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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
[_] 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
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MILLER EXPLORATION COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Delaware 38-3379776
(I.R.S. Employer
(State or Other Jurisdiction of Identification No.)
Incorporation or Organization)
49685-0348
3104 Logan Valley Road, Traverse City,
Michigan (Zip Code)
(Address of Principal Executive
Offices)
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Registrant's telephone number, including area code: (231) 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. [_]
Number of shares outstanding of the registrant's Common Stock, $0.01 par value
(excluding shares of treasury stock) as of March 20, 2000: 12,704,208
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant as of March 20, 2000: $17,468,286
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Company's May 26, 2000
annual meeting of stockholders are incorporated by reference in Part III of
this Form 10-K
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FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Forward-looking statements can be
identified by the words "anticipates," "expects," "intends," "plans,"
"projects," "believes," "estimates" and similar expressions. Miller
Exploration Company ("Miller" or the "Company") has based the forward-looking
statements relating to its operations on current expectations, estimates and
projections about the Company and the oil and gas industry in general. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that the Company cannot predict. In addition,
the Company has based many of these forward-looking statements on assumptions
about future events that may prove to be inaccurate. Accordingly, the
Company's actual outcomes and results may differ materially from what is
expressed or forecasted in the forward-looking statements. Any differences
could result from a variety of factors including the following: fluctuations
in crude oil and natural gas prices; failure or delays in achieving expected
production from oil and gas development projects; uncertainties inherent in
predicting oil and gas reserves and oil and gas reservoir performance; lack of
exploration success; disruption or interruption of the Company's production
facilities due to accidents or political events; liability for remedial
actions under environmental regulations; liability resulting from litigation;
world economic and political conditions; and changes in tax and other laws
applicable to the Company's business.
PART I
Item 1. Business.
The Company is an independent oil and gas exploration and production company
with exploration efforts concentrated primarily in the Mississippi Salt Basin
and the Blackfeet Indian Reservation in Northwest Montana. Miller emphasizes
the use of 3-D 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. References
herein to the "Company" or "Miller" are to Miller Exploration Company, a
Delaware corporation, and its subsidiaries and predecessors.
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 $48.8 million (net of post-closing adjustments) 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.
The Combination Transaction closed on February 9, 1998 in connection with
the closing of the Company's initial public offering of 5.5 million 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, 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.
Miller incurred expenditures for exploration and development activity of
$10.3 million with respect to the Company's interest in 9 gross wells (5.5 net
to the Company) for the year ended December 31, 1999 and $47.0
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million with respect to the Company's interest in 33 gross wells (14.0 net to
the Company) for the year ended December 31, 1998. The Company currently plans
to drill 11 wells (3.9 net to the Company) in 2000, 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 $7.4 million for 2000.
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. A salt dome is a
generally dome-shaped intrusion into sedimentary rock that has a mass of salt
as its core. The impermeable nature of the salt dome structure may act as a
mechanism to trap hydrocarbons migrating through surrounding rock formations.
These geologic structures were formed by the upward thrusting of subsurface
salt accumulations towards the surface. Such structures generally are found in
groups in geologic basins that provide the necessary conditions for their
formation. Salt domes are typically subsurface structures that are easily
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. 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. 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 undeveloped leasehold interests in 57,583 gross acres (29,224 net to the
Company) covering 20 known salt domes and related salt structures.
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 breached 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,
resulting in an approximate 87.5% working interest in the aggregate to the
Company. 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 drill sites along the flanks
of the salt domes. Based on the positive results of the first several
prospects drilled, MOC acquired leasehold interests around 15 additional salt
domes and related salt structures that it considered to be prospective.
Subsequently, the Company has sold down its interest in the salt domes to
generate cash flow for 3-D seismic survey costs, exploration activity and to
pay down the Company's outstanding debt.
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 salt core of the salt
dome or were too far off structure to encounter the anticipated hydrocarbon
trap. In
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1998, the Company acquired approximately 400 square miles of 3-D seismic data
in the Mississippi Salt Basin. Wells drilled on the 3-D data demonstrate that
the 3-D seismic more effectively images the edge of the salt dome, identifying
areas that had not been seen on the 2-D seismic, in addition to providing
better definition of the size and location of future drilling targets. The
Company has continued to use technologically advanced seismic processing
methods including prestack depth migration on the 3-D data.
The Company owns an interest in 12 producing wells in the Mississippi Salt
Basin that had an aggregate average production rate as of December 31, 1999 of
36.6 million cubic feet of natural gas equivalent per day ("MMcfe/d") gross
(20.9 MMcfe/d net to the Company) at depths ranging from 10,800 to 17,300
feet. Since the Company began its exploration activity in Mississippi in 1993,
it has participated in 28 2-D seismic supported and four 3-D seismic supported
wells drilled around 10 salt dome structures, with 14 of the 2-D wells (50%)
and two of the 3-D wells (50%) establishing commercial production. At December
31, 1999, the Company also was in the process of drilling and/or completing
three 3-D wells (.6 net to the Company). Subsequent to December 31, 1999, two
of these wells were completed and determined to be commercially productive
resulting in an aggregate 3-D supported success rate of 57%. The third well is
still being completed. The Company has a back-in after payout in a 3-D well
that became commercially productive in November 1999 which increases the 3-D
supported well success rate to 63%. The Company also participated in a 3-D
well drilled in January 2000 with logged pay that, if successfully completed,
would boost the 3-D success rate to 67%. The Company has 8 gross wells (2.4
net to the Company) budgeted in 2000 for the Mississippi Salt Basin with a
capital expenditure budget of $7.0 million, including $0.4 million for a new
3-D seismic survey around a currently productive salt dome. All 8 of the
Mississippi Salt Basin wells budgeted for 2000 will be based on 3-D seismic
data
Blackfeet Indian Reservation
In 1998, the Company entered into a joint venture program with K2 Energy
Corporation ("K2") to explore on the Blackfeet Indian Reservation (the
"Reservation") located in Glacier County, Montana. At December 31, 1999, the
Company owned an interest in 150,000 gross leasehold acres (75,000 net to the
Company) in the Reservation under an Indian Mineral Development Act ("IMDA")
agreement with K2, as operator. The initial three wells under the K2 agreement
were drilled in 1999. The Company submitted completion recommendations to K2,
but never received a response or the completion information on the initial
wells. The lack of communication with K2 has aggravated an already strained
relationship. The Company has submitted three drilling proposals to fulfill
its 2000 drilling commitment to its partner and operator, K2, with plans to
begin drilling in mid-summer 2000.
In February 1999, the Company entered into a separate IMDA agreement
("Miller Agreement") with the Blackfeet Indian Tribe (the "Tribe") covering
100,000 Tribal acres on the Reservation. The Miller Agreement gives the
Company the ability to pay up to $0.2 million for a one-year extension of the
two-well annual drilling commitment. The specific provision provides that the
Company will not ask for an unreasonable time extension nor will the Tribe
unreasonably withhold its consent. In November 1999, the Company requested an
extension until July 31, 2000, and received a letter from the Tribe on March
2, 2000, stating that the Company has not fulfilled its drilling obligation.
The Tribe has not acknowledged the drilling extension provision of the
contract. The Company believes that the extension has been unreasonably
withheld, which is a violation of the contract. The Company notified the Tribe
on March 14, 2000, and has demanded the return of the initial $1.0 million
bonus paid in May 1999, and is also currently evaluating additional options.
The northern boundary of the Reservation is located approximately 25 miles
south of the Waterton, Lookout Butte and Pincher Creek Fields (Alberta,
Canada), which have produced 3.8 trillion cubic feet of natural gas ("Tcf"),
0.3 Tcf and 0.5 Tcf, respectively. The eastern boundary of the Reservation is
outlined by the Cut Bank Oil Field (Glacier County, Montana), which has
produced approximately 175 million barrels of oil ("MMBbl") and 309 Bcf of
natural gas. In 1999, the Company incurred $2.1 million in leasehold, 2-D
seismic and drilling/completion costs on this project.
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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., Key Production Company Inc. ("Key"), and Remington
Oil & Gas Corp. ("Remington"). 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 areas of mutual interest (AMI's) over and around 20 salt domes and
related salt structures 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 AMI's. The joint venture exploration
agreements begin to expire January 1, 2000, except with respect to AMI's the
Company and its partners have established production and where joint operating
agreements have been executed. In the case where joint operating agreements
have been executed, the term extends as long as any lease within that AMI
remains in effect.
Under the joint venture agreement between MOC and Key, if either party
elects not to participate on a proposed 3-D seismic program proposed by the
other party, the non-participating party will farm-out its non-producing
leasehold interest in that dome, retaining an option to participate after
payout of the seismic expenses and the drilling and completion expenses of the
exploratory well, for a proportionally reduced 25% working interest in the
exploratory well. The non-participating party will retain 25% of its original
leasehold interest outside the initial well but within the identified dome
area. Without mutual agreement, no more than two 3-D seismic surveys will be
committed to and/or conducted concurrently. Either party may propose an
Initial Exploratory Well, defined as the first exploratory well proposed and
drilled on each dome after a 3-D program has been conducted. A party electing
not to participate in an Initial Exploratory Well is obligated to assign to
the proposing party its interest in leases within that dome area to the depth
drilled by the Initial Exploratory Well. For wells drilled without conducting
a 3-D survey, a non-participating party is subject to a 400% non-consent
penalty.
In October 1999, the Company executed a joint venture agreement with
Remington covering multiple salt domes in the Mississippi Salt Basin. The
terms of the joint venture arrangement provide an up front cash payment to the
Company with the opportunity to participate in the drilling of five prospects
in the Company's Mississippi Salt Basin Project. Remington will earn a
position in undeveloped acreage ranging from 14% to 40% working interest in
the prospects by paying a disproportionate share of drilling costs in the
five-well program. Remington and Miller will also be reviewing the merits of a
3-D survey over the Dry Creek Dome, wherein Remington will have the option to
earn 50% of the undeveloped acreage at the Company's Dry Creek Dome by paying
the first $900,000 of a 3-D seismic shoot.
Blackfeet Indian Reservation Agreements
The Company entered into an Exploration and Development Agreement (the
"EDA") with K2 on June 17, 1998 to explore and develop approximately 150,000
gross leasehold acres on the Reservation located in Glacier County, Montana.
The EDA provides that Miller and K2 are equal partners in the K2/Blackfeet
Agreement (the "K2 Agreement") executed between K2 and the Blackfeet Tribe on
March 9, 1998. Terms of the Agreement call for Miller/K2 to drill three gross
wells (1.5 net to the Company) and pay $0.6 million ($0.3 million net to the
Company) to the Tribe by May 1, 1999 for which 30,000 gross acres (15,000 net
to the Company) will be earned from the Tribe. Three gross additional wells
(1.5 net to the Company) must be drilled and $0.6 million paid ($0.3 million
net to the Company) to the Tribe each subsequent year for four years totaling
15 gross wells (7.5 net to the Company) and $3.0 million ($1.5 million net to
the Company) in payments to the Tribe for which 150,000 gross acres (75,000
net to the Company) will be earned. The Tribe will grant leases with a primary
term
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of eight years and can be held by production for 45 years and provides for a
maximum combined royalty and production tax burden of 35%. The Company has met
all its obligations for 1999 under these agreements.
The Company entered into a separate IMDA Agreement with the Tribe covering
100,000 Tribal acres that was approved February 26, 1999 (Miller Agreement).
Terms of the Miller Agreement call for the Company to pay $1.0 million to the
Tribe upon approval and approximately $0.5 million each anniversary for two
years. The Company is also obligated to drill a minimum of two wells each year
with a total commitment of 10 wells over a five-year period. In addition to
the standard force majeure language, Miller negotiated the ability for a one-
year extension of the drilling commitment for which the Tribe agreed the
extension would not be unreasonably withheld. The terms of the extension were
$2 per acre up to a maximum of $200,000 prorated for the number of months the
extension was granted. The specific provisions of the Agreement provide that
the Company will not ask for an unreasonable amount of time nor will the Tribe
unreasonably withhold its consent. The Company will earn 20,000 acres with
each set of two wells drilled, regardless of the outcome of the wells. A
separate oil and gas lease covering 640 acres will be issued with a $2 per
acre rental and an eight-year term. Pursuant to the terms of the K2/Miller
Agreement executed on June 17, 1998, K2 was offered their exclusive right to
purchase 50% of the Company's interest in the Miller Agreement for cost plus
20% on June 7, 1999. K2 conditionally accepted this offer and, to date, has
not paid for its proportionate share of said lands.
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 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. 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. In June 1999, the Company sold its interest in
all of its Antrim Shale properties located in Michigan, including the
production payments mentioned above to an unrelated third party for $4.5
million.
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Volumes, Prices and Production Costs
The following table sets forth information of the Company with respect to
production volumes, average prices received and average production costs for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
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1999 1998 1997
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<S> <C> <C> <C>
Production:
Crude oil and condensate (Mbbls)................. 255.9 247.6 47.4
Natural gas (MMcf)............................... 7,593.8 8,953.3 2,241.2
Natural gas equivalent (MMcfe)................... 9,129.2 10,438.7 2,525.9
Average sales prices:
Crude oil and condensate ($ per Bbl)............. $ 13.54 $ 10.69 $ 20.33
Natural gas ($ per Mcf).......................... 2.27 2.05 2.60
Natural gas equivalent ($ per Mcfe).............. 2.27 2.01 2.69
Average Costs ($ per Mcfe):
Lease operating expenses and production taxes.... $ 0.19 $ 0.32 $ 0.58
Depreciation, depletion and amortization......... 1.76 1.53 1.00
General and administrative....................... 0.34 0.33 0.87
</TABLE>
Oil and Natural Gas Marketing and Major Customers
Most of the Company's oil and natural gas production is sold 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. Crude oil and
natural gas commodity prices have been volatile and unpredictable during 1998
and 1999, with spot market prices for crude oil falling below $10 per Bbl, and
then rising close to $30 per Bbl, and natural gas prices dropping below $1 per
Mcf and then climbing up above $3 per Mcf during this two-year period. These
wide fluctuations have had a significant impact on the Company's results of
operations, cash flow and liquidity. 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, 1999, sales to the Company's four
largest customers were approximately 73%, 16%, 3% and 3%, 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
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operations, to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.
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 all oil and natural gas interests and other properties of the Company.
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,
exploratory wells, and wells developed as a result of 3-D seismic surveys. The
exemption is phased out if the average monthly sales price for oil and gas
exceeds $25.00 per Bbl and $3.50 per Mcf, respectively. The applicable
production is exempt for up to five years and expires June 30, 2003. In April
1999, the State enacted a bill that reduces the severance tax to 3% of the
value of oil and/or gas for five years for exploratory wells or wells for
which 3-D seismic was utilized (three years for a development well) for wells
drilled on or after July 1, 1999, provided that the average monthly sales
price of oil or gas does not exceed $20 per barrel or $2.50 per Mcf of gas,
respectively. The reduced rate will be repealed on July 1, 2003.
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 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
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Regulatory Commission ("FERC") regulates the transportation and sale 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 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 will
likely 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;
8
<PAGE>
and impose substantial liabilities for pollution resulting from the Company's
operations. The permits required for various of the Company's operations are
subject to revocation, modification and renewal by issuing authorities.
Governmental authorities have the power to enforce compliance with their
regulations, and violators are subject to civil and criminal penalties or
injunction. Management believes that the Company is in substantial compliance
with current applicable environmental laws and regulations, and that the
Company has no material commitments for capital expenditures to comply with
existing environmental requirements. Nevertheless, changes in existing
environmental laws and regulations or in interpretations thereof could have a
significant impact on the Company, as well as the oil and gas industry in
general and thus the Company is unable to predict the ultimate 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 several 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 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.
9
<PAGE>
Employees
As of March 20, 2000, the Company had 23 full-time employees, including two
geologists, a geophysicist and two engineers. 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.
Dependence on Exploratory Drilling Activities
The Company's revenues, operating results and future rate of growth are
substantially dependent upon the success of its exploratory drilling program.
Exploratory drilling involves numerous risks, including the risk that no
commercially productive oil or natural gas reservoirs will be encountered. The
cost of drilling, completing and operating wells is often uncertain, and
drilling operations may be curtailed, delayed or canceled as a result of a
variety of factors, including unexpected drilling conditions, pressure or
irregularities in formations, equipment failures or accidents, adverse weather
conditions, compliance with governmental requirements and shortages or delays
in the availability of drilling rigs and the delivery of equipment. Despite
the use of 2-D and 3-D seismic data and other advanced technologies,
exploratory drilling remains a speculative activity. Even when fully utilized
and properly interpreted, 2-D and 3-D seismic data and other advanced
technologies only assist geoscientists in identifying subsurface structures
and do not enable the interpreter to know whether hydrocarbons are in fact
present in those structures. In addition, the use of 2-D and 3-D seismic data
and other advanced technologies requires greater pre-drilling expenditures
than traditional drilling strategies, and the Company could incur losses as a
result of such expenditures. The Company's future drilling activities may not
be successful. There can be no assurance that the Company's overall drilling
success rate or its drilling success rate for activity within a particular
region will not decline. Unsuccessful drilling activities could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company may not have any option or lease rights in potential drilling
locations it identifies. Although the Company has identified numerous
potential drilling locations, there can be no assurance that they will ever be
leased or drilled or that oil or natural gas will be produced from these or
any other potential drilling locations. In addition, drilling locations
initially may be identified through a number of methods, some of which do not
include interpretation of 3-D or other seismic data Actual drilling results
are likely to vary from such statistical results, and such variance may be
material. Similarly, the Company's drilling schedule may vary from its capital
budget, and there is increased risk of such variance from the 2000 capital
budget because of future uncertainties, including those described above. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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.
10
<PAGE>
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 occasionally participates in 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.
Volatility of Oil and Natural Gas Prices
The Company's revenues, operating results and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. Historically, the markets for oil and natural gas have been
volatile and are likely to continue to be volatile in the future. Prices for
oil and natural gas are subject to wide fluctuation in response to relatively
minor changes in the supply of and demand for oil and natural gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. These factors include worldwide and domestic supplies of oil and
natural gas, the ability of the members of the Organization of Petroleum
Exporting Countries to agree to and maintain oil price and production
controls, political instability or armed conflict in oil-producing regions,
the price and level of foreign imports, the level of consumer demand, the
price and availability of alternative fuels, the availability of pipeline
capacity, weather conditions, domestic and foreign governmental regulations
and taxes and the overall economic environment. It is impossible to predict
future oil and natural gas price movements with certainty. A return to the
significantly lower oil and gas prices experienced in 1998 and early 1999, as
compared to historical averages, would likely have a material adverse effect
on the Company's financial condition, liquidity, ability to finance planned
capital expenditures and results of operations. Lower oil and natural gas
prices also may reduce the amount of oil and natural gas that the Company can
produce economically.
The Company periodically reviews the carry value of its oil and natural gas
properties under the full cost accounting rules of the Securities and Exchange
Commission ("SEC"). Under these rules, capitalized costs of proved oil and
natural gas properties may not exceed the present value of estimated future
net revenues from proved reserves, discounted at 10%, and the lower of cost or
market value of unproved properties. Application of the "ceiling" test
generally requires pricing future revenue at the unescalated prices in effect
as of the end of each fiscal quarter and requires a writedown for accounting
purposes if the ceiling is exceeded, even if prices were depressed for only a
short period of time. The Company may be required to writedown the carrying
value of its oil and natural gas properties when oil and natural gas prices
are depressed or unusually volatile. If a writedown is required, it would
result in a charge to earnings, but would not impact cash flow from operating
activities. Once incurred, a writedown of oil and natural gas properties is
not reversible at a later date.
Risks Associated with Management of Growth and Implementation of Growth
Strategy
Any increase in the Company's activities as an operator will increase its
exposure to operating hazards. The Company has relied in the past and expects
to continue to rely on project partners and independent contractors,
11
<PAGE>
including geologists, geophysicists and engineers, that have provided the
Company with seismic survey planning and management, project and prospect
generation, land acquisition, drilling and other services. As the Company
increases the number of projects it is evaluating or in which it is
participating, there will be additional demands on the Company's financial,
technical, operational and administrative resources and continued reliance by
the Company on project partners and independent contractors, and these strains
on resources, additional demands and continued reliance may negatively affect
the Company. The Company's ability to continue its growth will depend upon a
number of factors, including its ability to obtain leases or options on
properties, its ability to acquire additional 3-D seismic data, its ability to
identify and acquire new exploratory sites, its ability to develop existing
sites, its ability to continue to retain and attract skilled personnel, its
ability to maintain or enter into new relationships with project partners and
independent contractors, the results of its drilling program, hydrocarbon
prices, access to capital and other factors. There can be no assurance that
the Company will be successful in achieving growth or any other aspect of its
business strategy.
Reserve Replacement Risk
In general, production from oil and natural gas properties declines as
reserves are depleted, with the rate of decline depending on reservoir
characteristics. Except to the extent that the Company conducts successful
exploration and development activities or acquires properties containing
proved reserves, or both, the proved reserves of the Company will decline as
reserves are produced. The Company's future oil and natural gas production is
highly dependent upon its ability to economically find, develop or acquire
reserves in commercial quantities. The business of exploring for or developing
reserves is capital intensive. To the extent cash flow from operations is
reduced and external sources of capital become limited or unavailable, the
Company's ability to make the necessary capital investment to maintain or
expand its asset base of oil and natural gas reserves would be impaired. The
Company occasionally participates in wells as non-operator. The failure of an
operator of the Company's wells to adequately perform operations, or an
operator's breach of the applicable agreements, could adversely impact the
Company. In addition, there can be no assurance that the Company's future
exploration and development activities will result in additional proved
reserves or that the Company will be able to drill productive wells at
acceptable costs. Furthermore, although the Company's revenues could increase
if prevailing prices for oil and natural gas increase significantly, the
Company's finding and development costs also could increase.
Marketability of Production
The marketability of the Company's natural gas production depends in part
upon the availability, proximity and capacity of natural gas gathering
systems, pipelines and processing facilities. The Company delivers natural gas
through gas gathering systems and gas pipelines that it does not own. Federal
and state regulation of oil and natural gas production and transportation, tax
and energy policies, changes in supply and demand and general economic
conditions all could adversely affect the Company's ability to produce and
market its oil and natural gas. Any dramatic change in market factors could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Key Personnel
The Company has assembled a team of geologists, geophysicists and engineers,
some of whom are non-employee consultants and independent contractors, having
considerable experience in oil and natural gas exploration and production,
including applying 2-D and 3-D imaging technology. The Company is dependent
upon the knowledge, skills and experience of these experts to provide 2-D and
3-D imaging and to assist the Company in reducing the risks associated with
its participation in oil and natural gas exploration projects. In addition,
the success of the Company's business also depends to a significant extent
upon the abilities and continued efforts of its management. The Company does
not maintain key-man life insurance with respect to any of its employees. The
loss of services of key management personnel or the Company's technical
experts and consultants, or the inability to attract additional qualified
personnel, experts or consultants, could have a material
12
<PAGE>
adverse effect on the Company's business, financial condition, results of
operations, development efforts and ability to grow. There can be no assurance
that the Company will be successful in attracting and/or retaining its key
management personnel or technical experts or consultants.
Technological Changes
The oil and gas industry is characterized by rapid and significant
technological advancements and introductions of new products and services
utilizing new technologies. As others use or develop new technologies, the
Company may be placed at a competitive disadvantage, and competitive pressures
may force the Company to implement such new technologies at substantial costs.
In addition, other oil and gas companies may have greater financial, technical
and personnel resources that allow them to enjoy technological advantages and
may in the future allow them to implement new technologies before the Company.
There can be no assurance that the Company will be able to respond to such
competitive pressures and implement such technologies on a timely basis or at
an acceptable cost. One or more of the technologies currently utilized by the
Company or implemented in the future may become obsolete. In such cases, the
Company's business, financial condition and results of operations could be
materially adversely affected. If the Company is unable to utilize the most
advanced commercially available technology, the Company's business, financial
condition and results of operations could be materially and adversely
affected.
Substantial Capital Projects
The Company makes and will continue to make capital expenditures in its
exploration and development projects. The Company intends to finance these
capital expenditures with cash flow from operations. Additional financing may
be required in the future to fund the Company's developmental and exploratory
drilling and seismic activities. No assurance can be given as to the
availability or terms of any such additional financing that may be required or
that financing will continue to be available under the existing or new
financing arrangements. If additional capital sources are not available to the
Company, its drilling, seismic and other activities may be curtailed and its
business, financial conditions and results of operations could be materially
adversely affected.
Substantial Indebtedness
As of December 31, 1999, the Company had total indebtedness of $29.1
million. The Company's substantial indebtedness could have important
consequences. For example, it could (i) increase the Company's vulnerability
to adverse economic and industry conditions; (ii) require the Company to
dedicate a substantial portion of its cash flow from operations to payments on
indebtedness, thereby reducing the availability of its cash flow to fund
working capital, capital expenditures and other general corporate purposes;
(iii) limit the company's flexibility in planning for, or reacting to, changes
in its business and the oil and gas industry; (iv) place the Company at a
disadvantage compared to its competitors that have less debt and (v) limit the
Company's ability to borrow additional funds. In addition, failing to comply
with debt covenants could result in an event of default which, if not cured or
waived, could adversely affect the Company.
Influence of Certain Stockholders
As of December 31, 1999, the Company's directors, executive officers and
certain of their affiliates, beneficially owned approximately 38% of the
Company's outstanding Common Stock. Accordingly, these stockholders, as a
group, may be able to control the outcome of stockholder votes, including
votes concerning the election of directors, the adoption or amendment of
provisions in the Company's Certificate of Incorporation or Bylaws and the
approval of mergers or other significant corporate transactions. The existence
of these levels of ownership concentrated in a few persons makes it unlikely
that any other holder of Common Stock will be able to affect the management or
direction of the Company. These factors also may have the effect of delaying
or preventing a change in the management or voting control of the Company.
13
<PAGE>
Certain Antitakeover Considerations
The Company's Certificate of Incorporation and Bylaws include certain
provisions that may have the effect of delaying, deterring or preventing a
future takeover or change in control of the Company without the approval of
the Company's Board of Directors. Such provisions also may render the removal
of directors and management more difficult. Among other things, the Company's
Certificate of Incorporation and/or Bylaws: (i) provide for a classified Board
of Directors serving staggered three-year terms; (ii) impose restrictions on
who may call a special meeting of stockholders; (iii) include a requirement
that stockholder action be taken only by unanimous written consent or at
stockholder meetings; (iv) specify certain advance notice requirements for
stockholder nominations of candidates for election to the Board of Directors
and certain other stockholder proposals; and (v) impose certain restrictions
and supermajority voting requirements in connection with specified business
combinations not approved in advance by the Company's Board of Directors. In
addition, the Company's Board of Directors, without further action by the
stockholders, may cause the Company to issue up to 2.0 million shares of
preferred stock, $0.01 par value ("Preferred Stock"), on such terms and with
such rights, preferences and designations as the Board of Directors may
determine. Issuance of such Preferred Stock, depending upon the rights,
preferences and designations thereof, may have the effect of delaying,
deterring or preventing a change in control of the Company. Further, certain
provisions of the Delaware General Corporation Law (the "Delaware Law") impose
restrictions on the ability of a third party to effect a change in control and
may be considered disadvantageous by a stockholder.
