<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
SEPTEMBER 30, 1998 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
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS NOVEMBER 13, 1998
----- -----------------
<S> <C> <C>
Common stock, $.01 par value 12,492,597 shares
</TABLE>
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<PAGE>
MILLER EXPLORATION COMPANY
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Operations--
Three Months and Nine Months Ended September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Balance Sheets--
September 30, 1998 and December 31, 1997 . . . . . . . . . . . . .4
Consolidated Statement of Equity--
Nine Months Ended September 30, 1998 . . . . . . . . . . . . . . .5
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 1998 and 1997. . . . . . . . . . .6
Notes to Consolidated Financial Statements . . . . . . . . . . . .7
Pro Forma Statements of Operations--
Three Months and Nine Months Ended September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 23
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 24
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------- ------
(NOTE 1) (NOTE 1)
<S> <C> <C> <C> <C>
REVENUES:
Natural gas . . . . . . . . . . . . $4,833 $1,334 $13,395 $4,329
Crude oil and condensate. . . . . . . . 775 191 1,854 710
Other operating revenues. . . . . . . . 250 160 572 492
------ ------ ------- ------
Total operating revenues. . . . . . . . 5,858 1,685 15,821 5,531
------ ------ ------- ------
OPERATING EXPENSES:
Lease operating expenses and production taxes. 907 291 2,314 917
Depreciation, depletion and amortization . . 3,596 718 9,214 2,019
General and administrative . . . . . . . 763 434 2,596 1,335
------ ------ ------- ------
Total operating expenses . . . . . . 5,266 1,443 14,124 4,271
------ ------ ------- ------
OPERATING INCOME. . . . . . . . . . . . 592 242 1,697 1,260
------ ------ ------- ------
INTEREST EXPENSE. . . . . . . . . . . . (522) (532) (1,084) (922)
------ ------ ------- ------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . 70 (290) 613 338
------ ------ ------- ------
INCOME TAX PROVISION (CREDIT) (Note 2) . . . . (30) 5,492
------ -------
NET INCOME (LOSS) . . . . . . . . . . . $ 100 $ (290) $(4,879) $ 338
====== ====== ======= ======
-3-
<PAGE>
EARNINGS (LOSS) PER SHARE (Note 3). . . . . .
Basic . . . . . . . . . . . . . . $ 0.01 $ (0.46)
====== =======
Diluted . . . . . . . . . . . . . $ 0.01 $ (0.46)
====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
<TABLE>
MILLER EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
1998 1997
-------- --------
(UNAUDITED) (NOTE 1)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . $ 121 $ 146
Accounts receivable . . . . . . . . . . . . . 3,881 2,109
Inventories, prepaids and advances to operators. . . . 1,923 994
Other current assets. . . . . . . . . . . . . -- 2,936
-------- --------
Total current assets . . . . . . . . . . . 5,925 6,185
-------- --------
OIL AND GAS PROPERTIES at cost (full cost method):
Proved oil and gas properties. . . . . . . . . . 89,237 29,324
Unproved oil and gas properties . . . . . . . . . 41,851 7,069
Less-Accumulated depreciation, depletion and amortization (21,510) (12,425)
-------- --------
Net oil and gas properties . . . . . . . . . 109,578 23,968
-------- --------
OTHER ASSETS. . . . . . . . . . . . . . . . . 1,012 275
-------- --------
Total assets. . . . . . . . . . . . . . $116,515 $ 30,428
======== ========
LIABILITIES AND EQUITY
----------------------
CURRENT LIABILITIES:
Current portion of notes payable . . . . . . . . $ 500 $ 7,697
Accounts payable. . . . . . . . . . . . . . 7,199 3,870
Other accrued expenses. . . . . . . . . . . . 4,319 603
-------- --------
Total current liabilities . . . . . . . . . 12,018 12,170
-------- --------
NOTES PAYABLE . . . . . . . . . . . . . . . . 2,500 481
LONG-TERM DEBT . . . . . . . . . . . . . . . . 30,500 --
-5-
<PAGE>
DEFERRED INCOME TAXES. . . . . . . . . . . . . . 8,203 --
DEFERRED REVENUE . . . . . . . . . . . . . . . 1,623 1,664
COMMITMENTS AND CONTINGENCIES (NOTE 6)
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; 12,492,597 shares outstanding . . . . 126 --
Additional paid in capital . . . . . . . . . . 67,136 --
Deferred compensation . . . . . . . . . . . . (876) --
Combined equity . . . . . . . . . . . . . . -- 8,588
Retained earnings (deficit) . . . . . . . . . . (4,715) 7,525
-------- --------
Total equity. . . . . . . . . . . . . . 61,671 16,113
-------- --------
Total liabilities and equity . . . . . . . . $116,515 $ 30,428
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
<PAGE>
<TABLE>
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF EQUITY
(In thousands)
(Unaudited)
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID IN DEFERRED COMBINED RETAINED
STOCK STOCK CAPITAL COMPENSATION EQUITY EARNINGS
--------- ------ ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE-December 31, 1997 -- -- -- -- $8,588 $ 7,525
Net loss and capital prior to
S Corporation termination -- -- -- -- 173 (164)
S Corporation termination -- -- $16,122 -- (8,761) (7,361)
Common stock issuance -- $ 56 39,983 -- -- --
Combination transaction -- 69 10,156 -- -- --
Restricted stock issuance -- 1 875 $(876) -- --
Net loss after S Corporation
termination -- -- -- -- -- (4,715)
--- ---- ------- ----- ------ -------
BALANCE-September 30, 1998 -- $126 $67,136 $(876) $ -- $(4,715)
=== ==== ======= ===== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-7-
<PAGE>
<TABLE>
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
-------- -------
(NOTE 1)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . $ (4,879) $ 338
Adjustments to reconcile net income (loss) to net cash from
operating activities-
Depreciation, depletion and amortization. . . . . . . . 9,214 2,019
Deferred revenue. . . . . . . . . . . . . . . . (41) (42)
Deferred income taxes . . . . . . . . . . . . . . 268 --
Changes in assets and liabilities-
Accounts receivable. . . . . . . . . . . . . . (1,772) (7)
Other assets . . . . . . . . . . . . . . . . 1,874 229
Accounts payable. . . . . . . . . . . . . . . 3,329 (231)
Other accrued expenses. . . . . . . . . . . . . 3,716 (105)
-------- -------
Net cash flows provided by operating activities . . . 11,709 2,201
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures. . . . . . . . . . (32,161) (5,166)
Acquisition of properties. . . . . . . . . . . . . . . (51,011) --
Proceeds from sale of oil and gas properties and purchases of
equipment, net . . . . . . . . . . . . . . . . . 515 2,679
-------- -------
Net cash flows used in investing activities. . . . . . (82,657) (2,487)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal . . . . . . . . . . . . . . . . (8,178) (514)
Net borrowing on notes payable . . . . . . . . . . . . . 33,500 572
Contributions, return of capital and stock proceeds, net . . . . 45,601 125
Payments of dividends . . . . . . . . . . . . . . . . -- (200)
-------- -------
Net cash flows provided by (used in) financing activities . 70,923 (17)
-------- -------
-8-
<PAGE>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . (25) (303)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD . . . . . . . . . . . . . . . . . . . 146 410
-------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD . . . . . . . . . $ 121 $ 107
======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . . . $ 761 $ 943
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-9-
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND NATURE OF OPERATIONS
The consolidated financial statements of Miller Exploration Company
("Miller" or the "Company") and subsidiaries included herein have been
prepared by management without audit pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Accordingly, they
reflect all adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial results for the interim periods.
