its
books for its Note, and, prior to any transfer may be endorsed by such
Lender on the schedule attached to such Note or any continuation thereof or
on any separate record maintained by such Lender. Failure to make any such
notation or to attach a schedule shall not affect any Lender's or the
Borrower's rights or obligations in respect of such Loans or affect the
validity of such transfer by any Lender of its Note.
Section 2.07 PREPAYMENTS.
(a) VOLUNTARY PREPAYMENTS. The Borrower may prepay the Base
Rate Loans upon not less than one (1) Business Day's prior notice to
the Agent (which shall promptly notify the Lenders), which notice
shall specify the prepayment date (which shall be a Business Day) and
the amount of the prepayment (which shall be at least $1,000,000 or
the remaining aggregate principal balance outstanding on the Notes)
and shall be irrevocable and effective only upon receipt by the Agent,
provided that interest on the principal prepaid, accrued to the
prepayment date, shall be paid on the prepayment date. The Borrower
may prepay Eurodollar Loans on the same conditions as for Base Rate
Loans (except that prior notice to the Agent shall be not less than
three (3) Business Days for Eurodollar Loans) and in addition such
prepayments of Eurodollar Loans shall be subject to the terms of
Section 5.05 and shall be in an amount equal to all of the Eurodollar
Loans for the Interest Period prepaid.
(b) MANDATORY PREPAYMENTS.
(i) If, after giving effect to any termination or reduction
of the Aggregate Maximum Credit Amounts pursuant to Section 2.03(b),
the outstanding aggregate principal amount of the Loans plus the LC
Exposure exceeds the Aggregate Maximum Credit Amounts, the Borrower
shall (i) prepay the Loans on the date of such termination or
reduction in an aggregate principal amount equal to the excess,
together with interest on the principal amount paid accrued to the
date of such prepayment and (ii) if any excess remains after prepaying
all of the Loans because of LC Exposure, pay to the Agent on behalf of
the Lenders an amount equal to the excess to be held as cash
collateral as provided in Section 2.10(b) hereof.
(ii) Upon any redetermination of the amount of the Borrowing
Base in accordance with Section 2.08, if the redetermined Borrowing
Base results in a Borrowing Base Deficiency, then the Borrower shall
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within thirty (30) days of receipt of written notice thereof either:
(A) prepay the Loans in an aggregate principal amount equal to the
Borrowing Base Deficiency, together with interest on the principal
amount paid accrued to the date of such prepayment and if a Borrowing
Base Deficiency remains after prepaying all of the Loans because of LC
Exposure, the Borrower shall pay to the Agent on behalf of the Lenders
an amount equal to such remaining Borrowing Base Deficiency to be held
as cash collateral as provided in Section 2.10(b); or (B) the Borrower
shall notify the Agent (which will promptly notify the Lenders) in
writing of the Borrower's election to initiate a Deficiency Period
during which it will eliminate such Borrowing Base Deficiency by
making six (6) consecutive monthly Deficiency Payments, the first of
such payments being due and payable with the delivery to the Agent of
such notice and each of the remaining payments due and payable on the
same day of each month thereafter during the Deficiency Period;
provided however, in the event of an acceleration of the maturity of
the Notes pursuant to Section 10.02 hereof, such acceleration shall
also accelerate the maturity of all outstanding and unpaid Deficiency
Payments.
(iii) If a reduction in the Borrowing Base pursuant to
Section 2.08(d) because of a Transfer of any Oil and Gas Properties
will result in a Borrowing Base Deficiency, then the Borrower shall
immediately upon such Transfer prepay the Loans in an aggregate
principal amount equal to such Borrowing Base Deficiency, and if a
Borrowing Base Deficiency remains thereafter because of LC Exposure,
pay to the Agent on behalf of the Lenders an amount equal to such
remaining Borrowing Base Deficiency to be held as cash collateral as
provided in Section 2.10(b).
(c) GENERALLY. Prepayments permitted or required under this
Section 2.07 shall be without premium or penalty, except as required
under Section 5.05 for prepayment of Eurodollar Loans. Any prepayment
made during the Revolving Credit Period may be reborrowed subject to
the then effective Aggregate Commitments. Any prepayments made during
the Term Loan Period may not be reborrowed and shall be applied to
installments of the Notes in the inverse order of maturity.
Section 2.08 BORROWING BASE.
(a) The Borrowing Base shall be determined in accordance with
Section 2.08(b) by the Agent with the concurrence of the Lenders and
is subject to redetermination in accordance with Section 2.08(d).
Upon any redetermination of the Borrowing Base, such redetermination
shall remain in effect until the next successive Redetermination Date.
"REDETERMINATION DATE" shall mean the date that the redetermined
Borrowing Base becomes effective subject to the notice requirements
specified in Section 2.08(e) both for scheduled redeterminations and
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unscheduled redeterminations. So long as any of the Commitments are
in effect or any LC Exposure or Loans are outstanding hereunder, this
facility shall be governed by the then effective Borrowing Base.
During the period from and after the Closing Date until the first
redetermination pursuant to Section 2.08(d) or adjusted pursuant to
Section 8.08(c), the amount of the Borrowing Base shall be
$23,000,000.
(b) Upon receipt of the reports required by Section 8.07 and
such other reports, data and supplemental information as may from time
to time be reasonably requested by the Agent (the "ENGINEERING
REPORTS"), the Agent will redetermine the Borrowing Base. Such
redetermination will be in accordance with its normal and customary
procedures for evaluating oil and gas reserves and other related
assets as such exist at that particular time. The Agent, in its sole
discretion, may make adjustments to the rates, volumes and prices and
other assumptions set forth therein in accordance with its normal and
customary procedures for evaluating oil and gas reserves and other
related assets as such exist at that particular time. The Agent shall
propose to the Lenders a new Borrowing Base within 30 days following
receipt by the Agent and the Lenders of the Engineering Reports in a
timely and complete manner. After having received notice of such
proposal by the Agent, the Lenders shall have ten (10) Business Days
to agree or disagree with such proposal. If at the end of the ten
(10) Business Days, any Lender has not communicated its approval or
disapproval, such silence shall be deemed to be an approval. If the
Lenders have not approved the Borrowing Base within ten (10) Business
Days, the Lenders shall, within a reasonable period of time, agree on
a new Borrowing Base. The Agent and all of the Lenders must approve
any increase in the Borrowing Base. The Majority Lenders (one of
which must be the Agent) shall be required to approve a continuation
or decrease in any Borrowing Base.
(c) The Agent may exclude any Oil and Gas Property or portion of
production therefrom or any income from any other Property from the
Borrowing Base, at any time, because title information is not
reasonably satisfactory, such Property is not Mortgaged Property or
such Property is not assignable.
(d) So long as any of the Commitments are in effect and until
payment in full of all Loans hereunder, on or around the first
Business Day of each May and November, commencing November, 1998 (each
being a "SCHEDULED REDETERMINATION DATE"), the Lenders shall
redetermine the amount of the Borrowing Base in accordance with
Section 2.08(b). In addition, the Majority Lenders and the Borrower
may each initiate a redetermination of the Borrowing Base at any other
time as it so elects by specifying in writing to the other date on
which the Borrower is to furnish a Reserve Report in accordance with
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Section 8.07(b) and the date on which such redetermination is to
occur; PROVIDED, HOWEVER, that the Majority Lenders and the Borrower
may each initiate, only one such unscheduled redetermination during
any consecutive twelve (12) month period. Notwithstanding the
preceding sentence, if the Borrower or any Guarantor Transfers any Oil
and Gas Properties, then the Majority Lenders may, at their sole
election, reduce the Borrowing Base by the value given to such Oil and
Gas Properties in the immediately preceding Borrowing Base
redetermination.
(e) The Agent shall promptly notify in writing the Borrower and
the Lenders of the new Borrowing Base. Any redetermination of the
Borrowing Base shall not be in effect until written notice is received
by the Borrower.
Section 2.09 ASSUMPTION OF RISKS. The Borrower assumes all
risks of the acts or omissions of any beneficiary of any Letter of Credit
or any transferee thereof with respect to its use of such Letter of Credit.
Neither the Issuing Bank (except in the case of gross negligence or willful
misconduct on the part of the Issuing Bank or any of its employees), its
correspondents nor any Lender shall be responsible for the validity,
sufficiency or genuineness of certificates or other documents or any
endorsements thereon, even if such certificates or other documents should
in fact prove to be invalid, insufficient, fraudulent or forged; for
errors, omissions, interruptions or delays in transmissions or delivery of
any messages by mail, telex, or otherwise, whether or not they be in code;
for errors in translation or for errors in interpretation of technical
terms; the validity or sufficiency of any instrument transferring or
assigning or purporting to transfer or assign any Letter of Credit or the
rights or benefits thereunder or proceeds thereof, in whole or in part,
which may prove to be invalid or ineffective for any reason; the failure of
any beneficiary or any transferee of any Letter of Credit to comply fully
with conditions required in order to draw upon any Letter of Credit; or for
any other consequences arising from causes beyond the Issuing Bank's
control or the control of the Issuing Bank's correspondents. In addition,
neither the Issuing Bank, the Agent nor any Lender shall be responsible for
any error, neglect, or default of any of the Issuing Bank's correspondents;
and none of the above shall affect, impair or prevent the vesting of any of
the Issuing Bank's, the Agent's or any Lender's rights or powers hereunder
or under the Letter of Credit Agreements, all of which rights shall be
cumulative. The Issuing Bank and its correspondents may accept
certificates or other documents that appear on their face to be in order,
without responsibility for further investigation of any matter contained
therein regardless of any notice or information to the contrary. In
furtherance and not in limitation of the foregoing provisions, the Borrower
agrees that any action, inaction or omission taken or not taken by the
Issuing Bank or by any correspondent for the Issuing Bank in good faith in
connection with any Letter of Credit, or any related drafts, certificates,
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documents or instruments, shall be binding on the Borrower and shall not
put the Issuing Bank or its correspondents under any resulting liability to
the Borrower.
Section 2.10 OBLIGATION TO REIMBURSE AND TO PREPAY.
(a) If a disbursement by the Issuing Bank is made under any
Letter of Credit, the Borrower shall pay to the Agent within two (2)
Business Days after notice of any such disbursement is received by the
Borrower, the amount of each such disbursement made by the Issuing
Bank under the Letter of Credit (if such payment is not sooner
effected as may be required under this Section 2.10 or under other
provisions of the Letter of Credit), together with interest on the
amount disbursed from and including the date of disbursement until
payment in full of such disbursed amount at a varying rate per annum
equal to (i) the then applicable interest rate for Base Rate Loans
through the second Business Day after notice of such disbursement is
received by the Borrower and (ii) thereafter, the Post-Default Rate
for Base Rate Loans (but in no event to exceed the Highest Lawful
Rate) for the period from and including the third Business Day
following the date of such disbursement to and including the date of
repayment in full of such disbursed amount. The obligations of the
Borrower under this Agreement with respect to each Letter of Credit
shall be absolute, unconditional and irrevocable and shall be paid or
performed strictly in accordance with the terms of this Agreement
under all circumstances whatsoever, including, without limitation, but
only to the fullest extent permitted by applicable law, the following
circumstances: (i) any lack of validity or enforceability of this
Agreement, any Letter of Credit or any of the Security Instruments;
(ii) any amendment or waiver of (including any default), or any
consent to departure from this Agreement (except to the extent
permitted by any amendment or waiver), any Letter of Credit or any of
the Security Instruments; (iii) the existence of any claim, set-off,
defense or other rights which the Borrower may have at any time
against the beneficiary of any Letter of Credit or any transferee of
any Letter of Credit (or any Persons for whom any such beneficiary or
any such transferee may be acting), the Issuing Bank, the Agent, any
Lender or any other Person, whether in connection with this Agreement,
any Letter of Credit, the Security Instruments, the transactions
contemplated hereby or any unrelated transaction; (iv) any statement,
certificate, draft, notice or any other document presented under any
Letter of Credit proves to have been forged, fraudulent, insufficient
or invalid in any respect or any statement therein proves to have been
untrue or inaccurate in any respect whatsoever; (v) payment by the
Issuing Bank under any Letter of Credit against presentation of a
draft or certificate which appears on its face to comply, but does not
comply, with the terms of such Letter of Credit; and (vi) any other
circumstance or happening whatsoever, whether or not similar to any of
the foregoing.
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Notwithstanding anything in this Agreement to the contrary, the
Borrower will not be liable for payment or performance that results
from the gross negligence or willful misconduct of the Issuing Bank,
except (i) where the Borrower or any Subsidiary actually recovers the
proceeds for itself or the Issuing Bank of any payment made by the
Issuing Bank in connection with such gross negligence or willful
misconduct or (ii) in cases where the Agent makes payment to the named
beneficiary of a Letter of Credit.
(b) In the event of the occurrence of any Event of Default, a
payment or prepayment pursuant to Section 2.07(b) or the maturity of
the Notes, whether by acceleration or otherwise, an amount equal to
the LC Exposure (or the excess in the case of Section 2.07(b) shall be
deemed to be forthwith due and owing by the Borrower to the Issuing
Bank, the Agent and the Lenders as of the date of any such occurrence;
and the Borrower's obligation to pay such amount shall be absolute and
unconditional, without regard to whether any beneficiary of any such
Letter of Credit has attempted to draw down all or a portion of such
amount under the terms of a Letter of Credit, and, to the fullest
extent permitted by applicable law, shall not be subject to any
defense or be affected by a right of set-off, counterclaim or
recoupment which the Borrower may now or hereafter have against any
such beneficiary, the Issuing Bank, the Agent, the Lenders or any
other Person for any reason whatsoever. Such payments shall be held
by the Issuing Bank on behalf of the Lenders as cash collateral
securing the LC Exposure in an account or accounts at the Principal
Office; and the Borrower hereby grants to and by its deposit with the
Agent grants to the Agent a security interest in such cash collateral.
In the event of any such payment by the Borrower of amounts
contingently owing under outstanding Letters of Credit and in the
event that thereafter drafts or other demands for payment complying
with the terms of such Letters of Credit are not made prior to the
respective expiration dates thereof, the Agent agrees, if no Event of
Default has occurred and is continuing or if no other amounts are
outstanding under this Agreement, the Notes or the Security
Instruments, to remit to the Borrower amounts for which the contingent
obligations evidenced by the Letters of Credit have ceased.
(c) Each Lender severally and unconditionally agrees that it
shall promptly reimburse the Issuing Bank an amount equal to such
Lender's Percentage Share of any disbursement made by the Issuing Bank
under any Letter of Credit that is not reimbursed according to this
Section 2.10.
(d) Notwithstanding anything to the contrary contained herein,
if no Event of Default has occurred and is continuing and subject to
availability under the Aggregate Commitments (after reduction for LC
Exposure), to the extent the Borrower has not reimbursed the Issuing Bank
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for any drawn upon Letter of Credit within one (1) Business Days after
notice of such disbursement has been received by the Borrower, the amount
of such Letter of Credit reimbursement obligation shall automatically be
funded by the Lenders as a Revolving Credit Loan hereunder and used by the
Lenders to pay such Letter of Credit reimbursement obligation. If an Event
of Default has occurred and is continuing, or if the funding of such Letter
of Credit reimbursement obligation as a Loan would cause the aggregate
amount of all Loans outstanding to exceed the Aggregate Commitments (after
reduction for LC Exposure), such Letter of Credit reimbursement obligation
shall not be funded as a Loan, but instead shall accrue interest as
provided in Section 2.10(a).
Section 2.11 LENDING OFFICES. The Loans of each Type made by each
Lender shall be made and maintained at such Lender's Applicable Lending
Office for Loans of such Type.
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 REPAYMENT OF LOANS.
(a) REVOLVING CREDIT LOANS. Commencing on the Quarterly Date
immediately following the Revolving Credit Termination Date, the aggregate
principal amount of the Notes outstanding on the Revolving Credit
Termination Date shall be payable in twelve (12) equal consecutive
quarterly installments sufficient to amortize the outstanding principal
amount equally over the Term Loan Period with final payment of the
remaining principal balance on the Notes, if any, due on the Final Maturity
Date.
(b) GENERALLY. The Borrower will pay to the Agent, for the account
of each Lender, the principal payments required by this Section 3.01.
Section 3.02 INTEREST.
(a) INTEREST RATES. The Borrower will pay to the Agent, for the
account of each Lender, interest on the unpaid principal amount of
each Loan made by such Lender for the period commencing on the date
such Loan is made to, but excluding, the date such Loan shall be paid
in full, at the following rates per annum:
(i) if such a Loan is a Base Rate Loan, the Base Rate
(as in effect from time to time) plus the Applicable Margin, but
in no event to exceed the Highest Lawful Rate; and
(ii) if such a Loan is a Eurodollar Loan, for each
Interest Period relating thereto, the Eurodollar Rate for such
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Loan plus the Applicable Margin (as in effect from time to time),
but in no event to exceed the Highest Lawful Rate.
(b) POST-DEFAULT RATE. Notwithstanding the foregoing, the
Borrower will pay to the Agent, for the account of each Lender
interest at the applicable Post-Default Rate on any principal of any
Loan made by such Lender, and (to the fullest extent permitted by law)
on any other amount payable by the Borrower hereunder, under any Loan
Document or under any Note held by such Lender to or for account of
such Lender, for the period commencing on the date of an Event of
Default until the same is paid in full or all Events of Default are
cured or waived.
(c) DUE DATES. Accrued interest on Base Rate Loans shall be
payable on each Quarterly Date commencing on March 31, 1998, and
accrued interest on each Eurodollar Loan shall be payable on the last
day of the Interest Period therefor and, if such Interest Period is
longer than three months at three-month intervals following the first
day of such Interest Period, except that interest payable at the Post-
Default Rate shall be payable from time to time on demand and interest
on any Eurodollar Loan that is converted into a Base Rate Loan
(pursuant to Section 5.04) shall be payable on the date of conversion
(but only to the extent so converted).
(d) DETERMINATION OF RATES. Promptly after the determination of
any interest rate provided for herein or any change therein, the Agent
shall notify the Lenders to which such interest is payable and the
Borrower thereof. Each determination by the Agent of an interest rate
or fee hereunder shall, except in cases of manifest error, be final,
conclusive and binding on the parties.
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.01 PAYMENTS. Except to the extent otherwise provided
herein, all payments of principal, interest and other amounts to be made by
the Borrower under this Agreement and, the Notes and the Letter of Credit
Agreements shall be made in Dollars, in immediately available funds, to the
Agent at such account as the Agent shall specify by notice to the Borrower
from time to time, not later than 11:00 a.m. Houston, Texas time on the
date on which such payments shall become due (each such payment made after
such time on such due date to be deemed to have been made on the next
succeeding Business Day). Such payments shall be made without (to the
fullest extent permitted by applicable law) defense, set-off or
counterclaim. Each payment received by the Agent under this Agreement or
any Note for account of a Lender shall be paid promptly to such Lender in
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immediately available funds. Except as otherwise provided in the
definition of "Interest Period", if the due date of any payment under this
Agreement or any Note would otherwise fall on a day which is not a Business
Day such date shall be extended to the next succeeding Business Day and
interest shall be payable for any principal so extended for the period of
such extension. At the time of each payment to the Agent of any principal
of or interest on any borrowing, the Borrower shall notify the Agent of the
Loans to which such payment shall apply. In the absence of such notice the
Agent may specify the Loans to which such payment shall apply, but to the
extent possible such payment or prepayment will be applied first to the
Loans comprised of Base Rate Loans.
Section 4.02 PRO RATA TREATMENT. Except to the extent otherwise
provided herein each Lender agrees that: (i) each borrowing from the
Lenders under Section 2.01 and each continuation and conversion under
Section 2.02 shall be made from the Lenders pro rata in accordance with
their Percentage Share, each payment of fees under Section 2.04 shall be
made for account of the Lenders pro rata in accordance with their
Percentage Share, and each termination or reduction of the amount of the
Aggregate Maximum Credit Amounts under Section 2.03(b) shall be applied to
the Commitment of each Lender, pro rata according to the amounts of its
respective Commitment; (ii) each payment of principal of Loans by the
Borrower shall be made for account of the Lenders pro rata in accordance
with the respective unpaid principal amount of the Loans held by the
Lenders; and (iii) each payment of interest on Loans by the Borrower shall
be made for account of the Lenders pro rata in accordance with the amounts
of interest due and payable to the respective Lenders; and (iv) each
reimbursement by the Borrower of disbursements under Letters of Credit
shall be made for account of the Issuing Bank or, if funded by the Lenders,
pro rata for the account of the Lenders, in accordance with the amounts of
reimbursement obligations due and payable to each respective Lender.
Section 4.03 COMPUTATIONS. Interest on Eurodollar Loans and
fees shall be computed on the basis of a year of 360 days and actual days
elapsed (including the first day but excluding the last day) occurring in
the period for which such interest is payable, unless such calculation
would exceed the Highest Lawful Rate, in which case interest shall be
calculated on the per annum basis of a year of 365 or 366 days, as the case
may be. Interest on Base Rate Loans shall be computed on the basis of a
year of 365 or 366 days, as the case may be, and actual days elapsed
(including the first day but excluding the last day) occurring in the
period for which such interest is payable.
Section 4.04 NON-RECEIPT OF FUNDS BY THE AGENT. Unless the
Agent shall have been notified by a Lender or the Borrower prior to the
date on which such notifying party is scheduled to make payment to the
Agent (in the case of a Lender) of the proceeds of a Loan or a payment
under a Letter of Credit to be made by it hereunder or (in the case of the
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Borrower) a payment to the Agent for account of one or more of the Lenders
hereunder (such payment being herein called the "REQUIRED PAYMENT"), which
notice shall be effective upon receipt, that it does not intend to make the
Required Payment to the Agent, the Agent may assume that the Required
Payment has been made and may, in reliance upon such assumption (but shall
not be required to), make the amount thereof available to the intended
recipient(s) on such date and, if such Lender or the Borrower (as the case
may be) has not in fact made the Required Payment to the Agent, the
recipient(s) of such payment shall, on demand, repay to the Agent the
amount so made available together with interest thereon in respect of each
day during the period commencing on the date such amount was so made
available by the Agent until, but excluding, the date the Agent recovers
such amount at a rate per annum which, for any Lender as recipient, will be
equal to the Federal Funds Rate, and for the Borrower as recipient, will be
equal to the Base Rate plus the Applicable Margin.
Section 4.05 SET-OFF, SHARING OF PAYMENTS, ETC.
(a) The Borrower agrees that, in addition to (and without
limitation of) any right of set-off, bankers' lien or counterclaim a
Lender may otherwise have, each Lender shall have the right and be
entitled (after consultation with the Agent), at its option, to offset
balances held by it or by any of its Affiliates for account of the
Borrower at any of its offices, in Dollars or in any other currency,
against any principal of or interest on any of such Lender's Loans, or
any other amount payable to such Lender hereunder, which is not paid
when due (regardless of whether such balances are then due to the
Borrower), in which case it shall promptly notify the Borrower and the
Agent thereof, provided that such Lender's failure to give such notice
shall not affect the validity thereof.
(b) If any Lender shall obtain payment of any principal of or
interest on any Loan made by it to the Borrower under this Agreement
(or reimbursement as to any Letter of Credit) through the exercise of
any right of set-off, banker's lien or counterclaim or similar right
or otherwise, and, as a result of such payment, such Lender shall have
received a greater percentage of the principal or interest (or
reimbursement) then due hereunder by the Borrower to such Lender than
the percentage received by any other Lenders, it shall promptly (i)
notify the Agent and each other Lender thereof and (ii) purchase from
such other Lenders participations in (or, if and to the extent
specified by such Lender, direct interests in) the Loans (or
participations in Letters of Credit) made by such other Lenders (or in
interest due thereon, as the case may be) in such amounts, and make
such other adjustments from time to time as shall be equitable, to the
end that all the Lenders shall share the benefit of such excess
payment (net of any expenses which may be incurred by such Lender in
obtaining or preserving such excess payment) pro rata in accordance
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with the unpaid principal and/or interest on the Loans held by each of
the Lenders (or reimbursements of Letters of Credit). To such end all
the Lenders shall make appropriate adjustments among themselves (by
the resale of participations sold or otherwise) if such payment is
rescinded or must otherwise be restored. The Borrower agrees that any
Lender so purchasing a participation (or direct interest) in the Loans
made by other Lenders (or in interest due thereon, as the case may be)
may exercise all rights of set-off, banker's lien, counterclaim or
similar rights with respect to such participation as fully as if such
Lender were a direct holder of Loans (or Letters of Credit) in the
amount of such participation. Nothing contained herein shall require
any Lender to exercise any such right or shall affect the right of any
Lender to exercise, and retain the benefits of exercising, any such
right with respect to any other indebtedness or obligation of the
Borrower. If under any applicable bankruptcy, insolvency or other
similar law, any Lender receives a secured claim in lieu of a set-off
to which this Section 4.05 applies, such Lender shall, to the extent
practicable, exercise its rights in respect of such secured claim in a
manner consistent with the rights of the Lenders entitled under this
Section 4.05 to share the benefits of any recovery on such secured
claim.
Section 4.06 TAXES.
(a) PAYMENTS FREE AND CLEAR. Any and all payments by the
Borrower hereunder shall be made, in accordance with Section 4.01,
free and clear of and without deduction for any and all present or
future taxes, levies, imposts, deductions, charges or withholdings,
and all liabilities with respect thereto, EXCLUDING, in the case of
each Lender, the Issuing Bank and the Agent, taxes imposed on its
income, and franchise or similar taxes imposed on it, by (i) any
jurisdiction (or political subdivision thereof) of which the Agent,
the Issuing Bank or such Lender, as the case may be, is a citizen or
resident or in which such Lender has an Applicable Lending Office,
(ii) the jurisdiction (or any political subdivision thereof) in which
the Agent, the Issuing Bank or such Lender is organized, or (iii) any
jurisdiction (or political subdivision thereof) in which such Lender,
the Issuing Bank or the Agent is presently doing business which taxes
are imposed solely as a result of doing business in such jurisdiction
(all such non-excluded taxes, levies, imposts, deductions, charges,
withholdings and liabilities being hereinafter referred to as
"TAXES"). If the Borrower shall be required by law to deduct any
Taxes from or in respect of any sum payable hereunder to the Lenders,
the Issuing Bank or the Agent (i) the sum payable shall be increased
by the amount necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this
Section 4.06) such Lender, the Issuing Bank or the Agent (as the case
may be) shall receive an amount equal to the sum it would have
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received had no such deductions been made, (ii) the Borrower shall
make such deductions and (iii) the Borrower shall pay the full amount
deducted to the relevant taxing authority or other Governmental
Authority in accordance with applicable law.
(b) OTHER TAXES. In addition, to the fullest extent permitted
by applicable law, the Borrower agrees to pay any present or future
stamp or documentary taxes or any other excise or property taxes,
charges or similar levies that arise from any payment made hereunder
or from the execution, delivery or registration of, or otherwise with
respect to, this Agreement, any Assignment or any Security Instrument
(hereinafter referred to as "OTHER TAXES").
(c) INDEMNIFICATION. TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, THE BORROWER WILL INDEMNIFY EACH LENDER AND THE
ISSUING BANK AND THE AGENT FOR THE FULL AMOUNT OF TAXES AND OTHER
TAXES (INCLUDING, BUT NOT LIMITED TO, ANY TAXES OR OTHER TAXES IMPOSED
BY ANY GOVERNMENTAL AUTHORITY ON AMOUNTS PAYABLE UNDER THIS SECTION
4.06) PAID BY SUCH LENDER, THE ISSUING BANK OR THE AGENT (ON THEIR
BEHALF OR ON BEHALF OF ANY LENDER), AS THE CASE MAY BE, AND ANY
LIABILITY (INCLUDING PENALTIES, INTEREST AND EXPENSES) ARISING
THEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER
TAXES WERE CORRECTLY OR LEGALLY ASSERTED UNLESS THE PAYMENT OF SUCH
TAXES WAS NOT CORRECTLY OR LEGALLY ASSERTED AND SUCH LENDER'S PAYMENT
OF SUCH TAXES OR OTHER TAXES WAS THE RESULT OF ITS GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT. ANY PAYMENT PURSUANT TO SUCH INDEMNIFICATION
SHALL BE MADE WITHIN THIRTY (30) DAYS AFTER THE DATE ANY LENDER, THE
ISSUING BANK OR THE AGENT, AS THE CASE MAY BE, MAKES WRITTEN DEMAND
THEREFOR. IF ANY LENDER OR THE AGENT RECEIVES A REFUND OR CREDIT IN
RESPECT OF ANY TAXES OR OTHER TAXES FOR WHICH SUCH LENDER, ISSUING
BANK OR THE AGENT HAS RECEIVED PAYMENT FROM THE BORROWER IT SHALL
PROMPTLY NOTIFY THE BORROWER OF SUCH REFUND OR CREDIT AND SHALL, IF NO
DEFAULT HAS OCCURRED AND IS CONTINUING, WITHIN THIRTY (30) DAYS AFTER
RECEIPT OF A REQUEST BY THE BORROWER (OR PROMPTLY UPON RECEIPT, IF THE
BORROWER HAS REQUESTED APPLICATION FOR SUCH REFUND OR CREDIT PURSUANT
HERETO), PAY AN AMOUNT EQUAL TO SUCH REFUND OR CREDIT TO THE BORROWER
WITHOUT INTEREST (BUT WITH ANY INTEREST SO REFUNDED OR CREDITED),
PROVIDED THAT THE BORROWER, UPON THE REQUEST OF SUCH LENDER, THE
ISSUING BANK OR THE AGENT, AGREES TO RETURN SUCH REFUND OR CREDIT
(PLUS PENALTIES, INTEREST OR OTHER CHARGES) TO SUCH LENDER OR THE
AGENT IN THE EVENT SUCH LENDER OR THE AGENT IS REQUIRED TO REPAY SUCH
REFUND OR CREDIT.
(d) LENDER REPRESENTATIONS.
(i) Each Lender represents that it is either (1) a banking
association or corporation organized under the laws of the United
States of America or any state thereof or (2) it is entitled to
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complete exemption from United States withholding tax imposed on
or with respect to any payments, including fees, to be made to it
pursuant to this Agreement (A) under an applicable provision of a
tax convention to which the United States of America is a party
or (B) because it is acting through a branch, agency or office in
the United States of America and any payment to be received by it
hereunder is effectively connected with a trade or business in
the United States of America. Each Lender that is not a banking
association or corporation organized under the laws of the United
States of America or any state thereof agrees to provide to the
Borrower and the Agent on the Closing Date, or on the date of its
delivery of the Assignment pursuant to which it becomes a Lender,
and at such other times as required by United States law or as
the Borrower or the Agent shall reasonably request, two accurate
and complete original signed copies of either (A) Internal
Revenue Service Form 4224 (or successor form) certifying that all
payments to be made to it hereunder will be effectively connected
to a United States trade or business (the "FORM 4224
CERTIFICATION") or (B) Internal Revenue Service Form 1001 (or
successor form) certifying that it is entitled to the benefit of
a provision of a tax convention to which the United States of
America is a party which completely exempts from United States
withholding tax all payments to be made to it hereunder (the
"FORM 1001 CERTIFICATION"). In addition, each Lender agrees that
if it previously filed a Form 4224 Certification, it will deliver
to the Borrower and the Agent a new Form 4224 Certification prior
to the first payment date occurring in each of its subsequent
taxable years; and if it previously filed a Form 1001
Certification, it will deliver to the Borrower and the Agent a
new certification prior to the first payment date falling in the
third year following the previous filing of such certification.
Each Lender also agrees to deliver to the Borrower and the Agent
such other or supplemental forms as may at any time be required
as a result of changes in applicable law or regulation in order
to confirm or maintain in effect its entitlement to exemption
from United States withholding tax on any payments hereunder,
PROVIDED that the circumstances of such Lender at the relevant
time and applicable laws permit it to do so. If a Lender
determines, as a result of any change in either (i) a
Governmental Requirement or (ii) its circumstances, that it is
unable to submit any form or certificate that it is obligated to
submit pursuant to this Section 4.06, or that it is required to
withdraw or cancel any such form or certificate previously
submitted, it shall promptly notify the Borrower and the Agent of
such fact. If a Lender is organized under the laws of a
jurisdiction outside the United States of America, unless the
Borrower and the Agent have received a Form 1001 Certification or
Form 4224 Certification satisfactory to them indicating that all
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payments to be made to such Lender hereunder are not subject to
United States withholding tax, the Borrower shall withhold taxes
from such payments at the applicable statutory rate. Each Lender
agrees to indemnify and hold harmless the Borrower or Agent, as
applicable, from any United States taxes, penalties, interest and
other expenses, costs and losses incurred or payable by (i) the
Agent as a result of such Lender's failure to submit any form or
certificate that it is required to provide pursuant to this
Section 4.06 or (ii) the Borrower or the Agent as a result of
their reliance on any such form or certificate which such Lender
has provided to them pursuant to this Section 4.06.
(ii) For any period with respect to which a Lender has
failed to provide the Borrower with the form required pursuant to
this Section 4.06, if any, (other than if such failure is due to
a change in a Governmental Requirement occurring subsequent to
the date on which a form originally was required to be provided),
such Lender shall not be entitled to indemnification under
Section 4.06 with respect to taxes imposed by the United States
which taxes would not have been imposed but for such failure to
provide such forms; PROVIDED, HOWEVER, that if a Lender, which is
otherwise exempt from or subject to a reduced rate of withholding
tax, becomes subject to taxes because of its failure to deliver a
form required hereunder, the Borrower shall take such steps as
such Lender shall reasonably request to assist such Lender to
recover such taxes.
(iii) Any Lender claiming any additional amounts payable
pursuant to this Section 4.06 shall use reasonable efforts
(consistent with legal and regulatory restrictions) to file any
certificate or document requested by the Borrower or the Agent or
to change the jurisdiction of its Applicable Lending Office or to
contest any tax imposed if the making of such a filing or change
or contesting such tax would avoid the need for or reduce the
amount of any such additional amounts that may thereafter accrue
and would not, in the sole determination of such Lender, be
otherwise disadvantageous to such Lender.
Section 4.07 DISPOSITION OF PROCEEDS. The Mortgage contains an
assignment by the Borrower unto and in favor of the Agent for the benefit
of the Lenders of all production and all proceeds attributable thereto
which may be produced from or allocated to the Mortgaged Property, and the
Mortgage further provides in general for the application of such proceeds
to the satisfaction of the Indebtedness and other obligations described
therein and secured thereby. Notwithstanding the assignment contained in
the Mortgage, until the occurrence of an Event of Default, the Lenders
agree that they will neither notify the purchaser or purchasers of such
production nor take any other action to cause such proceeds to be remitted
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to the Lenders, but the Lenders will instead permit such proceeds to be
paid to the Borrower.
ARTICLE V
CAPITAL ADEQUACY
Section 5.01 ADDITIONAL COSTS.
(a) EURODOLLAR REGULATIONS, ETC. The Borrower shall pay
directly to each Lender from time to time such amounts as such Lender
may determine to be necessary to compensate such Lender for any costs
which it determines are attributable to its making or maintaining of
any Eurodollar Loans or issuing or participating in Letters of Credit
hereunder or its obligation to make any Eurodollar Loans or issue or
participate in any Letters of Credit hereunder, or any reduction in
any amount receivable by such Lender hereunder in respect of any of
such Eurodollar Loans, Letters of Credit or such obligation (such
increases in costs and reductions in amounts receivable being herein
called "ADDITIONAL COSTS"), resulting from any Regulatory Change
which: (i) changes the basis of taxation of any amounts payable to
such Lender under this Agreement or any Note in respect of any of such
Eurodollar Loans or Letters of Credit (other than taxes imposed on the
overall net income of such Lender or of its Applicable Lending Office
for any of such Eurodollar Loans by the jurisdiction in which such
Lender has its principal office or Applicable Lending Office); or
(ii) imposes or modifies any reserve, special deposit, minimum
capital, capital ratio or similar requirements relating to any
extensions of credit or other assets of, or any deposits with or other
liabilities of such Lender, or the Commitment or Loans of such Lender
or the Eurodollar interbank market; or (iii) imposes any other
condition affecting this Agreement or any Note (or any of such
extensions of credit or liabilities) or such Lender's Commitment or
Loans. Each Lender will notify the Agent and the Borrower of any
event occurring after the Closing Date which will entitle such Lender
to compensation pursuant to this Section 5.01(a) as promptly as
practicable after it obtains knowledge thereof and determines to
request such compensation, and will designate a different Applicable
Lending Office for the Loans of such Lender affected by such event if
such designation will avoid the need for, or reduce the amount of,
such compensation and will not, in the sole opinion of such Lender, be
disadvantageous to such Lender, provided that such Lender shall have
no obligation to so designate an Applicable Lending Office located in
the United States. If any Lender requests compensation from the
Borrower under this Section 5.01(a), the Borrower may, by notice to
such Lender, suspend the obligation of such Lender to make additional
Loans of the Type with respect to which such compensation is requested
until the Regulatory Change giving rise to such request ceases to be
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in effect (in which case the provisions of Section 5.04 shall be
applicable).
(b) REGULATORY CHANGE. Without limiting the effect of the
provisions of Section 5.01(a), in the event that at any time (by
reason of any Regulatory Change or any other circumstances arising
after the Closing Date affecting (A) any Lender, (B) the Eurodollar
interbank market or (C) such Lender's position in such market), the
Eurodollar Rate, as determined in good faith by such Lender, will not
adequately and fairly reflect the cost to such Lender of funding its
Eurodollar Loans, then, if such Lender so elects, by notice to the
Borrower and the Agent, the obligation of such Lender to make
additional Eurodollar Loans shall be suspended until such Regulatory
Change or other circumstances ceases to be in effect (in which case
the provisions of Section 5.04 shall be applicable).
(c) CAPITAL ADEQUACY. Without limiting the effect of the
foregoing provisions of this Section 5.01 (but without duplication),
the Borrower shall pay directly to any Lender from time to time on
request such amounts as such Lender may reasonably determine to be
necessary to compensate such Lender or its parent or holding company
for any costs which it determines are attributable to the maintenance
by such Lender or its parent or holding company (or any Applicable
Lending Office), pursuant to any Governmental Requirement following
any Regulatory Change, of capital in respect of its Commitment, its
Note, its Loans or any interest held by it in any Letter of Credit,
such compensation to include, without limitation, an amount equal to
any reduction of the rate of return on assets or equity of such Lender
or its parent or holding company (or any Applicable Lending Office) to
a level below that which such Lender or its parent or holding company
(or any Applicable Lending Office) could have achieved but for such
Governmental Requirement. Such Lender will notify the Borrower that
it is entitled to compensation pursuant to this Section 5.01(c) as
promptly as practicable after it determines to request such
compensation.
(d) COMPENSATION PROCEDURE. Any Lender notifying the Borrower
of the incurrence of additional costs under this Section 5.01 shall in
such notice to the Borrower and the Agent set forth in reasonable
detail the basis and amount of its request for compensation.
Determinations and allocations by each Lender for purposes of this
Section 5.01 of the effect of any Regulatory Change pursuant to
Section 5.01(a) or (b), or of the effect of capital maintained
pursuant to Section 5.01(c), on its costs or rate of return of
maintaining Loans or its obligation to make Loans or issue Letters of
Credit, or on amounts receivable by it in respect of Loans or Letters
of Credit, and of the amounts required to compensate such Lender under
this Section 5.01, shall be conclusive and binding for all purposes,
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provided that such determinations and allocations are made on a
reasonable basis. Any request for additional compensation under this
Section 5.01 shall be paid by the Borrower within thirty (30) days of
the receipt by the Borrower of the notice described in this Section
5.01(d).
Section 5.02 LIMITATION ON EURODOLLAR LOANS. Anything herein to
the contrary notwithstanding, if, on or prior to the determination of any
Eurodollar Rate for any Interest Period:
(i) the Agent determines (which determination shall be
conclusive, absent manifest error) that quotations of interest
rates for the relevant deposits referred to in the definition of
"Eurodollar Rate" in Section 1.02 are not being provided in the
relevant amounts or for the relevant maturities for purposes of
determining rates of interest for Eurodollar Loans as provided
herein; or
(ii) the Agent determines (which determination shall be
conclusive, absent manifest error) that the relevant rates of
interest referred to in the definition of "Eurodollar Rate" in
Section 1.02 upon the basis of which the rate of interest for
Eurodollar Loans for such Interest Period is to be determined are
not sufficient to adequately cover the cost to the Lenders of
making or maintaining Eurodollar Loans;
then the Agent shall give the Borrower prompt notice thereof, and so long
as such condition remains in effect, the Lenders shall be under no
obligation to make additional Eurodollar Loans.
Section 5.03 ILLEGALITY. Notwithstanding any other provision of
this Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to honor its obligation to make or maintain
Eurodollar Loans hereunder, then such Lender shall promptly notify the
Borrower thereof and such Lender's obligation to make Eurodollar Loans
shall be suspended until such time as such Lender may again make and
maintain Eurodollar Loans (in which case the provisions of Section 5.04
shall be applicable).
Section 5.04 BASE RATE LOANS PURSUANT TO SECTIONS 5.01, 5.02 AND
5.03. If the obligation of any Lender to make Eurodollar Loans shall be
suspended pursuant to Sections 5.01, 5.02 or 5.03 ("AFFECTED LOANS"), all
Affected Loans which would otherwise be made by such Lender shall be made
instead as Base Rate Loans (and, if an event referred to in Section 5.01(b)
or Section 5.03 has occurred and such Lender so requests by notice to the
Borrower, all Affected Loans of such Lender then outstanding shall be
automatically converted into Base Rate Loans on the date specified by such
Lender in such notice) and, to the extent that Affected Loans are so made
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as (or converted into) Base Rate Loans, all payments of principal which
would otherwise be applied to such Lender's Affected Loans shall be applied
instead to its Base Rate Loans.
Section 5.05 COMPENSATION. The Borrower shall pay to each
Lender within thirty (30) days of receipt of written request of such Lender
(which request shall set forth, in reasonable detail, the basis for
requesting such amounts and which shall be conclusive and binding for all
purposes provided that such determinations are made on a reasonable basis),
such amount or amounts as shall compensate it for any loss, cost, expense
or liability which such Lender determines are attributable to:
(i) any payment, prepayment or conversion of a Eurodollar
Loan properly made by such Lender or the Borrower for any reason
(including, without limitation, the acceleration of the Loans
pursuant to Section 10.01) on a date other than the last day of
the Interest Period for such Loan; or
(ii) any failure by the Borrower for any reason (including
but not limited to, the failure of any of the conditions
precedent specified in Article VI to be satisfied) to borrow,
continue or convert a Eurodollar Loan from such Lender on the
date for such borrowing, continuation or conversion specified in
the relevant notice given pursuant to Section 2.02(c).
Without limiting the effect of the preceding sentence, such compensation
shall include an amount equal to the excess, if any, of (i) the amount of
interest which would have accrued on the principal amount so paid, prepaid
or converted or not borrowed for the period from the date of such payment,
prepayment or conversion or failure to borrow to the last day of the
Interest Period for such Loan (or, in the case of a failure to borrow, the
Interest Period for such Loan which would have commenced on the date
specified for such borrowing) at the applicable rate of interest for such
Loan provided for herein over (ii) the interest component of the amount
such Lender would have bid in the London interbank market for Dollar
deposits of leading banks in amounts comparable to such principal amount
and with maturities comparable to such period (as reasonably determined by
such Lender).
Section 5.06 REPLACEMENT LENDERS.
(a) If any Lender has notified the Borrower and the Agent of its
incurring additional costs under Section 5.01 or has required the
Borrower to make payments for Taxes under Section 4.06, then the
Borrower may, unless such Lender has notified the Borrower and the
Agent that the circumstances giving rise to such notice no longer
apply, terminate, in whole but not in part, the Commitment of any
Lender (other than the Agent) (the "TERMINATED LENDER") at any time
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upon five (5) Business Days' prior written notice to the Terminated
Lender and the Agent (such notice referred to herein as a "NOTICE OF
TERMINATION").
(b) In order to effect the termination of the Commitment of the
Terminated Lender, the Borrower shall: (i) obtain an agreement with
one or more Lenders to increase their Commitment or Commitments and/or
(ii) request any one or more other banking institutions to become
parties to this Agreement in place and instead of such Terminated
Lender and agree to accept a Commitment or Commitments; PROVIDED,
HOWEVER, that such one or more other banking institutions are
reasonably acceptable to the Agent and become parties by executing an
Assignment (the Lenders or other banking institutions that agree to
accept in whole or in part the Commitment of the Terminated Lender
being referred to herein as the "REPLACEMENT LENDERS"), such that the
aggregate increased and/or accepted Commitments of the Replacement
Lenders under clauses (i) and (ii) above equal the Commitment of the
Terminated Lender.
(c) The Notice of Termination shall include the name of the
Terminated Lender, the date the termination will occur (the "LENDER
TERMINATION DATE"), and the Replacement Lender or Replacement Lenders
to which the Terminated Lender will assign its Commitment and, if
there will be more than one Replacement Lender, the portion of the
Terminated Lender's Commitment to be assigned to each Replacement
Lender.
(d) On the Lender Termination Date, (i) the Terminated Lender
shall by execution and delivery of an Assignment assign its Commitment
to the Replacement Lender or Replacement Lenders (pro rata, if there
is more than one Replacement Lender, in proportion to the portion of
the Terminated Lender's Commitment to be assigned to each Replacement
Lender) indicated in the Notice of Termination and shall assign to the
Replacement Lender or Replacement Lenders each of its Loans (if any)
then outstanding and participation interests in Letters of Credit (if
any) then outstanding pro rata as aforesaid), (ii) the Terminated
Lender shall endorse its Note, payable without recourse,
representation or warranty to the order of the Replacement Lender or
Replacement Lenders (pro rata as aforesaid), (iii) the Replacement
Lender or Replacement Lenders shall purchase the Note held by the
Terminated Lender (pro rata as aforesaid) at a price equal to the
unpaid principal amount thereof plus interest and facility and other
fees accrued and unpaid to the Lender Termination Date, and (iv) the
Replacement Lender or Replacement Lenders will thereupon (pro rata as
aforesaid) succeed to and be substituted in all respects for the
Terminated Lender with like effect as if becoming a Lender pursuant to
the terms of Section 12.06(b), and the Terminated Lender will have the
rights and benefits of an assignor under Section 12.06(b). To the
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extent not in conflict, the terms of Section 12.06(b) shall supplement
the provisions of this Section 5.06(d). For each assignment made
under this Section 5.06, the Replacement Lender shall pay to the Agent
the processing fee provided for in Section 12.06(b). The Borrower
will be responsible for the payment of any breakage costs associated
with termination and Replacement Lenders, as set forth in Section
5.05.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 INITIAL FUNDING.
The obligation of the Lenders to make the Initial Funding is
subject to the receipt by the Agent and the Lenders of all fees payable
pursuant to Section 2.04 on or before the Closing Date and the receipt by
the Agent of the following documents and satisfaction of the other
conditions provided in this Section 6.01, each of which shall be
satisfactory to the Agent in form and substance:
(a) A certificate of the Secretary or an Assistant Secretary of
each of the Borrower and the Parent setting forth (i) resolutions of
its board of directors with respect to the authorization of the
Borrower or the Parent, as applicable to execute and deliver the Loan
Documents to which it is a party and to enter into the transactions
contemplated in those documents, (ii) the officers of the Borrower or
the Parent, as applicable (y) who are authorized to sign the Loan
Documents to which Borrower or the Parent, as applicable is a party
and (z) who will, until replaced by another officer or officers duly
authorized for that purpose, act as its representative for the
purposes of signing documents and giving notices and other
communications in connection with this Agreement and the transactions
contemplated hereby, (iii) specimen signatures of the authorized
officers, and (iv) the articles or certificate of incorporation and
bylaws of the Borrower or the Parent, as applicable, certified as
being true and complete. The Agent and the Lenders may conclusively
rely on such certificate until the Agent receives notice in writing
from the Borrower or the Parent, as applicable to the contrary.
(b) Certificates of the appropriate state agencies with respect
to the existence, qualification and good standing of the Borrower and
the Parent.
(c) A compliance certificate which shall be substantially in the
form of EXHIBIT C, duly and properly executed by a Responsible Officer
and dated as of the date of the Initial Funding.
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(d) The Notes, duly completed and executed.
(e) The Security Instruments, including those described on
EXHIBIT D, duly completed and executed in sufficient number of
counterparts for recording, if necessary.
(f) Opinions of Warner Norcross & Judd L.L.P., counsel to the
Borrower and the Parent, and Phelps Dunbar, L.L.P., special
Mississippi counsel to the Agent, each in form and substance
satisfactory to the Agent, as to such matters incident to the
transactions herein contemplated as the Agent may reasonably request.
(g) A certificate of insurance coverage of the Borrower
evidencing that the Borrower is carrying insurance in accordance with
Section 7.19.
(h) The Agent shall have been furnished with appropriate UCC
search certificates reflecting no prior Liens.
(i) The Agent shall be satisfied with the terms and conditions
of, and values relating to the Properties acquired from Amerada Hess
Corporation pursuant to, the Agreement for Purchase and Sale dated
November 25, 1997, between the Borrower and Amerada Hess Corporation
as amended, supplemented or otherwise modified (the "AMERADA HESS
PURCHASE AND SALE AGREEMENT").
(j) The Parent shall have consummated an initial public offering
for the sale of common stock generating proceeds from the underwriter
that are contributed to the Borrower of at least $40,000,000.