Item 2. Properties.
Oil and Natural Gas Reserves
The Company's estimated total proved reserves of oil and natural gas as of
December 31, 1999 and 1998, and the present values of estimated future net
revenues attributable to these reserves as of those dates were as follows:
<TABLE>
<CAPTION>
As of December 31,
-----------------------
1999 1998
----------- -----------
(Dollars in thousands,
except per unit data)
<S> <C> <C>
Net Proved Reserves:
Crude oil (Mbbl)................................. 488.4 991.7
Natural gas (MMcf)............................... 14,957.2 28,921.9
Natural gas equivalent (MMcfe)................... 17,887.6 34,872.1
Net Proved Developed Reserves:
Crude oil (Mbbl)................................. 460.1 991.7
Natural gas (MMcf)............................... 14,944.5 28,641.6
Natural gas equivalent (MMcfe)................... 17,705.1 34,591.8
Estimated future net revenues before income
taxes(1).......................................... $ 34,917 $ 44,513
Present value of estimated future net revenues
before income taxes(2)............................ $ 28,720 $ 36,425
Standardized measure of discounted estimated future
net cash flows(3)................................. $ 28,720 $ 36,425
</TABLE>
- --------
(1) The average prices for crude oil were $22.29 per Bbl at December 31, 1999
and $8.85 per Bbl at December 31, 1998. The average prices for natural gas
were $2.12 per Mcf at December 31, 1999 and $2.01 per Mcf at December 31,
1998.
(2) The present value of estimated future net revenues attributable to the
Company's reserves was prepared using constant prices as of the
calculation date, discounted at 10% per annum on a pre-tax basis.
(3) 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 ("SFAS") No. 69. The balances
are not reduced by income taxes due to the tax basis of the properties and
a net operating loss carryforward.
14
<PAGE>
In June 1999, the Company sold its interest in all Michigan Basin Antrim
Shale properties.
The reserve estimates reflected above, as of December 31, 1999, were
prepared by Miller and Lents, Ltd., and as of December 31, 1998, by S.A.
Holditch & Associates (as to Michigan Basin Antrim Shale reserves) and Miller
and Lents, Ltd. (as to non-Michigan Basin Antrim Shale 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 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:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
--------- ---------- ---------
Gross Net Gross Net Gross Net
----- --- ----- ---- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells:
Oil......................................... 1 0.4 1 0.2 2 0.3
Natural gas................................. 1 1.0 8 2.6 2 0.6
Non-productive.............................. 4 2.2 18 8.6 8 1.8
--- --- --- ---- --- ---
Total..................................... 6 3.6 27 11.4 12 2.7
=== === === ==== === ===
Development Wells(1):
Oil......................................... 1 0.9 4 0.8 3 0.6
Natural gas................................. 1 0.6 -- -- 11 2.3
Non-productive.............................. 1 0.4 2 1.8 5 1.0
--- --- --- ---- --- ---
Total..................................... 3 1.9 6 2.6 19 3.9
=== === === ==== === ===
</TABLE>
- --------
(1) Includes nine gross Antrim Shale wells (1.3 net to the Company) for the
year ended December 31, 1997.
15
<PAGE>
At December 31, 1999, the Company was in the process of drilling and/or
completing three gross wells (0.6 net to the Company) that are not reflected
in the table. Subsequent to December 31, 1999, two of these wells were
determined to be commercially productive. Three of the non-productive
exploratory wells drilled during 1999 were in Montana with total capital
expenditures of approximately $0.8 million.
Productive Wells and Acreage
Productive Wells
The following table sets forth the Company's ownership interest as of
December 31, 1999 in productive oil and natural gas wells in the areas
indicated:
<TABLE>
<CAPTION>
Oil Natural Gas Total
--------- ------------ ----------
Region Gross Net Gross Net Gross Net
------ ----- --- ------ ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Mississippi Salt Basin.................... 2 0.6 10 7.9 12 8.5
Onshore Gulf Coast
Texas................................... 4 0.2 6 0.2 10 0.4
Michigan Basin/Other...................... 1 .1 1 1.0 2 1.1
--- --- ----- ----- --- ----
Total................................. 7 0.9 17 9.1 24 10.0
=== === ===== ===== === ====
</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 are producing from 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, 1999:
<TABLE>
<CAPTION>
Developed Undeveloped Total
------------ --------------- ---------------
Gross Net Gross Net Gross Net
------ ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Mississippi Salt Basin.......... 5,600 4,401 57,583 29,224 63,183 33,625
Montana......................... -- -- 250,000 175,000 250,000 175,000
Onshore Gulf Coast
Texas......................... 4,134 129 5,240 802 9,374 931
Louisiana..................... -- -- 2,993 575 2,993 575
Michigan Basin/Other............ 400 260 9,454 6,027 9,854 6,287
------ ----- ------- ------- ------- -------
Total....................... 10,134 4,790 325,270 211,628 335,404 216,418
====== ===== ======= ======= ======= =======
</TABLE>
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 total
gross and net acreage at December 31, 1999:
16
<PAGE>
<TABLE>
<CAPTION>
Acres Expiring
---------------
Gross Net
------- -------
<S> <C> <C>
Twelve Months Ending:
December 31, 2000.......................................... 30,044 15,280
December 31, 2001.......................................... 11,652 4,595
December 31, 2002.......................................... 13,901 6,244
Thereafter................................................. 279,807 190,299
------- -------
Total.................................................... 335,404 216,418
======= =======
</TABLE>
Facilities
The Company currently leases approximately 10,500 square feet of office
space for its principal offices in Traverse City, Michigan. The Company also
leases approximately 5,200 square feet of office space in Houston, Texas,
approximately 3,500 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.
Item 3. Legal Proceedings.
The Company has been named as a defendant in a lawsuit filed June 1, 1999 by
Energy Drilling Company ("Energy Drilling"), in the Parish of Catahoula,
Louisiana arising from a blowout of the Victor P. Vegas #1 well that was
drilled and operated by the Company. Energy Drilling, the drilling rig
contractor on the well, is claiming damages related to their destroyed
drilling rig and related costs amounting to approximately $1.2 million, plus
interest, attorneys' fees and costs.
The Company has been named in lawsuit brought by Victor P. Vegas, the
landowner of the surface location of the blowout well referenced above. The
suit was filed July 20, 1999 in the Parish of Orleans, Louisiana, claiming
unspecified damages related to environmental and other matters.
The Company has been named in a lawsuit brought by Charles Strictland,
employee of BJ Services, Inc., on September 30, 1999. The suit is claiming
damages of $1.0 million for personal injuries allegedly suffered at a well
site operated by the Company.
The Company has been named among several co-defendants in a lawsuit brought
by Eric Parkinson, husband and personal representative of the Estate of Kelly
Anne Parkinson (deceased). The amended complaint was filed December 13, 1999,
in the County of Hillsdale, Michigan, claiming an unspecified amount plus
interest and attorney fees for suffering the loss of the deceased care,
comfort, society and support. Kelly Anne Parkinson was killed in an automobile
accident on February 2, 1999, while traveling on a county road located next to
land wherein the Company is lessee of underground mineral rights. The
plaintiff alleges that the accident was the result of mud dragged on the road
from the leased property and alleges that the Company was negligent in its
duty to conduct its operations at the site with reasonable care.
The Company believes it has meritorious defenses to the claims discussed
above and intends to vigorously defend these lawsuits. The Company does not
believe that the final outcome of these matters will have a material adverse
effect on the Company's operating results, financial condition or liquidity.
Due to the uncertainties inherent in litigation, however, no assurances can be
given regarding the final outcome of each action. The Company currently
believes any costs resulting from each of the lawsuits mentioned above would
be covered by the Company's insurance.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of 1999, no matter was submitted to a vote of
security holders, through the solicitation of proxies or otherwise.
17
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock is traded on The Nasdaq National Market under the
symbol "MEXP."
As of March 20, 2000, the Company estimates that there were approximately
2,200 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.
The following table sets forth the high and low sales prices for the
Company's Common Stock for the periods indicated, all as reported by The
Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year Ended December 31, 1999:
First Quarter............................................ $ 5 $ 2
Second Quarter........................................... 2 5/16 9/16
Third Quarter............................................ 3 9/32 1 3/4
Fourth Quarter........................................... 2 3/16 3/4
</TABLE>
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's credit facility contains provisions that may have the
effect of limiting or prohibiting the payment of dividends.
18
<PAGE>
Item 6. Selected Financial Data.
The following table presents selected historical consolidated financial data
of the Company as of the dates and for the periods indicated. The historical
consolidated financial data as of and for each of the five years in the period
ended December 31, 1999 is derived from the consolidated financial statements
which have been audited by Arthur Andersen LLP, independent public
accountants. Earnings per share has been omitted for all periods prior to 1998
since such information is not meaningful and the historically combined Company
(prior to the Combination Transaction) was 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 Consolidated Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
------- -------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Natural gas.................. $17,266 $ 18,336 $ 5,819 $ 5,614 $ 2,748
Crude oil and condensate..... 3,465 2,646 964 1,101 715
Other operating revenues..... 558 829 629 395 296
------- -------- ------- ------- -------
Total operating revenues... 21,289 21,811 7,412 7,110 3,759
Operating expenses:
Lease operating expenses and
production taxes............ 1,704 3,363 1,478 1,123 777
Depreciation, depletion and
amortization................ 16,066 15,933 2,520 2,629 1,666
General and administrative... 3,134 3,475 2,186 1,591 1,270
Cost ceiling writedown....... -- 35,085 -- -- --
------- -------- ------- ------- -------
Total operating expenses... 20,904 57,856 6,184 5,343 3,713
------- -------- ------- ------- -------
Operating income (loss)........ 385 (36,045) 1,228 1,767 46
Interest expense............... (3,519) (1,635) (1,200) (1,139) (1,017)
Lawsuit settlement............. -- -- -- -- 3,521
------- -------- ------- ------- -------
Income (loss) before income
taxes......................... (3,134) (37,680) 28 628 2,550
------- ------- -------
Income tax provision (credit)
(1)........................... (1,152) 4,120
------- --------
Net income (loss).............. $(1,982) $(41,800) $ 28 $ 628 $ 2,550
======= ======== ======= ======= =======
Basic and diluted earnings
(loss) per share.............. $ (0.16) $ (3.75)
======= ========
Weighted average shares
outstanding................... 12,632 11,153
------- --------
<CAPTION>
As of December 31,
--------------------------------------------
1999 1998 1997 1996 1995
------- -------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (at end of
period):
Working capital................ $(4,200) $(15,925) $(5,985) $(2,682) $(1,980)
Oil and gas properties, net.... 58,837 80,014 23,968 20,732 17,731
Total assets................... 69,686 85,968 30,428 24,050 20,005
Long-term debt, excluding
current portion............... 25,610 31,837 481 8,723 7,643
Equity......................... 23,995 24,749 16,113 7,769 7,410
</TABLE>
- --------
(1) 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
in accordance with SFAS No. 109, "Accounting for Income Taxes."
19
<PAGE>
Item 7. 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 concentrated primarily in Mississippi and Montana.
The Company was organized in connection with the Combination Transaction.
The Combined Assets consist of MOC, interests in oil and natural gas
properties from the Affiliated Entities and interests in such properties owned
by certain business partners and investors, including 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 $48.8 million (net of post-closing
adjustments) 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 Offering.
The Combination Transaction closed on February 9, 1998 in connection with
the closing of the Offering. The Offering, including the sale of an additional
62,500 shares of Common Stock by the Company on March 9, 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.
For further discussion of the Offering and the Combination Transaction, see
Note 1 to the Consolidated Financial Statements.
The Company uses the full cost method of accounting for its oil and natural
gas properties. Under this method, all acquisition, exploration and
development costs, including any general and administrative costs that are
directly attributable to the Company's acquisition, exploration and
development activities, are capitalized in a "full cost pool" as incurred. The
Company records depletion of its full cost pool using the unit-of-production
method. SEC 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, net of deferred income taxes, may not exceed the net present
value of the Company's proved oil and gas reserves plus the lower of cost or
market of unproved properties. Any such excess costs should be charged against
earnings. Using unescalated period-end prices at December 31, 1999, of $2.38
per Mcfe, the Company would have recognized a non-cash impairment of oil and
gas properties in the amount of approximately $1.2 million pre-tax. However,
on the basis of the improvements in pricing experienced subsequent to period-
end of $2.80 per Mcfe, the Company has determined that a writedown is not
required.
20
<PAGE>
Results of Operations
The following table summarizes production volumes, average sales prices and
average costs for the Company's oil and natural gas operations for the periods
presented (in thousands, except per unit amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997 1999 1998 1997
------- -------- ------- ------- -------- -------
(Historical) (Pro Forma)
<S> <C> <C> <C> <C> <C> <C>
Production volumes:
Crude oil and
condensate (Mbbls).... 255.9 247.6 47.4 255.9 261.2 206.8
Natural gas (MMcf)..... 7,593.8 8,953.3 2,241.2 7,593.8 9,646.2 8,298.2
Natural gas equivalent
(MMcfe)............... 9,129.2 10,438.7 2,525.9 9,129.2 11,213.4 9,539.2
Revenues:
Natural gas............ $17,266 $ 18,336 $ 5,819 $17,266 $ 19,810 $20,774
Crude oil and
condensate............ 3,465 2,646 964 3,465 2,833 3,711
Operating expenses:
Lease operating
expenses and
production taxes...... $ 1,704 $ 3,363 $ 1,478 $ 1,704 $ 3,571 $ 2,423
Depletion, depreciation
and amortization...... 16,066 15,933 2,520 16,066 16,537 7,812
General and
administrative........ 3,134 3,475 2,186 3,134 3,175 2,606
Interest expense......... $ 3,519 $ 1,635 $ 1,200 $ 3,519 $ 1,635 $ 1,125
Net income (loss)........ $(1,982) $(41,800) $ 28 $(1,983) $(35,158) $ 8,438
Average sales prices:
Crude oil and
condensate ($ per
Bbl).................. $ 13.54 $ 10.69 $ 20.33 $ 13.54 $ 10.85 $ 17.94
Natural gas ($ per
Mcf).................. 2.27 2.05 2.60 2.27 2.05 2.50
Natural gas equivalent
($ per Mcfe).......... 2.27 2.01 2.69 2.27 2.02 2.57
Average costs ($ per
Mcfe):
Lease operating
expenses and
production taxes...... $ 0.19 $ 0.32 $ 0.58 $ 0.19 $ 0.32 $ 0.25
Depletion, depreciation
and amortization...... 1.76 1.53 1.00 1.76 1.47 0.82
General and
administrative........ 0.34 0.33 0.87 0.34 0.28 0.27
</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. The results of operations described below will
compare historical 1999 year end results of operations to pro forma 1998 year
end results of operations and pro forma 1998 year end results of operations to
pro forma 1997 year end results of operations. For additional information
regarding the Combination Transaction, see Note 1 to the Consolidated
Financial Statements.
Historical Year Ended December 31, 1999 compared to Pro Forma Year Ended
December 31, 1998
Oil and natural gas revenues for the year ended December 31, 1999 decreased
8% to $20.7 million from $22.6 million for the year ended December 31, 1998.
Oil and natural gas revenues for the years ended December 31, 1999 and 1998
include approximately ($0.3) million and $0.8 million of hedging (losses)
gains, respectively (see "Risk Management Activities and Derivative
Transactions" below). Production volumes for natural gas during the year ended
December 31, 1999 decreased 21% to 7,594 MMcf from 9,646 MMcf for the year
ended December 31, 1998. This decrease is attributable to the sales of the
Company's Antrim Shale gas properties in Michigan and certain non-strategic
properties in Texas and Louisiana that occurred earlier in 1999. The combined
proceeds from these property sales amounted to $7.6 million of which $7.1
million was applied to the Company's outstanding debt balance. The 23%
decrease in natural gas production volumes attributable to these sold
properties was partially offset by a 2% increase in natural gas produced from
the Mississippi Salt Basin properties for the year ended December 31, 1999
compared to the same period of 1998. Average natural gas prices increased 11%
to $2.27 per Mcf for the year ended December 31, 1999 from $2.05 per Mcf for
the year
21
<PAGE>
ended December 31, 1998 due to improved natural gas commodity prices during
the third and fourth quarters of 1999. Despite an 11% increase in oil
production volumes for the Mississippi Salt Basin properties, total oil
production for the year ended December 31, 1999 declined 2% to 256 MBbls from
261 MBbls for the year ended December 31, 1998. Reduced oil production
attributable to sold properties in Texas and Louisiana mentioned above offset
the production increases from the Mississippi Salt Basin properties. Average
oil prices increased 25% to $13.54 per barrel during the year ended December
31, 1999 from $10.85 per barrel for the year ended December 31, 1998 as oil
commodity prices rebounded in the third and fourth quarters of 1999.
Lease operating expenses and production taxes for the year ended December
31, 1999 decreased 52% to $1.7 million from $3.6 million for the year ended
December 31, 1998. Lease operating expenses and production taxes decreased due
to the combined effect of decreased production associated with the sale of
producing properties, as described above, and cost efficiencies realized by
the Company on its operated Mississippi Salt Basin properties during 1999.
Depreciation, depletion and amortization ("DD&A") expense for the year ended
December 31, 1999 decreased 3% to $16.1 million from $16.5 million for the
year ended December 31, 1998.
General and administrative expense for the year ended December 31, 1999
decreased 1% to $3.1 million from $3.2 million for the same period in 1998.
General and administrative costs started decreasing in 1999 due to a cost
reduction plan approved by the Company's board of directors in March 1999.
After removal of all non-cash items, general and administrative expense for
the year ended December 31, 1999 decreased 16% when compared to the same
period of 1998. General and administrative expense for the year ended December
31, 1999 includes the following non-cash items: 1) 401(k) contributions and
director fees which were satisfied with Company common stock and compensation
expense for the vested portion of restricted stock issued in February 1998, in
connection with the Initial Public Offering. General and administrative
expense for the year ended December 31, 1998 includes director fees paid in
Company common stock as a non-cash expense.
Using unescalated period-end prices at December 31, 1999, of $2.38 per Mcfe,
the Company would have recognized a non-cash impairment of oil and gas
properties in the amount of approximately $1.2 million pre-tax. However, on
the basis of the improvement in pricing experienced subsequent to period-end
of $2.80 per Mcfe, the Company has determined that a writedown is not
required.
At December 31, 1998, the Company recorded a non-cash cost ceiling writedown
of $34.4 million. The writedown was the combined result of a large downward
revision in oil and gas reserve quantities and depressed commodity prices.
Disappointing 2-D seismic-supported drilling results during 1998 and drilling
cost overruns on two non-operated properties also contributed to the cost
ceiling writedown. The Company based its ceiling test determination on a price
of $1.78 per Mcfe, which represented the March 1999 closing commodity prices.
Interest expense for the year ended December 31, 1999 increased 115% to $3.5
million from $1.6 million for the year ended December 31, 1998. This
substantial interest expense increase is attributable to a higher average debt
level in 1999 compared to 1998, due to substantial 3-D seismic acquisition
costs, and exploration and development activity in the third and fourth
quarters of 1998 that increased the outstanding debt balance. Also
contributing to higher interest expense in 1999 was the interest expense
associated with the Veritas Note Payable, more fully discussed in Liquidity
and Capital Resources below and in Note 7, and the prime plus 3.5% interest
rate that became effective with the Second Amendment to the Credit Facility
Agreement dated April 14, 1999, compared to the previous libor based rate
effective during 1998.
Net loss for the year ended December 31, 1999 decreased by $33.2 million to
$(2.0 million) from $(35.2 million) for the year ended December 31, 1998, as a
result of the factors described above.
Pro Forma Year Ended December 31, 1998 compared to Pro Forma Year Ended
December 31, 1997
Oil and natural gas revenues for the year ended December 31, 1998 decreased
8% to $22.6 million from $24.5 million for the year ended December 31, 1997.
Oil and natural gas revenues for the year ended December 31, 1998 include
approximately $0.8 million of hedging gains (see "Risk Management Activities
and Derivative
22
<PAGE>
Transactions" below). Production volumes for natural gas during the year ended
December 31, 1998 increased 16% to 9,646 MMcf from 8,298 MMcf for the year
ended December 31, 1997. Average natural gas prices decreased 18% to $2.05 per
Mcf for the year ended December 31, 1998 from $2.50 per Mcf for the year ended
December 31, 1997. Production volumes for oil during the year ended December
31, 1998 increased 26% to 261 MBbls from 207 MBbls for the year ended December
31, 1997. Average oil prices decreased 40% to $10.85 per barrel during the
year ended December 31, 1998 from $17.94 per barrel in the year ended December
31, 1997. The oil and gas industry suffered through a year of historically low
oil prices in 1998, caused by a global influx of crude oil supply brought on
by increased Middle-East exports combined with a weaker demand from Asian
markets that were experiencing an economic recession. The natural gas market
also was depressed as a result of abnormally mild winters caused by a strong
El Nino weather pattern that affected the United States during the past two
heating seasons. The Company would have experienced an even larger decrease in
revenue had it not been for the natural gas hedging gains of approximately
$0.8 million and the fact that only 12% of total operating revenues for 1998
were attributable to oil production.
Lease operating expenses and production taxes for the year ended December
31, 1998 increased 47% to $3.6 million from $2.4 million for the year ended
December 31, 1997. Lease operating expenses and production taxes increased
primarily due to increased production as described above and to several
workover projects that were completed during the year in an attempt to enhance
production during a period of low commodity prices.
Depreciation, depletion and amortization ("DD&A") expense for the year ended
December 31, 1998 increased 112% to $16.5 million from $7.8 million for the
year ended December 31, 1997. This increase was due to a 79% increase in the
1998 depletion rate to $1.47 per Mcfe from $.82 per Mcfe for the year ended
December 31, 1997. The higher depletion rate was the combined result of
increased production, an increase in costs subject to DD&A and a downward
revision in estimated proved oil and gas reserves.
General and administrative expense for the year ended December 31, 1998
increased 22% to $3.2 million from $2.6 million for the same period in 1997.
The rise in general and administrative costs is primarily attributable to
added expenses associated with the Company's initial year as a public company.
These incremental expenses include legal and professional fees paid to
attorneys and accountants, increased rents related to office facilities in
Mississippi and increased salaries and benefits due to additional financial,
technical, operational and administrative staff added during the year.
At December 31, 1998, the Company recorded a non-cash cost ceiling writedown
of $34.4 million. The writedown was the combined result of a large downward
revision in oil and gas reserve quantities and depressed commodity prices.
Disappointing 2-D seismic-supported drilling results and drilling cost
overruns also contributed to the cost ceiling writedown. The Company based its
ceiling test determination on a price of $1.78 per Mcfe, which represents the
March 1999 closing commodity prices.
Interest expense for the year ended December 31, 1998 increased 45% to $1.6
million from $1.1 million for the year ended December 31, 1997, as a result of
increased debt levels in 1998 for substantial exploration and development
activities in the Mississippi Salt Basin area.
Net income (loss) for the year ended December 31, 1998 decreased by $43.6
million from $(35.2) to $8.4 million for the year ended December 31, 1997, as
a result of the factors described above.
Liquidity and Capital Resources
Historically, the Company's primary sources of capital have been funds
generated by operations, and borrowings under bank credit facilities.
The Company has a credit facility (the "Credit Facility") with Bank of
Montreal, Houston Agency ("BMO"). The Credit Facility includes certain
negative covenants that impose limitations on the Company and its subsidiary
with respect to, among other things, distributions with respect to its capital
stock, limitations on financial ratios, 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. At December 31, 1999, $21.9 million was outstanding under the Credit
Facility.
23
<PAGE>
On April 14, 1999, the Company and BMO entered into the Second Amendment to
the Credit Facility. The Second Amendment stipulated, among other things, that
the Company submit a revised reserve report to BMO by October 1, 1999 for a
re-determination of the borrowing base and pay a $300,000 re-determination
fee.
On October 29, 1999, the re-determination fee was paid, and the Company and
BMO entered into the Third Amendment to the Credit Facility which included:
(i) terms requiring the Company to make principal payments to BMO during the
period beginning with October 1999 through February 2000, (ii) terms requiring
that all outstanding borrowings bear interest at BMO's prime rate plus 3.5%;
(iii) revision or waiver of certain negative covenant provisions through
September 30, 2000; (iv) a requirement to submit a revised reserve report to
BMO by April 1, 2000 for a re-determination of the borrowing base; (v) a
requirement that all proceeds from the sales of proved or unproved oil and gas
properties, prior to the re-determination date, must be used to reduce the
principal amount outstanding under the Credit Facility; and (vi) a requirement
for an amendment fee payable to BMO in an amount equal to 2% of the
outstanding balance of the Credit Facility at the April re-determination date.
Final maturity of the Credit Facility was set at January 1, 2001. Total
principal payments of $5.1 million were made under the Third Amendment with
the remaining $1.9 million waived through letter agreements subsequent to
December 31, 1999.
On March 20, 2000, the Company entered into a Fourth Amendment with BMO
which continued all of the provisions of the Third Amendment with the
exception of the following changes: i) extension of the final maturity date of
the Credit Facility to April 1, 2001; and ii) requirement of a $1.0 million
principal payment by March 31, 2000. At the April re-determination date, the
Company may be required to make additional payments of principal to the extent
its outstanding borrowings exceed the borrowing base. To the extent that
additional payments are required, management believes these would be fulfilled
from available cash flows, and would not have a material adverse effect on the
Company's operating results, financial condition or liquidity.
On April 14, 1999, the Company issued a $4.7 million note payable to one its
suppliers, Veritas DGC Land, Inc. (the "Veritas Note Payable"), for the
outstanding balance due to Veritas for past services provided in 1998 and
1999. The balance due Veritas was $4.7 million at December 31, 1999, and has
been classified as long-term debt in the accompanying financial statements.
The principal obligation under the Veritas Note Payable is due on April 15,
2001. Management plans to fulfill the principal obligation under the Veritas
Note Payable from available cash flows, property sales and other financing
sources.