Certain information and notes normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. However,
management believes that the disclosures are adequate to make the
information presented not misleading. These consolidated financial
statements should be read in conjunction with the financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain reclassifications have been made to prior period financial
statements to conform with the current presentation.
INITIAL PUBLIC OFFERING
On February 9, 1998, the Company completed the initial public offering
(the "Offering") of its Common Stock and concurrently completed the
Combination Transaction (as defined below). 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.
The consolidated financial statements as of and for the periods ended
September 30, 1998 include the accounts of the Company and its subsidiaries
-10-
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
after taking into effect the Offering and the Combination Transaction. The
financial statements as of or for the periods ending in 1997 include the
accounts of the Company and its affiliated entities (as defined below)
before the Offering and the Combination Transaction as previously included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries after elimination of all
intercompany accounts and transactions.
THE COMBINATION TRANSACTION
The Company was formed as a Delaware corporation in November 1997 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
(collectively, the "Combined Assets") 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. (the "affiliated entities," all Michigan corporations
owned by Miller family members who are beneficial owners of MOC) in
exchange for an aggregate consideration of approximately 5,300,000 shares
of Common Stock of Miller. The operations of all of these entities had
been managed through the same management team, and had been owned by the
same members of the Miller family. Miller completed the Combination
Transaction concurrently with consummation of the Offering.
PRINCIPLES OF COMBINATION
The accompanying financial statements as of and for the periods ending
in 1997 include the accounts of Miller, MOC and the other affiliated
entities described above, all of which share common ownership and
management. 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 SEC Staff Accounting Bulletin No. 47
-11-
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
because of the high degree of common ownership among, and the common
control of, the combined entities. Accordingly, the accompanying accounts
as of and for the periods ending in 1997 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 1,600,000 shares of Common Stock for interests
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 (February 9, 1998). The
financial statements as of and for the periods ending in 1997 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 was consummated concurrently
with the Offering. This acquisition was accounted for under the purchase
method of accounting and was financed with the use of proceeds from the
Offering and with new bank borrowings. The financial statements as of and
for the periods ending in 1997 do not include the activities of these AHC
interests.
In February 1998, MOC terminated its S corporation status which
required the Company to reclassify combined equity and retained earnings as
additional paid-in capital.
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
-12-
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company has established exploration efforts concentrated primarily in five
provinces: the Mississippi Salt Basin of central Mississippi; the onshore
Gulf Coast region of Texas and Louisiana; the Michigan Basin; the southern
Alberta Basin in Montana; and the Williston Basin in North Dakota.
OIL AND GAS PROPERTIES
Securities and Exchange Commission Regulation S-X, Rule 4-10 requires
companies reporting on a full cost basis to apply a ceiling test wherein
the capitalized costs within the full cost pool may not exceed the net
present value of the Company's proven oil and gas reserves plus the
carrying value of unproved properties. Any such excess costs should be
charged against earnings. Using unescalated period-end prices at September
30, 1998, the Company would have recognized a non-cash impairment of oil
and gas properties in the amount of approximately $572,000 pre-tax.
However, using the improvements in pricing experienced subsequent to
period-end, the Company has determined that a write off is not required.
RECLASSIFICATIONs
Certain reclassifications have been made to prior period statements to
conform with the September 30, 1998 presentation.
(2) INCOME TAXES
Before consummation of the Offering, the Company and the combined
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 affiliated entities. Accordingly, no
provision was made for income taxes in the accompanying financial
statements as of and for the periods ending in 1997.
Due to the use of different methods for tax and financial reporting
purposes in accounting for various transactions, 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 at December 31, 1997,
would have been recorded for this difference, with a corresponding
reduction in retained earnings.
