<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
MILLER EXPLORATION COMPANY
--------------------------
(Name of Registrant as Specified in its Charter)
-----------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction;
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
To the Stockholders of Miller Exploration Company:
You are cordially invited to attend a special meeting of the stockholders of
Miller Exploration Company to be held on , 2000 at , a.m., at .
Enclosed are a notice to stockholders, a proxy statement describing the
business to be transacted at the special meeting, and a proxy card for use in
voting at the special meeting.
At the special meeting, you will be asked to:
. approve (a) the issuance to Guardian Energy Management Corp. of
3,703,704 shares of common stock upon the conversion of a $5 million
promissory note and (b) the exercise by Guardian of warrants to purchase
1,562,500 shares of common stock for $1.35 per share, 2,500,000 shares
of common stock for $2.50 per share, and 9,000,000 shares of common
stock for $3.00 per share;
. approve a transaction with Eagle Investments, Inc. whereby Eagle will
pay Miller $500,000 in cash and assign to Miller certain non-producing
oil and gas leasehold interests, previously conveyed to Miller by Eagle,
and an exclusive right of first offer on the sale of Eagle's producing
and non-producing asset base in the Mississippi Salt Basin, in exchange
for (a) the issuance to Eagle of 1,851,851 shares of common stock, and
(b) the issuance of, and subsequent right to exercise, warrants for
781,250 shares of common stock at $1.35 per share and 1,250,000 shares
of common stock at $2.50 per share, respectively; and
. to act on other business noticed and properly brought before the special
meeting or any adjournment thereof.
THE BOARD OF DIRECTORS OF THE COMPANY HAS DETERMINED THAT EACH OF THESE
TRANSACTIONS IS FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS
STOCKHOLDERS. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL
OF BOTH THE PROPOSALS.
We hope that you will be able to attend the special meeting, and we urge you
to read the enclosed proxy statement before you decide to vote. Even if you do
not plan to attend, please complete, date, sign, and promptly return the
enclosed proxy card. It is important that your shares be represented at the
meeting.
Sincerely,
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NOTICE TO STOCKHOLDERS OF SPECIAL MEETING
TO BE HELD ON
PLEASE TAKE NOTICE that a special meeting of the stockholders of Miller
Exploration Company, a Delaware corporation, will be held on at a.m.,
at , to consider and vote on the following matters:
1. The issuance to Guardian Energy Management Corp. of (a) 3,703,704
shares of our common stock, par value $0.01 per share, upon the conversion
of a $5 million promissory note and (b) warrants to purchase 1,562,500
shares of common stock for $1.35 per share, 2,500,000 shares of common
stock for $2.50 per share, and 9,000,000 shares of common stock for $3.00
per share.
2. approve a transaction with Eagle Investments, Inc. whereby Eagle will
pay Miller $500,000 in cash and assign to Miller certain non-producing oil
and gas leasehold interests, previously conveyed to Miller by Eagle, and an
exclusive right of first offer on the sale of Eagle's producing and non-
producing asset base in the Mississippi Salt Basin, in exchange for (a) the
issuance to Eagle of 1,851,851 shares of common stock, and (b) the issuance
of, and subsequent right to exercise, warrants for 781,250 shares of common
stock at $1.35 per share and 1,250,000 shares of common stock at $2.50 per
share, respectively.
3. To act on other business noticed and properly brought before the
special meeting or any adjournment thereof.
These matters are more fully discussed in the attached proxy statement.
The board of directors has fixed the close of business on , 2000 as the
record date for determining which stockholders are entitled to notice of, and
to vote at, the special meeting or any postponement or adjournment thereof. If
you held our stock as of this date, you are entitled to vote. Complete lists
of these stockholders will be available for examination at our principal
executive offices during normal business hours by any holder of common stock,
for any purpose relevant to the special meeting, for a period of ten days
prior to the special meeting. The favorable vote of a majority of persons
present, in person or by proxy, and entitled to vote at the special meeting
constitutes a quorum. A quorum is necessary to transact any business at the
special meeting.
Even if you expect to be present at the special meeting, we request that you
sign, vote, and date the enclosed proxy and return it promptly in the enclosed
envelope. If you give a proxy, you have the power to revoke it at any time
prior to the special meeting. You may revoke your proxy at any time before the
vote occurs by filing with our company a written revocation or a subsequently-
dated proxy. If you are present at the special meeting, you may withdraw your
proxy and vote in person.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF EACH OF THE
ABOVE PROPOSALS.
By Order of the Board of Directors,
Deanna L. Cannon
Vice President--Finance and
Secretary
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TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT............................................... 1
SUMMARY................................................................... 2
RISK FACTORS.............................................................. 6
Risk Factors Relating to the Guardian Transaction....................... 6
Risk Factors Relating to the Eagle Transaction.......................... 7
INFORMATION CONCERNING SOLICITATION AND VOTING............................ 8
PROPOSAL ONE.............................................................. 9
Purpose and Background of the Guardian Transaction...................... 9
Terms of the Guardian Transaction....................................... 9
Use of Proceeds......................................................... 11
Recommendation of the Board of Directors................................ 12
Possible Effects of the Guardian Transaction on Stockholders............ 12
Reasons for Seeking Stockholder Approval................................ 12
PROPOSAL TWO.............................................................. 13
Purpose and Background of the Eagle Transaction......................... 13
Terms of the Eagle Transaction.......................................... 13
Use of Proceeds......................................................... 14
Recommendation of the Board of Directors................................ 14
Possible Effects of the Eagle Transaction on Stockholders............... 15
Reasons for Seeking Stockholder Approval................................ 15
RECENT DEVELOPMENTS....................................................... 16
Bank One Credit Facility................................................ 16
Veritas Indebtedness.................................................... 16
MANAGEMENT'S DISCUSSION AND ANALYSIS...................................... 17
Overview................................................................ 17
Results of Operations................................................... 18
Liquidity and Capital Resources......................................... 22
Risk Management Activities and Derivative Transactions.................. 24
Effects of Inflation and Changes in Price............................... 25
New Accounting Standard................................................. 25
INTEREST OF CERTAIN PERSONS IN THE TRANSACTION............................ 26
STOCKHOLDINGS OF PRINCIPAL STOCKHOLDERS, Directors and Management......... 27
STOCKHOLDER PROPOSALS..................................................... 29
PROPOSALS FOR THE NEXT ANNUAL MEETING..................................... 29
SOLICITATION OF PROXIES................................................... 29
INDEPENDENT PUBLIC ACCOUNTANTS............................................ 29
CONSOLIDATED FINANCIAL STATEMENTS......................................... F-1
ANNEX A................................................................... A-1
ANNEX B-1................................................................. B-1-1
ANNEX B-2................................................................. B-2-1
ANNEX B-3................................................................. B-3-1
ANNEX C................................................................... C-1
</TABLE>
i
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QUESTIONS AND ANSWERS ABOUT
THE SPECIAL MEETING AND THE PROPOSALS
Q: How do I vote?
A: After reading this proxy statement, please fill out and sign your proxy
card. Then mail your signed proxy card in the enclosed return envelope as
soon as possible so that your shares will be represented at the special
meeting.
Q: What happens if I do not return a proxy card?
A: If you do not return your proxy card you may still vote in person at the
special meeting. If you do not return a proxy card or attend the special
meeting, your shares will not be represented in the vote.
Q: May I vote in person?
A: Yes. You may attend the special meeting and vote your shares in person,
rather than signing and mailing your proxy card.
Q: May I change my vote after I have mailed my signed proxy card?
A: Yes. You may change your vote at any time before your proxy is voted at
the special meeting by following the instructions on page 8. You then may
either change your vote by sending in a new proxy or by attending the
special meeting and voting in person.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: No. Your broker will not be able to vote your shares without instructions
from you. You should instruct your broker to vote your shares, following
the directions provided by your broker.
Q: What is a warrant?
A: A warrant gives the holder the right to purchase a share of stock at a
fixed price at a designated time in the future.
Q: How will the issuance of stock and warrants affect the outstanding shares
of the common stock?
A: We currently have 13,241,891 shares of common stock outstanding. Assuming
both proposals are approved and all of the warrants issued to Guardian and
Eagle are exercised, we will have 33,891,196 shares of common stock
outstanding.
Q: Who can help answer my questions?
A: If you have additional questions about the two proposals, please call
Kelly Miller or Deanna Cannon at (231) 941-0004.
1
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SUMMARY
This summary, together with the preceding questions and answers section,
highlights selected information from this document and may not contain all of
the information that is important to you. To understand the two proposals
fully, and to obtain a more detailed description of the legal terms of the
proposals, you should carefully read this entire proxy statement.
The Guardian promissory note and warrants are included as Annexes A, B-1, B-
2, and B-3, respectively, to this document and the Eagle repurchase agreement
is included as Annex C. These are the legal documents that govern the two
proposals. We have included page references parenthetically to direct you to a
more complete description of the topics presented in this summary.
References in this proxy statement to the "Company" or "Miller" are to Miller
Exploration Company and its subsidiaries. References to "Guardian" are to
Guardian Energy Management Corp.
Summary of Proposals to be Considered at the Special meeting.
At the special meeting, our stockholders will consider and vote upon two
proposals. The first proposal, the Guardian transaction, is independent and may
be approved without consideration of the second proposal. The second proposal,
the Eagle transaction, is fully dependent on the approval of the Guardian
transaction. If the Guardian transaction is not approved, the Eagle transaction
shall automatically be withdrawn. A summary of the two proposals are as
follows:
(1) The Guardian Transaction. In July 2000, we issued a subordinated
convertible note to Guardian Energy Management Corp. in exchange for $5
million. If our stockholders approve conversion of the Guardian note into
shares of common stock, the note will not accrue interest. If approved, the
note will immediately be converted into the right to receive 3,703,704 shares
of common stock. We also issued to Guardian warrants to purchase 1,562,500
shares of common stock for $1.35 per share exercisable for one year from the
date of stockholder approval of the transaction, 2,500,000 shares of common
stock for $2.50 per share exercisable for two years from the date of
stockholder approval of the transaction, and 9,000,000 shares of common stock
for $3.00 per share and exercisable for four years from the date of stockholder
approval of the transaction. If all of these warrants are exercised, we would
receive an additional capital infusion of approximately $35 million. If the
Guardian transaction is not approved, we will incur substantial interest
charges on the principal amount of the note from July 11, 2000, the date the
note was issued until the note is paid in full, significantly reducing our
discretionary cash flow and substantially increasing our leverage. Also if the
Guardian transaction is not approved, Guardian will have the option to acquire
an interest in our producing properties.
(2) The Eagle Transaction. Eagle Investments, Inc. is a corporation that is
controlled and owned by C.E. Miller, the Chairman and largest beneficial
stockholder of the Company. We wish to purchase from Eagle 50% of its interests
in certain non-producing oil and gas leasehold properties located in the
Mississippi Salt Basin for $2,000,000, to be paid in shares of common stock.
Along with the properties, we will receive a $500,000 cash equity infusion and
an exclusive right of first offer on the sale of any of Eagle's remaining non-
producing leasehold, as well as the producing properties, that are located in
counties in which we have operations. The right of first offer expires December
31, 2000. In consideration of the $500,000 cash payment and the assignment of
these interests, we will issue to Eagle 1,851,851 shares of common stock and
warrants to purchase 781,250 shares of common stock for $1.35 per share
exercisable for one year from the date of stockholder approval of the
transaction and 1,250,000 shares of common stock for $2.50 per share
exercisable for two years from the date of stockholder approval of the
transaction. If all of these warrants are exercised, we would receive an
additional capital infusion of approximately $4.2 million.