(k) The Borrower shall have acquired the interests in the Oil
and Gas Properties contemplated by the Amerada Hess Purchase and Sale
Agreement.
(l) The Parent shall have executed and delivered to the Borrower
assignments from the Parent to the Borrower, in form and substance
satisfactory to the Agent, of all of the Parent's rights, titles, and
interest in and to all of its Oil and Gas Properties.
(m) Borrower shall have repaid all Debt for borrowed money and
terminated and/or released all credit agreements related thereto and
Liens securing such Debt.
(n) Such other documents as the Agent or any Lender or special
counsel to the Agent may reasonably request.
Section 6.02 INITIAL AND SUBSEQUENT LOANS AND LETTERS OF CREDIT.
The obligation of the Lenders to make Loans to the Borrower upon the
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occasion of each borrowing hereunder and to issue, renew, extend or reissue
Letters of Credit for the account of the Borrower (including the Initial
Funding) is subject to the further conditions precedent that, as of the
date of such Loans and after giving effect thereto:
(a) no Default shall have occurred and be continuing;
(b) no Material Adverse Effect shall have occurred; and
(c) the representations and warranties made by the Borrower and the
Parent in Article VII and in the Security Instruments shall be true on and
as of the date of the making of such Loans or issuance, renewal, extension
or reissuance of a Letter of Credit with the same force and effect as if
made on and as of such date and following such new borrowing, except to the
extent such representations and warranties are expressly limited to an
earlier date or the Majority Lenders may expressly consent in writing to
the contrary.
Each request for a borrowing or issuance, renewal, extension or
reissuance of a Letter of Credit by the Borrower hereunder shall constitute
a certification by the Borrower to the effect set forth in Section 6.02(c)
(both as of the date of such notice and, unless the Borrower otherwise
notifies the Agent prior to the date of and immediately following such
borrowing or issuance, renewal, extension or reissuance of a Letter of
Credit as of the date thereof).
Section 6.03 CONDITIONS PRECEDENT FOR THE BENEFIT OF LENDERS.
All conditions precedent to the obligations of the Lenders to make any Loan
are imposed hereby solely for the benefit of the Lenders, and no other
Person may require satisfaction of any such condition precedent or be
entitled to assume that the Lenders will refuse to make any Loan in the
absence of strict compliance with such conditions precedent.
Section 6.04 NO WAIVER. No waiver of any condition precedent
shall preclude the Agent or the Lenders from requiring such condition to be
met prior to making any subsequent Loan or preclude the Lenders from
thereafter declaring that the failure of the Borrower to satisfy such
condition precedent constitutes a Default.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
The Borrower and the Parent each represents and warrants to the Agent
and the Lenders that (each representation and warranty herein is given as
of the Closing Date and shall be deemed repeated and reaffirmed on the
dates of each borrowing and issuance, renewal, extension or reissuance of a
Letter of Credit as provided in Section 6.02):
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Section 7.01 CORPORATE EXISTENCE. Each of the Borrower, the
Parent and each Subsidiary: (i) is a corporation duly organized, legally
existing and in good standing under the laws of the jurisdiction of its
incorporation; (ii) has all requisite corporate power, and has all material
governmental licenses, authorizations, consents and approvals necessary to
own its assets and carry on its business as now being or as proposed to be
conducted; and (iii) is qualified to do business in all jurisdictions in
which the nature of the business conducted by it makes such qualification
necessary and where failure so to qualify would have a Material Adverse
Effect.
Section 7.02 FINANCIAL CONDITION. The audited consolidated
balance sheet of the Borrower and its Consolidated Subsidiaries as at
December 31, 1996 and the related consolidated statement of income,
stockholders' equity and cash flow of the Borrower and its Consolidated
Subsidiaries for the fiscal year ended on said date, with the opinion
thereon of Arthur Andersen L.L.P. heretofore furnished to each of the
Lenders and the unaudited consolidated balance sheet of the Borrower and
its Consolidated Subsidiaries as at September 30, 1997 and their related
consolidated statements of income, stockholders' equity and cash flow of
the Borrower and its Consolidated Subsidiaries for the nine month period
ended on such date heretofore furnished to the Agent, are complete and
correct and fairly present the consolidated financial condition of the
Borrower and its Consolidated Subsidiaries as at said dates and the results
of its operations for the fiscal year and the nine month period on said
dates, all in accordance with GAAP, as applied on a consistent basis
(subject, in the case of the interim financial statements, to normal year-
end adjustments). Neither the Borrower nor any Subsidiary has on the
Closing Date any material Debt, contingent liabilities, liabilities for
taxes, unusual forward or long-term commitments or unrealized or
anticipated losses from any unfavorable commitments, except as referred to
or reflected or provided for in the Financial Statements or in SCHEDULE
7.02. Since December 31, 1996, there has been no change or event having a
Material Adverse Effect. Since the date of the Financial Statements,
neither the business nor the Properties of the Borrower or any Subsidiary
have been materially and adversely affected as a result of any fire,
explosion, earthquake, flood, drought, windstorm, accident, strike or other
labor disturbance, embargo, requisition or taking of Property or
cancellation of contracts, permits or concessions by any Governmental
Authority, riot, activities of armed forces or acts of God or of any public
enemy.
Section 7.03 LITIGATION. Except as disclosed to the Lenders in
SCHEDULE 7.03 hereto, at the Closing Date there is no litigation, legal,
administrative or arbitral proceeding, investigation or other action of any
nature pending or, to the knowledge of the Borrower or the Parent
threatened against or affecting the Borrower, the Parent or any Subsidiary
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which involves the possibility of any judgment or liability against the
Borrower, the Parent or any Subsidiary not fully covered by insurance
(except for normal deductibles).
Section 7.04 NO BREACH. Neither the execution and delivery of
the Loan Documents, nor compliance with the terms and provisions hereof
will conflict with or result in a breach of, or require any consent which
has not been obtained as of the Closing Date under, the respective charter
or by-laws of the Borrower, the Parent or any Subsidiary, or any
Governmental Requirement or any agreement or instrument to which the
Borrower, the Parent or any Subsidiary is a party or by which it is bound
or to which it or its Properties are subject, or constitute a default under
any such agreement or instrument, or result in the creation or imposition
of any Lien upon any of the revenues or assets of the Borrower, the Parent
or any Subsidiary pursuant to the terms of any such agreement or instrument
other than the Liens created by the Loan Documents.
Section 7.05 AUTHORITY. The Borrower, the Parent and each
Subsidiary have all necessary corporate power and authority to execute,
deliver and perform its obligations under the Loan Documents to which it is
a party; and the execution, delivery and performance by the Borrower, the
Parent and each Subsidiary of the Loan Documents to which it is a party,
have been duly authorized by all necessary corporate action on its part;
and the Loan Documents constitute the legal, valid and binding obligations
of the Borrower, the Parent and each Subsidiary, enforceable in accordance
with their terms.
Section 7.06 APPROVALS. No authorizations, approvals or
consents of, and no filings or registrations with, any Governmental
Authority are necessary for the execution, delivery or performance by the
Borrower, the Parent or any Subsidiary of the Loan Documents to which it is
a party or for the validity or enforceability thereof, except for the
recording and filing of the Security Instruments as required by this
Agreement.
Section 7.07 USE OF LOANS. The proceeds of the Loans shall be
used by the Borrower only to repay in full Debt existing on the date of
Initial Funding, including without limitation, Debt payable to First of
America Bank - Michigan, N.A. and the C.E. Miller Trust, for general
corporate purposes, and to finance in whole or in part acquisitions of Oil
and Gas Properties; PROVIDED, HOWEVER, such proceeds shall not be used for
any hostile corporate acquisitions or takeovers. The Borrower is not
engaged principally, or as one of its important activities, in the business
of extending credit for the purpose, whether immediate, incidental or
ultimate, of buying or carrying margin stock (within the meaning of
Regulation G, T, U or X of the Board of Governors of the Federal Reserve
System) and no part of the proceeds of any Loan hereunder will be used to
buy or carry any margin stock.
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Section 7.08 ERISA.
(a) The Borrower, each Subsidiary and each ERISA Affiliate have
complied in all material respects with ERISA and, where applicable,
the Code regarding each Plan.
(b) Each Plan is, and has been, maintained in substantial
compliance with ERISA and, where applicable, the Code.
(c) No act, omission or transaction has occurred which could
result in imposition on the Borrower, any Subsidiary or any ERISA
Affiliate (whether directly or indirectly) of (i) either a civil
penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a
tax imposed pursuant to Chapter 43 of Subtitle D of the Code or (ii)
breach of fiduciary duty liability damages under section 409 of ERISA.
(d) No Plan (other than a defined contribution plan) or any
trust created under any such Plan has been terminated since
September 2, 1974. No liability to the PBGC (other than for the
payment of current premiums which are not past due) by the Borrower,
any Subsidiary or any ERISA Affiliate has been or is expected by the
Borrower, any Subsidiary or any ERISA Affiliate to be incurred with
respect to any Plan. No ERISA Event with respect to any Plan has
occurred.
(e) Full payment when due has been made of all amounts which the
Borrower, any Subsidiary or any ERISA Affiliate is required under the
terms of each Plan or applicable law to have paid as contributions to
such Plan, and no accumulated funding deficiency (as defined in
section 302 of ERISA and section 412 of the Code), whether or not
waived, exists with respect to any Plan.
(f) The actuarial present value of the benefit liabilities under
each Plan which is subject to Title IV of ERISA does not, as of the
end of the Borrower's most recently ended fiscal year, exceed the
current value of the assets (computed on a plan termination basis in
accordance with Title IV of ERISA) of such Plan allocable to such
benefit liabilities. The term "actuarial present value of the benefit
liabilities" shall have the meaning specified in section 4041 of
ERISA.
(g) None of the Borrower, any Subsidiary or any ERISA Affiliate
sponsors, maintains, or contributes to an employee welfare benefit
plan, as defined in section 3(1) of ERISA, including, without
limitation, any such plan maintained to provide benefits to former
employees of such entities, that may not be terminated by the
Borrower, a Subsidiary or any ERISA Affiliate in its sole discretion
at any time without any material liability.
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(h) None of the Borrower, any Subsidiary or any ERISA Affiliate
sponsors, maintains or contributes to, or has at any time in the
preceding six calendar years, sponsored, maintained or contributed to,
any Multiemployer Plan.
(i) None of the Borrower, any Subsidiary or any ERISA Affiliate
is required to provide security under section 401(a)(29) of the Code
due to a Plan amendment that results in an increase in current
liability for the Plan.
Section 7.09 TAXES. Except as set out in SCHEDULE 7.09, each of
the Borrower, the Parent and its Subsidiaries has filed all United States
Federal income tax returns and all other tax returns which are required to
be filed by them and have paid all material taxes due pursuant to such
returns or pursuant to any assessment received by the Borrower, the Parent
or any Subsidiary. The charges, accruals and reserves on the books of the
Borrower, the Parent and its Subsidiaries in respect of taxes and other
governmental charges are, in the opinion of the Borrower and the Parent,
adequate. No tax lien has been filed and, to the knowledge of the Borrower
or the Parent, no claim is being asserted with respect to any such tax, fee
or other charge.
Section 7.10 TITLES, ETC.
(a) Except as set out in SCHEDULE 7.10, each of the Borrower and
its Subsidiaries has good and defensible title to its material
(individually or in the aggregate) Properties, free and clear of all
Liens, except Liens permitted by Section 9.02. Except as set forth in
SCHEDULE 7.10, after giving full effect to the Excepted Liens, the
Borrower owns the net interests in production attributable to the
Hydrocarbon Interests reflected in the most recently delivered Reserve
Report and the ownership of such Properties shall not in any material
respect obligate the Borrower to bear the costs and expenses relating
to the maintenance, development and operations of each such Property
in an amount in excess of the working interest of each Property set
forth in the most recently delivered Reserve Report. All information
contained in the most recently delivered Reserve Report is true and
correct in all material respects as of the date thereof.
(b) All leases and agreements necessary for the conduct of the
business of the Borrower and its Subsidiaries are valid and
subsisting, in full force and effect and there exists no default or
event or circumstance which with the giving of notice or the passage
of time or both would give rise to a default under any such lease or
leases, which would affect in any material respect the conduct of the
business of the Borrower and its Subsidiaries.
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(c) The rights, Properties and other assets presently owned,
leased or licensed by the Borrower and its Subsidiaries including,
without limitation, all easements and rights of way, include all
rights, Properties and other assets necessary to permit the Borrower
and its Subsidiaries to conduct their business in all material
respects in the same manner as its business has been conducted prior
to the Closing Date.
(d) All of the assets and Properties of the Borrower and its
Subsidiaries which are reasonably necessary for the operation of its
business are in good working condition and are maintained in
accordance with prudent business standards.
Section 7.11 NO MATERIAL MISSTATEMENTS. No written information,
statement, exhibit, certificate, document or report furnished to the Agent
and the Lenders (or any of them) by the Borrower, the Parent or any
Subsidiary in connection with the negotiation of this Agreement contained
any material misstatement of fact or omitted to state a material fact or
any fact necessary to make the statement contained therein not materially
misleading in the light of the circumstances in which made and with respect
to the Borrower, the Parent and its Subsidiaries taken as a whole. There
is no fact peculiar to the Borrower, the Parent or any Subsidiary which has
a Material Adverse Effect or in the future is reasonably likely to have (so
far as the Borrower or the Parent can now foresee) a Material Adverse
Effect and which has not been set forth in this Agreement or the other
documents, certificates and statements furnished to the Agent by or on
behalf of the Borrower, the Parent or any Subsidiary prior to, or on, the
Closing Date in connection with the transactions contemplated hereby.
Section 7.12 INVESTMENT COMPANY ACT. Neither the Borrower nor
any Subsidiary is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of
1940, as amended.
Section 7.13 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the
Borrower nor any Subsidiary is a "holding company," or a "subsidiary
company" of a "holding company," or an "affiliate" of a "holding company"
or of a "subsidiary company" of a "holding company," or a "public utility"
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
Section 7.14 SUBSIDIARIES. Except for the Borrower, the Parent
has no Subsidiaries, and the Borrower has no Subsidiaries.
Section 7.15 LOCATION OF BUSINESS AND OFFICES. The Borrower's
principal place of business and chief executive offices are located at the
address stated on the signature page of this Agreement. The principal
place of business and chief executive office of each Subsidiary are located
at the addresses stated on SCHEDULE 7.14.
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Section 7.16 DEFAULTS. None of the Borrower, the Parent or any
Subsidiary is in default nor has any event or circumstance occurred which,
but for the expiration of any applicable grace period or the giving of
notice, or both, would constitute a default under any material agreement or
instrument to which the Borrower, the Parent or any Subsidiary is a party
or by which the Borrower, the Parent or any Subsidiary is bound which
default would have a Material Adverse Effect. No Default hereunder has
occurred and is continuing.
Section 7.17 ENVIRONMENTAL MATTERS. Except (i) as provided in
SCHEDULE 7.17 or (ii) as would not have a Material Adverse Effect (or with
respect to (c), (d) and (e) below, where the failure to take such actions
would not have a Material Adverse Effect):
(a) Neither any Property of the Borrower or any Subsidiary nor
the operations conducted thereon violate any order or requirement of
any court or Governmental Authority or any Environmental Laws;
(b) Without limitation of clause (a) above, no Property of the
Borrower or any Subsidiary nor the operations currently conducted
thereon or, to the best knowledge of the Borrower, by any prior owner
or operator of such Property or operation, are in violation of or
subject to any existing, pending or threatened action, suit,
investigation, inquiry or proceeding by or before any court or
Governmental Authority or to any remedial obligations under
Environmental Laws;
(c) All notices, permits, licenses or similar authorizations, if
any, required to be obtained or filed in connection with the operation
or use of any and all Property of the Borrower and each Subsidiary,
including without limitation past or present treatment, storage,
disposal or release of a hazardous substance or solid waste into the
environment, have been duly obtained or filed, and the Borrower and
each Subsidiary are in compliance with the terms and conditions of all
such notices, permits, licenses and similar authorizations;
(d) All hazardous substances, solid waste, and oil and gas
exploration and production wastes, if any, generated at any and all
Property of the Borrower or any Subsidiary have in the past been
transported, treated and disposed of in accordance with Environmental
Laws and so as not to pose an imminent and substantial endangerment to
public health or welfare or the environment, and, to the best
knowledge of the Borrower, all such transport carriers and treatment
and disposal facilities have been and are operating in compliance with
Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment, and are
not the subject of any existing, pending or threatened action,
investigation or inquiry by any Governmental Authority in connection
with any Environmental Laws;
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(e) The Borrower has taken all steps reasonably necessary to
determine and has determined that no hazardous substances, solid
waste, or oil and gas exploration and production wastes, have been
disposed of or otherwise released and there has been no threatened
release of any hazardous substances on or to any Property of the
Borrower or any Subsidiary except in compliance with Environmental
Laws and so as not to pose an imminent and substantial endangerment to
public health or welfare or the environment;
(f) To the extent applicable, all Property of the Borrower and
each Subsidiary currently satisfies all design, operation, and
equipment requirements imposed by the OPA or scheduled as of the
Closing Date to be imposed by OPA during the term of this Agreement,
and the Borrower does not have any reason to believe that such
Property, to the extent subject to OPA, will not be able to maintain
compliance with the OPA requirements during the term of this
Agreement; and
(g) Neither the Borrower nor any Subsidiary has any known
contingent liability in connection with any release or threatened
release of any oil, hazardous substance or solid waste into the
environment.
Section 7.18 COMPLIANCE WITH THE LAW. None of the Borrower, the
Parent or any Subsidiary has violated any Governmental Requirement or
failed to obtain any license, permit, franchise or other governmental
authorization necessary for the ownership of any of its Properties or the
conduct of its business, which violation or failure would have (in the
event such violation or failure were asserted by any Person through
appropriate action) a Material Adverse Effect. Except for such acts or
failures to act as would not have a Material Adverse Effect, the Oil and
Gas Properties (and properties unitized therewith) have been maintained,
operated and developed in a good and workmanlike manner and in conformity
with all applicable laws and all rules, regulations and orders of all duly
constituted authorities having jurisdiction and in conformity with the
provisions of all leases, subleases or other contracts comprising a part of
the Hydrocarbon Interests and other contracts and agreements forming a part
of the Oil and Gas Properties; specifically in this connection, (i) after
the Closing Date, no Oil and Gas Property is subject to having allowable
production reduced below the full and regular allowable (including the
maximum permissible tolerance) because of any overproduction (whether or
not the same was permissible at the time) prior to the Closing Date and
(ii) none of the wells comprising a part of the Oil and Gas Properties (or
properties unitized therewith) are deviated from the vertical more than the
maximum permitted by applicable laws, regulations, rules and orders, and
such wells are, in fact, bottomed under and are producing from, and the
well bores are wholly within, the Oil and Gas Properties (or in the case of
wells located on properties unitized therewith, such unitized properties).
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Section 7.19 INSURANCE. SCHEDULE 7.19 attached hereto contains
an accurate and complete description of all material policies of fire,
liability, workmen's compensation and other forms of insurance owned or
held by the Borrower, the Parent and each Subsidiary. All such policies
are in full force and effect, all premiums with respect thereto covering
all periods up to and including the date of the closing have been paid, and
no notice of cancellation or termination has been received with respect to
any such policy. Such policies are sufficient for compliance with all
requirements of law and of all agreements to which the Borrower, the Parent
or any Subsidiary is a party; are valid, outstanding and enforceable
policies; provide adequate insurance coverage in at least such amounts and
against at least such risks (but including in any event public liability)
as are usually insured against in the same general area by companies
engaged in the same or a similar business for the assets and operations of
the Borrower, the Parent and each Subsidiary; will remain in full force and
effect through the respective dates set forth in SCHEDULE 7.19 without the
payment of additional premiums; and will not in any way be affected by, or
terminate or lapse by reason of, the transactions contemplated by this
Agreement. SCHEDULE 7.19 identifies all material risks, if any, which the
Borrower, the Parent and its Subsidiaries and their respective Board of
Directors or officers have designated as being self-insured. None of the
Borrower, the Parent or any Subsidiary has been refused any insurance with
respect to its assets or operations, nor has its coverage been limited
below usual and customary policy limits, by an insurance carrier to which
it has applied for any such insurance or with which it has carried
insurance during the last three years.
Section 7.20 HEDGING AGREEMENTS. SCHEDULE 7.20 sets forth, as
of the Closing Date, a true and complete list of all Hedging Agreements
(including commodity price swap agreements, forward agreements or contracts
of sale which provide for prepayment for deferred shipment or delivery of
oil, gas or other commodities) of the Borrower and each Subsidiary, the
material terms thereof (including the type, term, effective date,
termination date and notional amounts or volumes), the net mark to market
value thereof, all credit support agreements relating thereto (including
any margin required or supplied), and the counter party to each such
agreement.
Section 7.21 RESTRICTION ON LIENS. None of the Borrower, the
Parent or any of its Subsidiaries is a party to any agreement or
arrangement (other than this Agreement and the Security Instruments), or
subject to any order, judgment, writ or decree, which either restricts or
purports to restrict its ability to grant Liens to other Persons on or in
respect of their respective assets or Properties.
Section 7.22 MATERIAL AGREEMENTS. Set forth on SCHEDULE 7.22
hereto is a complete and correct list of all material agreements, leases,
indentures, purchase agreements, obligations in respect of letters of
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credit, guarantees, joint venture agreements, and other instruments in
effect or to be in effect as of the Closing Date (other than Hedging
Agreements) providing for, evidencing, securing or otherwise relating to
any Debt of the Borrower or any of its Subsidiaries, and all obligations of
the Borrower or any of its Subsidiaries to issuers of surety or appeal
bonds issued for account of the Borrower or any such Subsidiary, and such
list correctly sets forth the names of the debtor or lessee and creditor or
lessor with respect to the Debt or lease obligations outstanding or to be
outstanding and the Property subject to any Lien securing such Debt or
lease obligation. Also set forth on SCHEDULE 7.22 hereto is a complete and
correct list of all material agreements and other instruments of the
Borrower and its Subsidiaries relating to the purchase, transportation by
pipeline, gas processing, marketing, sale and supply of natural gas and
other Hydrocarbons, but in any event, any such agreement or other
instrument that will account for more than 5% of the sales of the Borrower
and its Subsidiaries during the Borrower's current fiscal year.
Section 7.23 GAS IMBALANCES. As of the Closing Date, except as
set forth on SCHEDULE 7.23 or on the most recent certificate delivered
pursuant to Section 8.07(c), on a net basis there are no gas imbalances,
take or pay or other prepayments with respect to the Borrower's Oil and Gas
Properties which would require the Borrower to deliver five percent (5%) or
more of the monthly production from its Hydrocarbons produced on a monthly
basis from its Oil and Gas Properties at some future time without then or
thereafter receiving full payment therefor.
ARTICLE VIII
AFFIRMATIVE COVENANTS
The Borrower and the Parent each covenants and agrees that, so long as
any of the Commitments are in effect and until payment in full of all Loans
hereunder, all interest thereon and all other amounts payable by the
Borrower hereunder:
Section 8.01 REPORTING REQUIREMENTS. The Borrower or the Parent
shall deliver, or shall cause to be delivered, to the Agent with sufficient
copies of each for the Lenders:
(a) ANNUAL FINANCIAL STATEMENTS. As soon as available and in
any event within 90 days after the end of each fiscal year of the
Parent, the complete audited, consolidated and consolidating financial
statements (including income statements, balance sheets, statements of
changes in equity and statements of cash flows) of the Parent and its
Consolidated Subsidiaries, including the consolidated and
consolidating financial statements as of the end of such year, the
consolidated and consolidating statements of profit and loss and
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surplus as of the end of such year, and the consolidated and
consolidating statements of profit and loss and surplus for the fiscal
year then ended, and setting forth in each case in comparative form
the corresponding figures for the preceding fiscal year, and
accompanied by the related opinion of independent public accountants
of recognized national standing acceptable to the Agent which opinion
shall state that said financial statements fairly present the
consolidated and consolidating financial condition and results of
operations of the Parent and its Consolidated Subsidiaries as at the
end of, and for, such fiscal year and that such financial statements
have been prepared in accordance with GAAP, except for such changes in
such principles with which the independent public accountants shall
have concurred and such opinion shall not contain a "going concern" or
like qualification or exception, and a certificate of such accountants
stating that, in making the examination necessary for their opinion,
they obtained no knowledge, except as specifically stated, of any
Default.
(b) QUARTERLY FINANCIAL STATEMENTS. As soon as available and in
any event within 60 days after the end of each of the first three
fiscal quarterly periods of each fiscal year of the Parent, management
prepared consolidated and consolidating financial statements
(including income statements, balance sheets, statements of changes in
equity and statements of cash flows) of the Parent and its
Consolidated Subsidiaries as of the end of such quarter, and the
consolidated and consolidating statements of profit and loss and
surplus of the Parent and its Consolidated Subsidiaries from the
beginning of their fiscal year to the end of such quarter, and setting
forth in each case in comparative form the corresponding figures for
the corresponding period in the preceding fiscal year, accompanied by
the certificate of a Responsible Officer, which certificate shall
state that said financial statements fairly present the consolidated
and consolidating financial condition and results of operations of the
Parent and its Consolidated Subsidiaries in accordance with GAAP, as
at the end of, and for, such period (subject to normal year-end audit
adjustments).
(c) NOTICE OF DEFAULT, ETC. Promptly after the Borrower knows
that any Default or any Material Adverse Effect has occurred, a notice
of such Default or Material Adverse Effect, describing the same in
reasonable detail and the action the Borrower proposes to take with
respect thereto.
(d) OTHER ACCOUNTING REPORTS. Promptly upon receipt thereof, a
copy of each other report or letter submitted to the Borrower or any
Subsidiary by independent accountants in connection with any annual,
interim or special audit made by them of the books of the Borrower and
its Subsidiaries, and a copy of any response by the Borrower or any
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Subsidiary of the Borrower, or the Board of Directors of the Borrower
or any Subsidiary of the Borrower, to such letter or report.
(e) SEC FILINGS, ETC. Promptly after the sending or filing
thereof, copies of all reports, proxy statements and financial
statements which the Parent files with its shareholders or any
securities exchange, the SEC or any successor agency including,
without limitation, all reports of Form 10-K, 10-Q, and 8-K. Such
reports need not include exhibits. Borrower agrees to promptly
provide Agent with exhibits specifically requested by Agent.
(f) NOTICES UNDER OTHER LOAN AGREEMENTS. Promptly after the
furnishing thereof, copies of any statement, report or notice
furnished to any Person pursuant to the terms of any indenture, loan
or credit or other similar agreement, other than this Agreement and
not otherwise required to be furnished to the Lenders pursuant to any
other provision of this Section 8.01.
(g) HEDGING AGREEMENTS. As soon as available and in any event
within ten (10) Business Days after the last day of each calendar
quarter, a report, in form and substance satisfactory to the Agent,
setting forth as of the last Business Day of such calendar quarter a
true and complete list of all Hedging Agreements (including commodity
price swap agreements, forward agreements or contracts of sale which
provide for prepayment for deferred shipment or delivery of oil, gas
or other commodities) of the Borrower and each Subsidiary, the
material terms thereof (including the type, term, effective date,
termination date and notional amounts or volumes), the net mark to
market value therefor, any new credit support agreements relating
thereto not listed on SCHEDULE 7.23, any margin required or supplied
under any credit support document, and the counter party to each such
agreement.
(h) ANNUAL BUDGET. Concurrent with delivery of each January 1
Reserve Report, a one year financial projection for the Parent and its
Subsidiaries of revenues, expenses and capital expenditures, in form
and substance satisfactory to the Agent.
(i) PRODUCTION REPORTS, ETC. As soon as available and in any
event within 30 days after the end of each month, production reports,
which shall include quantities or volumes of production, and within 60
days after the end of each month, general and administrative cost
summaries by lease for its Oil and Gas Properties, which summaries
shall include revenue, realized product prices, operating expenses,
taxes, capital expenditures and lease operating costs which have
accrued to the Borrower's accounts in such period, and such other
information with respect thereto as the Agent may require.
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(j) DRILLING REPORTS, ETC. As soon as possible after the end
of each calendar quarter, but in any event not later than concurrent
with the delivery of the financial statements required by Sections
8.01(a) and (b), a report setting forth for the immediately preceding
calendar quarter (i) the number of wells drilled in which the
Borrower, the Parent, or any Subsidiary owns a beneficial or record
interest, (ii) the classification of such wells as developmental or
exploratory, (iii) whether each such well is a dry hole or completed
or expected to be completed as a commercially productive well, and
(iv) capital expenditures associated with such wells.
(k) OTHER MATTERS. From time to time such other information
regarding the business, affairs or financial condition of the Borrower
or any Subsidiary (including, without limitation, any Plan or
Multiemployer Plan and any reports or other information required to be
filed under ERISA) as any Lender or the Agent may reasonably request.
The Borrower and the Parent will furnish to the Agent, at the time each set
of financial statements is furnished pursuant to paragraph (a) or (b)
above, a certificate substantially in the form of EXHIBIT C executed by a
Responsible Officer (i) certifying as to the matters set forth therein and
stating that no Default has occurred and is continuing (or, if any Default
has occurred and is continuing, describing the same in reasonable detail),
and (ii) setting forth in reasonable detail the computations necessary to
determine whether the Borrower is in compliance with Sections 9.12, 9.13,
9.14 and 9.15 as of the end of the respective fiscal quarter or fiscal
year.
Section 8.02 LITIGATION. The Borrower shall promptly give to
the Agent notice of: (i) all legal or arbitral proceedings, and of all
proceedings before any Governmental Authority affecting the Borrower, the
Parent or any Subsidiary, except proceedings which, if adversely
determined, would not have a Material Adverse Effect, and (ii) of any
litigation or proceeding against or adversely affecting Borrower, the
Parent or any Subsidiary in which the amount involved is not covered in
full by insurance (subject to normal and customary deductibles and for
which the insurer has not assumed the defense), or in which injunctive or
similar relief is sought. The Borrower will, and will cause the Parent and
each of its Subsidiaries to, promptly notify the Agent and each of the
Lenders of any claim, judgment, Lien or other encumbrance affecting any
Property of the Borrower, the Parent or any Subsidiary if the value of the
claim, judgment, Lien, or other encumbrance affecting such Property shall
exceed $2,000,000.
Section 8.03 MAINTENANCE, ETC.
(a) GENERALLY. The Borrower and the Parent shall and shall
cause each Subsidiary to: preserve and maintain its corporate
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existence and all of its material rights, privileges and franchises;
keep books of record and account in which full, true and correct
entries will be made of all dealings or transactions in relation to
its business and activities; comply with all Governmental Requirements
if failure to comply with such requirements will have a Material
Adverse Effect; pay and discharge all taxes, assessments and
governmental charges or levies imposed on it or on its income or
profits or on any of its Property prior to the date on which penalties
attach thereto, except for any such tax, assessment, charge or levy
the payment of which is being contested in good faith and by proper
proceedings and against which adequate reserves are being maintained;
upon reasonable notice, permit representatives of the Agent or any
Lender, during normal business hours, to examine, copy and make
extracts from its books and records, to inspect its Properties, and to
discuss its business and affairs with its officers, all to the extent
reasonably requested by such Lender or the Agent (as the case may be);
and keep, or cause to be kept, insured by financially sound and
reputable insurers all Property of a character usually insured by
Persons engaged in the same or similar business similarly situated
against loss or damage of the kinds and in the amounts customarily
insured against by such Persons and carry such other insurance as is
usually carried by such Persons including, without limitation,
environmental risk insurance to the extent reasonably available.
(b) PROOF OF INSURANCE. Contemporaneously with the delivery of
the financial statements required by Section 8.01(a) to be delivered
for each year, the Borrower will furnish or cause to be furnished to
the Agent and the Lenders a certificate of insurance coverage from the
insurer in form and substance satisfactory to the Agent and, if
requested, will furnish the Agent and the Lenders copies of the
applicable policies.
(c) OIL AND GAS PROPERTIES. The Borrower will and will cause
each Subsidiary to, at its own expense, do or cause to be done all
things reasonably necessary to preserve and keep in good repair,
working order and efficiency all of its Oil and Gas Properties and
other material Properties including, without limitation, all
equipment, machinery and facilities, and from time to time will make
all the reasonably necessary repairs, renewals and replacements so
that at all times the state and condition of its Oil and Gas
Properties and other material Properties will be fully preserved and
maintained, except to the extent a portion of such Properties is no
longer capable of producing Hydrocarbons in economically reasonable
amounts. The Borrower will and will cause each Subsidiary to
promptly: (i) pay and discharge, or make reasonable and customary
efforts to cause to be paid and discharged, all delay rentals,
royalties, expenses and indebtedness accruing under the leases or
other agreements affecting or pertaining to its Oil and Gas
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Properties, (ii) perform or make reasonable and customary efforts to
cause to be performed, in accordance with industry standards, the
obligations required by each and all of the assignments, deeds,
leases, sub-leases, contracts and agreements affecting its interests
in its Oil and Gas Properties and other material Properties, (iii)
will and will cause each Subsidiary to do all other things necessary
to keep unimpaired, except for Liens described in Section 9.02, its
rights with respect to its Oil and Gas Properties and other material
Properties and prevent any forfeiture thereof or a default thereunder,
except to the extent a portion of such Properties is no longer capable
of producing Hydrocarbons in economically reasonable amounts. The
Borrower will and will cause each Subsidiary to operate its Oil and
Gas Properties and other material Properties or cause or make
reasonable and customary efforts to cause such Oil and Gas Properties
and other material Properties to be operated in a careful and
efficient manner in accordance with the practices of the industry and
in compliance with all applicable contracts and agreements and in
compliance in all material respects with all Governmental
Requirements.
Section 8.04 ENVIRONMENTAL MATTERS.
(a) ESTABLISHMENT OF PROCEDURES. The Borrower will and will
cause each Subsidiary to establish and implement such procedures as
may be reasonably necessary to continuously determine and assure that
any failure of the following does not have a Material Adverse Effect:
(i) all Property of the Borrower and its Subsidiaries and the
operations conducted thereon and other activities of the Borrower and
its Subsidiaries are in compliance with and do not violate the
requirements of any Environmental Laws, (ii) no oil, hazardous
substances or solid wastes are disposed of or otherwise released on or
to any Property owned by any such party except in compliance with
Environmental Laws, (iii) no hazardous substance will be released on
or to any such Property in a quantity equal to or exceeding that
quantity which requires reporting pursuant to Section 103 of CERCLA,
and (iv) no oil, oil and gas exploration and production wastes or
hazardous substance is released on or to any such Property so as to
pose an imminent and substantial endangerment to public health or
welfare or the environment.
(b) NOTICE OF ACTION. The Borrower will promptly notify the
Agent and the Lenders in writing of any threatened action,
investigation or inquiry by any Governmental Authority of which the
Borrower has knowledge in connection with any Environmental Laws,
excluding routine testing and corrective action.
(c) FUTURE ACQUISITIONS. The Borrower will and will cause each
Subsidiary to provide environmental audits and tests in accordance
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with American Society for Testing and Materials standards as
reasonably requested by the Agent and the Lenders (or as otherwise
required to be obtained by the Agent or the Lenders by any
Governmental Authority) in connection with any future acquisitions of
Oil and Gas Properties or other material Properties.
Section 8.05 FURTHER ASSURANCES. The Borrower and the Parent
will and will cause each Subsidiary to cure promptly any defects in the
creation and issuance of the Notes and the execution and delivery of the
Security Instruments and this Agreement. The Borrower and the Parent at
their expense will and will cause each Subsidiary to promptly execute and
deliver to the Agent upon request all such other documents, agreements and
instruments to comply with or accomplish the covenants and agreements of
the Borrower, the Parent or any Subsidiary, as the case may be, in the
Security Instruments and this Agreement, or to further evidence and more
fully describe the collateral intended as security for the Notes, or to
correct any omissions in the Security Instruments, or to state more fully
the security obligations set out herein or in any of the Security
Instruments, or to perfect, protect or preserve any Liens created pursuant
to any of the Security Instruments, or to make any recordings, to file any
notices or obtain any consents, all as may be necessary or appropriate in
connection therewith.
Section 8.06 PERFORMANCE OF OBLIGATIONS. The Borrower will pay
the Notes according to the reading, tenor and effect thereof; and the
Borrower and the Parent will, and will cause each Subsidiary to, do and
perform every act and discharge all of the obligations to be performed and
discharged by them under the Security Instruments and this Agreement, at
the time or times and in the manner specified.
Section 8.07 ENGINEERING REPORTS.
(a) On or before each March 1 and September 1, commencing with
September 1, 1998, the Borrower shall furnish to the Agent a Reserve
Report. The January 1 Reserve Report (due on or before each March 1)
of each year shall be prepared by certified independent petroleum
engineers or other independent petroleum consultant(s) acceptable to
the Agent and the July 1 Reserve Report (due on or before each
September 1) of each year shall be prepared by or under the
supervision of the chief engineer of the Borrower who shall certify
such Reserve Report to be true and accurate and to have been prepared
in accordance with the procedures used in the immediately proceeding
January 1 Reserve Report. Notwithstanding the first sentence of this
Section 8.07(a), the Agent, in its sole determination, may require
that a Reserve Report dated as of December 31, 1997, prepared by an
independent petroleum engineer or other consultant acceptable to the
Agent, be delivered on or before April 1, 1998 in connection with the
Scheduled Redetermination Date for May, 1998.
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(b) In the event of an unscheduled redetermination, the Borrower
shall furnish to the Agent a Reserve Report prepared by or under the
supervision of the chief engineer of the Borrower who shall certify
such Reserve Report to be true and accurate and to have been prepared
in accordance with the procedures used in the immediately preceding
Reserve Report. For any unscheduled redetermination requested
pursuant to Section 2.08(d)), the Borrower shall provide such Reserve
Report with an "as of" date as required by the Agent as soon as
possible, but in any event no later than 45 days following the receipt
of the request by the Agent.
(c) With the delivery of each Reserve Report, the Borrower shall
provide to the Agent, a certificate from a Responsible Officer
certifying that, to the best of his knowledge and in all material
respects: (i) the information contained in the Reserve Report and any
other information delivered in connection therewith is true and
correct, (ii) the Borrower owns good and defensible title to the Oil
and Gas Properties evaluated in such Reserve Report and such
Properties are free of all Liens except for Liens permitted by Section
9.02, (iii) except as set forth on an exhibit to the certificate, on a
net basis there are no gas imbalances, take or pay or other
prepayments with respect to its Oil and Gas Properties evaluated in
such Reserve Report which would require the Borrower to deliver
Hydrocarbons produced from such Oil and Gas Properties at some future
time without then or thereafter receiving full payment therefor, (iv)
none of its Oil and Gas Properties have been sold since the date of
the last Borrowing Base determination except as set forth on an
exhibit to the certificate, which certificate shall list all of its
Oil and Gas Properties sold and in such detail as reasonably required
by the Agent, (v) attached to the certificate is a list of its Oil and
Gas Properties added to and deleted from the immediately prior Reserve
Report and a list showing any change in working interest or net
revenue interest in its Oil and Gas Properties occurring and the
reason for such change, (vi) attached to the certificate is a list of
all Persons disbursing proceeds to the Borrower from its Oil and Gas
Properties and (vii) except as set forth on a schedule attached to the
certificate all of the Oil and Gas Properties evaluated by such
Reserve Report are Mortgaged Property.
Section 8.08 TITLE INFORMATION.
(a) DELIVERY. On or before the delivery to the Agent of each
Reserve Report required by Section 8.07(a), the Borrower will deliver
title information in form and substance acceptable to the Agent
covering enough of the Oil and Gas Properties evaluated by such
Reserve Report that were not included in the immediately preceding
Reserve Report, so that the Agent shall have received together with
title information previously delivered to the Agent, satisfactory
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title information on at least eighty percent (80%) of the value of the
Oil and Gas Properties evaluated by such Reserve Report.
(b) CURE OF TITLE DEFECTS. The Borrower shall cure any title
defects or exceptions which are not Excepted Liens raised by such
information, or substitute acceptable Mortgaged Properties with no
title defects or exceptions except for Excepted Liens covering
Mortgaged Properties of an equivalent value, within 45 days after a
request by the Agent or the Lenders to cure such defects or
exceptions.
(c) FAILURE TO CURE TITLE DEFECTS. If the Borrower is unable to
cure any title defect requested by the Agent or the Lenders to be
cured within the 45 day period or the Borrower does not comply with
the requirements to provide acceptable title information covering
eighty percent (80%) of the value of the Oil and Gas Properties
evaluated in the most recent Reserve Report, such default shall not be
a Default or an Event of Default, but instead the Agent and the
Lenders shall have the right to exercise the following remedy in their
sole discretion from time to time, and any failure to so exercise this
remedy at any time shall not be a waiver as to future exercise of the
remedy by the Agent or the Lenders. To the extent that the Agent or
the Lenders are not satisfied with title to any Mortgaged Property
after the time period in Section 8.08(b) has elapsed, such
unacceptable Mortgaged Property shall not count towards the eighty
percent (80%) requirement, and the Agent may send a notice to the
Borrower and the Lenders that the then outstanding Borrowing Base
shall be reduced by an amount as determined by all of the Lenders to
cause the Borrower to be in compliance with the requirement to provide
acceptable title information on eighty percent (80%) of the value of
the Oil and Gas Properties. This new Borrowing Base shall become
effective immediately after receipt of such notice.
Section 8.09 ADDITIONAL COLLATERAL.
(a) LIEN IN ACQUIRED OIL AND GAS PROPERTIES. Should the
Borrower, the Parent or any Subsidiary acquire any additional Oil and
Gas Properties, the Borrower and the Parent will, and will cause such
Subsidiary to, as applicable, grant to the Agent as security for the
Indebtedness a first-priority Lien interest (subject only to Excepted
Liens) on its interest in any Oil and Gas Properties not already
subject to a Lien of the Security Instruments, which Lien will be
created and perfected by and in accordance with the provisions of
mortgages, deeds of trust, security agreements and financing
statements, or other Security Instruments, all in form and substance
satisfactory to the Agent in its sole discretion and in sufficient
executed (and acknowledged where necessary or appropriate)
counterparts for recording purposes.
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(b) TITLE INFORMATION. Concurrently with the granting of the
Lien or other action referred to in Section 8.07(a) above, the
Borrower will provide to the Agent title information in form and
substance satisfactory to the Agent in its sole discretion with
respect to the Borrower's, the Parent's or such Subsidiary's interests
in such Oil and Gas Properties.
(c) LEGAL OPINIONS. Also, promptly after the filing of any new
Security Instrument in any state, upon the reasonable request of the
Agent, the Borrower will provide to the Agent an opinion addressed to
the Agent for the benefit of the Lenders in form and substance
satisfactory to the Agent in its sole discretion from counsel
acceptable to Agent, stating that the Security Instrument is valid,
binding and enforceable in accordance with its terms and in legally
sufficient form for such jurisdiction.
(d) PARTICIPATION AGREEMENTS. Within 60 days after the Closing
Date, the Borrower shall have received and duly recorded conveyances
or assignments of all interests in Oil and Gas Properties that have
been earned by the Borrower prior to the Closing Date pursuant to the
terms of any and all participation agreements, joint venture
agreements, farmout agreements, exploration agreements, or any other
agreements ("PARTICIPATION AGREEMENTS") to which it is a party and
under which events have occurred that entitle the Borrower to receive
a record title interest in any Oil and Gas Property. With respect to
any right to an assignment earned pursuant to any Participation
Agreement after the Closing Date, the Borrower or the Parent shall,
and shall cause any Guarantor to, within 90 days after earning such
right cause an assignment of the earned interest to the Borrower, the
Parent or such Guarantor to be executed and duly recorded. The
Borrower or the Parent, as applicable, shall and shall cause any
Subsidiary to, promptly upon recording of such an assignment, grant to
the Agent as security for the Indebtedness a first priority Lien in
its interests in the Oil and Gas Properties so assigned pursuant to a
Mortgage, supplement or amendment to an existing Mortgage, or other
Security Instrument in form and substance satisfactory to the Agent in
its sole discretion and in sufficient executed and acknowledged
counterparts for recording purposes.
Section 8.10 MORTGAGE TITLE INFORMATION/OPINIONS. Within 45
days following the Initial Funding, the Borrower shall cause to be
delivered to the Agent title information (which in the sole discretion of
the Agent may be, to the extent necessary, in the form of title opinions)
satisfactory to the Agent so that the Agent shall have received
satisfactory title information on at least eighty percent (80%) of the
value of the Oil and Gas Properties evaluated by the Initial Reserve Report
and showing the Lien of the Mortgages covering the Mortgaged Property to be
first and prior and subject to no exceptions.
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Section 8.11 ERISA INFORMATION AND COMPLIANCE. The Borrower will
promptly furnish and will cause the Subsidiaries and any ERISA Affiliate to
promptly furnish to the Agent with sufficient copies to the Lenders (i)
promptly after the filing thereof with the United States Secretary of
Labor, the Internal Revenue Service or the PBGC, copies of each annual and
other report with respect to each Plan or any trust created thereunder,
(ii) immediately upon becoming aware of the occurrence of any ERISA Event
or of any "prohibited transaction," as described in section 406 of ERISA or
in section 4975 of the Code, in connection with any Plan or any trust
created thereunder, a written notice signed by a Responsible Officer
specifying the nature thereof, what action the Borrower, the Subsidiary or
the ERISA Affiliate is taking or proposes to take with respect thereto,
and, when known, any action taken or proposed by the Internal Revenue
Service, the Department of Labor or the PBGC with respect thereto, and
(iii) immediately upon receipt thereof, copies of any notice of the PBGC's
intention to terminate or to have a trustee appointed to administer any
Plan. With respect to each Plan (other than a Multiemployer Plan), the
Borrower will, and will cause each Subsidiary and ERISA Affiliate to, (i)
satisfy in full and in a timely manner, without incurring any late payment
or underpayment charge or penalty and without giving rise to any lien, all
of the contribution and funding requirements of section 412 of the Code
(determined without regard to subsections (d), (e), (f) and (k) thereof)
and of section 302 of ERISA (determined without regard to sections 303, 304
and 306 of ERISA), and (ii) pay, or cause to be paid, to the PBGC in a
timely manner, without incurring any late payment or underpayment charge or
penalty, all premiums required pursuant to sections 4006 and 4007 of ERISA.
Section 8.12 HEDGING ACTIVITIES. The Borrower will, and will cause
each Subsidiary to, develop and maintain policies, controls and strategies
for their oil and gas hedging activities that are acceptable in all
material respects to the Agent and shall not enter into any Hedging Agreements
not in compliance with such policies, controls, and strategies.
Section 8.13 PAYMENT OF TRADE PAYABLES. The Borrower and the Parent
will pay and cause all Subsidiaries to pay all of their customary trade
payables incurred in the ordinary course of business within 60 days of the
invoice or billing date, unless being contested in good faith by
appropriate proceedings and if reserves adequate under GAAP shall have been
established therefor.
Section 8.14 SUBSIDIARY SECURITY. Should the Parent or the Borrower
create or acquire any Subsidiary to the extent permitted by the terms of
this Agreement, it will promptly grant to the Agent for the benefit of the
Lenders a security interest and pledge of all the capital stock of such
Subsidiary, in form and substance satisfactory to the Agent, and the
Borrower and Parent will cause such Subsidiary to enter into a guaranty of
the Indebtedness in form and substance satisfactory to the Agent. The
delivery of such security and guaranty shall be accompanied by such back up
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corporate authority and opinions of counsel as the Agent may reasonably
request.
ARTICLE IX
NEGATIVE COVENANTS
The Borrower and the Parent each covenants and agrees that, so long as
any of the Commitments are in effect and until payment in full of Loans
hereunder, all interest thereon and all other amounts payable by the
Borrower hereunder, without the prior written consent of the Majority
Lenders:
Section 9.01 DEBT. None of the Borrower, the Parent or any
Subsidiary will incur, create, assume or permit to exist any Debt, except:
(a) the Notes or other Indebtedness or any guaranty of or
suretyship arrangement for the Notes or other Indebtedness;
(b) Debt of the Borrower existing on the Closing Date which is
reflected in the Financial Statements or is disclosed in SCHEDULE
9.01, and any renewals or extensions (but not increases) thereof;
(c) accounts payable (for the deferred purchase price of
Property or services) from time to time incurred in the ordinary
course of business which, if greater than 60 days past the invoice or
billing date, are being contested in good faith by appropriate
proceedings if reserves adequate under GAAP shall have been
established therefor;
(d) Debt under capital leases (as required to be reported on the
financial statements of the Borrower pursuant to GAAP) not to exceed
$2,000,000;
(e) Debt associated with bonds or surety obligations required by
Governmental Requirements in connection with the operation of the Oil
and Gas Properties;
(f) Debt of the Parent created by loans permitted by Section
9.03(g); and
(g) Debt of the Borrower under Hedging Agreements with a Lender
or an Affiliate of any Lender or another investment grade counterparty
the notional amounts on which do not exceed 75% of the Borrower's
anticipated oil and/or gas production to be produced during the term
of such Hedging Agreements entered into as a part of its normal
business operations as a risk management strategy and/or hedge against
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changes resulting from market conditions related to the Borrower's and
its Subsidiaries' operations.