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<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Included in the deferred income tax provision for the nine months
ended September 30, 1998, is a one-time non-cash accounting charge of $5.4
million to record net deferred tax liabilities, for the differences between
tax basis and financial reporting basis, upon consummation of the Offering
and the termination of MOC's S corporation status. The effective income
tax rate for the Company for the nine months ended September 30, 1998, was
different than the statutory federal income tax rate for the following
reasons (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Income tax provision (benefit) at the federal statutory rate . . . . $ 208
Deferred tax liabilities recorded upon the Offering . . . . . . . 5,392
All other, net . . . . . . . . . . . . . . . . . . . (108)
------
Income tax provision . . . . . . . . . . . . . . . . . $5,492
======
</TABLE>
The principal components of the Company's net deferred tax liabilities
at September 30, 1998, are (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net deferred tax liabilities:
Intangible drilling costs . . . . . . . . . . . . . . $7,424
Tax depletion and depreciation in excess of financial statement
amounts . . . . . . . . . . . . . . . . . . . 684
Financial statement carrying value in excess of tax basis of
purchased assets . . . . . . . . . . . . . . . . 2,543
Other, net . . . . . . . . . . . . . . . . . . . (2,448)
------
Total net deferred tax liabilities . . . . . . . . . . . . $8,203
======
</TABLE>
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<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) EARNINGS PER SHARE
Earnings per share has been omitted from the statement of operations
for the three-month and nine-month periods ended September 30, 1997, since
such information is not meaningful and the historically combined Company
was not a separate legal entity with a singular capital structure. The
computation of earnings per share for the three-month and nine-month
periods ended September 30, 1998 is as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
------------ -----------
<S> <C> <C>
Net income (loss) attributable to
basic and diluted EPS . . . . . . . . . . . . $ 100 $(4,879)
Average common shares outstanding
applicable to basic EPS. . . . . . . . . . . 12,493 10,702
Add: options treasury shares and restricted stock . . . 109 --
------- -------
Average common shares outstanding
applicable to diluted EPS . . . . . . . . . . 12,602 10,702
Earnings (loss) per share:
Basic. . . . . . . . . . . . . . . . . $ 0.01 $ (0.46)
Diluted . . . . . . . . . . . . . . . . $ 0.01 $ (0.46)
</TABLE>
Options and restricted stock were not included in the computation of
diluted earnings per share for the nine months ended September 30, 1998
because their effect was antidilutive.
(4) NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 1997, the Company had a notes payable balance of
approximately $4.9 million which represented a borrowing against a $5.0
million bank line-of-credit and another $1.0 million line-of-credit. These
notes were paid in full during February 1998 from the proceeds of the
Offering.
-15-
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In November 1997, the Chairman of the Company loaned to MOC $2.5
million, pursuant to a promissory note, 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. At December 31, 1997 the balance of the term-loan was
approximately $0.7 million. The term loan was paid in full during February
1998 from the proceeds of the Offering.
In connection with the Offering, in February 1998, the Company entered
into a credit facility (the "Credit Facility") with Bank of Montreal,
Houston Agency ("BMO"). 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 BMO 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 gas reserves. The borrowing base
is $37.0 million and may not exceed $75.0 million. Amounts advanced under
the Credit Facility bear interest, payable quarterly, at either (i) BMO's
announced prime rate or (ii) the London Inter-Bank Offered Rate plus a
margin rate ranging from 0.75% to 1.62%, 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
hydrocarbon property of the Company, including its oil and gas properties.
At September 30, 1998, $30.5 million was outstanding under the Credit
Facility and is classified as long-term debt on the balance sheet.
In connection with the closing of the AHC acquisition on February 9,
1998, the Company has a note payable to AHC of $3.0 million (at September
-16-
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
30, 1998) which is payable on the anniversary date of the closing as follows:
$0.5 million in 1999, $1.0 million in 2000 and $1.5 million in 2001.
(5) RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
The Company uses a variety of derivative instruments to manage
exposure to fluctuations in commodity prices and interest rates. To
qualify for hedge accounting, derivatives must meet the following criteria:
(i) the item to be hedged exposes the Company to price or interest rate
risk; and (ii) the derivative reduces that exposure and is designated as a
hedge.
COMMODITY PRICE HEDGES
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 volatility in 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. For the nine months ended September 30, 1998, the
Company had approximately $407,000 of hedging gains which are included in
natural gas revenues in the consolidated statements of operations. For the
nine months ended September 30, 1998, the Company had hedged 34% of its
natural gas production, and as of September 30, 1998, the Company had 0.9
Bcf of open natural gas contracts for the months of October 1998, November
1998, February 1999 and March 1999. Subsequent to September 30, 1998, the
Company entered into additional natural gas contracts for approximately 1.7
Bcf for the time period of November 1998 to February 1999. Open contracts
totaling 1.3 Bcf subsequently have been settled resulting in hedge profits
of approximately $0.2 million.
INTEREST RATE HEDGE
The Company entered into an interest rate swap agreement, effective
November 2, 1998, to exchange the variable rate interest payment obligation
under the Credit Facility without exchanging the underlying principal
amount. This agreement converts the variable rate debt to fixed rate debt
to reduce the impact of interest rate fluctuations. The principal amount is
-17-
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
used to measure interest to be paid or received and does not represent the
exposure to credit loss. The principal amount of the Company's interest
rate swap is $25.0 million at November 2, 1998. The difference between the
amounts paid and received under the swap will be accrued and recorded as an
adjustment to interest expense over the life of the hedged agreement.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999 and cannot be applied retroactively. SFAS No. 133 must be applied to
(i) derivative instruments and (ii) certain derivative instruments embedded
in hybrid contracts that were issued, acquired or substantively modified
after December 31, 1997 (and, at the company's election, before January 1,
1998).
The Company has not yet quantified the impacts of adopting SFAS No.
133 on its financial statements and has not determined the timing of or
method of adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
(6) COMMITMENTS AND CONTINGENCIES
STOCK OPTIONS AND RESTRICTED STOCK
During 1997, the Company adopted the Stock Option and Restricted Stock
Plan of 1997 (the "1997 Stock Option Plan"). The Board of Directors
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<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. 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 stock
options 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 shares of restricted stock were transferred to
certain employees. At the time of the issuance of the restricted stock,
compensation expense of approximately $0.9 million was deferred. The
restricted stock will begin to vest at cumulative increments of one-half of
the total number of restricted stock of Common Stock subject thereto,
beginning on the first anniversary of the date of grant. Because the shares
of restricted stock 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.