2
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Reasons for the Guardian Transaction
(See page 12)
Our board of directors believes that the Guardian transaction and your
approval of the issuance of our common stock in the Guardian transaction are
desirable for a number of reasons, including the following:
. The Guardian transaction allowed us to enter into a new credit facility.
The terms of our new credit facility increase our discretionary cash
flow.
. If the Guardian warrants are exercised we will receive up to
approximately $35 million of additional equity capital.
. We will avoid substantial interest charges and penalties associated with
the Guardian note.
. We will avoid any obligation to transfer producing properties to
Guardian for the repayment of the note.
. The Guardian transaction allows us to complete the Eagle transaction.
. The Guardian transaction enhances our ability to obtain better terms
under the Veritas indebtedness.
. The Guardian transaction was an inducement for Eagle, Bank One, and
Veritas to enter into agreements that improve our debt and capital
structure.
. The transaction is fair to and in the best interests of our company and
stockholders.
Reasons for the Eagle Transaction
(See page 14)
Our board of directors believes that the Eagle transaction and your approval
of the issuance of shares of our common stock in the Eagle transaction are
desirable for a number of reasons, including the following:
. The repurchase will allow us to increase leasehold interests in the
Mississippi Salt Basin.
. We will receive a cash infusion of $500,000 of new equity capital.
. If the Eagle warrants are exercised we will receive up to approximately
$4 million of additional equity capital.
. We will be able to repurchase the Eagle assets for approximately the
same price that we sold them to Eagle.
. The capital infusion of $500,000 we will receive from Eagle will be used
for a principal payment under our indebtedness to Veritas DGC Land Inc.,
which will enable us to avoid a substantial penalties.
. The Eagle transaction was an inducement for Guardian, Bank One, and
Veritas to enter into agreements that improve our debt and capital
structure.
. The transaction is fair to and in the best interests of our company and
stockholders.
New Directors and Officers of Our Company
After the Guardian Transaction
(See page 10)
The terms of the Guardian transaction allow Guardian to designate two members
of our board of directors. Guardian has designated Paul A. Halpern and Robert
M. Boeve to fill the board seats recently vacated by the resignations of Dan A.
Hughes, Jr. and Frank M. Burke. Messrs. Halpern and Boeve were appointed to
fill the vacancies by the remaining directors on July 13, 2000.
3
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Dissenter's Rights
(See page 8)
Neither Delaware law nor our certificate of incorporation provide for any
rights of dissent or appraisal regarding the Guardian transaction or the Eagle
transaction.
Risks Associated with the Guardian Transaction
(See page 6)
You should be aware of and carefully consider the risks relating to the
Guardian transaction described more fully under "Risk Factors." These risk
include:
. the issuance of common stock upon the conversion of the Guardian note
and the exercise of any of the warrants will place a large percentage of
ownership with a new single stockholder;
. the terms of the warrants are fixed and will not be adjusted for changes
in the market value of our common stock;
. Guardian, as a large stockholder, may have interests that are different
from our existing shareholders. Guardian's significant ownership may
allow it to influence stockholder votes on these matters, and
. if Guardian decides to sell a significant portion of its investment in
Miller it could adversely affect the market price for our common stock.
Risks Associated with the Eagle Transaction
(See page 7)
You should be aware of and carefully consider the risks relating to the Eagle
transaction described more fully under "Risk Factors." These risks include:
. the consideration for the purchase is fixed and will not be adjusted for
changes in the value of the leasehold interests or our common stock;
. C.E. Miller, the Chairman of our board of directors, and Kelly Miller,
our Chief Executive Officer, had conflicts of interest in evaluating the
Eagle transaction;
. if Eagle decides to sell a significant portion of its investment in
Miller, it could adversely affect the market price for our common stock;
and
. the issuance of common stock and warrants will increase the percentage
of common stock beneficially owned by C. E. Miller.
Interests of Officers and Directors in the Proposals
that Differ from Your Interests
(See page 7)
You should be aware that C.E. Miller, Chairman of our board of directors, is
also the President and beneficial owner of 100% of the stock of Eagle. Because
of his role in both companies, he has interests that are different than yours.
In addition, Kelly E. Miller, our President and Chief Executive Officer, is C.
E. Miller's son and thus has an indirect interest in the Eagle transaction. Our
board of directors was aware of these interests and considered them in
approving the Eagle transaction.
The Special Meeting
(See page 8)
The special meeting will be held . At the special meeting, you will
be asked to approve the Guardian transaction and approve the Eagle transaction.
4
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Record Date; Voting Power
(See page 8)
You may vote at the special meeting if you owned shares of our common stock
as of the close of business on , the record date. You may cast one vote
per proposal for each share you own.
Stockholder Vote Required to Approve the Proposals
(See page 8)
Our board of directors voted in favor of both proposals and recommends that
you also vote for these proposals. The affirmative vote of a majority of all
the votes present and entitled to vote at the special meeting is necessary for
the approval of both the Guardian and Eagle transactions. Approval of the Eagle
transaction is not a condition of the Guardian transaction; however, approval
of the Guardian transaction is a condition to the approval of the Eagle
transaction. If the Guardian transaction is not approved at the special
meeting, the Eagle proposal will be automatically withdrawn.
Our Recommendations to Stockholders
Our board of directors, including all of our independent, disinterested
directors, believes that the approval of both the Guardian transaction and the
Eagle transaction is fair to you, advisable, and in your best interests and
recommends that you vote "for" the approval of both proposals.
5
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RISK FACTORS
You should carefully consider the following risk factors in determining
whether to vote to approve the Guardian transaction and the Eagle transaction.
Risk Factors Relating to the Guardian Transaction
The issuance of common stock and warrants will place a large percentage of
ownership with a new single stockholder.
Assuming the Guardian transaction is approved, Guardian will be issued
3,703,704 shares of our common stock and warrants to purchase an additional
13,062,500 shares. The transaction will cause a substantial dilution of the
voting power of the current stockholders. With this ownership, Guardian may be
able to substantially influence the outcome of stockholder votes, including
votes concerning the election of directors, the adoption or amendment of
provisions in our company's certificate of incorporation or bylaws, and the
approval of mergers and other significant corporate transactions. Guardian, as
a large stockholder, may have interests that are different than the other
stockholders. This concentration of ownership may also delay or prevent a
change of control of the Company, even if beneficial to our stockholders.
The terms of the warrants are fixed and will not be adjusted for changes in
the value of our common stock.
Assuming the Guardian transaction is approved, Guardian will be able to
exercise the following warrants:
. Warrant for 1,562,500 shares of common stock exercisable at a price of
$1.35 per share for one year from the date of stockholder approval of
the transaction,
. Warrant for 2,500,000 shares of common stock exercisable at a price of
$2.50 per share for two years from the date of stockholder approval of
the transaction, and
. Warrant for 9,000,000 shares of common stock exercisable at a price of
$3.00 per share for four years from the date of stockholder approval of
the transaction.
These terms are fixed and will not be adjusted for any upward or downward
changes in the market price of our common stock. These warrants may allow
Guardian, in the future, to purchase a large number of shares at prices
significantly below the then current market price.
The issuance of common stock and warrants may effect the market price of
existing shares of common stock.
Assuming the Guardian transaction is approved, we will have approximately
16,945,595 shares of common stock outstanding, together with warrants
exercisable for an additional 13,062,500 shares. Future sales of substantial
amounts of common stock, or the perception that these sales could occur, may
adversely affect the market price of our common stock.
6
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Risk Factors Relating to the Eagle Transaction
The terms of the warrants are fixed and will not be adjusted for changes in
the value of our common stock.
Assuming the Eagle transaction is approved, Eagle will be issued:
. 781,250 warrants exercisable at a price of $1.35 per share of common
stock for one year from the date of stockholder approval of the
transaction, and
. 1,250,000 warrants exercisable at a price of $2.50 per share of common
stock for two years from the date of stockholder approval of the
transaction.
These terms will be fixed and will not be adjusted for any upward or
downward changes in the price of our common stock. These warrants may allow
Eagle, in the future, to purchase a large number of shares at prices
significantly below the then current market price.
The interest of the Chairman of the Board, C.E. Miller, may differ from your
interests because the approval of the Eagle transaction may result in his
direct or indirect economic gain.
C.E. Miller, the Chairman of our board of directors, is also the President
and beneficial owner of 100% of the stock of Eagle. Because of his dual role
in this transaction, his interests may vary from yours regarding the
transaction. Consequently, he has a conflicting interest because of the
possibility of receiving a personal benefit from the approval of the Eagle
transaction apart from his ownership of our common stock. Kelly E. Miller, our
President and Chief Executive Officer, is the son of C.E. Miller and thus also
has an indirect interest in the Eagle transaction.
The issuance of common stock and warrants will increase the ownership
percentage of C.E. Miller and his affiliate.
Currently, C.E. Miller beneficially owns 11.61% of our outstanding common
stock. Assuming both proposals are approved, C.E. Miller will beneficially own
approximately 17.70% of the outstanding shares and warrants exercisable for an
additional 2,031,250 shares. Approval of the transactions will cause a
substantial dilution in the voting power of the current stockholders. With
this ownership, C. E. Miller may be able to substantially influence the
outcome of stockholder votes including votes concerning the election of
directors, the adoption or amendment of provisions in our certificate of
incorporation or bylaws, and the approval of mergers and other significant
corporate transactions. This concentration of ownership may also delay or
prevent a change in control of the Company, even if beneficial to our
stockholders.
The issuance of common stock and warrants may affect the market price of
existing shares of common stock.
Assuming both the Guardian transaction and the Eagle transaction are
approved, our company will have approximately 18,797,446 shares of common
stock outstanding, together with warrants exercisable for an additional
15,093,750 shares. Future sales of substantial amounts of common stock, or the
perception that these sales could occur, may adversely affect the market price
of our common stock.
7
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INFORMATION CONCERNING SOLICITATION AND VOTING
General
This proxy statement and the enclosed form of proxy are being sent to
stockholders of Miller Exploration Company, a Delaware corporation, in
connection with the solicitation of proxies by the board of directors for use
in connection with a special meeting of our stockholders to be held at ,
at a.m., on , 2000 and at any postponements or adjournments thereof.
Our principal executive offices are located at 3104 Logan Valley Road,
Traverse City, Michigan.
We have mailed this proxy statement and the accompanying form of proxy to
all stockholders entitled to notice of, and to vote at, the special meeting on
or about , 2000.
Each properly executed proxy received in time for the meeting will be voted
as specified therein. If a stockholder executes and returns a proxy, but does
not specify otherwise, the shares represented by such stockholder's proxy will
be voted "for" the Guardian transaction and "for" the Eagle transaction.
Revocability of Proxies
Any stockholder giving a proxy pursuant to this solicitation has the power
to revoke that proxy at any time before the shares to which it relates are
voted either by:
. filing with us at our principal executive offices written notice of
revocation or a duly executed proxy bearing a later date or
. by attending the special meeting, withdrawing the proxy, and voting in
person.
Voting Rights and Outstanding Shares
Only stockholders of record at the close of business on , 2000, the
record date, are entitled to notice of, and to vote at, the special meeting.
At the close of business on the record date, there were issued, outstanding,
and entitled to vote 13,241,891 shares of our common stock. Each outstanding
share is entitled to one vote on each matter to be voted upon at the special
meeting.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of common stock entitled to vote is necessary to constitute
a quorum at the special meeting. If a quorum is not present, either in person
or by proxy, the stockholders entitled to vote who are present, in person or
by proxy, have the power to adjourn the special meeting from time to time
without notice, other than an announcement at the special meeting, until a
quorum is present. At any adjourned special meeting at which a quorum is
present, in person or by proxy, any business may be transacted that might have
been transacted at the special meeting as originally noticed. Abstentions and
broker non-votes will be treated as shares that are present for purposes of
determining the presence of a quorum for the transaction of business.