Section 9.02 LIENS. None of the Borrower, the Parent, or any
Subsidiary will create, incur, assume or permit to exist any Lien on any of
its Properties (now owned or hereafter acquired), except:
(a) Liens securing the payment of any Indebtedness;
(b) Excepted Liens;
(c) Liens securing leases allowed under Section 9.01(d), but
only on the Property under lease;
(d) Liens disclosed on SCHEDULE 9.02; and
(e) Liens on cash or securities of the Borrower securing the
Debt described in Section 9.01(e).
Section 9.03 INVESTMENTS, LOANS AND ADVANCES. None of the
Borrower, the Parent or any Subsidiary will make or permit to remain
outstanding any loans or advances to or investments in any Person, except
that the foregoing restriction shall not apply to:
(a) investments, loans or advances reflected in the Financial
Statements or which are disclosed to the Lenders in SCHEDULE 9.03;
(b) accounts receivable arising in the ordinary course of
business;
(c) direct obligations of the United States or any agency
thereof, or obligations guaranteed by the United States or any agency
thereof, in each case maturing within one year from the date of
creation thereof;
(d) commercial paper maturing within one year from the date of
creation thereof rated in the highest grade by Standard & Poor's
Corporation or Moody's Investors Service, Inc.;
(e) deposits maturing within one year from the date of creation
thereof with, including certificates of deposit issued by, any Lender
or any office located in the United States of any other bank or trust
company which is organized under the laws of the United States or any
state thereof, has capital, surplus and undivided profits aggregating
at least $100,000,000.00 (as of the date of such Lender's or bank or
trust company's most recent financial reports) and has a short term
deposit rating of no lower than A2 or P2, as such rating is set forth
from time to time, by Standard & Poor's Corporation or Moody's
Investors Service, Inc., respectively;
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(f) deposits in money market funds investing exclusively in
investments described in Section 9.03(c), 9.03(d) or 9.03(e);
(g) loans made by the Borrower to the Parent to pay federal or
state taxes, payroll and payroll related taxes and other reasonable
general and administrative expenses not to exceed at any one time
outstanding $2,000,000 in the aggregate; and
(h) investments by the Borrower in direct ownership interests in
additional Oil and Gas Properties and gas gathering systems related
thereto.
Section 9.04 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. Neither
the Parent nor the Borrower will declare or pay any dividend, purchase,
redeem or otherwise acquire for value any of its stock now or hereafter
outstanding, return any capital to its stockholders or make any
distribution of its assets to its stockholders.
Section 9.05 SALES AND LEASEBACKS. None of the Borrower, the
Parent or any Subsidiary will enter into any arrangement, directly or
indirectly, with any Person whereby the Borrower, the Parent or any
Subsidiary shall sell or transfer any of its Property, whether now owned or
hereafter acquired, and whereby the Borrower, the Parent or any Subsidiary
shall then or thereafter rent or lease as lessee such Property or any part
thereof or other Property which the Borrower, the Parent or any Subsidiary
intends to use for substantially the same purpose or purposes as the
Property sold or transferred.
Section 9.06 NATURE OF BUSINESS. Neither the Borrower nor any
Subsidiary will allow any material change to be made in the character of
its business as an independent oil and gas exploration and production
company.
Section 9.07 LIMITATION ON LEASES. None of the Borrower, the
Parent or any Subsidiary will create, incur, assume or permit to exist any
obligation for the payment of rent or hire of Property of any kind
whatsoever (real or personal including capital leases, but excluding leases
of Hydrocarbon Interests), under leases or lease agreements which would
cause the aggregate amount of all payments made by the Borrower, the Parent
and its Subsidiaries pursuant to all such leases or lease agreements to
exceed $1,000,000 in any period of twelve consecutive calendar months
during the life of such leases.
Section 9.08 MERGERS, ETC. None of the Borrower, the Parent or
any Subsidiary will merge into or with or consolidate with any other
Person, or sell, lease or otherwise dispose of (whether in one transaction
or in a series of transactions) all or substantially all of its Property or
assets to any other Person, except that any Subsidiary may merge into or
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consolidate with the Parent and the Parent may merge or consolidate with
another Person; provided that (i) the Parent is the surviving corporation
of any merger or consolidation, (ii) upon completion of the merger or
consolidation, the Tangible Net Worth of the corporation that results from
the merger or consolidation is not less than the Tangible Net Worth of the
Parent before that merger or consolidation, (iii) no Default or Event of
Default has occurred and is continuing or will result from such merger or
consolidation, and (iv) the Loan Documents will be amended if deemed
necessary by the Majority Lenders to reflect such merger in form
satisfactory to the Majority Lenders.
Section 9.09 PROCEEDS OF NOTES AND LETTERS OF CREDIT. The
Borrower will not permit the proceeds of the Notes or Letters of Credit to
be used for any purpose other than those permitted by Section 7.07.
Neither the Borrower nor any Person acting on behalf of the Borrower has
taken or will take any action which might cause any of the Loan Documents
to violate Regulation G, T, U or X or any other regulation of the Board of
Governors of the Federal Reserve System or to violate Section 7 of the
Securities Exchange Act of 1934 or any rule or regulation thereunder, in
each case as now in effect or as the same may hereinafter be in effect.
Section 9.10 ERISA COMPLIANCE. The Borrower will not at any
time:
(a) Engage in, or permit any Subsidiary or ERISA Affiliate to
engage in, any transaction in connection with which the Borrower, any
Subsidiary or any ERISA Affiliate could be subjected to either a civil
penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a
tax imposed by Chapter 43 of Subtitle D of the Code;
(b) Terminate, or permit any Subsidiary or ERISA Affiliate to
terminate, any Plan in a manner, or take any other action with respect
to any Plan, which could result in any liability to the Borrower, any
Subsidiary or any ERISA Affiliate to the PBGC;
(c) Fail to make, or permit any Subsidiary or ERISA Affiliate to
fail to make, full payment when due of all amounts which, under the
provisions of any Plan, agreement relating thereto or applicable law,
the Borrower, a Subsidiary or any ERISA Affiliate is required to pay
as contributions thereto;
(d) Permit to exist, or allow any Subsidiary or ERISA Affiliate
to permit to exist, any accumulated funding deficiency within the
meaning of Section 302 of ERISA or section 412 of the Code, whether or
not waived, with respect to any Plan;
(e) Permit, or allow any Subsidiary or ERISA Affiliate to
permit, the actuarial present value of the benefit liabilities under
any Plan maintained by the Borrower, any Subsidiary or any ERISA
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Affiliate which is regulated under Title IV of ERISA to exceed the
current value of the assets (computed on a plan termination basis in
accordance with Title IV of ERISA) of such Plan allocable to such
benefit liabilities. The term "actuarial present value of the benefit
liabilities" shall have the meaning specified in section 4041 of
ERISA;
(f) Contribute to or assume an obligation to contribute to, or
permit any Subsidiary or ERISA Affiliate to contribute to or assume an
obligation to contribute to, any Multiemployer Plan;
(g) Acquire, or permit any Subsidiary or ERISA Affiliate to
acquire, an interest in any Person that causes such Person to become
an ERISA Affiliate with respect to the Borrower, any Subsidiary or any
ERISA Affiliate if such Person sponsors, maintains or contributes to,
or at any time in the six-year period preceding such acquisition has
sponsored, maintained, or contributed to, (1) any Multiemployer Plan,
or (2) any other Plan that is subject to Title IV of ERISA under which
the actuarial present value of the benefit liabilities under such Plan
exceeds the current value of the assets (computed on a plan
termination basis in accordance with Title IV of ERISA) of such Plan
allocable to such benefit liabilities;
(h) Incur, or permit any Subsidiary or ERISA Affiliate to incur,
a liability to or on account of a Plan under sections 515, 4062, 4063,
4064, 4201 or 4204 of ERISA;
(i) Contribute to or assume an obligation to contribute to, or
permit any Subsidiary or ERISA Affiliate to contribute to or assume an
obligation to contribute to, any employee welfare benefit plan, as
defined in section 3(1) of ERISA, including, without limitation, any
such plan maintained to provide benefits to former employees of such
entities, that may not be terminated by such entities in their sole
discretion at any time without any material liability; or
(j) Amend or permit any Subsidiary or ERISA Affiliate to amend,
a Plan resulting in an increase in current liability such that the
Borrower, any Subsidiary or any ERISA Affiliate is required to provide
security to such Plan under section 401(a)(29) of the Code.
Section 9.11 SALE OR DISCOUNT OF RECEIVABLES. None of the
Borrower, the Parent or any Subsidiary will discount or sell (with or
without recourse) any of its notes receivable or accounts receivable.
Section 9.12 CURRENT RATIO. The Parent will not permit its
ratio of (i) consolidated current assets (including an amount, if any, by
which the then effective Borrowing Base exceeds the sum of the aggregate
outstanding principal amount of the Loans, plus the LC Exposure) to (ii)
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consolidated current liabilities (excluding current maturities of the
Notes) to be less than 1.0 to 1.0 at any time.
Section 9.13 RATIO OF DEBT TO CAPITALIZATION. The Parent will
not permit its ratio of (i) Debt to (ii) Capitalization to be greater than
0.40 to 1.0 at any time. As used in this Section 9.13, "CAPITALIZATION"
shall mean Debt plus Tangible Net Worth.
Section 9.14 TANGIBLE NET WORTH. The Parent will not permit its
Tangible Net Worth as of the end of any fiscal quarter of the Parent
(calculated quarterly at the end of each fiscal quarter) to be less than
$38,000,000, PLUS 75% of the proceeds received from any equity offerings
occurring after February 9, 1998, plus 75% of Consolidated Net Income
aggregated for each calendar quarter from and after the Closing Date in
which Consolidated Net Income is positive.
Section 9.15 DEBT TO EBITDA COVERAGE RATIO. The Parent will not
permit its Debt to EBITDA Coverage Ratio as of the end of any fiscal
quarter of the Parent to be less than 1.00 to 1.00. For the purpose of
this Section 9.15, "DEBT TO EBITDA COVERAGE RATIO" shall mean the ratio of
(i) Debt as of the end of such fiscal quarter of the Borrower and its
Consolidated Subsidiaries to (ii) EBITDA for the immediately preceding four
fiscal quarters ending on such date.
Section 9.16 SALE OF PROPERTIES. Without the prior written
consent of the Lenders (which consent will not be unreasonably withheld),
neither the Parent nor the Borrower will, and will not permit any
Subsidiary to, Transfer any Property or any interest in any Property to any
Person.
Section 9.17 ENVIRONMENTAL MATTERS. None of the Borrower, the
Parent or any Subsidiary will cause or permit any of its Property to be in
violation of, or do anything or permit anything to be done which will
subject any such Property to any remedial obligations under any
Environmental Laws, assuming disclosure to the applicable Governmental
Authority of all relevant facts, conditions and circumstances, if any,
pertaining to such Property where such violations or remedial obligations
would have a Material Adverse Effect.
Section 9.18 TRANSACTIONS WITH AFFILIATES. None of the Borrower
any Subsidiary will enter into any transaction, including, without
limitation, any purchase, sale, lease or exchange of Property or the
rendering of any service, with any Affiliate unless such transactions are
otherwise permitted under this Agreement, are in the ordinary course of its
business and are upon fair and reasonable terms no less favorable to it
than it would obtain in a comparable arm's length transaction with a Person
not an Affiliate.
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Section 9.19 SUBSIDIARIES. The Parent shall not, and shall not
permit any Subsidiary to, (i) create any additional Subsidiaries, (ii) sell
or issue any stock or ownership interest of a Subsidiary, except to the
Parent and except in compliance with Section 9.03, or (iii) enter into any
agreement that would restrict any Subsidiaries ability to make
distributions to the Borrower.
Section 9.20 NEGATIVE PLEDGE AGREEMENTS. None of the Borrower,
the Parent or any Subsidiary will create, incur, assume or permit to
exist any contract, agreement or understanding (other than this Agreement
and the Security Instruments) which in any way prohibits or restricts the
granting, conveying, creation or imposition of any Lien on any of its
Property or restricts any Subsidiary from paying dividends to the Borrower,
or which requires the consent of or notice to other Persons in connection
therewith.
Section 9.21 GAS IMBALANCES, TAKE-OR-PAY OR OTHER PREPAYMENTS.
None of the Borrower, the Parent or any Subsidiary will allow gas
imbalances, take-or-pay or other prepayments with respect to the Oil and
Gas Properties of the Borrower, the Parent or any Subsidiary which would
require the Borrower, the Parent or such Subsidiary to deliver in the
aggregate five percent (5%) or more of their Hydrocarbons produced on a
monthly basis from such Oil and Gas Properties at some future time without
then or thereafter receiving full payment therefor.
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 EVENTS OF DEFAULT. One or more of the following
events shall constitute an "EVENT OF DEFAULT":
(a) the Borrower shall default in the payment or prepayment when
due of any principal of or interest on any Loan, or any reimbursement
obligation for a disbursement made under any Letter of Credit, or any
fees or other amount payable by it hereunder or under any Security
Instrument and such default, other than a default of a payment or
prepayment of principal (which shall have no cure period), shall
continue unremedied for a period of three Business Days; or
(b) the Borrower, the Parent or any Subsidiary shall default in
the payment when due of any principal of or interest on any of its
other Debt aggregating $2,000,000 or more, or any event specified in
any note, agreement, indenture or other document evidencing or
relating to any such Debt shall occur if the effect of such event is
to cause, or (with the giving of any notice or the lapse of time or
both) to permit the holder or holders of such Debt (or a trustee or
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agent on behalf of such holder or holders) to cause, such Debt to
become due prior to its stated maturity; or
(c) any representation, warranty or certification made or deemed
made herein or in any Security Instrument by the Borrower, the Parent
or any Subsidiary, or any certificate furnished to any Lender or the
Agent pursuant to the provisions hereof or any Security Instrument,
shall prove to have been false or misleading as of the time made or
furnished in any material respect; or
(d) the Borrower or the Parent shall default in the performance
of any of its obligations under Article IX or any other Article of
this Agreement other than under Article VIII; or the Borrower or the
Parent shall default in the performance of any of its obligations
under Article VIII or any Security Instrument (other than the payment
of amounts due which shall be governed by Section 10.01(a)) and such
default shall continue unremedied for a period of thirty (30) days
after the earlier to occur of (i) notice thereof to the Borrower or
the Parent by the Agent or any Lender (through the Agent), or (ii) the
Borrower or the Parent otherwise becoming aware of such default; or
(e) the Borrower shall admit in writing its inability to, or be
generally unable to, pay its debts as such debts become due; or
(f) the Borrower shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its
property, (ii) make a general assignment for the benefit of its
creditors, (iii) commence a voluntary case under the Federal
Bankruptcy Code (as now or hereafter in effect), (iv) file a petition
seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, winding-up, liquidation or composition or
readjustment of debts, (v) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under the Federal Bankruptcy Code,
or (vi) take any corporate action for the purpose of effecting any of
the foregoing; or
(g) a proceeding or case shall be commenced, without the
application or consent of the Borrower, in any court of competent
jurisdiction, seeking (i) its liquidation, reorganization, dissolution
or winding-up, or the composition or readjustment of its debts,
(ii) the appointment of a trustee, receiver, custodian, liquidator or
the like of the Borrower of all or any substantial part of its assets,
or (iii) similar relief in respect of the Borrower under any law
relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or adjustment of debts, and such proceeding or case shall
continue undismissed, or an order, judgment or decree approving or
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ordering any of the foregoing shall be entered and continue unstayed
and in effect, for a period of 60 days; or (iv) an order for relief
against the Borrower shall be entered in an involuntary case under the
Federal Bankruptcy Code; or
(h) a judgment or judgments for the payment of money in excess
of $1,000,000 in the aggregate shall be rendered by a court against
the Borrower or any Subsidiary and the same shall not be discharged
(or provision shall not be made for such discharge), or a stay of
execution thereof shall not be procured, within thirty (30) days from
the date of entry thereof and the Borrower or such Subsidiary shall
not, within said period of 30 days, or such longer period during which
execution of the same shall have been stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal; or
(i) the Security Instruments after delivery thereof shall for
any reason, except to the extent permitted by the terms thereof, cease
to be in full force and effect and valid, binding and enforceable in
accordance with their terms, or cease to create a valid and perfected
Lien of the priority required thereby on any of the collateral
purported to be covered thereby, except to the extent permitted by the
terms of this Agreement, or the Borrower shall so state in writing; or
(j) an event having a Material Adverse Effect shall occur; or
(k) a Change of Control shall occur; or
(l) the Borrower fails to pay any Deficiency Payment or to pay
in full any Borrowing Base Deficiency on or before the last day of the
related Deficiency Period; or
(m) the Parent or any other Guarantor takes, suffers or permits
to exist any of the events or conditions referred to in paragraphs
(e), (f), (g) or (h).
Section 10.02 REMEDIES.
(a) In the case of an Event of Default other than one referred
to in clauses (e), (f) or (g) of Section 10.01 or in clause (m) to the
extent it relates to clauses (e), (f) or (g), the Agent, upon request
of the Majority Lenders, shall, by notice to the Borrower, cancel the
Commitments and/or declare the principal amount then outstanding of,
and the accrued interest on, the Loans and all other amounts payable
by the Borrower hereunder and under the Notes (including without
limitation the payment of cash collateral to secure the LC Exposure as
provided in Section 2.10(b)) to be forthwith due and payable,
whereupon such amounts shall be immediately due and payable without
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presentment, demand, protest, notice of intent to accelerate, notice
of acceleration or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
(b) In the case of the occurrence of an Event of Default
referred to in clauses (e), (f) or (g) of Section 10.01 or in clause
(m) to the extent it relates to clauses (e), (f) or (g), the
Commitments shall be automatically canceled and the principal amount
then outstanding of, and the accrued interest on, the Loans and all
other amounts payable by the Borrower hereunder and under the Notes
(including without limitation the payment of cash collateral to secure
the LC Exposure as provided in Section 2.10(b)) shall become
automatically immediately due and payable without presentment, demand,
protest, notice of intent to accelerate, notice of acceleration or
other formalities of any kind, all of which are hereby expressly
waived by the Borrower.
(c) All proceeds received after maturity of the Notes, whether
by acceleration or otherwise shall be applied first to reimbursement
of expenses and indemnities provided for in this Agreement and the
Security Instruments; second to accrued interest on the Notes; third
to fees; fourth pro rata to principal outstanding on the Notes and
other Indebtedness; fifth to serve as cash collateral to be held by
the Agent to secure the LC Exposure; and any excess shall be paid to
the Borrower or as otherwise required by any Governmental Requirement.
ARTICLE XI
THE AGENT
Section 11.01 APPOINTMENT, POWERS AND IMMUNITIES. Each Lender
hereby irrevocably appoints and authorizes the Agent to act as its agent
hereunder and under the Security Instruments with such powers as are
specifically delegated to the Agent by the terms of this Agreement and the
Security Instruments, together with such other powers as are reasonably
incidental thereto. The Agent (which term as used in this sentence and in
Section 11.05 and the first sentence of Section 11.06 shall include
reference to its Affiliates and its and its Affiliates' officers,
directors, employees, attorneys, accountants, experts and agents): (i)
shall have no duties or responsibilities except those expressly set forth
in the Loan Documents, and shall not by reason of the Loan Documents be a
trustee or fiduciary for any Lender; (ii) makes no representation or
warranty to any Lender and shall not be responsible to the Lenders for any
recitals, statements, representations or warranties contained in this
Agreement, or in any certificate or other document referred to or provided
for in, or received by any of them under, this Agreement, or for the value,
validity, effectiveness, genuineness, execution, effectiveness, legality,
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enforceability or sufficiency of this Agreement, any Note or any other
document referred to or provided for herein or for any failure by the
Borrower or any other Person (other than the Agent) to perform any of its
obligations hereunder or thereunder or for the existence, value, perfection
or priority of any collateral security or the financial or other condition
of the Borrower, its Subsidiaries or any other obligor or guarantor; (iii)
except pursuant to Section 11.07 shall not be required to initiate or
conduct any litigation or collection proceedings hereunder; and (iv) shall
not be responsible for any action taken or omitted to be taken by it
hereunder or under any other document or instrument referred to or provided
for herein or in connection herewith including its own ordinary negligence,
except for its own gross negligence or willful misconduct. The Agent may
employ agents, accountants, attorneys and experts and shall not be
responsible for the negligence or misconduct of any such agents,
accountants, attorneys or experts selected by it in good faith or any
action taken or omitted to be taken in good faith by it in accordance with
the advice of such agents, accountants, attorneys or experts. The Agent
may deem and treat the payee of any Note as the holder thereof for all
purposes hereof unless and until a written notice of the assignment or
transfer thereof permitted hereunder shall have been filed with the Agent.
The Agent is authorized to release any collateral that is permitted to be
sold or released pursuant to the terms of the Loan Documents.
Section 11.02 RELIANCE BY AGENT. The Agent shall be entitled to
rely upon any certification, notice or other communication (including any
thereof by telephone, telex, telecopier, telegram or cable) believed by it
to be genuine and correct and to have been signed or sent by or on behalf
of the proper Person or Persons, and upon advice and statements of legal
counsel, independent accountants and other experts selected by the Agent.
Section 11.03 DEFAULTS. The Agent shall not be deemed to have
knowledge of the occurrence of a Default (other than the non-payment of
principal of or interest on Loans or of fees or failure to reimburse for
Letter of Credit drawings) unless the Agent has received notice from a
Lender or the Borrower specifying such Default and stating that such notice
is a "Notice of Default." In the event that the Agent receives such a
notice of the occurrence of a Default, the Agent shall give prompt notice
thereof to the Lenders. In the event of a payment Default, the Agent shall
give each Lender prompt notice of each such payment Default.
Section 11.04 RIGHTS AS A LENDER. With respect to its
Commitments and the Loans made by it and its participation in the issuance
of Letters of Credit, BMO (and any successor acting as Agent) in its
capacity as a Lender hereunder shall have the same rights and powers
hereunder as any other Lender and may exercise the same as though it were
not acting as the Agent, and the term "Lender" or "Lenders" shall, unless
the context otherwise indicates, include the Agent in its individual
capacity. BMO (and any successor acting as Agent) and its Affiliates may
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(without having to account therefor to any Lender) accept deposits from,
lend money to and generally engage in any kind of banking, trust or other
business with the Borrower (and any of its Affiliates) as if it were not
acting as the Agent, and BMO and its Affiliates may accept fees and other
consideration from the Borrower for services in connection with this
Agreement or otherwise without having to account for the same to the
Lenders.
Section 11.05 INDEMNIFICATION. THE LENDERS AGREE TO INDEMNIFY
THE AGENT AND THE ISSUING BANK RATABLY IN ACCORDANCE WITH THEIR PERCENTAGE
SHARES FOR THE INDEMNITY MATTERS AS DESCRIBED IN SECTION 12.03 TO THE
EXTENT NOT INDEMNIFIED OR REIMBURSED BY THE BORROWER UNDER SECTION 12.03,
BUT WITHOUT LIMITING THE OBLIGATIONS OF THE BORROWER UNDER SAID SECTION
12.03 AND FOR ANY AND ALL OTHER LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF
ANY KIND AND NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR
ASSERTED AGAINST THE AGENT OR THE ISSUING BANK IN ANY WAY RELATING TO OR
ARISING OUT OF: (I) THIS AGREEMENT, THE SECURITY INSTRUMENTS OR ANY OTHER
DOCUMENTS CONTEMPLATED BY OR REFERRED TO HEREIN OR THE TRANSACTIONS
CONTEMPLATED HEREBY, BUT EXCLUDING, UNLESS A DEFAULT HAS OCCURRED AND IS
CONTINUING, NORMAL ADMINISTRATIVE COSTS AND EXPENSES INCIDENT TO THE
PERFORMANCE OF ITS AGENCY DUTIES HEREUNDER OR (II) THE ENFORCEMENT OF ANY
OF THE TERMS OF THIS AGREEMENT, ANY SECURITY INSTRUMENT OR OF ANY SUCH
OTHER DOCUMENTS; WHETHER OR NOT ANY OF THE FOREGOING SPECIFIED IN THIS
SECTION 11.05 ARISES FROM THE SOLE OR CONCURRENT NEGLIGENCE OF THE AGENT OR
THE ISSUING BANK, PROVIDED THAT NO LENDER SHALL BE LIABLE FOR ANY OF THE
FOREGOING TO THE EXTENT THEY ARISE FROM THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE AGENT.
Section 11.06 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each
Lender acknowledges and agrees that it has, independently and without
reliance on the Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own credit analysis of
the Borrower and its decision to enter into this Agreement, and that it
will, independently and without reliance upon the Agent or any other
Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement. The Agent shall not be
required to keep itself informed as to the performance or observance by the
Borrower of this Agreement, the Notes, the Security Instruments or any
other document referred to or provided for herein or to inspect the
properties or books of the Borrower. Except for notices, reports and other
documents and information expressly required to be furnished to the Lenders
by the Agent hereunder, the Agent shall not have any duty or responsibility
to provide any Lender with any credit or other information concerning the
affairs, financial condition or business of the Borrower (or any of its
Affiliates) which may come into the possession of the Agent or any of its
Affiliates. In this regard, each Lender acknowledges that Vinson & Elkins
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L.L.P. is acting in this transaction as special counsel to the Agent only,
except to the extent otherwise expressly stated in any legal opinion or any
Loan Document. Each Lender will consult with its own legal counsel to the
extent that it deems necessary in connection with the Loan Documents and
the matters contemplated therein.
Section 11.07 ACTION BY AGENT. Except for action or other
matters expressly required of the Agent hereunder, the Agent shall in all
cases be fully justified in failing or refusing to act hereunder unless it
shall (i) receive written instructions from the Majority Lenders (or all of
the Lenders as expressly required by Section 12.04) specifying the action
to be taken, and (ii) be indemnified to its satisfaction by the Lenders
against any and all liability and expenses which may be incurred by it by
reason of taking or continuing to take any such action. The instructions
of the Majority Lenders (or all of the Lenders as expressly required by
Section 12.04) and any action taken or failure to act pursuant thereto by
the Agent shall be binding on all of the Lenders. If a Default has
occurred and is continuing, the Agent shall take such action with respect
to such Default as shall be directed by the Majority Lenders (or all of the
Lenders as required by Section 12.04) in the written instructions (with
indemnities) described in this Section 11.07, provided that, unless and
until the Agent shall have received such directions, the Agent may (but
shall not be obligated to) take such action, or refrain from taking such
action, with respect to such Default as it shall deem advisable in the best
interests of the Lenders. In no event, however, shall the Agent be
required to take any action which exposes the Agent to personal liability
or which is contrary to this Agreement and the Security Instruments or
applicable law.
Section 11.08 RESIGNATION OR REMOVAL OF AGENT. Subject to the
appointment and acceptance of a successor Agent as provided below, the
Agent may resign at any time by giving notice thereof to the Lenders and
the Borrower, and the Agent may be removed at any time with or without
cause by the Majority Lenders. Upon any such resignation or removal, the
Majority Lenders shall have the right to appoint a successor Agent. If no
successor Agent shall have been so appointed by the Majority Lenders and
shall have accepted such appointment within thirty (30) days after the
retiring Agent's giving of notice of resignation or the Majority Lenders'
removal of the retiring Agent, then the retiring Agent may, on behalf of
the Lenders, appoint a successor Agent. Upon the acceptance of such
appointment hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Agent, and the retiring Agent shall
be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation or removal hereunder as Agent, the provisions
of this Article XI and Section 12.03 shall continue in effect for its
benefit in respect of any actions taken or omitted to be taken by it while
it was acting as the Agent.
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ARTICLE XII
MISCELLANEOUS
Section 12.01 WAIVER. No failure on the part of the Agent or
any Lender to exercise and no delay in exercising, and no course of dealing
with respect to, any right, power or privilege under any of the Loan
Documents shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege under any of the Loan
Documents preclude any other or further exercise thereof or the exercise of
any other right, power or privilege. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
Section 12.02 NOTICES. All notices and other communications
provided for herein and in the other Loan Documents (including, without
limitation, any modifications of, or waivers or consents under, this
Agreement or the other Loan Documents) shall be given or made by telex,
telecopy, courier or U.S. Mail or in writing and telexed, telecopied,
mailed or delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or in the Loan
Documents or, as to any party, at such other address as shall be designated
by such party in a notice to each other party. Except as otherwise
provided in this Agreement or in the other Loan Documents, all such
communications shall be deemed to have been duly given when transmitted, if
transmitted before 1:00 p.m. local time on a Business Day (otherwise on the
next succeeding Business Day) by telex or telecopier and evidence or
confirmation of receipt is obtained, or personally delivered or, in the
case of a mailed notice, three (3) Business Days after the date deposited
in the mails, postage prepaid, in each case given or addressed as
aforesaid.
Section 12.03 PAYMENT OF EXPENSES, INDEMNITIES, ETC.
(a) The Borrower agrees:
(i) whether or not the transactions hereby contemplated are
consummated, to pay all reasonable expenses of the Agent in the
administration (both before and after the execution hereof and
including advice of counsel as to the rights and duties of the Agent
and the Lenders with respect thereto) of, and in connection with the
negotiation, syndication, investigation, preparation, execution and
delivery of, recording or filing of, preservation of rights under,
enforcement of, and refinancing, renegotiation or restructuring of,
the Loan Documents and any amendment, waiver or consent relating
thereto (including, without limitation, travel, photocopy, mailing,
courier, telephone and other similar expenses of the Agent, the cost
of environmental audits, surveys and appraisals at reasonable
intervals, the reasonable fees and disbursements of counsel and other
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outside consultants for the Agent and, in the case of enforcement, the
reasonable fees and disbursements of counsel for the Agent and any of
the Lenders); and promptly reimburse the Agent for all amounts
expended, advanced or incurred by the Agent or the Lenders to satisfy
any obligation of the Borrower under this Agreement or any Security
Instrument, including without limitation, all costs and expenses of
foreclosure;
(ii) TO INDEMNIFY THE AGENT AND EACH LENDER AND EACH OF THEIR
AFFILIATES AND EACH OF THEIR OFFICERS, DIRECTORS, EMPLOYEES,
REPRESENTATIVES, AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS
("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM HARMLESS AGAINST AND
PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR, THE INDEMNITY
MATTERS WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF
THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A
RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY ACTUAL OR
PROPOSED USE BY THE BORROWER OF THE PROCEEDS OF ANY OF THE LOANS OR
LETTERS OF CREDIT, (II) THE EXECUTION, DELIVERY AND PERFORMANCE OF THE
LOAN DOCUMENTS, (III) THE OPERATIONS OF THE BUSINESS OF THE BORROWER
AND ITS SUBSIDIARIES, (IV) THE FAILURE OF THE BORROWER OR ANY
SUBSIDIARY TO COMPLY WITH THE TERMS OF ANY SECURITY INSTRUMENT OR THIS
AGREEMENT, OR WITH ANY GOVERNMENTAL REQUIREMENT, (V) ANY INACCURACY OF
ANY REPRESENTATION OR ANY BREACH OF ANY WARRANTY OF THE BORROWER OR
ANY GUARANTOR SET FORTH IN ANY OF THE LOAN DOCUMENTS, (VI) THE
ISSUANCE, EXECUTION AND DELIVERY OR TRANSFER OF OR PAYMENT OR FAILURE
TO PAY UNDER ANY LETTER OF CREDIT, OR (VII) THE PAYMENT OF A DRAWING
UNDER ANY LETTER OF CREDIT NOTWITHSTANDING THE NON-COMPLIANCE, NON-
DELIVERY OR OTHER IMPROPER PRESENTATION OF THE MANUALLY EXECUTED
DRAFT(S) AND CERTIFICATION(S), (VIII) ANY ASSERTION THAT THE LENDERS
WERE NOT ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE
SECURITY INSTRUMENTS OR (IX) ANY OTHER ASPECT OF THE LOAN DOCUMENTS,
INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND DISBURSEMENTS
OF COUNSEL AND ALL OTHER EXPENSES INCURRED IN CONNECTION WITH
INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY SUCH ACTION, SUIT,
PROCEEDING (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES) OR
CLAIM AND INCLUDING ALL INDEMNITY MATTERS ARISING BY REASON OF THE
ORDINARY NEGLIGENCE OF ANY INDEMNIFIED PARTY, BUT EXCLUDING ALL
INDEMNITY MATTERS ARISING SOLELY BY REASON OF CLAIMS BETWEEN THE
LENDERS OR ANY LENDER AND THE AGENT OR A LENDER'S SHAREHOLDERS AGAINST
THE AGENT OR LENDER OR BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT ON THE PART OF THE INDEMNIFIED PARTY; AND
(iii) TO INDEMNIFY AND HOLD HARMLESS FROM TIME TO TIME THE
INDEMNIFIED PARTIES FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, COST
RECOVERY ACTIONS, ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND
LIABILITIES TO WHICH ANY SUCH PERSON MAY BECOME SUBJECT (I) UNDER ANY
ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY SUBSIDIARY OR ANY
OF THEIR PROPERTIES, INCLUDING WITHOUT LIMITATION, THE TREATMENT OR
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DISPOSAL OF HAZARDOUS SUBSTANCES ON ANY OF THEIR PROPERTIES, (II) AS A
RESULT OF THE BREACH OR NON-COMPLIANCE BY THE BORROWER OR ANY
SUBSIDIARY WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR
ANY SUBSIDIARY, (III) DUE TO PAST OWNERSHIP BY THE BORROWER OR ANY
SUBSIDIARY OF ANY OF THEIR PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR
PROPERTIES WHICH, THOUGH LAWFUL AND FULLY PERMISSIBLE AT THE TIME,
COULD RESULT IN PRESENT LIABILITY, (IV) THE PRESENCE, USE, RELEASE,
STORAGE, TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON OR AT ANY OF
THE PROPERTIES OWNED OR OPERATED BY THE BORROWER OR ANY SUBSIDIARY, OR
(V) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION
WITH THE LOAN DOCUMENTS; PROVIDED, HOWEVER, NO INDEMNITY SHALL BE
AFFORDED UNDER THIS SECTION 12.03(A)(III) IN RESPECT OF ANY PROPERTY
FOR ANY OCCURRENCE ARISING FROM THE ACTS OR OMISSIONS OF THE AGENT OR
ANY LENDER DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS
OR ASSIGNS SHALL HAVE OBTAINED POSSESSION OF SUCH PROPERTY (WHETHER BY
FORECLOSURE OR DEED IN LIEU OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION
OR OTHERWISE).
(b) No Indemnified Party may settle any claim to be indemnified
without the consent of the indemnitor, such consent not to be
unreasonably withheld; provided, that the indemnitor may not
reasonably withhold consent to any settlement that an Indemnified
Party proposes, if the indemnitor does not have the financial ability
to pay all its obligations outstanding and asserted against the
indemnitor at that time, including the maximum potential claims
against the Indemnified Party to be indemnified pursuant to this
Section 12.03.
(c) In the case of any indemnification hereunder, the Agent or
Lender, as appropriate shall give notice to the Borrower of any such
claim or demand being made against the Indemnified Party and the
Borrower shall have the non-exclusive right to join in the defense
against any such claim or demand provided that if the Borrower
provides a defense, the Indemnified Party shall bear its own cost of
defense unless there is a conflict between the Borrower and such
Indemnified Party.
(d) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED
PARTIES NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY
KIND OR CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN
AFFIRMATIVE ACT OR AN OMISSION, INCLUDING WITHOUT LIMITATION, ALL
TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF
TORTS OF ONE OR MORE OF THE INDEMNIFIED PARTIES OR BY REASON OF STRICT
LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE INDEMNIFIED
PARTIES. TO THE EXTENT THAT AN INDEMNIFIED PARTY IS FOUND TO HAVE
COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, THIS
CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL CONTINUE BUT SHALL
ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED TO HAVE
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OCCURRED BY REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF THE INDEMNIFIED PARTY.
(e) The Borrower's obligations under this Section 12.03 shall
survive any termination of this Agreement and the payment of the Notes
and shall continue thereafter in full force and effect.
(f) The Borrower shall pay any amounts due under this Section
12.03 within thirty (30) days of the receipt by the Borrower of notice
of the amount due.
Section 12.04 AMENDMENTS, ETC. Any provision of this Agreement
or any Security Instrument may be amended, modified or waived with the
Borrower's and the Majority Lenders' prior written consent; provided that
(i) no amendment, modification or waiver which extends the final maturity
of the Loans, increases the Aggregate Maximum Credit Amounts, forgives the
principal amount of any Indebtedness outstanding under this Agreement,
releases any guarantor of the Indebtedness or releases all or substantially
all of the collateral, reduces the interest rate applicable to the Loans or
the fees payable to the Lenders generally, affects Section 2.03(a), this
Section 12.04 or Section 12.06(a) or modifies the definition of "Majority
Lenders" shall be effective without consent of all Lenders; (ii) no
amendment, modification or waiver which increases the Maximum Credit Amount
of any Lender shall be effective without the consent of such Lender; and
(iii) no amendment, modification or waiver which modifies the rights,
duties or obligations of the Agent shall be effective without the consent
of the Agent.
Section 12.05 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
Section 12.06 ASSIGNMENTS AND PARTICIPATIONS.
(a) The Borrower may not assign its rights or obligations
hereunder or under the Notes or any Letters of Credit without the
prior consent of all of the Lenders and the Agent.
(b) Any Lender may, upon the written consent of the Agent and,
if no Event of Default has occurred and is continuing, the Borrower
(which consent will not be unreasonably withheld), assign to one or
more assignees all or a portion of its rights and obligations under
this Agreement pursuant to an Assignment Agreement substantially in
the form of EXHIBIT E (an "ASSIGNMENT"); PROVIDED, HOWEVER, that
(i) any such assignment shall be in the amount of at least $10,000,000
or such lesser amount to which the Borrower has consented and (ii) the
assignee or assignor shall pay to the Agent a processing and
recordation fee of $2,500 for each assignment. Any such assignment
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will become effective upon the execution and delivery to the Agent of
the Assignment and the consent of the Agent. Promptly after receipt
of an executed Assignment, the Agent shall send to the Borrower a copy
of such executed Assignment. Upon receipt of such executed
Assignment, the Borrower, will, at its own expense, execute and
deliver new Notes to the assignor and/or assignee, as appropriate, in
accordance with their respective interests as they appear. Upon the
effectiveness of any assignment pursuant to this Section 12.06(b), the
assignee will become a "Lender," if not already a "Lender," for all
purposes of this Agreement and the Security Instruments. The assignor
shall be relieved of its obligations hereunder to the extent of such
assignment (and if the assigning Lender no longer holds any rights or
obligations under this Agreement, such assigning Lender shall cease to
be a "Lender" hereunder except that its rights under Sections 4.06,
5.01, 5.05 and 12.03 shall not be affected). The Agent will prepare
on the last Business Day of each month during which an assignment has
become effective pursuant to this Section 12.06(b), a new ANNEX I
giving effect to all such assignments effected during such month, and
will promptly provide the same to the Borrower and each of the
Lenders.
(c) Each Lender may transfer, grant or assign participations in
all or any part of such Lender's interests hereunder pursuant to this
Section 12.06(c) to any Person, PROVIDED that: (i) such Lender shall
remain a "Lender" for all purposes of this Agreement and the
transferee of such participation shall not constitute a "Lender"
hereunder; and (ii) no participant under any such participation shall
have rights to approve any amendment to or waiver of any of the Loan
Documents except to the extent such amendment or waiver would
(x) forgive any principal owing on any Indebtedness or extend the
final maturity of the Loans, (y) reduce the interest rate (other than
as a result of waiving the applicability of any post-default increases
in interest rates) or fees applicable to any of the Commitments or
Loans or Letters of Credit in which such participant is participating,
or postpone the payment of any thereof, or (z) release any guarantor
of the Indebtedness or release all or substantially all of the
collateral (except as provided in the Loan Documents) supporting any
of the Commitments or Loans or Letters of Credit in which such
participant is participating. In the case of any such participation,
the participant shall not have any rights under this Agreement or any
of the Security Instruments (the participant's rights against the
granting Lender in respect of such participation to be those set forth
in the agreement with such Lender creating such participation), and
all amounts payable by the Borrower hereunder shall be determined as
if such Lender had not sold such participation, PROVIDED that such
participant shall be entitled to receive additional amounts under
Article V on the same basis as if it were a Lender and be indemnified
under Section 12.03 as if it were a Lender. In addition, each
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agreement creating any participation must include an agreement by the
participant to be bound by the provisions of Section 12.15.
(d) The Lenders may furnish any information concerning the
Borrower in the possession of the Lenders from time to time to
assignees and participants (including prospective assignees and
participants); provided that, such Persons agree to be bound by the
provisions of Section 12.15.
(e) Notwithstanding anything in this Section 12.06 to the
contrary, any Lender may assign and pledge its Note to any Federal
Reserve Bank as collateral security pursuant to Regulation A of the
Board of Governors of the Federal Reserve System and any operating
circular issued by such Federal Reserve System and/or such Federal
Reserve Bank. No such assignment and/or pledge shall release the
assigning and/or pledging Lender from its obligations hereunder.
(f) Notwithstanding any other provisions of this Section 12.06,
no transfer or assignment of the interests or obligations of any
Lender or any grant of participations therein shall be permitted if
such transfer, assignment or grant would require the Borrower to file
a registration statement with the SEC or to qualify the Loans under
the "Blue Sky" laws of any state.
Section 12.07 INVALIDITY. In the event that any one or more of
the provisions contained in any of the Loan Documents or the Letters of
Credit, the Letter of Credit Agreements shall, for any reason, be held
invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of the
Notes, this Agreement or any Security Instrument.
Section 12.08 COUNTERPARTS. This Agreement may be executed in
any number of counterparts, all of which taken together shall constitute
one and the same instrument and any of the parties hereto may execute this
Agreement by signing any such counterpart.
Section 12.09 REFERENCES. The words "herein," "hereof,"
"hereunder" and other words of similar import when used in this Agreement
refer to this Agreement as a whole, and not to any particular article,
section or subsection. Any reference herein to a Section shall be deemed
to refer to the applicable Section of this Agreement unless otherwise
stated herein. Any reference herein to an exhibit or schedule shall be
deemed to refer to the applicable exhibit or schedule attached hereto
unless otherwise stated herein.
Section 12.10 SURVIVAL. The obligations of the parties under
Section 4.06, Article V, and Sections 11.05 and 12.03 shall survive the
repayment of the Loans and the termination of the Commitments. To the
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extent that any payments on the Indebtedness or proceeds of any collateral
are subsequently invalidated, declared to be fraudulent or preferential,
set aside or required to be repaid to a trustee, debtor in possession,
receiver or other Person under any bankruptcy law, common law or equitable
cause, then to such extent, the Indebtedness so satisfied shall be revived
and continue as if such payment or proceeds had not been received and the
Agent's and the Lenders' Liens, security interests, rights, powers and
remedies under this Agreement and each Security Instrument shall continue
in full force and effect. In such event, each Security Instrument shall be
automatically reinstated and the Borrower shall take such action as may be
reasonably requested by the Agent and the Lenders to effect such
reinstatement.
Section 12.11 CAPTIONS. Captions and section headings appearing
herein are included solely for convenience of reference and are not
intended to affect the interpretation of any provision of this Agreement.
Section 12.12 NO ORAL AGREEMENTS. THE LOAN DOCUMENTS EMBODY THE
ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL
OTHER AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE
SUBJECT MATTER HEREOF AND THEREOF. THE 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.
Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS EXCEPT TO
THE EXTENT THAT UNITED STATES FEDERAL LAW PERMITS ANY LENDER TO CHARGE
INTEREST AT THE RATE ALLOWED BY THE LAWS OF THE STATE WHERE SUCH
LENDER IS LOCATED. TEX. REV. CIV. STAT. ANN. ART. 5069, CH. 15 (WHICH
REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRI-
PARTY ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR THE NOTES.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THE LOAN
DOCUMENTS SHALL BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF
THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND,
BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY
ACCEPTS FOR ITSELF AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF
ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES ANY
OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING
OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY
NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING
IN SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS
NON-EXCLUSIVE AND DOES NOT PRECLUDE THE AGENT OR ANY LENDER FROM
OBTAINING JURISDICTION OVER THE BORROWER IN ANY COURT OTHERWISE HAVING
JURISDICTION.
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(c) THE BORROWER HEREBY IRREVOCABLY DESIGNATES CT CORPORATION
LOCATED AT 350 N. ST. PAUL STREET, DALLAS, TEXAS 75201, AS THE
DESIGNEE, APPOINTEE AND AGENT OF THE BORROWER TO RECEIVE, FOR AND ON
BEHALF OF THE BORROWER, SERVICE OF PROCESS IN SUCH RESPECTIVE
JURISDICTIONS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THE
LOAN DOCUMENTS. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED
ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY OVERNIGHT COURIER TO THE
BORROWER AT ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW, BUT THE
FAILURE OF THE BORROWER TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY
WAY THE SERVICE OF SUCH PROCESS. THE BORROWER FURTHER IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS
IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT ITS
SAID ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER
SUCH MAILING.
(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR ANY
LENDER OR ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED
AGAINST THE BORROWER IN ANY OTHER JURISDICTION.
(e) THE BORROWER AND EACH LENDER HEREBY (I) IRREVOCABLY AND
UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL
BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT
OR ANY SECURITY INSTRUMENT AND FOR ANY COUNTERCLAIM THEREIN; (II)
IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY
RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY
SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES
OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (III) CERTIFY THAT NO
PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OF COUNSEL FOR ANY PARTY
HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH
PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVERS, AND (IV) ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT, THE SECURITY INSTRUMENTS AND THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS,
THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 12.13.
Section 12.14 INTEREST. It is the intention of the parties
hereto that each Lender shall conform strictly to usury laws applicable to
it. Accordingly, if the transactions contemplated hereby would be usurious
as to any Lender under laws applicable to it (including the laws of the
United States of America and the State of Texas or any other jurisdiction
whose laws may be mandatorily applicable to such Lender notwithstanding the
other provisions of this Agreement), then, in that event, notwithstanding
anything to the contrary in any of the Loan Documents or any agreement
entered into in connection with or as security for the Notes, it is agreed
as follows: (i) the aggregate of all consideration which constitutes
interest under law applicable to any Lender that is contracted for, taken,
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reserved, charged or received by such Lender under any of the Loan
Documents or agreements or otherwise in connection with the Notes shall
under no circumstances exceed the maximum amount allowed by such applicable
law, and any excess shall be canceled automatically and if theretofore paid
shall be credited by such Lender on the principal amount of the
Indebtedness (or, to the extent that the principal amount of the
Indebtedness shall have been or would thereby be paid in full, refunded by
such Lender to the Borrower); and (ii) in the event that the maturity of
the Notes is accelerated by reason of an election of the holder thereof
resulting from any Event of Default under this Agreement or otherwise, or
in the event of any required or permitted prepayment, then such
consideration that constitutes interest under law applicable to any Lender
may never include more than the maximum amount allowed by such applicable
law, and excess interest, if any, provided for in this Agreement or
otherwise shall be canceled automatically by such Lender as of the date of
such acceleration or prepayment and, if theretofore paid, shall be credited
by such Lender on the principal amount of the Indebtedness (or, to the
extent that the principal amount of the Indebtedness shall have been or
would thereby be paid in full, refunded by such Lender to the Borrower).
All sums paid or agreed to be paid to any Lender for the use, forbearance
or detention of sums due hereunder shall, to the extent permitted by law
applicable to such Lender, be amortized, prorated, allocated and spread
throughout the full term of the Loans evidenced by the Notes until payment
in full so that the rate or amount of interest on account of any Loans
hereunder does not exceed the maximum amount allowed by such applicable
law. If at any time and from time to time (i) the amount of interest
payable to any Lender on any date shall be computed at the Highest Lawful
Rate applicable to such Lender pursuant to this Section 12.14 and (ii) in
respect of any subsequent interest computation period the amount of
interest otherwise payable to such Lender would be less than the amount of
interest payable to such Lender computed at the Highest Lawful Rate
applicable to such Lender, then the amount of interest payable to such
Lender in respect of such subsequent interest computation period shall
continue to be computed at the Highest Lawful Rate applicable to such
Lender until the total amount of interest payable to such Lender shall
equal the total amount of interest which would have been payable to such
Lender if the total amount of interest had been computed without giving
effect to this Section 12.14. To the extent that Article 5069-1.04 of the
Texas Revised Civil Statutes is relevant for the purpose of determining the
Highest Lawful Rate, such Lender elects to determine the applicable rate
ceiling under such Article by the indicated weekly rate ceiling from time
to time in effect.