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<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(7) NON-CASH INVESTING ACTIVITIES
During 1998, the Company recorded a one-time non-cash charge of
approximately $5.4 million for the termination of MOC's S corporation
status, as more fully discussed in Note 2, and acquired certain oil and gas
properties owned by non-affiliated parties for approximately $12.8 million
of its Common Stock, as more fully discussed in Note 1. These non-cash
investing activities have been excluded from the combined statement of cash
flows.
PRO FORMA FINANCIAL DATA
The pro forma financial data 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 statements of operations for the three months and nine months
ended September 30, 1998 and 1997 were prepared on the basis that the
Combination Transaction and the Offering occurred on January 1, 1997. Pro
forma data gives 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 pro forma data 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
financial statements.
-20-
<PAGE>
<TABLE>
MILLER EXPLORATION COMPANY
PRO FORMA STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- ----------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenues:
Natural gas<Fa> . . . . . . . . . . . $4,833 $4,902 $14,868 $15,565
Crude oil and condensate<Fa> . . . . . . . 775 559 2,041 2,783
Other operating revenues . . . . . . . . 250 160 572 492
------ ------ ------- -------
Total operating revenues. . . . . . . . 5,858 5,621 17,481 18,840
------ ------ ------- -------
Operating Expenses:
Lease operating expenses and production taxes<Fa> 907 463 2,521 1,517
Depreciation, depletion and amortization<Fb>. . 3,555 1,944 10,024 6,966
General and administrative<Fc> . . . . . . 763 514 2,296 1,625
------ ------ ------- -------
Total operating expenses. . . . . . . . 5,225 2,921 14,841 10,108
------ ------ ------- -------
Operating Income . . . . . . . . . . . . 633 2,700 2,640 8,732
------ ------ ------- -------
Interest Expense<Fd> . . . . . . . . . . . (522) (199) (1,084) (724)
------ ------ ------- -------
Income before income taxes . . . . . . . . . 111 2,501 1,556 8,008
------ ------ ------- -------
Provision (credit) for income taxes<Fe>. . . . . (16) 664 362 2,234
------ ------ ------- -------
Net income . . . . . . . . . . . . . . $ 127 $1,837 $ 1,194 $ 5,774
====== ====== ======= =======
Earnings per share<Ff>:
Basic . . . . . . . . . . . . . . . $ 0.01 $ 0.15 $ 0.10 $ 0.46
Diluted . . . . . . . . . . . . . . 0.01 0.15 0.09 0.46
-21-
<PAGE>
Average number of shares outstanding<Ff>:
Basic. . . . . . . . . . . . . . . 12,493 12,493 12,493 12,493
Diluted . . . . . . . . . . . . . . 12,602 12,602 12,602 12,602
<FN>
- -------------------------
Notes to pro forma financial data (unaudited):
<Fa> Includes results of operations from the Acquired Properties.
<Fb> Reflects the estimated additional depreciation, depletion and
amortization expense resulting from the acquisition of the Acquired
Properties using the unit-of-production method.
<Fc> Reflects 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 $0.3 million of non-recurring
bonuses paid to certain employees of the Company in connection with
consummation of the Offering.
<Fd> Reflects 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 and the increase in interest expense from the new borrowing
under the Credit Facility.
<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 consummation of the Combination Transaction,
the Company was required to record a one-time non-cash charge to
earnings of $5.4 million in connection with establishing a deferred
tax liability on the balance sheet. This non-recurring charge has
been excluded from the statements.
<Ff> Reflects 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.
</FN>
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Miller is an independent oil and gas exploration, development and
production company that has developed a base of producing properties and
inventory of prospects in Mississippi, Louisiana, Texas, Montana and
North Dakota.
-22-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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.
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.
Securities and Exchange Commission Regulation S-X, Rule 4-10 requires
companies reporting on a full cost basis to apply a ceiling test wherein
the capitalized costs within the full cost pool may not exceed the net
present value of the Company's proven oil and gas reserves plus the
carrying value of unproved properties. Any such excess costs should be
charged against earnings. Using unescalated period-end prices at September
30, 1998, the Company would have recognized a non-cash impairment of oil
and gas properties in the amount of approximately $572,000 pre-tax.
However, using the improvements in pricing experienced subsequent to
period-end, the Company has determined that a write off is not required.
The Company was organized as a Delaware corporation in November 1997
to serve as the surviving company in the Combination Transaction. On
February 9, 1998, pursuant to the agreements among the Company and the
owners of the Combined Assets, the Company issued to those owners
approximately 6,900,000 shares of Common Stock. Additionally, the Company
acquired interests in certain properties from AHC for approximately $50.5
million in cash. The issuance of the shares and the cash payment were
completed on February 9, 1998, in connection with the Company's initial
public offering.
For further discussion of the Offering and the Combination
Transaction, see Note 1 to the Consolidated Financial Statements.
-23-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997
The following table summarizes production volumes, average sales
prices, operating revenues and average costs for the Company's oil and
natural gas operations for the periods presented (in thousands, except per
unit amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
------ ------ ------ ------
(HISTORICAL) (PRO FORMA)
(Dollars in thousands, except per unit amounts)
<S> <C> <C> <C> <C>
Production volumes:
Crude oil and condensate (Mbbls) . . . . . 73 9 73 44
Natural gas (Mmcf) . . . . . . . . . . 2,349 553 2,349 1,805
Natural gas equivalent (Mmcfe) . . . . . . 2,787 609 2,787 2,068
Average sales prices:
Crude oil and condensate ($ per Bbl) . . . . $10.62 $21.22 $10.62 $12.70
Natural gas ($ per Mcf) . . . . . . . . 2.06 2.41 2.06 2.72
Natural gas equivalent ($ per Mcfe) . . . . 2.01 2.50 2.01 2.64
Average Costs ($ per Mcfe):
Lease operating expenses and production taxes . $ .33 $ .48 $ .33 $ .22
Depletion, depreciation and amortization. . . 1.29 1.18 1.28 .94
General and administrative . . . . . . . .27 .71 .27 .25
</TABLE>
Because of the significance of the Combination Transaction which
occurred on February 9, 1998, the results of operations have been presented
above on a pro forma and historical basis, and the results of operations
will be described below on a pro forma basis. For additional information
regarding the Combination Transaction, see Note 1 to the Consolidated
Financial Statements and the Pro Forma Statements of Operations in this
filing.