Abstentions and broker non-votes are tabulated separately, with abstentions
counted as a "no" vote in tabulations of the votes cast on a proposal for
purposes of determining whether a proposal has been approved, while broker
non-votes relating to a proposal are not counted as voting power present with
respect to that proposal.
The Guardian transaction is an independent proposal and may be approved by a
majority of the votes present and entitled to vote thereon, without
consideration of the Eagle transaction. The Eagle transaction is fully
dependent on the approval of the Guardian transaction. If the Guardian
transaction is approved, a majority of the votes present and entitled to vote
thereon will be required to approve the Eagle transaction. If the Guardian
transaction is not approved, the Eagle transaction shall automatically be
withdrawn.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THE APPROVAL OF THE GUARDIAN TRANSACTION AND "FOR" THE APPROVAL OF THE
EAGLE TRANSACTION.
Dissenters' Rights
Neither Delaware law nor our certificate of incorporation provide for any
rights of appraisal or dissent regarding the Guardian transaction or the Eagle
transaction.
8
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PROPOSAL ONE
THE GUARDIAN TRANSACTION
THE PRINCIPAL TERMS OF THE GUARDIAN TRANSACTION ARE SET FORTH IN THE
GUARDIAN NOTE, A COPY OF WHICH IS SET FORTH AS ANNEX "A" HERETO, AND THE
GUARDIAN WARRANTS WHICH ARE ATTACHED HERETO AS ANNEXES B-1, B-2 AND B-3 AND
MADE A PART OF THIS PROXY STATEMENT. THE FOLLOWING DISCUSSION SETS FORTH A
DESCRIPTION OF CERTAIN MATERIAL TERMS OF THE GUARDIAN TRANSACTION AND IS
QUALIFIED BY THE MORE COMPLETE INFORMATION SET FORTH THEREIN.
Purpose and Background of the Guardian Transaction
Since early 1999, we have been exploring opportunities to increase our
financial flexibility, including equity infusions and replacing or
restructuring our existing credit facility with the Bank of Montreal. During
this period, we have had discussions with a variety of potential investors and
lenders. In March 2000, we approached Guardian about making an equity
investment in the Company. Guardian expressed an interest in the Company and
indicated it would like to see the Company obtain a more favorable senior
credit facility while continuing to de-lever the balance sheet through a
reduction in debt.
In April 2000, we began negotiating the terms of a new senior credit
facility with Bank One. Among the conditions imposed on us by Bank One were a
maximum borrowing base of $12.5 million, an extension of the maturity date of
our indebtedness to Veritas DGC Land, Inc., and an equity investment of at
least $5 million.
The terms of the Guardian transaction, the Eagle transaction, our new senior
credit facility and our restructured indebtedness to Veritas are the result of
extensive negotiations among the Company and each of the parties involved. We
believe the increased flexibility, reduced interest expense and additional
liquidity provided by our new senior credit facility will be critical to the
success of our future operations.
Guardian Energy Management Corp. is a wholly owned subsidiary of Guardian
Industries Corp. Guardian Energy Management Corp. is engaged in the
exploration, development and production of oil and natural gas in North
America. Its primary customers consist of utility and natural gas transmission
companies.
Guardian Industries Corp. is a privately-owned, multinational corporation
based in Auburn Hills, Michigan. Together Guardian Industries and its
subsidiaries and affiliates constitute one of the largest global manufacturers
of float glass and fabricated glass products for the commercial and
residential construction industries and are a leading supplier of vehicle
glass and exterior trim systems to the global automotive industry. Guardian
Fiberglass, Inc., a Guardian Industries subsidiary, is one of the largest
manufacturers of fiberglass in the world and occupies a significant and
growing position in the building materials distribution business. Guardian
Industries, its subsidiaries and affiliates employ 17,500 people and operate
facilities in 17 countries on five continents.
Terms of the Guardian Transaction
The Securities Purchase Agreement. On July 11, 2000, we entered into a
Securities Purchase Agreement with Guardian. Under the terms of this agreement
we issued Guardian a convertible promissory note and issued Guardian warrants
exercisable for a total of 13,062,500 shares of our common stock at a weighted
average exercise price of $2.70 per share in exchange for $5 million in cash.
The Securities Purchase Agreement also provides that we will
. hold a special meeting of our stockholders as promptly as practicable to
seek approval of the issuance of the shares of common stock upon the
conversion of the Guardian note and the exercise of the Guardian
warrants;
. until December 31, 2005, limit our board of directors to no more than
eight (8) directors; and
9
<PAGE>
. grant Guardian a right of first offer with respect to private placements
of our common stock occurring on or before the fourth anniversary of the
date on which our stockholders approve the Guardian transaction. The
right of first offer only applies to private placements at prices below:
. $3.00 per share prior to the first anniversary of stockholder
approval,
. $3.50 per share prior to the second anniversary of stockholder
approval,
. $4.00 per share prior to the fourth anniversary of stockholder
approval.
Under the Securities Purchase Agreement, Guardian agreed to reimburse us for
up to $15,000 in expenses incurred in connection with the negotiation and
documentation of the Guardian transaction.
The terms of the Guardian transaction allow Guardian to designate two
members of our board of directors. On July 13, 2000, our board appointed two
designees of Guardian, Paul A. Halpern and Robert M. Boeve, to fill the
vacancies created by the recent resignations of Dan A. Hughes, Jr., and Frank
M. Burke.
Mr. Halpern is Vice-President of Operations for Guardian and Associate Tax
Counsel for Guardian Industries. Mr. Halpern was formerly Tax Director for
McDermott International Inc. He currently is responsible for Guardian's energy
exploration and production activities and certain tax functions. Mr. Halpern
received his Bachelor of Business Administration degree from Drexel University
and received his law degree from Temple University.
Mr. Boeve is Manager and Chief Executive Officer of Jordan Exploration
Company, LLC, which currently operates approximately 360 wells with
exploration and/or operating interests in Texas, Oklahoma, Wyoming, North
Dakota, and Michigan. Mr. Boeve received his Master of Business Administration
degree in Finance from the University of Minnesota. Mr. Boeve is also managing
member of the newly created ECCO Investments, LLC, a private investment
company which recently purchased 370,370 shares of our common stock for an
aggregate purchase price of $500,000 ($1.35 per share).
The Guardian Note. If the Guardian Transaction is approved at the special
meeting, the Guardian note will automatically be converted into 3,703,704
shares of our common stock. The note issued to Guardian provides that if the
conversion of the note is approved by January 11, 2001 and no default occurs,
the note will not bear interest. In the Guardian note we agree not to declare
any dividends or distributions in cash or property while the Guardian note
remains outstanding. If the conversion of the Guardian note is not approved,
the Guardian note will accrue interest from July 11, 2000 until the Guardian
note matures on September 1, 2003 at the lower of:
(1) the maximum legal rate or;
(2) . for the first 365 days after June 11, 2000, the prime rate plus 10%;
. for the next 365 days, the prime rate plus 12%; and
. thereafter the prime rate plus 15%.
If the Guardian note is not converted into common stock, principal and
interest payments under the note may be made in cash, by the issuance of
warrants exercisable for common stock (subject to a maximum of 2,157,767
shares) or in a combination of cash and warrants. Payments made in warrants
will be valued at the lower of (1) the weighted average of the closing prices
of common stock on the NASDAQ for the 30 consecutive trading days ending on
the trading day prior to the applicable warrant issue date or (2) $1.25 per
share. Additionally, if the conversion of the Guardian note into common stock
has not been approved by January 10, 2001, Guardian will be given the right to
exchange any outstanding principal or interest for an undivided interest in
all of the Company's current producing properties or in certain properties as
agreed to between Guardian and the Company. The purchase price for these
interests will be based upon their reserve value using either the then current
Bank One price deck discounted at a rate of 15%, or the price at which
production from the properties is being hedged.
10
<PAGE>
The Warrants. Under the terms of the Securities Purchase Agreement we issued
a series of warrants exercisable for our common stock to Guardian. The
principal economic terms of the three series of warrants are:
. 1,562,500 warrants exercisable at a price of $1.35 per share of common
stock for a period of one year from the date of stockholder approval;
. 2,500,000 warrants exercisable at a price of $2.50 per share of common
stock for a period of two years from the date of stockholder approval;
and
. 9,000,000 warrants exercisable at a price of $3.00 per share of common
stock for a period of four years from the date of stockholder approval.
The warrants are exercisable only for cash and provide for customary anti-
dilution protection in the event of recapitalizations, combinations or
subdivisions of the common stock, dividends or distributions on our common
stock and mergers or other extraordinary transactions. In addition, we agree
in the warrant agreements not to
. issue shares of common stock or securities exercisable for or
convertible into common stock under any plan or plans for the benefit of
our employees or directors that in the aggregate exceed 15% of our
outstanding common stock as of the date thereof, and
. issue more than 300,000 such shares or securities at a price which is
below the price quoted for our common stock at the close of business on
the day prior to issuance of plan securities.
Registration Rights Agreement. We have also entered into a registration
rights agreement with Guardian. If the Guardian transaction is approved, the
shares of common stock to be received by Guardian will be issued in private
placements that are exempt from the registration requirements of the
Securities Act of 1933, and as a result there will be restrictions on the
resale of the shares of common stock Guardian receives imposed under the
Securities Act. Because of these Securities Act restrictions, Guardian
required that we grant them certain registration rights and enter into the
registration rights agreement.
Pursuant to the registration rights agreement, we have agreed to file and
cause to be declared effective within 180 days after receipt of Guardian's
request a "shelf" registration statement registering the resale of the common
stock to be issued to Guardian under the note and the warrants. Guardian also
will have additional "piggyback" registration rights under the registration
rights agreement to require that its shares of common stock be included in
registrations proposed by the Company (either for itself or for the benefit of
other stockholders).
The Company will bear all the expenses associated with the registration of
any common stock under the registration rights agreement, other than
underwriting discounts or commissions and any legal fees and expenses of
Guardian.
Voting Agreement. As a condition to Guardian's entering into the Securities
Purchase Agreement and lending the Company $5 million pursuant to the Guardian
note, C.E. Miller, our Chairman, Kelly Miller, our Chief Executive Officer and
President, and other members of the Miller family entered into a voting
agreement with Guardian. Under the terms of the voting agreement, the members
of the Miller family have agreed to vote the 5,260,124 shares of our common
stock (39.7% of the then current outstanding shares) that they beneficially
own in favor of the Guardian transaction.
Use of Proceeds
The Company used the net proceeds from the Guardian note to repay a portion
of a loan with its then current senior lender, Bank of Montreal. On July 19,
2000, we repaid the outstanding balance under our senior credit agreement with
the Bank of Montreal and entered into a new senior credit facility with Bank
One. We have agreed to use any proceeds we receive from the exercise of the
warrants granted to Guardian to repay our indebtedness to Veritas DGC Land,
Inc., currently approximately $4.2 million. We expect that any additional
proceeds we receive from the exercise of the Guardian warrants will be used
for capital expenditures associated with our exploration and production
activities and for general corporate purposes.
11
<PAGE>
Recommendation of the Board of Directors
Our board of directors, including all independent disinterested directors,
has unanimously approved the Guardian transaction, has determined that the
transaction is in the best interests of the stockholders, and recommends that
the shareholders vote "for" the approval of the conversion.
The Guardian transaction was approved on July 13, 2000, the same day as the
appointment of the new directors, and the new directors did not participate in
the deliberations or approval of the Guardian transaction.