Section 12.15 CONFIDENTIALITY. In the event that the Borrower
provides to the Agent or the Lenders written confidential information
belonging to the Borrower, if the Borrower shall denominate such
information in writing as "confidential", the Agent and the Lenders shall
thereafter maintain such information in confidence in accordance with the
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standards of care and diligence that each utilizes in maintaining its own
confidential information. This obligation of confidence shall not apply to
such portions of the information which (i) are in the public domain, (ii)
hereafter become part of the public domain without the Agent or the Lenders
breaching their obligation of confidence to the Borrower, (iii) are
previously known by the Agent or the Lenders from some source other than
the Borrower, (iv) are hereafter developed by the Agent or the Lenders
without using the Borrower's information, (v) are hereafter obtained by or
available to the Agent or the Lenders from a third party who owes no
obligation of confidence to the Borrower with respect to such information
or through any other means other than through disclosure by the Borrower,
(vi) are disclosed with the Borrower's consent, (vii) must be disclosed
either pursuant to any Governmental Requirement or to Persons regulating
the activities of the Agent or the Lenders, or (viii) as may be required by
law or regulation or order of any Governmental Authority in any judicial,
arbitration or governmental proceeding. Further, the Agent or a Lender may
disclose any such information to any other Lender, any independent
petroleum engineers or consultants, any independent certified public
accountants, any legal counsel employed by such Person in connection with
this Agreement or any Security Instrument, including without limitation,
the enforcement or exercise of all rights and remedies thereunder, or any
assignee or participant (including prospective assignees and participants)
in the Loans; PROVIDED, HOWEVER, that the Agent or the Lenders shall
receive a confidentiality agreement from the Person to whom such
information is disclosed such that said Person shall have the same
obligation to maintain the confidentiality of such information as is
imposed upon the Agent or the Lenders hereunder. Notwithstanding anything
to the contrary provided herein, this obligation of confidence shall cease
three (3) years from the date the information was furnished, unless the
Borrower requests in writing at least thirty (30) days prior to the
expiration of such three year period, to maintain the confidentiality of
such information for an additional three year period. The Borrower waives
any and all other rights it may have to confidentiality as against the
Agent and the Lenders arising by contract, agreement, statute or law except
as expressly stated in this Section 12.15.
Section 12.16 EFFECTIVENESS. This Agreement shall not be
effective until the date (the "EFFECTIVE DATE") that it is delivered to the
Agent in the State of Texas, accepted by the Lenders in such State, and
executed by the Agent in such State.
Section 12.17 EXCULPATION PROVISIONS. EACH OF THE PARTIES
HERETO SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND
THE SECURITY INSTRUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND
KNOWLEDGE OF THE TERMS OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS; THAT
IT HAS IN FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL
NOTICE AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS
AGREEMENT; THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS
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<PAGE>
CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS
AGREEMENT AND THE SECURITY INSTRUMENTS; AND HAS RECEIVED THE ADVICE OF ITS
ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE SECURITY INSTRUMENTS; AND
THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE
SECURITY INSTRUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN
SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS
RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS
THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY
PROVISION OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS ON THE BASIS THAT
THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE
PROVISION IS NOT "CONSPICUOUS."
[SIGNATURES BEGIN NEXT PAGE]
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The parties hereto have caused this Agreement to be duly executed
as of the day and year first above written.
BORROWER: MILLER OIL CORPORATION
By:__________________________________________
Name: Kelly E. Miller
Title: President
Address for Notices:
3014 Logan Valley Road
Traverse City, Michigan 49685-0348
Telecopier No.: 616/941-8312
Telephone No.: 616/941-0004
Attention: Kelly E. Miller
PARENT: MILLER EXPLORATION COMPANY
By:__________________________________________
Name: Kelly E. Miller
Title: President and Chief Executive Officer
Address for Notices:
3014 Logan Valley Road
Traverse City, Michigan 49685-0348
Telecopier No.: 616/941-8312
Telephone No.: 616/941-0004
Attention: Kelly E. Miller
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<PAGE>
LENDER AND AGENT: BANK OF MONTREAL
By:__________________________________________
Name: Donald G. Warmington
Title: Director
Lending Office for Base Rate Loans and
LIBOR Loans:
115 South LaSalle
Chicago, Illinois 60603
Address for Notices:
115 South LaSalle
Chicago, Illinois 60603
Telecopier No.: 312/750-6061
Telephone No.: 312/750-4326
Attention: Farid Ali
With copy to:
Bank of Montreal
700 Louisiana, Suite 4400
Houston, Texas 77002
Attention: Kenneth M. Schott
Telecopier No.: 713/546-9754
Telephone No.: 713/223-4007
S-2
<PAGE>
ANNEX I
LIST OF PERCENTAGE SHARES AND MAXIMUM CREDIT AMOUNTS
<TABLE>
<CAPTION>
NAME OF LENDER PERCENTAGE MAXIMUM CREDIT AMOUNT
-------------- ---------- ---------------------
SHARE
-----
<S> <C> <C>
Bank of Montreal 100% $75,000,000
</TABLE>
Annex I-1
<PAGE>
EXHIBIT A
FORM OF NOTE
$_____________________________ ___________________, 1998
FOR VALUE RECEIVED, MILLER OIL CORPORATION, a Michigan corporation
(the "BORROWER") hereby promises to pay to the order of _________________
_____________ (the "LENDER"), at the Principal Office of Bank of Montreal
(the "AGENT"), at 115 South LaSalle, Chicago, Illinois 60603, the principal
sum of _____________ Dollars ($____________) (or such lesser amount as
shall equal the aggregate unpaid principal amount of the Loans made by the
Lender to the Borrower under the Credit Agreement, as hereinafter defined),
in lawful money of the United States of America and in immediately
available funds, on the dates and in the principal amounts provided in the
Credit Agreement, and to pay interest on the unpaid principal amount of
each such Loan, at such office, in like money and funds, for the period
commencing on the date of such Loan until such Loan shall be paid in full,
at the rates per annum and on the dates provided in the Credit Agreement.
The date, amount, Type, interest rate, Interest Period and maturity of
each Loan made by the Lender to the Borrower, and each payment made on
account of the principal thereof, shall be recorded by the Lender on its
books and, prior to any transfer of this Note, endorsed by the Lender on
the schedules attached hereto or any continuation thereof.
This Note is one of the Notes referred to in the Credit Agreement
dated as of February 9, 1998 among the Borrower, the Lenders which are or
become parties thereto (including the Lender) and the Agent (as the same
may be amended or supplemented from time to time, the "CREDIT AGREEMENT"),
and evidences Loans made by the Lender thereunder. Capitalized terms used
in this Note have the respective meanings assigned to them in the Credit
Agreement.
This Note is issued pursuant to the Credit Agreement and is entitled
to the benefits provided for in the Credit Agreement and the Security
Instruments. The Credit Agreement provides for the acceleration of the
maturity of this Note upon the occurrence of certain events, for
prepayments of Loans upon the terms and conditions specified therein and
other provisions relevant to this Note.
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<PAGE>
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF TEXAS.
MILLER OIL CORPORATION
By:__________________________________________
Name:
Title:
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<PAGE>
EXHIBIT B
FORM OF BORROWING, CONTINUATION AND CONVERSION REQUEST
_____________________, 199__
Miller Oil Corporation, a Michigan corporation (the "BORROWER"),
pursuant to the Credit Agreement dated as of February 9, 1998 among the
Borrower, Bank of Montreal, as Agent for the lenders (the "LENDERS") which
are or become parties thereto, and such Lenders (together with all
amendments or supplements thereto, the "CREDIT AGREEMENT"), hereby makes
the requests indicated below (unless otherwise defined herein, capitalized
terms are defined in the Credit Agreement):
[ ] 1. Loans:
(a) Aggregate amount of new Loans to be $______________________;
(b) Requested funding date is _________________, 199__;
(c) $_____________________ of such borrowings are to be Eurodollar
Loans;
$_____________________ of such borrowings are to be Base Rate
Loans; and
(d) Length of Interest Period for Eurodollar Loans is:
_________________________.
[ ] 2. Eurodollar Loan Continuation for Eurodollar Loans maturing on
_____________________:
(a) Aggregate amount to be continued as Eurodollar Loans is
$____________________;
(b) Aggregate amount to be converted to Base Rate Loans is
$____________________;
(c) Length of Interest Period for continued Eurodollar Loans is
________________________.
[ ] 3. Conversion of Outstanding Base Rate Loans to Eurodollar Loans:
Convert $__________________ of the outstanding Base Rate Loans to
Eurodollar Loans on ____________________ with an Interest Period
of ______________________.
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<PAGE>
[ ] 4. Conversion of outstanding Eurodollar Loans to Base Rate Loans:
Convert $__________________ of the outstanding Eurodollar Loans
with Interest Period maturing on ______________________, 199_,
to Base Rate Loans.
The undersigned certifies that he is the _____________________ of the
Borrower, and that as such he is authorized to execute this certificate on
behalf of the Borrower. The undersigned further certifies, represents and
warrants on behalf of the Borrower that the Borrower is entitled to receive
the requested borrowing, continuation or conversion under the terms and
conditions of the Credit Agreement.
MILLER OIL CORPORATION
By:_________________________________
Name:
Title:
B-2
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
The undersigned hereby certify that they are the _______________ of
Miller Oil Corporation, a Michigan corporation (the "BORROWER") and the
_______________ of Miller Exploration Company, a Delaware corporation (the
"PARENT"), respectively, and that as such they are authorized to execute
this certificate on behalf of the Borrower and the Parent, respectively.
With reference to the Credit Agreement dated as of February 9, 1998 among
the Borrower, the Parent, Bank of Montreal, as Agent for the lenders (the
"LENDERS") which are or become a party thereto, and such Lenders (together
with all amendments or supplements thereto being the "CREDIT AGREEMENT"),
the undersigned represent and warrant as follows (each capitalized term
used herein having the same meaning given to it in the Credit Agreement
unless otherwise specified):
(a) The representations and warranties of the Borrower and
the Parent contained in Article VII of the Credit Agreement and
in the Security Instruments and otherwise made in writing by or
on behalf of the Borrower and the Parent pursuant to the Credit
Agreement and the Security Instruments were true and correct when
made, and are repeated at and as of the time of delivery hereof
and are true and correct at and as of the time of delivery
hereof, except as such representations and warranties are
modified to give effect to the transactions expressly permitted
by the Credit Agreement.
(b) The Borrower and the Parent have each performed and
complied with all agreements and conditions contained in the
Credit Agreement and in the Security Instruments required to be
performed or complied with by it prior to or at the time of
delivery hereof.
(c) None of the Borrower, the Parent, or any Subsidiary has
incurred any material liabilities, direct or contingent, since
December 31, 1996, except those set forth in SCHEDULE 9.01 to the
Credit Agreement and except those allowed by the terms of the
Credit Agreement or consented to by the Lenders in writing.
(d) Since December 31, 1996, no change has occurred, either
in any case or in the aggregate, in the condition, financial or
otherwise, of the Borrower, the Parent, or any Subsidiary which
would have a Material Adverse Effect.
(e) There exists, and, after giving effect to the loan or
loans with respect to which this certificate is being delivered,
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<PAGE>
will exist, no Default under the Credit Agreement or any event or
circumstance which constitutes, or with notice or lapse of time
(or both) would constitute, an event of default under any loan or
credit agreement, indenture, deed of trust, security agreement or
other agreement or instrument evidencing or pertaining to any
Debt of the Borrower, the Parent, or any Subsidiary, or under any
material agreement or instrument to which the Borrower, the
Parent, or any Subsidiary is a party or by which the Borrower,
the Parent, or any Subsidiary is bound.
(f) The financial statements furnished to the Agent with
this certificate fairly present the consolidated financial
condition and results of operations of the Borrower and its
Consolidated Subsidiaries as at the end of, and for, the fiscal
[quarter][year] ending ___________________ and such financial
statements have been approved in accordance with the accounting
procedures specified in the Credit Agreement.
(g) Attached hereto are the detailed computations necessary
to determine whether the Borrower and its Consolidated
Subsidiaries are in compliance with Sections 9.12, 9.13, 9.14 and
9.15 of the Credit Agreement as of the end of the fiscal
[quarter][year] ending __________________.
EXECUTED AND DELIVERED this 9th day of February 1998.
BORROWER: MILLER OIL CORPORATION
By:_____________________________________
Name:
Title:
PARENT: MILLER EXPLORATION COMPANY
By:_____________________________________
Name:
Title:
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<PAGE>
EXHIBIT D
SECURITY INSTRUMENTS
1. Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement executed by Borrower, with respect to
properties located in:
(a) Mississippi
(b) Michigan
(c) Texas
2. Financing Statements relating to the immediately preceding
documents to be filed with:
3. Guaranty Agreement to be executed by Parent
4. Fee Letter
D-1
<PAGE>
EXHIBIT E
FORM OF ASSIGNMENT AGREEMENT
ASSIGNMENT AGREEMENT ("AGREEMENT") dated as of ________________,
199___ between: _________________________________ (the "ASSIGNOR") and
__________________________ (the "ASSIGNEE").
RECITALS
A. The Assignor is a party to the Credit Agreement dated as of
February 9, 1998 (as amended and supplemented and in effect from time to
time, the "CREDIT AGREEMENT") among Miller Oil Corporation, a Michigan
corporation (the "BORROWER"), each of the lenders that is or becomes a
party thereto as provided in Section 12.06 of the Credit Agreement
(individually, together with its successors and assigns, a "LENDER", and
collectively, together with their successors and assigns, the "LENDERS"),
and Bank of Montreal, in its individual capacity, ("BMO") and as agent for
the Lenders (in such capacity, together with its successors in such
capacity, the "AGENT").
B. The Assignor proposes to sell, assign and transfer to the
Assignee, and the Assignee proposes to purchase and assume from the
Assignor, [all][a portion] of the Assignor's Maximum Credit Amount,
outstanding Loans and its Percentage Share of the outstanding LC Exposure,
all on the terms and conditions of this Agreement.
C. In consideration of the foregoing and the mutual agreements
contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
ARTICLE I
DEFINITIONS.
Section 1.01 DEFINITIONS. All capitalized terms used but not
defined herein have the respective meanings given to such terms in the
Credit Agreement.
Section 1.02 OTHER DEFINITIONS. As used herein, the following terms
have the following respective meanings:
"ASSIGNED INTEREST" shall mean all of Assignor's (in its capacity
as a "Lender") rights and obligations (i) under the Credit Agreement
and the other Security Instruments in respect of the Maximum Credit
Amount of the Assignor in the principal amount equal to
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<PAGE>
$____________________, including, without limitation, any obligation
to participate pro rata in any LC Exposure, and (ii) to make Loans
under the Maximum Credit Amount and any right to receive payments for
the Loans outstanding under the Maximum Credit Amount assigned hereby
of $_______________ (the "LOAN BALANCE"), plus the interest and fees
which will accrue from and after the Assignment Date.
"ASSIGNMENT DATE" shall mean _____________________, 199___.
ARTICLE II
SALE AND ASSIGNMENT.
Section 2.01 SALE AND ASSIGNMENT. On the terms and conditions set
forth herein, effective on and as of the Assignment Date, the Assignor
hereby sells, assigns and transfers to the Assignee, and the Assignee
hereby purchases and assumes from the Assignor, all of the right, title and
interest of the Assignor in and to, and all of the obligations of the
Assignor in respect of, the Assigned Interest. Such sale, assignment and
transfer is without recourse and, except as expressly provided in this
Agreement, without representation or warranty.
Section 2.02 ASSUMPTION OF OBLIGATIONS. The Assignee agrees with
the Assignor (for the express benefit of the Assignor and the Borrower)
that the Assignee will, from and after the Assignment Date, perform all of
the obligations of the Assignor in respect of the Assigned Interest. From
and after the Assignment Date: (a) the Assignor shall be released from the
Assignor's obligations in respect of the Assigned Interest, and (b) the
Assignee shall be entitled to all of the Assignor's rights, powers and
privileges under the Credit Agreement and the other Security Instruments in
respect of the Assigned Interest.
Section 2.03 CONSENT BY AGENT. By executing this Agreement as
provided below, in accordance with Section 12.06(b) of the Credit
Agreement, the Agent hereby acknowledges notice of the transactions
contemplated by this Agreement and consents to such transactions.
ARTICLE III
PAYMENTS.
Section 3.01 PAYMENTS. As consideration for the sale, assignment and
transfer contemplated by Section 2.01 hereof, the Assignee shall, on the
Assignment Date, assume Assignor's obligations in respect of the Assigned
Interest and pay to the Assignor an amount equal to the Loan Balance, if
any. An amount equal to all accrued and unpaid interest and fees shall be
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<PAGE>
paid to the Assignor as provided in Section 3.02 (iii) below. Except as
otherwise provided in this Agreement, all payments hereunder shall be made
in Dollars and in immediately available funds, without setoff, deduction or
counterclaim.
Section 3.02 ALLOCATION OF PAYMENTS. The Assignor and the Assignee
agree that (i) the Assignor shall be entitled to any payments of principal
with respect to the Assigned Interest made prior to the Assignment Date,
together with any interest and fees with respect to the Assigned Interest
accrued prior to the Assignment Date, (ii) the Assignee shall be entitled
to any payments of principal with respect to the Assigned Interest made
from and after the Assignment Date, together with any and all interest and
fees with respect to the Assigned Interest accruing from and after the
Assignment Date, and (iii) the Agent is authorized and instructed to
allocate payments received by it for account of the Assignor and the
Assignee as provided in the foregoing clauses. Each party hereto agrees
that it will hold any interest, fees or other amounts that it may receive
to which the other party hereto shall be entitled pursuant to the preceding
sentence for account of such other party and pay, in like money and funds,
any such amounts that it may receive to such other party promptly upon
receipt.
Section 3.03 DELIVERY OF NOTES. Promptly following the receipt by
the Assignor of the consideration required to be paid under Section 3.01
hereof, the Assignor shall, in the manner contemplated by Section 12.06(b)
of the Credit Agreement, (i) deliver to the Agent (or its counsel) the Note
held by the Assignor and (ii) notify the Agent to request that the Borrower
execute and deliver new Notes to the Assignor, if Assignor continues to be
a Lender, and the Assignee, dated the date of this Agreement in respective
principal amounts equal to the respective Maximum Credit Amounts of the
Assignor (if appropriate) and the Assignee after giving effect to the sale,
assignment and transfer contemplated hereby.
Section 3.04 FURTHER ASSURANCES. The Assignor and the Assignee
hereby agree to execute and deliver such other instruments, and take such
other actions, as either party may reasonably request in connection with
the transactions contemplated by this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT.
Section 4.01 CONDITIONS PRECEDENT. The effectiveness of the sale,
assignment and transfer contemplated hereby is subject to the satisfaction
of each of the following conditions precedent:
(a) the execution and delivery of this Agreement by the Assignor
and the Assignee;
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<PAGE>
(b) the receipt by the Assignor of the payment required to be
made by the Assignee under Section 3.01 hereof; and
(c) the acknowledgment and consent by the Agent contemplated by
Section 2.03 hereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES.
Section 5.01 REPRESENTATIONS AND WARRANTIES OF THE ASSIGNOR. The
Assignor represents and warrants to the Assignee as follows:
(a) it has all requisite power and authority, and has taken all
action necessary to execute and deliver this Agreement and to fulfill
its obligations under, and consummate the transactions contemplated
by, this Agreement;
(b) the execution, delivery and compliance with the terms hereof
by Assignor and the delivery of all instruments required to be
delivered by it hereunder do not and will not violate any Governmental
Requirement applicable to it;
(c) this Agreement has been duly executed and delivered by it
and constitutes the legal, valid and binding obligation of the
Assignor, enforceable against it in accordance with its terms;
(d) all approvals and authorizations of, all filings with and
all actions by any Governmental Authority necessary for the validity
or enforceability of its obligations under this Agreement have been
obtained;
(e) the Assignor has good title to, and is the sole legal and
beneficial owner of, the Assigned Interest, free and clear of all
Liens, claims, participations or other charges of any nature
whatsoever; and
(f) the transactions contemplated by this Agreement are
commercial banking transactions entered into in the ordinary course
of the banking business of the Assignor.
Section 5.02 DISCLAIMER. Except as expressly provided in Section
5.01 hereof, the Assignor does not make any representation or warranty, nor
shall it have any responsibility to the Assignee, with respect to the
accuracy of any recitals, statements, representations or warranties
contained in the Credit Agreement or in any certificate or other document
referred to or provided for in, or received by any Lender under, the Credit
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<PAGE>
Agreement, or for the value, validity, effectiveness, genuineness,
execution, legality, enforceability or sufficiency of the Credit
Agreement, the Notes or any other document referred to or provided
for therein or for any failure by the Borrower or any other Person (other
than Assignor) to perform any of its obligations thereunder prior or for
the existence, value, perfection or priority of any collateral security or
the financial or other condition of the Borrower or the Subsidiaries [or
any other obligor or guarantor], or any other matter relating to the Credit
Agreement or any other Security Instrument or any extension of credit
thereunder.
Section 5.03 REPRESENTATIONS AND WARRANTIES OF THE ASSIGNEE. The
Assignee represents and warrants to the Assignor as follows:
(a) it has all requisite power and authority, and has taken all
action necessary to execute and deliver this Agreement and to fulfill
its obligations under, and consummate the transactions contemplated
by, this Agreement;
(b) the execution, delivery and compliance with the terms hereof
by Assignee and the delivery of all instruments required to be
delivered by it hereunder do not and will not violate any Governmental
Requirement applicable to it;
(c) this Agreement has been duly executed and delivered by it
and constitutes the legal, valid and binding obligation of the
Assignee, enforceable against it in accordance with its terms;
(d) all approvals and authorizations of, all filings with and
all actions by any Governmental Authority necessary for the validity
or enforceability of its obligations under this Agreement have been
obtained;
(e) the Assignee has fully reviewed the terms of the Credit
Agreement and the other Security Instruments and has independently and
without reliance upon the Assignor, and based on such information as
the Assignee has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement;
(f) the Assignee hereby affirms that the representations
contained in Section 4.06(d)[(i)][ii)] of the Credit Agreement are
true and accurate as to it [IF (ii) IS SELECTED ADD: and, the Assignee
has contemporaneously herewith delivered to the Agent and the Borrower
such certifications as are required thereby to avoid the withholding
taxes referred to in Section 4.06]; and
(g) the transactions contemplated by this Agreement are
commercial banking transactions entered into in the ordinary course
of the banking business of the Assignee.
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<PAGE>
ARTICLE VI
MISCELLANEOUS.
Section 6.01 NOTICES. All notices and other communications provided
for herein (including, without limitation, any modifications of, or
waivers, requests or consents under, this Agreement) shall be given or made
in writing (including, without limitation, by telex or telecopy) to the
intended recipient at its "Address for Notices" specified below its name on
the signature pages hereof or, as to either party, at such other address as
shall be designated by such party in a notice to the other party.
Section 6.02 AMENDMENT, MODIFICATION OR WAIVER. No provision of
this Agreement may be amended, modified or waived except by an instrument
in writing signed by the Assignor and the Assignee, and consented to by the
Agent.
Section 6.03 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. The representations and
warranties made herein by the Assignee are also made for the benefit of the
Agent and the Borrower, and the Assignee agrees that the Agent and the
Borrower are entitled to rely upon such representations and warranties.
Section 6.04 ASSIGNMENTS. Neither party hereto may assign any of
its rights or obligations hereunder except in accordance with the terms of
the Credit Agreement.
Section 6.05 CAPTIONS. The captions and section headings appearing
herein are included solely for convenience of reference and are not
intended to affect the interpretation of any provision of this Agreement.
Section 6.06 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be identical and all of which,
taken together, shall constitute one and the same instrument, and each of
the parties hereto may execute this Agreement by signing any such
counterpart.
Section 6.07 GOVERNING LAW. This Agreement shall be governed by,
and construed in accordance with, the law of the State of ________________.
Section 6.08 EXPENSES. To the extent not paid by the Borrower
pursuant to the terms of the Credit Agreement, each party hereto shall bear
its own expenses in connection with the execution, delivery and performance
of this Agreement.
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<PAGE>
Section 6.09 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNOR:
________________________________________
By:_____________________________________
Name:
Title:
Address for Notices:
________________________________________
________________________________________
________________________________________
Telecopier No.: ________________________
Telephone No.: ________________________
Attention: ________________________
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<PAGE>
ASSIGNEE:
________________________________________
By:_____________________________________
Name:
Title:
Address for Notices:
________________________________________
________________________________________
________________________________________
Telecopier No.:_________________________
Telephone No.:__________________________
Attention:______________________________
ACKNOWLEDGED AND CONSENTED TO:
BANK OF MONTREAL, AS AGENT
By:___________________________
Name:
Title:
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<PAGE>
EXHIBIT F
APPLICATION AND REIMBURSEMENT AGREEMENT
FOR IRREVOCABLE STANDBY LETTER OF CREDIT
BANK OF MONTREAL Date: ___________________
Letter of Credit Processing Center SLDC 3896/ _____________
311 West Monroe Street
Chicago, Illinois 60606
Gentlemen:
We request you to open and transmit by cable/airmail/courier your
Irrevocable Letter of Credit in favor of:
available by their drafts, drawn at sight on: Bank of Montreal, ________
_________________ or not exceeding a total of: ___________________________
accompanied by the following document(s):
Drafts drawn under this Letter of Credit must be drawn and presented
together with accompanying documentation at your principal office in
Chicago, Illinois not later than:
In consideration of your issuing at our request your Irrevocable Letter of
Credit (hereinafter called "Credit") on the terms mentioned above:
1. We hereby agree to pay you in immediately available and freely
transferable funds the amount of each draft or acceptance drawn under the
Credit, such payment to be made at the maturity of each respective draft or
acceptance or, if so demanded by you, on demand in advance of any drawing
or maturity.
2. Payment shall be made by us at your office in Chicago, Illinois in
lawful money of the United States, provided that, if a draft or other
request for payment under the Credit is drawn in a currency other than
United States currency, we shall pay the equivalent in United States
currency, at the rate of exchange then current in Chicago for cable
transfers to the place of payment in the currency in which such drawing was
made, as determined by you and notified to us, or, if you so request of us
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<PAGE>
at your option, we shall pay you the amount of such drawing in the currency
in which the drawing was made in a place, form and manner acceptable to
you.
3. We also agree to pay you the commissions, indemnifications, and other
amounts required under the Credit Agreement referred to below.
4. Any amounts not paid when due hereunder shall bear interest as
provided in the Credit Agreement. You are hereby authorized to charge any
depository or other account of ours or any of us maintained with you for
the full amount of any drawing paid by you under the Credit and for payment
of any other amount payable by us hereunder not paid to you on demand. If
by charging such account you create an overdraft in one of our accounts, we
shall pay interest to you on such overdrawn amount at the rate specified in
our agreement with you establishing such account or, if no such rate is
specified, at the Post-Default Rate provided for in the Credit Agreement.
5. We agree that in the event of any extension of the maturity or time
for presentation of drafts, acceptances or documents, or any other
modification of the terms of the Credit, at the request of any of us, with
or without notification to the others, or in the event of any increase in
the amount of the Credit at our request, this agreement shall be binding
upon us with regard to the credit extended, increased or otherwise
modified, to drafts, documents and property covered thereby, and to any
action taken by you or any of your correspondents, in accordance with such
extension, increase or other modification.
6. The users of the Credit shall be deemed our agents and we assume all
risks of their acts, omissions, or misrepresentations. Neither you nor your
correspondents shall be responsible for the validity, truthfulness, or
genuineness of any documents even if such documents should in fact prove to
be in any or all respects invalid, fraudulent or forged; for failure of any
draft to bear any reference or adequate reference to the Credit, or failure
of any person to note the amount of any draft on the reverse of the Credit,
or to surrender or to take up the Credit as required by the terms of the
Credit, each of which provisions, if contained in the Credit itself, it is
agreed may be waived by you, or for errors, omissions, interruptions or
delays in transmission or delivery of any message, by mail, cable,
telegraph, wireless, or otherwise, whether or not they be in cipher; nor
shall you be responsible for any error, neglect or default of any of your
correspondents; and none of the above shall affect, impair or prevent the
vesting of any of your rights or powers hereunder.
7. The Credit is issued under the Credit Agreement dated as of February
9, 1998 among us, other lenders signatory thereto and the Bank of Montreal,
as Agent (the "CREDIT AGREEMENT"). To the extent of any conflict between
this Agreement and the Credit Agreement, the Credit Agreement shall govern.
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8. You shall not be deemed to have waived any of your rights hereunder,
unless you or your authorized agent shall have signed such waiver in
writing. No such waiver, unless expressly as stated therein, shall be
effective as to any transaction which occurs subsequent to the date of such
waiver, or as to any continuance of a breach after such waiver.
9. The word "property", as used in this agreement, includes goods,
merchandise, securities, funds, chooses in action, and any and all other
forms of property, whether real, personal or mixed, and any right or
interest therein.
10. Without limiting the foregoing and in addition to the provisions of
paragraph numbered 6 hereof, you are hereby expressly authorized and
directed to honor any request for payment which is made under and in
compliance with the terms of said Credit without regard to, and without any
duty on your part to inquire into, the existence of any disputes or
controversies between any of the undersigned, the beneficiary of the Credit
or any other person, firm or corporation, or the respective rights, duties
or liabilities of any of them or whether any facts or occurrences
represented in any of the documents presented under the Credit are true or
correct. Furthermore, we fully understand and agree that your sole
obligation to us shall be limited to honoring requests for payment made
under and in compliance with the terms of the Credit and this application
and your obligation remains so limited even if you may have assisted us in
the preparation of the wording of the Credit or any documents required to
be presented thereunder or you may otherwise be aware of the underlying
transaction giving rise to the Credit and this application. In addition,
and without limiting any of the other provisions hereof, you and your
correspondents may (a) act in reliance upon any oral, telephonic,
telegraphic, electronic or written request or notice believed by you or
your relevant correspondent in good faith to have been authorized by us or
any one of us, whether or not given or signed by an authorized person, and
(b) receive, accept or pay as complying with the terms of the Credit any
drafts or other document, otherwise in order, that may be signed by, or
issued to, the administrator or executor of, or the trustee in bankruptcy
of, or the receiver for any of the property of, or any other person or
entity acting as the representative of, in the place of or as the successor
in interest to, the party in whose name the Credit provides that any drafts
or other documents should be drawn or issued.
11. If this agreement is signed by one party, the terms "we," "our," "us,"
shall be read throughout as "I," "my," "me," as the case may be. If this
agreement is signed by two or more parties, it shall constitute the joint
and several agreement of such parties. This agreement shall be deemed to be
made under and shall in all respects be governed by the law of the State of
Illinois. The Credit and, to the extent not inconsistent with the laws of
the State of Illinois, this agreement will be subject to the Uniform
Customs and Practice for Documentary Credits as most recently published by
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the International Chamber of Commerce (the "UCP"), except that Article 41
and 43 of the UCP (1993 Revision) published by the International Chamber of
Commerce as Publication No. 500 shall not apply nor shall any equivalent
provision in any future version of the UCP.
Very truly yours,
_______________________________________________________
(FIRM'S name, IF APPLICABLE)
For Bank Use Only BY __________________________________
[ ] __________ _____TITLE _________________________________
Approved by DATE BY ___________________________________
TITLE_________________________________________
C60092 N7/94
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<PAGE>
EXHIBIT 10.12
GUARANTY AGREEMENT
BY
MILLER EXPLORATION COMPANY
IN FAVOR OF
BANK OF MONTREAL, AS AGENT
FEBRUARY 9, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1: GENERAL TERMS
Section 1.1 TERMS DEFINED ABOVE . . . . . . . . . . . . . . . . . .1
Section 1.2 CERTAIN DEFINITIONS . . . . . . . . . . . . . . . . . .1
Section 1.3 CREDIT AGREEMENT DEFINITIONS. . . . . . . . . . . . . .2
ARTICLE 2: THE GUARANTY
Section 2.1 LIABILITIES GUARANTEED. . . . . . . . . . . . . . . . .2
Section 2.2 NATURE OF GUARANTY. . . . . . . . . . . . . . . . . . .2
Section 2.3 AGENT'S RIGHTS. . . . . . . . . . . . . . . . . . . . .2
Section 2.4 GUARANTOR'S WAIVERS . . . . . . . . . . . . . . . . . .3
Section 2.5 MATURITY OF LIABILITIES; PAYMENT. . . . . . . . . . . .3
Section 2.6 AGENT'S EXPENSES. . . . . . . . . . . . . . . . . . . .3
Section 2.7 LIABILITY . . . . . . . . . . . . . . . . . . . . . . .3
Section 2.8 EVENTS AND CIRCUMSTANCES NOT REDUCING OR
DISCHARGING GUARANTOR'S OBLIGATIONS . . . . . . . . . .4
ARTICLE 3: REPRESENTATIONS AND WARRANTIES
Section 3.1 BY GUARANTOR. . . . . . . . . . . . . . . . . . . . . .6
Section 3.2 NO REPRESENTATION BY LENDERS. . . . . . . . . . . . . .6
Section 3.3 INCORPORATION OF CREDIT AGREEMENT REPRESENTATIONS,
WARRANTIES AND COVENANTS. . . . . . . . . . . . . . . .6
Section 4.1 SUBORDINATION OF ALL GUARANTOR CLAIMS . . . . . . . . .6
Section 4.2 CLAIMS IN BANKRUPTCY. . . . . . . . . . . . . . . . . .7
Section 4.3 PAYMENTS HELD IN TRUST. . . . . . . . . . . . . . . . .7
Section 4.4 LIENS SUBORDINATE . . . . . . . . . . . . . . . . . . .7
Section 4.5 NOTATION OF RECORDS . . . . . . . . . . . . . . . . . .7
ARTICLE 5: MISCELLANEOUS
Section 5.1 SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . .7
Section 5.2 NOTICES . . . . . . . . . . . . . . . . . . . . . . . .8
Section 5.3 BUSINESS AND FINANCIAL INFORMATION. . . . . . . . . . .8
Section 5.4 CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . .8
Section 5.5 INVALIDITY. . . . . . . . . . . . . . . . . . . . . . .8
Section 5.6 ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . .8
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GUARANTY AGREEMENT
THIS GUARANTY AGREEMENT by MILLER EXPLORATION COMPANY, a Delaware
corporation (hereinafter called "GUARANTOR"), is in favor of BANK OF
MONTREAL, as agent (the "AGENT") for the lenders (the "LENDERS") that are
or become parties to the Credit Agreement defined below.
W I T N E S S E T H:
WHEREAS, on even date herewith, Miller Oil Corporation, a Michigan
corporation (hereinafter called "BORROWER"), the Agent and the Lenders have
entered into that certain Credit Agreement (as the same may be amended from
time to time, the "CREDIT AGREEMENT"); and
WHEREAS, one of the terms and conditions stated in the Credit
Agreement for the making of the loans described therein is the execution
and delivery to the Agent for the benefit of the Lenders of this Guaranty
Agreement;
NOW, THEREFORE, (i) in order to comply with the terms and conditions
of the Credit Agreement, (ii) to induce the Lenders, at any time or from
time to time, to loan monies, with or without security to or for the
account of Borrower in accordance with the terms of the Credit Agreement,
(iii) at the special insistence and request of the Lenders, and (iv) for
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, Guarantor hereby agrees as follows:
ARTICLE 1: GENERAL TERMS
Section 1.1 TERMS DEFINED ABOVE. As used in this Guaranty
Agreement, the terms "Borrower", "Guarantor", "Credit Agreement" and
"Lenders" shall have the meanings indicated above.
Section 1.2 CERTAIN DEFINITIONS. As used in this Guaranty
Agreement, the following terms shall have the following meanings, unless
the context otherwise requires:
"GUARANTOR CLAIMS" shall have the meaning indicated in Section
4.1 hereof.
"GUARANTY AGREEMENT" shall mean this Guaranty Agreement, as the
same may from time to time be amended or supplemented.
"LIABILITIES" shall mean (a) any and all indebtedness,
obligations and liabilities of the Borrower pursuant to the
Credit Agreement, including without limitation, the unpaid
principal of and interest on the Notes, including without
limitation, interest accruing subsequent to the filing of a
petition or other action concerning bankruptcy or other similar
proceeding; (b) any additional loans made by the Lenders to the
<PAGE>
Borrower; (c) payment of and performance of any and all present
or future obligations of the Borrower according to the terms of
any present or future Hedging Agreements with any Lender or its
Affiliate, and (d) all renewals, rearrangements, increases,
extensions for any period, amendments or supplement in whole or
in part of the Notes or any documents evidencing the above.
Section 1.3 CREDIT AGREEMENT DEFINITIONS. Unless otherwise defined
herein, all terms beginning with a capital letter which are defined in the
Credit Agreement shall have the same meanings herein as therein.
ARTICLE 2: THE GUARANTY
Section 2.1 LIABILITIES GUARANTEED. Guarantor hereby irrevocably
and unconditionally guarantees the prompt payment of the Liabilities when
due, whether at maturity or otherwise.
Section 2.2 NATURE OF GUARANTY. This Guaranty Agreement is an
absolute, irrevocable, completed and continuing guaranty of payment and not
a guaranty of collection, and no notice of the Liabilities or any extension
of credit already or hereafter contracted by or extended to Borrower need
be given to Guarantor. This Guaranty Agreement may not be revoked by
Guarantor and shall continue to be effective with respect to debt under the
Liabilities arising or created after any attempted revocation by Guarantor
and shall remain in full force and effect until the Liabilities are paid in
full and the Commitments are terminated, notwithstanding that from time to
time prior thereto no Liabilities may be outstanding. Borrower and the
Lenders may modify, alter, rearrange, extend for any period and/or renew
from time to time, the Liabilities, and the Lenders may waive any Default
or Events of Default without notice to the Guarantor and in such event
Guarantor will remain fully bound hereunder on the Liabilities. This
Guaranty Agreement shall continue to be effective or be reinstated, as the
case may be, if at any time any payment of the Liabilities is rescinded or
must otherwise be returned by any of the Lenders upon the insolvency,
bankruptcy or reorganization of Borrower or otherwise, all as though such
payment had not been made. This Guaranty Agreement may be enforced by the
Agent and any subsequent holder of any of the Liabilities and shall not be
discharged by the assignment or negotiation of all or part of the
Liabilities. Guarantor hereby expressly waives presentment, demand, notice
of non-payment, protest and notice of protest and dishonor, notice of
Default or Event of Default, notice of intent to accelerate the maturity
and notice of acceleration of the maturity and any other notice in
connection with the Liabilities, and also notice of acceptance of this
Guaranty Agreement, acceptance on the part of the Lenders being
conclusively presumed by the Lenders' request for this Guaranty Agreement
and delivery of the same to the Agent.
Section 2.3 AGENT'S RIGHTS. Guarantor authorizes the Agent,
without notice or demand and without affecting Guarantor's liability
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<PAGE>
hereunder, to take and hold security for the payment of this Guaranty
Agreement and/or the Liabilities, and exchange, enforce, waive and release
any such security; and to apply such security and direct the order or
manner of sale thereof as the Agent in its discretion may determine; and to
obtain a guaranty of the Liabilities from any one or more Persons and at
any time or times to enforce, waive, rearrange, modify, limit or release
any of such other Persons from their obligations under such guaranties.
Section 2.4 GUARANTOR'S WAIVERS.
(a) GENERAL. Guarantor waives any right to require any of the
Lenders to (i) proceed against Borrower or any other Person liable on
the Liabilities, (ii) enforce any of their rights against any other
guarantor of the Liabilities (iii) proceed or enforce any of their
rights against or exhaust any security given to secure the Liabilities
(iv) have Borrower joined with Guarantor in any suit arising out of
this Guaranty Agreement and/or the Liabilities, or (v) pursue any
other remedy in the Lenders' powers whatsoever. The Lenders shall not
be required to mitigate damages or take any action to reduce, collect
or enforce the Liabilities. Guarantor waives any defense arising by
reason of any disability, lack of corporate authority or power, or
other defense of Borrower or any other guarantor of the Liabilities,
and shall remain liable hereon regardless of whether Borrower or any
other guarantor be found not liable thereon for any reason. Whether
and when to exercise any of the remedies of the Lenders under any of
the Loan Documents shall be in the sole and absolute discretion of the
Agent, and no delay by the Agent in enforcing any remedy, including
delay in conducting a foreclosure sale, shall be a defense to the
Guarantor's liability under this Guaranty Agreement. To the extent
allowed by applicable law, the Guarantor hereby waives any good faith
duty on the part of the Agent in exercising any remedies provided in
the Loan Documents.
(b) SUBROGATION. Until the Liabilities have been paid in full,
the Guarantor waives all rights of subrogation or reimbursement
against the Borrower, whether arising by contract or operation of law
(including, without limitation, any such right arising under any
federal or state bankruptcy or insolvency laws) and waives any right
to enforce any remedy which the Lenders now have or may hereafter have
against the Borrower, and waives any benefit or any right to
participate in any security now or hereafter held by the Agent or any
Lender.
Section 2.5 MATURITY OF LIABILITIES; PAYMENT. Guarantor agrees
that if the maturity of any of the Liabilities is accelerated by bankruptcy
or otherwise, such maturity shall also be deemed accelerated for the
purpose of this Guaranty Agreement without demand or notice to Guarantor.
Guarantor will, forthwith upon notice from the Agent, pay to the Agent the
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<PAGE>
amount due and unpaid by Borrower and guaranteed hereby. The failure of
the Agent to give this notice shall not in any way release Guarantor
hereunder.
Section 2.6 AGENT'S EXPENSES. If Guarantor fails to pay the
Liabilities after notice from the Agent of Borrower's failure to pay any
Liabilities at maturity, and if the Agent obtains the services of an
attorney for collection of amounts owing by Guarantor hereunder, or
obtaining advice of counsel in respect of any of their rights under this
Guaranty Agreement, or if suit is filed to enforce this Guaranty Agreement,
or if proceedings are had in any bankruptcy, probate, receivership or other
judicial proceedings for the establishment or collection of any amount
owing by Guarantor hereunder, or if any amount owing by Guarantor hereunder
is collected through such proceedings, Guarantor agrees to pay to the Agent
the Agent's reasonable attorneys' fees.
Section 2.7 LIABILITY. It is expressly agreed that the liability
of the Guarantor for the payment of the Liabilities guaranteed hereby shall
be primary and not secondary.
Section 2.8 EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING
GUARANTOR'S OBLIGATIONS. Guarantor hereby consents and agrees to each of
the following to the fullest extent permitted by law, and agrees that
Guarantor's obligations under this Guaranty Agreement shall not be
released, diminished, impaired, reduced or adversely affected by any of the
following, and waives any rights (including without limitation rights to
notice) which Guarantor might otherwise have as a result of or in
connection with any of the following:
(a) MODIFICATIONS, ETC. Any renewal, extension,
modification, increase, decrease, alteration or rearrangement of
all or any part of the Liabilities, or of the Notes, or the
Credit Agreement or any instrument executed in connection
therewith, or any contract or understanding between Borrower and
any of the Lenders, or any other Person, pertaining to the
Liabilities;
(b) ADJUSTMENT, ETC. Any adjustment, indulgence,
forbearance or compromise that might be granted or given by any
of the Lenders to Borrower or Guarantor or any Person liable on
the Liabilities;
(c) CONDITION OF BORROWER OR GUARANTOR. The insolvency,
bankruptcy arrangement, adjustment, composition, liquidation,
disability, dissolution, death or lack of power of Borrower or
Guarantor or any other Person at any time liable for the payment
of all or part of the Liabilities; or any dissolution of Borrower
or Guarantor, or any sale, lease or transfer of any or all of the
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<PAGE>
assets of Borrower or Guarantor, or any changes in the
shareholders, partners, or members of Borrower or Guarantor; or
any reorganization of Borrower or Guarantor;
(d) INVALIDITY OF LIABILITIES. The invalidity, illegality
or unenforceability of all or any part of the Liabilities, or any
document or agreement executed in connection with the
Liabilities, for any reason whatsoever, including without
limitation the fact that the Liabilities, or any part thereof,
exceed the amount permitted by law, the act of creating the
Liabilities or any part thereof is ULTRA VIRES, the officers or
representatives executing the documents or otherwise creating the
Liabilities acted in excess of their authority, the Liabilities
violate applicable usury laws, the Borrower has valid defenses,
claims or offsets (whether at law, in equity or by agreement)
which render the Liabilities wholly or partially uncollectible
from Borrower, the creation, performance or repayment of the
Liabilities (or the execution, delivery and performance of any
document or instrument representing part of the Liabilities or
executed in connection with the Liabilities, or given to secure
the repayment of the Liabilities) is illegal, uncollectible,
legally impossible or unenforceable, or the Credit Agreement or
other documents or instruments pertaining to the Liabilities have
been forged or otherwise are irregular or not genuine or
authentic;
(e) RELEASE OF OBLIGORS. Any full or partial release of
the liability of Borrower on the Liabilities or any part thereof,
of any co-guarantors, or any other Person now or hereafter
liable, whether directly or indirectly, jointly, severally, or
jointly and severally, to pay, perform, guarantee or assure the
payment of the Liabilities or any part thereof, it being
recognized, acknowledged and agreed by Guarantor that Guarantor
may be required to pay the Liabilities in full without assistance
or support of any other Person, and Guarantor has not been
induced to enter into this Guaranty Agreement on the basis of a
contemplation, belief, understanding or agreement that other
parties other than the Borrower will be liable to perform the
Liabilities, or the Lenders will look to other parties to perform
the Liabilities.
(f) OTHER SECURITY. The taking or accepting of any other
security, collateral or guaranty, or other assurance of payment,
for all or any part of the Liabilities;
(g) RELEASE OF COLLATERAL, ETC. Any release, surrender,
exchange, subordination, deterioration, waste, loss or impairment
(including without limitation negligent, willful, unreasonable or
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<PAGE>
unjustifiable impairment) of any collateral, property or
security, at any time existing in connection with, or assuring or
securing payment of, all or any part of the Liabilities;
(h) CARE AND DILIGENCE. The failure of the Lenders or any
other Person to exercise diligence or reasonable care in the
preservation, protection, enforcement, sale or other handling or
treatment of all or any part of such collateral, property or
security;
(i) STATUS OF LIENS. The fact that any collateral,
security, security interest or lien contemplated or intended to
be given, created or granted as security for the repayment of the
Liabilities shall not be properly perfected or created, or shall
prove to be unenforceable or subordinate to any other security
interest or lien, it being recognized and agreed by Guarantor
that Guarantor is not entering into this Guaranty Agreement in
reliance on, or in contemplation of the benefits of, the
validity, enforceability, collectibility or value of any of the
collateral for the Liabilities;
(j) PAYMENTS RESCINDED. Any payment by Borrower to the
Lenders is held to constitute a preference under the bankruptcy
laws, or for any reason the Lenders are required to refund such
payment or pay such amount to Borrower or someone else; or
(k) OTHER ACTIONS TAKEN OR OMITTED. Any other action taken
or omitted to be taken with respect to the Credit Agreement, the
Liabilities, or the security and collateral therefor, whether or
not such action or omission prejudices Guarantor or increases the
likelihood that Guarantor will be required to pay the Liabilities
pursuant to the terms hereof; it being the unambiguous and
unequivocal intention of Guarantor that Guarantor shall be
obligated to pay the Liabilities when due, notwithstanding any
occurrence, circumstance, event, action, or omission whatsoever,
whether contemplated or uncontemplated, and whether or not
otherwise or particularly described herein, except for the full
and final payment and satisfaction of the Liabilities.
ARTICLE 3: REPRESENTATIONS AND WARRANTIES
Section 3.1 BY GUARANTOR. In order to induce the Lenders to accept
this Guaranty Agreement, Guarantor represents and warrants to the Lenders
(which representations and warranties will survive the creation of the
Liabilities and any extension of credit thereunder) that:
(a) BENEFIT TO GUARANTOR. Guarantor's guaranty pursuant to
this Guaranty Agreement reasonably may be expected to benefit,
directly or indirectly, Guarantor.
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<PAGE>
(b) SOLVENCY. The Guarantor hereby represents that (i) it
is not insolvent as of the date hereof and will not be rendered
insolvent as a result of this Guaranty Agreement, (ii) it is not
engaged in business or a transaction, or about to engage in a
business or a transaction, for which any property or assets
remaining with such Guarantor is unreasonably small capital, and
(iii) it does not intend to incur, or believe it will incur,
debts that will be beyond its ability to pay as such debts
mature.
Section 3.2 NO REPRESENTATION BY LENDERS. Neither the Lenders nor
any other Person has made any representation, warranty or statement to the
Guarantor in order to induce the Guarantor to execute this Guaranty
Agreement.
Section 3.3 INCORPORATION OF CREDIT AGREEMENT REPRESENTATIONS,
WARRANTIES AND COVENANTS. The Guarantor hereby represents and warrants that
the matters contained in each of the applicable representations and
warranties contained in Article VII of the Credit Agreement pertaining to
the Guarantor or its Properties are true and correct as of the date of this
Guaranty Agreement, and covenants and agrees, so long as any of the
Liabilities or Commitment remains outstanding, to comply with the
applicable covenants contained in Articles VIII and IX of the Credit
Agreement pertaining to the Guarantor or its Properties. The Guarantor
hereby acknowledges that it has been furnished a copy of the Credit
Agreement and that it is thoroughly familiar with the representations,
warranties and covenants which are incorporated herein by virtue of this
Section 3.3.
ARTICLE 4: SUBORDINATION OF INDEBTEDNESS
Section 4.1 SUBORDINATION OF ALL GUARANTOR CLAIMS. As used herein,
the term "GUARANTOR CLAIMS" shall mean all debts and liabilities of
Borrower to Guarantor, whether such debts and liabilities now exist or are
hereafter incurred or arise, or whether the obligation of Borrower thereon
be direct, contingent, primary, secondary, several, joint and several, or
otherwise, and irrespective of whether such debts or liabilities be
evidenced by note, contract, open account, or otherwise, and irrespective
of the person or persons in whose favor such debts or liabilities may, at
their inception, have been, or may hereafter be created, or the manner in
which they have been or may hereafter be acquired by Guarantor. The
Guarantor Claims shall include without limitation all rights and claims of
Guarantor against Borrower arising as a result of subrogation or otherwise
as a result of Guarantor's payment of all or a portion of the Liabilities.