PRO FORMA THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO PRO FORMA
THREE MONTHS ENDED SEPTEMBER 30, 1997
Oil and natural gas revenues for the three months ended September 30,
1998 increased 3% to $5.6 million from $5.5 million for the same period in
-24-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
1997. The revenues for the three months ended September 30, 1998, include
approximately $329,000 of hedging gains (see Risk Management Activities and
Derivatives Transactions below). Production volumes for natural gas during
the three months ended September 30, 1998 increased 30% to 2,349 MMcf from
1,805 MMcf for the same period in 1997. Average natural gas prices
decreased 24% to $2.06 per Mcf for the three months ended September 30,
1998 from $2.72 per Mcf in the same period in 1997. Production volumes for
oil during the three months ended September 30, 1998 increased 66% to 73
MBbls from 44 MBbls for the same period in 1997. Average oil prices
decreased 16% to $10.62 per barrel during the three months ended
September 30, 1998 from $12.70 per barrel in the same period in 1997. The
changes in commodity prices were experienced by the industry as a whole
during the third quarter of 1998.
Lease operating expenses and production taxes for the three months
ended September 30, 1998 increased 96% to $0.9 million from $0.5 million
for the same period in 1997. 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 $.33 per Mcfe for the
three months ended September 30, 1998 from $.22 per Mcfe in the same period
in 1997.
Depreciation, depletion and amortization ("DD&A") expense for the
three months ended September 30, 1998 increased 83% to $3.6 million from
$1.9 million for the same period in 1997. This increase was due to a 36%
increase in the 1998 depletion rate to $1.28 per Mcfe from $.94 per Mcfe
for the three months ended September 30, 1997. The higher depletion rate
was the combined result of increased production and an increase in costs
subject to DD&A.
General and administrative expense for the three months ended
September 30, 1998 increased 48% to $0.8 million from $0.5 million for the
same period in 1997, as a result of increases in the number of employees
and related salaries and benefits.
Interest expense for the three months ended September 30, 1998
increased 162% to $0.5 million from $0.2 million in the same period in
1997, as a result of increased debt levels in 1998 for substantial
exploration and development activities in the Mississippi Salt Basin area.
Net income for the three months ended September 30, 1998 decreased to
$0.1 million from $1.8 million for the same period in 1997, as a result of
the factors described above.
-25-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The following table summarizes production volumes, average sales
prices, operating revenues and average costs for the Company's oil and
natural gas operations for the periods presented (in thousands, except per
unit amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
------ ------ ------ ------
(HISTORICAL) (PRO FORMA)
(Dollars in thousands, except per unit amounts)
<S> <C> <C> <C> <C>
Production volumes:
Crude oil and condensate (Mbbls) . . . . . 162 33 176 152
Natural gas (Mmcf) . . . . . . . . . . 6,442 1,713 7,135 6,295
Natural gas equivalent (Mmcfe) . . . . . . 7,414 1,913 8,191 7,206
Average sales prices:
Crude oil and condensate ($ per Bbl) . . . . $11.44 $21.26 $11.60 $18.33
Natural gas ($ per Mcf) . . . . . . . . 2.08 2.53 2.08 2.47
Natural gas equivalent ($ per Mcfe. . . . . 2.06 2.63 2.06 2.55
Average Costs ($ per Mcfe):
Lease operating expenses and production taxes . $ .31 $ 0.48 $ .31 $ 0.21
Depletion, depreciation and amortization. . . 1.24 1.06 1.22 0.97
General and administrative . . . . . . . .35 0.70 .28 0.23
</TABLE>
Because of the significance of the Combination Transaction which occurred
on February 9, 1998, the results of operations have been presented above on
a pro forma and historical basis, and the results of operations will be
described below on a pro forma basis. For additional information regarding
the Combination Transaction, see Note 1 to the Consolidated Financial
Statements and the Pro Forma Statements of Operations in this filing.
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO PRO FORMA NINE
MONTHS ENDED SEPTEMBER 30, 1997
Oil and natural gas revenues for the nine months ended September 30,
1998 decreased 8% to $16.9 million from $18.3 million for the same period
in 1997. The revenues for the nine months ended September 30, 1998,
-26-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
include approximately $407,000 of hedging gains (see Risk Management
Activities and Derivatives Transactions below). Production volumes for
natural gas during the nine months ended September 30, 1998 increased 13%
to 7,135 MMcf from 6,295 MMcf for the same period in 1997. Average natural
gas prices decreased 16% to $2.08 per Mcf for the nine months ended
September 30, 1998 from $2.47 per Mcf in the same period in 1997.
Production volumes for oil during the nine months ended September 30, 1998
increased 16% to 176 MBbls from 152 MBbls for the same period in 1997.
Average oil prices decreased 37% to $11.60 per barrel during the nine
months ended September 30, 1998 from $18.33 per barrel in the same period
in 1997. This decrease in commodity prices was experienced by the industry
as a whole during the first nine months of 1998.
Lease operating expenses and production taxes for the nine months
ended September 30, 1998 increased 66% to $2.5 million from $1.5 million
for the same period in 1997. 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 $.31 per Mcfe for the
nine months ended September 30, 1998 from $0.21 per Mcfe in the same period
in 1997.
DD&A expense for the nine months ended September 30, 1998 increased
44% to $10.0 million from $7.0 million for the same period in 1997. This
increase was due to a 26% increase in the 1998 depletion rate to $1.22 per
Mcfe from $0.97 per Mcfe for the nine months ended September 30, 1997. The
higher depletion rate was the combined result of increased production and
an increase in costs subject to DD&A.
General and administrative expense for the nine months ended
September 30, 1998 increased 41% to $2.3 million from $1.6 million for the
same period in 1997, as a result of increases in the number of employees
and related salaries and benefits.