On April 14, 1999, the Company also entered into an agreement (the "Warrant
Agreement") to issue warrants to Veritas that entitle Veritas to purchase
shares of the Company's Common Stock in lieu of receiving cash payments for
the accrued interest obligations under the Veritas Note Payable. The Warrant
Agreement requires the Company to issue warrants to Veritas in conjunction
with the signing of the Warrant Agreement, as well as on the six and, at the
Company's option, 12 and 18 month anniversaries of the Warrant Agreement. The
warrants to be issued must equal 9% of the then current outstanding principal
balance of the Veritas Note Payable. The number of shares to be issued upon
exercise of the warrants issued on April 14, 1999, and on the six-month
anniversary was determined based upon a five-day weighted average closing
price of the Company's Common Stock at April 14, 1999. The exercise price of
each warrant is $0.01 per share. On April 14, 1999, warrants exercisable for
322,752 shares of Common Stock were issued to Veritas in connection with
execution of the Veritas Note Payable. On October 14, 1999, the six-month
anniversary of the Warrant Agreement, warrants exercisable for another 322,752
shares of Common Stock were issued to Veritas.
The Company has the option, in lieu of issuing warrants, to make a cash
payment to Veritas at the 12 and 18 month anniversaries equivalent to 9% of
the then current principal balance of the Veritas Note Payable. The number of
shares to be issued on the 12 and 18 month anniversaries will be based upon a
five-day weighted average closing price of the Company's common stock at April
14, 2000. Under the terms of the Warrant Agreement, all warrants issued will
expire on April 15, 2002. In addition, the Company also entered into an
agreement with Veritas that (i) requires the Company to file a registration
statement with the SEC to register shares of Common Stock that are issuable
upon exercise of the above warrants and (ii) grants certain piggy-back
registration rights in connection with the warrants.
24
<PAGE>
In connection with the closing of the AHC acquisition on February 9, 1998,
the Company has a non-interest bearing note payable to AHC (the "AHC Note
Payable") of $2.5 million (at December 31, 1999) which is payable on the
annual anniversary dates of the closing as follows: $1.0 million in 2000 and
$1.5 million in 2001. The Company has obtained a 60-day extension of the $1.0
million payment from February 2000 to April 2000.
At December 31, 1999, the Company had a working capital deficit of $0.7
million (excluding the current portion of long-term debt). Management plans to
meet these working capital requirements from available cash flows, property
sales and other financing sources.
The Company has budgeted capital expenditures of approximately an unrisked
$7.4 million for 2000. Capital expenditures will be used to fund drilling and
development activities, the shooting of a new 3-D seismic survey and leasehold
acquisitions and extensions 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 year ended December
31, 1999 were approximately $10.3 million. The Company intends to fund its
2000 budgeted capital expenditures through operational cash flow.
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. A return to the significantly lower oil and gas prices experienced
in 1998 and early 1999, as compared to historical averages, would likely have
an adverse effect on the Company's financial condition, liquidity, ability to
finance capital expenditures and results of operations. Lower oil and natural
gas prices also may reduce 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 program. While the Company believes that cash flow
from operations and improved commodity prices should allow the Company to
implement its present business strategy through 2000, additional debt or
equity financing may be required during the remainder of 2000 and in the
future to fund the Company's growth, development and exploration program, and
to satisfy its existing obligations. The failure to obtain and exploit such
capital resources could have a material adverse effect on the Company,
including further curtailment of its exploration and other activities.
Risk Management Activities and Derivative Transactions
The Company uses a variety of derivative instruments ("derivatives") 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 derivatives (e.g., NYMEX futures
contracts) for a portion of its oil and 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.
The Company's hedging strategy is to maximize its return on investment
through hedging a portion of its activities relating to oil and natural gas
price volatility. While this strategy should help the Company reduce its
25
<PAGE>
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 oil and 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 year ended December 31, 1999, the Company had hedged 45% of
its oil and natural gas production, and as of December 31, 1999, the Company
had 0.9 Bcfe of open oil and natural gas contracts for the months of January
2000 through March 2000.
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 notional amount is used to measure
interest to be paid or received and does not represent the exposure to credit
loss. The notional amount of the Company's interest rate swap was $25.0
million at December 31, 1998, and had a fair value of approximately $0.2
million. During March 1999, the Company terminated its interest rate swap
agreement and received $0.3 million, which is being recognized in earnings
ratably as the related outstanding loan balance is amortized.
Market Risk Information
The market risk inherent in the Company's derivatives is the potential loss
arising from adverse changes in commodity prices and interest rates. The
prices of oil and natural gas are subject to fluctuations resulting from
changes in supply and demand. To reduce price risk caused by the market
fluctuations, the Company's policy is to hedge (through the use of
derivatives) future production. Because commodities covered by these
derivatives are substantially the same commodities that the Company sells in
the physical market, no special correlation studies other than monitoring the
degree of convergence between the derivative and cash markets are deemed
necessary. The changes in market value of these derivatives have a high
correlation to the price changes of oil and natural gas.
A sensitivity analysis model was used to calculate the fair values of the
Company's derivatives rates in effect at December 31, 1999. The sensitivity
analysis involved increasing or decreasing the forward rates by a hypothetical
10% and calculating the resulting unfavorable change in the fair values of the
derivatives. The results of this analysis, which may differ from actual
results, showed this type of change would not have a material impact on the
fair value of the derivatives.
Effects of Inflation and Changes in Price
Crude oil and natural gas commodity prices have been volatile and
unpredictable during 1998 and 1999, with crude oil prices falling below $10
per Bbl and rising close to $30 per Bbl, and natural gas prices dropping below
$1 per Mcf and then climbing up above $3 per Mcf during this two-year time
period. These wide fluctuations have had a significant impact on the Company's
results of operations, cash flow and liquidity. 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 thereby frequently change and become
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
26
<PAGE>
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.
Year 2000 Readiness Disclosure
The Company has completed its Year 2000 Readiness Plan ("Year 2000 Plan")
which focused on the Company's computer systems and any embedded computer
chips integrated into Company operated oil and gas production related
equipment. Implementation of the Year 2000 Plan included an assessment and
complete inventory of computer hardware/software systems plus oil and gas
production equipment. The Company identified, remediated and tested those
critical systems that were not year 2000 compliant to prevent any business
disruption.
The Company expensed the cost of software upgrades as incurred and utilized
Company personnel to execute the various phases of the Year 2000 Plan. The
total costs to implement the Year 2000 Plan was less than $10,000 and did not
have a material effect on the Company's financial position, liquidity or
results of operations.
The Company does not anticipate any year 2000 related matters to develop
subsequent to the 1999 year-end, but the Company will continue to monitor its
systems for any such developments.
New Accounting Standard
In 1998, the Financial Accounting Standards Board issued 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, 2000.
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 its
adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required hereunder is included in "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Risk Management
Activities and Derivative Transactions" in Item 7, which is incorporated by
reference in this Item 7A.
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.
27
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information regarding directors of the Company contained under the
captions "Board of Directors," "Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the definitive Proxy Statement
for the Company's annual meeting of stockholders to be held on May 26, 2000 is
here incorporated by reference.
Item 11. Executive Compensation.
The information contained under the captions "Compensation of Directors" and
"Executive Compensation" in the definitive Proxy Statement for the Company's
annual meeting of stockholders to be held on May 26, 2000 is here incorporated
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the captions "Voting Securities," "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of Management"
in the definitive Proxy Statement for the Company's annual meeting of
stockholders to be held on May 26, 2000 is here incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
The information contained under the captions "Voting Securities," "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of Management"
in the definitive Proxy Statement for the Company's annual meeting of
stockholders to be held on May 26, 2000 is here incorporated by reference.
28
<PAGE>
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.
Item 14(a)(3). Exhibits. The following exhibits are filed as a part of this
report.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Exchange and Combination Agreement dated November 12, 1997. Previously
filed as exhibit 2.1 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 Quarterly Report on Form 10-Q for the quarter ended June 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 here
incorporated by reference.
10.1(a) Stock Option and Restricted Stock Plan of 1997.* 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.* 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.* 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.*
10.3 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.
10.4 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.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.5 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.
10.6 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.
10.7 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.
10.8 $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.
10.9 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.
10.10 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.
10.11 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.
10.12 $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.
10.13 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.
10.14 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.
10.15 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.
10.16 First Amendment to Credit Agreement among Miller Oil Corporation and
Bank of Montreal dated June 24, 1998. Previously filed as an exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and here incorporated by reference.
10.17 Second Amendment to Credit Agreement between Miller Oil Corporation
and Bank of Montreal dated April 14, 1999. Previously filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and here incorporated by reference.
10.18 Agreement between Eagle Investments, Inc. and Miller Oil Corporation,
dated April 1, 1999. Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, and
here incorporated by reference.
10.19 $4,696,040.60 Note between Miller Exploration Company and Veritas DGC
Land, Inc., dated April 14, 1999. Previously filed as an exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, and here incorporated by reference.
10.20 Warrant between Miller Exploration Company and Veritas DGC Land, Inc.,
dated April 14, 1999. Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, and
here incorporated by reference.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.21 Registration Rights Agreement between Miller Exploration Company and
Veritas DGC Land, Inc., dated April 14, 1999. Previously filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and here incorporated by reference.
10.22 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated March 16, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.23 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated May 18, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.24 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated May 27, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.25 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated June 30, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.26 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated October 18, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and here incorporated by reference.
10.27 Form of Equity Compensation Plan for Non-Employee Directors Agreement
dated December 7, 1998.
10.28 Third Amendment to Credit Agreement among Miller Oil Corporation and
Bank of Montreal dated October 29, 1999.
10.29 Form of Employment Agreement for Lew P. Murray dated February 9, 1998.
10.30 Form of Employment Agreement for Michael L. Calhoun dated February 9,
1998.
10.31 Form of Stock Option Agreement granted to Lew P. Murray dated January
1, 2000.
10.32 Fourth Amendment to Credit Agreement among Miller Oil Corporation and
Bank of Montreal dated March 20, 2000.
11.1 Computation of Earnings per Share.
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.
23.2 Consent of Miller and Lents, Ltd.
23.3 Consent of Arthur Andersen LLP.
24.1 Limited Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Management contract or compensatory plan or arrangement.
Item 14(b). The Company filed no reports on Form 8-K during the last quarter of
1999.
31
<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
/s/ Kelly E. Miller
By: _________________________________
Kelly E. Miller
President and Chief Executive
Officer
POWER OF ATTORNEY
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ C. E. Miller* Chairman of the Board March 24, 2000
______________________________________
C. E. Miller
/s/ Kelly E. Miller Director (Principal Executive March 24, 2000
______________________________________ Officer)
Kelly E. Miller
/s/ Deanna L. Cannon (Principal Financial and March 24, 2000
______________________________________ Accounting Officer)
Deanna L. Cannon
/s/ Frank M. Burke, Jr.* Director March 24, 2000
______________________________________
Frank M. Burke, Jr.
/s/ Dan A. Hughes, Jr.* Director March 24, 2000
______________________________________
Dan A. Hughes, Jr.
/s/ William Casey McManemin* Director March 24, 2000
______________________________________
William Casey McManemin
/s/ Kenneth J. Foote* Director March 24, 2000
______________________________________
Kenneth J. Foote
/s/ Richard J. Burgess* Director March 24, 2000
______________________________________
Richard J. Burgess
/s/ Deanna L. Cannon Attorney-in-Fact
*By: _________________________________
Deanna L. Cannon
</TABLE>
32
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements of Miller Exploration Company
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997.................................................... F-4
Consolidated Statements of Equity for the Years Ended December 31, 1999,
1998 and 1997.......................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Supplemental Quarterly Financial Data (unaudited)....................... F-25
</TABLE>
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 consolidated balance sheets of MILLER
EXPLORATION COMPANY (a Delaware corporation) and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
equity, and cash flows for each of the three years in the period ended
December 31, 1999. 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 financial position of Miller Exploration Company
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Detroit, Michigan
March 24, 2000
F-2
<PAGE>
MILLER EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
As of December
31,
------------------
1999 1998
-------- --------
(Note 1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 3,712 $ 22
Restricted cash (Note 3)................................. 1,079 --
Accounts receivable...................................... 4,580 3,959
Inventories, prepaids and advances to operators.......... 640 978
-------- --------
Total current assets................................... 10,011 4,959
-------- --------
OIL AND GAS PROPERTIES--at cost (full cost method):
Proved oil and gas properties............................ 115,040 103,272
Unproved oil and gas properties.......................... 22,678 39,995
Less-Accumulated depreciation, depletion and
amortization............................................ (78,881) (63,253)
-------- --------
Net oil and gas properties............................. 58,837 80,014
-------- --------
OTHER ASSETS (Note 2)...................................... 838 995
-------- --------
Total assets........................................... $ 69,686 $ 85,968
======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........................ $ 3,500 $ 10,500
Accounts payable......................................... 3,472 6,819
Accrued expenses and other current liabilities........... 7,239 3,565
-------- --------
Total current liabilities.............................. 14,211 20,884
-------- --------
LONG-TERM DEBT............................................. 25,610 31,837
DEFERRED INCOME TAXES...................................... 5,816 6,883
DEFERRED REVENUE........................................... 54 1,615
COMMITMENTS AND CONTINGENCIES (Note 10)
EQUITY:
Common stock warrants.................................... 845 --
Preferred stock, $0.01 par value; 2,000,000 shares
authorized; none outstanding............................ -- --
Common stock, $0.01 par value; 40,000,000 shares
authorized; 12,681,244 shares outstanding at December
31, 1999................................................ 127 126
Additional paid in capital............................... 66,690 67,136
Deferred compensation.................................... (48) (876)
Retained deficit......................................... (43,619) (41,637)
-------- --------
Total equity........................................... 23,995 24,749
-------- --------
Total liabilities and equity........................... $ 69,686 $ 85,968
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE>
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------------
1999 1998 1997
------- -------- --------
(Note 1) (Note 1)
<S> <C> <C> <C>
REVENUES:
Natural gas...................................... $17,266 $ 18,336 $ 5,819
Crude oil and condensate......................... 3,465 2,646 964
Other operating revenues......................... 558 829 629
------- -------- -------
Total operating revenues....................... 21,289 21,811 7,412
------- -------- -------
OPERATING EXPENSES:
Lease operating expenses and production taxes.... 1,704 3,363 1,478
Depreciation, depletion and amortization......... 16,066 15,933 2,520
General and administrative....................... 3,134 3,475 2,186
Cost ceiling writedown........................... -- 35,085 --
------- -------- -------
Total operating expenses....................... 20,904 57,856 6,184
------- -------- -------
OPERATING INCOME (LOSS)............................ 385 (36,045) 1,228
------- -------- -------
INTEREST EXPENSE................................... (3,519) (1,635) (1,200)
------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES.................. (3,134) (37,680) 28
------- -------- -------
INCOME TAX PROVISION (CREDIT) (Note 4)............. (1,152) 4,120
------- --------
NET INCOME (LOSS).................................. $(1,982) $(41,800) $ 28
======= ======== =======
EARNINGS (LOSS) PER SHARE (Note 5)
Basic............................................ $ (0.16) $ (3.75)
======= ========
Diluted.......................................... $ (0.16) $ (3.75)
======= ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE>
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Add'l
Stock Preferred Common Paid In Deferred Combined Retained
Warrants Stock Stock Capital Compensation Equity Deficit
-------- --------- ------ ------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE--December 31,
1996................... $-- $ -- $-- $ -- $ -- $ 72 $ 7,697
Contributions and
return of capital,
net.................. -- -- -- -- -- 8,516 --
Net income............ -- -- -- -- -- -- 28
Dividends declared.... -- -- -- -- -- -- (200)
---- ----- ---- ------- ----- ------ --------
BALANCE--December 31,
1997................... -- -- -- -- -- 8,588 7,525
Net loss and capital
prior to
S Corporation
termination.......... -- -- -- -- -- 172 (163)
S Corporation
termination.......... -- -- -- 16,122 -- (8,760) (7,362)
Common stock
issuance............. -- -- 56 39,983 -- -- --
Combination
transaction.......... -- -- 69 10,156 -- -- --
Restricted stock
issuance............. -- -- 1 875 (876) -- --
Net loss after S
Corporation
Termination.......... -- -- -- -- -- -- (41,637)
---- ----- ---- ------- ----- ------ --------
BALANCE--December 31,
1998................... $-- $ -- $126 $67,136 $(876) $ -- $(41,637)
Issuance of restricted
stock and benefit
plan shares.......... -- -- -- (500) 794 -- --
Issuance of non-
employee Directors'
shares............... -- -- 1 88 -- -- --
Common stock warrants
Issued............... $845 -- -- -- -- -- --
Forfeiture of
restricted shares.... -- -- -- (34) 34 -- --
Net loss.............. -- -- -- -- -- -- (1,982)
---- ----- ---- ------- ----- ------ --------
BALANCE--December 31,
1999................... $845 $ -- $127 $66,690 $ (48) $ -- $(43,619)
==== ===== ==== ======= ===== ====== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE>
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Note 1) (Note 1)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ (1,982) $(41,800) $ 28
Adjustments to reconcile net income (loss) to net
cash from operating activities--
Depreciation, depletion and amortization....... 16,066 15,933 2,520
Cost ceiling writedown......................... -- 35,085 --
Deferred income taxes.......................... (1,067) (1,052) --
Deferred revenue............................... (34) (49) (58)
Changes in assets and liabilities--
Restricted cash.............................. (1,079) -- --
Accounts receivable.......................... (621) (1,850) 137
Other current assets......................... -- 2,952 (3,432)
Other assets................................. 48 (118) --
Accounts payable............................. (3,347) 6,786 2,761
Accrued expenses and other current
liabilities................................. 3,674 2,962 34
-------- -------- -------
Net cash flows provided by operating
activities................................ 11,658 18,849 1,990
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures......... (10,265) (46,950) (8,822)
Acquisition of properties........................ -- (51,011) --
Proceeds from sale of oil and gas properties and
purchases of equipment, net..................... 14,296 3,065 2,955
-------- -------- -------
Net cash flows provided by (used in)
investing activities...................... 4,031 (94,896) (5,867)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal............................ (15,717) (5,178) (572)
Borrowing on long-term debt...................... 2,490 35,500 3,512
Contributions, return of capital and stock
proceeds, net................................... 1,228 45,601 873
Payments of dividends............................ -- -- (200)
-------- -------- -------
Net cash flows provided by (used in)
financing activities...................... (11,999) 75,923 3,613
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 3,690 (124) (264)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD............................................ 22 146 410
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD..... $ 3,712 $ 22 $ 146
======== ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest......................................... $ 3,033 $ 1,571 $ 1,373
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Nature of Operations
The Combination Transaction
Miller Exploration Company ("Miller" or 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 were beneficial owners of MOC) in exchange
for an aggregate consideration of approximately 5.3 million 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 an initial public offering (the "Offering").
Initial Public Offering
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 5.5 million 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 year ended December
31, 1998 include the accounts of the Company and its subsidiaries after taking
into effect the Offering and the Combination Transaction. The financial
statements for the period ending in 1997 include the accounts of the Company
and its affiliated entities (as defined above) before the Offering and the
Combination Transaction.
Other Transactions Completed Concurrently With the Initial Public 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 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 for the period 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,
whereby the Company acquired interests in certain crude oil and natural gas
producing properties and undeveloped properties from Amerada Hess Corporation
("AHC") for $48.8 million, net of post-closing adjustments. 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 for the period 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.
F-7
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Principles of Combination
The accompanying financial statements for the period ending in 1997 include
the accounts of Miller, MOC and the other affiliated entities (as defined
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
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 accounts for the
period 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.
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 the
Mississippi Salt Basin of central Mississippi and the Blackfeet Indian
Reservation of the southern Alberta Basin in Montana.
(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 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 within the full cost pool, net of
deferred income taxes, 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. Using
unescalated period-end prices at December 31, 1999, of $2.38 per Mcfe, the
Company would have recognized a non-cash impairment of oil and gas properties
in the amount of approximately $1.2 million pre-tax. However, on the basis of
the improvements in pricing experienced subsequent to period-end of $2.80 per
Mcfe, the Company has determined that a writedown is not required. At December
31, 1998, the Company recognized a non-cash cost ceiling writedown in the
amount of $35.1 million. The Company based its ceiling test determination on a
price of $1.78 per Mcfe, which represented the March 1999 closing commodity
prices. The Company did not have any such charges against earnings during the
year ended December 31, 1997.
F-8
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment is included in other assets in the accompanying
balance sheets and 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 five to 20 years.
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.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform with the 1999 presentation.
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 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.
Other
For significant accounting policies regarding income taxes, see Note 4; for
earnings per share, see Note 5; for financial instruments, see Note 8; for
risk management activities and derivative transactions, see Note 9; and for
stock-based compensation, see Note 11.
(3) Restricted Cash
In 1999, the Company entered into escrow agreements at the request of
certain joint venture partners regarding the drilling of certain wells
operated by the Company. Terms of the escrow agreements require the parties to
the agreements to deposit their proportionate share of the estimated costs of
drilling each subject well into a separate escrow account. The escrow account
is controlled by an independent third party agent and is restricted to the
sole purpose of processing payments to vendors and suppliers for charges and
expenses associated with the drilling of the wells covered by the escrow
agreements.
F-9
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires the asset and liability approach for income
taxes. Under this approach, deferred tax assets and liabilities are recognized
based on anticipated future tax consequences attributable to differences
between financial statement carrying amounts of assets and liabilities and
their respective tax bases.
Before consummation of the Offering, the Company and the 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 affiliated entities. Accordingly, no provision was made
for income taxes in the accompanying financial statements for the period
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 would have been recorded for this difference,
with a corresponding reduction in retained earnings.
Included in the deferred income tax provision for the year ended December
31, 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 years ended December 31, 1999 and 1998, was different than
the statutory federal income tax rate for the following reasons (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Net loss................................................ $(1,982) $(41,800)
Add back:
Income tax provision (credit)......................... (1,152) 4,120
------- --------
Pre-tax loss............................................ (3,134) (37,680)
Income tax provision (credit) at the federal statutory
rate................................................... (1,066) (12,811)
Deferred tax liabilities recorded upon the Offering..... -- 5,392
Valuation allowance..................................... -- 11,700
All other, net.......................................... (86) (161)
------- --------
Income tax provision (credit)........................... $(1,152) $ 4,120
======= ========
</TABLE>
The components of the provision of income taxes for the year ended December
31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Currently payable........................................... $ -- $ --
Deferred to future periods.................................. (1,152) 4,120
------- ------
Total income taxes.......................................... $(1,152) $4,120
======= ======
</TABLE>
F-10
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The principal components of the Company's deferred tax assets (liabilities)
recognized in the balance sheet as of December 31, 1999 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Unsuccessful well and lease costs.................... $ (3,075) $ (3,655)
Intangible drilling costs............................ (3,905) (3,923)
Financial statement carrying value in excess of tax
basis of purchased assets........................... (1,268) (1,503)
Other................................................ (568) (807)
Deferred tax assets:
Net operating loss carryforward...................... 14,700 14,705
-------- --------
Net deferred tax assets................................ 5,884 4,817
Less: Valuation allowance.............................. (11,700) (11,700)
-------- --------
Net deferred tax liability............................. $ (5,816) $ (6,883)
======== ========
</TABLE>
SFAS No. 109 requires that the Company record a valuation allowance when it
is more likely than not that some portion or all of the deferred tax assets
will not be realized. In the fourth quarter of 1998, the Company recorded a
$35.1 million cost ceiling writedown. The writedown and significant tax net
operating loss carryforwards resulted in a net deferred tax asset at December
31, 1998. The Company believes it is more likely than not that a portion of
the deferred tax assets will not be realized, therefore, the Company has
recorded a valuation allowance. At December 31, 1999, the Company had regular
tax net operating loss carryforwards of approximately $3.0 million. This loss
carryforward amount will expire during 2012. The Company also had a percentage
depletion carryforward of approximately $0.9 million at December 31, 1999,
which is available to offset future federal income taxes payable and has no
expiration date.
(5) Earnings Per Share
In accordance with the provisions of SFAS No. 128, "Earnings per Share,"
basic earnings per share is computed on the basis of the weighted-average
number of common shares outstanding during the periods. Diluted earnings per
share is computed based upon the weighted-average number of common shares plus
the assumed issuance of common shares for all potentially dilutive securities.
Earnings per share has been omitted from the statement of operations for the
year ended December 31, 1997, since such information is not meaningful and the
historically combined Company (prior to the Combination Transaction) was not a
separate legal entity with a singular capital structure. The computation of
earnings per share for the year ended December 31, 1999 and 1998 is as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Net loss attributable to basic and diluted EPS.......... $(1,982) $(41,800)
Average common shares outstanding applicable to basic
EPS.................................................... 12,633 11,153
Add: options treasury shares and restricted stock -- --
------- --------
Average common shares outstanding applicable to diluted
EPS.................................................... 12,633 11,153
Earnings (loss) per share:
Basic................................................. $ (0.16) $ (3.75)
------- --------
Diluted............................................... $ (0.16) $ (3.75)
------- --------
</TABLE>
Options and restricted stock were not included in the computation of diluted
earnings per share for the years ended December 31, 1999 and 1998 because
their effect was antidilutive.
F-11
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) 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 received 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 were reflected on a gross basis in the
accompanying consolidated financial statements and the associated proved
reserves also were reflected in the accompanying supplemental oil and gas
disclosures to the consolidated financial statements.
During 1995 and 1996, the Company also received advance cash payments from
MSLP of approximately $1.6 million. These proceeds were recorded as deferred
revenue, and were recognized in income as the natural gas volumes under the
agreement are delivered.
In June 1999, the Company sold its interest in the Antrim Shale properties
located in Michigan, which includes the above-referenced net production
payment stream for $4.5 million of which $4.0 million was used to reduce the
Company's outstanding Credit Facility balance (see Note 7). The remaining
deferred revenue discussed above has been credited to the Company's
capitalized cost pool.
(7) Long-Term Debt
The Company has entered into a credit facility (the "Credit Facility") with
Bank of Montreal, Houston Agency ("BMO"). The Credit Facility includes certain
negative covenants that impose limitations on the Company and its subsidiary
with respect to, among other things, distributions with respect to its capital
stock, limitations on financial ratios, 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. At December 31, 1999, $21.9 million was outstanding under the Credit
Facility.
On April 14, 1999, the Company and BMO entered into the Second Amendment to
the Credit Facility. The Second Amendment stipulated, among other things, that
the Company would submit a revised reserve report to BMO by October 1, 1999
for a re-determination of the borrowing base and pay a $300,000 re-
determination fee.