Prior to approving the Guardian transaction, our board of directors
considered various alternatives including continuing its original credit
agreement with the Bank of Montreal or obtaining financing from other
financial institutions. In approving the Guardian transaction, the Board
concluded that the terms of the Guardian transaction presented the best course
of action for the Company. The material factors considered by the Board in
making such recommendation include the following:
. The Guardian transaction allowed us to enter into a new credit facility.
The terms of the new credit facility increase on discretionary cash
flow, which can be applied toward exploration opportunities and/or other
oil and gas asset acquisition and joint venture opportunities.
. If the Guardian warrants are exercised we will receive approximately $35
million in additional equity capital.
. By approving the note conversion, we will avoid substantial interest
charges and penalties associated with the Guardian note and eliminate
unintended additional debt. Also, we will avoid selling Guardian an
undivided interest in our current producing properties. Conversely, if
the note conversion is not approved, the resulting additional interest
will reduce our discretionary cash flow and lessen our ability to carry
a higher working interest.
. The Guardian transaction allows us to complete the Eagle transaction,
which in turn will permit us to purchase additional strategic leasehold
interests in our core area of interest and receive a cash infusion that
we will use to pay down Veritas' indebtedness.
. The Guardian transaction enhances our ability to obtain better terms
under the Veritas indebtedness through lower interest rates and extended
maturity.
. The Guardian transaction was an inducement for Eagle, Bank One, and
Veritas to enter into agreements that improve our debt and capital
structure.
. The terms of the Guardian transaction are fair, equitable, and in the
best interests of our company and stockholders.
Possible Effects of the Guardian Transaction on Stockholders
Upon approval of the Guardian transaction, Guardian will own 3,703,704
shares of our common stock (approximately 20% of the outstanding common stock,
assuming the Eagle transaction is approved) and will hold warrants exercisable
for an additional 13,062,500 shares in the future. The issuance of a large
amount of common stock and warrants also may adversely affect the market price
of our common stock. The Guardian transaction will result in a large
percentage of ownership being held by a single new stockholder. After issuance
of both the Guardian and Eagle shares and exercise of all warrants under both
transactions, Guardian will own approximately 49.5% and C. E. Miller
beneficially will own approximately 15.8% of all of the outstanding common
stock of the Company. The possible effects of the transaction on stockholders
are more fully discussed on page 6 under "Risk Factors."
Reasons for Seeking Stockholder Approval
The rules of the NASDAQ Stock Market provide that stockholder approval is
required prior to the issuance of common stock by the Company when the number
of shares of common stock to be issued in a transaction or series of
transactions, other than a public offering, would equal at least 20% of the
number of shares of common stock outstanding before such issuance. The shares
of common stock to be issued to Guardian upon the conversion of the Guardian
note and the exercise of all of the Guardian warrants represent approximately
126.6% of the shares of common stock outstanding, based upon the number of
shares of common stock outstanding as of the record date.
12
<PAGE>
PROPOSAL TWO
THE EAGLE TRANSACTION
THE PRINCIPAL TERMS OF THE EAGLE TRANSACTION ARE SET FORTH IN THE EAGLE
LETTER AGREEMENT, A COPY OF WHICH IS SET FORTH AS ANNEX C HERETO AND IS MADE A
PART OF THIS PROXY STATEMENT. THE FOLLOWING DISCUSSION SETS FORTH A
DESCRIPTION OF CERTAIN MATERIAL TERMS OF THE EAGLE AGREEMENT AND IS QUALIFIED
BY THE MORE COMPLETE INFORMATION SET FORTH IN THE AGREEMENT ITSELF.
Purpose and Background of the Eagle Transaction
In March and May, 1999, to raise additional capital to make required
payments under our senior credit facility with the Bank of Montreal, we
assigned to Eagle our interests in approximately 5,451 acres of undeveloped
properties in the Mississippi Salt Basin for approximately $3.9 million in
cash. In those transactions, we were given the right to repurchase not less
than 100% of the assets sold to Eagle at any time before January 1, 2000,
excluding producing properties. In addition, we were given an exclusive right
of first offer through January 1, 2000 on any sale of Eagle's properties in
counties that contain Miller's existing leasehold base.
We have always been interested in increasing our ownership interest in the
non-producing properties we sold to Eagle in 1999. Those transactions were
entered into on an arm's length basis at a time when the Company had no other
reasonable alternative solutions to meet our required principal payments under
our senior credit facility. The Eagle transaction allows us to repurchase 50%
of the interests in the transferred non-producing properties in exchange for
shares of common stock. As a requirement of the acquisition, Eagle will be
required to provide a $500,000 cash equity infusion that will be used to make
a required $500,000 reduction of our indebtedness to Veritas DGC Land, Inc.
Eagle will also receive warrants to purchase 781,250 shares of common stock at
a price of $1.35 per share and 1,250,000 shares of common stock at a price of
$2.50 per share. These warrant issuances are on the same terms as the warrants
granted to Guardian as part of the Guardian transaction except that Eagle was
not granted any warrants that are exercisable for four years at the $3.00
exercise price.
Terms of the Eagle Transaction
Although our original agreement with Eagle has expired, Eagle has agreed to
assign to the Company 50% of its interest in the non-producing properties
listed below. The purchase price for these properties is $2 million which will
be paid through the issuance of 1,481,481 shares of our common stock,
representing a purchase price of $1.35 per share. Additionally, Eagle will
infuse $500,000 into the Company in exchange for 370,370 shares of common
stock, also at $1.35 per share.
EAGLE PROPERTIES TO BE ACQUIRED
<TABLE>
<CAPTION>
Property Name Working Interest Acquired
------------- -------------------------
<S> <C>
Arm Dome........................................ 0.08080
Centerville Dome................................ 0.07325
Don't Dome...................................... 0.05290
Dry Creek Dome.................................. 0.07645
Eminence Dome................................... 0.02115
Grange Dome..................................... 0.08080
N.E. Collins.................................... 0.10585
S.W. Kola....................................... 0.10585
Kola Dome....................................... 0.06380
Midway Dome..................................... 0.03960
Moselle Dome.................................... 0.15585
Richmond Dome................................... 0.07120
</TABLE>
13
<PAGE>
In addition to the 1,851,851 shares of common stock, Eagle will also be
issued warrants exercisable for (a) 781,250 shares of common stock at an
exercise price of $1.35 per share exercisable for one year from the date of
stockholder approval and (b) 1,250,000 shares of common stock at an exercise
price of $2.50 per share exercisable for two years from the date of
stockholder approval.
Registration Rights Agreement. We also will enter into a registration rights
agreement with Eagle. If the Eagle transaction is approved, the shares of
common stock to be received by Eagle will be issued in private placements that
are exempt from the registration requirements of the Securities Act of 1933,
and as a result there will be restrictions on the resale of the shares of
common stock Eagle receives imposed under the Securities Act. Because of these
Securities Act restrictions, Eagle has requested that we grant it certain
registration rights and enter into the registration rights agreement
substantially similar to that entered into with Guardian.
Use of Proceeds
The $500,000 equity infusion received from Eagle will be used to make a
required $500,000 payment toward the reduction of our indebtedness to Veritas.
We expect that any additional proceeds we receive from the exercise of the
Eagle warrants will be used for capital expenditures associated with our
exploration and production activities and for general corporate purposes.
Recommendation of the Board of Directors
The board of directors of the Company, including all of the independent,
disinterested directors, has approved the Eagle transaction, has determined
that the agreement is in the best interests of the stockholders, and
recommends that the stockholders vote "for" the approval of the transaction.
The Eagle transaction was approved on July 13, 2000, the same day as the
appointment of the new directors, and the Guardian designees did not
participate in the deliberations or approval of the Eagle transaction.
The material factors considered by the Board in making such recommendation
include the following:
. The repurchase will allow us to increase leasehold interests in
potentially valuable land with 3-D seismic in the Mississippi Salt
Basin, where the majority of our exploration and production already
takes place.
. We will receive a cash infusion of $500,000 of new equity capital, thus
improving our overall capital structure.
. If the Eagle warrants are exercised, we will receive up to approximately
$4 million of additional equity capital.
. We will be able to repurchase the Eagle assets for approximately the
same price that we sold them to Eagle, even though gas and oil prices
have increased approximately 157% and 76%, respectively, from the date
of our initial sale of these assets.
. Eagle will only retain the well bore for the producing properties, and
we will acquire all the leasehold property rights outside the producing
well bores, excepting only the reserves attributable to that well, and
excepting the producing zone in the Langston #1 well in the adjoining
640-acre units, which will give us the benefit of any future
opportunities that may exist within producing units.
. The capital infusion of $500,000 we will receive from Eagle will be used
for a principal payment of $500,000 under our indebtedness to Veritas
DGC Land Inc., which will avoid a substantial penalty of $750,000
payable in warrants exercisable for common stock at the existing market
price.
. The Eagle transaction was an inducement for Guardian, Bank One, and
Veritas to enter into agreements that improve our debt and capital
structure.
. The $2,000,000 purchase price for the leasehold interests and various
other rights is fair, equitable, and in the best interests of our
company and stockholders.
14
<PAGE>
Possible Effects of the Eagle Transaction on Stockholders
Upon approval of the Eagle transaction, C. E. Miller will own beneficially
3,357,654 shares of our common stock (approximately 17.9% of the outstanding
common stock of the Company) and will hold, through Eagle, warrants
exercisable for an additional 2,031,250 shares. The issuance of a larger
amount of common stock and warrants may adversely affect the market price of
our common stock. The effects of the transaction on stockholders are more
fully discussed on page 7 under "Risk Factors."
Reasons for Seeking Stockholder Approval
The rules of the NASDAQ Stock Market provide that stockholder approval is
required prior to the issuance of common stock by the Company when (a) the
number of shares of common stock to be issued in a transaction or series of
transactions, other than a public offering, would equal at least 20% of the
number of shares of Common stock outstanding before such issuance and (b) any
insider has a 5% or greater interest in assets to be acquired by a company and
the consideration to be paid for such assets could result in an increase in
the number of shares of outstanding common stock of 5% or more. The shares of
common stock to be issued upon the closing of the Eagle transaction and the
exercise of all of the Eagle warrants will constitute approximately 29.3% of
the shares of common stock outstanding, based upon the number of shares of
common stock outstanding at the record date.
RECENT DEVELOPMENTS
Bank One Credit Facility
On July 19, 2000, we entered into a new senior credit facility with Bank
One, Texas NA, which replaced our credit facility with Bank of Montreal. The
new credit facility has a 30-month term and a current borrowing base of $11.5
million. The interest rate under the new credit facility has been reduced from
prime plus 3 1/2% to either prime plus 2% or LIBOR plus 4% at the Company's
option. The new credit facility requires us to make monthly principal payments
of $500,000 until the next borrowing base re-determination which is scheduled
for January 1, 2001.
Veritas Indebtedness
On July 19, 2000, we also entered into an agreement to amend the terms of
our $4.7 million note, warrant and registration rights agreement with Veritas
DGC Land, Inc. Under this agreement the term of the note has been extended 36
months and the interest rate reduced significantly from 18% to 9 3/4%. In
connection with the extension and material reduction in the interest rate, we
agreed to make $1 million in payments by December 31, 2000. We made a $500,000
payment of principal in July 2000 and have agreed to pay another $500,000 by
December 31, 2000, which will be paid from the proceeds of the Eagle
transaction. If we do not pay the $500,000 by December 31, 2000, Veritas DGC
Land Inc. will be issued $750,000 in warrants at the then current market price
as a penalty.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements beginning on page F-1. Certain information, including
information regarding our plans and strategy for business, are forward-looking
statements. These statements are based on certain assumptions and analyses
made by our management in light of its experiences and its perception of
historical trends, current conditions, expected future developments, and other
factors it believes are appropriate. Such statements are subject to a number
of risks and uncertainties regarding general economic and business conditions,
prices of crude oil and natural gas, business opportunities, changes in laws
or regulations, and other factors that may be beyond our control. Such
statements are not guarantees of future performance and actual results or
developments may differ materially from those projected in the forward-looking
statements.