Interest expense for the nine months ended September 30, 1998
increased 50% to $1.1 million from $0.7 million in the same period in 1997,
as a result of increased debt levels in 1998 for substantial exploration
and development activities in the Mississippi Salt Basin area.
Net income for the nine months ended September 30, 1998 decreased to
$1.2 million from $5.8 million for the same period in 1997, as a result of
the factors described above.
-27-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 $5.6 million (excluding current maturities of
notes payable) at September 30, 1998 and $6.0 million at December 31, 1997.
The Company has entered into the Credit Facility with BMO. 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 BMO 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 borrowing base is
$37.0 million and may not exceed $75.0 million. Amounts advanced under the
Credit Facility bear interest, payable quarterly, at either (i) BMO's
announced prime rate or (ii) the London Inter-Bank Offered Rate plus
a margin rate ranging from 0.75% to 1.62%, 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. At
September 30, 1998, $30.5 million was outstanding under the Credit
Facility.
In connection with the closing of the AHC acquisition, the Company has
a note payable to AHC of $3.0 million (at September 30, 1998) which is
payable during 1999-2001.
Pursuant to a promissory note dated November 26, 1997, the C.E. Miller
Trust loaned on an unsecured basis $2.5 million to MOC, which MOC used to
fund a down payment made in connection with the Combination Transaction.
This note was paid in full during February 1998 from the proceeds of the
Offering.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
At December 31, 1997, the Company had an approximate notes payable
balance of $5.0 million which represented a borrowing against a $5.0
million bank line-of-credit and another $1.0 million line-of-credit. These
notes were 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. At December 31, 1997, the balance of the term loan was
$0.7 million. The term loan was paid in full during February 1998 from the
proceeds of the Offering.
The Company has budgeted 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. Actual capital expenditures for the
nine months ended September 30, 1998 were approximately $32.2 million.
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.
-29-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
The Company uses a variety of derivative instruments to manage
exposure to fluctuations in commodity prices and interest rates. To
qualify for hedge accounting, derivatives must meet the following criteria:
(i) the item to be hedged exposes the Company to price or interest rate
risk; and (ii) the derivative reduces that exposure and is designated as a
hedge.
COMMODITY PRICE HEDGES
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
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 hedge contracts
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. For the nine months ended September 30, 1998, the
Company had hedged 34% of its natural gas production. As of September 30,
1998, the Company had 0.9 Bcf of open natural gas contracts for the months
of October 1998, November 1998, February 1999 and March 1999. Subsequent
to September 30, 1998, the Company entered into additional natural gas
contracts for approximately 1.7 Bcf for the time period of November 1998 to
February 1999. Open contracts totaling 1.3 Bcf subsequently have been
settled resulting in hedge profits of approximately $0.2 million.
-30-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
INTEREST RATE HEDGE
The Company entered into an interest rate swap agreement, effective
November 2, 1998, to exchange the variable rate interest payment obligation
under the Credit Facility without exchanging the underlying principal
amount. This agreement converts the variable rate debt to fixed rate debt
to reduce the impact of interest rate fluctuations. The principal amount is
used to measure interest to be paid or received and does not represent the
exposure to credit loss. The principal amount of the Company's interest
rate swap is $25.0 million at November 2, 1998. The difference between the
amounts paid and received under the swap will be accrued and recorded as an
adjustment to interest expense over the life of the hedged agreement.
For additional information regarding recently issued accounting
standards impacting the accounting for hedging activities, see Note 5 to
the Consolidated Financial Statements in this filing.
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.
ENVIRONMENTAL AND OTHER REGULATORY MATTERS
The Company's business is subject to certain federal, state and local
laws and regulations relating to the exploration for, and the development,
production and transportation of, oil and natural gas, as well as
environmental and safety matters. Many of these laws and regulations have
become more stringent in recent years, often imposing greater liability on
a larger number of potentially responsible parties. Although the Company
believes it is in substantial compliance with all applicable laws and
regulations, the requirements imposed by laws and regulations frequently
are changed and subject to interpretation, and the Company is unable to
predict the ultimate cost of compliance with these requirements or their
effect on its operations. Any suspensions, terminations or inability to
meet applicable bonding requirements could materially adversely affect the
Company's business, financial condition and results of operations.
Although significant expenditures may be required to comply with
governmental laws and regulations applicable to the Company, compliance
has not had a material adverse effect on the earnings or competitive
-31-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
position of the Company. Future regulations may add to the cost of,
or significantly limit, drilling activity.
YEAR 2000 READINESS DISCLOSURE
This Year 2000 Readiness Disclosure is based upon and partially
repeats information provided by the Company's outside consultants and
others regarding the Year 2000 readiness of the Company and its customers,
suppliers, financial institutions and other parties. Although the Company
believes this information to be accurate, it has not independently verified
such information.
The Company is aware of the issues associated with the programming
code in existing computer systems as the millennium (year 2000) approaches.
The "year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the two
digit year value to 00. The issue is whether computer systems will
properly recognize date sensitive information when the year changes to
2000. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail.
The Company has initiated a plan to prepare its computer systems and
applications for possible year 2000 problems. Under the plan, the Company
will continue to identify its computer hardware and software systems and
equipment with embedded computer chips; assess the effects of the year 2000
issues; and enhance the plan by developing the steps necessary to identify,
correct or reprogram and test systems for year 2000 compliance. The
Company has completed approximately 50% of the year 2000 modifications on
its networked computer applications. The Company will continue to assess
the impact of the year 2000 issue on its systems and applications
throughout 1998 and 1999. The Company's goal is to perform tests of its
systems and applications during 1999 and to have systems and applications
year 2000 ready by July 1999, allowing the remaining time to be used for
validation and testing.
The Company expects to incur internal staff costs as well as
consulting and other expenses to prepare the systems for the year 2000.
The Company expects to spend no more than $75,000 in connection with
identifying, assessing, remediating and testing year 2000 issues. The
Company expects that it will expense all costs associated
with system changes. The Company also may invest in new or upgraded
technology which has a definable value lasting beyond 2000. In these
instances, where year 2000 compliance is merely ancillary, the Company may
capitalize and depreciate such an asset over its estimated useful life.