On October 29, 1999, the re-determination fee was paid, and the Company and
BMO entered into the Third Amendment to the Credit Facility which included:
(i) terms requiring the Company to make principal payments to BMO during the
period beginning with October 1999 through February 2000, (ii) terms requiring
that all outstanding borrowings bear interest at BMO's prime rate plus 3.5%;
(iii) revision or waiver of certain negative covenant provisions through
September 30, 2000; (iv) a requirement to submit a revised reserve report to
BMO by April 1, 2000 for a re-determination of the borrowing base; (v) a
requirement that all proceeds from the sales of proved or unproved oil and gas
properties, prior to the re-determination date, must be used to reduce the
principal amount outstanding under the Credit Facility; and (vi) a requirement
for an amendment fee payable to BMO in an amount equal to 2% of the
outstanding balance of the Credit Facility at the April re-determination date.
Final maturity of the Credit Facility was set at January 1, 2001. Total
principal payments of $5.1 million were made under the Third Amendment with
the remaining $1.9 million waived through letter agreements subsequent to
December 31, 1999.
On March 20, 2000, the Company entered into a Fourth Amendment with BMO
which continued all of the provisions of the Third Amendment with the
exception of the following changes: i) extension of the final maturity date of
the Credit Facility to April 1, 2001; and ii) requirement of a $1.0 million
principal payment by March 31, 2000. At the April re-determination date, the
Company may be required to make additional payments
F-12
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of principal to the extent its outstanding borrowings exceed the borrowing
base. To the extent that additional payments are required, management believes
these would be fulfilled from available cash flows, and would not have a
material adverse effect on the Company's operating results, financial
condition or liquidity.
On April 14, 1999, the Company issued a $4.7 million note payable to one of
its suppliers, Veritas DGC Land, Inc. (the "Veritas Note Payable"), for the
outstanding balance due to Veritas for past services provided in 1998 and
1999. The balance due Veritas was $4.7 million at December 31, 1999, and has
been classified as long-term debt in the accompanying financial statements.
The principal obligation under the Veritas Note Payable is due on April 15,
2001. Management plans to fulfill the principal obligation under the Veritas
Note Payable from available cash flows, property sales and other financing
sources.
On April 14, 1999, the Company also entered into an agreement (the "Warrant
Agreement") to issue warrants to Veritas that entitle Veritas to purchase
shares of the Company's Common Stock in lieu of receiving cash payments for
the accrued interest obligations under the Veritas Note Payable. The Warrant
Agreement requires the Company to issue warrants to Veritas in conjunction
with the signing of the Warrant Agreement, as well as on the six and, at the
Company's option, 12 and 18 month anniversaries of the Warrant Agreement. The
warrants to be issued must equal 9% of the then current outstanding principal
balance of the Veritas Note Payable. The number of shares to be issued upon
exercise of the warrants issued on April 14, 1999 and on the six-month
anniversary is determined based upon a five-day weighted average closing price
of the Company's Common Stock at April 14, 1999. The exercise price of each
warrant is $0.01 per share. On April 14, 1999, warrants exercisable for
322,752 shares of Common Stock were issued to Veritas in connection with
execution of the Veritas Note Payable. On October 14, 1999, the six-month
anniversary of the Warrant Agreement, warrants exercisable for another 322,752
shares of Common Stock were issued to Veritas.
The Company has the option, in lieu of issuing warrants, to make a cash
payment to Veritas at the 12 and 18 month anniversaries equivalent to 9% of
the then current principal balance of the Veritas Note Payable. The number of
shares to be issued on the 12 and 18 month anniversaries will be based upon
the five-day weighted average closing price of the Company's common stock at
April 14, 2000. Under the terms of the Warrant Agreement, all warrants issued
will expire on April 15, 2002. In addition, the Company also entered into an
agreement with Veritas that (i) requires the Company to file a registration
statement with the SEC to register shares of Common Stock that are issuable
upon exercise of the above warrants and (ii) grants certain piggy-back
registration rights in connection with the warrants.
In connection with the closing of the AHC acquisition on February 9, 1998,
the Company has a non-interest bearing note payable to AHC (the "AHC Note
Payable") of $2.5 million (at December 31, 1999) which is payable on the
annual anniversary dates of the closing as follows: $1.0 million in 2000 and
$1.5 million in 2001. The Company has obtained a 60-day extension of the $1.0
million payment from February 2000 to April 2000.
The Company's long-term debt consisted of the following as of December 31,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
BMO Credit Facility....................................... $ 21,914 $35,500
Veritas Note Payable...................................... 4,696 3,837
AHC Note Payable.......................................... 2,500 3,000
-------- -------
Total................................................... 29,110 42,337
Less current portion of long-term debt.................... (3,500) (10,500)
-------- -------
$(25,610) $31,837
======== =======
</TABLE>
F-13
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's minimum principal requirements as of December 31, 1999 are as
follows (in thousands):
<TABLE>
<S> <C>
2000................................. $ 3,500
2001................................. 25,610
-------
$29,110
=======
</TABLE>
(8) Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each significant class of financial instruments:
Cash, Restricted Cash, Temporary Cash Investments, Accounts Receivables,
Accounts Payable and Notes Payable
The carrying amount approximates fair value because of the short maturity of
those instruments.
Long-Term Debt
The interest rate on the Credit Facility is reset as BMO's prime rate
changes to reflect current market rates. Consequently, the carrying value of
the Credit Facility approximates fair value.
Hedging Arrangements
Refer to Note 9 for a description of the Company's price hedging
arrangements and the fair values of the arrangements.
(9) 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 derivatives (e.g., NYMEX futures
contracts) for a portion of its oil and 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. For the years
ended December 31, 1999, 1998 and 1997, the Company hedged 45%, 36% and 1% of
its oil and gas production, respectively, and as of December 31, 1999, the
Company had 0.9 Bcfe of open oil and natural gas contracts for the months of
January 2000 through March, 2000.
F-14
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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 notional amount is used to measure
interest to be paid or received and does not represent the exposure to credit
loss. The notional amount of the Company's interest rate swap was $25.0
million at December 31, 1998, and had a fair value of approximately $0.2
million. During March 1999, the Company terminated its interest rate swap
agreement and received $0.3 million, which is being recognized in earnings
ratably as the related outstanding loan balance is amortized.
(10) 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; Jackson, Mississippi; and Columbia, Mississippi; as well as
warehouse space in Columbia, Mississippi. The lease agreements in Houston and
Jackson were signed by the Company in September 1997 and April 1998,
respectively. Each lease has a five year term. The lease for office and
warehouse space in Columbia was assumed through the purchase of certain oil
and gas properties from AHC in February 1998, as more fully discussed in Note
1. The Columbia lease term ends in June 2001.
Future minimum lease payments required of the Company for years ending
December 31, are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................... $259
2001.................................... 213
2002.................................... 147
2003.................................... 32
2004.................................... --
Thereafter.............................. --
----
$651
====
</TABLE>
Total net rent expense under these lease arrangements was $255,078, $198,547
and $103,464 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Employee Benefit Plan
The Company has a qualified 401(k) savings plan (the "Plan") covering
substantially all eligible employees. The Plan provides for discretionary
matching contributions by the Company. Commencing in July 1998, matching
contributions have been in the form of Company stock. Contributions charged
against operations totaled $189,421, $66,359, and $64,348 for the years ended
December 31, 1999, 1998 and 1997, 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
F-15
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
working interests, fees, reimbursements and other financial items. These
payments to the employees, which were charged against operations, totaled
$54,611 and $134,916 for the years ended December 31, 1998 and 1997,
respectively. These programs were terminated upon the consummation of the
Offering in February 1998.
Other
The Company has been named as a defendant in a lawsuit filed June 1, 1999 by
Energy Drilling Company ("Energy Drilling"), in the Parish of Catahoula,
Louisiana arising from a blowout of the Victor P. Vegas #1 well that was
drilled and operated by the Company. Energy Drilling, the drilling rig
contractor on the well, is claiming damages related to their destroyed
drilling rig and related costs amounting to approximately $1.2 million, plus
interest, attorneys' fees and costs.
The Company has been named in lawsuit brought by Victor P. Vegas, the
landowner of the surface location of the blowout well referenced above. The
suit was filed July 20, 1999 in the Parish of Orleans, Louisiana, claiming
unspecified damages related to environmental and other matters.
The Company has been named in a lawsuit brought by Charles Strictland,
employee of BJ Services, Inc., on September 30, 1999. The suit is claiming
damages of $1.0 million for personal injuries allegedly suffered at a well
site operated by the Company.
The Company has been named in a lawsuit brought by Eric Parkinson, husband
and personal representative of the Estate of Kelly Anne Parkinson (deceased).
The amended complaint was filed December 13, 1999, in the County of Hillsdale,
Michigan, claiming an unspecified amount plus interest and attorney fees for
suffering the loss of the deceased care, comfort, society and support. Kelly
Anne Parkinson was killed in an automobile accident on February 2, 1999, while
traveling on a county road located next to land wherein the Company is lessee
of underground mineral rights. The plaintiff alleges that the accident was the
result of mud dragged on the road from the leased property and alleges that
the Company was negligent in its duty to conduct its operations at the site
with reasonable care.
The Company believes it has meritorious defenses to the claims discussed
above and intends to vigorously defend these lawsuits. The Company does not
believe that the final outcome of these matters will have a material adverse
effect on the Company's operating results, financial condition or liquidity.
Due to the uncertainties inherent in litigation, however, no assurances can be
given regarding the final outcome of each action. The Company currently
believes any costs resulting from the lawsuits mentioned above would be
covered by the Company's insurance.
(11) Stock-Based Compensation
During 1997, the Company adopted the Stock Option and Restricted Stock Plan
of 1997 (the "1997 Plan"). The Board of Directors contemplates that the 1997
Plan primarily will be used to grant stock options. However, the 1997 Plan
permits grants of restricted stock and tax benefit rights if determined to be
desirable to advance the purposes of the 1997 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 Plan are directors, corporate officers and other full-time employees of
the Company and its subsidiaries. A maximum of 1.2 million shares of Common
Stock (subject to certain antidilution adjustments) are available for
Incentive Awards under the 1997 Plan. Upon consummation of the Offering in
February 1998, a total of 577,350 stock options were granted by the Company to
directors, corporate officers and other full-time employees of the Company,
and 109,500 shares of restricted stock were granted to certain employees. 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. During 1999 and
1998, incentive stock options of 25,000 and 54,600, respectively, were issued
to outside directors and new employees under the 1997 Plan.
F-16
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Since the above stock options have been granted at market price, no
compensation cost has been recognized for stock options granted under the 1997
Plan. The restricted stock vests 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 is recognized over the two-year vesting period as the
risk of forfeiture passes. In February 1999, 54,750 shares of restricted stock
vested, and the Company recognized compensation expense of approximately $0.2
million, accordingly.
On January 1, 2000, the Company granted 191,500 stock options to certain
employees with an exercise price of $0.01 per share. The right to exercise the
options shall vest and be exercisable when the normal trading average of the
stock on the market remains above the designated values for a period of five
consecutive trading days as follows:
<TABLE>
<CAPTION>
Percentage
Five-Day Daily Average Target Vested
----------------------------- ----------
<S> <C>
$2.00........................................................... 40%
$2.75........................................................... 30%
$3.50........................................................... 30%
</TABLE>
The Company accounts for all stock options issued under the provisions and
related interpretations of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." In accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company intends to continue to
apply APB No. 25 for purposes of determining net income and to present the pro
forma disclosures required by SFAS No. 123.
The status of the restricted stock and stock options granted under the Stock
Option and Restricted Stock Plan of 1997 is as follows:
<TABLE>
<CAPTION>
Restricted
Stock Options
---------- ----------------------
Number Number Average
of Shares of Shares Grant Price
---------- --------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1998............. -- -- --
Granted.................................. 109,500 904,950 $8.08
Exercised................................ -- -- --
Forfeited................................ -- (500) 8.00
Outstanding at December 31, 1998........... 109,500 904,450 $8.08
Granted.................................. -- 25,000 3.11
Exercised................................ (54,750) -- --
Forfeited................................ (11,250) (167,700) 8.19
------- -------- -----
Outstanding at December 31, 1999........... 43,500 761,750 $7.89
======= ======== =====
</TABLE>
The average fair value of shares granted during 1999 and 1998 was $1.68 and
$4.10, respectively. The fair value of each option grant is estimated using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for estimating fair value:
<TABLE>
<CAPTION>
Assumption 1999 1998
---------- -------- --------
<S> <C> <C>
Dividend Yield............................................. 0% 0%
Risk-free interest rate.................................... 6.5% 5.5%
Expected Life.............................................. 10 years 10 years
Expected volatility........................................ 25.5% 25.7%
</TABLE>
F-17
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes certain information for the options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
-------------------------- ----------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Grant Grant
Grant Prices Shares Life Price Shares Price
------------ ------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$2.19 to $10.13.................. 761,750 9 years $7.89 147,350 $8.05
</TABLE>
The Company's pro forma net loss and earnings (loss) per share of common
stock had compensation costs been recorded in accordance with SFAS No. 123,
are presented below (in thousands except per share data):
<TABLE>
<CAPTION>
As Reported Pro Forma
----------------- -----------------
1999 1998 1999 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net loss............................. $(1,982) $(41,800) $(2,384) $(42,229)
Earnings (loss) per share of Common
Stock
Basic.............................. $ (0.16) $ (3.75) $ (0.19) $ (3.79)
Diluted............................ $ (0.16) $ (3.75) $ (0.19) $ (3.79)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure should not
be interpreted as being indicative of future effects.
(12) 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 10). The Company realized a gain on
the sale of the property of approximately $160,000. This gain was deferred and
is being amortized in proportion to the gross rental charges under the
operating lease.
Until March 1999, the Company provided technical and administrative services
to a corporation controlled by a related party. In connection with this
arrangement, $66,667, $200,000 and $200,000 were recognized as management fee
income (see Note 15) for the years ended December 31, 1999, 1998 and 1997,
respectively.
A certain stockholder and director of the Company has controlling interest
in a corporation that is the operator of jointly owned properties. Payments to
this operator for the Company's proportionate share of leasehold, seismic,
drilling and operating expenses amounted to $794,319 (net of $1,126,321 in
control of well insurance reimbursements), $7,370,718, and $2,038,938 in 1999,
1998 and 1997, respectively. This operator also paid the Company crude oil and
natural gas revenues as disclosed in Note 16.
A certain stockholder and director of the Company is a principal in an
organization that provides consulting services to the Company. Consulting fees
paid to this organization amounted to $30,738 for 1997. There were no
consulting fees paid to this organization in 1999 or 1998.
During 1999, an affiliated entity purchased a working interest in certain
unproved oil and gas properties from the Company for $3.9 million. The Company
believes that the purchase price was representative of the fair market value
of these interests and that the terms were consistent with those available to
unrelated parties.
F-18
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Concentrations of Risk
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.
The Company also has a significant concentration of properties in the
Mississippi Salt Basin, which are affected by changes in economic and other
conditions, including but not limited to crude oil and natural gas prices and
operating costs.
(14) Non-Cash Activities
During 1999, the Company issued 38,479 shares (with a value of $89,000 at
the date of issue) of common stock as compensation for 1998 director fees, as
provided for under the Equity Compensation Plan for Non-employee Directors;
and reclassified approximately $1.5 from deferred revenue to capitalized oil
and gas property costs as more fully discussed in Note 6. 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 discussed in Note 4;
acquired certain oil and gas properties owned by non-affiliated parties for
approximately $12.8 million of its Common Stock, as discussed in Note 1; and
converted an accounts payable balance of $3.8 million into a note payable, as
discussed in Note 7. During 1997, the stockholders contributed approximately
$7.6 million of notes payable to MOC as capital.
(15) Other Operating Revenues
The majority of the other operating revenues are reimbursements for general
and administrative activities that the Company performs on behalf of partners
and investors in jointly owned oil and gas properties. All other management
fees that were earned for exploration and development activities have been
credited against oil and gas property costs.
(16) 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,
--------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Carthage Energy Services Inc.................................. 73% 50% --%
EOTT.......................................................... 16% 9% --%
Muskegon Development Co....................................... 3% 7% 27%
Dan A. Hughes Company......................................... 2% 21% 30%
Amerada Hess Corporation...................................... 2% 12% 39%
</TABLE>
F-19
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(17) Supplemental Financial Information on Oil and Gas Exploration,
Development and Production Activities (Unaudited)
The following information was prepared in accordance with the Supplemental
Disclosure Requirements of SFAS No. 69, "Disclosures About Oil and Gas
Producing Activities."
Users of this information should be aware that the process of estimating
quantities of "proved" and "proved developed" crude oil and natural gas
reserves is very complex, requiring significant subjective decisions in the
evaluation of all available geological, engineering and economic data for each
reservoir. The data for a given reservoir also may change substantially over
time as a result of numerous factors including, but not limited to, additional
development activity, evolving production history and continual reassessment
of the viability of production under varying economic conditions.
Consequently, material revisions to existing reserve estimates occur from time
to time. Although every reasonable effort is made to ensure that reserve
estimates reported represent the most accurate assessments possible, the
significance of the subjective decisions required and variances in available
data for various reservoirs make these estimates generally less precise than
other estimates presented in connection with financial statement disclosures.
Proved reserves represent estimated quantities of natural gas and crude oil
that geological and engineering data demonstrate, with reasonable certainty,
to be recoverable in future years from known reservoirs under economic and
operating conditions existing at the time the estimates were made.
Proved developed reserves are proved reserves expected to be recovered,
through wells and equipment in place and under operating methods being
utilized at the time the estimates were made.
The following estimates of proved reserves and future net cash flows as of
December 31, 1999, 1998 and 1997 have been prepared by Miller and Lents, Ltd.
(as to non-Michigan Antrim Shale reserves) and as of December 31, 1998 and
1997 by S.A. Holditch and Associates (as to Michigan Antrim Shale reserves),
independent petroleum engineers. All of the Company's reserves are located in
the United States.
F-20
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimated Quantities of Proved Oil and Gas Reserves
The following table sets forth the Company's net proved and proved developed
reserves at December 31 for each of the three years in the period ended
December 31, 1999, 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:
<TABLE>
<CAPTION>
Total
---------------------
Oil (MBbl) Gas (Mmcf)
---------- ----------
<S> <C> <C>
Estimated Proved Reserves
December 31, 1995..................................... 135.0 15,762.2
Extensions and discoveries........................... 514.9 553.7
Purchase of reserves................................. -- 1,016.1
Revisions and other changes.......................... 40.3 2,054.0
Production........................................... (46.5) (2,030.0)
------ --------
December 31, 1996..................................... 643.7 17,356.0
Extensions and discoveries........................... 10.6 3,629.8
Revisions and other changes.......................... 161.6 (1,129.5)
Production........................................... (47.4) (2,241.2)
------ --------
December 31, 1997..................................... 768.5 17,615.1
Extensions and discoveries........................... 130.1 5,863.7
Purchases of reserves................................ 308.3 23,086.7
Revisions and other changes.......................... 63.3 (8,586.1)
Production........................................... (247.6) (8,953.3)
Sales of reserves.................................... (30.9) (104.2)
------ --------
December 31, 1998..................................... 991.7 28,921.9
------ --------
Extensions and discoveries........................... 60.4 880.3
Revisions and other changes.......................... (175.1) 2,391.1
Production........................................... (255.9) (7,593.8)
Sales of reserves.................................... (132.7) (9,642.3)
------ --------
December 31, 1999..................................... 488.4 14,957.2
====== ========
Estimated Proved Developed Reserves
December 31, 1996.................................... 121.0 15,221.2
====== ========
December 31, 1997.................................... 130.2 13,964.4
====== ========
December 31, 1998.................................... 991.7 28,641.6
====== ========
December 31, 1999.................................... 460.1 14,944.5
====== ========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating To Proved
Oil and Gas Reserves
The following information has been developed utilizing procedures prescribed
by SFAS No. 69 and based on crude oil and natural gas reserve and production
volumes estimated by the Company's petroleum engineers. It may be useful for
certain comparison purposes, but should not be solely relied upon in
evaluating the Company or its performance. Further, information contained in
the following table should not be considered as representative of realistic
assessments of future cash flows, nor should the Standardized Measure of
Discounted Future Net Cash Flows be viewed as representative of the current
value of the Company.
F-21
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Future revenues(1)............................ $42,556 $ 66,975 $ 54,896
Future production costs(2).................... (7,237) (20,930) (19,091)
Future development costs(2)................... (402) (1,532) (5,300)
------- -------- --------
Future net cash flows......................... 34,917 44,513 30,505
Discount to present value at 10% annual rate.. (6,197) (8,088) (10,571)
------- -------- --------
Present value of future net revenues before
income taxes................................. 28,720 36,425 19,934
Future income taxes discounted at 10% annual
rate(3)...................................... -- -- --
------- -------- --------
Standardized measure of discounted future net
cash flows................................... $28,720 $ 36,425 $ 19,934
======= ======== ========
</TABLE>
- --------
(1) 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.
(2) 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.
(3) The 1999 and 1998 balance is not reduced by income taxes due to the tax
basis of the properties and a net operating loss carryforward. Does not
include income taxes for 1997 as the Company was not subject to federal
income taxes until consummation of the Offering in February 1998.
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
New discoveries............................... $ 3,213 $ 9,962 $ 4,059
Purchase of reserves.......................... -- 55,803 --
Sales of reserves in place.................... (7,003) (167) --
Revisions to reserves......................... 3,262 (18,635) 350
Sales, net of production costs................ (19,027) (17,619) (5,305)
Changes in prices............................. 16,571 (11,776) (22,280)
Accretion of discount......................... 3,643 1,993 3,006
Changes in timing of production and other..... (8,364) (3,070) 10,039
-------- -------- --------
Net change during the year.................... $ (7,705) $ 16,491 $(10,131)
======== ======== ========
</TABLE>
F-22
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED 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, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Proved properties...................................... $115,040 $103,272
Unproved properties.................................... 22,678 39,995
-------- --------
137,718 143,267
Less--Accumulated depreciation, depletion and
amortization.......................................... (78,881) (63,253)
-------- --------
$ 58,837 $ 80,014
======== ========
</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:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ------
(In thousands)
<S> <C> <C> <C>
Property acquisition costs(1)....................... $ 1,818 $ 60,974 $4,577
Exploration costs................................... 2,572 32,142 2,226
Development costs................................... 5,875 17,615 2,019
------- -------- ------
Total(2).......................................... $10,265 $110,731 $8,822
======= ======== ======
</TABLE>
- --------
(1) Includes $19,556 in 1998 and $757 in 1996 for the acquisition of proved
producing properties.
(2) Includes $12,770 in 1998 of non-cash acquisitions of proved producing and
unproved properties in connection with the Combination Transaction as more
fully described in Note 1.
F-23
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, 1998 and
1997. The results of operations below do not include general and
administrative expenses, income taxes and interest expense.
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ------
(In thousands)
<S> <C> <C> <C>
Operating Revenues:
Natural gas...................................... $17,266 $ 18,336 $5,819
Crude oil and condensate......................... 3,465 2,646 964
------- -------- ------
Total operating revenues....................... 20,731 20,982 6,783
------- -------- ------
Operating expenses:
Lease operating expenses and production taxes.... $ 1,704 $ 3,363 $1,478
Depreciation, depletion and amortization......... 16,066 15,933 2,520
Cost ceiling writedown........................... -- 35,085 --
------- -------- ------
Total operating expenses....................... 17,770 54,381 3,998
------- -------- ------
Results of operations.............................. $ 2,961 $(33,399) $2,785
======= ======== ======
</TABLE>
F-24
<PAGE>
MILLER EXPLORATION COMPANY
SUPPLEMENTAL QUARTERLY FINANCIAL DATA
Unaudited Quarterly Financial Information
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------
June Sept.
March 31 30 30 Dec. 31
-------- ------ ------ --------
(In thousands, except per share
data)
<S> <C> <C> <C> <C>
1999
Total Operating Revenues................... $ 4,980 $4,960 $5,545 $ 5,804
Operating Income........................... 108 59 171 47
Net Loss................................... (288) (576) (546) (572)
Earnings per share:
Basic.................................... (0.02) (0.05) (0.04) (0.05)
Diluted.................................. (0.02) (0.05) (0.04) (0.05)
1998
Total Operating Revenues................... $ 4,236 $5,727 $5,858 $ 5,990
Operating Income (Loss).................... 39 1,066 592 (37,742)
Net Income (Loss).......................... (5,581) 601 100 (36,920)
Earnings per share:
Basic.................................... (0.79) 0.05 0.01 (3.02)
Diluted.................................. (0.79) 0.05 0.01 (3.02)
1997
Total Operating Revenues................... $ 2,308 $1,538 $1,685 $ 1,881
Operating Income (Loss).................... 903 115 242 (32)
Net Income (Loss).......................... 721 (93) (290) (310)
</TABLE>
F-25
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Exchange and Combination Agreement dated November 12, 1997. Previously
filed as exhibit 2.1 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 Quarterly Report on Form 10-Q for the quarter ended June 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 here
incorporated by reference.
10.1(a) Stock Option and Restricted Stock Plan of 1997.* 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.* 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.* 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.*
10.3 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.
10.4 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.
10.5 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.
10.6 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.7 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.
10.8 $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.
10.9 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.
10.10 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.
10.11 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.
10.12 $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.
10.13 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.
10.14 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.
10.15 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.
10.16 First Amendment to Credit Agreement among Miller Oil Corporation and
Bank of Montreal dated June 24, 1998. Previously filed as an exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and here incorporated by reference.
10.17 Second Amendment to Credit Agreement between Miller Oil Corporation
and Bank of Montreal dated April 14, 1999. Previously filed as an
exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, and here incorporated by reference.
10.18 Agreement between Eagle Investments, Inc. and Miller Oil Corporation,
dated April 1, 1999. Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, and
here incorporated by reference.
10.19 $4,696,040.60 Note between Miller Exploration Company and Veritas DGC
Land, Inc., dated April 14, 1999. Previously filed as an exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, and here incorporated by reference.
10.20 Warrant between Miller Exploration Company and Veritas DGC Land,
Inc., dated April 14, 1999. Previously filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998, and here incorporated by reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.21 Registration Rights Agreement between Miller Exploration Company and
Veritas DGC Land, Inc., dated April 14, 1999. Previously filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and here incorporated by reference.
10.22 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated March 16, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.23 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated May 18, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.24 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated May 27, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.25 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated June 30, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.26 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated October 18, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and here incorporated by reference.
10.27 Form of Equity Compensation Plan for Non-Employee Directors Agreement
dated December 7, 1998.
10.28 Third Amendment to Credit Agreement between Miller Oil Corporation and
Bank of Montreal dated October 29, 1999.
10.29 Form of Employment Agreement for Lew P. Murray dated February 9, 1998.
10.30 Form of Employment Agreement for Michael L. Calhoun dated February 9,
1998.
10.31 Form of Stock Option Agreement granted to Lew P. Murray dated January
1, 2000.