Until the Liabilities shall be paid and satisfied in full and Guarantor
shall have performed all of its obligations hereunder, Guarantor shall not
receive or collect, directly or indirectly, from Borrower or any other
party any amount upon the Guarantor Claims.
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<PAGE>
Section 4.2 CLAIMS IN BANKRUPTCY. In the event of receivership,
bankruptcy, reorganization, arrangement, debtor's relief, or other
insolvency proceedings involving Borrower as debtor, the Lenders shall have
the right to prove their claim in any proceeding, so as to establish its
rights hereunder and receive directly from the receiver, trustee or other
court custodian, dividends and payments which would otherwise be payable
upon Guarantor Claims. Guarantor hereby assigns such dividends and
payments to the Lenders. Should the Agent or any Lender receive, for
application upon the Liabilities, any such dividend or payment which is
otherwise payable to Guarantor, and which, as between Borrower and
Guarantor, shall constitute a credit upon the Guarantor Claims, then upon
payment in full of the Liabilities, Guarantor shall become subrogated to
the rights of the Lenders to the extent that such payments to the Lenders
on the Guarantor Claims have contributed toward the liquidation of the
Liabilities, and such subrogation shall be with respect to that proportion
of the Liabilities which would have been unpaid if the Agent or a Lender
had not received dividends or payments upon the Guarantor Claims.
Section 4.3 PAYMENTS HELD IN TRUST. In the event that
notwithstanding Sections 4.1 and 4.2 above, Guarantor should receive any
funds, payments, claims or distributions which is prohibited by such
Sections, Guarantor agrees to hold in trust for the Lenders an amount equal
to the amount of all funds, payments, claims or distributions so received,
and agrees that it shall have absolutely no dominion over the amount of
such funds, payments, claims or distributions except to pay them promptly
to the Agent, and Guarantor covenants promptly to pay the same to the
Agent.
Section 4.4 LIENS SUBORDINATE. Guarantor agrees that any liens,
security interests, judgment liens, charges or other encumbrances upon
Borrower's assets securing payment of the Guarantor Claims shall be and
remain inferior and subordinate to any liens, security interests, judgment
liens, charges or other encumbrances upon Borrower's assets securing
payment of the Liabilities, regardless of whether such encumbrances in
favor of Guarantor, the Agent or the Lenders presently exist or are
hereafter created or attach. Without the prior written consent of the
Lenders, Guarantor shall not (a) exercise or enforce any creditor's right
it may have against the Borrower, or (b) foreclose, repossess, sequester or
otherwise take steps or institute any action or proceeding (judicial or
otherwise, including without limitation the commencement of or joinder in
any liquidation, bankruptcy, rearrangement, debtor's relief or insolvency
proceeding) to enforce any lien, mortgages, deeds of trust, security
interest, collateral rights, judgments or other encumbrances on assets of
Borrower held by Guarantor, provided, however, that nothing in this
Guaranty Agreement shall prevent Guarantor from taking any action necessary
to preserve any such rights, liens, mortgages, deeds of trusts, security
interests, collateral rights, judgments or other encumbrances.
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<PAGE>
Section 4.5 NOTATION OF RECORDS. All promissory notes, accounts
receivable ledgers or other evidence of the Guarantor Claims accepted by or
held by Guarantor shall contain a specific written notice thereon that the
indebtedness evidenced thereby is subordinated under the terms of this
Guaranty Agreement.
ARTICLE 5: MISCELLANEOUS
Section 5.1 SUCCESSORS AND ASSIGNS. This Guaranty Agreement is and
shall be in every particular available to the successors and assigns of the
Lenders and is and shall always be fully binding upon the legal representa-
tives, heirs, successors and assigns of Guarantor, notwithstanding that
some or all of the monies, the repayment of which this Guaranty Agreement
applies, may be actually advanced after any bankruptcy, receivership,
reorganization, death, disability or other event affecting Guarantor.
Section 5.2 NOTICES. Any notice or demand to Guarantor under or in
connection with this Guaranty Agreement may be given and shall conclusively
be deemed and considered to have been given and received in accordance with
Section 12.02 of the Credit Agreement, addressed to Guarantor at the
address on the signature page hereof or at such other address provided to
the Agent in writing.
Section 5.3 BUSINESS AND FINANCIAL INFORMATION. The Guarantor will
promptly furnish to the Agent and the Lenders from time to time upon
request such information regarding the business and affairs and financial
condition of the Guarantor and its subsidiaries as the Agent and the
Lenders may reasonably request.
Section 5.4 CONSTRUCTION. This Guaranty Agreement is a contract
made under and shall be construed in accordance with and governed by the
laws of the State of Texas.
Section 5.5 INVALIDITY. In the event that any one or more of the
provisions contained in this Guaranty Agreement shall, for any reason, be
held invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Guaranty Agreement.
Section 5.6 ENTIRE AGREEMENT. THIS WRITTEN GUARANTY AGREEMENT
EMBODIES THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE LENDERS AND THE
GUARANTOR AND SUPERSEDES ALL OTHER AGREEMENTS AND UNDERSTANDINGS BETWEEN
SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THIS
WRITTEN GUARANTY AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
[SIGNATURES BEGIN NEXT PAGE]
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WITNESS THE EXECUTION HEREOF, as of the 9th day of February, 1998.
MILLER EXPLORATION COMPANY
By:__________________________________________
Kelly E. Miller
President & Chief Executive Officer
Address: 3014 Logan Valley Road
Traverse City, Michigan 49685-0348
Telecopier No.: 616/941-8312
Telephone No.: 616/941-0004
Attention: Kelly E. Miller
S-1
<PAGE>
EXHIBIT 10.13
NOTE
$75,000,000.00 February 9, 1998
FOR VALUE RECEIVED, MILLER OIL CORPORATION, a Michigan corporation
(the "BORROWER") hereby promises to pay to the order of BANK OF MONTREAL
(the "LENDER"), at the Principal Office of Bank of Montreal (the "AGENT"),
at 115 South LaSalle, Chicago, Illinois 60603, the principal sum of
Seventy-Five Million and No/100 Dollars ($75,000,000.00) (or such lesser
amount as shall equal the aggregate unpaid principal amount of the Loans
made by the Lender to the Borrower under the Credit Agreement, as
hereinafter defined), in lawful money of the United States of America and
in immediately available funds, on the dates and in the principal amounts
provided in the Credit Agreement, and to pay interest on the unpaid
principal amount of each such Loan, at such office, in like money and
funds, for the period commencing on the date of such Loan until such Loan
shall be paid in full, at the rates per annum and on the dates provided in
the Credit Agreement.
The date, amount, Type, interest rate, Interest Period and maturity of
each Loan made by the Lender to the Borrower, and each payment made on
account of the principal thereof, shall be recorded by the Lender on its
books and, prior to any transfer of this Note, endorsed by the Lender on
the schedules attached hereto or any continuation thereof.
This Note is one of the Notes referred to in the Credit Agreement
dated as of February 9, 1998 among the Borrower, the Lenders which are or
become parties thereto (including the Lender) and the Agent (as the same
may be amended or supplemented from time to time, the "CREDIT AGREEMENT"),
and evidences Loans made by the Lender thereunder. Capitalized terms used
in this Note have the respective meanings assigned to them in the Credit
Agreement.
This Note is issued pursuant to the Credit Agreement and is entitled
to the benefits provided for in the Credit Agreement and the Security
Instruments. The Credit Agreement provides for the acceleration of the
maturity of this Note upon the occurrence of certain events, for
prepayments of Loans upon the terms and conditions specified therein and
other provisions relevant to this Note.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF TEXAS.
<PAGE>
MILLER OIL CORPORATION
By:_____________________________________
Name: Kelly E. Miller
Title: President
<PAGE>
EXHIBIT 10.14
MORTGAGE
(MICHIGAN)
FROM
MILLER OIL CORPORATION
(TAXPAYER I.D. 38-2607711)
TO
JAMES WHITMORE, AS TRUSTEE
FOR THE BENEFIT OF
BANK OF MONTREAL, AS AGENT
(TAXPAYER I.D. 134941092)
THIS INSTRUMENT HAS BEEN DRAFTED BY AND
WHEN RECORDED RETURN TO:
VINSON & ELKINS L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760
Attn: Richard H. Mourglia
NOTICE: A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE. A POWER OF
SALE MAY ALLOW THE MORTGAGEE TO TAKE THE MORTGAGED PROPERTY AND SELL IT
WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE
MORTGAGOR UNDER THIS MORTGAGE IF AND TO THE EXTENT PERMITTED BY APPLICABLE
LAW OF THE JURISDICTION IN WHICH THE MORTGAGED PROPERTY IS LOCATED.
<PAGE>
TABLE OF CONTENTS
ARTICLE I
GRANT OF LIEN AND INDEBTEDNESS SECURED
Section 1.01 GRANT OF LIENS. . . . . . . . . . . . . . . . . . . . .1
Section 1.02 GRANT OF SECURITY INTEREST. . . . . . . . . . . . . . .4
Section 1.03 INDEBTEDNESS SECURED. . . . . . . . . . . . . . . . . .4
Section 1.04 FIXTURE FILING, ETC.. . . . . . . . . . . . . . . . . .5
Section 1.05 FUTURE ADVANCE. . . . . . . . . . . . . . . . . . . . .6
Section 1.06 PRO RATA BENEFIT. . . . . . . . . . . . . . . . . . . .6
Section 1.07 DEFINED TERMS . . . . . . . . . . . . . . . . . . . . .6
ARTICLE II
ASSIGNMENT OF PRODUCTION
Section 2.01 ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . .6
Section 2.02 NO MODIFICATION OF PAYMENT OBLIGATIONS. . . . . . . . .7
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.01 TITLE . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 3.02 DEFEND TITLE. . . . . . . . . . . . . . . . . . . . . .7
Section 3.03 NOT A FOREIGN PERSON. . . . . . . . . . . . . . . . . .8
Section 3.04 POWER TO CREATE LIEN AND SECURITY . . . . . . . . . . .8
Section 3.05 REVENUE AND COST BEARING INTEREST . . . . . . . . . . .8
Section 3.06 RENTALS PAID; LEASES IN EFFECT. . . . . . . . . . . . .8
Section 3.07 OPERATION BY THIRD PARTIES. . . . . . . . . . . . . . .8
Section 3.08 ABANDON, SALES. . . . . . . . . . . . . . . . . . . . .9
Section 3.09 FAILURE TO PERFORM. . . . . . . . . . . . . . . . . . .9
Section 3.10 OPERATION OF MORTGAGED PROPERTY, ETC. . . . . . . . . .9
Section 3.11 WASTE; ALTERATION . . . . . . . . . . . . . . . . . . 10
ARTICLE IV
RIGHTS AND REMEDIES
Section 4.01 EVENT OF DEFAULT. . . . . . . . . . . . . . . . . . . 10
Section 4.02 FORECLOSURE AND SALE. . . . . . . . . . . . . . . . . 10
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<PAGE>
Section 4.03 SUBSTITUTE TRUSTEES AND AGENTS. . . . . . . . . . . . 11
Section 4.04 JUDICIAL FORECLOSURE; RECEIVERSHIP. . . . . . . . . . 12
Section 4.05 FORECLOSURE FOR INSTALLMENTS. . . . . . . . . . . . . 12
Section 4.06 SEPARATE SALES. . . . . . . . . . . . . . . . . . . . 12
Section 4.07 POSSESSION OF MORTGAGED PROPERTY. . . . . . . . . . . 12
Section 4.08 OCCUPANCY AFTER FORECLOSURE . . . . . . . . . . . . . 13
Section 4.09 REMEDIES CUMULATIVE, CONCURRENT AND NONEXCLUSIVE. . . 13
Section 4.10 NO RELEASE OF OBLIGATIONS . . . . . . . . . . . . . . 13
Section 4.11 RELEASE OF AND RESORT TO COLLATERAL . . . . . . . . . 14
Section 4.12 WAIVER OF REDEMPTION, NOTICE AND MARSHALLING OF
ASSETS, ETC . . . . . . . . . . . . . . . . . . . . . 14
Section 4.13 DISCONTINUANCE OF PROCEEDINGS . . . . . . . . . . . . 14
Section 4.14 APPLICATION OF PROCEEDS . . . . . . . . . . . . . . . 14
Section 4.15 RESIGNATION OF OPERATOR . . . . . . . . . . . . . . . 15
Section 4.16 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE V
THE TRUSTEE
Section 5.01 DUTIES, RIGHTS, AND POWERS OF TRUSTEE . . . . . . . . 16
Section 5.02 SUCCESSOR TRUSTEE . . . . . . . . . . . . . . . . . . 16
Section 5.03 RETENTION OF MONEYS . . . . . . . . . . . . . . . . . 17
ARTICLE VI
MISCELLANEOUS
Section 6.01 INSTRUMENT CONSTRUED AS MORTGAGE, ETC.. . . . . . . . 17
Section 6.02 RELEASE OF MORTGAGE . . . . . . . . . . . . . . . . . 17
Section 6.03 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . 17
Section 6.04 SUCCESSORS AND ASSIGNS OF PARTIES . . . . . . . . . . 18
Section 6.05 SATISFACTION OF PRIOR ENCUMBRANCE . . . . . . . . . . 18
Section 6.06 SUBROGATION OF TRUSTEE. . . . . . . . . . . . . . . . 18
Section 6.07 NATURE OF COVENANTS . . . . . . . . . . . . . . . . . 18
Section 6.08 NOTICES . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.09 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . 18
SECTION 6.10 EXCULPATION PROVISIONS. . . . . . . . . . . . . . . . 19
SECTION 6.11 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . 19
Exhibit A - Mortgaged Property
Exhibit B - Agreements
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<PAGE>
MORTGAGE
This MORTGAGE (this "MORTGAGE") is entered into as of the effective
time and date hereinafter stated (the "EFFECTIVE DATE") by MILLER OIL
CORPORATION, whose address for notice is 3014 Logan Valley Road, Traverse
City, Michigan 49685-0348 ("MORTGAGOR"), to JAMES WHITMORE, as Trustee,
whose address for notice is 700 Louisiana, Suite 4400, Houston, Texas 77002
("TRUSTEE") for the benefit of BANK OF MONTREAL with offices at 700
Louisiana, Suite 4400, Houston, Texas 77002, as Agent (in such capacity,
"MORTGAGEE") for itself and such other financial institutions (collectively
called the "LENDERS") which are or hereafter become a party to the Credit
Agreement (hereinafter defined).
R E C I T A L S:
A. On even date herewith, Mortgagor, Mortgagee, and the lenders
parties thereto (the "LENDERS") are executing a Credit Agreement (such
agreement, as may from time to time be amended or supplemented, called the
"CREDIT AGREEMENT") pursuant to which, upon the terms and conditions stated
therein, the Lenders agree to make loans to Mortgagor.
B. The Lenders have conditioned their obligations under the Credit
Agreement upon the execution and delivery by Mortgagor of this Mortgage,
and Mortgagor has agreed to enter into this Mortgage.
C. Therefore, in order to comply with the terms and conditions of
the Credit Agreement and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Mortgagor hereby
agrees with Mortgagee as follows:
ARTICLE I
GRANT OF LIEN AND INDEBTEDNESS SECURED
Section 1.01 GRANT OF LIENS. To secure payment of the Indebtedness
(as hereinafter defined) and the performance of the covenants and
obligations herein contained, Mortgagor does by these presents hereby
GRANT, BARGAIN, SELL, ASSIGN, MORTGAGE, TRANSFER, CONVEY and WARRANT unto
Mortgagee, with power of sale (to the extent permitted by applicable law)
unto Trustee and Trustee's successors and substitutes in trust hereunder,
for the use and benefit of Mortgagee, the real and personal property,
rights, titles, interests and estates described in the following paragraphs
(a) through (g) (collectively called the "MORTGAGED PROPERTY"):
(a) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to the oil and gas leases and/or oil, gas and
other mineral leases and other interests and estates and the lands and
premises covered or affected thereby which are described on EXHIBIT A
<PAGE>
hereto (collectively called the "HYDROCARBON PROPERTY") or which
Hydrocarbon Property is otherwise referred to herein, and specifically, but
without limitation, the undivided interests of Mortgagor which are more
particularly described on attached EXHIBIT A.
(b) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in, to and under (i) the properties now or hereafter
pooled or unitized with the Hydrocarbon Property; (ii) all presently
existing or future unitization, communitization, pooling agreements and
declarations of pooled units and the units created thereby (including,
without limitation, all units created under orders, regulations, rules or
other official acts of any Federal, State or other governmental body or
agency having jurisdiction and any units created solely among working
interest owners pursuant to operating agreements or otherwise) which may
affect all or any portion of the Hydrocarbon Property including, without
limitation, those units which may be described or referred to on attached
EXHIBIT A; (iii) all operating agreements, production sales or other
contracts, farmout agreements, farm-in agreements, participation
agreements, exploration agreements, joint venture agreements, area of
mutual interest agreements, assignments, equipment leases and other
agreements described or referred to in this Mortgage or which relate to any
of the Hydrocarbon Property or interests in the Hydrocarbon Property
described or referred to herein or on attached EXHIBIT A or to the
production, sale, purchase, exchange, processing, handling, storage,
transporting or marketing of the Hydrocarbons (hereinafter defined) from or
attributable to such Hydrocarbon Property or interests, including without
limitation, all such agreements described in EXHIBIT B attached hereto;
(iv) all geological, geophysical, engineering, accounting, title, legal,
and other technical or business data concerning the Mortgaged Property, the
Hydrocarbons, or any other item of Property which are in the possession of
Mortgagor or in which Mortgagor can otherwise grant a security interest,
and all books, files, records, magnetic media, computer records, and other
forms of recording or obtaining access to such data; and (v) the
Hydrocarbon Property described on attached EXHIBIT A and covered by this
Mortgage even though Mortgagor's interests therein be incorrectly described
or a description of a part or all of such Hydrocarbon Property or
Mortgagor's interests therein be omitted; it being intended by Mortgagor
and Mortgagee herein to cover and affect hereby all interests which
Mortgagor may now own or may hereafter acquire in and to the Hydrocarbon
Property notwithstanding that the interests as specified on EXHIBIT A may
be limited to particular lands, specified depths or particular types of
property interests.
(c) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to all oil, gas, casinghead gas, condensate,
distillate, liquid hydrocarbons, gaseous hydrocarbons and all products
refined therefrom and all other minerals (collectively called the
"HYDROCARBONS") in and under and which may be produced and saved from or
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<PAGE>
attributable to the Hydrocarbon Property, the lands pooled or unitized
therewith and Mortgagor's interests therein, including all oil in tanks and
all rents, issues, profits, proceeds, products, revenues and other income
from or attributable to the Hydrocarbon Property, the lands pooled or
unitized therewith and Mortgagor's interests therein which are subjected or
required to be subjected to the liens and security interests of this
Mortgage.
(d) All tenements, hereditaments, appurtenances and properties in
anywise appertaining, belonging, affixed or incidental to the Hydrocarbon
Property, rights, titles, interests and estates described or referred to in
paragraphs (a) and (b) above, which are now owned or which may hereafter be
acquired by Mortgagor, including, without limitation, any and all property,
real or personal, now owned or hereafter acquired and situated upon, used,
held for use, or useful in connection with the operating, working or
development of any of such Hydrocarbon Property or the lands pooled or
unitized therewith (excluding drilling rigs, trucks, automotive equipment
or other personal property which may be taken to the premises for the
purpose of drilling a well or for other similar temporary uses) and
including any and all oil wells, gas wells, injection wells or other wells,
buildings, structures, field separators, liquid extraction plants, plant
compressors, pumps, pumping units, pipelines, sales and flow lines,
gathering systems, field gathering systems, salt water disposal facilities,
tanks and tank batteries, fixtures, valves, fittings, machinery and parts,
engines, boilers, meters, apparatus, equipment, appliances, tools,
implements, cables, wires, towers, casing, tubing and rods, surface leases,
rights-of-way, easements, servitudes, licenses and other surface and
subsurface rights together with all additions, substitutions, replacements,
accessions and attachments to any and all of the foregoing properties.
(e) Any property that may from time to time hereafter, by delivery or
by writing of any kind, be subjected to the lien and security interest
hereof by Mortgagor or by anyone on Mortgagor's behalf; and the Trustee is
hereby authorized to receive the same at any time as additional security
hereunder.
(f) All of the rights, titles and interests of every nature
whatsoever now owned or hereafter acquired by Mortgagor in and to the
Hydrocarbon Property rights, titles, interests and estates and every part
and parcel thereof, including, without limitation, the Hydrocarbon Property
rights, titles, interests and estates as the same may be enlarged by the
discharge of any payments out of production or by the removal of any
charges or Permitted Encumbrances (as hereinafter defined in Section 3.01)
to which any of the Hydrocarbon Property rights, titles, interests or
estates are subject, or otherwise; all rights of Mortgagor to liens and
security interests securing payment of proceeds from the sale of production
from the Mortgaged Property; together with any and all renewals and
extensions of any of the Hydrocarbon Property rights, titles, interests or
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<PAGE>
estates; all contracts and agreements supplemental to or amendatory of or
in substitution for the contracts and agreements described or mentioned
above; and any and all additional interests of any kind hereafter acquired
by Mortgagor in and to the Hydrocarbon Property rights, titles, interests
or estates.
(g) All accounts, contract rights, inventory, general intangibles,
insurance contracts and insurance proceeds constituting a part of, relating
to or arising out of those portions of the Mortgaged Property which are
described in paragraphs (a) through (f) above and all proceeds and products
of all such portions of the Mortgaged Property and payments in lieu of
production (such as "take or pay" payments), whether such proceeds or
payments are goods, money, documents, instruments, chattel paper,
securities, accounts, general intangibles, fixtures, real property, or
other assets.
Any fractions or percentages specified on attached EXHIBIT A in
referring to Mortgagor's interests are solely for purposes of the
warranties made by Mortgagor pursuant to Sections 3.01 and 3.05 hereof and
shall in no manner limit the quantum of interest affected by this
Section 1.01 with respect to any Hydrocarbon Property or with respect to
any unit or well identified on said EXHIBIT A.
TO HAVE AND TO HOLD the Mortgaged Property unto the Trustee and to his
successors and assigns forever to secure the payment of the Indebtedness
(hereinafter defined) and to secure the performance of the covenants,
agreements, and obligations of the Mortgagor herein contained.
Section 1.02 GRANT OF SECURITY INTEREST. To further secure the
Indebtedness, Mortgagor hereby grants to Mortgagee a security interest in
and to the Mortgaged Property (whether now or hereafter acquired by
operation of law or otherwise) insofar as the Mortgaged Property consists
of equipment, accounts, contract rights, general intangibles, insurance
contracts, insurance proceeds, inventory, Hydrocarbons, fixtures and any
and all other personal property of any kind or character defined in and
subject to the provisions of the Uniform Commercial Code presently in
effect in the jurisdiction in which the Mortgaged Property is situated
("APPLICABLE UCC"), including the proceeds and products from any and all
of such personal property. Upon the happening of any of the Events of
Default, Mortgagee is and shall be entitled to all of the rights, powers
and remedies afforded a secured party by the Applicable UCC with reference
to the personal property and fixtures in which Mortgagee has been granted a
security interest herein, or the Trustee or Mortgagee may proceed as to
both the real and personal property covered hereby in accordance with the
rights and remedies granted under this Mortgage in respect of the real
property covered hereby. Such rights, powers and remedies shall be
cumulative and in addition to those granted to the Trustee or Mortgagee
under any other provision of this Mortgage or under any other Security
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<PAGE>
Instrument. Written notice mailed to Mortgagor as provided herein at least
five (5) days prior to the date of public sale of any part of the Mortgaged
Property which is personal property subject to the provisions of the
Applicable UCC or prior to the date after which private sale of any such
part of the Mortgaged Property will be made, shall constitute reasonable
notice.
Section 1.03 INDEBTEDNESS SECURED. This Mortgage is executed and
delivered by Mortgagor to secure and enforce the following (the
"INDEBTEDNESS"):
(a) Payment of and performance of any and all indebtedness,
obligations and liabilities of Mortgagor pursuant to the Credit Agreement,
whether now existing or hereafter arising, including without limitation,
those certain promissory notes which are or may be executed by Mortgagor
payable to the order of each Lender and being in the aggregate principal
amount of $75,000,000 with final maturity on or before February 9, 2004 and
all other notes given in substitution therefor or in modification, renewal
or extension thereof, in whole or in part (such notes, as from time to time
supplemented, amended or modified and all other notes given in substitution
therefor or in modification, renewal or extension thereof, in whole or in
part, being hereafter called the "NOTE").
(b) Any sums which may be advanced or paid by Mortgagee under the
terms hereof or of the Credit Agreement on account of the failure of
Mortgagor to comply with the covenants of Mortgagor contained herein or in
the Credit Agreement; and all other indebtedness of Mortgagor arising
pursuant to the provisions of this Mortgage.
(c) Any additional loans made by Mortgagee to Mortgagor. It is
contemplated that Mortgagee may lend additional sums to Mortgagor from time
to time, but shall not be obligated to do so, and Mortgagor agrees that any
such additional loans shall be secured by this Mortgage.
(d) Payment of and performance of any and all present or future
obligations of Mortgagor according to the terms of any present or future
interest rate or currency swap, rate cap, rate floor, rate collar, forward
rate agreement or other exchange or rate protection agreements or any
option with respect to any such transaction now existing or hereafter
entered into between Mortgagor and Mortgagee.
(e) Payment of and performance of any and all present or future
obligations of Mortgagor according to the terms of any present or future
swap agreements, cap, floor, collar, forward agreement or other exchange
or protection agreements relating to crude oil, natural gas or other
hydrocarbons or any option with respect to any such transaction now
existing or hereafter entered into between Mortgagor and Mortgagee.
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<PAGE>
(f) Performance of all Letter of Credit Agreements executed from time
to time by Mortgagor under or pursuant to the Credit Agreement and all
reimbursement obligations for drawn or undrawn portions under any Letter of
Credit now outstanding or hereafter issued under or pursuant to the Credit
Agreement.
(g) Payment of and performance of any and all other indebtedness,
obligations and liabilities of any kind of Mortgagor to the Mortgagee, now
or hereafter existing, arising directly between Mortgagor and the Mortgagee
or acquired outright, as a participation, conditionally or as collateral
security from another by the Mortgagee, absolute or contingent, joint
and/or several, secured or unsecured, due or not due, arising by operation
of law or otherwise, or direct or indirect, including indebtedness,
obligations and liabilities to the Mortgagee of Mortgagor as a member of
any partnership, syndicate, association or other group, and whether
incurred by Mortgagor as principal, surety, endorser, guarantor,
accommodation party or otherwise.
Section 1.04 FIXTURE FILING, ETC. Without in any manner limiting
the generality of any of the other provisions of this Mortgage: (i) some
portions of the goods described or to which reference is made herein are or
are to become fixtures on the land described or to which reference is made
herein or on attached EXHIBIT A; (ii) the security interests created hereby
under applicable provisions of the Applicable UCC will attach to
Hydrocarbons (minerals including oil and gas) or the accounts resulting
from the sale thereof at the wellhead or minehead located on the land
described or to which reference is made herein; (iii) this Mortgage is to
be filed of record in the real estate records as a financing statement, and
(iv) Mortgagor is the record owner of the real estate or interests in the
real estate comprised of the Mortgaged Property.
Section 1.05 FUTURE ADVANCE. This Mortgage is a "Future Advance
Mortgage" under Act No. 348 of Public Acts of Michigan of 1990, as amended
(MCLA <Section>565.901 ET SEQ.) All future advances under this Mortgage or
under all other agreements at any time made between Mortgagor and Mortgagee
shall have the same priority as if the future advance was made on the date
that this Mortgage was recorded. This Mortgage shall secure all
indebtedness of Mortgagor, its successors and assigns, under this Mortgage,
whenever incurred. Notice is hereby given that the Indebtedness secured
hereby may INCREASE as a result of any defaults hereunder by Mortgagor due
to, for example, and without limitation, unpaid interest or late charges,
unpaid taxes or insurance premiums which Mortgagee elects to advance,
defaults under leases that Mortgagee elects to cure, attorneys' fees or
costs incurred in enforcing the loan documents or other expenses incurred
by Mortgagee in protecting the Mortgaged Property, the security of this
Mortgage or Mortgagee's rights and interests.
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Section 1.06 PRO RATA BENEFIT. This Mortgage is executed and
granted for the pro rata benefit and security of Mortgagee, and the
Lenders, and any and all future holders of an interest in the Indebtedness
and the interest thereon for whatever period; it being understood and
agreed that possession of any Note (or any replacements of said Note) at
any time by Mortgagor shall not in any manner extinguish the Indebtedness,
such Note or this Mortgage securing payment thereof, and Mortgagor shall
have the right to issue and reissue any of the Notes from time to time as
its interest or as convenience may require, without in any manner
extinguishing or affecting the Indebtedness, the obligations under any of
the Notes, or the security of this Mortgage.
Section 1.07 DEFINED TERMS. Any capitalized term used in this
Mortgage and not defined in this Mortgage shall have the meaning assigned
to such term in the Credit Agreement.
ARTICLE II
ASSIGNMENT OF PRODUCTION
Section 2.01 ASSIGNMENT. Mortgagor has absolutely and
unconditionally assigned, transferred, and conveyed, and does hereby
absolutely and unconditionally assign, transfer and convey unto Mortgagee,
its successors and assigns, all of the Hydrocarbons and all products
obtained or processed therefrom, and the revenues and proceeds now and
hereafter attributable to the Hydrocarbons and said products and all
payments in lieu of the Hydrocarbons such as "take or pay" payments or
settlements. The Hydrocarbons and products are to be delivered into pipe
lines connected with the Mortgaged Property, or to the purchaser thereof,
to the credit of Mortgagee, free and clear of all taxes, charges, costs,
and expenses; and all such revenues and proceeds shall be paid directly to
Mortgagee, at its banking quarters in Chicago, Illinois with no duty or
obligation of any party paying the same to inquire into the rights of
Mortgagee to receive the same, what application is made thereof, or as to
any other matter. Mortgagor agrees to perform all such acts, and to
execute all such further assignments, transfers and division orders, and
other instruments as may be required or desired by Mortgagee or any party
in order to have said proceeds and revenues so paid to Mortgagee.
Mortgagee is fully authorized to receive and receipt for said revenues and
proceeds; to endorse and cash any and all checks and drafts payable to the
order of Mortgagor or Mortgagee for the account of Mortgagor received from
or in connection with said revenues or proceeds and to hold the proceeds
thereof in a bank account as additional collateral securing the
Indebtedness; and to execute transfer and division orders in the name of
Mortgagor, or otherwise, with warranties binding Mortgagor. All proceeds
received by the Mortgagee pursuant to this assignment shall be applied as
provided in the other Loan Documents. Mortgagee shall not be liable for
any delay, neglect, or failure to effect collection of any proceeds or to
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take any other action in connection therewith or hereunder; but Mortgagee
shall have the right, at its election, in the name of Mortgagor or
otherwise, to prosecute and defend any and all actions or legal proceedings
deemed advisable by Mortgagee in order to collect such funds and to protect
the interests of Mortgagee, and/or Mortgagor, with all costs, expenses and
attorneys' fees incurred in connection therewith being paid by Mortgagor.
Mortgagor hereby appoints Mortgagee as its attorney-in-fact to pursue any
and all rights of Mortgagor to liens on and security interests in the
Hydrocarbons securing payment of proceeds of runs attributable to the
Hydrocarbons. In addition to the rights granted to Trustee and/or
Mortgagee in Section 1.01 (f) of this Mortgage, Mortgagor hereby further
transfers and assigns to Mortgagee any and all such liens, security
interests, financing statements or similar interests of Mortgagor
attributable to its interest in the Hydrocarbons and proceeds of runs
therefrom arising under or created by said statutory provision, judicial
decision or otherwise. The power of attorney granted to Mortgagee in this
Section 2.01, being coupled with an interest, shall be irrevocable so long
as the Indebtedness or any part thereof remains unpaid.
Section 2.02 NO MODIFICATION OF PAYMENT OBLIGATIONS. Nothing herein
contained shall modify or otherwise alter the obligation of Mortgagor to
make prompt payment of all principal and interest owing on the Indebtedness
when and as the same become due regardless of whether the proceeds of the
Hydrocarbons are sufficient to pay the same and the rights provided in
accordance with the foregoing assignment provision shall be cumulative of
all other security of any and every character now or hereafter existing to
secure payment of the Indebtedness.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
Mortgagor hereby represents, warrants and covenants as follows:
Section 3.01 TITLE. To the extent of the undivided interests
specified on attached EXHIBIT A, Mortgagor has good and indefeasible title
to and is possessed of the Mortgaged Property. The Mortgaged Property is
free of any and all Liens (as defined in the Credit Agreement) except Liens
allowed by Section 9.02 of the Credit Agreement and Liens described on
EXHIBIT A hereto (collectively, the "PERMITTED ENCUMBRANCES").
Section 3.02 DEFEND TITLE. This Mortgage is, and always will be
kept, a direct first lien and security interest upon the Mortgaged Property
subject only to the Permitted Encumbrances and Mortgagor will not create or
suffer to be created or permit to exist any lien, security interest or
charge prior or junior to or on a parity with the lien and security
interest of this Mortgage upon the Mortgaged Property or any part thereof
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or upon the rents, issues, revenues, profits and other income therefrom.
Mortgagor will warrant and defend the title to the Mortgaged Property
against the claims and demands of all other persons whomsoever and will
maintain and preserve the lien created hereby so long as any of the
Indebtedness secured hereby remains unpaid. Should an adverse claim be
made against or a cloud develop upon the title to any part of the Mortgaged
Property, Mortgagor agrees it will immediately defend against such adverse
claim or take appropriate action to remove such cloud at Mortgagor's cost
and expense, and Mortgagor further agrees that the Trustee and/or Mortgagee
may take such other action as they deem advisable to protect and preserve
their interests in the Mortgaged Property, and in such event Mortgagor will
indemnify the Trustee and Mortgagee against any and all cost, attorney's
fees and other expenses which they may incur in defending against any such
adverse claim or taking action to remove any such cloud.
Section 3.03 NOT A FOREIGN PERSON. Mortgagor is not a "foreign
person" within the meaning of the Internal Revenue Code of 1986, as amended
(hereinafter called the "CODE"), Sections 1445 and 7701 (i.e. Mortgagor is
not a non-resident alien, foreign corporation, foreign partnership, foreign
trust or foreign estate as those terms are defined in the Code and any
regulations promulgated thereunder).
Section 3.04 POWER TO CREATE LIEN AND SECURITY. The Mortgagor has
full power and lawful authority to grant, bargain, sell, assign, transfer,
mortgage, and convey a security interest in all of the Mortgaged Property
in the manner and form herein provided and without obtaining the
authorization, approval, consent or waiver of any lessor, sublessor,
Governmental Authority or other party or parties whomsoever.
Section 3.05 REVENUE AND COST BEARING INTEREST. Mortgagor's
ownership of the Hydrocarbon Property and the undivided interests therein
as specified on attached EXHIBIT A will, after giving full effect to all
Permitted Encumbrances, afford Mortgagor not less than those net interests
(expressed as a fraction, percentage or decimal) in the production from or
which is allocated to such Hydrocarbon Property specified as working
interest on attached EXHIBIT A and will cause Mortgagor to bear not more
than that portion (expressed as a fraction, percentage or decimal),
specified as net revenue interest on attached EXHIBIT A, of the costs of
drilling, developing and operating the wells identified on EXHIBIT A.
Section 3.06 RENTALS PAID; LEASES IN EFFECT. All rentals and
royalties due and payable in accordance with the terms of any leases or
subleases comprising a part of the Hydrocarbon Property have been duly paid
or provided for and all leases or subleases comprising a part of the
Hydrocarbon Property are in full force and effect.
Section 3.07 OPERATION BY THIRD PARTIES. All or portions of the
Mortgaged Property may be comprised of interests in the Hydrocarbon
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Property which are other than working interests or which may be operated by
a party or parties other than Mortgagor and with respect to all or any such
interests and properties as may be comprised of interests other than
working interests or which may be operated by parties other than Mortgagor,
Mortgagor's covenants as expressed in this Article III are modified to
require that Mortgagor use its best efforts to obtain compliance with such
covenants by the working interest owners or the operator or operators of
such leases or properties.
Section 3.08 ABANDON, SALES. The Mortgagor will not sell, lease,
assign, transfer or otherwise dispose or abandon any of the Mortgaged
Property except as permitted by the Credit Agreement.
Section 3.09 FAILURE TO PERFORM. The Mortgagor agrees that if the
Mortgagor fails to perform any act or to take any action which the
Mortgagor is required to perform or take hereunder or pay any money which
the Mortgagor is required to pay hereunder, each of the Mortgagee and the
Trustee in the Mortgagor's name or its or their own name may, but shall not
be obligated to, perform or cause to perform such act or take such action
or pay such money, and any expenses so incurred by either of them and any
money so paid by either of them shall be a demand obligation owing by the
Mortgagor to the Mortgagee or the Trustee, as the case may be, and each of
the Mortgagee and the Trustee, upon making such payment, shall be
subrogated to all of the rights of the Person receiving such payment. Each
amount due and owing by Mortgagor to each of the Mortgagee and the Trustee
pursuant to this Mortgage shall bear interest from the date of such
expenditure or payment or other occurrence which gives rise to such amount
being owed to such Person until paid at the Post-Default Rate, and all such
amounts together with such interest thereon shall be a part of the
Indebtedness described in Section 1.03 hereof.
Section 3.10 OPERATION OF MORTGAGED PROPERTY, ETC. Mortgagor will
promptly pay and discharge all rentals, delay rentals, royalties and
indebtedness accruing under, and perform or cause to be performed each and
every act, matter or thing required by, each and all of the assignments,
deeds, leases, sub-leases, contracts and agreements described or referred
to herein or affecting Mortgagor's interests in the Mortgaged Property, and
will do all other things necessary to keep unimpaired Mortgagor's rights
with respect thereto and prevent any forfeiture thereof or default
thereunder. The Mortgaged Property (and properties unitized therewith) has
been maintained, operated and developed in a good and workmanlike manner
and in conformity with all applicable laws and all rules, regulations and
orders of all duly constituted authorities having jurisdiction and in
conformity with the provisions of all leases, subleases or other contracts
comprising a part of the Hydrocarbon Property and other contracts and
agreements forming a part of the Mortgaged Property; specifically in this
connection, (i) after the Effective Date no Mortgaged Property is subject
to having allowable production reduced below the full and regular allowable
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(including the maximum permissible tolerance) because of any overproduction
(whether or not the same was permissible at the time) prior to the
Effective Date and (ii) none of the wells comprising a part of the
Mortgaged Property (or properties unitized therewith) are deviated from the
vertical more than the maximum permitted by applicable laws, regulations,
rules and orders, and such wells are, in fact, bottomed under and are
producing from, and the well bores are wholly within, the Mortgaged
Property (or, in the case of wells located on properties unitized
therewith, such unitized properties). Mortgagor will operate the Mortgaged
Property in a careful and efficient manner in accordance with the practices
of the industry and in compliance with all applicable contracts and
agreements and in compliance with all applicable proration and conservation
laws of the jurisdiction in which the Mortgaged Property is situated, and
all applicable laws, rules and regulations of every other agency and
authority from time to time constituted to regulate the development and
operation of the Mortgaged Property and the production and sale of
Hydrocarbons and other minerals therefrom. Mortgagor will do or cause to
be done such development work as may be reasonably necessary to the prudent
and economical operation of the Mortgaged Property in accordance with the
most approved practices of operators in the industry, including all to be
done that may be appropriate to protect from diminution the productive
capacity of the Mortgaged Property and each producing well thereon
including, without limitation, cleaning out and reconditioning each well
from time to time, plugging and completing at a different level each such
well, drilling a substitute well to conform to changed spacing regulations
and to protect the Mortgaged Property against drainage whenever and as
often as is necessary.
Section 3.11 WASTE; ALTERATION. Mortgagor will not commit or permit
any waste of the Mortgaged Property and will notify Mortgagee in writing of
any alterations or additions to the Mortgaged Property of a material
nature. Nonpayment of any taxes or assessments levied or assessed upon
Mortgaged Property, or nonpayment of any insurance premium upon any
insurance policy related to any such Mortgaged Property, or any part
thereof, shall constitute waste, and shall entitle Mortgagee to exercise
the remedies afforded by Section 600.2927 of the Michigan Revised
Judicature Act of 1961, as now or hereafter amended, and by any other
statute or law now or hereafter in effect, including the appointment of a
receiver, to which appointment Mortgagor consents.
ARTICLE IV
RIGHTS AND REMEDIES
Section 4.01 EVENT OF DEFAULT. An "EVENT OF DEFAULT" under the
Credit Agreement shall be an Event of Default under this Mortgage.
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Section 4.02 FORECLOSURE AND SALE. If an Event of Default shall
occur and be continuing, Mortgagee shall have the right and option to
proceed with foreclosure by directing the Trustee, or his successors or
substitutes in trust, to proceed with foreclosure and to sell, to the
extent permitted by law, all or any portion of the Mortgaged Property at
one or more sales, as an entirety or in parcels, at such place or places in
otherwise such manner and upon such notice as may be required by law
(including, without limitation, the statutes of the State of Michigan for
foreclosure of mortgages by advertisement being Sections 600.3201 ET SEQ.,
Michigan Compiled Laws, as amended), or, in the absence of any such
requirement, as the Mortgagee may deem appropriate, and to make conveyance
to the purchaser or purchasers. Where the Mortgaged Property is situated
in more than one county, notice as above provided shall be posted and filed
in all such counties (if such notices are required by law), and all such
Mortgaged Property may be sold in any such county and any such notice shall
designate the county where such Mortgaged Property is to be sold. Nothing
contained in this Section 4.02 shall be construed so as to limit in any way
the Trustee's rights to sell the Mortgaged Property, or any portion
thereof, by private sale if, and to the extent that, such private sale is
permitted under the laws of the applicable jurisdiction or by public or
private sale after entry of a judgment by any court of competent
jurisdiction so ordering. Mortgagor hereby irrevocably appoints the
Trustee to be the attorney of Mortgagor and in the name and on behalf of
Mortgagor to execute and deliver any deeds, transfers, conveyances,
assignments, assurances and notices which Mortgagor ought to execute and
deliver and do and perform any and all such acts and things which Mortgagor
ought to do and perform under the covenants herein contained and generally,
to use the name of Mortgagor in the exercise of all or any of the powers
hereby conferred on the Trustee. At any such sale: (i) whether made under
the power herein contained or any other legal enactment, or by virtue of
any judicial proceedings or any other legal right, remedy or recourse, it
shall not be necessary for Trustee to have physically present, or to have
constructive possession of, the Mortgaged Property (Mortgagor hereby
covenanting and agreeing to deliver to Trustee any portion of the Mortgaged
Property not actually or constructively possessed by Trustee immediately
upon demand by Trustee) and the title to and right of possession of any
such property shall pass to the purchaser thereof as completely as if the
same had been actually present and delivered to purchaser at such sale,
(ii) each instrument of conveyance executed by Trustee shall contain a
general warranty of title, binding upon Mortgagor and its successors and
assigns, (iii) each and every recital contained in any instrument of
conveyance made by Trustee shall conclusively establish the truth and
accuracy of the matters recited therein, including, without limitation,
nonpayment of the Indebtedness, advertisement and conduct of such sale in
the manner provided herein and otherwise by law and appointment of any
successor Trustee hereunder, (iv) any and all prerequisites to the validity
thereof shall be conclusively presumed to have been performed, (v) the
receipt of Trustee or of such other party or officer making the sale shall
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be a sufficient discharge to the purchaser or purchasers for its purchase
money and no such purchaser or purchasers, or its assigns or personal
representatives, shall thereafter be obligated to see to the application
of such purchase money, or be in any way answerable for any loss,
misapplication or nonapplication thereof, (vi) to the fullest extent
permitted by law, Mortgagor shall be completely and irrevocably divested of
all of its right, title, interest, claim and demand whatsoever, either at
law or in equity, in and to the property sold and such sale shall be a
perpetual bar both at law and in equity against Mortgagor, and against any
and all other persons claiming or to claim the property sold or any part
thereof, by, through or under Mortgagor, and (vii) to the extent and under
such circumstances as are permitted by law, Mortgagee may be a purchaser at
any such sale, and shall have the right, after paying or accounting for all
costs of said sale or sales, to credit the amount of the bid upon the
amount of the Indebtedness (in the order of priority set forth in Section
4.14 hereof) in lieu of cash payment.
Section 4.03 SUBSTITUTE TRUSTEES AND AGENTS. The Trustee or his
successor or substitute may appoint or delegate any one or more persons as
agent to perform any act or acts necessary or incident to any sale held by
Trustee, including the posting of notices and the conduct of sale, but in
the name and on behalf of Trustee, his successor or substitute. If Trustee
or his successor or substitute shall have given notice of sale hereunder,
any successor or substitute trustee thereafter appointed may complete the
sale and the conveyance of the property pursuant thereto as if such notice
had been given by the successor or substitute trustee conducting the sale.
Section 4.04 JUDICIAL FORECLOSURE; RECEIVERSHIP. If any of the
Indebtedness shall become due and payable and shall not be promptly paid,
the Trustee or Mortgagee shall have the right and power to proceed by a
suit or suits in equity or at law, whether for the specific performance of
any covenant or agreement herein contained or in aid of the execution of
any power herein granted, or for any foreclosure hereunder or for the sale
of the Mortgaged Property under the judgment or decree of any court or
courts of competent jurisdiction, or for the appointment of a receiver
pending any foreclosure hereunder or the sale of the Mortgaged Property
under the order of a court or courts of competent jurisdiction or under
executory or other legal process, or for the enforcement of any other
appropriate legal or equitable remedy. Any money advanced by the Trustee
and/or Mortgagee in connection with any such receivership shall be a demand
obligation (which obligation Mortgagor hereby expressly promises to pay)
owing by Mortgagor to the Trustee and/or Mortgagee and shall bear interest
from the date of making such advance by the Trustee and/or Mortgagee until
paid at the Post Default Rate.
Section 4.05 FORECLOSURE FOR INSTALLMENTS. Mortgagee shall also
have the option to proceed with foreclosure in satisfaction of any
installments of the Indebtedness which have not been paid when due either
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through the courts or by directing the Trustee or his successors in trust
to proceed with foreclosure in satisfaction of the matured but unpaid
portion of the Indebtedness as if under a full foreclosure, conducting the
sale as herein provided and without declaring the entire principal balance
and accrued interest due; such sale may be made subject to the unmatured
portion of the Indebtedness, and any such sale shall not in any manner
affect the unmatured portion of the Indebtedness, but as to such unmatured
portion of the Indebtedness this Mortgage shall remain in full force and
effect just as though no sale had been made hereunder. It is further
agreed that several sales may be made hereunder without exhausting the
right of sale for any unmatured part of the Indebtedness, it being the
purpose hereof to provide for a foreclosure and sale of the security for
any matured portion of the Indebtedness without exhausting the power to
foreclose and sell the Mortgaged Property for any subsequently maturing
portion of the Indebtedness.
Section 4.06 SEPARATE SALES The Mortgaged Property may be sold in
one or more parcels and in such manner and order as Mortgagee, in its sole
discretion, may elect, it being expressly understood and agreed that the
right of sale arising out of any Event of Default shall not be exhausted by
any one or more sales.
Section 4.07 POSSESSION OF MORTGAGED PROPERTY. Mortgagor agrees to
the full extent that it lawfully may, that, in case one or more of the
Events of Default shall have occurred and shall not have been remedied,
then, and in every such case, the Trustee or Mortgagee shall have the right
and power to enter into and upon and take possession of all or any part of
the Mortgaged Property in the possession of Mortgagor, its successors or
assigns, or its or their agents or servants, and may exclude Mortgagor, its
successors or assigns, and all persons claiming under Mortgagor, and its or
their agents or servants wholly or partly therefrom; and, holding the same,
the Trustee may use, administer, manage, operate and control the Mortgaged
Property and conduct the business thereof to the same extent as Mortgagor,
its successors or assigns, might at the time do and may exercise all rights
and powers of Mortgagor, in the name, place and stead of Mortgagor, or
otherwise as the Trustee shall deem best. All costs, expenses and
liabilities of every character incurred by the Trustee and/or Mortgagee in
administering, managing, operating, and controlling the Mortgaged Property
shall constitute a demand obligation (which obligation Mortgagor hereby
expressly promises to pay) owing by Mortgagor to the Trustee and/or
Mortgagee and shall bear interest from date of expenditure until paid at
the Post Default Rate, all of which shall constitute a portion of the
Indebtedness and shall be secured by this Mortgage and all other Security
Instruments.
Section 4.08 OCCUPANCY AFTER FORECLOSURE. In the event there is a
foreclosure sale hereunder and at the time of such sale Mortgagor or
Mortgagor's heirs, devisees, representatives, successors or assigns or any
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other person claiming any interest in the Mortgaged Property by, through or
under Mortgagor, are occupying or using the Mortgaged Property or any part
thereof, each and all shall immediately become the tenant of the purchaser
at such sale, which tenancy shall be a tenancy from day to day, terminable
at the will of either the landlord or tenant, or at a reasonable rental per
day based upon the value of the property occupied, such rental to be due
daily to the purchaser; to the extent permitted by applicable law, the
purchaser at such sale shall, notwithstanding any language herein
apparently to the contrary, have the sole option to demand immediate
possession following the sale or to permit the occupants to remain as
tenants at will. In the event the tenant fails to surrender possession of
said property upon demand, the purchaser shall be entitled to institute and
maintain a summary action for possession of the Mortgaged Property (such as
an action for forcible entry and detainer) in any court having
jurisdiction.