-32-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Based on currently available information, management does not
anticipate that the costs to address the year 2000 issues will have a
material adverse impact on the Company's financial condition, results of
operations or liquidity. However, the extent to which the computer
operations and other systems of the Company's important third parties are
adversely affected could, in turn, affect the Company's ability to
communicate with third parties and could have a material adverse effect on
the operations of the Company (including but not limited to failures in
service, disruptions in the Company's ability to bill customers and pay
suppliers and the possible slowdown of certain computer-dependent
processes).
The Company has begun to inquire of third party vendors, suppliers and
customers, which have a material relationship with the Company, as to the
status of their year 2000 readiness. To date, the Company has not received
sufficient responses from these third parties that would enable the Company
to assess the status of the third parties' readiness for the year 2000.
Unreadiness by these third parties would expose the Company to the
potential for loss and impairment of business processes and activities.
The Company is assessing these risks and is creating contingency plans
intended to address perceived risks.
The costs of the project and the date on which the Company expects to
complete the year 2000 modifications are based on management's best
estimates. There can be no guarantee that these estimates will be achieved
and actual results could differ from those anticipated. Specific factors
that might cause differences include, but are not limited to, the ability
of other companies on which the Company's systems rely to modify or convert
their systems to be year 2000 ready, the ability of all third parties who
have business relationships with the Company to continue their businesses
without interruption and similar uncertainties. As a result, the Company
is in the process of evaluating possible internal and external scenarios
that might have an adverse impact on the Company. The Company also
recognizes that a contingency plan must be developed in the event the
Company's systems cannot be made year 2000 compliant on a timely basis.
The Company expects to complete the development of this contingency plan by
July 1999.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of
operations, and other sections of this Form 10-Q, contain forward-looking
statements that are based on management's beliefs, assumptions, current
expectations, estimates and projections about the oil and gas industry, the
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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,
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, the effects
of the Year 2000 issue on the Company's business, 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.
-34-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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 5. OTHER INFORMATION
The Company's Bylaws contain provisions regarding the procedure and
permissibility of stockholder proposals. Under the Bylaws no matter may be
presented for stockholder action at an annual or special meeting of
stockholders unless such matter is: (i) specified in the notice of the
meeting (or any supplement to the notice) given by or at the direction of
the Board of Directors; (ii) otherwise presented at the meeting by or at
the direction of the Board of Directors; (iii) properly presented for
action at the meeting by a stockholder in accordance with the notice
provisions set forth in the Bylaws and any other applicable requirements;
or (iv) a procedural matter presented, or accepted for presentation, by the
Chairperson of the meeting in his or her sole discretion.
For a matter to be properly presented by a stockholder, the
stockholder must have given timely notice of the matter in writing to the
Secretary of the Company. To be timely, the notice must be delivered to or
mailed to and received at the principal executive offices of the Company
not less than 120 calendar days prior to the date corresponding to the date
of the Company's proxy statement or notice of meeting released to
stockholders in connection with the last preceding annual meeting of
stockholders in the case of an annual meeting (unless the Company did not
hold an annual meeting within the last year, or if the date of the upcoming
annual meeting changed by more than 30 days from the date of the last
preceding meeting, then the notice must be delivered or mailed and received
not more than seven days after the earlier of the date of the notice of the
meeting or public disclosure of the date of the meeting), and not more than
seven days after the earlier of the date of the notice of the meeting or
public disclosure of the date of the meeting in the case of a special
meeting. The notice by the stockholder must set forth: (i) a brief
description of the matter the stockholder desires to present for
stockholder action; (ii) the name and record address of the stockholder
proposing the matter for stockholder action; (iii) the class and number of
shares of capital stock of the Company that are beneficially owned by the
stockholder; and (iv) any material interest of the stockholder in the
matter proposed for stockholder action.
The stockholder proposal, together with any accompanying supporting
statement, may not in the aggregate exceed 500 words. Except to the extent
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<PAGE>
that a stockholder proposal submitted pursuant to the Bylaws is not made
available at the time of mailing, the notice of the purposes of the meeting
shall include the name and address of and the number of shares of the
voting security held by the proponent of each stockholder proposal.
A stockholder may submit matters and proposals for stockholder action
at any annual or special stockholder meeting if the matters and proposals
are of general concern to, and are proper subjects for action by, the
stockholders. A submitted proposal or matter may not be presented for
stockholder action if it: (i) relates to the enforcement of a personal
claim or the redress of a personal grievance against the Company, its
management or any other person; (ii) consists of a recommendation, request
or mandate that action be taken with respect to a matter, including a
general economic, political, racial, religious, social or similar cause,
that is not significantly related to the Company's business or is not
within the Company's power to effectuate; (iii) has, at the stockholder's
request, previously been submitted in either of the last two annual
stockholder meetings and the stockholder has failed to present the
proposal, in person or by proxy, for action at the meeting; (iv) is
substantially similar to a matter or proposal presented within the
preceding five calendar years: (x) if it was submitted once during the past
five annual meetings and it received less than 3% of the total votes cast,
or (y) if it was submitted twice during the past five annual meetings and
it received less than 6% of the total votes cast at the time of its second
submission, or (z) if it was submitted three times during such period and
it received less than 10% of the votes cast at the time of its third
submission (if any of (x), (y) or (z) apply, the proposal may be omitted
for three years after the latest previous submission); or (v) consists of a
recommendation or request that the management take action with respect to a
matter relating to the conduct of the Company's ordinary business
operations.
Notwithstanding the above, if the stockholder desires to require the
Company to include the stockholder's proposal in the Company's proxy
materials, matters and proposals submitted for inclusion on the agenda
shall be governed by the rules and regulations under the Securities
Exchange Act of 1934, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed as exhibits to this
report on Form 10-Q:
EXHIBIT NO. DOCUMENT
3.1 Certificate of Incorporation of the Registrant.
Previously filed as an exhibit to the Company's
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<PAGE>
Registration Statement on Form S-1 (333-40383), and
incorporated herein by reference.