10.32 Fourth Amendment to Credit Agreement among Miller Oil Corporation and
Bank of Montreal dated March 20, 2000.
11.1 Computation of Earnings per Share.
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.
23.2 Consent of Miller and Lents, Ltd.
23.3 Consent of Arthur Andersen LLP.
24.1 Limited Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Management contract or compensatory plan or arrangement.
<PAGE>
EXHIBIT 10.27
MILLER EXPLORATION COMPANY
EQUITY COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
SECTION 1
Establishment and Purpose of Plan
The Company hereby establishes the Equity Compensation Plan for Non-
Employee Directors (the "Plan") for its non-employee directors. The purposes of
the Plan are to provide an opportunity and means by which non-employee directors
can increase their financial interest in the Company, and thereby increase their
personal interest in the Company's continued success, through the payment of
directors' fees in Company Common Stock.
SECTION 2
Definitions
The following words have the following meanings unless a different meaning
is plainly required by the context:
2.1 "Award" means the award of Common Stock to a Participant under the
Plan.
2.2 "Committee" means a committee designated by the Board of Directors of
the Company to administer the Plan or, if no committee is designated, the Board
of Directors.
2.3 "Common Stock" means the Common Stock of the Company, $.01 par value.
2.4 "Company" means Miller Exploration Company, a Delaware corporation,
and its subsidiaries.
2.5 "Director's Fee" means the amount of income payable to a Participant
for service as a director for a fiscal year, including without limitation
payments for attendance at meetings of the Board of Directors or meetings of
committees of the Board of Directors, and any retainer fee paid to members of
the Board of Directors, but excluding reimbursement of costs.
2.6 "Market Value" of any security on any given date means if the
security is listed for trading on The Nasdaq 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.
2.7 "Non-Employee Director" shall mean a director of the Company who is
not employed by the Company or its subsidiaries.
<PAGE>
2.8 "Participant" means the Non-Employee Directors of the Company who are
granted Awards under the Plan.
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 Awards granted under the
Plan, to supervise the administration of the Plan and 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 may
delegate recordkeeping, calculation, payment, and other ministerial
administrative functions to individuals designated by the Committee, who may be
employees of the Company.
3.2 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 Awards as the Committee may deem necessary or desirable and as are
consistent with the terms of the Plan, including the authority to determine
whether and when Awards will be granted, the persons to be granted Awards, and
the amount of Awards to be granted to each person. Awards shall be awarded by
the Committee, and 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 benefits 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.
SECTION 4
Shares Subject to the Plan
4.1 Number of Shares. Subject to adjustment as provided in Section 4.2, a
maximum of 120,000 shares of Common Stock shall be available for Awards under
the Plan. Such shares may be authorized but unissued shares.
-2-
<PAGE>
4.2 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 Awards under the 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 Award,
with an appropriate cash adjustment for the value of any Awards eliminated.
SECTION 5
Awards
5.1 Grant. Subject to adjustments provided in Section 4.2, the
Committee, in its discretion, may determine to compensate a Participant for the
Participant's Director's Fee in shares of Common Stock rather than cash.
5.2 Determination of Number of Shares. If the Committee determines to
compensate a Participant in shares of Common Stock rather than cash, the number
of shares of Common Stock (rounded to the nearest whole share) to be awarded to
a Participant shall be calculated by dividing the dollar amount of a
Participant's Director's Fee for a fiscal year by the Market Value of the Common
Stock on the day before the payment date.
5.3 Time of Payment by the Company. If a Participant is compensated for
the Participant's Director's Fee in shares of Common Stock rather than cash
pursuant to an Award hereunder, the Company shall distribute or cause to be
distributed to a Participant the number of shares of Common Stock as calculated
in Section 5.2 on or before the 45th day after the end of the Company's fiscal
year in which the Director's Fees are earned. The time of payment may be amended
before or after an Award (a) by the Committee in its sole discretion, if the
terms of such amendment benefits the Participant, or (b) in all other cases, by
the Committee with the consent of the Participant.
SECTION 6
General Provisions
6.1 No Rights to Awards. No Participant or other person shall have any
claim to be granted any Award, and there is no obligation of uniformity of
treatment of Participants. The terms and conditions of the Awards of the same
type and the determination of the Committee to grant a waiver or modification of
any Award and the terms and conditions thereof need not be the same with respect
to each Participant.
-3-
<PAGE>
6.2 Compliance With Laws; Listing and Registration of Shares. All
issuances of Common Stock 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 issue of shares thereunder, such Award may not be granted in whole or
in part, 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.
6.3 No Limit on Other Compensation Arrangements. Nothing contained in
the Plan shall prevent the Company 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.
6.4 No Right to Directorship. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the directorship
of the Company.
6.5 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.
6.6 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.
6.7 Unfunded Plan. This Plan shall be an unfunded plan within the
meaning of the Internal Revenue Code of 1986, as amended. Benefits provided in
the Plan constitute only an unsecured contractual promise to pay in accordance
with the terms of the Plan by the Company.
SECTION 7
Effective Date and Duration of the Plan
This Plan stall take effect December 7, 1998, which is the effective
date of approval by the Board of Directors, provided that, if required by
applicable law, rule or regulation or by the listing standards of any securities
exchange or quotation service, an Award granted before stockholder approval
shall be subject to approval of the Plan by the Company's stockholders at a
regular or special meeting. Unless earlier terminated by the Board of
Directors, no Award shall be granted under this Plan after December 6, 2008.
-4-
<PAGE>
SECTION 8
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 Award
without the consent of the Participant. No termination, amendment, or
modification of the Plan shall become effective with respect to any Award
previously granted under the Plan without the prior written consent of the
Participant holding such Award unless such amendment or modification benefits
the Participant.
-5-
<PAGE>
EXHIBIT 10.28
THIRD AMENDMENT TO CREDIT AGREEMENT
THIRD AMENDMENT TO CREDIT AGREEMENT (this "Third Amendment"), dated as
of October 29, 1999 (the "Effective Date") among Miller Oil Corporation, a
corporation formed under the laws of the State of Michigan (the "Borrower"),
Miller Exploration Company (the "Parent"), each of the lenders that is a
signatory, or which becomes a signatory, to the Credit Agreement referred to
below (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 as a Lender and as agent for
Lenders under the Credit Agreement referred to below (in its capacity as agent,
together with its successors and assigns in such capacity, the "Agent").
RECITALS
WHEREAS, the Borrower, the Parent, the Lenders and the Agent are
parties to that certain Credit Agreement, dated as of February 9, 1998, as
amended by that certain First Amendment to Credit Agreement, dated as of June
24, 1998 and as amended by that certain Second Amendment to Credit Agreement
dated as of April 14, 1999 (as so amended, the "Credit Agreement"); and
WHEREAS, the Borrower has advised the Lenders and the Agent that it
desires to amend certain provisions of the Credit Agreement, and the Borrower
has requested that the Lenders and the Agent agree to amend certain provisions
of the Credit Agreement; and
WHEREAS, the Lenders and the Agent have agreed to so amend certain
provisions of the Credit Agreement upon the terms and subject to the conditions
and limitations of this Third Amendment;
NOW, THEREFORE, in consideration of the premises, covenants and
agreements contained herein, the parties hereto hereby agrees as follows:
Section 1. Definitions. Capitalized terms used and not otherwise
defined herein are used with the meanings ascribed thereto in the Credit
Agreement. The following capitalized terms shall have the following respective
meanings when used herein:
A. "Lending Relationship" shall refer to the Credit Agreement and the
other Loan Documents, including, without limitation, this Third Amendment,
together with any and all negotiations, discussions, acts, omissions, renewals,
extensions, and other agreements or events related to the Credit Agreement and
such other Loan Documents, the parties' obligations thereunder and the
transactions contemplated thereby, including, without limitation, any such
negotiations, discussions, acts, omissions, renewals, extensions, other
agreements or events that (a) occurred prior to the date
<PAGE>
hereof, (b) may occur on the date hereof, or (c) occurred prior to the execution
of this Third Amendment and the instruments and documents executed and delivered
in connection herewith or relating hereto.
B. "Supplemental Mortgages" shall mean, collectively, all those
mortgages and supplements to mortgages necessary to grant to the Agent for the
benefit of the Lenders a first priority perfected Lien on the Oil and Gas
Properties owned by the Parent, the Borrower or any Subsidiary including those
Oil and Gas Properties acquired by the Parent, the Borrower or any Subsidiary
after February 9, 1998, and including without limitation, those properties
listed on Schedule III hereto and those properties located in the State of
Montana, all such mortgages and supplements to mortgages to be delivered within
thirty (30) days of the date hereof in accordance with Section 7.
C. "Released Claims" shall mean any and all claims (including without
limitation any liabilities, damages, demands and causes of action arising
therefrom), whether (a) at law or in equity, (b) on the alleged commission of a
tort, (c) on the alleged breach (or anticipatory breach or repudiation) of any
contract, duty, or warranty (whether oral or written, express or implied), (d)
on the alleged violation of any statute, tariff, or regulation (whether
promulgated by the United States, any state thereof, any foreign state or
country, or any other governmental agency or entity, wherever located), or (e)
on any other factual, legal or equitable theory, including, without limitation,
any claim for damages of any type or nature, for injunctive or other relief, for
attorneys' fees, interest or any other liability whatsoever on any theory,
including without limitation any loss, cost or damage in connection with or
based upon "lender liability", unfair dealing, duress, coercion, control or
undue influence, extortion or commercial bribery, breach of an implied covenant
or duty of good faith and fair dealing, material misrepresentation or omission,
overreaching, unconscionability, conflict of interest, bad faith, malpractice,
disparate bargaining position, detrimental reliance, promissory estoppel,
estoppel by deed, waiver, laches, or any other equitable theory, equitable
subordination, breach of fiduciary duty or any other duty, or tortious
inducement to commit such breach, tortious interference with contract or
prospective business relations, negligent performance of contractual
obligations, or other theories of negligence, negligent or intentional
infliction of emotional distress, slander, libel, other defamation, fraudulent
transfer, conversion, trespass to (or clouding the title of) property, usury,
violations of the Racketeer Influenced and Corrupt Organizations Act, deceptive
trade practices, conspiracy, or any theory of liability as partners or joint
venturers, that any Releasing Party may have as of the date hereof against any
Released Party with respect to the Lending Relationship.
D. "Released Party" shall mean each of the Agent, the Lenders and
their respective predecessors, successors, assigns, directors, officers,
partners, employees, agents, attorneys, principals and Affiliates and all other
Persons liable or who might be claimed to be liable on their behalf
(collectively, the "Released Parties").
2
<PAGE>
E. "Releasing Party" shall mean each of the Borrower and the
Guarantors and their respective predecessors, successors, assigns, directors,
officers, partners, employees, agents, attorneys, principals, Affiliates and all
other Persons who might have a claim against any Released Party (collectively,
the "Releasing Parties").
Section 2. Amendments to Credit Agreement. The Credit Agreement is
amended hereby as follows:
A. Section 1.02 is amended hereby:
(i) by inserting the reference "and the Third Amendment"
after the reference "Second Amendment" in the definition of the term
"Agreement";
(ii) by deleting the references "October 15, 1999" and
"$37,000,000" in the definition of "Aggregate Maximum Credit Amounts" and
substituting the references "April 15, 2000" and "$25,468,000".
(iii) by deleting the reference "(i) the sixth anniversary of
the Closing Date," in the definition of the term "Final Maturity Date" and
substituting the following therefor "(i) January 1, 2001,".
(iv) by adding the following definition where alphabetically
appropriate:
"Third Amendment Effective Date" shall mean the "Effective
Date" as such term is defined in the Third Amendment.
B. Section 2.07 of the Credit Agreement is amended hereby as
follows:
(i) by deleting subsection (b)(i) in its entirety and
substituting therefor the following new subsection (b)(i):
"(i) The Borrower shall make prepayments as set forth below:
A. The Borrower shall prepay the Loans as follows:
(1) On or before October 31, 1999, after
application of any prepayments made pursuant to
subsection C. below, the amount of $750,000;
(2) On or before November 30, 1999, after
application of any prepayments made pursuant to
subsection C. below, the amount of $750,000;
3
<PAGE>
(3) On or before December 31, 1999, after
application of any prepayments made pursuant to
subsection C. below, the amount of $750,000;
(4) On or before January 31, 2000, after
application of any prepayments made pursuant to
subsection C. below, the amount of $4,000,000;
and
(5) On or before February 29, 2000, after
application of any prepayments made pursuant to
subsection C. below, the amount of $750,000;
B. In addition to the prepayments required by
subsections 2.07(b)(i)A. and C., upon any Transfer of Property
that would be included in the Borrowing Base, the Borrower shall
prepay the Loans in an amount equal to 100% of the net cash
proceeds of any such Transfer, and any net cash proceeds in
excess of the value attributable to such Property in the
Borrowing Base determined by the Agent in its sole discretion at
the time of the Transfer shall be credited against the
prepayments required under subsection 2.07(b)(i)(A);
C. Upon any Transfer of Property that would not be
included in the Borrowing Base, the Borrower shall prepay the
Loans in an amount equal to 100% of the net cash proceeds of any
such Transfer, which prepayments shall be credited against the
prepayments required under subsection 2.07(b)(i)(A);
D. The entire amount of any prepayment made
pursuant to this subsection shall be applied to reduce the
Aggregate Maximum Credit Amounts pro rata to each Lender based on
its Percentage Share."
C. Section 2.08 of the Credit Agreement is amended hereby by as
follows:
(i) by deleting the reference "October 15, 1999" in subsection
(d) and substituting therefor the reference "April 15, 2000"; and
(ii) by deleting the first sentence of subsection (d) in its
entirety and substituting the following therefor:
"On April 15, 2000 (or such earlier time as the Borrower shall
request in writing to the Agent, provided that the Borrower timely
delivers a Reserve Report as required by Section 8.07 hereof) and, so
long as any of the
4
<PAGE>
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, 2000 (each being a "Scheduled
Redetermination Date"), the Lenders shall redetermine the amount of
the Borrowing Base in accordance with Section 2.08(b)."
D. Section 8.07 of the Credit Agreement is amended hereby as follows:
(i) by deleting the first sentence of subsection (a) in its
entirety and substituting the following therefor:
"On April 1, 2000 (or, if the Borrower requests a Borrowing Base
redetermination prior to April 15, 2000 in accordance with Section
2.08 hereof, not less than 15 days prior to the date of such
redetermination) and on or before each November 1 and April 1
thereafter, commencing November 1, 2000, the Borrower shall furnish to
the Agent a Reserve Report."
E. Section 9.12 of the Credit Agreement is amended hereby by deleting
the reference "December 31, 1999" and substituting the reference "October 1,
2000."
F. Section 9.14 of the Credit Agreement is amended hereby by deleting
the reference "$24,000,000" and substituting the reference "$20,000,000."
Section 3. Covenants.
A. Covenants of the Borrower and the Parent. The Borrower or the
Parent, as the case may be, covenants and agrees that during the period from the
Third Amendment Effective Date through and including April 15, 2000 (or, if
earlier, the date of the next redetermination of the Borrowing Base in
accordance with Section 2.08(d) of the Credit Agreement as amended hereby):
(i) Every two weeks the Parent shall deliver cash budgets in
form and substance reasonably satisfactory to the Agent and cash flow
statements in form and substance reasonably satisfactory to the Agent with
variance analysis to budget (including accounts receivables and accounts
payables reporting) not later than the Friday following the last week to
which such budgets and statements relate.
(ii) The Borrower shall not spud any wells or conduct any other
drilling operations (other than with respect to wells identified on
Schedule II hereto and routine workovers normally expensed in accordance
with past practice) without the prior written consent of the Agent and the
Lenders, and shall not, without the prior written consent of the Agent and
the Lenders, use any amounts to acquire acreage, leases, seismic data, or
for any drilling costs and expenses other than to acquire, extend or renew
5
<PAGE>
the Leases identified on Schedule I hereto or to pay the drilling costs or
expenses identified on Schedule II hereto.
(iii) The Borrower shall use its best efforts to raise capital,
whether through debt, equity or consummation of asset sales to achieve Borrowing
Base compliance, provided that the Lenders shall not require proceeds raised
through debt or equity offerings to be used for debt prepayments.
(iv) The Borrower shall provide to the Agent from time to time
upon request by the Agent the certificate of a Responsible Officer of the
Borrower stating that, except as disclosed in a schedule thereto, the Borrower
has not received written notice that any mechanics' liens have been filed or
will be filed on the Mortgaged Properties; provided that mere receipt of an
invoice for services rendered shall not constitute written notice that a
mechanics' lien will be filed.
B. The Lenders and the Agent Covenants. Each of the Lenders and the
Agent, as the case may be, covenants and agrees that during the period from the
Third Amendment Effective Date through and including April 15, 2000 (or, if
earlier, the date of the next determination of the Borrowing Base in accordance
with Section 2.08(d) of the Credit Agreement as amended hereby):
(i) the Agent will release any Lien that it may have on assets
of the Borrower sold by the Borrower in one or more arms length
transactions for fair value by the Borrower in accordance with the terms of
the Credit Agreement as amended hereby, the net cash proceeds of which
sales are paid to the Bank pursuant to Section 2.07(b)(i) of the Credit
Agreement as amended hereby.
Section 4. Conditions Precedent. This Third Amendment shall become
binding upon receipt by the Agent of the following documents and satisfaction of
the other conditions provided in this Section 4, each of which must be
satisfactory to the Agent in form and substance:
A. counterparts of this Amendment executed by the Borrower, the Agent
and the Lenders;
B. certificates of the Secretary or an Assistant Secretary of the
Borrower and the Guarantor setting forth for each of them (i) the resolutions of
its board of directors or managers (or if such Guarantor is a partnership,
resolutions of the general partner of such partnership), as applicable, with
respect to the authorization to execute and deliver this Amendment and
consummate the transactions contemplated hereby; (ii) the Responsible Officer of
such entity authorized to sign this Amendment, and (iii) the signature of such
authorized Responsible Officer of such entity;
C. a Consent and Acknowledgement executed by each of the Guarantors;
6
<PAGE>
D. an opinion of counsel to Borrower substantially in the form
attached hereto as Exhibit A;
E. payment to the Agent for the ratable benefit of the Lenders of all
accrued and unpaid Interest outstanding under the Credit Agreement and the
Notes; F. payment of the fees and expenses of the Agent and the Lenders
including the payment of the Amendment Fee provided in Section 8.A. of the
Second Amendment; and
G. such other documents as the Agent may reasonably request.
Section 5. Representations and Warranties.
A. The Borrower hereby reaffirms that the representations and
warranties made by the Borrower and the Parent in the Credit Agreement were true
and correct when made and, except as to be described in writing to the Agent as
of the date hereof, are true and correct as though made on and as of the date
hereof, and further, the Borrower represents that,
(i) as of the date hereof, no Default or Material Adverse
Effect has occurred and is continuing except as previously disclosed to the
Agent in writing or as set forth in Schedule IV hereto;
(ii) neither the Borrower, the Parent nor any Subsidiary has
acquired any additional Oil and Gas Properties since April 14, 1999 except as
identified on Schedule III hereto; and
(iii) the execution, delivery and performance by the Borrower or
any Guarantor of this Third Amendment and the other Loan Documents and all
instruments and documents to be delivered by the Borrower or such Guarantor, to
the extent a party thereto, hereunder and thereunder and the creation of all
Liens provided for herein and therein: (a) are within the Borrower's or such
Guarantor's corporate power; (b) have been duly authorized by all necessary or
proper corporate action, including the consent of stockholders, members and/or
partners therein or thereof; (c) are not in contravention of any provision of
the Borrower's or such Guarantor's certificate of incorporation, bylaws or
similar organizational and/or governing documents; (d) will not violate (1) any
law or regulation or (2) any order or decree of any court or governmental
instrumentality; (e) will not conflict with or result in the breach or
termination of, constitute a default under or accelerate any performance
required by, any indenture, mortgage, deed of trust, lease, agreement or other
instrument to which the Borrower or such Guarantor is a party or by which the
Borrower or such Guarantor or any of their respective property is bound; (f)
will not result in the creation or imposition of any Lien upon any of the
property of the Borrower or such Guarantor other than those in favor of the
Agent pursuant to the terms of this Third Amendment and the other Loan Documents
7
<PAGE>
to be delivered in connection herewith; and (g) do not require the consent or
approval of any governmental body, agency, authority or any other Person that
has not been duly obtained, made or complied with prior to the date hereof. At
or prior to the date hereof, each of this Third Amendment and the other Loan
Documents to be delivered in connection herewith shall have been duly executed
and delivered for the benefit of or on behalf of the Borrower or such Guarantor,
in each case to the extent a party thereto, and each shall then constitute a
legal, valid and binding obligation of the Borrower or such Guarantor,
enforceable against it in accordance with its terms.
B. Each of the Borrower and such Guarantor further represents and
warrants, for itself only that he or it (i) is executing this Third Amendment
after consultation with counsel of his or its own choosing, (ii) has read and
understands the release granted by Section 6 hereof, (iii) desires to execute
this Third Amendment and (iv) has the requisite authority to enter into and be
bound by this Third Amendment, including the release granted by Section 6
hereof.
Section 6. Release.
A. Each of the Releasing Parties desires and intends fully to
compromise, release and settle any and all of the Released Claims; and each of
the Releasing Parties hereby covenants, warrants and represents unto each of the
Released Parties that such Releasing Party does hereby FOREVER RELEASE, ACQUIT,
WAIVE AND DISCHARGE each of the Released Parties of and from the Released Claims
and each of the Releasing Parties hereby declares the same FOREVER RELEASED,
ACQUITTED, WAIVED, SETTLED AND DISCHARGED. This release is effective without
regard to whether (i) such Released Claims are known or unknown, (ii) damages
arising out of such Released Claims have yet accrued, (iii) such Released Claims
arose collaterally, directly, derivatively, or otherwise between the parties
hereto or (iv) an ordinary person in the same or similar circumstances would or
would not, through the exercise of due care, have discovered such claims by the
date of this Amendment. In connection with the foregoing release:
B. The Borrower and each Guarantor represents and warrants that it
has the full power and authority to perform the release granted in this Section
6 and that it has not in any manner made any assignment of any Released Claim to
any third party.
C. The release granted in this Section 6 will be effective upon
execution of this Third Amendment by all of the parties hereto.
D. Each party executing this Amendment understands and agrees that
the release granted in this Section 6 is a full, final and complete release of
the Released Claims and that such release may be pleaded as an absolute and
final bar to any or all suits which may hereafter be filed or prosecuted by any
one or more of the Releasing Parties or anyone claiming by, through or under any
one or more of the Releasing Parties in respect of any of the matters released
hereby, and that no recovery on account of the
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Released Claims may hereafter be had from any of the Released Parties; and that
the consideration given for such release is not an admission of liability or
fault on the part of any of the Released Parties (it being the express intent of
the parties hereto to obtain peace of mind and avoid the expense and uncertainty
of potential litigation), and that none of the Releasing Parties or those
claiming by, through or under any of them will ever claim that it is.
E. The parties hereto acknowledge that the release granted by this
Section 6 does not have any effect with respect to relationships between the
Borrower and each Guarantor and the Lenders and the Agent other than in
connection with the Lending Relationship.
Section 7. Events of Default and Remedies.
A. The occurrence of the following event (regardless of the reason
therefor) shall constitute an "Event of Default" hereunder:
(i) The Borrower shall fail to deliver within thirty (30) days
after closing the Supplemental Mortgages and the other documents required under
Section 8.09 of the Credit Agreement (including, without limitation, the legal
opinion), granting to the Agent a first priority Lien interest (subject only to
Excepted Liens) on the Borrower's, the Parent's, or any Subsidiary's interest in
any additional Oil and Gas Property listed on Schedule III hereto.
B. The occurrence and continuation of an Event of Default hereunder
shall constitute an Event of Default under the Credit Agreement as amended
hereby.
Section 8. Payment of Fees and Expenses; Form of Payment.
A. The Borrower agrees to pay to the Agent for the ratable benefit of
the Lenders a fee (the "Amendment Fee") in an amount equal to two percent (2%)
on the outstanding balance of the Loans as of April 15, 2000, payable on April
15, 2000.
B. The Borrower agrees, whether or not the transactions contemplated
hereby are consummated, to pay all reasonable expenses of the Agent and the
Lenders (including, without limitation, all reasonable fees and disbursements of
counsel and other outside consultants for the Agent and/or the Lenders) in
connection with the negotiation, investigation, preparation, execution and
delivery of, recording and filing of, preservation of rights under and
enforcement of this Amendment and the other Loan Documents to be delivered in
connection herewith.
C. All payments to be made by the Borrower under this Amendment shall
be made in Dollars, in immediately available funds, to the Agent at such account
as the Agent shall specify by notice in accordance with Section 4.01 of the
Credit Agreement.
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Section 9. Limitations. The amendments set forth herein are limited
precisely as written and shall not be deemed to (a) be a consent to, or waiver
or modification of, any other term or condition of the Credit Agreement or any
of the other Loan Documents, or (b) prejudice any right or rights that the
Lenders or the Agent may have at any time under or in connection with the Credit
Agreement as amended hereby or any of the other Loan Documents. Except as
expressly supplemented, amended or modified hereby, the terms and provisions of
the Credit Agreement or any other Loan Documents are and shall remain in full
force and effect. In the event of a conflict between this Amendment and any of
the foregoing documents, the terms of this Amendment shall be controlling.
Section 10. 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 decision to enter into this Amendment, 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 Amendment or the Credit Agreement. The Agent shall not be
required to keep itself informed as to the performance or observance by the
Borrower of this Amendment or any other Loan Document or any other document
referred to or provided for herein or therein 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 and under the Credit Agreement, 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 Weil, Gotshal &
Manges LLP is acting in this transaction as special counsel to the Agent only.
Each Lender will consult with its own legal counsel to the extent that it deems
necessary in connection with this Amendment and the matters contemplated herein.
Section 11. Governing Law. This Amendment and the rights and
obligations of the parties hereunder and under the Credit Agreement shall be
construed in accordance with and be governed by the laws of the State of Texas
and the United States of America.
Section 12. Descriptive Headings, etc. The descriptive headings of the
several Sections of this Amendment are inserted for convenience only and shall
not be deemed to affect the meaning or construction of any of the provisions
hereof.
Section 13. Counterparts. This Amendment may be executed in any number
of counterparts and by different parties on separate counterparts and all of
such counterparts shall together constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the date first written above.
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE (Section)26.02
THIS AMENDMENT AND OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE PARTIES
BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF TOGETHER
CONSTITUTE A WRITTEN LOAN AGREEMENT AND 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
AGREEMENT BETWEEN THE PARTIES.