Overview
We are 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.
We use the full cost method of accounting for our 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 our acquisition, exploration and development activities, are
capitalized in a "full cost pool" as incurred. We record depletion of our 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 our 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, we 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, we determined that a writedown was not
required.
16
<PAGE>
Results of Operations
Three Months Ended March 31, 2000 and 1999.
The following table summarizes production volumes, average sales prices and
average costs for our oil and natural gas operations for the three months
ended March 31, 2000 and 1999 (in thousands, except per unit amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Production volumes:
Crude oil and condensate (MBbls)........................ 47.2 77.0
Natural gas (MMcf)...................................... 1,642.0 2,054.9
Natural gas equivalent (MMcfe).......................... 1,925.2 2,516.9
Revenues:
Crude oil and condensate................................ $ 1,093 $ 716
Natural gas............................................. 4,417 4,119
Operating expenses:
Lease operating expenses and production taxes........... $ 458 $ 602
Depletion, depreciation and amortization................ 4,371 3,392
General and administrative.............................. 709 878
Interest expense.......................................... $ 848 $ 594
Net loss.................................................. (438) (288)
Average sales prices:
Crude oil and condensate ($ per Bbl).................... $ 23.16 $ 9.30
Natural gas ($ per Mcf)................................. 2.69 2.00
Natural gas equivalent ($ per Mcfe)..................... 2.86 1.92
Average Costs ($ per Mcfe):
Lease operating expenses and production taxes........... $ 0.24 $ 0.24
Depletion, depreciation and amortization................ 2.27 1.35
General and administrative.............................. 0.37 0.35
</TABLE>
Three Months Ended March 31, 2000 compared to Three Months Ended March 31,
1999
Oil and natural gas revenues for the three months ended March 31, 2000
increased 14% to $5.5 million from $4.8 million for the comparable period in
the prior year. The revenues for the three months ended March 31, 2000 and
1999 include approximately $0.06 million and $0.4 million of hedging gains,
respectively (see "Risk Management Activities and Derivative Transactions"
below). In 1999, we sold substantially all of our producing properties in
Texas, Louisiana and the Antrim Shale properties in Michigan. These property
sales and the resultant lost production represent the primary reason why
production volumes for the three months ended March 31, 2000 decreased 24% to
1,925.2 Mmcfe from 2,516.9 Mmcfe for the comparable period of the prior year.
Average realized oil prices increased 149% to $23.16 per barrel from the
significantly depressed price of $9.30 per barrel experienced during the
comparable period of 1999. Realized natural gas prices for the three months
ended March 31, 2000 increased 35% to $2.69 per Mcf from $2.00 per Mcf for the
comparable period of the prior year.
Lease operating expenses and production taxes for the three months ended
March 31, 2000 decreased 24% to $0.46 million from $0.60 million for the
comparable period in the prior year. Lease operating expenses decreased due to
the reduction in expenses attributable to the sale of producing properties in
Texas, Louisiana and Michigan in 1999. The lease operating expenses and
production taxes on a per unit of production basis for the three months ended
March 31, 2000, of $0.24 per Mcfe was unchanged from the same period of 1999.
17
<PAGE>
Depreciation, depletion and amortization ("DD&A") expense for the three
months ended March 31, 2000 increased 29% to $4.4 million from $3.4 million
for the comparable period in the prior year. The higher depletion expense was
the combined result of an increase in costs subject to depletion and an
increased depletion rate due to a reduction in estimated proved oil and gas
reserves from sales of proved reserves in 1999.
General and administrative expenses for the three months ended March 31,
2000 decreased 19% to $0.7 million from $0.9 million for the comparable period
in the prior year. Legal and professional fees decreased 19% for the three
months ended March 31, 2000 compared to the same period of 1999. Salaries,
wages and related fringe benefits dropped by 28% for the three months ended
March 31, 2000 after removal of non-cash items: (a) employer matching 401(k)
contributions which were made with our common stock; and (b) salaries and
wages expense for the vested portion of restricted stock issued in February
1998, in connection with our initial public offering. This decrease is due to
a reduction in staff level by ten employees and certain salary reductions
implemented in May 1999. We expect the lower level of general and
administrative expenses to continue for the remainder of 2000.
Interest expense for the three months ended March 31, 2000 increased 43% to
$0.8 million from $0.6 million for the comparable period in the prior year, as
a result of the prime plus 3.5% interest rate that became effective with the
Second Amendment to the Credit Facility dated April 14, 1999 and interest
expense associated with the Veritas Note Payable agreement dated April 14,
1999.
Net loss for the three months ended March 31, 2000 increased to $0.4 million
from $0.3 million for the comparable period in the prior year, as a result of
the factors described above.
Years Ended December 31, 1999, 1998 and 1997.
The following table summarizes production volumes, average sales prices and
average costs for our oil and natural gas operations for the years ended
December 31, 1999, 1998 and 1997 (in thousands, except per unit amounts):
<TABLE>
<CAPTION>
1999 1998 1997 1998 1997
---------- ---------- ---------- -------- --------
Historical Historical Historical Proforma Proforma
<S> <C> <C> <C> <C> <C>
Production volumes:
Crude oil and condensate
(Mbbls)................. 255.9 247.6 47.4 261.2 206.8
Natural gas (MMcf)....... 7,593.8 8,953.3 2,241.2 9,646.2 8,298.2
Natural gas equivalent
(MMcfe)................. 9,129.2 10,438.7 2,525.9 11,213.4 9,539.2
Revenues:
Natural gas.............. $17,266 $ 18,336 $ 5,819 $ 19,810 $20.774
Crude oil condensate..... 3,465 2,646 964 2,833 3,711
Operating expenses:
Lease operating expenses
and production taxes.... $ 1,704 $ 3,363 $ 1,478 $ 3,571 $ 2,423
Depletion, depreciation
and amortization........ $16,066 $ 15,933 2,520 16,537 7,812
General and
administrative.......... 3,134 3,475 2,186 3,175 2,606
Interest expense........... $ 3,519 $ 1,635 $ 1,200 $ 1,635 $ 1,125
Net income (loss).......... $(1,982) $(41,800) $ 28 $(35,158) $ 8,438
Average sales prices:
Crude oil and condensate
($ per Bbl)............. $ 13.54 $ 10.69 $ 20.33 $ 10.85 $ 17.94
Natural gas ($ per Mcf).. 2.27 2.05 2.60 2.05 2.50
Natural gas equivalent ($
per Mcfe)............... 2.27 2.01 2.69 2.02 2.57
Average costs ($ per Mcfe):
Lease operating expenses
and Production taxes.... $ 0.19 $ 0.32 $ 0.58 $ 0.32 $ 0.25
Depletion, depreciation
and Amortization........ 1.76 1.53 1.00 1.47 0.82
General and
administrative.......... 0.34 0.33 0.87 0.28 0.27
</TABLE>
18
<PAGE>
Because of the significance of a series of related transactions entered into
concurrently with our Initial Public Offering (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 our
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 our 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 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 us
on our operated Mississippi Salt Basin properties during 1999.
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 our 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: 401(k) contributions and director fees
which were satisfied with shares of our common stock and compensation expense
for the vested portion of restricted stock issued in February 1998, in
connection with our Initial Public Offering. General and administrative
expense for the year ended December 31, 1998 includes director fees paid in
shares of our common stock as a non-cash expense.
Using unescalated period-end prices at December 31, 1999, of $2.38 per Mcfe,
we 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, we determined
that a writedown was not required.
19
<PAGE>
At December 31, 1998, we 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.
We based our 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 to the Consolidated Financial
Statements, 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 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. We 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.
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 our 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.
20
<PAGE>
At December 31, 1998, we 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. We based our 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, our primary sources of capital have been funds generated by
operations, and borrowings under our bank credit facility.
Concurrently with our Initial Public Offering, we entered into a credit
facility with Bank of Montreal, Houston Agency ("Bank of Montreal"). The
credit facility, as amended, required principal reductions and included
certain negative covenants that imposed limitations on us and our subsidiary
with respect to, among other things, distributions with respect to our capital
stock, limitations on financial ratios, the creation or incurrence of liens,
restrictions on proceeds from sales of oil and gas properties, the incurrence
of additional indebtedness, making loans and investments and mergers and
consolidations. Our obligations under the credit facility were secured by a
lien on all of our real and personal property. Commencing April 1999, the
interest rate under this facility was increased to Bank of Montreal's prime
plus 3.5%.
We made principal payments of approximately $15.0 million and $5.5 million
for the year ended December 31, 1999 and for the six months ended June 30,
2000, respectively, under the credit facility. At June 30, 2000, the
outstanding debt balance under our credit facility with Bank of Montreal was
$16.4 million. On July 11, 2000, a principal payment of $4.9 million was made
using the proceeds received in the Guardian transaction which reduced the
outstanding balance to $11.5 million.
On July 19, 2000, the Company entered into a new senior credit facility with
Bank One, Texas, NA, which replaced the existing credit facility with Bank of
Montreal. The new credit facility has a 30-month term and a current borrowing
base of $11.5 million. The interest rate under the new credit facility is
either Bank One prime plus 2% or LIBOR plus 4%, at the Company's option. The
new credit facility requires us to make monthly principal payments of $500,000
until the next borrowing base re-determination which is scheduled for
January 1, 2001.
The new credit facility with Bank One includes certain negative covenants
that impose restrictions on us with respect to, among other things, incurrence
of additional indebtedness, limitations on financial ratios, making
investments and mergers and consolidation.
On April 14, 1999, we issued a $4.7 million note payable to one our
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 was originally due on
April 15, 2001. On July 19, 2000, the note was amended as more fully described
below.
On April 14, 1999, we also entered into an agreement (the "Warrant
Agreement") to issue warrants to Veritas that entitle Veritas to purchase
shares of our common stock in lieu of receiving cash payments for the accrued
interest obligations under the Veritas Note Payable. The Warrant Agreement
required us to issue warrants to Veritas in conjunction with the signing of
the Warrant Agreement, as well as on the six and, at our option,
21
<PAGE>
12 and 18 month anniversaries of the Warrant Agreement. The warrants issued
equal 9% of the then current outstanding principal balance of the Veritas Note
Payable. The number of shares 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 our 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
and April 14, 2000, warrants exercisable for 322,752 shares and 454,994
shares, respectively, of our common stock were issued to Veritas. The Warrant
Agreement was also amended on July 19, 2000.
Under the terms of the amended note and warrant, the maturity of the note
was extended from April 15, 2001 to July 21, 2003 and the expiration date for
all warrants was extended until June 21, 2004. The annual interest rate has
been reduced from 18% to 9 3/4%, provided the entire Veritas note balance is
paid in full by December 31, 2001. If all principal and interest under the
Veritas note is not paid by December 31, 2001, the Veritas note will instead
bear interest at 13 3/4% until paid in full. Interest accrues from and after
October 15, 2000 and is payable commencing April 15, 2001 and continuing on
each October 15 and April 15 until all principal is paid in full. Interest
will be paid in warrants under the terms of the Warrant Agreement until such
time as the Company is in borrowing base compliance with its senior lender, as
defined in the senior credit facility, at which time interest will be paid in
cash only.
Under the amended note, a principal payment of $500,000 was made on July 19,
2000, the effective date of the amendment, and another $500,000 payment is
required from proceeds of the Eagle transaction within five days of
stockholder approval. If the Eagle transaction is not approved, the second
payment must be made on or before December 31, 2000. Nonpayment of this second
principal payment results in a penalty payment of $750,000 payable in warrants
at the then current market price of our common stock.