Section 4.09 REMEDIES CUMULATIVE, CONCURRENT AND NONEXCLUSIVE.
Every right, power and remedy herein given to the Trustee or Mortgagee
shall be cumulative and in addition to every other right, power and remedy
herein specifically given or now or hereafter existing in equity, at law or
by statute (including specifically those granted by the Applicable UCC in
effect and applicable to the Mortgaged Property or any portion thereof)
each and every right, power and remedy whether specifically herein given or
otherwise existing may be exercised from time to time and so often and in
such order as may be deemed expedient by the Trustee or Mortgagee, and the
exercise, or the beginning of the exercise, of any such right, power or
remedy shall not be deemed a waiver of the right to exercise, at the same
time or thereafter any other right, power or remedy. No delay or omission
by the Trustee or Mortgagee in the exercise of any right, power or remedy
shall impair any such right, power or remedy or operate as a waiver thereof
or of any other right, power or remedy then or thereafter existing.
Section 4.10 NO RELEASE OF OBLIGATIONS. Neither Mortgagor, any
guarantor nor any other person hereafter obligated for payment of all or
any part of the Indebtedness shall be relieved of such obligation by reason
of (a) the failure of Trustee to comply with any request of Mortgagor, or
any guarantor or any other person so obligated to foreclose the lien of
this Mortgage or to enforce any provision hereunder or under the Credit
Agreement; (b) the release, regardless of consideration, of the Mortgaged
Property or any portion thereof or interest therein or the addition of any
other property to the Mortgaged Property; (c) any agreement or stipulation
between any subsequent owner of the Mortgaged Property and Mortgagee
extending, renewing, rearranging or in any other way modifying the terms of
this Mortgage without first having obtained the consent of, given notice to
or paid any consideration to Mortgagor, any guarantor or such other person,
and in such event Mortgagor, guarantor and all such other persons shall
continue to be liable to make payment according to the terms of any such
extension or modification agreement unless expressly released and
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discharged in writing by Mortgagee; or (d) by any other act or occurrence
save and except the complete payment of the Indebtedness and the complete
fulfillment of all obligations hereunder or under the Credit Agreement.
Section 4.11 RELEASE OF AND RESORT TO COLLATERAL. Mortgagee may
release, regardless of consideration, any part of the Mortgaged Property
without, as to the remainder, in any way impairing, affecting,
subordinating or releasing the lien or security interest created in or
evidenced by this Mortgage or its stature as a first and prior lien and
security interest in and to the Mortgaged Property, and without in any way
releasing or diminishing the liability of any person or entity liable for
the repayment of the Indebtedness. For payment of the Indebtedness,
Mortgagee may resort to any other security therefor held by Mortgagee or
Trustee in such order and manner as Mortgagee may elect.
Section 4.12 WAIVER OF REDEMPTION, NOTICE AND MARSHALLING OF ASSETS,
ETC. To the fullest extent permitted by law, Mortgagor hereby irrevocably
and unconditionally waives and releases (a) all benefits that might accrue
to Mortgagor by virtue of any present or future moratorium law or other law
exempting the Mortgaged Property from attachment, levy or sale on execution
or providing for any appraisement, valuation, stay of execution, exemption
from civil process, redemption (provided, however, that if the laws of any
state in which the Mortgaged Properties are located do not permit the
redemption period to be waived, the redemption period is specifically
reduced to the minimum amount of time allowable by statute) or extension of
time for payment; (b) all notices of any Event of Default or of Mortgagee's
intention to accelerate maturity of the Indebtedness or of Trustee's
election to exercise or his actual exercise of any right, remedy or
recourse provided for hereunder or under the Credit Agreement; and (c) any
right to a marshalling of assets or a sale in inverse order of alienation.
If any law referred to in this Mortgage and now in force, of which
Mortgagor or its successor or successors might take advantage despite the
provisions hereof, shall hereafter be repealed or cease to be in force,
such law shall thereafter be deemed not to constitute any part of the
contract herein contained or to preclude the operation or application of
the provisions hereof.
Section 4.13 DISCONTINUANCE OF PROCEEDINGS In case Mortgagee shall
have proceeded to invoke any right, remedy or recourse permitted hereunder
or under the Credit Agreement and shall thereafter elect to discontinue or
abandon same for any reason, Mortgagee shall have the unqualified right so
to do and, in such an event, Mortgagor and Mortgagee shall be restored to
their former positions with respect to the Indebtedness, this Mortgage, the
Credit Agreement, the Mortgaged Property and otherwise, and the rights,
remedies, recourses and powers of Mortgagee shall continue as if same had
never been invoked.
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Section 4.14 APPLICATION OF PROCEEDS. The proceeds of any sale of
the Mortgaged Property or any part thereof and all other monies received by
the Trustee or Mortgagee in any proceedings for the enforcement hereof or
otherwise, whose application has not elsewhere herein been specifically
provided for, shall be applied:
(a) first, to the payment of all expenses incurred by the Trustee or
Mortgagee incident to the enforcement of this Mortgage, the Credit
Agreement or any of the Indebtedness (including, without limiting the
generality of the foregoing, expenses of any entry or taking of possession,
of any sale, of advertisement thereof, and of conveyances, and court costs,
compensation of agents and employees, legal fees and a reasonable
commission to the Trustee acting), and to the payment of all other charges,
expenses, liabilities and advances incurred or made by the Trustee or
Mortgagee under this Mortgage or in executing any trust or power hereunder;
(b) second to payment of the Indebtedness in such order and manner as
Mortgagee may elect; and
(c) third, to Mortgagor; or as otherwise required by any Governmental
Requirement.
Section 4.15 RESIGNATION OF OPERATOR. In addition to all rights and
remedies under this Mortgage, at law and in equity, if any Event of Default
shall occur and Trustee or the Mortgagee shall exercise any remedies under
this Mortgage with respect to any portion of the Mortgaged Property (or
Mortgagor shall transfer any Mortgaged Property "in lieu of" foreclosure),
the Mortgagee or the Trustee shall have the right to request that any
operator of any Mortgaged Property which is either Mortgagor or any
Affiliate of Mortgagor to resign as operator under the joint operating
agreement applicable thereto, and no later than 60 days after receipt by
Mortgagor of any such request, Mortgagor shall resign (or cause such other
party to resign) as operator of such Mortgaged Property.
Section 4.16 INDEMNITY. IN CONNECTION WITH ANY ACTION TAKEN BY THE
TRUSTEE AND/OR MORTGAGEE PURSUANT TO THIS MORTGAGE, THE TRUSTEE AND/OR
MORTGAGEE AND THEIR OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES,
AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS ("INDEMNIFIED PARTIES") SHALL
NOT BE LIABLE FOR ANY LOSS SUSTAINED BY MORTGAGOR RESULTING FROM AN
ASSERTION THAT MORTGAGEE HAS RECEIVED FUNDS FROM THE PRODUCTION OF
HYDROCARBONS CLAIMED BY THIRD PERSONS OR ANY ACT OR OMISSION OF ANY
INDEMNIFIED PARTY IN ADMINISTERING, MANAGING, OPERATING OR CONTROLLING THE
MORTGAGED PROPERTY INCLUDING SUCH LOSS WHICH MAY RESULT FROM THE ORDINARY
NEGLIGENCE OF AN INDEMNIFIED PARTY UNLESS SUCH LOSS IS CAUSED BY THE
WILLFUL MISCONDUCT AND BAD FAITH OF AN INDEMNIFIED PARTY, NOR SHALL THE
TRUSTEE AND/OR MORTGAGEE BE OBLIGATED TO PERFORM OR DISCHARGE ANY
OBLIGATION, DUTY OR LIABILITY OF MORTGAGOR. MORTGAGOR SHALL AND DOES HEREBY
AGREE TO INDEMNIFY EACH INDEMNIFIED PARTY FOR, AND TO HOLD EACH INDEMNIFIED
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PARTY HARMLESS FROM, ANY AND ALL LIABILITY, LOSS OR DAMAGE WHICH MAY OR
MIGHT BE INCURRED BY ANY INDEMNIFIED PARTY BY REASON OF THIS MORTGAGE OR
THE EXERCISE OF RIGHTS OR REMEDIES HEREUNDER; SHOULD THE TRUSTEE AND/OR
MORTGAGEE MAKE ANY EXPENDITURE ON ACCOUNT OF ANY SUCH LIABILITY, LOSS OR
DAMAGE, THE AMOUNT THEREOF, INCLUDING COSTS, EXPENSES AND REASONABLE
ATTORNEYS' FEES, SHALL BE A DEMAND OBLIGATION (WHICH OBLIGATION MORTGAGOR
HEREBY EXPRESSLY PROMISES TO PAY) OWING BY MORTGAGOR TO THE TRUSTEE AND/OR
MORTGAGEE AND SHALL BEAR INTEREST FROM THE DATE EXPENDED UNTIL PAID AT THE
POST-DEFAULT RATE, SHALL BE A PART OF THE INDEBTEDNESS AND SHALL BE SECURED
BY THIS MORTGAGE AND ANY OTHER SECURITY INSTRUMENT. MORTGAGOR HEREBY
ASSENTS TO, RATIFIES AND CONFIRMS ANY AND ALL ACTIONS OF THE TRUSTEE AND/OR
MORTGAGEE WITH RESPECT TO THE MORTGAGED PROPERTY TAKEN UNDER THIS MORTGAGE.
THE LIABILITIES OF THE MORTGAGOR AS SET FORTH IN THIS SECTION 4.16 SHALL
SURVIVE THE TERMINATION OF THIS MORTGAGE.
ARTICLE V
THE TRUSTEE
Section 5.01 DUTIES, RIGHTS, AND POWERS OF TRUSTEE. It shall be no
part of the duty of the Trustee to see to any recording, filing or
registration of this Mortgage or any other instrument in addition or
supplemental thereto, or to give any notice thereof, or to see to the
payment of or be under any duty in respect of any tax or assessment or
other governmental charge which may be levied or assessed on the Mortgaged
Property, or any part thereof, or against Mortgagor, or to see to the
performance or observance by Mortgagor of any of the covenants and
agreements contained herein. The Trustee shall not be responsible for the
execution, acknowledgment or validity of this Mortgage or of any instrument
in addition or supplemental hereto or for the sufficiency of the security
purported to be created hereby, and makes no representation in respect
thereof or in respect of the rights of Mortgagee. The Trustee shall have
the right to advise with counsel upon any matters arising hereunder and
shall be fully protected in relying as to legal matters on the advice of
counsel. The Trustee shall not incur any personal liability hereunder
except for Trustee's own willful misconduct; and the Trustee shall have the
right to rely on any instrument, document or signature authorizing or
supporting any action taken or proposed to be taken by him hereunder,
believed by him in good faith to be genuine.
Section 5.02 SUCCESSOR TRUSTEE. The Trustee may resign by written
notice addressed to Mortgagee or be removed at any time with or without
cause by an instrument in writing duly executed on behalf of Mortgagee.
In case of the death, resignation or removal of the Trustee, a successor
trustee may be appointed by Mortgagee by instrument of substitution
complying with any applicable requirements of law, or, in the absence of
any such requirement, without other formality than appointment and
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designation in writing. Written notice of such appointment and designation
shall be given by Mortgagee to Mortgagor, but the validity of any such
appointment shall not be impaired or affected by failure to give such
notice or by any defect therein. Such appointment and designation shall be
full evidence of the right and authority to make the same and of all the
facts therein recited, and, upon the making of any such appointment and
designation, this Mortgage shall vest in the successor trustee all the
estate and title in and to all of the Mortgaged Property, and the successor
trustee shall thereupon succeed to all of the rights, powers, privileges,
immunities and duties hereby conferred upon the Trustee named herein, and
one such appointment and designation shall not exhaust the right to appoint
and designate a successor trustee hereunder but such right may be exercised
repeatedly as long as any Indebtedness remains unpaid hereunder. To
facilitate the administration of the duties hereunder, Mortgagee may
appoint multiple trustees to serve in such capacity or in such
jurisdictions as Mortgagee may designate.
Section 5.03 RETENTION OF MONEYS. All moneys received by Trustee
shall, until used or applied as herein provided, be held in trust for the
purposes for which they were received, but need not be segregated in any
manner from any other moneys (except to the extent required by law), and
Trustee shall be under no liability for interest on any moneys received by
him hereunder.
ARTICLE VI
MISCELLANEOUS
Section 6.01 INSTRUMENT CONSTRUED AS MORTGAGE, ETC. With respect
to any portions of the Mortgaged Property located in any state or other
jurisdiction the laws of which do not provide for the use or enforcement
of a deed of trust or the office, rights and authority of the Trustee as
herein provided, the general language of conveyance hereof to the Trustee
is intended and the same shall be construed as words of mortgage unto and
in favor of Mortgagee and the rights and authority granted to the Trustee
herein may be enforced and asserted by Mortgagee in accordance with the
laws of the jurisdiction in which such portion of the Mortgaged Property is
located and the same may be foreclosed at the option of Mortgagee as to any
or all such portions of the Mortgaged Property in any manner permitted by
the laws of the jurisdiction in which such portions of the Mortgaged
Property is situated. This Mortgage may be construed as a mortgage, deed
of trust, chattel mortgage, conveyance, assignment, security agreement,
pledge, financing statement, hypothecation or contract, or any one or more
of them, in order fully to effectuate the lien hereof and the purposes and
agreements herein set forth.
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<PAGE>
Section 6.02 RELEASE OF MORTGAGE. If all Indebtedness secured
hereby shall be paid and the Credit Agreement terminated, Mortgagee shall
forthwith cause satisfaction and discharge of this Mortgage to be entered
upon the record at the expense of Mortgagor and shall execute and deliver
or cause to be executed and delivered such instruments of satisfaction and
reassignment as may be appropriate. Otherwise, this Mortgage shall remain
and continue in full force and effect.
Section 6.03 SEVERABILITY. If any provision hereof is invalid or
unenforceable in any jurisdiction, the other provisions hereof shall remain
in full force and effect in such jurisdiction and the remaining provisions
hereof shall be liberally construed in favor of the Trustee and Mortgagee
in order to effectuate the provisions hereof, and the invalidity or
unenforceability of any provision hereof in any jurisdiction shall not
affect the validity or enforceability of any such provision in any other
jurisdiction.
Section 6.04 SUCCESSORS AND ASSIGNS OF PARTIES. The term
"Mortgagee" as used herein shall mean and include any legal owner, holder,
assignee or pledgee of any of the Indebtedness secured hereby. The terms
used to designate Trustee, Mortgagee and Mortgagor shall be deemed to
include the respective heirs, legal representatives, successors and assigns
of such parties.
Section 6.05 SATISFACTION OF PRIOR ENCUMBRANCE. To the extent that
proceeds of the Credit Agreement are used to pay indebtedness secured by
any outstanding lien, security interest, charge or prior encumbrance
against the Mortgaged Property, such proceeds have been advanced by
Mortgagee at Mortgagor's request, and Mortgagee shall be subrogated to any
and all rights, security interests and liens owned by any owner or holder
of such outstanding liens, security interests, charges or encumbrances,
irrespective of whether said liens, security interests, charges or
encumbrances are released, and it is expressly understood that, in
consideration of the payment of such other indebtedness by Mortgagee,
Mortgagor hereby waives and releases all demands and causes of action for
offsets and payments to, upon and in connection with the said indebtedness.
Section 6.06 SUBROGATION OF TRUSTEE. This Mortgage is made with
full substitution and subrogation of the Trustee and his successors in this
trust and his and their assigns in and to all covenants and warranties by
others heretofore given or made in respect of the Mortgaged Property or any
part thereof.
Section 6.07 NATURE OF COVENANTS. The covenants and agreements
herein contained shall constitute covenants running with the land and
interests covered or affected hereby and shall be binding upon the heirs,
legal representatives, successors and assigns of the parties hereto.
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<PAGE>
Section 6.08 NOTICES. All notices, requests, consents, demands and
other communications required or permitted hereunder shall be in writing
and shall be deemed sufficiently given or furnished if delivered by
registered or certified United States mail, postage prepaid, or by personal
service (including express or courier service) at the addresses specified
in the first paragraph of this Mortgage (unless changed by similar notice
in writing given by the particular party whose address is to be changed).
Any such notice or communication shall be deemed to have been given either
at the time of personal delivery or, in the case of delivery at the address
and in the manner provided herein, upon receipt; provided that, service of
notice as required by the laws of any state in which portions of the
Mortgaged Property may be situated shall for all purposes be deemed
appropriate and sufficient with the giving of such notice.
Section 6.09 COUNTERPARTS. This Mortgage is being executed in
several counterparts, all of which are identical, except that to facilitate
recordation, if the Mortgaged Property is situated in more than one county,
descriptions of only those portions of the Mortgaged Property located in
the county in which a particular counterpart is recorded shall be attached
as EXHIBIT A thereto. An EXHIBIT A containing a description of all
Mortgaged Property wheresoever situated will be attached to that certain
counterpart to be attached to a Financing Statement and filed with the
Secretary of State of Michigan in the Uniform Commercial Code Records.
Each of such counterparts shall for all purposes be deemed to be an
original and all such counterparts shall together constitute but one and
the same instrument.
SECTION 6.10 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS MORTGAGE; AND AGREES
THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS MORTGAGE;
THAT IT HAS IN FACT READ THIS MORTGAGE AND IS FULLY INFORMED AND HAS FULL
NOTICE AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS MORTGAGE;
THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE
THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS MORTGAGE; AND
HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS MORTGAGE; AND
THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS MORTGAGE RESULT IN ONE
PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION
AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY.
EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE
VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS MORTGAGE
ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION
OR THAT THE PROVISION IS NOT "CONSPICUOUS."
SECTION 6.11 GOVERNING LAW. THIS MORTGAGE SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS,
EXCEPT TO THE EXTENT THAT THE LAW OF THE JURISDICTION WHERE THE MORTGAGED
PROPERTY IS LOCATED OR SOME OTHER JURISDICTION MANDATORILY APPLIES.
[SIGNATURES BEGIN NEXT PAGE]
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<PAGE>
WITNESS THE EXECUTION HEREOF, this 6th day of February, 1998, to be
effective as of the 9th day of February, 1998 (the "EFFECTIVE DATE").
MORTGAGOR:
WITNESSED BY: MILLER OIL CORPORATION
__________________________ By:______________________________
Name: Kelly E. Miller
President
__________________________
Name:
The name and address of the Debtor/Mortgagor is:
MILLER OIL CORPORATION
3014 Logan Valley Road
Traverse City, Michigan 49685-0348
Federal Tax I.D. 38-2607711
The name and address of the Secured Party/Mortgagee is:
Bank of Montreal, as Agent
700 Louisiana, Suite 4400
Houston, Texas 77002
Federal Tax I.D. 134941092
S-1
<PAGE>
THE STATE OF TEXAS <Section>
<Section>
COUNTY OF HARRIS <Section>
THIS INSTRUMENT was acknowledged before me on February ____, 1998 by
Kelly E. Miller, President of Miller Oil Corporation, a Michigan
corporation, on behalf of such corporation.
______________________________
Notary Public in and for the
State of Texas
______________________________
Printed Name
S-2
<PAGE>
EXHIBIT 10.15
THIS INSTRUMENT WAS PREPARED BY AND
WHEN RECORDED RETURN TO:
VINSON & ELKINS L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760
Attn: Richard H. Mourglia
MORTGAGE, DEED OF TRUST,
ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT,
AND FINANCING STATEMENT
(MISSISSIPPI)
SECURING A $75,000,000 LOAN ISSUED PURSUANT
TO A CREDIT AGREEMENT AND EVIDENCED
BY PROMISSORY NOTES
FROM
MILLER OIL CORPORATION
(TAXPAYER I.D. 38-2607711)
TO
JAMES WHITMORE, AS TRUSTEE
FOR THE BENEFIT OF
BANK OF MONTREAL, AS AGENT
(TAXPAYER I.D. 134941092)
A CARBON, PHOTOGRAPHIC, OR OTHER REPRODUCTION OF THIS INSTRUMENT IS
SUFFICIENT AS A FINANCING STATEMENT.
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS, SECURES
PAYMENT OF FUTURE ADVANCES, AND COVERS PROCEEDS OF MORTGAGED PROPERTY.
THIS INSTRUMENT COVERS MINERALS AND OTHER SUBSTANCES OF VALUE WHICH MAY BE
EXTRACTED FROM THE EARTH (INCLUDING WITHOUT LIMITATION OIL AND GAS) AND THE
ACCOUNTS RELATED THERETO, WHICH WILL BE FINANCED AT THE WELLHEADS OF THE
WELL OR WELLS LOCATED ON THE PROPERTIES DESCRIBED IN EXHIBIT A HERETO.
THIS INSTRUMENT, WHICH COVERS GOODS THAT ARE OR ARE TO BECOME FIXTURES ON
THE REAL PROPERTY DESCRIBED HEREIN, IS TO BE FILED OR RECORDED, AMONG OTHER
PLACES, IN THE REAL ESTATE RECORDS OR SIMILAR RECORDS OF THE COUNTY
RECORDERS OF THE COUNTIES LISTED ON EXHIBIT A HERETO. THE GRANTOR HAS AN
INTEREST OF RECORD IN THE REAL ESTATE CONCERNED, WHICH INTEREST IS
DESCRIBED IN EXHIBIT A ATTACHED HERETO.
<PAGE>
THIS INSTRUMENT SECURES A LINE OF CREDIT THAT IS USED PRIMARILY FOR
BUSINESS OR COMMERCIAL PURPOSES AND IS NOT MADE TO A NATURAL PERSON.
THE FINAL MATURITY DATE OF THIS DEED OF TRUST IS FEBRUARY 9, 2004.
THE RECORD OWNER OF THE PROPERTY IS MILLER OIL COMPANY.
<PAGE>
TABLE OF CONTENTS
ARTICLE I:
GRANT OF LIEN AND INDEBTEDNESS SECURED
Section 1.01 GRANT OF LIENS. . . . . . . . . . . . . . . . . . . . .1
Section 1.02 GRANT OF SECURITY INTEREST. . . . . . . . . . . . . . .4
Section 1.03 INDEBTEDNESS SECURED. . . . . . . . . . . . . . . . . .4
Section 1.04 FIXTURE FILING, ETC.. . . . . . . . . . . . . . . . . .5
Section 1.05 PRO RATA BENEFIT. . . . . . . . . . . . . . . . . . . .6
Section 1.06 DEFINED TERMS . . . . . . . . . . . . . . . . . . . . .6
ARTICLE II
ASSIGNMENT OF PRODUCTION
Section 2.01 ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . .6
Section 2.02 NO MODIFICATION OF PAYMENT OBLIGATIONS. . . . . . . . .7
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.01 TITLE . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 3.02 DEFEND TITLE. . . . . . . . . . . . . . . . . . . . . .7
Section 3.03 NOT A FOREIGN PERSON. . . . . . . . . . . . . . . . . .8
Section 3.04 POWER TO CREATE LIEN AND SECURITY . . . . . . . . . . .8
Section 3.05 REVENUE AND COST BEARING INTEREST . . . . . . . . . . .8
Section 3.06 RENTALS PAID; LEASES IN EFFECT. . . . . . . . . . . . .8
Section 3.07 OPERATION BY THIRD PARTIES. . . . . . . . . . . . . . .8
Section 3.08 ABANDON, SALES. . . . . . . . . . . . . . . . . . . . .8
Section 3.09 FAILURE TO PERFORM. . . . . . . . . . . . . . . . . . .9
Section 3.10 OPERATION OF MORTGAGED PROPERTY, ETC. . . . . . . . . .9
ARTICLE IV
RIGHTS AND REMEDIES
Section 4.01 EVENT OF DEFAULT. . . . . . . . . . . . . . . . . . . 10
Section 4.02 FORECLOSURE AND SALE. . . . . . . . . . . . . . . . . 10
Section 4.03 SUBSTITUTE TRUSTEES AND AGENTS. . . . . . . . . . . . 11
Section 4.04 JUDICIAL FORECLOSURE; RECEIVERSHIP. . . . . . . . . . 12
Section 4.05 FORECLOSURE FOR INSTALLMENTS. . . . . . . . . . . . . 12
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<PAGE>
Section 4.06 SEPARATE SALES. . . . . . . . . . . . . . . . . . . . 12
Section 4.07 POSSESSION OF MORTGAGED PROPERTY. . . . . . . . . . . 12
Section 4.08 OCCUPANCY AFTER FORECLOSURE . . . . . . . . . . . . . 13
Section 4.09 REMEDIES CUMULATIVE, CONCURRENT AND NONEXCLUSIVE. . . 13
Section 4.10 NO RELEASE OF OBLIGATIONS . . . . . . . . . . . . . . 13
Section 4.11 RELEASE OF AND RESORT TO COLLATERAL . . . . . . . . . 14
Section 4.12 WAIVER OF REDEMPTION, NOTICE AND MARSHALLING OF
ASSETS, ETC . . . . . . . . . . . . . . . . . . . . . 14
Section 4.13 DISCONTINUANCE OF PROCEEDINGS . . . . . . . . . . . . 14
Section 4.14 APPLICATION OF PROCEEDS . . . . . . . . . . . . . . . 15
Section 4.15 RESIGNATION OF OPERATOR . . . . . . . . . . . . . . . 15
Section 4.16 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE V
THE TRUSTEE
Section 5.01 DUTIES, RIGHTS, AND POWERS OF TRUSTEE . . . . . . . . 16
Section 5.02 SUCCESSOR TRUSTEE . . . . . . . . . . . . . . . . . . 16
Section 5.03 RETENTION OF MONEYS . . . . . . . . . . . . . . . . . 17
ARTICLE VI
MISCELLANEOUS
Section 6.01 INSTRUMENT CONSTRUED AS MORTGAGE, ETC.. . . . . . . . 17
Section 6.02 RELEASE OF MORTGAGE . . . . . . . . . . . . . . . . . 17
Section 6.03 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . 17
Section 6.04 SUCCESSORS AND ASSIGNS OF PARTIES . . . . . . . . . . 18
Section 6.05 SATISFACTION OF PRIOR ENCUMBRANCE . . . . . . . . . . 18
Section 6.06 SUBROGATION OF TRUSTEE. . . . . . . . . . . . . . . . 18
Section 6.07 NATURE OF COVENANTS . . . . . . . . . . . . . . . . . 18
Section 6.08 NOTICES . . . . . . . . . . . . . . . . . . . . . . . 18
Section 6.09 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . 18
SECTION 6.10 EXCULPATION PROVISIONS. . . . . . . . . . . . . . . . 19
Section 6.11 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . 19
Exhibit A - Mortgaged Property
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<PAGE>
MORTGAGE, DEED OF TRUST,
ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
This MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY
AGREEMENT AND FINANCING STATEMENT (as amended, supplemented or otherwise
modified, this "MORTGAGE") is entered into as of the effective time and
date hereinafter stated (the "EFFECTIVE DATE") by MILLER OIL CORPORATION, a
Michigan corporation with offices at 3014 Logan Valley Road, Traverse City,
Michigan 49685-0348 ("MORTGAGOR"), for the benefit of BANK OF MONTREAL with
offices at 700 Louisiana, Suite 4400, Houston, Texas 77002, as Agent (in
such capacity, "MORTGAGEE") for itself and such other financial
institutions (collectively called the "LENDERS") which are or hereafter
become a party to the Credit Agreement (hereinafter defined).
R E C I T A L S:
A. Mortgagor, Mortgagee, and the Lenders are parties to that certain
Credit Agreement dated as of February 9, 1998 (such agreement, as from time
to time amended or supplemented, the "CREDIT AGREEMENT") pursuant to which,
upon the terms and conditions stated therein, the Lenders agreed to make
loans to and extend credit on behalf of Borrower.
B. Mortgagee and the Lenders have conditioned their respective
obligations under the Credit Agreement upon the execution and delivery by
Mortgagor of this Mortgage, and Mortgagor has agreed to enter into this
Mortgage.
THEREFORE, in order to comply with the terms and conditions of the
Credit Agreement and in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Mortgagor and Mortgagee hereby agree as follows:
ARTICLE I:
GRANT OF LIEN AND INDEBTEDNESS SECURED
Section 1.01 GRANT OF LIENS. For and in consideration of Ten
Dollars ($10.00) and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and to secure payment of the
Indebtedness (as hereinafter defined) and the performance of the covenants
and obligations herein contained, Mortgagor does by these presents hereby
GRANT, BARGAIN, SELL, ASSIGN, MORTGAGE, PLEDGE, HYPOTHECATE, SET OVER,
TRANSFER, CONVEY and GRANT A POWER OF SALE unto James Whitmore of Houston,
Harris County, Texas, as Trustee, whose address for notice hereunder is 700
Louisiana, Suite 4400, Houston, Texas 77002 ("TRUSTEE") and Trustee's
successors and substitutes in trust hereunder, for the use and benefit of
Mortgagee, the real and personal property, rights, titles, interests and
estates described in the following paragraphs (a) through (g) (collectively
called the "MORTGAGED PROPERTY"):
<PAGE>
(a) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to the oil and gas leases and/or oil, gas and
other mineral leases and other interests and estates and the lands and
premises covered or affected thereby which are described on EXHIBIT A
hereto (collectively called the "HYDROCARBON PROPERTY") or which
Hydrocarbon Property is otherwise referred to herein, and specifically, but
without limitation, the undivided interests of Mortgagor which are more
particularly described on attached EXHIBIT A.
(b) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to (i) the properties now or hereafter pooled
or unitized with the Hydrocarbon Property; (ii) all presently existing or
future unitization, communitization, pooling agreements and declarations of
pooled units and the units created thereby (including, without limitation,
all units created under orders, regulations, rules or other official acts
of any Federal, State or other governmental body or agency having
jurisdiction and any units created solely among working interest owners
pursuant to operating agreements or otherwise) which may affect all or any
portion of the Hydrocarbon Property including, without limitation, those
units which may be described or referred to on attached EXHIBIT A;
(iii) all operating agreements, production sales or other contracts,
farmout agreements, farm-in agreements, area of mutual interest agreements,
joint venture agreements, participation agreements, assignments, equipment
leases and other agreements described or referred to in this Mortgage or
which relate to any of the Hydrocarbon Property or interests in the
Hydrocarbon Property described or referred to herein or on attached
EXHIBIT A or to the production, sale, purchase, exchange, processing,
handling, storage, transporting or marketing of the Hydrocarbons
(hereinafter defined) from or attributable to such Hydrocarbon Property or
interests, including without limitation, all such agreements described in
EXHIBIT B attached hereto; (iv) all geological, geophysical, engineering,
accounting, title, legal, and other technical or business data concerning
the Mortgaged Property, the Hydrocarbons, or any other item of Property
which are in the possession of Mortgagor or in which Mortgagor can
otherwise grant a security interest, and all books, files, records,
magnetic media, computer records, and other forms of recording or obtaining
access to such data; and (v) the Hydrocarbon Property described in and
covered by this Mortgage even though Mortgagor's interests therein be
incorrectly described or a description of a part or all of such Hydrocarbon
Property or Mortgagor's interests therein be omitted; it being intended by
Mortgagor and Mortgagee herein to cover and affect hereby all interests
which Mortgagor may now own or may hereafter acquire in and to the
Hydrocarbon Property notwithstanding that the interests as specified on
EXHIBIT A may be limited to particular lands, specified depths or
particular types of property interests.
(c) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to all oil, gas, casinghead gas, condensate,
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<PAGE>
distillate, liquid hydrocarbons, gaseous hydrocarbons and all products
refined therefrom and all other minerals (collectively called the
"HYDROCARBONS") in and under and which may be produced and saved from or
attributable to the Hydrocarbon Property, the lands pooled or unitized
therewith and Mortgagor's interests therein, including all oil in tanks and
all rents, issues, profits, proceeds, products, revenues and other income
from or attributable to the Hydrocarbon Property, the lands pooled or
unitized therewith and Mortgagor's interests therein which are subjected or
required to be subjected to the liens and security interests of this
Mortgage.
(d) All tenements, hereditaments, appurtenances and properties in
anywise appertaining, belonging, affixed or incidental to the Hydrocarbon
Property, rights, titles, interests and estates described or referred to in
paragraphs (a) and (b) above, which are now owned or which may hereafter be
acquired by Mortgagor, including, without limitation, any and all property,
real or personal, now owned or hereafter acquired and situated upon, used,
held for use, or useful in connection with the operating, working or
development of any of such Hydrocarbon Property or the lands pooled or
unitized therewith (excluding drilling rigs, trucks, automotive equipment
or other personal property which may be taken to the premises for the
purpose of drilling a well or for other similar temporary uses) and
including any and all oil wells, gas wells, injection wells or other wells,
buildings, structures, field separators, liquid extraction plants, plant
compressors, pumps, pumping units, pipelines, sales and flow lines,
gathering systems, field gathering systems, salt water disposal facilities,
tanks and tank batteries, fixtures, valves, fittings, machinery and parts,
engines, boilers, meters, apparatus, equipment, appliances, tools,
implements, cables, wires, towers, casing, tubing and rods, surface leases,
rights-of-way, easements, servitudes, licenses and other surface and
subsurface rights together with all additions, substitutions, replacements,
accessions and attachments to any and all of the foregoing properties.
(e) Any property that may from time to time hereafter, by delivery or
by writing of any kind, be subjected to the lien and security interest
hereof by Mortgagor or by anyone on Mortgagor's behalf; and the Trustee is
hereby authorized to receive the same at any time as additional security
hereunder.
(f) All of the rights, titles and interests of every nature
whatsoever now owned or hereafter acquired by Mortgagor in and to the
Hydrocarbon Property rights, titles, interests and estates and every part
and parcel thereof, including, without limitation, the Hydrocarbon Property
rights, titles, interests and estates as the same may be enlarged by the
discharge of any payments out of production or by the removal of any
charges or Permitted Encumbrances (as hereinafter defined in Section 3.01)
to which any of the Hydrocarbon Property rights, titles, interests or
estates are subject, or otherwise; all rights of Mortgagor to liens and
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<PAGE>
security interests securing payment of proceeds from the sale of production
from the Mortgaged Property; together with any and all renewals and
extensions of any of the Hydrocarbon Property rights, titles, interests or
estates; all contracts and agreements supplemental to or amendatory of or
in substitution for the contracts and agreements described or mentioned
above; and any and all additional interests of any kind hereafter acquired
by Mortgagor in and to the Hydrocarbon Property rights, titles, interests
or estates.
(g) All accounts, contract rights (including without limitation,
rights arising out of the agreements and contracts described on EXHIBIT B
attached hereto), inventory, general intangibles, insurance contracts and
insurance proceeds constituting a part of, relating to or arising out of
those portions of the Mortgaged Property which are described in paragraphs
(a) through (f) above and all proceeds and products of all such portions of
the Mortgaged Property and payments in lieu of production (such as "take or
pay" payments), whether such proceeds or payments are goods, money,
documents, instruments, chattel paper, securities, accounts, general
intangibles, fixtures, real property, or other assets.
Any fractions or percentages specified on attached EXHIBIT A in
referring to Mortgagor's interests are solely for purposes of the
warranties made by Mortgagor pursuant to Sections 3.01 and 3.05 hereof and
shall in no manner limit the quantum of interest affected by this
Section 1.01 with respect to any Hydrocarbon Property or with respect to
any unit or well identified on said EXHIBIT A.
TO HAVE AND TO HOLD the Mortgaged Property unto the Trustee and to his
successors and assigns forever to secure the payment of the Indebtedness
(hereinafter defined) and to secure the performance of the covenants,
agreements, and obligations of the Mortgagor herein contained.
Section 1.02 GRANT OF SECURITY INTEREST. To further secure the
Indebtedness, Mortgagor hereby grants to Mortgagee a security interest in
and to the Mortgaged Property (whether now or hereafter acquired by
operation of law or otherwise) insofar as the Mortgaged Property consists
of equipment, accounts, contract rights (including without limitation,
rights arising out of the agreements and contracts described on EXHIBIT B
attached hereto), general intangibles, insurance contracts, insurance
proceeds, inventory, Hydrocarbons, fixtures and any and all other personal
property of any kind or character defined in and subject to the provisions
of the Uniform Commercial Code presently in effect in the jurisdiction in
which the Mortgaged Property is situated ("APPLICABLE UCC"), including the
proceeds and products from any and all of such personal property. Upon the
happening of any of the Events of Default, Mortgagee is and shall be
entitled to all of the rights, powers and remedies afforded a secured party
by the Applicable UCC with reference to the personal property and fixtures
in which Mortgagee has been granted a security interest herein, or the
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Trustee or Mortgagee may proceed as to both the real and personal property
covered hereby in accordance with the rights and remedies granted under
this Mortgage in respect of the real property covered hereby. Such rights,
powers and remedies shall be cumulative and in addition to those granted to
the Trustee or Mortgagee under any other provision of this Mortgage or
under any other Security Instrument. Written notice mailed to Mortgagor as
provided herein at least five (5) days prior to the date of public sale of
any part of the Mortgaged Property which is personal property subject to
the provisions of the Applicable UCC, or prior to the date after which
private sale of any such part of the Mortgaged Property will be made, shall
constitute reasonable notice.
Section 1.03 INDEBTEDNESS SECURED. This Mortgage is executed and
delivered by Mortgagor to secure and enforce the following (the
"INDEBTEDNESS"):
(a) Payment of and performance of any and all indebtedness,
obligations and liabilities of Mortgagor pursuant to the Credit Agreement,
whether now existing or hereafter arising, including without limitation,
those certain promissory notes which are or may be executed by Mortgagor
payable to the order of each Lender and being in the aggregate principal
amount of $75,000,000 together with interest at the rate set forth on the
Credit Agreement, with final maturity on or before February 9, 2004 and all
other notes given in substitution therefor or in modification, renewal or
extension thereof, in whole or in part (such notes, as from time to time
supplemented, amended or modified and all other notes given in substitution
therefor or in modification, renewal or extension thereof, in whole or in
part, being hereafter called the "NOTE").
(b) Any sums which may be advanced or paid by Mortgagee under the
terms hereof or of the Credit Agreement on account of the failure of
Mortgagor to comply with the covenants of Mortgagor contained herein or in
the Credit Agreement; and all other indebtedness of Mortgagor arising
pursuant to the provisions of this Mortgage.
(c) Any additional loans made by Mortgagee to Mortgagor. It is
contemplated that Mortgagee may lend additional sums to Mortgagor from time
to time, but shall not be obligated to do so, and Mortgagor agrees that any
such additional loans shall be secured by this Mortgage.
(d) Payment of and performance of any and all present or future
obligations of Mortgagor according to the terms of any present or future
interest rate or currency swap, rate cap, rate floor, rate collar, forward
rate agreement or other exchange or rate protection agreements or any
option with respect to any such transaction now existing or hereafter
entered into between Mortgagor and Mortgagee.
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(e) Payment of and performance of any and all present or future
obligations of Mortgagor according to the terms of any present or future
swap agreements, cap, floor, collar, forward agreement or other exchange
or protection agreements relating to crude oil, natural gas or other
hydrocarbons or any option with respect to any such transaction now
existing or hereafter entered into between Mortgagor and Mortgagee.
(f) Performance of all Letter of Credit Agreements executed from time
to time by Mortgagor under or pursuant to the Credit Agreement and all
reimbursement obligations for drawn or undrawn portions under any Letter of
Credit now outstanding or hereafter issued under or pursuant to the Credit
Agreement.
(g) Payment of and performance of any and all other indebtedness,
obligations and liabilities of any kind of Mortgagor to the Mortgagee, now
or hereafter existing, arising directly between Mortgagor and the Mortgagee
or acquired outright, as a participation, conditionally or as collateral
security from another by the Mortgagee, absolute or contingent, joint
and/or several, secured or unsecured, due or not due, arising by operation
of law or otherwise, or direct or indirect, including indebtedness,
obligations and liabilities to the Mortgagee of Mortgagor as a member of
any partnership, syndicate, association or other group, and whether
incurred by Mortgagor as principal, surety, endorser, guarantor,
accommodation party or otherwise.
Section 1.04 FIXTURE FILING, ETC. Without in any manner limiting
the generality of any of the other provisions of this Mortgage: (i) some
portions of the goods described or to which reference is made herein are or
are to become fixtures on the land described or to which reference is made
herein or on attached Exhibit A; (ii) the security interests created hereby
under applicable provisions of the Applicable UCC will attach to
Hydrocarbons (minerals including oil and gas) or the accounts resulting
from the sale thereof at the wellhead or minehead located on the land
described or to which reference is made herein; (iii) this Mortgage is to
be filed of record in the real estate records as a financing statement, and
(iv) Mortgagor is the record owner of the real estate or interests in the
real estate comprised of the Mortgaged Property.
Section 1.05 PRO RATA BENEFIT. This Mortgage is executed and
granted for the pro rata benefit and security of Mortgagee, and the
Lenders, and any and all future holders of an interest in the Indebtedness
and the interest thereon for whatever period; it being understood and
agreed that possession of any Note (or any replacements of said Note) at
any time by Mortgagor shall not in any manner extinguish the Indebtedness,
such Note or this Mortgage securing payment thereof, and Mortgagor shall
have the right to issue and reissue any of the Notes from time to time as
its interest or as convenience may require, without in any manner
extinguishing or affecting the Indebtedness, the obligations under any of
the Notes, or the security of this Mortgage.
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Section 1.06 DEFINED TERMS. Any capitalized term used in this
Mortgage and not defined in this Mortgage shall have the meaning assigned
to such term in the Credit Agreement.
ARTICLE II
ASSIGNMENT OF PRODUCTION
Section 2.01 ASSIGNMENT. Mortgagor has absolutely and
unconditionally assigned, transferred, and conveyed, and does hereby
absolutely and unconditionally assign, transfer and convey unto Mortgagee,
its successors and assigns, all of the Hydrocarbons and all products
obtained or processed therefrom, and the revenues and proceeds now and
hereafter attributable to the Hydrocarbons and said products and all
payments in lieu of the Hydrocarbons such as "take or pay" payments or
settlements. The Hydrocarbons and products are to be delivered into pipe
lines connected with the Mortgaged Property, or to the purchaser thereof,
to the credit of Mortgagee, free and clear of all taxes, charges, costs,
and expenses; and all such revenues and proceeds shall be paid directly to
Mortgagee, at its banking quarters in Chicago, Illinois with no duty or
obligation of any party paying the same to inquire into the rights of
Mortgagee to receive the same, what application is made thereof, or as to
any other matter. Mortgagor agrees to perform all such acts, and to
execute all such further assignments, transfers and division orders, and
other instruments as may be required or desired by Mortgagee or any party
in order to have said proceeds and revenues so paid to Mortgagee.
Mortgagee is fully authorized to receive and receipt for said revenues and
proceeds; to endorse and cash any and all checks and drafts payable to the
order of Mortgagor or Mortgagee for the account of Mortgagor received from
or in connection with said revenues or proceeds and to hold the proceeds
thereof in a bank account as additional collateral securing the
Indebtedness; and to execute transfer and division orders in the name of
Mortgagor, or otherwise, with warranties binding Mortgagor. All proceeds
received by the Mortgagee pursuant to this assignment shall be applied as
provided in the other Loan Documents. Mortgagee shall not be liable for
any delay, neglect, or failure to effect collection of any proceeds or to
take any other action in connection therewith or hereunder; but Mortgagee
shall have the right, at its election, in the name of Mortgagor or
otherwise, to prosecute and defend any and all actions or legal proceedings
deemed advisable by Mortgagee in order to collect such funds and to protect
the interests of Mortgagee, and/or Mortgagor, with all costs, expenses and
attorneys' fees incurred in connection therewith being paid by Mortgagor.
Mortgagor hereby appoints Mortgagee as its attorney-in-fact to pursue any
and all rights of Mortgagor to liens on and security interests in the
Hydrocarbons securing payment of proceeds of runs attributable to the
Hydrocarbons. In addition to the rights granted to Trustee and/or
Mortgagee in Section 1.01 (f) of this Mortgage, Mortgagor hereby further
transfers and assigns to Mortgagee any and all such liens, security
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interests, financing statements or similar interests of Mortgagor
attributable to its interest in the Hydrocarbons and proceeds of runs
therefrom arising under or created by said statutory provision, judicial
decision or otherwise. The power of attorney granted to Mortgagee in this
Section 2.01, being coupled with an interest, shall be irrevocable so long
as the Indebtedness or any part thereof remains unpaid.
Section 2.02 NO MODIFICATION OF PAYMENT OBLIGATIONS. Nothing herein
contained shall modify or otherwise alter the obligation of Mortgagor to
make prompt payment of all principal and interest owing on the Indebtedness
when and as the same become due regardless of whether the proceeds of the
Hydrocarbons are sufficient to pay the same and the rights provided in
accordance with the foregoing assignment provision shall be cumulative of
all other security of any and every character now or hereafter existing to
secure payment of the Indebtedness.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
Mortgagor hereby represents, warrants and covenants as follows:
Section 3.01 TITLE. To the extent of the undivided interests
specified on attached EXHIBIT A, Mortgagor has good and indefeasible title
to and is possessed of the Mortgaged Property. The Mortgaged Property is
free of any and all Liens (as defined in the Credit Agreement) except Liens
allowed by Section 9.02 of the Credit Agreement and Liens described on
EXHIBIT A hereto (collectively, the "PERMITTED ENCUMBRANCES").
Section 3.02 DEFEND TITLE. This Mortgage is, and always will be
kept, a direct first lien and security interest upon the Mortgaged Property
subject only to the Permitted Encumbrances. Mortgagor will not create or
suffer to be created or permit to exist any lien, security interest or
charge prior or junior to or on a parity with the lien and security
interest of this Mortgage upon the Mortgaged Property or any part thereof
or upon the rents, issues, revenues, profits and other income therefrom.
Mortgagor will warrant and defend the title to the Mortgaged Property
against the claims and demands of all other persons whomsoever and will
maintain and preserve the lien created hereby so long as any of the
Indebtedness secured hereby remains unpaid. Should an adverse claim be
made against or a cloud develop upon the title to any part of the Mortgaged
Property, Mortgagor agrees it will immediately defend against such adverse
claim or take appropriate action to remove such cloud at Mortgagor's cost
and expense, and Mortgagor further agrees that the Trustee and/or Mortgagee
may take such other action as they deem advisable to protect and preserve
their interests in the Mortgaged Property, AND IN SUCH EVENT MORTGAGOR WILL
INDEMNIFY THE TRUSTEE AND MORTGAGEE AGAINST ANY AND ALL COST, ATTORNEY'S
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FEES AND OTHER EXPENSES WHICH THEY MAY INCUR IN DEFENDING AGAINST ANY SUCH
ADVERSE CLAIM OR TAKING ACTION TO REMOVE ANY SUCH CLOUD.
Section 3.03 NOT A FOREIGN PERSON. Mortgagor is not a "foreign
person" within the meaning of the Internal Revenue Code of 1986, as amended
(hereinafter called the "CODE"), Sections 1445 and 7701 (i.e. Mortgagor is
not a non-resident alien, foreign corporation, foreign partnership, foreign
trust or foreign estate as those terms are defined in the Code and any
regulations promulgated thereunder).
Section 3.04 POWER TO CREATE LIEN AND SECURITY. The Mortgagor has
full power and lawful authority to grant, bargain, sell, assign, transfer,
mortgage, and convey a security interest in all of the Mortgaged Property
in the manner and form herein provided and without obtaining the
authorization, approval, consent or waiver of any lessor, sublessor,
Governmental Authority or other party or parties whomsoever.
Section 3.05 REVENUE AND COST BEARING INTEREST. Mortgagor's
ownership of the Hydrocarbon Property and the undivided interests therein
as specified on attached EXHIBIT A will, after giving full effect to all
Permitted Encumbrances, afford Mortgagor not less than those net interests
(expressed as a fraction, percentage or decimal) in the production from or
which is allocated to such Hydrocarbon Property specified as working
interest on attached EXHIBIT A and will cause Mortgagor to bear not more
than that portion (expressed as a fraction, percentage or decimal),
specified as net revenue interest on attached EXHIBIT A, of the costs of
drilling, developing and operating the wells identified on EXHIBIT A.
Section 3.06 RENTALS PAID; LEASES IN EFFECT. All rentals and
royalties due and payable in accordance with the terms of any leases or
subleases comprising a part of the Hydrocarbon Property have been duly paid
or provided for and all leases or subleases comprising a part of the
Hydrocarbon Property are in full force and effect.
Section 3.07 OPERATION BY THIRD PARTIES. All or portions of the
Mortgaged Property may be comprised of interests in the Hydrocarbon
Property which are other than working interests or which may be operated by
a party or parties other than Mortgagor and with respect to all or any such
interests and properties as may be comprised of interests other than
working interests or which may be operated by parties other than Mortgagor,
Mortgagor's covenants as expressed in this Article III are modified to
require that Mortgagor use its best efforts to obtain compliance with such
covenants by the working interest owners or the operator or operators of
such leases or properties.
Section 3.08 ABANDON, SALES. The Mortgagor will not sell, lease,
assign, transfer or otherwise dispose or abandon any of the Mortgaged
Property except as permitted by the Credit Agreement.