3.2 Bylaws of the Registrant. Previously filed as an
exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, and here
incorporated by reference.
4.1 Certificate of Incorporation. See Exhibit 3.1.
4.2 Bylaws. See Exhibit 3.2.
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 incorporated herein by
reference.
10.1(a) Stock Option and Restricted Stock Plan of 1997.<F*>
Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997, and here incorporated by
reference.
10.1(b) Form of Stock Option Agreement.<F*> Previously
filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997,
and here incorporated by reference.
10.1(c) Form of Restricted Stock Agreement.<F*> Previously
filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997,
and here incorporated by reference.
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
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<PAGE>
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.
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. Previously
filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, and
here incorporated by reference.
10.12 Guaranty Agreement by Miller Exploration Company in
favor of Bank of Montreal dated February 9, 1998.
Previously filed as an exhibit to the Company's Annual
-38-
<PAGE>
Report on Form 10-K for the year ended December 31,
1997, and here incorporated by reference.
10.13 $75,000,000 Promissory Note of Miller Oil Corporation
to Bank of Montreal dated February 9, 1998. Previously
filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, and
here incorporated by reference.
10.14 Mortgage (Michigan) between Miller Oil Corporation and
James Whitmore, as trustee for the benefit of Bank of
Montreal, dated February 9, 1998. Previously filed as
an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, and here
incorporated by reference.
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. Previously filed as
an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, and here
incorporated by reference.
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. Previously filed as an exhibit to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, and here incorporated by
reference.
11.1 Computation of Earnings Per Share.
27 Financial Data Schedule.
- ------------------------
<F*>Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during
the fiscal quarter ended September 30, 1998.
-39-
<PAGE>
SIGNATURES
Pursuant to the requirement 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
Date: November 12, 1998 By: /S/ WILLIAM J. BAUMGARTNER
William J. Baumgartner
Vice President-Finance, Chief
Financial Officer and Secretary
(Principal Accounting and Financial
Officer)
-40-
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT
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
incorporated herein by reference.
3.2 Bylaws of the Registrant. Previously filed as an
exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, and here
incorporated by reference.
4.1 Certificate of Incorporation. See Exhibit 3.1.
4.2 Bylaws. See Exhibit 3.2.
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 incorporated herein by
reference.
10.1(a) Stock Option and Restricted Stock Plan of 1997.<F*>
Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997, and here incorporated by
reference.
10.1(b) Form of Stock Option Agreement.<F*> Previously
filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997,
and here incorporated by reference.
10.1(c) Form of Restricted Stock Agreement.<F*> Previously
filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997,
and here incorporated by reference.
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*>
<PAGE>
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.
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. Previously
filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, and
here incorporated by reference.
<PAGE>
10.12 Guaranty Agreement by Miller Exploration Company in
favor of Bank of Montreal dated February 9, 1998.
Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997, and here incorporated by reference.
10.13 $75,000,000 Promissory Note of Miller Oil Corporation
to Bank of Montreal dated February 9, 1998. Previously
filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, and
here incorporated by reference.
10.14 Mortgage (Michigan) between Miller Oil Corporation and
James Whitmore, as trustee for the benefit of Bank of
Montreal, dated February 9, 1998. Previously filed as
an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, and here
incorporated by reference.
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. Previously filed as
an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, and here
incorporated by reference.
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. Previously filed as an exhibit to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, and here incorporated by
reference.
11.1 Computation of Earnings Per Share.
27 Financial Data Schedule.
- ------------------------
<F*>Management contract or compensatory plan or arrangement.
<PAGE>
EXHIBIT 11.1
<TABLE>
MILLER EXPLORATION COMPANY
COMPUTATION OF EARNINGS PER COMMON SHARE
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
--------------------- ---------------------
(In thousands, except (In thousands, except
per share data) per share data)
<S> <C> <C>
BASIC EARNINGS (LOSS) PER
SHARE
Net income (loss) $ 100 $(4,879)
Shares
Weighted average shares outstanding 12,493 10,702
------- -------
Basic earnings (loss) per share $ 0.01 $ (0.46)
======= =======
DILUTED EARNINGS (LOSS) PER
SHARE
Net income (loss) $ 100 $(4,879)
Shares
Weighted average shares outstanding 12,602 10,702
------- -------
Diluted earnings (loss) per share $ 0.01 $ (0.46)
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q FOR MILLER EXPLORATION COMPANY AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 121
<SECURITIES> 0
<RECEIVABLES> 3,881
<ALLOWANCES> 0
<INVENTORY> 89
<CURRENT-ASSETS> 5,925
<PP&E> 131,088
<DEPRECIATION> (21,510)
<TOTAL-ASSETS> 116,515
<CURRENT-LIABILITIES> 12,018
<BONDS> 0
<COMMON> 126
0
0
<OTHER-SE> 61,545
<TOTAL-LIABILITY-AND-EQUITY> 116,515
<SALES> 15,249
<TOTAL-REVENUES> 15,821
<CGS> 0
<TOTAL-COSTS> 14,123
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,084
<INCOME-PRETAX> 614
<INCOME-TAX> 5,492
<INCOME-CONTINUING> (4,879)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,879)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q FOR MILLER EXPLORATION COMPANY AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 121
<SECURITIES> 0
<RECEIVABLES> 3,881
<ALLOWANCES> 0
<INVENTORY> 89
<CURRENT-ASSETS> 5,925
<PP&E> 131,088
<DEPRECIATION> (21,510)
<TOTAL-ASSETS> 116,515
<CURRENT-LIABILITIES> 12,018
<BONDS> 0
<COMMON> 126
0
0
<OTHER-SE> 61,545
<TOTAL-LIABILITY-AND-EQUITY> 116,515
<SALES> 5,608
<TOTAL-REVENUES> 5,858
<CGS> 0
<TOTAL-COSTS> 5,266
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 522
<INCOME-PRETAX> 70
<INCOME-TAX> (30)
<INCOME-CONTINUING> 100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