Any additional proceeds derived from exercise of warrants issued or from
other debt or equity transactions in the future must be used to pay interest
and principal on the amended Veritas note until paid in full.
In connection with the closing of the AHC acquisition on February 9, 1998,
we issued a non-interest bearing note payable to AHC (the "AHC Note Payable")
of $2.5 million (at December 31, 1999) which was payable on the annual
anniversary dates of the closing as follows: $1.0 million in 2000 and $1.5
million in 2001. We had obtained a six-month extension of the $1.0 million
payment from February 2000 to August 2000. This payment was made on August 3,
2000. Also, the $1.5 million payment due February 2001 has been divided into
three quarterly installments of $500,000 each, payable commencing February
2001. Terms of the extension agreement require monthly interest payments at an
annual interest rate of 12% for the periods February through August 2000 and
February through July 2001.
We have currently budgeted capital expenditures of approximately $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 our 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. We intend to fund our 2000 budgeted
capital expenditures through operational cash flow.
Our 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. We
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 our 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 we can produce economically.
We have experienced and expect to continue to experience substantial working
capital requirements primarily due to our active exploration and development
program. We believe that cash flow from operations and improved commodity
prices should allow us to implement our present business strategy through
2000.
22
<PAGE>
Risk Management Activities and Derivative Transactions
We use 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: (a) the
item to be hedged exposes us to price or interest rate risk; and (b) the
derivative reduces that exposure and is designated as a hedge.
Commodity Price Hedges
We periodically enter into certain derivatives (e.g., NYMEX futures
contracts) for a portion of our oil and natural gas production to achieve a
more predictable cash flow, as well as to reduce the exposure to price
fluctuations. Our hedging arrangements apply to only a portion of our
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 us to risk of financial loss in certain
circumstances, including instances where production is less than expected, our
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. We expect that the amount of hedge contracts that we have
in place will vary from time to time.
Our hedging strategy is to maximize our return on investment through hedging
a portion of our activities relating to oil and natural gas price volatility.
While this strategy should help us reduce our exposure to price risks, it also
limits our potential gains from increases in market prices for natural gas. We
intend to continue to hedge up to 50% of our 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 our exposure to declines in natural
gas prices. For the year ended December 31, 1999, we had hedged 45% of our oil
and natural gas production, and as of December 31, 1999, we had 0.9 Bcfe of
open oil and natural gas contracts for the months of January 2000 through
March 2000.
Interest Rate Hedge
We 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 our interest rate swap was $25.0 million at December 31,
1998, and had a fair value of approximately $0.2 million. During March 1999,
we terminated our 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 our 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, our policy
is to hedge (through the use of derivatives) future production. Because
commodities covered by these derivatives are substantially the same
commodities that we sell 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 our
derivatives 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.
23
<PAGE>
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 our results
of operations, cash flow and liquidity. Recent rates of inflation have had a
minimal effect on the Company.
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. We
have not yet quantified the impacts of adopting SFAS No. 133 on our financial
statements and have not determined the timing of or method of our adoption of
SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and
other comprehensive income.
24
<PAGE>
INTEREST OF CERTAIN PERSONS IN THE TRANSACTION
Transactions with C.E. Miller and Affiliates
The following information describes agreements or transactions between
Miller Oil Corporation, or "MOC," our predecessor and C.E. Miller, Chairman of
the Board and a director of our company and MOC, or his affiliates, in
addition to the transaction described in Proposal 2:
Asset Purchase Agreement. During March and May 1999, Eagle, an affiliate of
our company, purchased certain undeveloped leasehold interests from us and
assumed any obligations under existing joint operating agreements,
participation agreements and any other agreements relating to the assets. The
proceeds from sale of these assets totaled $3.9 million and were used to meet
our May 31 scheduled payment obligation to our senior lender, the Bank of
Montreal.
All sales of assets were subject to the approval of our outside directors
and we had the absolute right to repurchase, on or before December 31, 1999,
all of the assets purchased by Eagle. The assets could not be repurchased
individually, and had to be repurchased in their entirety excepting those
assets where drilling operations had begun. No assets were repurchased by us
during 1999.
Service Agreement. MOC entered into an Amended Service Agreement dated
January 1, 1997, amending a prior service agreement, with Eagle, an oil and
gas exploratory company beneficially owned by C.E. Miller. Under the amended
agreement, MOC provides Eagle with administrative, technical, consulting and
other services required by Eagle to operate its business in the ordinary
course. These services include, among others, developing prospects,
coordinating, permitting, drilling and facility construction and operation,
maintaining joint venture relationships and providing accounting, financial,
tax and budget-preparation services. As compensation for its services, Eagle
agreed to pay MOC a fixed fee of $50,000 per calendar quarter, subject to
annual adjustments to be negotiated by MOC and Eagle, as well as additional
fees for specialized services as agreed by the parties. Eagle also agreed to
reimburse MOC its out-of-pocket expenses incurred in providing the services.
Either party may terminate the agreement at any time upon 60 days' prior
notice. Eagle paid MOC $66,667 under the service arrangement in 1999, which
the Company believes is adequate compensation for the services provided to
Eagle. On March 1, 1999, by mutual agreement, the parties terminated the
Service Agreement effective May 1, 1999.
Lease of Principal Offices. We are currently leasing our principal office
building from C.E. and Betty Miller under a five-year lease expiring in April
2003. The office is located at 3104 Logan Valley Road, Traverse City,
Michigan, and the lease has a 4% annual escalation clause. The current monthly
rent is $8,395 for approximately 10,000 sq. ft. We believe that the rental
rate is representative of the fair market rental rate for the premises.
25
<PAGE>
STOCKHOLDINGS OF PRINCIPAL STOCKHOLDERS,
DIRECTORS, AND MANAGEMENT
To our knowledge, set forth below is certain information, as of July 31,
2000, regarding ownership of common stock by:
. each person who beneficially owns more than 5% of our outstanding shares
of common stock,
. each director and executive officer of our Company, and
. all directors and executive officers of our Company as a group.
<TABLE>
<CAPTION>
Total
Beneficial Percent of
Name and Address of Beneficial Owner(1) Ownership(2)(3) Class
--------------------------------------- --------------- ----------
<S> <C> <C>
Siemens Financial Services, Inc. .................. 1,025,105 7.7%
186 Wood Avenue
South Iselin, New Jersey 08830
C.E. Miller(4)..................................... 1,505,803 11.4%
Kelly E. Miller(5)................................. 1,369,666 10.2%
David A. Miller(6)................................. 754,879 5.7%
Daniel R. Miller(7)................................ 888,360 6.7%
Sue Ellen Bell(8).................................. 797,398 6.0%
Robert M. Boeve(9)................................. 372,370 2.8%
Paul Halpern(10)................................... *
William Casey McManemin............................ 69,495 1.0%
Lew P. Murray(11).................................. 52,325 *
Michael L. Calhoun................................. 15,250 *
Kenneth J. Foote (12).............................. 135,669 1.0%
Richard J. Burgess................................. 34,600 *
Deanna L. Cannon................................... 8,000 *
Executive Officers and Directors as a group (9
persons).......................................... 3,563,478 26.9%
</TABLE>
--------
* Less than 1%.
(1) The address of each reporting person, unless otherwise noted, is 3104
Logan Valley Road, Traverse City, Michigan 49685.
(2) The number of shares stated are based on information provided by each
person listed and include shares personally owned of record by the
person and shares which, under applicable regulations, are considered to
be otherwise beneficially owned by the person.
(3) Excludes the following shares that may be acquired through the exercise
of stock options granted under the "1997 Stock Plan" which currently are
exercisable:
<TABLE>
<CAPTION>
Name Number of Options
---- -----------------
<S> <C>
Kelly E. Miller........................................... 198,000
William Casey McManemin................................... 8,400
Lew P. Murray............................................. 120,000
Michael L. Calhoun........................................ 15,000
Kenneth J. Foote.......................................... 8,400
Richard J. Burgess........................................ 10,400
Deanna L. Cannon.......................................... 21,000
Robert M. Boeve........................................... 10,000
Paul A. Halpern........................................... 10,000
</TABLE>
26
<PAGE>
(4) Includes 213,919 shares held by the Kelly E. Miller Retained Annuity
Trust #1, 213,919 shares held by the Daniel R. Miller Retained Annuity
Trust #1, 320,879 shares held by the David A. Miller Retained Annuity
Trust #1 and 213,919 shares held by the Sue Ellen Bell Retained Annuity
Trust #1, with respect to each of which C.E. Miller is the sole trustee.
Also includes 264,199 shares held by Eagle Investments, Inc. ("Eagle")
and 122,565 shares held by Eagle International, Inc. ("Eagle
International"), each of which is owned by a revocable trust of which
C.E. Miller is the sole trustee.
(5) Includes 84,024 shares held by Miller and Miller, Inc., which is owned
by a revocable trust of which Kelly E. Miller is the sole trustee and
97,717 shares held by the Company's 401(k) plan wherein Kelly E. Miller
has sole voting power as the sole trustee. Excludes 213,919 shares held
by the Kelly E. Miller Retained Annuity Trust #1, of which Kelly E.
Miller's father, C.E. Miller, is the sole trustee and of which Kelly E.
Miller is the Grantor with the Trust established for the benefit of his
minor children as beneficiaries.
(6) Includes 84,024 shares held by Oak Shores Investments, Inc., which is
owned by a revocable trust of which David A. Miller is the sole trustee.
Excludes 320,879 shares held by the David A. Miller Retained Annuity
Trust #1, of which David A. Miller's father, C.E. Miller, is the sole
trustee and of which David A. Miller is the Grantor with the Trust
established for the benefit of his minor children as beneficiaries.
(7) Includes 74,634 shares held by Double Diamond Enterprises, Inc., which
is owned by a revocable trust of which Daniel R. Miller is the sole
trustee. Excludes 213,919 shares held by the Daniel R. Miller Retained
Annuity Trust #1, of which Daniel R. Miller's father, C.E. Miller, is
the sole trustee and of which Daniel R. Miller is the Grantor with the
Trust established for the benefit of his minor children as
beneficiaries.
(8) Includes 84,024 shares held by Frontier Investments, Inc., which is
owned by a revocable trust of which Sue E. Bell is the sole trustee.
Excludes 213,919 shares held by the Sue Ellen Bell Retained Annuity
Trust #1, of which Sue E. Bell's father, C.E. Miller, is the sole
trustee and of which Sue E. Bell is the Grantor with the Trust
established for the benefit of her minor children as beneficiaries.
(9) Includes 370,370 shares held by ECCO Investments, LLC. Mr. Boeve owns
25% and is managing member of this entity. Mr. Boeve disclaims
beneficial ownership of these shares, except for those in which he has a
direct pecuniary interest.
(10) Excludes up to 2,157,767 shares currently acquirable without stockholder
approval upon exercise of warrants held by Guardian Energy Management
Corp., for which Mr. Halpern serves as Vice President, Operations.
(11) Includes 4,621 shares held as part of the Miller Oil Corporation 401(k)
Savings Plan for which Mr. Murray has sole dispositive power.
(12) Includes 1,500 shares held by Mr. Foote's spouse.
27
<PAGE>
STOCKHOLDER PROPOSALS
The only business that may be conducted at a special meeting of stockholders
is business that was addressed before the meeting according to our bylaws
regarding notice of meetings. Under these requirements, the only business to
be conducted at the special meeting are the approvals of (a) the issuance of
shares of stock pursuant to the Guardian transaction and (b) the Eagle
transaction.