BORROWER: MILLER OIL CORPORATION
By: /s/ Kelly E. Miller
--------------------------------
Name: Kelly E. Miller
------------------------------
Title: President
-----------------------------
PARENT: MILLER EXPLORATION COMPANY
By: /s/ Kelly E. Miller
--------------------------------
Name: Kelly E. Miller
------------------------------
Title: President & CEO
-----------------------------
LENDER AND AGENT: BANK OF MONTREAL
By: /s/ Thomas E. McGraw
--------------------------------
Thomas E. McGraw
Director
<PAGE>
EXHIBIT 10.29
EMPLOYMENT AGREEMENT
THIS IS AN EMPLOYMENT AGREEMENT (the "Agreement") between MILLER
EXPLORATION COMPANY, a Delaware corporation ("Company") and Lew P. Murray
("Employee"). The parties agree as follows:
1. Effective Date and Term. This Agreement will take effect as of February
9, 1998. The initial term of this Agreement will be three (3) years following
its effective date. If the Employment terminates at any time before expiration
of this Agreement, then notwithstanding such expiration the parties will remain
obligated to comply with their respective obligations under Paragraph 6. The
Employee's obligations and the Company's rights under Paragraphs 8, 9 and 10
shall survive expiration of this Agreement, and shall continue in full force and
effect.
2. Employment. The Employee will serve as Vice President of Exploration of
the Company, or in other positions assigned by the Company (the "Employment").
The Employee's duties will be those assigned by the Company's Board of Directors
or the President or Chief Executive Officer, as the case may be. The Employment
will be full time, and the Employee's entire business time and best efforts will
be devoted to the performance of Employee's duties for the Company during the
term of the Employment, provided that, except as otherwise provided in this
Agreement, nothing in this Paragraph shall prevent the Employee from engaging in
additional activities in connection with personal investments and community
affairs that do not compromise the Company's assets and are not inconsistent
with the Employee's duties under this Agreement. Employee will comply with the
Company's employment policies.
3. Termination of Employment. During the term of this Agreement, the
Employment may be terminated as provided in Paragraph 5. After expiration of
this Agreement, either party may terminate the Employment at will.
4. Compensation. The Employee will be compensated during the Employment
as follows:
a. Salary. The Employee will be paid an initial annual salary of at
least $140,000, subject to adjustment as provided below, which will be
payable in equal periodic installments according to the Company's customary
payroll practices, but no less frequently than monthly. The Employee's
salary will be reviewed by the Company's Compensation Committee not less
frequently than annually, and may be adjusted upward or downward in the sole
discretion of the Board of Directors, but in no event will the salary be
less than $112,000 per year, except upon approval of employee.
b. Stock Options. Employee has been granted options to purchase
100,000 shares of the Company's common stock at the initial public offering
price of $8.00 per share. The options will have a 10-year term and will
vest in cumulative annual increments of one-fifth of the total number of
shares subject to the options,
<PAGE>
beginning on the first anniversary of the date of grant (February 4, 1999).
The options have been granted pursuant to a separate stock option agreement
between the Company and Employee, and the options will be subject to any
restrictions and other terms set forth in that agreement and in any plan
under which the options may be granted, including the Company's Stock Option
and Restricted Stock Plan of 1997. In addition, the stock and other stock
options granted in the future, will vest upon a Change in Control of the
Company, as defined in Paragraph 15, (which definition shall modify and
supersede any definition of a "Change in Control" or comparable term in the
stock option plan or the agreement referenced in the preceding sentence.)
Employee may participate in future option programs as determined by the
Board of Directors.
c. Restricted Stock. Employee has been issued 15,000 shares of
restricted common stock that will vest in cumulative annual increments of
one-half of the total number of restricted shares granted, beginning on the
first anniversary of the date of grant. In addition, the stock and other
restricted stock granted in the future, will vest upon a change in control
of the Company, as referenced in Paragraph 15, (which definition shall
modify and supersede any definition of a "Change in Control" or comparable
term in the restricted stock plan or the agreement referenced in the
following sentence.) The restricted stock has been granted pursuant to the
Company's Stock Option and Restricted Stock Plan of 1997 agreement between
the Company and Employee, and the restricted stock will be subject to any
restrictions and other terms set forth in that agreement and in any plan
under which the restricted stock may be granted, including the Company's
Stock Option and Restricted Stock Plan of 1997. Employee may participate in
future restricted stock programs as determined by the Board of Directors.
d. Bonus. The Employee will be eligible to participate in any bonus
program covering the position in which the Employee serves, on the terms set
forth in such bonus program. The terms of any present or future bonus
programs are subject to revision from time to time in the Company's
discretion.
e. Benefits. The Employee will, during the term of Employment, be
permitted to participate in such pension, 401(k), profit sharing, life
insurance, health insurance, and other employee benefit plans of the Company
that may be in effect from time to time, to the extent the Employee is
eligible under the terms of those plans (collectively, the "Benefits"). In
addition, Employee will be eligible to receive twenty (20) days of vacation.
f. Business Expenses. The Company will reimburse the Employee for
reasonable ordinary and necessary business expenses incurred in the
performance of duties on behalf of the Company, subject to Employee's
prompt submission of proper
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documentation for tax and accounting purposes and, if applicable, subject
to the approval of the respective Supervisor.
g. Plan Terms and Changes. The terms of applicable insurance
policies and benefit plans in effect from time to time will govern with
regard to specific issues of coverage and benefit eligibility. It is
understood that all benefit programs are subject to change or cancellation
in the discretion of the Company.
5. Termination of Employment. During the term of this Agreement, Employee's
Employment may be terminated in the following circumstances:
a. Death. The Employment will terminate automatically in the event
of Employee's death.
b. Disability. If Employee becomes "disabled", the Company may elect
to terminate Employee's Employment due to such disability. For the purposes
of this Agreement, the Employee will be deemed to be "disabled" if the
Employee is unable to perform the essential functions of the Employee's
duties under this Agreement, due to physical or mental illness, for 120
consecutive days, or 180 days during any twelve-month period, as determined
in accordance with this Paragraph. The disability of the Employee will be
determined by a medical doctor selected by written agreement of the Company
and the Employee upon the request of either party by notice to the other. If
the Company and the Employee cannot agree on the selection of a medical
doctor, each of them will select a medical doctor and the two medical
doctors will select a third medical doctor who will determine whether the
Employee is disabled. The determination of the medical doctor selected under
this Paragraph will be binding on both parties.
c. Termination by Company for Cause. The Company may terminate the
Employment immediately for Cause, defined as Employee's: (i) material breach
of this Agreement, including but not limited to, continued poor performance
of duties after warning and reasonable opportunity to correct performance
deficiencies; (ii) willful failure to substantially perform properly
assigned job duties; (iii) misappropriation of Company property, intentional
damage to Company property, activities in aid of a competitor,
insubordination, conviction of a crime involving moral turpitude, or
performance of any act (including any dishonest or fraudulent act or
statement) that is willfully detrimental to the interests of the Company.
d. Termination by Employee for Good Reason. Employee may terminate
the Employment for Good Reason if:
(i) Either
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(A) the Company materially breaches its obligations to
Employee under this Agreement; or
(B) the Company fails to assign or a Successor fails to
assume this Agreement as provided in Paragraph 14; or
the Successor reduces Employee's salary, reduces
Employee's bonus opportunity, or materially reduces the
overall value of Employee's fringe benefits.
(ii) Employee notifies the Board of Directors in writing, within
60 days after the act or omission in question, asserting that the act
or omission in question constitutes Good Reason and explaining why
such act or omission constitutes a material breach; and
(iii) the Company fails, within 30 days after such notification,
to take all steps necessary to cure the breach; and
(iv) Employee resigns by written notice within 30 days after
expiration of the 30 day period under (iii) above.
If Employee terminates the Employment for Good Reason, Employee will
be paid Severance Pay as provided in Paragraph 6. Employee's failure to
object to a material breach as provided above will not waive Employee's
right to resign with Good Reason after following the above procedure with
regard to any future material breach.
e. Discretionary Termination by Employee. Employee may terminate the
Employment at will, with at least 45 days advance written notice, and
Employee agrees not to leave the Employment with Company without giving
such notice.
f. Discretionary Termination by Company. Company may terminate the
Employee's Employment at will, but if it does so it will pay Employee
Severance Pay as provided in Paragraph 6.
Employee agrees to cooperate during the 90-day period following any
termination of the Employment by consulting upon request to assist in
transition of Employee's duties and knowledge about the Company's business, such
consulting to be performed at Employee's reasonable convenience by telephone,
and the Company agrees to pay a consulting fee computed as Employee's weekly
salary divided by 40 for each hour of consultation (unless Employee is receiving
Severance Pay under Paragraph 6).
6. Payments After Termination of Employment.
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a. Upon termination of Employee's Employment, Employee shall not be
entitled to any further compensation from Company or any Affiliate, except:
(i) unpaid salary installments through the end of the week in which the
Employment terminates; and (ii) any vested benefits accrued prior to the
date the Employment terminates under the terms of any written Company
benefit plan that expressly calls for payments or rights after termination
of employment; (iii) COBRA continuation coverage at Employee's expense, if
Employee is eligible under applicable law; and (iv) Severance Pay (if any)
becoming due under Paragraph 6 or Paragraph 15.
b. The Company will pay Employee the Severance Pay described in this
Paragraph if the Company terminates the Employee's Employment during the
term of this Agreement other than as permitted under Paragraph 5(b)
("Disability") or 5(c) ("Cause"), except that no Severance Pay will be
owing from the Company by reason of the sale of the Company's business, if
this Agreement is assigned to and assumed by a Successor Company, as
provided in Paragraph 14. A purported termination of the Employment under
Paragraph 5(c) ("Termination by Company for Cause") or Paragraph 5(b)
("Disability") that is ultimately found to have been improper under such
paragraph shall be deemed to have been a termination under Paragraph 5(f)
("Discretionary Termination by Company"). The Company will also pay
Employee the Severance Pay described in this Paragraph if the Employee
terminates his Employment during the term of this Agreement for Good
Reason, as provided in Paragraph 5(d) ("Termination by Employee for Good
Reason").
c. Amount and Duration of Severance Pay. Subject to the other
provisions of this Paragraph 6, the Severance Pay will consist of:
(i) continuation of Employee's initial weekly salary (or current
salary, whichever is greater) for 26 weeks;
(ii) continuation during the Severance Pay Period, at Company's
expense, of Employee's existing benefits employee and dependent
health, dental and prescription drug coverage, life insurance if
possible under the policy for the remaining term of this Agreement
(without affecting Employee's right to elect COBRA continuation
coverage beginning on the expiration date of this Agreement), subject
to Employee's continuing payment of the normal employee contribution;
and
(iii) if Employee dies during Severance Pay period, Severance
Pay will continue for the benefit of the Employee's designated
beneficiary.
In addition, upon Employee's becoming entitled to Severance Pay, all
options and restricted stock previously granted to Employee will vest.
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d. Conditions to Severance Pay. In order to be eligible for the
Severance Pay, Employee must meet the following conditions:
(i) Employee must comply with Employee's obligations under
Paragraphs 8, 9 and 10 of this Agreement;
(ii) Employee must not claim unemployment compensation for any
week for which Employee receives Severance Pay;
(iii) Employee must promptly sign and continue to honor a
general release form acceptable to the Company and Employee of any and
all claims against Company and its affiliates (defined for purposes of
this Agreement as entities having an ownership interest in the
Company, and subsidiaries and other entities in which the Company has
an ownership interest), and all of their officers, directors,
employees and agents. The release will not waive the Employee's right
to any payments due under this Paragraph 6 or Employee's rights to any
vested benefits accrued prior to the date of termination of Employment
under the terms of the applicable written benefit plans of the
Company, or any right of Employee to indemnification or liability
insurance coverage or Employee's rights to previously granted stock
options and/or restricted stock. If Employee ever seeks to make a
claim against the Company contrary to the general release, it is
understood that Employee must return the severance pay to company
before doing so. If the company successfully enforces the general
release, the Severance Pay will be returned to the Employee less the
Company's cost of enforcement.
(iv) Employee must resign, upon written request by Company, from
all positions with or representing Company or any Affiliate, including
but not limited to membership on boards of directors; and
(v) Employee must provide the Company during the Severance Pay
Period (without additional compensation) with consulting services
regarding matters within the scope of Employee's former duties, upon
request by the Board of Directors, provided that Employee will only be
required to provide such services by telephone at Employee's
reasonable convenience, and not for more than forty (40) hours in any
month.
e. Offsets to Severance Pay. The Severance Pay due to Employee for
any week will be reduced by any disability benefits received by Employee
for the same period under any Workmen's Compensation law, or under the
Federal Social Security act Disability Benefits Provisions, or under any
disability insurance policy provided to Employee by Company as a fringe
benefit.
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7. Conflicts of Interest. During the Employment, the Employee will not
acquire, directly or indirectly, any financial interest in, accept gifts or
favors from, or establish any relationship other than on behalf of the Company
with, any customer, supplier, distributor, or other person who does or seeks to
do business with the Company, unless Employee has disclosed the financial
interest, gift, favor, or relationship to the Company's Board of Directors, in
writing, and has received the written approval of the Board of Directors for
such activity or transaction. The Employee is not otherwise precluded from
participating in the management of personal or family holdings, even though they
may offset the Company's operations.
8. Loyalty and Confidentiality; Company Property. The Employee will be
loyal to the Company during the Employment and will forever hold in strictest
confidence and will not use or disclose any information regarding the Company's
techniques, processes, developmental or experimental work, prospects, trade
secrets, customer or prospect names or information, or proprietary or
confidential information relating to the current or planned areas of activity,
prospects, areas of interest, services, sales, employees or business of the
Company, except as such disclosure or use may be required in connection with the
Employee's work for the Company. Upon termination of the Employment, the
Employee will deliver to the Company any and all materials relating to the
Company's business, including without limitation all customer lists and
information, keys, financial information, business notes, business plans,
Company provided autos or other equipment, credit cards, memoranda, prospects,
seismic information, specifications and documents, except as reasonably
necessary to ensure and verify the Company's compliance with this Agreement. All
Company property will be returned promptly and in good condition except for
normal wear. The Employee agrees not to retain any copies, reproductions or
summaries of any such materials. This covenant will continue in effect after
termination of the Employment and shall survive expiration of this Agreement.
9. Ideas, Concepts and Inventions Relating to Company's Business. All
business ideas and concepts and all inventions, improvements and developments
made or conceived by the Employee, either solely or in collaboration with
others, during the Employment, whether or not during working hours, and relating
to the Company's business or any aspect thereof, or to any business, product,
prospect, areas of activity or areas of interest the Company is considering
entering or developing, shall become and remain the exclusive property of the
Company, its successors and assigns. The Employee shall disclose promptly in
writing to the Company all such inventions, improvements and developments, and
will cooperate in confirming, protecting and obtaining legal protection of the
Company's ownership rights, and leasehold interest. This provision shall
continue in effect after termination of the Employment and shall survive
expiration of this Agreement as to ideas, concepts, inventions, improvements,
developments, and prospects made or conceived in whole or in part prior to the
date the Employment terminates.
The Employee understands and agrees that the ideas, concepts, prospects,
production, areas of activity, areas of interest, inventions, improvements,
developments which the Employee invented, conceived or participated in prior to
becoming employed by the Company, and to which the Employee, or any assignee of
the Employee, now claims title, are available for development,
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exploration, and can be capitalized upon, utilized by the Company for its own
gain. Any exceptions are completely described on an exhibit signed by the
parties and attached to this Agreement. If no such exhibit is attached, then
Employee represents and warrants that there are no such inventions,
improvements, developments or prospects to which the Company would be
restricted.
10. Covenant Not to Compete. During the Employment, and for one (1) year
after termination of the Employment, the Employee will not compete directly with
the Company. Competing directly with the Company shall be defined as purchasing
leases in an area defined by the Company as a Prospect for purposes of buying
leases, or divulging proprietary information about said area. It is expressly
understood and agreed that Employee shall in no way be restricted from acting as
a consultant or consulting in such areas as long as Employee does not use
proprietary information in such activity. Should the Company enter into
operations directly affecting the Employee's previously existing interests,
immediate family, relatives, or otherwise, the Employee will abstain from making
decisions or recommendations that materially adversely affect Company
operations. In the event that the Company should sell a working interest,
leasehold interest, any other such interest to the Employee, or his or her
immediate family, relatives, or otherwise, either corporately or individually,
the Employee will have the full rights and liberties associated to represent
said sale.
11. Entire Agreement. No agreements or representations, oral or otherwise,
express or implied, with respect to the Employee's Employment with the Company
or any of the subjects covered by this Agreement have been made by either party
which are not set forth expressly in this Agreement, and this Agreement
supersedes any pre-existing employment agreements and any other agreements on
the subjects covered by this Agreement. Other Company policies and practices not
addressed in this Agreement may be addressed in the Company's Employee Manual,
as may be modified from time to time.
12. Amendment and Waiver; Authority. No provisions of this Agreement may
be amended, modified, waived or discharged, and no additional obligations may be
imposed on the Company or the Employee, unless such waiver, modification,
discharge or obligation is (a) agreed to in a written agreement signed by an
officer of the Company authorized by the Board of Directors and the Employee and
(b) the terms of such written agreement are expressly approved by the Board of
Directors. No waiver by either party at any time of any breach or non-
performance of this Agreement by the other party shall be deemed a waiver of any
prior or subsequent breach or non-performance. No employee, officer or agent of
the Company other than the Board of Directors has any authority to offer
employment other than employment terminable at will by the Company, or to limit
the Company's right to terminate employment at will in any way.
13. Severability. The invalidity or unenforceability of any provision of
this Agreement will not affect the validity or enforceability of any other
provision of this Agreement, which will remain in full force and effect. If a
court of competent jurisdiction ever determines that any provision of this
Agreement (including but not limited to all or any part of the non-competition
covenant in Paragraph 10) is unenforceable as written, it is the intent of the
parties that such
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<PAGE>
provision shall be deemed narrowed or revised in such jurisdiction (as to
geographic scope, duration, or any other matter) to the extent necessary to
allow its enforcement. Such revision shall thereafter govern in such
jurisdiction, subject only to any allowable appeals of such court decision.
14. Assignability. This Agreement contemplates personal services by the
Employee, and Employee may not transfer or assign Employee's rights or
obligations under this Agreement, except that Employee may designate
beneficiaries for Severance Pay in the event of Employee's death during the
Severance Pay Period, and may designate beneficiaries for benefits as allowed by
the Company's benefit programs. This Agreement may be assigned by the Company to
any subsidiary or parent corporation or a division of such corporation;
(however, the Company must obtain final approval by the Employee for such an
assignment of said Agreement, which will not be unreasonably withheld), or to
any entity which succeeds to all or substantially all of the Company's
businesses ("Successor Company").
15. Provisions Relating to Change in Control. For purposes of this
Agreement, the following definitions shall apply:
1. Definition
(a) "Change in Control" shall mean (i) the failure of the Continuing
Directors at any time to constitute at least a majority of the members of
the Corporation's Board of Directors; (ii) the acquisition by any Person
(as defined in Section 13(d) and 14(d)(2) of the Securities Exchange Act of
1934 (the "Act")) other than an Excluded Holder of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Act) of twenty
percent (20%) or more of the outstanding Common Stock or the combined
voting power of the Corporation's outstanding securities entitled to vote
generally in the election of directors; (iii) the approval by the
stockholders of the Corporation of a reorganization, merger or
consolidation, unless with or into a Permitted Successor; or (iv) the
approval by the stockholders of the Corporation of a complete liquidation
or dissolution of the Corporation or the sale or disposition of all or
substantially all of the assets of the Corporation other than to a
Permitted Successor.
(b) "Continuing Directors" mean the individuals constituting the
Corporation's Board of Directors as of the date of this Agreement and any
subsequent directors whose election or nomination for election by the
Corporation's stockholders was approved by a vote of two-thirds (2/3) of
the individuals who are then Continuing Directors, but specifically
excluding any individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as the term is
used in Rule 14a-11 of Regulation 14A promulgated under the Act) or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Corporation's Board of Directors.
(c) "Excluded Holder" means the Corporation, a Subsidiary, any
employee benefit plan (i.e., any plan or program established by the
Corporation or a Subsidiary for the
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compensation or benefit of employees of the Corporation or any of its
Subsidiaries) of the Corporation or a Subsidiary or any trust holding
Common Stock or other securities pursuant to the terms of an employee
benefit plan, or any member of the Miller Group.
(d) "Miller Group" means (i) C.E. Miller, Kelly E. Miller, David A.
Miller, Daniel R. Miller, Sue Ellen Bell and their respective spouses,
lineal descendants and spouses of such descendants (collectively, the
"Miller Family"), (ii) the estate of any member of the Miller Family, (iii)
any trust established for the benefit of any member of the Miller Family,
(iv) any trust of which the power to vote, dispose or direct the voting or
disposition of any Common Stock of the Corporation included in the corpus
of such trust is controlled by one or more members of the Miller Family,
(v) without limiting the generality of the preceding clauses (iii) and
(iv), the Kelly E. Miller Retained Annuity Trust #1, the David A. Miller
Retained Annuity Trust #1, the Daniel R. Miller Retained Annuity Trust #1,
the Sue Ellen Bell Retained Annuity Trust #1, the Kelly E. Miller Trust,
the David A. Miller Trust, the Daniel R. Miller Trust and the Sue E. Bell
Trust, (vi) any corporation of which a majority of the outstanding shares
of capital stock entitled to vote generally for directors is beneficially
owned by, or a partnership of which a majority of the partnership interests
with voting rights are beneficially owned by, or a limited liability
company of which a majority of the membership interests with voting rights
are beneficially owned by, any of the individuals or entities identified in
clauses (i) through (v) above, including without limitation Eagle
Investments, Inc., Eagle International, Inc., Oak Shores Investments, Inc.,
Double Diamond Enterprises, Inc., and Frontier Investments, Inc.
(e) "Permitted Successor" means a corporation which, immediately
following the consummation of a transaction specified in clauses (iii) and
(iv) of the definition of "Change in Control" above, satisfies each of the
following criteria: (A) sixty percent (60%) or more of the outstanding
common stock of the corporation and the combined voting power of the
outstanding securities of the corporation entitled to vote generally in the
election of directors (in each case determined immediately following the
consummation of the applicable transaction) is beneficially owned, directly
or indirectly, by all or substantially all of the Persons who were the
beneficial owners of the Corporation's outstanding Common Stock and
outstanding securities entitled to vote generally in the election of
directors (respectively) immediately prior to the applicable transaction,
(B) no Person other than an Excluded Holder beneficially owns, directly or
indirectly, twenty percent (20%) or more of the outstanding common stock of
the corporation or the combined voting power of the outstanding securities
of the corporation entitled to vote generally in the election of directors
(for these purposes the term Excluded Holder shall include the corporation,
any Subsidiary of the corporation and any employee benefit plan of the
corporation or any such Subsidiary or any trust holding common stock or
other securities of the corporation pursuant to the terms of any such
employee benefit plan), and (C) at least a majority of the Board of
Directors is comprised of Continuing Directors.
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(f) "Person" means any individual, corporation (including any non-
profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization or other
entity or governmental body.
(g) "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 Corporation
or by one or more Subsidiaries of the Corporation.
2. Effect of Change in Control
If there is a Change in Control of the Company, or the Employee
terminates the employment for Good Reason as permitted under Paragraph
5(d), then the Employee shall receive the Lump Sum Payment described in the
Severance Pay provided under Paragraph 6, and in addition all unvested
stock options and restricted stock described in Paragraphs 4(b) and 4(c)
above will vest immediately.
3. Special Tax Provision
If any payment or payments to be made to the Employee by the Company
following the termination of the Employee's employment, whether such
payments are to be made under this Agreement or otherwise, would result in
Employee incurring any excess parachute payment excise tax under IRC
Sections 280G and 4999, then those payments that are to be made to
Employee under this Agreement and that constitute "parachute payments" (as
that term is defined under IRC Section 280G) shall be reduced or delayed to
the extent necessary to eliminate any "excess parachute payments" (as that
term is defined under IRC Section 280G) to Employee; provided, however,
that such reductions or delays shall be made if, and only if (A), below,
is greater than (B), below, where: (A) equals the present value as of the
date of termination of Employee's employment of the total payments to be
made to the Employee after such reductions or delays; and (B) equals the
present value as of the date of termination of the Employee's employment of
the total payments to be made to the Employee in the absence of such
reduction and after application of the 20% excise tax on excess parachute
payments. If such reductions or delays are to be made, the Employee shall
determine which payments shall be reduced or delayed. Employee's
determination as to whether reductions or delays are called for under this
Paragraph shall be final and binding, if reasonable. If the Company fails
to accept any reasonable determination of Employee under this Paragraph,
the Company shall reimburse Employee for all expenses and losses (including
but not limited to attorney fees and any additional taxes or interest or
penalties on unpaid taxes) incurred by Employee as a result of the
Company's failure to accept such determinations.
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16. Notices. Notices to a party under this Agreement must be
personally delivered First Class mail, Facsimile, or sent by certified mail
(return receipt requested) and will be deemed given upon post office delivery or
attempted delivery to the recipient's last known address. Notices to the Company
must be sent to the attention of the Company's Board of Directors.
17. Headings. The Paragraph and other headings in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
18. Arbitration. The Company and the Employee agree that the sole and
exclusive method for resolving any dispute between them regarding this Agreement
or its interpretation application or its termination shall be arbitration under
the procedures set forth in this Paragraph; provided, however, that nothing in
this Paragraph prohibits a party from seeking preliminary or permanent
injunctive relief from a court of competent jurisdiction, or from seeking
judicial enforcement of the arbitration award. If either party demands
arbitration of a dispute covered by this Paragraph, an arbitrator shall be
selected, and the arbitrator shall hold a hearing at which both parties may
appear, with or without counsel, and present evidence and argument. Pre-hearing
discovery shall be allowed in the discretion of and to the extent deemed
appropriate by the arbitrator, and the arbitrator shall have subpoena power. The
procedural rules for an arbitration hearing under this Paragraph, and the
selection of the arbitrator shall be pursuant to the rules of the American
Arbitration Association for Commercial Arbitration Hearings and such rules as
the arbitrator may determine. The hearing shall be held in Houston, Texas. The
award of the arbitrator(s) shall be final and binding and may be enforced by and
certified as a judgment of any court of competent jurisdiction. The fees and
expenses of the arbitrator shall be paid equally by the Company and the
Employee. The attorney fees and expenses incurred by the parties shall be paid
by the losing party.
19. Governing Law. The validity, interpretation, and construction of
this Agreement are to be governed by the laws of the State of Texas, without
regard to principles of conflicts of law.
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* * * * * * *
<PAGE>
The parties have signed this Agreement as of the date and year first
above written.