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Section 3.09 FAILURE TO PERFORM. The Mortgagor agrees that if the
Mortgagor fails to perform any act or to take any action which the
Mortgagor is required to perform or take hereunder or pay any money which
the Mortgagor is required to pay hereunder, each of the Mortgagee and the
Trustee in the Mortgagor's name or its or their own name may, but shall not
be obligated to, perform or cause to perform such act or take such action
or pay such money, and any expenses so incurred by either of them and any
money so paid by either of them shall be a demand obligation owing by the
Mortgagor to the Mortgagee or the Trustee, as the case may be, and each of
the Mortgagee and the Trustee, upon making such payment, shall be
subrogated to all of the rights of the Person receiving such payment. Each
amount due and owing by Mortgagor to each of the Mortgagee and the Trustee
pursuant to this Mortgage shall bear interest from the date of such
expenditure or payment or other occurrence which gives rise to such amount
being owed to such Person until paid at the Post-Default Rate, and all such
amounts together with such interest thereon shall be a part of the
Indebtedness described in Section 1.03 hereof.
Section 3.10 OPERATION OF MORTGAGED PROPERTY, ETC. Mortgagor will
promptly pay and discharge all rentals, delay rentals, royalties and
indebtedness accruing under, and perform or cause to be performed each and
every act, matter or thing required by, each and all of the assignments,
deeds, leases, sub-leases, contracts and agreements described or referred
to herein or affecting Mortgagor's interests in the Mortgaged Property, and
will do all other things necessary to keep unimpaired Mortgagor's rights
with respect thereto and prevent any forfeiture thereof or default
thereunder. The Mortgaged Property (and properties unitized therewith) has
been maintained, operated and developed in a good and workmanlike manner
and in conformity with all applicable laws and all rules, regulations and
orders of all duly constituted authorities having jurisdiction and in
conformity with the provisions of all leases, subleases or other contracts
comprising a part of the Hydrocarbon Property and other contracts and
agreements forming a part of the Mortgaged Property; specifically in this
connection, (i) after the Effective Date no Mortgaged Property is subject
to having allowable production reduced below the full and regular allowable
(including the maximum permissible tolerance) because of any overproduction
(whether or not the same was permissible at the time) prior to the
Effective Date and (ii) none of the wells comprising a part of the
Mortgaged Property (or properties unitized therewith) are deviated from the
vertical more than the maximum permitted by applicable laws, regulations,
rules and orders, and such wells are, in fact, bottomed under and are
producing from, and the well bores are wholly within, the Mortgaged
Property (or, in the case of wells located on properties unitized
therewith, such unitized properties). Mortgagor will operate the Mortgaged
Property in a careful and efficient manner in accordance with the practices
of the industry and in compliance with all applicable contracts and
agreements and in compliance with all applicable proration and conservation
laws of the jurisdiction in which the Mortgaged Property is situated, and
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all applicable laws, rules and regulations of every other agency and
authority from time to time constituted to regulate the development and
operation of the Mortgaged Property and the production and sale of
Hydrocarbons and other minerals therefrom. Mortgagor will do or cause to
be done such development work as may be reasonably necessary to the prudent
and economical operation of the Mortgaged Property in accordance with the
most approved practices of operators in the industry, including all to be
done that may be appropriate to protect from diminution the productive
capacity of the Mortgaged Property and each producing well thereon
including, without limitation, cleaning out and reconditioning each well
from time to time, plugging and completing at a different level each such
well, drilling a substitute well to conform to changed spacing regulations
and to protect the Mortgaged Property against drainage whenever and as
often as is necessary.
ARTICLE IV
RIGHTS AND REMEDIES
Section 4.01 EVENT OF DEFAULT. An "EVENT OF DEFAULT" under the
Credit Agreement shall be an Event of Default under this Mortgage.
Section 4.02 FORECLOSURE AND SALE.
(a) GENERALLY. If an Event of Default shall occur and be
continuing, Mortgagee shall have the right and option to proceed with
foreclosure by directing the Trustee, or his successors or substitutes in
trust, to proceed with foreclosure and to sell, to the extent permitted by
law, all or any portion of the Mortgaged Property at one or more sales, as
an entirety or in parcels, at such place or places in otherwise such manner
and upon such notice as may be required by law, or, in the absence of any
such requirement, as the Mortgagee may deem appropriate, and to make
conveyance to the purchaser or purchasers. Where the Mortgaged Property is
situated in more than one jurisdiction, notice as above provided shall be
posted and filed in all such jurisdictions (if such notices are required by
law), and all such Mortgaged Property may be sold in any such jurisdiction
and any such notice shall designate the jurisdiction where such Mortgaged
Property is to be sold. Nothing contained in this Section 4.02 shall be
construed so as to limit in any way the Trustee's rights to sell the
Mortgaged Property, or any portion thereof, by private sale if, and to the
extent that, such private sale is permitted under the laws of the
applicable jurisdiction or by public or private sale after entry of a
judgment by any court of competent jurisdiction so ordering. Mortgagor
hereby irrevocably appoints the Trustee to be the attorney of Mortgagor and
in the name and on behalf of Mortgagor to execute and deliver any deeds,
transfers, conveyances, assignments, assurances and notices which Mortgagor
ought to execute and deliver and do and perform any and all such acts and
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things which Mortgagor ought to do and perform under the covenants herein
contained and generally, to use the name of Mortgagor in the exercise of
all or any of the powers hereby conferred on the Trustee. At any such
sale: (i) whether made under the power herein contained or any other legal
enactment, or by virtue of any judicial proceedings or any other legal
right, remedy or recourse, it shall not be necessary for Trustee to have
physically present, or to have constructive possession of, the Mortgaged
Property (Mortgagor hereby covenanting and agreeing to deliver to Trustee
any portion of the Mortgaged Property not actually or constructively
possessed by Trustee immediately upon demand by Trustee) and the title to
and right of possession of any such property shall pass to the purchaser
thereof as completely as if the same had been actually present and
delivered to purchaser at such sale, (ii) each instrument of conveyance
executed by Trustee shall contain a general warranty of title, binding upon
Mortgagor and its successors and assigns, (iii) each and every recital
contained in any instrument of conveyance made by Trustee shall
conclusively establish the truth and accuracy of the matters recited
therein, including, without limitation, nonpayment of the Indebtedness,
advertisement and conduct of such sale in the manner provided herein and
otherwise by law and appointment of any successor Trustee hereunder,
(iv) any and all prerequisites to the validity thereof shall be
conclusively presumed to have been performed, (v) the receipt of Trustee or
of such other party or officer making the sale shall be a sufficient
discharge to the purchaser or purchasers for its purchase money and no such
purchaser or purchasers, or its assigns or personal representatives, shall
thereafter be obligated to see to the application of such purchase money,
or be in any way answerable for any loss, misapplication or nonapplication
thereof, (vi) to the fullest extent permitted by law, Mortgagor shall be
completely and irrevocably divested of all of its right, title, interest,
claim and demand whatsoever, either at law or in equity, in and to the
property sold and such sale shall be a perpetual bar both at law and in
equity against Mortgagor, and against any and all other persons claiming or
to claim the property sold or any part thereof, by, through or under
Mortgagor, and (vii) to the extent and under such circumstances as are
permitted by law, Mortgagee may be a purchaser at any such sale, and shall
have the right, after paying or accounting for all costs of said sale or
sales, to credit the amount of the bid upon the amount of the Indebtedness
(in the order of priority set forth in Section 4.14 hereof) in lieu of cash
payment.
(b) MISSISSIPPI. Any sale of any part of the Mortgaged Property
located in the State of Mississippi shall be made after having published
notice of the day, time, place and terms of sale in a newspaper published
in the county in which the Mortgaged Property is situated for three
consecutive weeks preceding the date of sale; and by posting one notice of
such sale at the courthouse of the county in which the Mortgaged property
is situated for said period of time. The Trustee shall have the power to
select the county or judicial district in which the sale shall be made,
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newspaper advertisement published, and notice of sale posted in the event
the Mortgaged Property is located in more than one county or in two
judicial districts in the same county. The Trustee in said trust shall
have the full power to fix the day, time, place and terms of sale and may
appoint or delegate any one or more persons as agent to perform any act or
acts necessary or incident to any sale held by the Trustee, including the
posting of notices in the conduct of the sale but in the name of and on
behalf of the Trustee, his substitute or successor. In connection with the
foregoing, Mortgagor waives the provisions of Section 89-1-55 of the
Mississippi Code of 1972, recompiled and laws amendatory thereto, if any,
as far as said section restricts the right of the Trustee to offer at sale
more than 160 acres at one time and the Trustee may, in his discretion,
offer the Mortgaged Property as a whole or in such part or parts as he may
deem desirable regardless of the manner in which it may be described. Any
sale made by the Trustee hereunder may be adjourned by announcement at the
time and place appointed for such sale without further notice except as may
be required by law. Mortgagor also waives the provisions of Section 89-1-59
of the Mississippi Code of 1972, recompiled and laws amendatory thereto,
insofar as said section allows the Mortgagor to reinstate an accelerated
debt.
Section 4.03 SUBSTITUTE TRUSTEES AND AGENTS. The Trustee or his
successor or substitute may appoint or delegate any one or more persons as
agent to perform any act or acts necessary or incident to any sale held by
Trustee, including the posting of notices and the conduct of sale, but in
the name and on behalf of Trustee, his successor or substitute. If Trustee
or his successor or substitute shall have given notice of sale hereunder,
any successor or substitute trustee thereafter appointed may complete the
sale and the conveyance of the property pursuant thereto as if such notice
had been given by the successor or substitute trustee conducting the sale.
Section 4.04 JUDICIAL FORECLOSURE; RECEIVERSHIP. If any of the
Indebtedness shall become due and payable and shall not be promptly paid,
the Trustee or Mortgagee shall have the right and power to proceed by a
suit or suits in equity or at law, whether for the specific performance of
any covenant or agreement herein contained or in aid of the execution of
any power herein granted, or for any foreclosure hereunder or for the sale
of the Mortgaged Property under the judgment or decree of any court or
courts of competent jurisdiction, or for the appointment of a receiver
pending any foreclosure hereunder or the sale of the Mortgaged Property
under the order of a court or courts of competent jurisdiction or under
executory or other legal process, or for the enforcement of any other
appropriate legal or equitable remedy. Any money advanced by the Trustee
and/or Mortgagee in connection with any such receivership shall be a demand
obligation (which obligation Mortgagor hereby expressly promises to pay)
owing by Mortgagor to the Trustee and/or Mortgagee and shall bear interest
from the date of making such advance by the Trustee and/or Mortgagee until
paid at the Post-Default Rate.
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Section 4.05 FORECLOSURE FOR INSTALLMENTS. Mortgagee shall also
have the option to proceed with foreclosure in satisfaction of any
installments of the Indebtedness which have not been paid when due either
through the courts or by directing the Trustee or his successors in trust
to proceed with foreclosure in satisfaction of the matured but unpaid
portion of the Indebtedness as if under a full foreclosure, conducting the
sale as herein provided and without declaring the entire principal balance
and accrued interest due; such sale may be made subject to the unmatured
portion of the Indebtedness, and any such sale shall not in any manner
affect the unmatured portion of the Indebtedness, but as to such unmatured
portion of the Indebtedness this Mortgage shall remain in full force and
effect just as though no sale had been made hereunder. It is further
agreed that several sales may be made hereunder without exhausting the
right of sale for any unmatured part of the Indebtedness, it being the
purpose hereof to provide for a foreclosure and sale of the security for
any matured portion of the Indebtedness without exhausting the power to
foreclose and sell the Mortgaged Property for any subsequently maturing
portion of the Indebtedness.
Section 4.06 SEPARATE SALES The Mortgaged Property may be sold in
one or more parcels and in such manner and order as Mortgagee, in its sole
discretion, may elect, it being expressly understood and agreed that the
right of sale arising out of any Event of Default shall not be exhausted by
any one or more sales.
Section 4.07 POSSESSION OF MORTGAGED PROPERTY. Mortgagor agrees to
the full extent that it lawfully may, that, in case one or more of the
Events of Default shall have occurred and shall not have been remedied,
then, and in every such case, the Trustee or Mortgagee shall have the right
and power to enter into and upon and take possession of all or any part of
the Mortgaged Property in the possession of Mortgagor, its successors or
assigns, or its or their agents or servants, and may exclude Mortgagor, its
successors or assigns, and all persons claiming under Mortgagor, and its or
their agents or servants wholly or partly therefrom; and, holding the same,
the Trustee may use, administer, manage, operate and control the Mortgaged
Property and conduct the business thereof to the same extent as Mortgagor,
its successors or assigns, might at the time do and may exercise all rights
and powers of Mortgagor, in the name, place and stead of Mortgagor, or
otherwise as the Trustee shall deem best. All costs, expenses and
liabilities of every character incurred by the Trustee and/or Mortgagee in
administering, managing, operating, and controlling the Mortgaged Property
shall constitute a demand obligation (which obligation Mortgagor hereby
expressly promises to pay) owing by Mortgagor to the Trustee and/or
Mortgagee and shall bear interest from date of expenditure until paid at
the Post-Default Rate, all of which shall constitute a portion of the
Indebtedness and shall be secured by this Mortgage and all other Security
Instruments.
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Section 4.08 OCCUPANCY AFTER FORECLOSURE. In the event there is a
foreclosure sale hereunder and at the time of such sale Mortgagor or
Mortgagor's heirs, devisees, representatives, successors or assigns or any
other person claiming any interest in the Mortgaged Property by, through or
under Mortgagor, are occupying or using the Mortgaged Property or any part
thereof, each and all shall immediately become the tenant of the purchaser
at such sale, which tenancy shall be a tenancy from day to day, terminable
at the will of either the landlord or tenant, or at a reasonable rental per
day based upon the value of the property occupied, such rental to be due
daily to the purchaser; to the extent permitted by applicable law, the
purchaser at such sale shall, notwithstanding any language herein
apparently to the contrary, have the sole option to demand immediate
possession following the sale or to permit the occupants to remain as
tenants at will. In the event the tenant fails to surrender possession of
said property upon demand, the purchaser shall be entitled to institute and
maintain a summary action for possession of the Mortgaged Property (such as
an action for forcible entry and detainer) in any court having
jurisdiction.
Section 4.09 REMEDIES CUMULATIVE, CONCURRENT AND NONEXCLUSIVE.
Every right, power and remedy herein given to the Trustee or Mortgagee
shall be cumulative and in addition to every other right, power and remedy
herein specifically given or now or hereafter existing in equity, at law or
by statute (including specifically those granted by the Applicable UCC in
effect and applicable to the Mortgaged Property or any portion thereof)
each and every right, power and remedy whether specifically herein given or
otherwise existing may be exercised from time to time and so often and in
such order as may be deemed expedient by the Trustee or Mortgagee, and the
exercise, or the beginning of the exercise, of any such right, power or
remedy shall not be deemed a waiver of the right to exercise, at the same
time or thereafter any other right, power or remedy. No delay or omission
by the Trustee or Mortgagee in the exercise of any right, power or remedy
shall impair any such right, power or remedy or operate as a waiver thereof
or of any other right, power or remedy then or thereafter existing.
Section 4.10 NO RELEASE OF OBLIGATIONS. Neither Mortgagor, any
guarantor nor any other person hereafter obligated for payment of all or
any part of the Indebtedness shall be relieved of such obligation by reason
of (a) the failure of Trustee to comply with any request of Mortgagor, or
any guarantor or any other person so obligated to foreclose the lien of
this Mortgage or to enforce any provision hereunder or under the Credit
Agreement; (b) the release, regardless of consideration, of the Mortgaged
Property or any portion thereof or interest therein or the addition of any
other property to the Mortgaged Property; (c) any agreement or stipulation
between any subsequent owner of the Mortgaged Property and Mortgagee
extending, renewing, rearranging or in any other way modifying the terms of
this Mortgage without first having obtained the consent of, given notice to
or paid any consideration to Mortgagor, any guarantor or such other Person,
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and in such event Mortgagor, guarantor and all such other Persons shall
continue to be liable to make payment according to the terms of any such
extension or modification agreement unless expressly released and
discharged in writing by Mortgagee; or (d) by any other act or occurrence
save and except the complete payment of the Indebtedness and the complete
fulfillment of all obligations hereunder or under the Credit Agreement.
Section 4.11 RELEASE OF AND RESORT TO COLLATERAL. Mortgagee may
release, regardless of consideration, any part of the Mortgaged Property
without, as to the remainder, in any way impairing, affecting,
subordinating or releasing the Lien or security interest created in or
evidenced by this Mortgage or its stature as a first and prior Lien and
security interest in and to the Mortgaged Property, and without in any way
releasing or diminishing the liability of any person or entity liable for
the repayment of the Indebtedness. For payment of the Indebtedness,
Mortgagee may resort to any other security therefor held by Mortgagee or
Trustee in such order and manner as Mortgagee may elect.
Section 4.12 WAIVER OF REDEMPTION, NOTICE AND MARSHALLING OF ASSETS,
ETC. To the fullest extent permitted by law, Mortgagor hereby irrevocably
and unconditionally waives and releases (a) all benefits that might accrue
to Mortgagor by virtue of any present or future moratorium law or other law
exempting the Mortgaged Property from attachment, levy or sale on execution
or providing for any appraisement, valuation, stay of execution, exemption
from civil process, redemption (provided, however, that if the laws of any
state in which the Mortgaged Properties are located do not permit the
redemption period to be waived, the redemption period is specifically
reduced to the minimum amount of time allowable by statute) or extension of
time for payment; (b) presentment, demand, notice of non-payment, protest
and notice of protest and dishonor, notice of Event of Default, notice of
intent to accelerate maturity of the Indebtedness and notice of
acceleration of the maturity thereof and any other notice in connection
with the Indebtedness or of Trustee's election to exercise or his actual
exercise of any right, remedy or recourse provided for hereunder or under
the Credit Agreement; and (c) any right to a marshalling of assets or a
sale in inverse order of alienation. If any law referred to in this
Mortgage and now in force, of which Mortgagor or its successor or
successors might take advantage despite the provisions hereof, shall
hereafter be repealed or cease to be in force, such law shall thereafter be
deemed not to constitute any part of the contract herein contained or to
preclude the operation or application of the provisions hereof.
Section 4.13 DISCONTINUANCE OF PROCEEDINGS In case Mortgagee shall
have proceeded to invoke any right, remedy or recourse permitted hereunder
or under the Credit Agreement and shall thereafter elect to discontinue or
abandon same for any reason, Mortgagee shall have the unqualified right so
to do and, in such an event, Mortgagor and Mortgagee shall be restored to
their former positions with respect to the Indebtedness, this Mortgage, the
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Credit Agreement, the Mortgaged Property and otherwise, and the rights,
remedies, recourses and powers of Mortgagee shall continue as if same had
never been invoked.
Section 4.14 APPLICATION OF PROCEEDS. The proceeds of any sale of
the Mortgaged Property or any part thereof and all other monies received by
the Trustee or Mortgagee in any proceedings for the enforcement hereof or
otherwise, whose application has not elsewhere herein been specifically
provided for, shall be applied:
(a) first, to the payment of all expenses incurred by the Trustee or
Mortgagee incident to the enforcement of this Mortgage, the Credit
Agreement or any of the Indebtedness (including, without limiting the
generality of the foregoing, expenses of any entry or taking of possession,
of any sale, of advertisement thereof, and of conveyances, and court costs,
compensation of agents and employees, legal fees and a reasonable
commission to the Trustee acting), and to the payment of all other charges,
expenses, liabilities and advances incurred or made by the Trustee or
Mortgagee under this Mortgage or in executing any trust or power hereunder;
(b) second to payment of the Indebtedness in such order and manner as
Mortgagee may elect; and
(c) third, to Mortgagor; or as otherwise required by any Governmental
Requirement.
Section 4.15 RESIGNATION OF OPERATOR. In addition to all rights and
remedies under this Mortgage, at law and in equity, if any Event of Default
shall occur and Trustee or the Mortgagee shall exercise any remedies under
this Mortgage with respect to any portion of the Mortgaged Property (or
Mortgagor shall transfer any Mortgaged Property "in lieu of" foreclosure),
the Mortgagee or the Trustee shall have the right to request that any
operator of any Mortgaged Property which is either Mortgagor or any
Affiliate of Mortgagor to resign as operator under the joint operating
agreement applicable thereto, and no later than 60 days after receipt by
Mortgagor of any such request, Mortgagor shall resign (or cause such other
party to resign) as operator of such Mortgaged Property.
Section 4.16 INDEMNITY. IN CONNECTION WITH ANY ACTION TAKEN BY THE
TRUSTEE AND/OR MORTGAGEE PURSUANT TO THIS MORTGAGE, THE TRUSTEE AND/OR
MORTGAGEE AND THEIR OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES,
AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS ("INDEMNIFIED PARTIES") SHALL
NOT BE LIABLE FOR ANY LOSS SUSTAINED BY MORTGAGOR RESULTING FROM AN
ASSERTION THAT MORTGAGEE HAS RECEIVED FUNDS FROM THE PRODUCTION OF
HYDROCARBONS CLAIMED BY THIRD PERSONS OR ANY ACT OR OMISSION OF ANY
INDEMNIFIED PARTY IN ADMINISTERING, MANAGING, OPERATING OR CONTROLLING THE
MORTGAGED PROPERTY INCLUDING SUCH LOSS WHICH MAY RESULT FROM THE ORDINARY
NEGLIGENCE OF AN INDEMNIFIED PARTY UNLESS SUCH LOSS IS CAUSED BY THE
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WILLFUL MISCONDUCT AND BAD FAITH OF AN INDEMNIFIED PARTY, NOR SHALL THE
TRUSTEE AND/OR MORTGAGEE BE OBLIGATED TO PERFORM OR DISCHARGE ANY
OBLIGATION, DUTY OR LIABILITY OF MORTGAGOR. MORTGAGOR SHALL AND DOES HEREBY
AGREE TO INDEMNIFY EACH INDEMNIFIED PARTY FOR, AND TO HOLD EACH INDEMNIFIED
PARTY HARMLESS FROM, ANY AND ALL LIABILITY, LOSS OR DAMAGE WHICH MAY OR
MIGHT BE INCURRED BY ANY INDEMNIFIED PARTY BY REASON OF THIS MORTGAGE OR
THE EXERCISE OF RIGHTS OR REMEDIES HEREUNDER; SHOULD THE TRUSTEE AND/OR
MORTGAGEE MAKE ANY EXPENDITURE ON ACCOUNT OF ANY SUCH LIABILITY, LOSS OR
DAMAGE, THE AMOUNT THEREOF, INCLUDING COSTS, EXPENSES AND REASONABLE
ATTORNEYS' FEES, SHALL BE A DEMAND OBLIGATION (WHICH OBLIGATION MORTGAGOR
HEREBY EXPRESSLY PROMISES TO PAY) OWING BY MORTGAGOR TO THE TRUSTEE AND/OR
MORTGAGEE AND SHALL BEAR INTEREST FROM THE DATE EXPENDED UNTIL PAID AT THE
POST-DEFAULT RATE, SHALL BE A PART OF THE INDEBTEDNESS AND SHALL BE SECURED
BY THIS MORTGAGE AND ANY OTHER SECURITY INSTRUMENT. MORTGAGOR HEREBY
ASSENTS TO, RATIFIES AND CONFIRMS ANY AND ALL ACTIONS OF THE TRUSTEE AND/OR
MORTGAGEE WITH RESPECT TO THE MORTGAGED PROPERTY TAKEN UNDER THIS MORTGAGE.
THE LIABILITIES OF THE MORTGAGOR AS SET FORTH IN THIS SECTION 4.16 SHALL
SURVIVE THE TERMINATION OF THIS MORTGAGE.
ARTICLE V
THE TRUSTEE
Section 5.01 DUTIES, RIGHTS, AND POWERS OF TRUSTEE. It shall be no
part of the duty of the Trustee to see to any recording, filing or
registration of this Mortgage or any other instrument in addition or
supplemental thereto, or to give any notice thereof, or to see to the
payment of or be under any duty in respect of any tax or assessment or
other governmental charge which may be levied or assessed on the Mortgaged
Property, or any part thereof, or against Mortgagor, or to see to the
performance or observance by Mortgagor of any of the covenants and
agreements contained herein. The Trustee shall not be responsible for the
execution, acknowledgment or validity of this Mortgage or of any instrument
in addition or supplemental hereto or for the sufficiency of the security
purported to be created hereby, and makes no representation in respect
thereof or in respect of the rights of Mortgagee. The Trustee shall have
the right to advise with counsel upon any matters arising hereunder and
shall be fully protected in relying as to legal matters on the advice of
counsel. The Trustee shall not incur any personal liability hereunder
except for Trustee's own willful misconduct; and the Trustee shall have the
right to rely on any instrument, document or signature authorizing or
supporting any action taken or proposed to be taken by him hereunder,
believed by him in good faith to be genuine.
Section 5.02 SUCCESSOR TRUSTEE. The Trustee may resign by written
notice addressed to Mortgagee or be removed at any time with or without
cause by an instrument in writing duly executed on behalf of Mortgagee. In
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case of the death, resignation or removal of the Trustee, a successor
trustee may be appointed by Mortgagee by instrument of substitution
complying with any applicable requirements of law, or, in the absence of
any such requirement, without other formality than appointment and
designation in writing. Written notice of such appointment and designation
shall be given by Mortgagee to Mortgagor, but the validity of any such
appointment shall not be impaired or affected by failure to give such
notice or by any defect therein. Such appointment and designation shall be
full evidence of the right and authority to make the same and of all the
facts therein recited, and, upon the making of any such appointment and
designation, this Mortgage shall vest in the successor trustee all the
estate and title in and to all of the Mortgaged Property, and the successor
trustee shall thereupon succeed to all of the rights, powers, privileges,
immunities and duties hereby conferred upon the Trustee named herein, and
one such appointment and designation shall not exhaust the right to appoint
and designate a successor trustee hereunder but such right may be exercised
repeatedly as long as any Indebtedness remains unpaid hereunder. To
facilitate the administration of the duties hereunder, Mortgagee may
appoint multiple trustees to serve in such capacity or in such
jurisdictions as Mortgagee may designate.
Section 5.03 RETENTION OF MONEYS. All moneys received by Trustee
shall, until used or applied as herein provided, be held in trust for the
purposes for which they were received, but need not be segregated in any
manner from any other moneys (except to the extent required by law), and
Trustee shall be under no liability for interest on any moneys received by
him hereunder.
ARTICLE VI
MISCELLANEOUS
Section 6.01 INSTRUMENT CONSTRUED AS MORTGAGE, ETC. With respect to
any portions of the Mortgaged Property located in any state or other
jurisdiction the laws of which do not provide for the use or enforcement of
a deed of trust or the office, rights and authority of the Trustee as
herein provided, the general language of conveyance hereof to the Trustee
is intended and the same shall be construed as words of mortgage unto and
in favor of Mortgagee and the rights and authority granted to the Trustee
herein may be enforced and asserted by Mortgagee in accordance with the
laws of the jurisdiction in which such portion of the Mortgaged Property is
located and the same may be foreclosed at the option of Mortgagee as to any
or all such portions of the Mortgaged Property in any manner permitted by
the laws of the jurisdiction in which such portions of the Mortgaged
Property is situated. This Mortgage may be construed as a mortgage, deed
of trust, chattel mortgage, conveyance, assignment, security agreement,
pledge, financing statement, hypothecation or contract, or any one or more
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of them, in order fully to effectuate the lien hereof and the purposes and
agreements herein set forth.
Section 6.02 RELEASE OF MORTGAGE. If all Indebtedness secured
hereby shall be paid and the Credit Agreement terminated, Mortgagee shall
forthwith cause satisfaction and discharge of this Mortgage to be entered
upon the record at the expense of Mortgagor and shall execute and deliver
or cause to be executed and delivered such instruments of satisfaction and
reassignment as may be appropriate. Otherwise, this Mortgage shall remain
and continue in full force and effect.
Section 6.03 SEVERABILITY. If any provision hereof is invalid or
unenforceable in any jurisdiction, the other provisions hereof shall remain
in full force and effect in such jurisdiction and the remaining provisions
hereof shall be liberally construed in favor of the Trustee and Mortgagee
in order to effectuate the provisions hereof, and the invalidity or
unenforceability of any provision hereof in any jurisdiction shall not
affect the validity or enforceability of any such provision in any other
jurisdiction.
Section 6.04 SUCCESSORS AND ASSIGNS OF PARTIES. The term "Lenders"
as used herein shall mean and include any legal owner, holder, assignee or
pledgee of any of the Indebtedness secured hereby. The terms used to
designate Trustee, Mortgagee and Mortgagor shall be deemed to include the
respective heirs, legal representatives, successors and assigns of such
parties.
Section 6.05 SATISFACTION OF PRIOR ENCUMBRANCE. To the extent that
proceeds of the Credit Agreement are used to pay indebtedness secured by
any outstanding lien, security interest, charge or prior encumbrance
against the Mortgaged Property, such proceeds have been advanced by
Mortgagee at Mortgagor's request, and Mortgagee shall be subrogated to any
and all rights, security interests and liens owned by any owner or holder
of such outstanding liens, security interests, charges or encumbrances,
irrespective of whether said liens, security interests, charges or
encumbrances are released, and it is expressly understood that, in
consideration of the payment of such other indebtedness by Mortgagee,
Mortgagor hereby waives and releases all demands and causes of action for
offsets and payments to, upon and in connection with the said indebtedness.
Section 6.06 SUBROGATION OF TRUSTEE. This Mortgage is made with
full substitution and subrogation of the Trustee and his successors in this
trust and his and their assigns in and to all covenants and warranties by
others heretofore given or made in respect of the Mortgaged Property or any
part thereof.
Section 6.07 NATURE OF COVENANTS. The covenants and agreements
herein contained shall constitute covenants running with the land and
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interests covered or affected hereby and shall be binding upon the heirs,
legal representatives, successors and assigns of the parties hereto.
Section 6.08 NOTICES. All notices, requests, consents, demands and
other communications required or permitted hereunder shall be given in
accordance with the terms of Section 12.02 of the Credit Agreement or as
required by applicable Governmental Requirement.
Section 6.09 COUNTERPARTS. This Mortgage is being executed in
several counterparts, all of which are identical, except that to facilitate
recordation, if the Mortgaged Property is situated in more than one county,
descriptions of only those portions of the Mortgaged Property located in
the county in which a particular counterpart is recorded shall be attached
as EXHIBIT A thereto. An EXHIBIT A containing a description of all
Mortgaged Property wheresoever situated will be attached to that certain
counterpart to be attached to a Financing Statement and filed with the
Secretary of State of Mississippi in the Uniform Commercial Code Records.
Each of such counterparts shall for all purposes be deemed to be an
original and all such counterparts shall together constitute but one and
the same instrument.
SECTION 6.10 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS MORTGAGE; AND AGREES
THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS MORTGAGE;
THAT IT HAS IN FACT READ THIS MORTGAGE AND IS FULLY INFORMED AND HAS FULL
NOTICE AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS MORTGAGE;
THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE
THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS MORTGAGE; AND
HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS MORTGAGE; AND
THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS MORTGAGE RESULT IN ONE
PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION
AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY.
EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE
VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS MORTGAGE ON
THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR
THAT THE PROVISION IS NOT "CONSPICUOUS."
Section 6.11 GOVERNING LAW. THIS MORTGAGE SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS,
EXCEPT TO THE EXTENT THAT THE LAW OF THE JURISDICTION WHERE THE MORTGAGED
PROPERTY IS LOCATED OR SOME OTHER JURISDICTION MANDATORILY APPLIES.
[SIGNATURES BEGIN NEXT PAGE]
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WITNESS THE EXECUTION HEREOF, this 6th day of February, 1998, to be
effective as of the 9th day of February, 1998 (the "EFFECTIVE DATE").
MORTGAGOR:
MILLER OIL CORPORATION, a Michigan
corporation
By:_____________________________________
Kelly E. Miller
President
The name and address of the Debtor/Mortgagor is:
MILLER OIL CORPORATION
3014 Logan Valley Road
Traverse City, Michigan 49685-0348
Federal Tax I.D. 38-2607711
The name and address of the Secured Party/Mortgagee is:
Bank of Montreal, as Agent
700 Louisiana, Suite 4400
Houston, Texas 77002
Federal Tax I.D. 134941092
S-1
<PAGE>
THE STATE OF TEXAS <Section>
<Section>
COUNTY OF HARRI <Section>
Personally appeared before me, the undersigned authority in and for
said County and State, within my jurisdiction, the within named Kelly E.
Miller, who acknowledges that he is President of MILLER OIL CORPORATION,
a Michigan corporation, and that for and on behalf of the said corporation,
and as its act and deed he executed the above and foregoing instrument,
after first having been duly authorized by said corporation to do so.
WITNESS my hand and official stamp or seal, this __th day of February
1998.
___________________________________
Notary Public
S-2
<PAGE>
WHEN RECORDED RETURN TO:
VINSON & ELKINS L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, TX 77002-6760
Attn: Richard H. Mourglia
MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
(TEXAS)
FROM
MILLER OIL CORPORATION
(TAXPAYER I.D. 38-2607711)
TO
JAMES WHITMORE, AS TRUSTEE
FOR THE BENEFIT OF
BANK OF MONTREAL, AS AGENT
(TAXPAYER I.D. 134941092)
<PAGE>
<PAGE>
TABLE OF CONTENTS
ARTICLE I GRANT OF LIEN AND INDEBTEDNESS SECURED
Section 1.01 GRANT OF LIENS. . . . . . . . . . . . . . . . . . . . .1
Section 1.02 GRANT OF SECURITY INTEREST. . . . . . . . . . . . . . .4
Section 1.03 INDEBTEDNESS SECURED. . . . . . . . . . . . . . . . . .4
Section 1.04 FIXTURE FILING, ETC.. . . . . . . . . . . . . . . . . .5
Section 1.05 PRO RATA BENEFIT. . . . . . . . . . . . . . . . . . . .5
Section 1.06 DEFINED TERMS . . . . . . . . . . . . . . . . . . . . .6
ARTICLE II ASSIGNMENT OF PRODUCTION
Section 2.01 ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . .6
Section 2.02 RIGHTS UNDER TEXAS ACT. . . . . . . . . . . . . . . . .7
Section 2.03 NO MODIFICATION OF PAYMENT OBLIGATIONS. . . . . . . . .7
ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.01 TITLE . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 3.02 DEFEND TITLE. . . . . . . . . . . . . . . . . . . . . .7
Section 3.03 NOT A FOREIGN PERSON. . . . . . . . . . . . . . . . . .7
Section 3.04 POWER TO CREATE LIEN AND SECURITY . . . . . . . . . . .8
Section 3.05 REVENUE AND COST BEARING INTEREST . . . . . . . . . . .8
Section 3.06 RENTALS PAID; LEASES IN EFFECT. . . . . . . . . . . . .8
Section 3.07 OPERATION BY THIRD PARTIES. . . . . . . . . . . . . . .8
Section 3.08 ABANDON, SALES. . . . . . . . . . . . . . . . . . . . .8
Section 3.09 FAILURE TO PERFORM. . . . . . . . . . . . . . . . . . .8
Section 3.10 OPERATION OF MORTGAGED PROPERTY, ETC. . . . . . . . . .9
ARTICLE IV RIGHTS AND REMEDIES
Section 4.01 EVENT OF DEFAULT. . . . . . . . . . . . . . . . . . . 10
Section 4.02 FORECLOSURE AND SALE. . . . . . . . . . . . . . . . . 10
Section 4.03 SUBSTITUTE TRUSTEES AND AGENTS. . . . . . . . . . . . 11
Section 4.04 JUDICIAL FORECLOSURE; RECEIVERSHIP. . . . . . . . . . 11
Section 4.05 FORECLOSURE FOR INSTALLMENTS. . . . . . . . . . . . . 11
Section 4.06 SEPARATE SALES. . . . . . . . . . . . . . . . . . . . 12
Section 4.07 POSSESSION OF MORTGAGED PROPERTY. . . . . . . . . . . 12
Section 4.08 OCCUPANCY AFTER FORECLOSURE . . . . . . . . . . . . . 12
Section 4.09 REMEDIES CUMULATIVE, CONCURRENT AND NONEXCLUSIVE. . . 12
Section 4.10 NO RELEASE OF OBLIGATIONS . . . . . . . . . . . . . . 13
Section 4.11 RELEASE OF AND RESORT TO COLLATERAL . . . . . . . . . 13
Section 4.12 WAIVER OF REDEMPTION, NOTICE AND MARSHALLING OF ASSETS,
ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.13 DISCONTINUANCE OF PROCEEDINGS . . . . . . . . . . . . 14
Section 4.14 APPLICATION OF PROCEEDS . . . . . . . . . . . . . . . 14
Section 4.15 RESIGNATION OF OPERATOR . . . . . . . . . . . . . . . 14
Section 4.16 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . 15
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ARTICLE V THE TRUSTEE
Section 5.01 DUTIES, RIGHTS, AND POWERS OF TRUSTEE . . . . . . . . 15
Section 5.02 SUCCESSOR TRUSTEE . . . . . . . . . . . . . . . . . . 16
Section 5.03 RETENTION OF MONEYS . . . . . . . . . . . . . . . . . 16
ARTICLE VI MISCELLANEOUS
Section 6.01 INSTRUMENT CONSTRUED AS MORTGAGE, ETC.. . . . . . . . 16
Section 6.02 RELEASE OF MORTGAGE . . . . . . . . . . . . . . . . . 17
Section 6.03 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . 17
Section 6.04 SUCCESSORS AND ASSIGNS OF PARTIES . . . . . . . . . . 17
Section 6.05 SATISFACTION OF PRIOR ENCUMBRANCE . . . . . . . . . . 17
Section 6.06 SUBROGATION OF TRUSTEE. . . . . . . . . . . . . . . . 17
Section 6.07 NATURE OF COVENANTS . . . . . . . . . . . . . . . . . 17
Section 6.08 NOTICES . . . . . . . . . . . . . . . . . . . . . . . 17
Section 6.09 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . 18
SECTION 6.10 EXCULPATION PROVISIONS. . . . . . . . . . . . . . . . 18
Exhibit A - Mortgaged Property
Exhibit B - Agreements
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<PAGE>
MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
This MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY
AGREEMENT AND FINANCING STATEMENT (this "MORTGAGE") is entered into as of
the effective time and date hereinafter stated (the "EFFECTIVE DATE") by
MILLER OIL CORPORATION, whose address for notice is 3014 Logan Valley Road,
Traverse City, Michigan 49685-0348 ("MORTGAGOR"), to James Whitmore, as
Trustee, whose address for notice is 700 Louisiana, Suite 4400, Houston,
Texas 77002 ("TRUSTEE") for the benefit of BANK OF MONTREAL with offices at
700 Louisiana, Suite 4400, Houston, Texas 77002, as Agent (in such
capacity, "MORTGAGEE") for itself and such other financial institutions
(collectively called the "LENDERS") which are or hereafter become a party
to the Credit Agreement (hereinafter defined).
R E C I T A L S:
A. On even date herewith, Mortgagor, Mortgagee, and the lenders
parties thereto (the "LENDERS") are executing a Credit Agreement (such
agreement, as may from time to time be amended or supplemented, called the
"CREDIT AGREEMENT") pursuant to which, upon the terms and conditions stated
therein, the Lenders agree to make loans to Mortgagor.
B. The Lenders have conditioned their obligations under the Credit
Agreement upon the execution and delivery by Mortgagor of this Mortgage,
and Mortgagor has agreed to enter into this Mortgage.
C. Therefore, in order to comply with the terms and conditions of
the Credit Agreement and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Mortgagor hereby
agrees with Mortgagee as follows:
ARTICLE I
GRANT OF LIEN AND INDEBTEDNESS SECURED
Section 1.01 GRANT OF LIENS. To secure payment of the Indebtedness
(as hereinafter defined) and the performance of the covenants and
obligations herein contained, Mortgagor does by these presents hereby
GRANT, BARGAIN, SELL, ASSIGN, MORTGAGE, TRANSFER and CONVEY unto Trustee
and Trustee's successors and substitutes in trust hereunder, for the use
and benefit of Mortgagee, the real and personal property, rights, titles,
interests and estates described in the following paragraphs (a) through (g)
(collectively called the "MORTGAGED PROPERTY"):
(a) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to the oil and gas leases and/or oil, gas and
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other mineral leases and other interests and estates and the lands and
premises covered or affected thereby which are described on EXHIBIT A
hereto (collectively called the "HYDROCARBON PROPERTY") or which
Hydrocarbon Property is otherwise referred to herein, and specifically, but
without limitation, the undivided interests of Mortgagor which are more
particularly described on attached EXHIBIT A.
(b) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to (i) the properties now or hereafter pooled
or unitized with the Hydrocarbon Property; (ii) all presently existing or
future unitization, communitization, pooling agreements and declarations of
pooled units and the units created thereby (including, without limitation,
all units created under orders, regulations, rules or other official acts
of any Federal, State or other governmental body or agency having
jurisdiction and any units created solely among working interest owners
pursuant to operating agreements or otherwise) which may affect all or any
portion of the Hydrocarbon Property including, without limitation, those
units which may be described or referred to on attached EXHIBIT A;
(iii) all operating agreements, production sales or other contracts,
farmout agreements, farm-in agreements, participation agreements,
exploration agreements, joint venture agreements, area of mutual interest
agreements, assignments, equipment leases and other agreements described or
referred to in this Mortgage or which relate to any of the Hydrocarbon
Property or interests in the Hydrocarbon Property described or referred to
herein or on attached EXHIBIT A or to the production, sale, purchase,
exchange, processing, handling, storage, transporting or marketing of the
Hydrocarbons (hereinafter defined) from or attributable to such Hydrocarbon
Property or interests, including without limitation, all such agreements
described in EXHIBIT B attached hereto; (iv) all geological, geophysical,
engineering, accounting, title, legal, and other technical or business data
concerning the Mortgaged Property, the Hydrocarbons, or any other item of
Property which are in the possession of Mortgagor or in which Mortgagor can
otherwise grant a security interest, and all books, files, records,
magnetic media, computer records, and other forms of recording or obtaining
access to such data; and (v) the Hydrocarbon Property described on attached
EXHIBIT A and covered by this Mortgage even though Mortgagor's interests
therein be incorrectly described or a description of a part or all of such
Hydrocarbon Property or Mortgagor's interests therein be omitted; it being
intended by Mortgagor and Mortgagee herein to cover and affect hereby all
interests which Mortgagor may now own or may hereafter acquire in and to
the Hydrocarbon Property notwithstanding that the interests as specified on
EXHIBIT A may be limited to particular lands, specified depths or
particular types of property interests.
(c) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to all oil, gas, casinghead gas, condensate,
distillate, liquid hydrocarbons, gaseous hydrocarbons and all products
refined therefrom and all other minerals (collectively called the
"HYDROCARBONS") in and under and which may be produced and saved from or
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attributable to the Hydrocarbon Property, the lands pooled or unitized
therewith and Mortgagor's interests therein, including all oil in tanks and
all rents, issues, profits, proceeds, products, revenues and other income
from or attributable to the Hydrocarbon Property, the lands pooled or
unitized therewith and Mortgagor's interests therein which are subjected or
required to be subjected to the liens and security interests of this
Mortgage.
(d) All tenements, hereditaments, appurtenances and properties in
anywise appertaining, belonging, affixed or incidental to the Hydrocarbon
Property, rights, titles, interests and estates described or referred to in
paragraphs (a) and (b) above, which are now owned or which may hereafter be
acquired by Mortgagor, including, without limitation, any and all property,
real or personal, now owned or hereafter acquired and situated upon, used,
held for use, or useful in connection with the operating, working or
development of any of such Hydrocarbon Property or the lands pooled or
unitized therewith (excluding drilling rigs, trucks, automotive equipment
or other personal property which may be taken to the premises for the
purpose of drilling a well or for other similar temporary uses) and
including any and all oil wells, gas wells, injection wells or other wells,
buildings, structures, field separators, liquid extraction plants, plant
compressors, pumps, pumping units, pipelines, sales and flow lines,
gathering systems, field gathering systems, salt water disposal facilities,
tanks and tank batteries, fixtures, valves, fittings, machinery and parts,
engines, boilers, meters, apparatus, equipment, appliances, tools,
implements, cables, wires, towers, casing, tubing and rods, surface leases,
rights-of-way, easements, servitudes, licenses and other surface and
subsurface rights together with all additions, substitutions, replacements,
accessions and attachments to any and all of the foregoing properties.
(e) Any property that may from time to time hereafter, by delivery or
by writing of any kind, be subjected to the lien and security interest
hereof by Mortgagor or by anyone on Mortgagor's behalf; and the Trustee is
hereby authorized to receive the same at any time as additional security
hereunder.
(f) All of the rights, titles and interests of every nature
whatsoever now owned or hereafter acquired by Mortgagor in and to the
Hydrocarbon Property rights, titles, interests and estates and every part
and parcel thereof, including, without limitation, the Hydrocarbon Property
rights, titles, interests and estates as the same may be enlarged by the
discharge of any payments out of production or by the removal of any
charges or Permitted Encumbrances (as hereinafter defined in Section 3.01)
to which any of the Hydrocarbon Property rights, titles, interests or
estates are subject, or otherwise; all rights of Mortgagor to liens and
security interests securing payment of proceeds from the sale of production
from the Mortgaged Property, including, but not limited to, those liens and
security interests provided in Tex. Bus. & Com. Code Ann. <Section>9.319
(Tex. UCC) (Vernon Supp. 1989) ("<Section>9.319 TEX. UCC"), as amended from
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time to time; together with any and all renewals and extensions of any of
the Hydrocarbon Property rights, titles, interests or estates; all
contracts and agreements supplemental to or amendatory of or in
substitution for the contracts and agreements described or mentioned above;
and any and all additional interests of any kind hereafter acquired by
Mortgagor in and to the Hydrocarbon Property rights, titles, interests or
estates.
(g) All accounts, contract rights, inventory, general intangibles,
insurance contracts and insurance proceeds constituting a part of, relating
to or arising out of those portions of the Mortgaged Property which are
described in paragraphs (a) through (f) above and all proceeds and products
of all such portions of the Mortgaged Property and payments in lieu of
production (such as "take or pay" payments), whether such proceeds or
payments are goods, money, documents, instruments, chattel paper,
securities, accounts, general intangibles, fixtures, real property, or
other assets.
Any fractions or percentages specified on attached EXHIBIT A in
referring to Mortgagor's interests are solely for purposes of the
warranties made by Mortgagor pursuant to Sections 3.01 and 3.05 hereof and
shall in no manner limit the quantum of interest affected by this
Section 1.01 with respect to any Hydrocarbon Property or with respect to
any unit or well identified on said EXHIBIT A.
TO HAVE AND TO HOLD the Mortgaged Property unto the Trustee and to his
successors and assigns forever to secure the payment of the Indebtedness
(hereinafter defined) and to secure the performance of the covenants,
agreements, and obligations of the Mortgagor herein contained.
Section 1.02 GRANT OF SECURITY INTEREST. To further secure the
Indebtedness, Mortgagor hereby grants to Mortgagee a security interest in
and to the Mortgaged Property (whether now or hereafter acquired by
operation of law or otherwise) insofar as the Mortgaged Property consists
of equipment, accounts, contract rights, general intangibles, insurance
contracts, insurance proceeds, inventory, Hydrocarbons, fixtures and any
and all other personal property of any kind or character defined in and
subject to the provisions of the Texas Business and Commerce Code, Chapters
1 through 9 ("TEXAS UCC"), including the proceeds and products from any and
all of such personal property. Upon the happening of any of the Events of
Default, Mortgagee is and shall be entitled to all of the rights, powers
and remedies afforded a secured party by the Texas UCC with reference to
the personal property and fixtures in which Mortgagee has been granted a
security interest herein, or the Trustee or Mortgagee may proceed as to
both the real and personal property covered hereby in accordance with the
rights and remedies granted under this Mortgage in respect of the real
property covered hereby. Such rights, powers and remedies shall be
cumulative and in addition to those granted to the Trustee or Mortgagee
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under any other provision of this Mortgage or under any other Security
Instrument. Written notice mailed to Mortgagor as provided herein at least
five (5) days prior to the date of public sale of any part of the Mortgaged
Property which is personal property subject to the provisions of the Texas
UCC, or prior to the date after which private sale of any such part of the
Mortgaged Property will be made, shall constitute reasonable notice.
Section 1.03 INDEBTEDNESS SECURED. This Mortgage is executed and
delivered by Mortgagor to secure and enforce the following (the
"INDEBTEDNESS"):
(a) Payment of and performance of any and all indebtedness,
obligations and liabilities of Mortgagor pursuant to the Credit Agreement,
whether now existing or hereafter arising, including without limitation,
those certain promissory notes which are or may be executed by Mortgagor
payable to the order of each Lender and being in the aggregate principal
amount of $75,000,000 with final maturity on or before February 9, 2004 and
all other notes given in substitution therefor or in modification, renewal
or extension thereof, in whole or in part (such notes, as from time to time
supplemented, amended or modified and all other notes given in substitution
therefor or in modification, renewal or extension thereof, in whole or in
part, being hereafter called the "NOTE").
(b) Any sums which may be advanced or paid by Mortgagee under the
terms hereof or of the Credit Agreement on account of the failure of
Mortgagor to comply with the covenants of Mortgagor contained herein or in
the Credit Agreement; and all other indebtedness of Mortgagor arising
pursuant to the provisions of this Mortgage.