PROPOSALS FOR THE NEXT ANNUAL MEETING
Any proposals of holders of common stock intended to be presented at the
annual meeting of our stockholders to be held in May 2001 must be received by
us at our principal executive offices, 3140 Logan Valley Road, Traverse City,
Michigan, Attention: Secretary, not later than in order to be
included in the proxy statement and form of proxy relating to such meeting.
Stockholder proposals submitted outside the processes of Rule 14a-8
promulgated under the Securities Exchange Act of 1934, as amended, will be
considered untimely if received by us after .
SOLICITATION OF PROXIES
Solicitation of proxies will be made initially by mail. In addition,
directors, officers, and employees our company and its subsidiaries may
solicit proxies by telephone or facsimile or personally without additional
compensation. We will bear all costs of solicitation of proxies, including the
charges and expenses of brokerage firms, banks, trustees, or other nominees
for forwarding proxy materials to beneficial owners.
INDEPENDENT PUBLIC ACCOUNTANTS
We have not changed our independent certified public accountants and have
not had any disagreement with our independent certified public accountants on
accounting or financial disclosures required to be made under the rules of the
Securities and Exchange Commission. Representatives of Arthur Andersen L.L.P.,
our independent certified public accountants, are not expected to be present
at the special meeting.
28
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements
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
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December
31, 1999................................................................ F-26
Consolidated Statements of Operations for the Three Months Ended March
31, 2000 and 1999 (unaudited)........................................... F-27
Consolidated Statement of Equity for the Three Months Ended March 31,
2000 (unaudited)........................................................ F-28
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 2000 and 1999 (unaudited)........................................... F-29
Notes to Consolidated Financial Statements............................... F-30
</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
(Note 1) 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 Deferred
Stock Preferred Common Paid In Com- Combined Retained
Warrants Stock Stock Capital pensation 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
(Note 1) 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
F-12
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 anniverseries 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.
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
F-14
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
F-15
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
F-16
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Five-Day Daily Average Target Percentage 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
Range of Average Average Average
Grant Prices Remaining Grant Grant
------------ 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.
(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
F-18
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
(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
F-19
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
------------------------------------
March 31 June 30 Sept. 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>
MILLER EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
As of March 31, As of December 31,
2000 1999
--------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 1,197 $ 3,712
Restricted cash (Note 2).................. 107 1,079
Accounts receivable....................... 3,359 4,580
Inventories, prepaids and advances to
operators................................ 500 640
-------- --------
Total current assets.................... 5,163 10,011
-------- --------
OIL AND GAS PROPERTIES--at cost (full cost
method):
Proved oil and gas properties............. 120,971 115,040
Unproved oil and gas properties........... 18,348 22,678
Less-Accumulated depreciation, depletion
and amortization......................... (83,143) (78,881)
-------- --------
Net oil and gas properties.............. 56,176 58,837
-------- --------
OTHER ASSETS................................ 775 838
-------- --------
Total assets............................ $ 62,114 $ 69,686
======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......... $ 4,624 $ 3,500
Accounts payable.......................... 1,778 3,472
Accrued expenses and other current
liabilities.............................. 4,340 7,239
-------- --------
Total current liabilities............... 10,742 14,211
-------- --------
LONG-TERM DEBT.............................. 22,069 25,610
DEFERRED INCOME TAXES....................... 5,591 5,816
DEFERRED REVENUE............................ 45 54
COMMITMENTS AND CONTINGENCIES (NOTE 6)
EQUITY:
Common stock warrants..................... 845 845
Preferred stock, $0.01 par value;
2,000,000 shares authorized; none
outstanding.............................. -- --
Common stock, $0.01 par value; 20,000,000
shares authorized; 12,704,208 shares and
12,681,244 shares outstanding at March
31, 2000 and December 31, 1999,
respectively............................. 127 127
Additional paid in capital................ 66,752 66,690
Deferred compensation..................... -- (48)
Retained deficit.......................... (44,057) (43,619)
-------- --------
Total equity............................ 23,667 23,995
-------- --------
Total liabilities and equity............ $ 62,114 $ 69,686
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
REVENUES:
Natural gas.......................................... $ 4,417 $ 4,119
Crude oil and condensate............................. 1,093 716
Other operating revenues............................. 213 145
---------- ----------
Total operating revenues........................... 5,723 4,980
---------- ----------
OPERATING EXPENSES:
Lease operating expenses and production taxes........ 458 602
Depreciation, depletion and amortization............. 4,371 3,392
General and administrative........................... 709 878
---------- ----------
Total operating expenses........................... 5,538 4,872
---------- ----------
OPERATING INCOME....................................... 185 108
---------- ----------
INTEREST EXPENSE....................................... (848) (594)
---------- ----------
LOSS BEFORE INCOME TAXES............................... (663) (486)
---------- ----------
INCOME TAX PROVISION (CREDIT).......................... (225) (198)
---------- ----------
NET LOSS............................................... $ (438) $ (288)
========== ==========
EARNINGS (LOSS) PER SHARE (Note 3)
Basic................................................ $ (0.03) $ (0.02)
========== ==========
Diluted.............................................. $ (0.03) $ (0.02)
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Additional
Stock Preferred Common Paid In Deferred Retained
Warrants Stock Stock Capital Compensation Deficit
-------- --------- ------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE--December 31,
1999................... $845 $ -- $127 $66,690 $(48) $(43,619)
Issuance of restricted
stock and benefit
plan shares.......... -- -- -- 62 48 --
Net loss.............. -- -- -- -- -- (438)
---- ----- ---- ------- ---- --------
BALANCE--March 31,
2000................... $845 $ -- $127 $66,752 $-- $(44,057)
==== ===== ==== ======= ==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended
March 31,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (438) $ (288)
Adjustments to reconcile net loss to net cash from
operating activities--
Depreciation, depletion and amortization............ 4,371 3,392
Deferred income taxes............................... (225) (149)
Deferred revenue.................................... (9) (6)
Changes in assets and liabilities--
Restricted cash................................... 972 --
Accounts receivable............................... 1,221 543
Other assets...................................... 95 534
Accounts payable.................................. (1,694) (2,364)
Accrued expenses and other current liabilities.... (2,899) 1,239
---------- ----------
Net cash flows provided by operating
activities..................................... 1,394 2,901
========== ==========
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures.............. (1,602) (5,607)
Proceeds from sale of oil and gas properties and
purchases of equipment, net.......................... -- 1,201
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal................................. (2,556) (500)
Borrowing on long-term debt........................... 139 2,490
Contributions, return of capital and stock proceeds,
net.................................................. 110 262
---------- ----------
Net cash flows provided by financing
activities..................................... (2,307) 2,252
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS................. (2,515) 747
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD.... 3,712 22
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.......... $ 1,197 $ 769
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest............................................ $ 637 $ 641
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization and Nature of Operations
The consolidated financial statements of Miller Exploration Company (the
"Company") and subsidiary included herein have been prepared by management
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Accordingly, they reflect all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the financial results for the interim periods. Certain information and notes
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, management believes that the
disclosures are adequate to make the information presented not misleading.
These consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
the Company and its subsidiary after elimination of all intercompany accounts
and transactions.
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.
Oil and Gas Properties
Securities and Exchange Commission Regulation S-X, Rule 4-10 requires
companies reporting on a full cost basis to apply a ceiling test wherein the
capitalized costs within the full cost pool may not exceed the net present
value of the Company's proven oil and gas reserves plus the lower of the cost
or market value of unproved properties. Any such excess costs should be
charged against earnings.
Reclassifications
Certain reclassifications have been made to prior period statements to
conform with the March 31, 2000 presentation.
(2) 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 covered by the escrow
agreements.
F-30
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(3) Earnings Per Share
The computation of earnings (loss) per share for the three-month periods
ended March 31, 2000 and 1999 are as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Net loss attributable to basic and diluted EPS........... $ (438) $ (288)
Average common shares outstanding applicable to basic
EPS..................................................... 12,699 12,553
Add: stock options, treasury shares and restricted
stock................................................... -- --
------- -------
Average common shares outstanding applicable to diluted
EPS..................................................... 12,699 12,553
Earnings (loss) per share:
Basic.................................................. $ (0.03) $ (0.02)
Diluted................................................ $ (0.03) $ (0.02)
</TABLE>
Options and restricted stock were not included in the computation of diluted
earnings per share for the three months ended March 31, 2000 and 1999 because
their effect was antidilutive.
(4) Long-Term Debt
Bank 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 March 31, 2000, approximately $19.4 million was outstanding under
the Credit Facility. All required principal and interest payments have been
made according to the terms of the amendments discussed below.
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 redetermination of the borrowing base and pay a $300,000 redetermination
fee.
On October 29, 1999, the redetermination 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 redetermination of the borrowing base; (v) a
requirement that all proceeds from the sales of proved or unproved oil and gas
properties, prior to the redetermination 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 redetermination date.
Final maturity of the Credit Facility was set at January 1, 2001. Total
principal payments of $5.1 million were made between October 29, 1999 and
March 19, 2000 under the Third Amendment.
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.
F-31
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
During April 2000, the Company and BMO agreed to amend the Fourth Amendment
to extend the borrowing base redetermination date from April 15, 2000 to June
15, 2000, to allow time for the Company to negotiate a new Credit Facility
with a new lender. The Amendment also included: (i) terms requiring the
Company to make monthly principal payments to BMO of $1.0 million commencing
April 30, 2000 and continuing until the earlier of payment of the loan in
full, June 15, 2001 or the next borrowing base redetermination; (ii) extension
of the final maturity date of the Credit Facility to June 15, 2001; and (iii)
payment of a $150,000 amendment fee to BMO by May 1, 2000. The April principal
payment and the amendment fee were paid on April 28, 2000. At the June
redetermination date or in connection with a new Credit Facility with a new
lender, the Company will likely be required to make additional monthly
payments of principal. To the extent 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.
Other
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 March 31, 2000, 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 the weighted average closing price of the
Company's Common Stock for the five business days following 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.
Based upon the weighted average closing price of the Company's Common Stock
for the five business days following April 14, 2000, warrants exercisable for
454,994 shares of Common Stock will be issued to Veritas in connection with
the twelve-month anniversary of the Warrant Agreement. The Company has the
option, in lieu of issuing warrants, to make a cash payment to Veritas at the
eighteen- month anniversary equivalent to 9% of the then current principal
balance of the Veritas Note Payable. 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 March 31, 2000) 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 six-month extension of the $1.0
million payment from February 2000 to August 2000.
F-32
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Also, the $1.5 million payment due February 2001 has been divided into three
quarterly installments of $500,000 each, payable commencing February 2001.
Terms of the extension agreement require monthly interest payments at an
annual interest rate of 12% for the periods February through August 2000 and
February through July 2001.
The Company's long-term debt consisted of the following as of March 31, 2000
(in thousands):
<TABLE>
<S> <C>
BMO Credit Facility............................................... $ 19,373
Veritas Note Payable.............................................. 4,696
AHC Note Payable.................................................. 2,500
Other............................................................. 124
--------
Total........................................................... 26,693
Less current portion of long-term debt............................ (4,624)
--------
$(22,069)
========
</TABLE>
(5) 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
The Company periodically enters into certain derivatives (primarily 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 only to a portion
of its production, provide only partial price protection against volatility 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 income when the hedged transaction occurs. The
Company expects that the amount of hedge contracts that it has in place will
vary from time to time. For the three months ended March 31, 2000 and 1999,
the Company realized approximately $0.06 million and $0.4 million,
respectively, of hedging gains which are included in oil and natural gas
revenues in the consolidated statements of operations. For the three months
ended March 31, 2000 and 1999, the Company had hedged 47% and 37%,
respectively, of its oil and natural gas production, and as of March 31, 2000
the Company had 1.1 Bcf of open oil and natural gas contracts for the months
of April 2000 to September 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 difference between the amounts paid and received under the swap is
accrued and recorded as an adjustment to interest expense over the life of the
hedged agreement, which was to expire
F-33
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
February 9, 2001. During March 1999, the Company terminated its interest rate
swap agreement and received $0.3 million, which will be recognized in earnings
ratably as the related outstanding loan balance is amortized.