/s/ Lew P. Murray
--------------------------------------
Lew P. Murray
"Employee"
MILLER EXPLORATION COMPANY
By /s/ Kelly E. Miller
------------------------------------
Its President
-----------------------------------
"Company"
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<PAGE>
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
THIS IS AN EMPLOYMENT AGREEMENT (the "Agreement") between MILLER
EXPLORATION COMPANY, a Delaware corporation ("Company") and Michael L. Calhoun
("Employee"). The parties agree as follows:
1. Effective Date and Term. This Agreement will take effect as of
February 9, 1998. The initial term of this Agreement will be three (3) years
following its effective date. If the Employment terminates at any time before
expiration of this Agreement, then notwithstanding such expiration the parties
will remain obligated to comply with their respective obligations under
Paragraph 6. The Employee's obligations and the Company's rights under
Paragraphs 8, 9 and 10 shall survive expiration of this Agreement, and shall
continue in full force and effect.
2. Employment. The Employee will serve as Vice President of
Operations of the Company, or in other positions assigned by the Company (the
"Employment"). The Employee's duties will be those assigned by the Company's
Board of Directors or the President or Chief Executive Officer, as the case may
be. The Employment will be full time, and the Employee's entire business time
and best efforts will be devoted to the performance of Employee's duties for the
Company during the term of the Employment, provided that, except as otherwise
provided in this Agreement, nothing in this Paragraph shall prevent the Employee
from engaging in additional activities in connection with personal investments
and community affairs that do not compromise the Company's assets and are not
inconsistent with the Employee's duties under this Agreement. Employee will
comply with the Company's employment policies.
3. Termination of Employment. During the term of this Agreement, the
Employment may be terminated as provided in Paragraph 5. After expiration of
this Agreement, either party may terminate the Employment at will.
4. Compensation. The Employee will be compensated during the Employment
as follows:
a. Salary. The Employee will be paid an initial annual salary
of at least $135,000, subject to adjustment as provided below, which will
be payable in equal periodic installments according to the Company's
customary payroll practices, but no less frequently than monthly. The
Employee's salary will be reviewed by the Company's Compensation Committee
not less frequently than annually, and may be adjusted upward or downward
in the sole discretion of the Board of Directors, but in no event will the
salary be less than $108,000 per year, except upon approval of employee.
b. Stock Options. Employee has been granted options to purchase
25,000 shares of the Company's common stock at the initial public offering
price of $8.00 per share. The options will have a 10-year term and will
vest in cumulative annual increments of one-fifth of the total number of
shares subject to the options,
<PAGE>
beginning on the first anniversary of the date of grant (February 4, 1999).
The options have been granted pursuant to a separate stock option agreement
between the Company and Employee, and the options will be subject to any
restrictions and other terms set forth in that agreement and in any plan
under which the options may be granted, including the Company's Stock
Option and Restricted Stock Plan of 1997. In addition, the stock and other
stock options granted in the future, will vest upon a Change in Control of
the Company, as defined in Paragraph 15, (which definition shall modify and
supersede any definition of a "Change in Control" or comparable term in the
stock option plan or the agreement referenced in the preceding sentence.)
Employee may participate in future option programs as determined by the
Board of Directors.
c. Restricted Stock. Employee has been issued 2,000 shares of
restricted common stock that will vest in cumulative annual increments of
one-half of the total number of restricted shares granted, beginning on the
first anniversary of the date of grant. In addition, the stock and other
restricted stock granted in the future, will vest upon a change in control
of the Company, as referenced in Paragraph 15, (which definition shall
modify and supersede any definition of a "Change in Control" or comparable
term in the restricted stock plan or the agreement referenced in the
following sentence.) The restricted stock has been granted pursuant to the
Company's Stock Option and Restricted Stock Plan of 1997 agreement between
the Company and Employee, and the restricted stock will be subject to any
restrictions and other terms set forth in that agreement and in any plan
under which the restricted stock may be granted, including the Company's
Stock Option and Restricted Stock Plan of 1997. Employee may participate
in future restricted stock programs as determined by the Board of
Directors.
d. Bonus. The Employee will be eligible to participate in any
bonus program covering the position in which the Employee serves, on the
terms set forth in such bonus program. The terms of any present or future
bonus programs are subject to revision from time to time in the Company's
discretion.
e. Benefits. The Employee will, during the term of Employment,
be permitted to participate in such pension, 401(k), profit sharing, life
insurance, health insurance, and other employee benefit plans of the
Company that may be in effect from time to time, to the extent the Employee
is eligible under the terms of those plans (collectively, the "Benefits").
In addition, Employee will be eligible to receive twenty (20) days of
vacation.
f. Business Expenses. The Company will reimburse the Employee
for reasonable ordinary and necessary business expenses incurred in the
performance of duties on behalf of the Company, subject to Employee's
prompt submission of proper
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documentation for tax and accounting purposes and, if applicable, subject
to the approval of the respective Supervisor.
g. Plan Terms and Changes. The terms of applicable insurance
policies and benefit plans in effect from time to time will govern with
regard to specific issues of coverage and benefit eligibility. It is
understood that all benefit programs are subject to change or cancellation
in the discretion of the Company.
5. Termination of Employment. During the term of this Agreement,
Employee's Employment may be terminated in the following circumstances:
a. Death. The Employment will terminate automatically in the
event of Employee's death.
b. Disability. If Employee becomes "disabled", the Company may
elect to terminate Employee's Employment due to such disability. For the
purposes of this Agreement, the Employee will be deemed to be "disabled" if
the Employee is unable to perform the essential functions of the Employee's
duties under this Agreement, due to physical or mental illness, for 120
consecutive days, or 180 days during any twelve-month period, as determined
in accordance with this Paragraph. The disability of the Employee will be
determined by a medical doctor selected by written agreement of the Company
and the Employee upon the request of either party by notice to the other.
If the Company and the Employee cannot agree on the selection of a medical
doctor, each of them will select a medical doctor and the two medical
doctors will select a third medical doctor who will determine whether the
Employee is disabled. The determination of the medical doctor selected
under this Paragraph will be binding on both parties.
c. Termination by Company for Cause. The Company may terminate
the Employment immediately for Cause, defined as Employee's: (i) material
breach of this Agreement, including but not limited to, continued poor
performance of duties after warning and reasonable opportunity to correct
performance deficiencies; (ii) willful failure to substantially perform
properly assigned job duties; (iii) misappropriation of Company property,
intentional damage to Company property, activities in aid of a competitor,
insubordination, conviction of a crime involving moral turpitude, or
performance of any act (including any dishonest or fraudulent act or
statement) that is willfully detrimental to the interests of the Company.
d. Termination by Employee for Good Reason. Employee may
terminate the Employment for Good Reason if:
(i) Either
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(A) the Company materially breaches its
obligations to Employee under this Agreement; or
(B) the Company fails to assign or a Successor
fails to assume this Agreement as provided in Paragraph 14;
or the Successor reduces Employee's salary, reduces
Employee's bonus opportunity, or materially reduces the
overall value of Employee's fringe benefits.
(ii) Employee notifies the Board of Directors in writing,
within 60 days after the act or omission in question, asserting that
the act or omission in question constitutes Good Reason and explaining
why such act or omission constitutes a material breach; and
(iii) the Company fails, within 30 days after such
notification, to take all steps necessary to cure the breach; and
(iv) Employee resigns by written notice within 30 days after
expiration of the 30 day period under (iii) above.
If Employee terminates the Employment for Good Reason, Employee
will be paid Severance Pay as provided in Paragraph 6. Employee's failure
to object to a material breach as provided above will not waive Employee's
right to resign with Good Reason after following the above procedure with
regard to any future material breach.
e. Discretionary Termination by Employee. Employee may
terminate the Employment at will, with at least 45 days advance written
notice, and Employee agrees not to leave the Employment with Company
without giving such notice.
f. Discretionary Termination by Company. Company may terminate
the Employee's Employment at will, but if it does so it will pay Employee
Severance Pay as provided in Paragraph 6.
Employee agrees to cooperate during the 90-day period following any
termination of the Employment by consulting upon request to assist in
transition of Employee's duties and knowledge about the Company's business, such
consulting to be performed at Employee's reasonable convenience by telephone,
and the Company agrees to pay a consulting fee computed as Employee's weekly
salary divided by 40 for each hour of consultation (unless Employee is receiving
Severance Pay under Paragraph 6).
6. Payments After Termination of Employment.
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a. Upon termination of Employee's Employment, Employee shall not
be entitled to any further compensation from Company or any Affiliate,
except: (i) unpaid salary installments through the end of the week in which
the Employment terminates; and (ii) any vested benefits accrued prior to
the date the Employment terminates under the terms of any written Company
benefit plan that expressly calls for payments or rights after termination
of employment; (iii) COBRA continuation coverage at Employee's expense, if
Employee is eligible under applicable law; and (iv) Severance Pay (if any)
becoming due under Paragraph 6 or Paragraph 15.
b. The Company will pay Employee the Severance Pay described in
this Paragraph if the Company terminates the Employee's Employment during
the term of this Agreement other than as permitted under Paragraph 5(b)
("Disability") or 5(c) ("Cause"), except that no Severance Pay will be
owing from the Company by reason of the sale of the Company's business, if
this Agreement is assigned to and assumed by a Successor Company, as
provided in Paragraph 14. A purported termination of the Employment under
Paragraph 5(c) ("Termination by Company for Cause") or Paragraph 5(b)
("Disability") that is ultimately found to have been improper under such
paragraph shall be deemed to have been a termination under Paragraph 5(f)
("Discretionary Termination by Company"). The Company will also pay
Employee the Severance Pay described in this Paragraph if the Employee
terminates his Employment during the term of this Agreement for Good
Reason, as provided in Paragraph 5(d) ("Termination by Employee for Good
Reason").
c. Amount and Duration of Severance Pay. Subject to the other
provisions of this Paragraph 6, the Severance Pay will consist of:
(i) continuation of Employee's initial weekly salary (or
current salary, whichever is greater) for 52 weeks;
(ii) continuation during the Severance Pay Period, at
Company's expense, of Employee's existing benefits employee and
dependent health, dental and prescription drug coverage, life
insurance if possible under the policy for the remaining term of this
Agreement (without affecting Employee's right to elect COBRA
continuation coverage beginning on the expiration date of this
Agreement), subject to Employee's continuing payment of the normal
employee contribution; and
(iii) if Employee dies during Severance Pay period,
Severance Pay will continue for the benefit of the Employee's
designated beneficiary.
In addition, upon Employee's becoming entitled to Severance Pay,
all options and restricted stock previously granted to Employee will vest.
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d. Conditions to Severance Pay. In order to be eligible for the
Severance Pay, Employee must meet the following conditions:
(i) Employee must comply with Employee's obligations under
Paragraphs 8, 9 and 10 of this Agreement;
(ii) Employee must not claim unemployment compensation for
any week for which Employee receives Severance Pay;
(iii) Employee must promptly sign and continue to honor a
general release form acceptable to the Company and Employee of any and
all claims against Company and its affiliates (defined for purposes of
this Agreement as entities having an ownership interest in the
Company, and subsidiaries and other entities in which the Company has
an ownership interest), and all of their officers, directors,
employees and agents. The release will not waive the Employee's right
to any payments due under this Paragraph 6 or Employee's rights to any
vested benefits accrued prior to the date of termination of Employment
under the terms of the applicable written benefit plans of the
Company, or any right of Employee to indemnification or liability
insurance coverage or Employee's rights to previously granted stock
options and/or restricted stock. If Employee ever seeks to make a
claim against the Company contrary to the general release, it is
understood that Employee must return the severance pay to company
before doing so. If the company successfully enforces the general
release, the Severance Pay will be returned to the Employee less the
Company's cost of enforcement.
(iv) Employee must resign, upon written request by Company,
from all positions with or representing Company or any Affiliate,
including but not limited to membership on boards of directors; and
(v) Employee must provide the Company during the Severance
Pay Period (without additional compensation) with consulting services
regarding matters within the scope of Employee's former duties, upon
request by the Board of Directors, provided that Employee will only be
required to provide such services by telephone at Employee's
reasonable convenience, and not for more than forty (40) hours in any
month.
e. Offsets to Severance Pay. The Severance Pay due to Employee
for any week will be reduced by any disability benefits received by
Employee for the same period under any Workmen's Compensation law, or under
the Federal Social Security act Disability Benefits Provisions, or under
any disability insurance policy provided to Employee by Company as a fringe
benefit.
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7. Conflicts of Interest. During the Employment, the Employee will
not acquire, directly or indirectly, any financial interest in, accept gifts or
favors from, or establish any relationship other than on behalf of the Company
with, any customer, supplier, distributor, or other person who does or seeks to
do business with the Company, unless Employee has disclosed the financial
interest, gift, favor, or relationship to the Company's Board of Directors, in
writing, and has received the written approval of the Board of Directors for
such activity or transaction. The Employee is not otherwise precluded from
participating in the management of personal or family holdings, even though they
may offset the Company's operations.
8. Loyalty and Confidentiality; Company Property. The Employee will
be loyal to the Company during the Employment and will forever hold in strictest
confidence and will not use or disclose any information regarding the Company's
techniques, processes, developmental or experimental work, prospects, trade
secrets, customer or prospect names or information, or proprietary or
confidential information relating to the current or planned areas of activity,
prospects, areas of interest, services, sales, employees or business of the
Company, except as such disclosure or use may be required in connection with the
Employee's work for the Company. Upon termination of the Employment, the
Employee will deliver to the Company any and all materials relating to the
Company's business, including without limitation all customer lists and
information, keys, financial information, business notes, business plans,
Company provided autos or other equipment, credit cards, memoranda, prospects,
seismic information, specifications and documents, except as reasonably
necessary to ensure and verify the Company's compliance with this Agreement.
All Company property will be returned promptly and in good condition except for
normal wear. The Employee agrees not to retain any copies, reproductions or
summaries of any such materials. This covenant will continue in effect after
termination of the Employment and shall survive expiration of this Agreement.
9. Ideas, Concepts and Inventions Relating to Company's Business.
All business ideas and concepts and all inventions, improvements and
developments made or conceived by the Employee, either solely or in
collaboration with others, during the Employment, whether or not during working
hours, and relating to the Company's business or any aspect thereof, or to any
business, product, prospect, areas of activity or areas of interest the Company
is considering en tering or developing, shall become and remain the exclusive
property of the Company, its succes sors and assigns. The Employee shall
disclose promptly in writing to the Company all such inventions, improvements
and developments, and will cooperate in confirming, protecting and obtaining
legal protection of the Company's ownership rights, and leasehold interest.
This provision shall continue in effect after termination of the Employment and
shall survive expiration of this Agreement as to ideas, concepts, inventions,
improvements, developments, and prospects made or conceived in whole or in part
prior to the date the Employment terminates.
The Employee understands and agrees that the ideas, concepts,
prospects, production, areas of activity, areas of interest, inventions,
improvements, developments which the Employee invented, conceived or
participated in prior to becoming employed by the Company, and to which the
Employee, or any assignee of the Employee, now claims title, are available for
development,
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exploration, and can be capitalized upon, utilized by the Company for its own
gain. Any exceptions are completely described on an exhibit signed by the
parties and attached to this Agreement. If no such exhibit is attached, then
Employee represents and warrants that there are no such inventions,
improvements, developments or prospects to which the Company would be
restricted.
10. Covenant Not to Compete. During the Employment, and for one (1)
year after termination of the Employment, the Employee will not compete directly
with the Company. Competing directly with the Company shall be defined as
purchasing leases in an area defined by the Company as a Prospect for purposes
of buying leases, or divulging proprietary information about said area. It is
expressly understood and agreed that Employee shall in no way be restricted from
acting as a consultant or consulting in such areas as long as Employee does not
use proprietary information in such activity. Should the Company enter into
operations directly affecting the Employee's previously existing interests,
immediate family, relatives, or otherwise, the Employee will abstain from making
decisions or recommendations that materially adversely affect Company
operations. In the event that the Company should sell a working interest,
leasehold interest, any other such interest to the Employee, or his or her
immediate family, relatives, or otherwise, either corporately or individually,
the Employee will have the full rights and liberties associated to represent
said sale.
11. Entire Agreement. No agreements or representations, oral or
otherwise, express or implied, with respect to the Employee's Employment with
the Company or any of the subjects covered by this Agreement have been made by
either party which are not set forth expressly in this Agreement, and this
Agreement supersedes any pre-existing employment agreements and any other
agreements on the subjects covered by this Agreement. Other Company policies
and practices not addressed in this Agreement may be addressed in the Company's
Employee Manual, as may be modified from time to time.
12. Amendment and Waiver; Authority. No provisions of this
Agreement may be amended, modified, waived or discharged, and no additional
obligations may be imposed on the Company or the Employee, unless such waiver,
modification, discharge or obligation is (a) agreed to in a written agreement
signed by an officer of the Company authorized by the Board of Directors and the
Employee and (b) the terms of such written agreement are expressly approved by
the Board of Directors. No waiver by either party at any time of any breach or
non-performance of this Agreement by the other party shall be deemed a waiver of
any prior or subsequent breach or non-performance. No employee, officer or
agent of the Company other than the Board of Directors has any authority to
offer employment other than employment terminable at will by the Company, or to
limit the Company's right to terminate employment at will in any way.
13. Severability. The invalidity or unenforceability of any
provision of this Agreement will not affect the validity or enforceability of
any other provision of this Agreement, which will remain in full force and
effect. If a court of competent jurisdiction ever determines that any provision
of this Agreement (including but not limited to all or any part of the
non-competition covenant in Paragraph 10) is unenforceable as written, it is the
intent of the parties that such
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provision shall be deemed narrowed or revised in such jurisdiction (as to
geographic scope, duration, or any other matter) to the extent necessary to
allow its enforcement. Such revision shall thereafter govern in such
jurisdiction, subject only to any allowable appeals of such court decision.
14. Assignability. This Agreement contemplates personal services by
the Employee, and Employee may not transfer or assign Employee's rights or
obligations under this Agreement, except that Employee may designate
beneficiaries for Severance Pay in the event of Employee's death during the
Severance Pay Period, and may designate beneficiaries for benefits as allowed by
the Company's benefit programs. This Agreement may be assigned by the Company
to any subsidiary or parent corporation or a division of such corporation;
(however, the Company must obtain final approval by the Employee for such an
assignment of said Agreement, which will not be unreasonably withheld), or to
any entity which succeeds to all or substantially all of the Company's
businesses ("Successor Company").
15. Provisions Relating to Change in Control. For purposes of this
Agreement, the following definitions shall apply:
1. Definition
(a) "Change in Control" shall mean (i) the failure of the
Continuing Directors at any time to constitute at least a majority of the
members of the Corporation's Board of Directors; (ii) the acquisition by
any Person (as defined in Section 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934 (the "Act")) other than an Excluded Holder of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Act) of twenty percent (20%) or more of the outstanding Common Stock or
the combined voting power of the Corporation's outstanding securities
entitled to vote generally in the election of directors; (iii) the approval
by the stockholders of the Corporation of a reorganization, merger or
consolidation, unless with or into a Permitted Successor; or (iv) the
approval by the stockholders of the Corporation of a complete liquidation
or dissolution of the Corporation or the sale or disposition of all or
substantially all of the assets of the Corporation other than to a
Permitted Successor.
(b) "Continuing Directors" mean the individuals constituting the
Corporation's Board of Directors as of the date of this Agreement and any
subsequent directors whose election or nomination for election by the
Corporation's stockholders was approved by a vote of two-thirds (2/3) of
the individuals who are then Continuing Directors, but specifically
excluding any individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as the term is
used in Rule 14a-11 of Regulation 14A promulgated under the Act) or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Corporation's Board of Directors.
(c) "Excluded Holder" means the Corporation, a Subsidiary, any
employee benefit plan (i.e., any plan or program established by the
Corporation or a Subsidiary for the
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<PAGE>
compensation or benefit of employees of the Corporation or any of its
Subsidiaries) of the Corporation or a Subsidiary or any trust holding
Common Stock or other securities pursuant to the terms of an employee
benefit plan, or any member of the Miller Group.
(d) "Miller Group" means (i) C.E. Miller, Kelly E. Miller, David
A. Miller, Daniel R. Miller, Sue Ellen Bell and their respective spouses,
lineal descendants and spouses of such descendants (collectively, the
"Miller Family"), (ii) the estate of any member of the Miller Family, (iii)
any trust established for the benefit of any member of the Miller Family,
(iv) any trust of which the power to vote, dispose or direct the voting or
disposition of any Common Stock of the Corporation included in the corpus
of such trust is controlled by one or more members of the Miller Family,
(v) without limiting the generality of the preceding clauses (iii) and
(iv), the Kelly E. Miller Retained Annuity Trust #1, the David A. Miller
Retained Annuity Trust #1, the Daniel R. Miller Retained Annuity Trust #1,
the Sue Ellen Bell Retained Annuity Trust #1, the Kelly E. Miller Trust,
the David A. Miller Trust, the Daniel R. Miller Trust and the Sue E. Bell
Trust, (vi) any corporation of which a majority of the outstanding shares
of capital stock entitled to vote generally for directors is beneficially
owned by, or a partnership of which a majority of the partnership interests
with voting rights are beneficially owned by, or a limited liability
company of which a majority of the membership interests with voting rights
are beneficially owned by, any of the individuals or entities identified in
clauses (i) through (v) above, including without limitation Eagle
Investments, Inc., Eagle International, Inc., Oak Shores Investments, Inc.,
Double Diamond Enterprises, Inc., and Frontier Investments, Inc.
(e) "Permitted Successor" means a corporation which, immediately
following the consummation of a transaction specified in clauses (iii) and
(iv) of the definition of "Change in Control" above, satisfies each of the
following criteria: (A) sixty percent (60%) or more of the outstanding
common stock of the corporation and the combined voting power of the
outstanding securities of the corporation entitled to vote generally in the
election of directors (in each case determined immediately following the
consummation of the applicable transaction) is beneficially owned, directly
or indirectly, by all or substantially all of the Persons who were the
beneficial owners of the Corporation's outstanding Common Stock and
outstanding securities entitled to vote generally in the election of
directors (respectively) immediately prior to the applicable transaction,
(B) no Person other than an Excluded Holder beneficially owns, directly or
indirectly, twenty per cent (20%) or more of the outstanding common stock
of the corporation or the combined voting power of the outstanding
securities of the corporation entitled to vote generally in the election of
directors (for these purposes the term Excluded Holder shall include the
corporation, any Subsidiary of the corporation and any employee benefit
plan of the corporation or any such Subsidiary or any trust holding common
stock or other securities of the corporation pursuant to the terms of any
such employee benefit plan), and (C) at least a majority of the Board of
Directors is comprised of Continuing Directors.
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<PAGE>
(f) "Person" means any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization or other
entity or governmental body.
(g) "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
Corporation or by one or more Subsidiaries of the Corporation.
2. Effect of Change in Control
If there is a Change in Control of the Company, or the Employee
terminates the employment for Good Reason as permitted under Paragraph
5(d), then the Employee shall receive the Lump Sum Payment described in the
Severance Pay provided under Paragraph 6, and in addition all unvested
stock options and restricted stock described in Paragraphs 4(b) and 4(c)
above will vest immediately.
3. Special Tax Provision
If any payment or payments to be made to the Employee by the
Company following the termination of the Employee's employment, whether
such payments are to be made under this Agreement or otherwise, would
result in Employee incurring any excess parachute payment excise tax under
IRC Sections 280G and 4999, then those payments that are to be made to
Employee under this Agreement and that constitute "parachute payments" (as
that term is defined under IRC Section 280G) shall be reduced or delayed to
the extent necessary to eliminate any "excess parachute payments" (as that
term is defined under IRC Section 280G) to Employee; provided, however,
that such reductions or delays shall be made if, and only if (A), below,
is greater than (B), below, where: (A) equals the present value as of the
date of termination of Employee's employment of the total payments to be
made to the Employee after such reductions or delays; and (B) equals the
present value as of the date of termination of the Employee's employment of
the total payments to be made to the Employee in the absence of such
reduction and after application of the 20% excise tax on excess parachute
payments. If such reductions or delays are to be made, the Employee shall
determine which payments shall be reduced or delayed. Employee's
determination as to whether reductions or delays are called for under this
Paragraph shall be final and binding, if reasonable. If the Company fails
to accept any reasonable determination of Employee under this Paragraph,
the Company shall reimburse Employee for all expenses and losses (including
but not limited to attorney fees and any additional taxes or interest or
penalties on unpaid taxes) incurred by Employee as a result of the
Company's failure to accept such determinations.
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<PAGE>
16. Notices. Notices to a party under this Agreement must be
personally delivered First Class mail, Facsimile, or sent by certified mail
(return receipt requested) and will be deemed given upon post office delivery or
attempted delivery to the recipient's last known address. Notices to the
Company must be sent to the attention of the Company's Board of Directors.
17. Headings. The Paragraph and other headings in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
18. Arbitration. The Company and the Employee agree that the sole and
exclusive method for resolving any dispute between them regarding this Agreement
or its interpretation application or its termination shall be arbitration under
the procedures set forth in this Paragraph; provided, however, that nothing in
this Paragraph prohibits a party from seeking preliminary or permanent
injunctive relief from a court of competent jurisdiction, or from seeking
judicial enforcement of the arbitration award. If either party demands
arbitration of a dispute covered by this Paragraph, an arbitrator shall be
selected, and the arbitrator shall hold a hearing at which both parties may
appear, with or without counsel, and present evidence and argument. Pre-hearing
discovery shall be allowed in the discretion of and to the extent deemed
appropriate by the arbitrator, and the arbitrator shall have subpoena power.
The procedural rules for an arbitration hearing under this Paragraph, and the
selection of the arbitrator shall be pursuant to the rules of the American
Arbitration Association for Commercial Arbitration Hearings and such rules as
the arbitrator may determine. The hearing shall be held in Houston, Texas. The
award of the arbitrator(s) shall be final and binding and may be enforced by and
certified as a judgment of any court of competent jurisdiction. The fees and
expenses of the arbitrator shall be paid equally by the Company and the
Employee. The attorney fees and expenses incurred by the parties shall be paid
by the losing party.
19. Governing Law. The validity, interpretation, and construction of
this Agreement are to be governed by the laws of the State of Texas, without
regard to principles of conflicts of law.
* * * * * * *
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<PAGE>
The parties have signed this Agreement as of the date and year first
above written.
/s/ Michael L. Calhoun
---------------------------------------------
Michael L. Calhoun
"Employee"
MILLER EXPLORATION COMPANY
By /s/ Kelly E. Miller
-------------------------------------------
Its President
------------------------------------------
"Company"
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EXHIBIT 10.31
Grantee: Lew P. Murray Grant Date: Jan. 1, 2000
------------------------ -----------------------
Number of Shares: 60,000 Expiration Date: Jan. 1, 2010
--------------- ------------------
Exercise Price Per Share: $ 0.01 Option Number: 057
------- ---------------------
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 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.