(c) Any additional loans made by Mortgagee to Mortgagor. It is
contemplated that Mortgagee may lend additional sums to Mortgagor from time
to time, but shall not be obligated to do so, and Mortgagor agrees that any
such additional loans shall be secured by this Mortgage.
(d) Payment of and performance of any and all present or future
obligations of Mortgagor according to the terms of any present or future
interest rate or currency swap, rate cap, rate floor, rate collar, forward
rate agreement or other exchange or rate protection agreements or any
option with respect to any such transaction now existing or hereafter
entered into between Mortgagor and Mortgagee.
(e) Payment of and performance of any and all present or future
obligations of Mortgagor according to the terms of any present or future
swap agreements, cap, floor, collar, forward agreement or other exchange or
protection agreements relating to crude oil, natural gas or other
hydrocarbons or any option with respect to any such transaction now
existing or hereafter entered into between Mortgagor and Mortgagee.
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(f) Performance of all Letter of Credit Agreements executed from time
to time by Mortgagor under or pursuant to the Credit Agreement and all
reimbursement obligations for drawn or undrawn portions under any Letter of
Credit now outstanding or hereafter issued under or pursuant to the Credit
Agreement.
(g) Payment of and performance of any and all other indebtedness,
obligations and liabilities of any kind of Mortgagor to the Mortgagee, now
or hereafter existing, arising directly between Mortgagor and the Mortgagee
or acquired outright, as a participation, conditionally or as collateral
security from another by the Mortgagee, absolute or contingent, joint
and/or several, secured or unsecured, due or not due, arising by operation
of law or otherwise, or direct or indirect, including indebtedness,
obligations and liabilities to the Mortgagee of Mortgagor as a member of
any partnership, syndicate, association or other group, and whether
incurred by Mortgagor as principal, surety, endorser, guarantor,
accommodation party or otherwise.
Section 1.04 FIXTURE FILING, ETC. Without in any manner limiting
the generality of any of the other provisions of this Mortgage: (i) some
portions of the goods described or to which reference is made herein are or
are to become fixtures on the land described or to which reference is made
herein or on attached EXHIBIT A; (ii) the security interests created hereby
under applicable provisions of the Texas UCC will attach to Hydrocarbons
(minerals including oil and gas) or the accounts resulting from the sale
thereof at the wellhead or minehead located on the land described or to
which reference is made herein; (iii) this Mortgage is to be filed of
record in the real estate records as a financing statement, and (iv)
Mortgagor is the record owner of the real estate or interests in the real
estate comprised of the Mortgaged Property.
Section 1.05 PRO RATA BENEFIT. This Mortgage is executed and
granted for the pro rata benefit and security of Mortgagee, and the
Lenders, and any and all future holders of an interest in the Indebtedness
and the interest thereon for whatever period; it being understood and
agreed that possession of any Note (or any replacements of said Note) at
any time by Mortgagor shall not in any manner extinguish the Indebtedness,
such Note or this Mortgage securing payment thereof, and Mortgagor shall
have the right to issue and reissue any of the Notes from time to time as
its interest or as convenience may require, without in any manner
extinguishing or affecting the Indebtedness, the obligations under any of
the Notes, or the security of this Mortgage.
Section 1.06 DEFINED TERMS. Any capitalized term used in this
Mortgage and not defined in this Mortgage shall have the meaning assigned
to such term in the Credit Agreement.
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ARTICLE II
ASSIGNMENT OF PRODUCTION
Section 2.01 ASSIGNMENT. Mortgagor has absolutely and
unconditionally assigned, transferred, and conveyed, and does hereby
absolutely and unconditionally assign, transfer and convey unto Mortgagee,
its successors and assigns, all of the Hydrocarbons and all products
obtained or processed therefrom, and the revenues and proceeds now and
hereafter attributable to the Hydrocarbons and said products and all
payments in lieu of the Hydrocarbons such as "take or pay" payments or
settlements. The Hydrocarbons and products are to be delivered into pipe
lines connected with the Mortgaged Property, or to the purchaser thereof,
to the credit of Mortgagee, free and clear of all taxes, charges, costs,
and expenses; and all such revenues and proceeds shall be paid directly to
Mortgagee, at its banking quarters in Chicago, Illinois with no duty or
obligation of any party paying the same to inquire into the rights of
Mortgagee to receive the same, what application is made thereof, or as to
any other matter. Mortgagor agrees to perform all such acts, and to
execute all such further assignments, transfers and division orders, and
other instruments as may be required or desired by Mortgagee or any party
in order to have said proceeds and revenues so paid to Mortgagee.
Mortgagee is fully authorized to receive and receipt for said revenues and
proceeds; to endorse and cash any and all checks and drafts payable to the
order of Mortgagor or Mortgagee for the account of Mortgagor received from
or in connection with said revenues or proceeds and to hold the proceeds
thereof in a bank account as additional collateral securing the
Indebtedness; and to execute transfer and division orders in the name of
Mortgagor, or otherwise, with warranties binding Mortgagor. All proceeds
received by the Mortgagee pursuant to this assignment shall be applied as
provided in the other Loan Documents. Mortgagee shall not be liable for
any delay, neglect, or failure to effect collection of any proceeds or to
take any other action in connection therewith or hereunder; but Mortgagee
shall have the right, at its election, in the name of Mortgagor or
otherwise, to prosecute and defend any and all actions or legal proceedings
deemed advisable by Mortgagee in order to collect such funds and to protect
the interests of Mortgagee, and/or Mortgagor, with all costs, expenses and
attorneys' fees incurred in connection therewith being paid by Mortgagor.
Mortgagor hereby appoints Mortgagee as its attorney-in-fact to pursue any
and all rights of Mortgagor to liens on and security interests in the
Hydrocarbons securing payment of proceeds of runs attributable to the
Hydrocarbons. In addition to the rights granted to Trustee and/or
Mortgagee in Section 1.01 (f) of this Mortgage, Mortgagor hereby further
transfers and assigns to Mortgagee any and all such liens, security
interests, financing statements or similar interests of Mortgagor
attributable to its interest in the Hydrocarbons and proceeds of runs
therefrom arising under or created by said statutory provision, judicial
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decision or otherwise. The power of attorney granted to Mortgagee in this
Section 2.01, being coupled with an interest, shall be irrevocable so long
as the Indebtedness or any part thereof remains unpaid.
Section 2.02 RIGHTS UNDER TEXAS ACT. Mortgagor hereby grants,
sells, assigns, sets over and mortgages unto Mortgagee during the term
hereof, all of Mortgagor's rights and interests pursuant to the provisions
of <Section>9.319 Tex. UCC, hereby vesting in Mortgagee all of Mortgagor's
rights as an interest owner to the continuing security interest in and lien
upon the Mortgaged Property.
Section 2.03 NO MODIFICATION OF PAYMENT OBLIGATIONS. Nothing herein
contained shall modify or otherwise alter the obligation of Mortgagor to
make prompt payment of all principal and interest owing on the Indebtedness
when and as the same become due regardless of whether the proceeds of the
Hydrocarbons are sufficient to pay the same and the rights provided in
accordance with the foregoing assignment provision shall be cumulative of
all other security of any and every character now or hereafter existing to
secure payment of the Indebtedness.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
Mortgagor hereby represents, warrants and covenants as follows:
Section 3.01 TITLE. To the extent of the undivided interests
specified on attached EXHIBIT A, Mortgagor has good and indefeasible title
to and is possessed of the Mortgaged Property. The Mortgaged Property is
free of any and all Liens (as defined in the Credit Agreement) except Liens
allowed by Section 9.02 of the Credit Agreement and Liens described on
EXHIBIT A hereto (collectively, the "PERMITTED ENCUMBRANCES").
Section 3.02 DEFEND TITLE. This Mortgage is, and always will be
kept, a direct first lien and security interest upon the Mortgaged Property
subject only to the Permitted Encumbrances and Mortgagor will not create or
suffer to be created or permit to exist any lien, security interest or
charge prior or junior to or on a parity with the lien and security
interest of this Mortgage upon the Mortgaged Property or any part thereof
or upon the rents, issues, revenues, profits and other income therefrom.
Mortgagor will warrant and defend the title to the Mortgaged Property
against the claims and demands of all other persons whomsoever and will
maintain and preserve the lien created hereby so long as any of the
Indebtedness secured hereby remains unpaid. Should an adverse claim be
made against or a cloud develop upon the title to any part of the Mortgaged
Property, Mortgagor agrees it will immediately defend against such adverse
claim or take appropriate action to remove such cloud at Mortgagor's cost
and expense, and Mortgagor further agrees that the Trustee and/or Mortgagee
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may take such other action as they deem advisable to protect and preserve
their interests in the Mortgaged Property, and in such event Mortgagor will
indemnify the Trustee and Mortgagee against any and all cost, attorney's
fees and other expenses which they may incur in defending against any such
adverse claim or taking action to remove any such cloud.
Section 3.03 NOT A FOREIGN PERSON. Mortgagor is not a "foreign
person" within the meaning of the Internal Revenue Code of 1986, as amended
(hereinafter called the "CODE"), Sections 1445 and 7701 (i.e. Mortgagor is
not a non-resident alien, foreign corporation, foreign partnership, foreign
trust or foreign estate as those terms are defined in the Code and any
regulations promulgated thereunder).
Section 3.04 POWER TO CREATE LIEN AND SECURITY. The Mortgagor has
full power and lawful authority to grant, bargain, sell, assign, transfer,
mortgage, and convey a security interest in all of the Mortgaged Property
in the manner and form herein provided and without obtaining the
authorization, approval, consent or waiver of any lessor, sublessor,
Governmental Authority or other party or parties whomsoever.
Section 3.05 REVENUE AND COST BEARING INTEREST. Mortgagor's
ownership of the Hydrocarbon Property and the undivided interests therein
as specified on attached EXHIBIT A will, after giving full effect to all
Permitted Encumbrances, afford Mortgagor not less than those net interests
(expressed as a fraction, percentage or decimal) in the production from or
which is allocated to such Hydrocarbon Property specified as working
interests on attached EXHIBIT A and will cause Mortgagor to bear not more
than that portion (expressed as a fraction, percentage or decimal),
specified as net revenue interests on attached EXHIBIT A, of the costs of
drilling, developing and operating the wells identified on EXHIBIT A.
Section 3.06 RENTALS PAID; LEASES IN EFFECT. All rentals and
royalties due and payable in accordance with the terms of any leases or
subleases comprising a part of the Hydrocarbon Property have been duly paid
or provided for and all leases or subleases comprising a part of the
Hydrocarbon Property are in full force and effect.
Section 3.07 OPERATION BY THIRD PARTIES. All or portions of the
Mortgaged Property may be comprised of interests in the Hydrocarbon
Property which are other than working interests or which may be operated by
a party or parties other than Mortgagor and with respect to all or any such
interests and properties as may be comprised of interests other than
working interests or which may be operated by parties other than Mortgagor,
Mortgagor's covenants as expressed in this Article III are modified to
require that Mortgagor use its best efforts to obtain compliance with such
covenants by the working interest owners or the operator or operators of
such leases or properties.
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Section 3.08 ABANDON, SALES. The Mortgagor will not sell, lease,
assign, transfer or otherwise dispose or abandon any of the Mortgaged
Property except as permitted by the Credit Agreement.
Section 3.09 FAILURE TO PERFORM. The Mortgagor agrees that if the
Mortgagor fails to perform any act or to take any action which the
Mortgagor is required to perform or take hereunder or pay any money which
the Mortgagor is required to pay hereunder, each of the Mortgagee and the
Trustee in the Mortgagor's name or its or their own name may, but shall not
be obligated to, perform or cause to perform such act or take such action
or pay such money, and any expenses so incurred by either of them and any
money so paid by either of them shall be a demand obligation owing by the
Mortgagor to the Mortgagee or the Trustee, as the case may be, and each of
the Mortgagee and the Trustee, upon making such payment, shall be
subrogated to all of the rights of the Person receiving such payment. Each
amount due and owing by Mortgagor to each of the Mortgagee and the Trustee
pursuant to this Mortgage shall bear interest from the date of such
expenditure or payment or other occurrence which gives rise to such amount
being owed to such Person until paid at the Post-Default Rate, and all such
amounts together with such interest thereon shall be a part of the
Indebtedness described in Section 1.03 hereof.
Section 3.10 OPERATION OF MORTGAGED PROPERTY, ETC. Mortgagor will
promptly pay and discharge all rentals, delay rentals, royalties and
indebtedness accruing under, and perform or cause to be performed each and
every act, matter or thing required by, each and all of the assignments,
deeds, leases, sub-leases, contracts and agreements described or referred
to herein or affecting Mortgagor's interests in the Mortgaged Property, and
will do all other things necessary to keep unimpaired Mortgagor's rights
with respect thereto and prevent any forfeiture thereof or default
thereunder. The Mortgaged Property (and properties unitized therewith) has
been maintained, operated and developed in a good and workmanlike manner
and in conformity with all applicable laws and all rules, regulations and
orders of all duly constituted authorities having jurisdiction and in
conformity with the provisions of all leases, subleases or other contracts
comprising a part of the Hydrocarbon Property and other contracts and
agreements forming a part of the Mortgaged Property; specifically in this
connection, (i) after the Effective Date no Mortgaged Property is subject
to having allowable production reduced below the full and regular allowable
(including the maximum permissible tolerance) because of any overproduction
(whether or not the same was permissible at the time) prior to the
Effective Date and (ii) none of the wells comprising a part of the
Mortgaged Property (or properties unitized therewith) are deviated from the
vertical more than the maximum permitted by applicable laws, regulations,
rules and orders, and such wells are, in fact, bottomed under and are
producing from, and the well bores are wholly within, the Mortgaged
Property (or, in the case of wells located on properties unitized
therewith, such unitized properties). Mortgagor will operate the Mortgaged
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Property in a careful and efficient manner in accordance with the practices
of the industry and in compliance with all applicable contracts and
agreements and in compliance with all applicable proration and conservation
laws of the jurisdiction in which the Mortgaged Property is situated, and
all applicable laws, rules and regulations of every other agency and
authority from time to time constituted to regulate the development and
operation of the Mortgaged Property and the production and sale of
Hydrocarbons and other minerals therefrom. Mortgagor will do or cause to
be done such development work as may be reasonably necessary to the prudent
and economical operation of the Mortgaged Property in accordance with the
most approved practices of operators in the industry, including all to be
done that may be appropriate to protect from diminution the productive
capacity of the Mortgaged Property and each producing well thereon
including, without limitation, cleaning out and reconditioning each well
from time to time, plugging and completing at a different level each such
well, drilling a substitute well to conform to changed spacing regulations
and to protect the Mortgaged Property against drainage whenever and as
often as is necessary.
ARTICLE IV
RIGHTS AND REMEDIES
Section 4.01 EVENT OF DEFAULT. An "EVENT OF DEFAULT" under the
Credit Agreement shall be an Event of Default under this Mortgage.
Section 4.02 FORECLOSURE AND SALE. If an Event of Default shall
occur and be continuing, Mortgagee shall have the right and option to
proceed with foreclosure by directing the Trustee, or his successors or
substitutes in trust, to proceed with foreclosure and to sell, to the
extent permitted by law, all or any portion of the Mortgaged Property at
one or more sales, as an entirety or in parcels, at such place or places in
otherwise such manner and upon such notice as may be required by law, or,
in the absence of any such requirement, as the Mortgagee may deem
appropriate, and to make conveyance to the purchaser or purchasers. Where
the Mortgaged Property is situated in more than one county, notice as above
provided shall be posted and filed in all such counties (if such notices
are required by law), and all such Mortgaged Property may be sold in any
such county and any such notice shall designate the county where such
Mortgaged Property is to be sold. Nothing contained in this Section 4.02
shall be construed so as to limit in any way the Trustee's rights to sell
the Mortgaged Property, or any portion thereof, by private sale if, and to
the extent that, such private sale is permitted under the laws of the
applicable jurisdiction or by public or private sale after entry of a
judgment by any court of competent jurisdiction so ordering. Mortgagor
hereby irrevocably appoints the Trustee to be the attorney of Mortgagor and
in the name and on behalf of Mortgagor to execute and deliver any deeds,
transfers, conveyances, assignments, assurances and notices which Mortgagor
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ought to execute and deliver and do and perform any and all such acts and
things which Mortgagor ought to do and perform under the covenants herein
contained and generally, to use the name of Mortgagor in the exercise of
all or any of the powers hereby conferred on the Trustee. At any such
sale: (i) whether made under the power herein contained or any other legal
enactment, or by virtue of any judicial proceedings or any other legal
right, remedy or recourse, it shall not be necessary for Trustee to have
physically present, or to have constructive possession of, the Mortgaged
Property (Mortgagor hereby covenanting and agreeing to deliver to Trustee
any portion of the Mortgaged Property not actually or constructively
possessed by Trustee immediately upon demand by Trustee) and the title to
and right of possession of any such property shall pass to the purchaser
thereof as completely as if the same had been actually present and
delivered to purchaser at such sale, (ii) each instrument of conveyance
executed by Trustee shall contain a general warranty of title, binding upon
Mortgagor and its successors and assigns, (iii) each and every recital con-
tained in any instrument of conveyance made by Trustee shall conclusively
establish the truth and accuracy of the matters recited therein, including,
without limitation, nonpayment of the Indebtedness, advertisement and
conduct of such sale in the manner provided herein and otherwise by law and
appointment of any successor Trustee hereunder, (iv) any and all
prerequisites to the validity thereof shall be conclusively presumed to
have been performed, (v) the receipt of Trustee or of such other party or
officer making the sale shall be a sufficient discharge to the purchaser or
purchasers for its purchase money and no such purchaser or purchasers, or
its assigns or personal representatives, shall thereafter be obligated to
see to the application of such purchase money, or be in any way answerable
for any loss, misapplication or nonapplication thereof, (vi) to the fullest
extent permitted by law, Mortgagor shall be completely and irrevocably
divested of all of its right, title, interest, claim and demand whatsoever,
either at law or in equity, in and to the property sold and such sale shall
be a perpetual bar both at law and in equity against Mortgagor, and against
any and all other persons claiming or to claim the property sold or any
part thereof, by, through or under Mortgagor, and (vii) to the extent and
under such circumstances as are permitted by law, Mortgagee may be a pur-
chaser at any such sale, and shall have the right, after paying or
accounting for all costs of said sale or sales, to credit the amount of the
bid upon the amount of the Indebtedness (in the order of priority set forth
in Section 4.14 hereof) in lieu of cash payment.
Section 4.03 SUBSTITUTE TRUSTEES AND AGENTS. The Trustee or his
successor or substitute may appoint or delegate any one or more persons as
agent to perform any act or acts necessary or incident to any sale held by
Trustee, including the posting of notices and the conduct of sale, but in
the name and on behalf of Trustee, his successor or substitute. If Trustee
or his successor or substitute shall have given notice of sale hereunder,
any successor or substitute trustee thereafter appointed may complete the
sale and the conveyance of the property pursuant thereto as if such notice
had been given by the successor or substitute trustee conducting the sale.
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<PAGE>
Section 4.04 JUDICIAL FORECLOSURE; RECEIVERSHIP. If any of the
Indebtedness shall become due and payable and shall not be promptly paid,
the Trustee or Mortgagee shall have the right and power to proceed by a
suit or suits in equity or at law, whether for the specific performance of
any covenant or agreement herein contained or in aid of the execution of
any power herein granted, or for any foreclosure hereunder or for the sale
of the Mortgaged Property under the judgment or decree of any court or
courts of competent jurisdiction, or for the appointment of a receiver
pending any foreclosure hereunder or the sale of the Mortgaged Property
under the order of a court or courts of competent jurisdiction or under
executory or other legal process, or for the enforcement of any other
appropriate legal or equitable remedy. Any money advanced by the Trustee
and/or Mortgagee in connection with any such receivership shall be a demand
obligation (which obligation Mortgagor hereby expressly promises to pay)
owing by Mortgagor to the Trustee and/or Mortgagee and shall bear interest
from the date of making such advance by the Trustee and/or Mortgagee until
paid at the Post Default Rate.
Section 4.05 FORECLOSURE FOR INSTALLMENTS. Mortgagee shall also
have the option to proceed with foreclosure in satisfaction of any
installments of the Indebtedness which have not been paid when due either
through the courts or by directing the Trustee or his successors in trust
to proceed with foreclosure in satisfaction of the matured but unpaid
portion of the Indebtedness as if under a full foreclosure, conducting the
sale as herein provided and without declaring the entire principal balance
and accrued interest due; such sale may be made subject to the unmatured
portion of the Indebtedness, and any such sale shall not in any manner
affect the unmatured portion of the Indebtedness, but as to such unmatured
portion of the Indebtedness this Mortgage shall remain in full force and
effect just as though no sale had been made hereunder. It is further
agreed that several sales may be made hereunder without exhausting the
right of sale for any unmatured part of the Indebtedness, it being the
purpose hereof to provide for a foreclosure and sale of the security for
any matured portion of the Indebtedness without exhausting the power to
foreclose and sell the Mortgaged Property for any subsequently maturing
portion of the Indebtedness.
Section 4.06 SEPARATE SALES The Mortgaged Property may be sold in
one or more parcels and in such manner and order as Mortgagee, in its sole
discretion, may elect, it being expressly understood and agreed that the
right of sale arising out of any Event of Default shall not be exhausted by
any one or more sales.
Section 4.07 POSSESSION OF MORTGAGED PROPERTY. Mortgagor agrees to
the full extent that it lawfully may, that, in case one or more of the
Events of Default shall have occurred and shall not have been remedied,
then, and in every such case, the Trustee or Mortgagee shall have the right
and power to enter into and upon and take possession of all or any part of
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<PAGE>
the Mortgaged Property in the possession of Mortgagor, its successors or
assigns, or its or their agents or servants, and may exclude Mortgagor, its
successors or assigns, and all persons claiming under Mortgagor, and its or
their agents or servants wholly or partly therefrom; and, holding the same,
the Trustee may use, administer, manage, operate and control the Mortgaged
Property and conduct the business thereof to the same extent as Mortgagor,
its successors or assigns, might at the time do and may exercise all rights
and powers of Mortgagor, in the name, place and stead of Mortgagor, or
otherwise as the Trustee shall deem best. All costs, expenses and
liabilities of every character incurred by the Trustee and/or Mortgagee in
administering, managing, operating, and controlling the Mortgaged Property
shall constitute a demand obligation (which obligation Mortgagor hereby
expressly promises to pay) owing by Mortgagor to the Trustee and/or
Mortgagee and shall bear interest from date of expenditure until paid at
the Post Default Rate, all of which shall constitute a portion of the
Indebtedness and shall be secured by this Mortgage and all other Security
Instruments.
Section 4.08 OCCUPANCY AFTER FORECLOSURE. In the event there is a
foreclosure sale hereunder and at the time of such sale Mortgagor or
Mortgagor's heirs, devisees, representatives, successors or assigns or any
other person claiming any interest in the Mortgaged Property by, through or
under Mortgagor, are occupying or using the Mortgaged Property or any part
thereof, each and all shall immediately become the tenant of the purchaser
at such sale, which tenancy shall be a tenancy from day to day, terminable
at the will of either the landlord or tenant, or at a reasonable rental per
day based upon the value of the property occupied, such rental to be due
daily to the purchaser; to the extent permitted by applicable law, the
purchaser at such sale shall, notwithstanding any language herein
apparently to the contrary, have the sole option to demand immediate
possession following the sale or to permit the occupants to remain as
tenants at will. In the event the tenant fails to surrender possession of
said property upon demand, the purchaser shall be entitled to institute and
maintain a summary action for possession of the Mortgaged Property (such as
an action for forcible entry and detainer) in any court having
jurisdiction.
Section 4.09 REMEDIES CUMULATIVE, CONCURRENT AND NONEXCLUSIVE.
Every right, power and remedy herein given to the Trustee or Mortgagee
shall be cumulative and in addition to every other right, power and remedy
herein specifically given or now or hereafter existing in equity, at law or
by statute (including specifically those granted by the Texas UCC and
applicable to the Mortgaged Property or any portion thereof) each and every
right, power and remedy whether specifically herein given or otherwise
existing may be exercised from time to time and so often and in such order
as may be deemed expedient by the Trustee or Mortgagee, and the exercise,
or the beginning of the exercise, of any such right, power or remedy shall
not be deemed a waiver of the right to exercise, at the same time or
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<PAGE>
thereafter any other right, power or remedy. No delay or omission by the
Trustee or Mortgagee in the exercise of any right, power or remedy shall
impair any such right, power or remedy or operate as a waiver thereof or of
any other right, power or remedy then or thereafter existing.
Section 4.10 NO RELEASE OF OBLIGATIONS. Neither Mortgagor, any
guarantor nor any other person hereafter obligated for payment of all or
any part of the Indebtedness shall be relieved of such obligation by reason
of (a) the failure of Trustee to comply with any request of Mortgagor, or
any guarantor or any other person so obligated to foreclose the lien of
this Mortgage or to enforce any provision hereunder or under the Credit
Agreement; (b) the release, regardless of consideration, of the Mortgaged
Property or any portion thereof or interest therein or the addition of any
other property to the Mortgaged Property; (c) any agreement or stipulation
between any subsequent owner of the Mortgaged Property and Mortgagee
extending, renewing, rearranging or in any other way modifying the terms of
this Mortgage without first having obtained the consent of, given notice to
or paid any consideration to Mortgagor, any guarantor or such other person,
and in such event Mortgagor, guarantor and all such other persons shall
continue to be liable to make payment according to the terms of any such
extension or modification agreement unless expressly released and
discharged in writing by Mortgagee; or (d) by any other act or occurrence
save and except the complete payment of the Indebtedness and the complete
fulfillment of all obligations hereunder or under the Credit Agreement.
Section 4.11 RELEASE OF AND RESORT TO COLLATERAL. Mortgagee may
release, regardless of consideration, any part of the Mortgaged Property
without, as to the remainder, in any way impairing, affecting,
subordinating or releasing the lien or security interest created in or
evidenced by this Mortgage or its stature as a first and prior lien and
security interest in and to the Mortgaged Property, and without in any way
releasing or diminishing the liability of any person or entity liable for
the repayment of the Indebtedness. For payment of the Indebtedness,
Mortgagee may resort to any other security therefor held by Mortgagee or
Trustee in such order and manner as Mortgagee may elect.
Section 4.12 WAIVER OF REDEMPTION, NOTICE AND MARSHALLING OF ASSETS,
ETC. To the fullest extent permitted by law, Mortgagor hereby irrevocably
and unconditionally waives and releases (a) all benefits that might accrue
to Mortgagor by virtue of any present or future moratorium law or other law
exempting the Mortgaged Property from attachment, levy or sale on execution
or providing for any appraisement, valuation, stay of execution, exemption
from civil process, redemption (provided, however, that if the laws of any
state in which the Mortgaged Properties are located do not permit the
redemption period to be waived, the redemption period is specifically
reduced to the minimum amount of time allowable by statute) or extension of
time for payment; (b) all notices of any Event of Default or of Mortgagee's
intention to accelerate maturity of the Indebtedness or of Trustee's
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<PAGE>
election to exercise or his actual exercise of any right, remedy or
recourse provided for hereunder or under the Credit Agreement; and (c) any
right to a marshalling of assets or a sale in inverse order of alienation.
If any law referred to in this Mortgage and now in force, of which
Mortgagor or its successor or successors might take advantage despite the
provisions hereof, shall hereafter be repealed or cease to be in force,
such law shall thereafter be deemed not to constitute any part of the
contract herein contained or to preclude the operation or application of
the provisions hereof.
Section 4.13 DISCONTINUANCE OF PROCEEDINGS In case Mortgagee shall
have proceeded to invoke any right, remedy or recourse permitted hereunder
or under the Credit Agreement and shall thereafter elect to discontinue or
abandon same for any reason, Mortgagee shall have the unqualified right so
to do and, in such an event, Mortgagor and Mortgagee shall be restored to
their former positions with respect to the Indebtedness, this Mortgage, the
Credit Agreement, the Mortgaged Property and otherwise, and the rights,
remedies, recourses and powers of Mortgagee shall continue as if same had
never been invoked.
Section 4.14 APPLICATION OF PROCEEDS. The proceeds of any sale of
the Mortgaged Property or any part thereof and all other monies received by
the Trustee or Mortgagee in any proceedings for the enforcement hereof or
otherwise, whose application has not elsewhere herein been specifically
provided for, shall be applied:
(a) first, to the payment of all expenses incurred by the Trustee or
Mortgagee incident to the enforcement of this Mortgage, the Credit
Agreement or any of the Indebtedness (including, without limiting the
generality of the foregoing, expenses of any entry or taking of possession,
of any sale, of advertisement thereof, and of conveyances, and court costs,
compensation of agents and employees, legal fees and a reasonable
commission to the Trustee acting), and to the payment of all other charges,
expenses, liabilities and advances incurred or made by the Trustee or
Mortgagee under this Mortgage or in executing any trust or power hereunder;
(b) second to payment of the Indebtedness in such order and manner as
Mortgagee may elect; and
(c) third, to Mortgagor; or as otherwise required by any Governmental
Requirement.
Section 4.15 RESIGNATION OF OPERATOR. In addition to all rights and
remedies under this Mortgage, at law and in equity, if any Event of Default
shall occur and Trustee or the Mortgagee shall exercise any remedies under
this Mortgage with respect to any portion of the Mortgaged Property (or
Mortgagor shall transfer any Mortgaged Property "in lieu of" foreclosure),
the Mortgagee or the Trustee shall have the right to request that any
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<PAGE>
operator of any Mortgaged Property which is either Mortgagor or any
Affiliate of Mortgagor to resign as operator under the joint operating
agreement applicable thereto, and no later than 60 days after receipt by
Mortgagor of any such request, Mortgagor shall resign (or cause such other
party to resign) as operator of such Mortgaged Property.
Section 4.16 INDEMNITY. IN CONNECTION WITH ANY ACTION TAKEN BY THE
TRUSTEE AND/OR MORTGAGEE PURSUANT TO THIS MORTGAGE, THE TRUSTEE AND/OR
MORTGAGEE AND THEIR OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS,
ATTORNEYS, ACCOUNTANTS AND EXPERTS ("INDEMNIFIED PARTIES") SHALL NOT BE
LIABLE FOR ANY LOSS SUSTAINED BY MORTGAGOR RESULTING FROM AN ASSERTION THAT
MORTGAGEE HAS RECEIVED FUNDS FROM THE PRODUCTION OF HYDROCARBONS CLAIMED BY
THIRD PERSONS OR ANY ACT OR OMISSION OF ANY INDEMNIFIED PARTY IN
ADMINISTERING, MANAGING, OPERATING OR CONTROLLING THE MORTGAGED PROPERTY
INCLUDING SUCH LOSS WHICH MAY RESULT FROM THE ORDINARY NEGLIGENCE OF AN
INDEMNIFIED PARTY UNLESS SUCH LOSS IS CAUSED BY THE WILLFUL MISCONDUCT AND
BAD FAITH OF AN INDEMNIFIED PARTY, NOR SHALL THE TRUSTEE AND/OR MORTGAGEE BE
OBLIGATED TO PERFORM OR DISCHARGE ANY OBLIGATION, DUTY OR LIABILITY OF
MORTGAGOR. MORTGAGOR SHALL AND DOES HEREBY AGREE TO INDEMNIFY EACH
INDEMNIFIED PARTY FOR, AND TO HOLD EACH INDEMNIFIED PARTY HARMLESS FROM, ANY
AND ALL LIABILITY, LOSS OR DAMAGE WHICH MAY OR MIGHT BE INCURRED BY ANY
INDEMNIFIED PARTY BY REASON OF THIS MORTGAGE OR THE EXERCISE OF RIGHTS OR
REMEDIES HEREUNDER; SHOULD THE TRUSTEE AND/OR MORTGAGEE MAKE ANY EXPENDITURE
ON ACCOUNT OF ANY SUCH LIABILITY, LOSS OR DAMAGE, THE AMOUNT THEREOF,
INCLUDING COSTS, EXPENSES AND REASONABLE ATTORNEYS' FEES, SHALL BE A DEMAND
OBLIGATION (WHICH OBLIGATION MORTGAGOR HEREBY EXPRESSLY PROMISES TO PAY)
OWING BY MORTGAGOR TO THE TRUSTEE AND/OR MORTGAGEE AND SHALL BEAR INTEREST
FROM THE DATE EXPENDED UNTIL PAID AT THE POST-DEFAULT RATE, SHALL BE A PART
OF THE INDEBTEDNESS AND SHALL BE SECURED BY THIS MORTGAGE AND ANY OTHER
SECURITY INSTRUMENT. MORTGAGOR HEREBY ASSENTS TO, RATIFIES AND CONFIRMS ANY
AND ALL ACTIONS OF THE TRUSTEE AND/OR MORTGAGEE WITH RESPECT TO THE MORTGAGED
PROPERTY TAKEN UNDER THIS MORTGAGE. THE LIABILITIES OF THE MORTGAGOR AS SET
FORTH IN THIS SECTION 4.16 SHALL SURVIVE THE TERMINATION OF THIS MORTGAGE.
ARTICLE V
THE TRUSTEE
Section 5.01 DUTIES, RIGHTS, AND POWERS OF TRUSTEE. It shall be no
part of the duty of the Trustee to see to any recording, filing or
registration of this Mortgage or any other instrument in addition or
supplemental thereto, or to give any notice thereof, or to see to the
payment of or be under any duty in respect of any tax or assessment or
other governmental charge which may be levied or assessed on the Mortgaged
Property, or any part thereof, or against Mortgagor, or to see to the
performance or observance by Mortgagor of any of the covenants and
agreements contained herein. The Trustee shall not be responsible for the
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<PAGE>
execution, acknowledgment or validity of this Mortgage or of any instrument
in addition or supplemental hereto or for the sufficiency of the security
purported to be created hereby, and makes no representation in respect
thereof or in respect of the rights of Mortgagee. The Trustee shall have
the right to advise with counsel upon any matters arising hereunder and
shall be fully protected in relying as to legal matters on the advice of
counsel. The Trustee shall not incur any personal liability hereunder
except for Trustee's own willful misconduct; and the Trustee shall have the
right to rely on any instrument, document or signature authorizing or
supporting any action taken or proposed to be taken by him hereunder,
believed by him in good faith to be genuine.
Section 5.02 SUCCESSOR TRUSTEE. The Trustee may resign by written
notice addressed to Mortgagee or be removed at any time with or without
cause by an instrument in writing duly executed on behalf of Mortgagee. In
case of the death, resignation or removal of the Trustee, a successor
trustee may be appointed by Mortgagee by instrument of substitution
complying with any applicable requirements of law, or, in the absence of
any such requirement, without other formality than appointment and
designation in writing. Written notice of such appointment and designation
shall be given by Mortgagee to Mortgagor, but the validity of any such
appointment shall not be impaired or affected by failure to give such
notice or by any defect therein. Such appointment and designation shall be
full evidence of the right and authority to make the same and of all the
facts therein recited, and, upon the making of any such appointment and
designation, this Mortgage shall vest in the successor trustee all the
estate and title in and to all of the Mortgaged Property, and the successor
trustee shall thereupon succeed to all of the rights, powers, privileges,
immunities and duties hereby conferred upon the Trustee named herein, and
one such appointment and designation shall not exhaust the right to appoint
and designate a successor trustee hereunder but such right may be exercised
repeatedly as long as any Indebtedness remains unpaid hereunder. To
facilitate the administration of the duties hereunder, Mortgagee may
appoint multiple trustees to serve in such capacity or in such
jurisdictions as Mortgagee may designate.
Section 5.03 RETENTION OF MONEYS. All moneys received by Trustee
shall, until used or applied as herein provided, be held in trust for the
purposes for which they were received, but need not be segregated in any
manner from any other moneys (except to the extent required by law), and
Trustee shall be under no liability for interest on any moneys received by
him hereunder.
ARTICLE VI
MISCELLANEOUS
Section 6.01 INSTRUMENT CONSTRUED AS MORTGAGE, ETC. With respect to
any portions of the Mortgaged Property located in any state or other
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<PAGE>
jurisdiction the laws of which do not provide for the use or enforcement of
a deed of trust or the office, rights and authority of the Trustee as
herein provided, the general language of conveyance hereof to the Trustee
is intended and the same shall be construed as words of mortgage unto and
in favor of Mortgagee and the rights and authority granted to the Trustee
herein may be enforced and asserted by Mortgagee in accordance with the
laws of the jurisdiction in which such portion of the Mortgaged Property is
located and the same may be foreclosed at the option of Mortgagee as to any
or all such portions of the Mortgaged Property in any manner permitted by
the laws of the jurisdiction in which such portions of the Mortgaged
Property is situated. This Mortgage may be construed as a mortgage, deed
of trust, chattel mortgage, conveyance, assignment, security agreement,
pledge, financing statement, hypothecation or contract, or any one or more
of them, in order fully to effectuate the lien hereof and the purposes and
agreements herein set forth.
Section 6.02 RELEASE OF MORTGAGE. If all Indebtedness secured
hereby shall be paid and the Credit Agreement terminated, Mortgagee shall
forthwith cause satisfaction and discharge of this Mortgage to be entered
upon the record at the expense of Mortgagor and shall execute and deliver
or cause to be executed and delivered such instruments of satisfaction and
reassignment as may be appropriate. Otherwise, this Mortgage shall remain
and continue in full force and effect.
Section 6.03 SEVERABILITY. If any provision hereof is invalid or
unenforceable in any jurisdiction, the other provisions hereof shall remain
in full force and effect in such jurisdiction and the remaining provisions
hereof shall be liberally construed in favor of the Trustee and Mortgagee
in order to effectuate the provisions hereof, and the invalidity or
unenforceability of any provision hereof in any jurisdiction shall not
affect the validity or enforceability of any such provision in any other
jurisdiction.
Section 6.04 SUCCESSORS AND ASSIGNS OF PARTIES. The term "Lenders"
as used herein shall mean and include any legal owner, holder, assignee or
pledgee of any of the Indebtedness secured hereby. The terms used to
designate Trustee, Mortgagee and Mortgagor shall be deemed to include the
respective heirs, legal representatives, successors and assigns of such
parties.
Section 6.05 SATISFACTION OF PRIOR ENCUMBRANCE. To the extent that
proceeds of the Credit Agreement are used to pay indebtedness secured by
any outstanding lien, security interest, charge or prior encumbrance
against the Mortgaged Property, such proceeds have been advanced by
Mortgagee at Mortgagor's request, and Mortgagee shall be subrogated to any
and all rights, security interests and liens owned by any owner or holder
of such outstanding liens, security interests, charges or encumbrances,
irrespective of whether said liens, security interests, charges or
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<PAGE>
encumbrances are released, and it is expressly understood that, in
consideration of the payment of such other indebtedness by Mortgagee,
Mortgagor hereby waives and releases all demands and causes of action for
offsets and payments to, upon and in connection with the said indebtedness.
Section 6.06 SUBROGATION OF TRUSTEE. This Mortgage is made with
full substitution and subrogation of the Trustee and his successors in this
trust and his and their assigns in and to all covenants and warranties by
others heretofore given or made in respect of the Mortgaged Property or any
part thereof.
Section 6.07 NATURE OF COVENANTS. The covenants and agreements
herein contained shall constitute covenants running with the land and
interests covered or affected hereby and shall be binding upon the heirs,
legal representatives, successors and assigns of the parties hereto.
Section 6.08 NOTICES. All notices, requests, consents, demands and
other communications required or permitted hereunder shall be in writing
and shall be deemed sufficiently given or furnished if delivered by
registered or certified United States mail, postage prepaid, or by personal
service (including express or courier service) at the addresses specified
in the first paragraph of this Mortgage (unless changed by similar notice
in writing given by the particular party whose address is to be changed).
Any such notice or communication shall be deemed to have been given either
at the time of personal delivery or, in the case of delivery at the address
and in the manner provided herein, upon receipt; provided that, service of
notice as required by the laws of any state in which portions of the
Mortgaged Property may be situated shall for all purposes be deemed
appropriate and sufficient with the giving of such notice.
Section 6.09 COUNTERPARTS. This Mortgage is being executed in
several counterparts, all of which are identical, except that to facilitate
recordation, if the Mortgaged Property is situated in more than one
jurisdiction, descriptions of only those portions of the Mortgaged Property
located in the jurisdiction in which a particular counterpart is recorded
shall be attached as EXHIBIT A thereto. An EXHIBIT A containing a
description of all Mortgaged Property wheresoever situated will be attached
to that certain counterpart to be attached to a Financing Statement and
filed with the Secretary of State of Texas in the Uniform Commercial Code
Records. Each of such counterparts shall for all purposes be deemed to be
an original and all such counterparts shall together constitute but one and
the same instrument.
SECTION 6.10 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS MORTGAGE; AND AGREES THAT
IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS MORTGAGE; THAT
IT HAS IN FACT READ THIS MORTGAGE AND IS FULLY INFORMED AND HAS FULL NOTICE
AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS MORTGAGE; THAT IT
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<PAGE>
HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT
THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS MORTGAGE; AND HAS RECEIVED
THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS MORTGAGE; AND THAT IT
RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS MORTGAGE RESULT IN ONE PARTY
ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND
RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH
PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR
ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS MORTGAGE ON THE BASIS
THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE
PROVISION IS NOT "CONSPICUOUS."
[SIGNATURES BEGIN NEXT PAGE]
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<PAGE>
WITNESS THE EXECUTION HEREOF, this 6th day of February, 1998, to be
effective as of the 9th day of February, 1998 (the "EFFECTIVE DATE").
MORTGAGOR:
MILLER OIL CORPORATION
By:___________________
Kelly E. Miller
President
The name and address of the Debtor/Mortgagor is:
MILLER OIL CORPORATION
3014 Logan Valley Road
Traverse City, Michigan 49685-0348
Federal Tax I.D. 38-2607711
The name and address of the Secured Party/Mortgagee is:
Bank of Montreal, as Agent
700 Louisiana, Suite 4400
Houston, Texas 77002
Federal Tax I.D. 134941092
-S-1-
<PAGE>
THE STATE OF TEXAS <Section>
<Section>
COUNTY OF HARRIS <Section>
THIS INSTRUMENT was acknowledged before me on February __, 1998 by
Kelly E. Miller, President of Miller Oil Corporation, a Michigan
corporation, on behalf of such corporation.
______________________________
Notary Public in and for the
State of Texas
<PAGE>
EXHIBIT 11.1
<TABLE>
MILLER EXPLORATION COMPANY
COMPUTATION OF EARNINGS PER COMMON SHARE
<CAPTION>
YEAR ENDED DECEMBER,
1997
HISTORICAL PRO FORMA
---------- ---------
(In thousands, except per share data)
<S> <C> <C>
BASIC EARNINGS PER
SHARE
Net Income $ 28 $ 8,438
Shares
Weighted average shares
outstanding
Combined Assets and Offering 12,493
--------
Basic earnings per share $ 0.68
========
DILUTED EARNINGS PER
SHARE
Net Income $ 28 $ 8,438
Shares
Weighted average shares
outstanding
Combined Assets and Offering 12,493
--------
Diluted earnings per share $ 0.68
========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER,
1997
-------------------------------------
(In thousands, except per share data)
<S> <C>
CALCULATION OF PRO
FORMA BASIC AND DILUTED
EARNINGS PER COMMON
SHARE
Pro Forma Net Income
Attributable to Common Shares $ 8,438
Pro Forma Weighted Average Shares 12,493
-------
Pro Forma Earnings per Common Share $ 0.68
=======
</TABLE>
<PAGE>
EXHIBIT 23.1
SAH S. A. HOLDITCH & ASSOCIATES, INC.
INTERNATIONAL PETROLEUM CONSULTANTS
Petroleum Engineering & Geoscience Services
- ---------------------------------------------------------------------------
ONE SHELL SQUARE
701 POYDRAS STREET, SUITE 4320
NEW ORLEANS, LOUISIANA 70139-7738
(504) 523-2117
FAX (504) 523-3547
[email protected]
http://www.holditch.com
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
Board of Directors
Miller Exploration Company
Traverse City, Michigan
We hereby consent to the references to our firm and to our reserve
estimates contained in the Annual Report on Form 10-K of Miller Exploration
Company for the fiscal year ended December 31, 1997. Our estimates of the
proved reserves of Miller Exploration Company are contained in our report
entitled "Miller Exploration Company, A Reserve and Economic Evaluation of
Certain Oil and Gas Interests in 19 Antrim Shale Gas Projects, As of
January 1, 1998." We hereby consent to the incorporation by reference of
our estimates contained in the Annual Report on Form 10-K into Miller
Exploration Company's Registration Statement on Form S-1 (333-40383).
S. A. HOLDITCH & ASSOCIATES, INC.
/s/ Denton Copeland, P.E.
Denton Copeland, P.E.
Vice President
New Orleans, Louisiana
March 30, 1998
COLLEGE STATION - PITTSBURGH - HOUSTON - NEW ORLEANS
<PAGE>
EXHIBIT 23.2
MILLER AND LENTS, LTD.
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
Board of Directors
Miller Exploration Company
Traverse City, Michigan
We hereby consent to the references to Miller and Lents, Ltd. and to the
proved reserve estimates from our report entitled, "Miller Exploration
Company, Proved Reserves and Future Net Revenues as of December 31, 1997,
SEC Price Case, Consolidation Interests" dated March 19, 1998 in the Annual
Report on Form 10-K of Miller Exploration Company for the fiscal year ended
December 31, 1997. We hereby consent to the incorporation by reference of
the Miller and Lents, Ltd. estimates of proved reserves contained in the
Annual Report on Form 10-K into Miller Exploration Company's Registration
Statement on Form S-1 (333-40383).
MILLER AND LENTS, LTD.
/s/ Larry M. Gring
Larry M. Gring
Senior Vice President
Houston, Texas
March 30, 1998
<PAGE>
EXHIBIT 24.1
LIMITED POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Miller Exploration Company, does hereby
appoint C.E. MILLER, KELLY E. MILLER, and WILLIAM J. BAUMGARTNER, or any of
them, his attorneys or attorney to execute in his name an Annual Report of
Miller Exploration Company on Form 10-K for its fiscal year ended December
31, 1997, and any amendments to that report, and to file it with the
Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: March 23, 1998 /S/ C.E. MILLER
C.E. Miller
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Miller Exploration Company, does hereby
appoint C.E. MILLER, KELLY E. MILLER, and WILLIAM J. BAUMGARTNER, or any of
them, his attorneys or attorney to execute in his name an Annual Report of
Miller Exploration Company on Form 10-K for its fiscal year ended December
31, 1997, and any amendments to that report, and to file it with the
Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: March 23, 1998 /S/ KELLY E. MILLER
Kelly E. Miller
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Miller Exploration Company, does hereby
appoint C.E. MILLER, KELLY E. MILLER, and WILLIAM J. BAUMGARTNER, or any of
them, his attorneys or attorney to execute in his name an Annual Report of
Miller Exploration Company on Form 10-K for its fiscal year ended December
31, 1997, and any amendments to that report, and to file it with the
Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: March 23, 1998 /S/ WILLIAM J. BAUMGARTNER
William J. Baumgartner
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Miller Exploration Company, does hereby
appoint C.E. MILLER, KELLY E. MILLER, and WILLIAM J. BAUMGARTNER, or any of
them, his attorneys or attorney to execute in his name an Annual Report of
Miller Exploration Company on Form 10-K for its fiscal year ended December
31, 1997, and any amendments to that report, and to file it with the
Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: March 23, 1998 /S/ FRANK M. BURKE, JR.
Frank M. Burke, Jr.
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Miller Exploration Company, does hereby
appoint C.E. MILLER, KELLY E. MILLER, and WILLIAM J. BAUMGARTNER, or any of
them, his attorneys or attorney to execute in his name an Annual Report of
Miller Exploration Company on Form 10-K for its fiscal year ended December
31, 1997, and any amendments to that report, and to file it with the
Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: March 23, 1998 /S/ DAN A. HUGHES, JR.
Dan A. Hughes, Jr.
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Miller Exploration Company, does hereby
appoint C.E. MILLER, KELLY E. MILLER, and WILLIAM J. BAUMGARTNER, or any of
them, his attorneys or attorney to execute in his name an Annual Report of
Miller Exploration Company on Form 10-K for its fiscal year ended December
31, 1997, and any amendments to that report, and to file it with the
Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: March 23, 1998 /S/ WILLIAM CASEY MCMANEMIN
William Casey McManemin
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Miller Exploration Company, does hereby
appoint C.E. MILLER, KELLY E. MILLER, and WILLIAM J. BAUMGARTNER, or any of
them, his attorneys or attorney to execute in his name an Annual Report of
Miller Exploration Company on Form 10-K for its fiscal year ended December
31, 1997, and any amendments to that report, and to file it with the
Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: March 23, 1998 /S/ KENNETH J. FOOTE
Kenneth J. Foote
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-K FOR MILLER EXPLORATION COMPANY AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 146
<SECURITIES> 0
<RECEIVABLES> 2,109
<ALLOWANCES> 0
<INVENTORY> 47
<CURRENT-ASSETS> 6,185
<PP&E> 36,393
<DEPRECIATION> (12,425)
<TOTAL-ASSETS> 30,428
<CURRENT-LIABILITIES> 12,170
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 16,113
<TOTAL-LIABILITY-AND-EQUITY> 30,428
<SALES> 6,783
<TOTAL-REVENUES> 7,412
<CGS> 0
<TOTAL-COSTS> 6,184
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,200
<INCOME-PRETAX> 28
<INCOME-TAX> 0
<INCOME-CONTINUING> 28
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