2. TERM AND DELAYED VESTING. Grantee's conditional right to exercise
this option shall vest and be exercisable when the normal trading average of the
stock on the market remains above the designated values for a period of five
consecutive trading days as follows:
<PAGE>
Five Day Daily Average Target Percentage Vested
$2.00 40%
$2.75 30%
$3.50 30%
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. If the
Company's headquarters are moved from Traverse City, Michigan, Grantee's delayed
vesting shall be accelerated and to the extent not previously terminated,
Grantee may thereafter exercise all of this outstanding unexercised option.
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, 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 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.
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<PAGE>
6. TERMINATION OF EMPLOYEE STATUS.
(a) TERMINATION FOR GOOD REASON. If Grantee's employment is
terminated by the Company or a subsidiary for any reason other than
disability, death or cause, 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 Grantee is terminated for cause,
Grantee's right to exercise this option shall terminate. 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, and may
prevent exercise of the option during any period of determination of the
facts of the matter.
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
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
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<PAGE>
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. WITHHOLDING. Grantee consents to any applicable tax withholding
required by reason of this agreement or the vesting of the options hereunder,
and shall make appropriate provision for the same.
13. 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.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
15. 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 /s/ Kelly E. Miller
-------------------------
Its President
---------------------
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<PAGE>
I have received a copy of the Stock Option Agreement concerning the
grant of 60,000 shares on January 1, 2000 and agree to receive stock options
according to the terms of such agreement.
/s/ Lew P. Murray
---------------------------------
Signature
Lew P. Murray
---------------------------------
Print name
(Please detach this page after signing and return to Miller Exploration
Company)
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<PAGE>
EXHIBIT 10.32
FOURTH AMENDMENT TO CREDIT AGREEMENT
FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Fourth Amendment"), dated
as of March 20, 2000 but effective as of February 29, 2000 (the "Effective
Date") among Miller Oil Corporation, a corporation formed under the laws of the
State of Michigan (the "Borrower"), Miller Exploration Company (the "Parent"),
each of the lenders that is a signatory, or which becomes a signatory, to the
Credit Agreement referred to below (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 as a
Lender and as agent for Lenders under the Credit Agreement referred to below (in
its capacity as agent, together with its successors and assigns in such
capacity, the "Agent").
RECITALS
WHEREAS, the Borrower, the Parent, the Lenders and the Agent are
parties to that certain Credit Agreement, dated as of February 9, 1998, as
amended by that certain First Amendment to Credit Agreement, dated as of June
24, 1998, and as amended by that certain Second Amendment to Credit Agreement
dated as of April 14, 1999, and as amended by that certain Third Amendment to
Credit Agreement dated as of October 29, 1999 (as so amended, the "Credit
Agreement"); and
WHEREAS, the Borrower has advised the Lenders and the Agent that it
desires to amend certain provisions of the Credit Agreement, and the Borrower
has requested that the Lenders and the Agent agree to amend certain provisions
of the Credit Agreement; and
WHEREAS, the Lenders and the Agent have agreed to so amend certain
provisions of the Credit Agreement upon the terms and subject to the conditions
and limitations of this Third Amendment;
NOW, THEREFORE, in consideration of the premises, covenants and
agreements contained herein, the parties hereto hereby agrees as follows:
Section 1. Definitions. Capitalized terms used and not otherwise
defined herein are used with the meanings ascribed thereto in the Credit
Agreement. The following capitalized terms shall have the following respective
meanings when used herein:
A. "Lending Relationship" shall refer to the Credit Agreement and the
other Loan Documents, including, without limitation, this Fourth Amendment,
together with any and all negotiations, discussions, acts, omissions, renewals,
extensions, and other agreements or events related to the Credit Agreement and
such other Loan Documents, the parties' obligations thereunder and the
transactions contemplated thereby, including, without limitation, any such
negotiations, discussions, acts, omissions,
<PAGE>
renewals, extensions, other agreements or events that (a) occurred prior to the
date hereof, (b) may occur on the date hereof, or (c) occurred prior to the
execution of this Fourth Amendment and the instruments and documents executed
and delivered in connection herewith o r relating hereto.
B. "Supplemental Mortgages" shall mean, collectively, all those
mortgages and supplements to mortgages necessary to grant to the Agent for the
benefit of the Lenders a first priority perfected Lien on the Oil and Gas
Properties owned by the Parent, the Borrower or any Subsidiary including those
Oil and Gas Properties acquired by the Parent, the Borrower or any Subsidiary
after February 9, 1998, and including without limitation, those properties
listed on Schedule III hereto and those properties located in the State of
Montana, all such mortgages and supplements to mortgages to be delivered within
thirty (30) days of the dat e hereof in accordance with Section 7.
C. "Released Claims" shall mean any and all claims (including without
limitation any liabilities, damages, demands and causes of action arising
therefrom), whether (a) at law or in equity, (b) on the alleged commission of a
tort, (c) on the alleged breach (or anticipatory breach or repudiation) of any
contract, duty, or warranty (whether oral or written, express or implied), (d)
on the alleged violation of any statute, tariff, or regulation (whether
promulgated by the United States, any state thereof, any foreign state or
country, or any other governmental agency or entity, wherever located), or (e)
on any other factual, legal or equitable theory, including, without limitation,
any claim for damages of any type or nature, for injunctive or other relief, for
attorneys' fees, interest or any other liability whatsoever on any theory,
including without limitation any loss, cost or damage in connection with or
based upon "lender liability", unfair dealing, duress, coercion, control or
undue influence, extortion or commercial bribery, breach of an implied covenant
or duty of good faith and fair dealing, material misrepresentation or omission,
overreaching, unconscionability, conflict of interest, bad faith, malpractice,
disparate bargaining position, detrimental reliance, promissory estoppel,
estoppel by deed, waiver, laches, or any other equitable theory, equitable
subordination, breach of fiduciary duty or any other duty, or tortious
inducement to commit such breach, tortious interference with contract or
prospective business relations, negligent performance of contractual
obligations, or other theories of negligence, negligent or intentional
infliction of emotional distress, slander, libel, other defamation, fraudulent
transfer, conversion, trespass to (or clouding the title of) property, usury,
violations of the Racketeer Influenced and Corrupt Organizations Act, deceptive
trade practices, conspiracy, or any theory of liability as partners or joint
venturers, that any Releasing Party may have as of the date hereof against any
Released P arty with respect to the Lending Relationship.
D. "Released Party" shall mean each of the Agent, the Lenders and
their respective predecessors, successors, assigns, directors, officers,
partners, employees, agents, attorneys, principals and Affiliates and all other
Persons liable or who might be claimed to be liable on their behalf
(collectively, the "Released Parties").
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<PAGE>
E. "Releasing Party" shall mean each of the Borrower and the
Guarantors and their respective predecessors, successors, assigns, directors,
officers, partners, employees, agents, attorneys, principals, Affiliates and all
other Persons who might have a claim against any Released Party (collectively,
the "Releasing Parties").
Section 2. Amendments to Credit Agreement. The Credit Agreement is
amended hereby as follows:
A. Section 1.02 is amended hereby:
(i) by inserting the reference "and the Fourth Amendment"
after the reference "Th ird Amend ment" in the definition of the term
"Agreement";
(ii) "by deleting the reference "January 1, 2001" in the
definition of the term "Final Maturity Date" and substituting the following
therefor "(i) April 1, 2001,".
(iii) by adding the following definitions where alphabetically
appropriate: "Fourth Amendment" shall mean the Fourth Amendment to Credit
Agreement dated as of March 20, 2000.
"Fourth Amendment Effective Date" shall mean the "Effective Date"
as such term is defined in the Fourth Amendment.
"Second Amendment" shall mean the Second Amendment to Credit
Agreement dated as of April 14, 1999.
"Third Amendment" shall mean the Third Amendment to Credit
Agreement dated as of October 29, 1999.
B. Section 2.07 of the Credit Agreement is amended hereby as follows:
(i) by deleting subsection (b)(i) in its entirety and
substituting therefor the following new subsection (b)(i):
"(i) The Borrower shall make prepayments as set forth below:
A. The Borrower shall prepay the Loans as follows:
(1) On or before February 29, 2000, after
application of any prepayments made pursuant to
subsection C. below, the amount of $1,500,000; and
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<PAGE>
(2) On or before March 31, 2000, after application
of any prepayments made pursuant to subsection C. below
during such month, the amount of $1,000,000.
B. Upon any Transfer of Property that would be included in
the Borrowing Base, the Borrower shall prepay the Loans in an
amount equal to 100% of the net cash proceeds of any such
Transfer, and any net cash proceeds in excess of the value
attributable to such Property in the Borrowing Base determined by
the Agent in its sole discretion at the time of the Transfer
shall be credited against the prepayments required under
subsection 2.07(b)(i)(A);
C. Upon any Transfer of Property that would not be included
in the Borrowing Base, the Borrower shall prepay the Loans in an
amount equal to 100% of the net cash proceeds of any such
Transfer, which prepayments shall be credited against the
prepayments required under subsection 2.07(b)(i)(A);
D. The entire amount of any prepayment made pursuant to
this subsection shall be applied to reduce the Aggregate Maximum
Credit Amounts pro rata to each Lender based on its Percentage
Share."
C. Section 9.12 of the Credit Agreement is hereby deleted in its
entirety and the following is substituted therefor "Intentionally Omitted."
Section 3. Covenants.
A. Covenants of the Borrower and the Parent. The Borrower or the
Parent, as the case may be, covenants and agrees that during the period from the
Fourth Amendment Effective Date through and including April 15, 2000 (or, if
earlier, the date of the next redetermination of the Borrowing Base in
accordance with Section 2.08 (d) of the Credit Agreement as amended hereby):
(i) Every two weeks the Parent shall deliver cash budgets in
form and substance reasonably satisfactory to the Agent and cash flow statements
in form and substance reasonably satisfactory to the Agent with variance
analysis to budget (including accounts receivables and accounts payables
reporting) not later than the Friday following the last week to which such
budgets and statements relate.
(ii) The Borrower shall not spud any wells or conduct any other
drilling operations (other than with respect to wells identified on Schedule II
hereto and routine workovers normally expensed in accordance with past practice)
without the prior
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<PAGE>
written consent of the Agent and the Lenders, and shall not, without the prior
written consent of the Agent and the Lenders, use any amounts to acquire
acreage, leases, seismic data, or for any drilling costs and expenses other than
to acquire, extend or renew the Leases identified on Schedule I hereto or to pay
the drilling costs or expenses identified on Schedule II hereto.
(iii) The Borrower shall use its best efforts to raise capital,
whether through debt, equity or consummation of asset sales to achieve Borrowing
Base compliance, provided that the Lenders shall not require proceeds raised
through debt or equity offerings to be used for debt prepayments.
(iv) The Borrower shall provide to the Agent from time to time
upon request by the Agent the certificate of a Responsible Officer of the
Borrower stating that, except as disclosed in a schedule thereto, the Borrower
has not received written notice that any mechanics' liens have been filed or
will be filed on the Mortgaged Properties; provided that mere receipt of an
invoice for services rendered shall not constitute written notice that a
mechanics' lien will be filed.
B. The Lenders and the Agent Covenants. Each of the Lenders and the
Agent, as the case may be, covenants and agrees that during the period from the
Fourth Amendment Effective Date through and including April 15, 2000 (or, if
earlier, the date of the next determination of the Borrowing Base in accordance
with Section 2.08(d) of the Credit Agreement as amended hereby):
(i) the Agent will release any Lien that it may have on assets of
the Borrower sold by the Borrower in one or more arms length transactions for
fair value by the Borrower in accordance with the terms of the Credit Agreement
as amended hereby, the net cash proceeds of which sales are paid to the Bank
pursuant to Section 2.07(b)(i) of the Credit Agreement as amended hereby.
Section 4. Conditions Precedent. This Fourth Amendment shall become
binding upon receipt by the Agent of the following documents and satisfaction of
the other conditions provided in this Section 4, each of which must be
satisfactory to the Agent in form and substance:
A. counterparts of this Amendment executed by the Borrower, the Agent
and the Lenders;
B. certificates of the Secretary or an Assistant Secretary of the
Borrower and the Parent setting forth for each of them (i) the resolutions of
its board of directors, as applicable, with respect to the authorization to
execute and deliver this Amendment and consummate the transactions contemplated
hereby; (ii) the Responsible Officer of such entity authorized to sign as the
case may be this Amendment, and the Consent and Acknowledgements referred to in
this Section 4, and (iii) the signature of such authorized Responsible Officer
of such entity;
5
<PAGE>
C. a Consent and Acknowledgement executed by each of the Guarantors;
D. an opinion of counsel to Borrower and Parent substantially in the
form attached hereto as Exhibit A;
E. payment to the Agent for the ratable benefit of the Lenders of all
accrued and unpaid Interest outstanding under the Credit Agreement and the
Notes;
F. payment of the fees and expenses of the Agent and Lenders; and
G. such other documents as the Agent may reasonably request.
Section 5. Representations and Warranties.
A. The Borrower hereby reaffirms that the representations and
warranties made by the Borrower and the Parent in the Credit Agreement were true
and correct when made and, except as to be described in writing to the Agent as
of the date hereof, are true and correct as though made on and as of the date
hereof, and further, the Borrower represents that,
(i) as of the date hereof, no Default or Material Adverse
Effect has occurred and is continuing except as previously disclosed to the
Agent in writing or as set forth in Schedule IV hereto;
(ii) neither the Borrower, the Parent nor any Subsidiary has
acquired any additional Oil and Gas Properties since October 29, 1999 except as
identified on S chedule III hereto; and
(iii) the execution, delivery and performance by the Borrower or
any Guarantor of this Fourth Amendment and the other Loan Documents and all
instruments and documents to be delivered by the Borrower or such Guarantor, to
the extent a party thereto, hereunder and thereunder and the creation of all
Liens provided for herein and therein: (a) are within the Borrower's or such
Guarantor's corporate power; (b) have been duly authorized by all necessary or
proper corporate action, including the consent of stockholders, members and/or
partners therein or thereof; (c) are not in contravention of any provision of
the Borrower's or such Guarantor's certificate of incorporation, bylaws or
similar organizational and/or governing documents; (d) will not violate (1) any
law or regulation or (2) any order or decree of any court or governmental
instrumentality; (e) will not conflict with or result in the breach or
termination of, constitute a default under or accelerate any performance
required by, any indenture, mortgage, deed of trust, lease, agreement or other
instrument to which the Borrower or such Guarantor is a party or by which the
Borrower or such Guarantor or any of their respective property is bound; (f)
will not result in the creation or imposition of any Lien upon any of the
property of the Borrower or such Guarantor other than those in favor of the
Agent pursuant to the terms of this Fourth Amendment and the other Loan
6
<PAGE>
Documents to be delivered in connection herewith; and (g) do not require the
consent or approval of any governmental body, agency, authority or any other
Person that has not been duly obtained, made or complied with prior to the date
hereof. At or prior to the date hereof, each of the Fourth Amendment and the
other Loan Documents to be delivered in connection herewith shall have been duly
executed and delivered for the benefit of or on behalf of the Borrower or such
Guarantor, in each case to the extent a party thereto, and each shall then
constitute a legal, valid and binding obligation of the Borrower or such
Guarantor, enforceable against it in accordance with its terms.
B. Each of the Borrower and such Guarantor further represents and
warrants, for itself only that he or it (i) is executing this Fourth Amendment
after consultation with counsel of his or its own choosing, (ii) has read and
understands the release granted by Section 6 hereof, (iii) desires to execute
this Fourth Amendment and (iv) has the requisite authority to enter into and be
bound by this Fourth Amendment, including the release granted by Section 6
hereof.
Section 6. Release.
A. Each of the Releasing Parties desires and intends fully to
compromise, release and settle any and all of the Released Claims; and each of
the Releasing Parties hereby covenants, warrants and represents unto each of the
Released Parties that such Releasing Party does hereby FOREVER RELEASE, ACQUIT,
WAIVE AND DISCHARGE each of the Released Parties of and from the Released Claims
and each of the Releasing Parties hereby declares the same FOREVER RELEASED,
ACQUITTED, WAIVED, SETTLED AND DISCHARGED. This release is effective without
regard to whether (i) such Released Claims are known or unknown, (ii) damages
arising out of such Released Claims have yet accrued, (iii) such Released Claims
arose collaterally, directly, derivatively, or otherwise between the parties
hereto or (iv) an ordinary person in the same or similar circumstances would or
would not, through the exercise of due care, have discovered such claims by the
date of this Fourth Amendment. In connection with the foregoing release:
B. The Borrower and each Guarantor represents and warrants that it has
the full power and authority to perform the release granted in this Section 6
and that it has not in any manner made any assignment of any Released Claim to
any third party.
C. The release granted in this Section 6 will be effective upon
execution of this Fourth Amendment by all of the parties hereto.
D. Each party executing this Fourth Amendment understands and agrees
that the release granted in this Section 6 is a full, final and complete release
of the Released Claims and that such release may be pleaded as an absolute and
final bar to any or all suits which may hereafter be filed or prosecuted by any
one or more of the Releasing Parties or anyone claiming by, through or under any
one or more of the Releasing Parties in respect of any of the matters released
hereby, and that no recovery on
7
<PAGE>
account of the Released Claims may hereafter be had from any of the Released
Parties; and that the consideration given for such release is not an admission
of liability or fault on the part of any of the Released Parties (it being the
express intent of the parties hereto to obtain peace of mind and avoid the
expense and uncertainty of potential litigation), and that none of the Releasing
Parties or those claiming by, through or under any of them will ever claim that
it is.
E. The parties hereto acknowledge that the release granted by this
Section 6 does not have any effect with respect to relationships between the
Borrower and each Guarantor and the Lenders and the Agent other than in
connection with the Lending Relationship.
Section 7. Events of Default and Remedies.
A. The occurrence of the following event (regardless of the reason
therefor) shall constitute an "Event of Default" hereunder:
(i) The Borrower shall fail to deliver within thirty (30) days
after closing the Supplemental Mortgages and the other documents required under
Section 8.09 of the Credit Agreement (including, without limitation, the legal
opinion), granting to the Agent a first priority Lien interest (subject only to
Excepted Liens) on the Borrower's, the Parent's, or any Subsidiary's interest in
any additional Oil and Gas Property listed on Schedule III hereto.
B. The occurrence and continuation of an Event of Default hereunder
shall constitute an Event of Default under the Credit Agreement as amended
hereby.
Section 8. Payment of Fees and Expenses; Form of Payment.
A. The Borrower confirms its obligation to pay to the Agent for the
ratable benefit of the Lenders the Amendment Fee provided in the Third
Amendment, which Amendment Fee is in an amount equal to two percent (2%) on the
outstanding balance of the Loans as of April 15, 2000, payable on April 15,
2000.
B. The Borrower agrees, whether or not the transactions contemplated
hereby are consummated, to pay all reasonable expenses of the Agent and the
Lenders (including, without limitation, all reasonable fees and disbursements of
counsel and other outside consultants for the Agent and/or the Lenders) in
connection with the negotiation, investigation, preparation, execution and
delivery of, recording and filing of, preservation of rights under and
enforcement of this Amendment and the other Loan Documents to be delivered in
connection herewith.
C. All payments to be made by the Borrower under this Amendment shall
be made in Dollars, in immediately available funds, to the Agent at such account
as the Agent shall specify by notice in accordance with Section 4.01 of the
Credit Agreement.
8
<PAGE>
Section 9. Limitations. The amendments set forth herein are limited
precisely as written and shall not be deemed to (a) be a consent to, or waiver
or modification of, any other term or condition of the Credit Agreement or any
of the other Loan Documents, or (b) prejudice any right or rights that the
Lenders or the Agent may have at any time under or in connection with the Credit
Agreement as amended hereby or any of the other Loan Documents. Except as
expressly supplemented, amended or modified hereby, the terms and provisions of
the Credit Agreement or any other Loan Documents are and shall remain in full
force and effect. In the event of a conflict between this Fourth Amendment and
any of the foregoing documents, the terms of this Fourth Amendment shall be
controlling.
Section 10. 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 decision to enter into this Fourth Amendment,
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 Fourth Amendment or the Credit Agreement. The Agent
shall not be required to keep itself informed as to the performance or
observance by the Borrower of this Fourth Amendment or any other Loan Document
or any other document referred to or provided for herein or therein 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 and under the Credit Agreement, 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
Weil, Gotshal & Manges LLP is acting in this transaction as special counsel to
the Agent only. Each Lender will consult with its own legal counsel to the
extent that it deems necessary in connection with this Fourth Amendment and the
matters contemplated herein.
Section 11. Governing Law. This Fourth Amendment and the rights and
obligations of the parties hereunder and under the Credit Agreement shall be
construed in accordance with and be governed by the laws of the State of Texas
and the United States of America.
Section 12. Descriptive Headings, etc. The descriptive headings of the
several Sections of this Fourth Amendment are inserted for convenience only and
shall not be deemed to affect the meaning or construction of any of the
provisions hereof.
Section 13. Counterparts. This Fourth Amendment may be executed in any
number of counterparts and by different parties on separate counterparts and all
of such counterparts shall together constitute one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be executed as of the date first written above.
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE (Section)26.02
THIS FOURTH AMENDMENT AND OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE
PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF
TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND 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 AGREEMENT BETWEEN THE PARTIES.
BORROWER: MILLER OIL CORPORATION
By: /s/ Kelly E. Miller
-------------------------------
Name: Kelly E. Miller
------------------------------
Title: President
----------------------------
PARENT: MILLER EXPLORATION COMPANY
By: /s/ Kelly E. Miller
------------------------------
Name: Kelly E. Miller
-----------------------------
Title: President
---------------------------
LENDER AND AGENT: BANK OF MONTREAL
By: /s/ Thomas E. McGraw
-----------------------------
Thomas E. McGraw
Director
S
<PAGE>
EXHIBIT 11.1
MILLER EXPLORATION COMPANY
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998
----------- ------------
(In thousands,
except per share data)
<S> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Net loss............................................ $ (1,982) $ (41,800)
Shares
Weighted average shares outstanding............... 12,633 11,153
----------- ------------
Basic earnings (loss) per share..................... $ (0.16) $ (3.75)
=========== ============
DILUTED EARNINGS (LOSS) PER SHARE
Net loss............................................ $ (1,982) $ (41,800)
Shares
Weighted average shares outstanding............... 12,633 11,153
----------- ------------
Diluted earnings (loss) per share................... $ (0.16) $ (3.75)
=========== ============
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
Board of Directors
Miller Exploration Company
Traverse City, Michigan
We hereby consent to the references to our firm (previously S. A. Holditch &
Associates) and to our reserve estimates contained in the Annual Report on
Form 10-K of Miller Exploration Company for the year ended December 31, 1999.
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 18 Antrim Shale Gas
Projects, As of January 1, 1999". 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 Forms S-8 (Nos. 333-
70247, 333-70249, and 333-70251).
Holditch-Reservoir Technologies
Consulting Services
/s/ Chuck Boyer
By: _________________________________
Operations Manager--Eastern U.S.
Pittsburgh, Pennsylvania
March 16, 2000
<PAGE>
EXHIBIT 23.2
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, 1999, SEC
Price Case" dated February 2, 2000 in the Annual Report on Form 10-K of Miller
Exploration Company for the year ended December 31, 1999. We hereby consent to
the incorporation by reference of the Miller and Lent, Ltd. estimates of
proved reserves contained in the Annual Report on Form 10-K into Miller
Exploration Company's Registration Statement on Forms S-8 (Nos. 333-70247,
333-70249, and 333-70251).
MILLER AND LENTS, LTD.
/s/ Gregory W. Armes
By___________________________________
President
Houston, Texas
March 20, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report on the consolidated financial statements of Miller Exploration
Company and subsidiaries in this Form 10-K, into the Company's previously
filed Registration Statement File Nos. 333-70247, 333-70249, 333-70251 and
333-84563.
/s/ Arthur Andersen LLP
Detroit, Michigan
March 24, 2000
<PAGE>
EXHIBIT 24.1
FORM 10-K
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 KELLY E.
MILLER, DEANNA L. CANNON, and MARK EARLY, 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, 1999, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Date Signature
January 3, 2000 /s/ Richard J. Burgess
- ------------------------ ---------------------------------
(Sign and print name and title)
<PAGE>
EXHIBIT 24.1
FORM 10-K
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 KELLY E.
MILLER, DEANNA L. CANNON, and MARK EARLY, 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, 1999, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Date Signature
January 15, 2000 /s/ William Casey McManemin
- ------------------------ ---------------------------------
(Sign and print name and title)
<PAGE>
EXHIBIT 24.1
FORM 10-K
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 KELLY E.
MILLER, DEANNA L. CANNON, and MARK EARLY, 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, 1999, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Date Signature
March 20, 2000 /s/ C.E. Miller
- ------------------------ ---------------------------------
(Sign and print name and title)
<PAGE>
EXHIBIT 24.1
FORM 10-K
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 KELLY E.
MILLER, DEANNA L. CANNON, and MARK EARLY, 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, 1999, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Date Signature
December 22, 2000 /s/ Frank M. Burke, Jr.
- ------------------------ ---------------------------------
(Sign and print name and title)
<PAGE>
EXHIBIT 24.1
FORM 10-K
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 KELLY E.
MILLER, DEANNA L. CANNON, and MARK EARLY, 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, 1999, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Date Signature
February 15, 2000 /s/ Dan A. Hughes, Jr.
- ------------------------ ---------------------------------
(Sign and print name and title)
<PAGE>
EXHIBIT 24.1
FORM 10-K
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 KELLY E.
MILLER, DEANNA L. CANNON, and MARK EARLY, 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, 1999, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Date Signature
January 15, 2000 /s/ Kenneth J. Foote
- ------------------------ ---------------------------------
(Sign and print name and title)
<TABLE> <S> <C>
<PAGE>
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,791
<SECURITIES> 0
<RECEIVABLES> 4,580
<ALLOWANCES> 0
<INVENTORY> 202
<CURRENT-ASSETS> 10,011
<PP&E> 137,718
<DEPRECIATION> 78,881
<TOTAL-ASSETS> 69,686
<CURRENT-LIABILITIES> 14,211
<BONDS> 0
127
0
<COMMON> 0
<OTHER-SE> 23,868
<TOTAL-LIABILITY-AND-EQUITY> 69,686
<SALES> 20,731
<TOTAL-REVENUES> 21,289
<CGS> 0
<TOTAL-COSTS> 20,904
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,519
<INCOME-PRETAX> (3,134)
<INCOME-TAX> (1,152)
<INCOME-CONTINUING> (1,982)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,982)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