(6) Commitments and Contingencies
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. During 1999, incentive stock options of
25,000 were issued to outside directors and new employees under the 1997 Plan.
In February 2000 and 1999, 43,500 and 54,750 shares of restricted stock
vested, respectively, and the Company recognized compensation expense of
approximately $60,000 and $178,000, 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 vests and they become exercisable when the normal trading average of
the Common Stock on the market remains above the designated target prices for
a period of five consecutive trading days as follows:
<TABLE>
<CAPTION>
Five-Day Daily Average Target Percentage Vested
----------------------------- -----------------
<S> <C>
$2.00 40%
$2.75 30%
$3.50 30%
</TABLE>
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 Strickland,
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. Kelly Anne Parkinson was killed in an
automobile accident on February 2, 1999, while
F-34
<PAGE>
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
On May 1, 2000, Miller Exploration filed a lawsuit in the United States
District Court for the District of Montana against K2 America Corporation and
K2 Energy Corporation (hereinafter collectively referred to as "K2"). Miller's
lawsuit includes certain claims of relief and allegations by Miller against
K2, including breach of contract arising from failure by K2 to agree to
escrow, repudiation, and rescission; specific performance; declaratory relief;
partition of K2 lands that are subject to the K2/Blackfeet IMDA; negligence;
and tortuous interference with contract. The lawsuit is on file with the
United States District Court for the District of Montana, Great Falls Division
and is not subject to protective order.
On May 1, 2000, Miller Exploration gave notice to the Blackfeet Tribal
Business Council demanding arbitration of all disputes as provided for under
the Indian Mineral Development Act (IMDA) agreement between Miller and the
Blackfeet (the "Miller/Blackfeet IMDA") dated February 19, 1999, and pursuant
to the IMDA agreement between K2 and the Blackfeet ("K2/Blackfeet IMDA") dated
May 30, 1997.
The disputes for which Miller demands arbitration include but are not
limited to the unreasonable withholding of a consent to a drilling extension
as provided in the Miller/Blackfeet IMDA, as well as a determination by the
Blackfeet dated March 16, 2000, that certain wells which Miller proposed to
drill "would not satisfy the mandatory drilling obligations" under the
K2/Blackfeet IMDA. Miller contends the K2/Blackfeet IMDA, gives it as lessee,
and not the Blackfeet, the exclusive right to select drill sites and well
depths.
(7) Related Party Transactions
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.
(8) Non-Cash Activities
In February 2000 and 1999, 43,500 and 54,750 shares of restricted stock,
respectively, vested. In connection therewith, the Company recognized
compensation expenses of approximately $60,000 and $178,000 for the quarter
ended March 31, 2000 and 1999, accordingly. These non-cash activities have
been excluded from the consolidated statements of cash flows.
F-35
<PAGE>
ANNEX A
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE MAY NOT BE PLEDGED, SOLD,
OFFERED FOR SALE, TRANSFERRED, OR OTHERWISE DISPOSED OF UNTIL THE HOLDER
HEREOF PROVIDES INFORMATION SATISFACTORY TO THE ISSUER (WHICH, IN THE
DISCRETION OF THE ISSUER, MAY INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO
THE ISSUER) THAT SUCH PLEDGE, SALE, OFFER, TRANSFER, OR OTHER DISPOSITION WILL
NOT VIOLATE APPLICABLE FEDERAL OR STATE LAWS.
PROMISSORY NOTE
U.S. $5,000,000 July 11, 2000
1. Promise to Pay; Interest Rate. On September 1, 2003 (the "Maturity
Date"), for value received, the undersigned, Miller Exploration Company, a
Delaware corporation (the "Company"), promises to pay to the order of Guardian
Energy Management Corp., a Michigan corporation or any of its assigns which
holds this Note ("Payee"), the principal sum of U.S. FIVE MILLION DOLLARS
($5,000,000), without interest (except as provided below). Upon the failure to
make any payment when due of principal, the failure of the stockholders of the
Company to approve the issuance of the Conversion Shares (as hereinafter
defined) at the meeting of stockholders of the Company contemplated by Section
9 hereof, or the occurrence and continuation of any Event of Default (as
hereinafter defined) under any instrument evidencing, relating to, or securing
payment of this Note, the principal balance of this Note and any accrued,
unpaid past-due interest shall bear interest from the date hereof until the
payment in full of all principal and interest outstanding from time to time
under this Note at a rate per annum which from day to day shall equal (i) the
Maximum Rate (as hereinafter defined), or (ii) (a) for a period of 365 days
from the date hereof, at the sum of the Prime Rate plus ten percent (10%) per
annum, (b) for the period of 365 days thereafter, at the sum of the Prime Rate
plus twelve percent (12%) per annum, and (c) thereafter at the sum of the
Prime Rate plus fifteen percent (15%) per annum, whichever is lower. "Prime
Rate" shall mean the annual rate of interest published daily in the Wall
Street Journal as the "Prime Rate." Subject to provisions set forth in
Sections 7 and 8 hereof, all payments of principal made by the Company
hereunder, shall be made in immediately available funds, in lawful money of
the United States of America at such location as is directed by Payee without
set-off, deduction or counterclaim, or at Payee's option and subject to the
provisions of the following paragraph, by the issuance of warrants ("Principal
Warrants") exercisable for the purchase of shares of the Company's common
stock, par value $.01 per share ("Common Stock"). Principal Warrants shall be
exercisable for a number of shares of Common Stock equal to the amount of the
principal payment divided by the lower of: (a) the weighted average of the
closing prices of the Common Stock on the NASDAQ National Market System or
other principal exchange or quotation system on which the Common Stock is then
traded or listed (in each case as reported by the Wall Street Journal) for the
thirty consecutive trading days ending on the trading day immediately prior to
the date on which such Principal Warrant is issued; or (b) one dollar and
twenty-five cents ($1.25) per share. Subject to the provisions of the
following paragraph and Sections 7 and 8 hereof, payments of interest
hereunder, if any, shall be paid by the Company, at the Company's option,
either in immediately available funds or by the issuance of warrants
("Interest Warrants," and together with the Principal Warrants, the "Payment
Warrants') exercisable for the purchase of shares of Common Stock. Interest
Warrants shall be exercisable for a number of shares of Common Stock equal to
the remainder of the subject amount of interest divided by the lower of: (a)
the weighted average of the closing prices of the Common Stock on the NASDAQ
National Market System or other principal exchange or quotation system on
which the Common Stock is then traded or listed (in each case as reported by
the Wall Street Journal) for the thirty consecutive trading days ending on the
trading day immediately prior to the date on which such Interest Warrant is
issued; or (b) one dollar and twenty-five cents ($1.25) per share. Interest
hereunder, if any, shall accrue and be payable on December and June of
each year following the date hereof. The per share exercise price for any
Principal Warrants or Interest Warrants issued hereunder shall be $.01 per
share.
A-1
<PAGE>
The provisions of the preceding paragraph notwithstanding, in no event shall
the Company issue Payment Warrants as payment of principal and/or interest on
the Note which are exercisable for more than two million one hundred fifty-
seven thousand seven hundred and sixty-seven (2,157,767) shares of Common
Stock.
The term "Maximum Rate" as used herein means the maximum rate of interest
permitted under applicable law. The term "applicable law," as used in this
Note, shall mean the applicable laws of the State of Delaware or applicable
laws of the United States, whichever laws allow the greater rate of interest,
as such laws now exist or may be changed or amended or come into effect in the
future.
2. Subordination. Payee agrees that all indebtedness and obligations of the
Company to Payee evidenced by this Note, including, without limitation, all
obligations for the payment of principal, interest, penalties, fees, costs,
expenses and indemnities (the "Subordinated Obligations"), shall be and hereby
are subordinated in right of payment and claim in favor of the indebtedness
and obligations of the Company, not to exceed fourteen million United Stated
dollars (US $14,000,000) in principal amount, under that certain credit
agreement dated as of February 9, 1998, as amended from time to time, by and
between the Company and Bank of Montreal, Houston Agency and any successor or
replacement credit facilities or borrowings of the Company that do not by
their terms provide that they are subordinate to or pari passu with this Note
(the "Senior Obligations"). Except pursuant to the provisions set forth in
Section 8, until the Senior Obligations have been paid in full and all
obligations of the Company with respect thereto have terminated, Payee agrees
that it will not request, demand, accept, or receive (by set-off or other
manner), and the Company agrees that it will not pay or deliver to Payee,
whether by payment, prepayment, set-off or otherwise, any payment amount,
credit, reduction of all or any part of the amounts owing under the
Subordinated Obligations; provided, however, that nothing in this Section 2
shall be interpreted to prohibit the Company or Payee from exercising their
respective rights to convert the amounts owing under this Note or the Payment
Warrants, if any, into shares of the Company's common stock, par value $0.01
per share (the "Common Stock") pursuant to the provisions of Section 7 hereof.
The Company covenants and agrees with Payer that it shall not extend maturity
of its Senior Obligations beyond September 1, 2003.
3. Events of Default. The entire unpaid principal balance of, and all
accrued interest on, this Note shall immediately be due and payable at the
option of Payee (or with respect to clause (c) automatically without notice of
any kind) upon the occurrence and continuation of any one or more events of
default ("Event of Default"). For purpose of this Note, the term "Event of
Default" shall mean: (a) a failure by the undersigned to pay when due any
installment of principal or interest under this Note or any other costs due
hereunder; (b) there shall have been any breach of a representation or
warranty or any material breach of any covenant or agreement set forth in this
Note or the other Transaction Documents on the part of the Company, which
breach shall not have been cured within twenty (20) days following receipt by
the Company of written notice of such breach; (c) the Company shall generally
fail to pay its debts as such debts become due, shall admit in writing its
inability to pay its debts generally, or shall make a general assignment for
the benefit of its creditors; or any proceeding shall be instituted by or
against the Company seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law relating
to bankruptcy, insolvency, reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee or
other similar official for it or for any substantial part of its property and,
in the case of any such proceeding instituted against it (but not instituted
by it), either such proceeding shall remain undismissed or unstayed for a
period of thirty (30) days or any of the actions sought in such proceeding
(including, without limitation, the entry of an order for relief against it or
the appointment of a receiver, trustee, custodian or other similar official
for it or for any substantial part of its property) shall occur, or the
Company shall take any action to authorize any of the actions set forth above
in this clause (c).
The term "Transaction Documents" as used herein means the collective
reference to the Securities Purchase Agreement dated as of the date hereof
(the "Securities Purchase Agreement") by and between the Company and Payee,
and each other agreement, document and instrument required to be executed in
accordance therewith, including, without limitation (as each such term is
defined in the Securities Purchase Agreement) (i) the Voting Agreement, (ii)
the Warrants, (iii) the Registration Rights Agreement and (iv)this Note.
A-2
<PAGE>
4. Application of Payments. Each payment received by the Payee shall be
applied first to the payment of any costs due hereunder, then to any accrued
interest due hereunder and then to the reduction of the unpaid principal
balance thereof.
5. Waivers. Except as may be otherwise provided herein, the makers, signers,
sureties and endorsers of this Note severally waive demand, presentment,
notice of dishonor, notice of intent to demand or accelerate payment hereof,
notice of acceleration, diligence in collecting, grace, notice and protest,
and agree to one or more extensions for any period or periods of time and
partial payments, before or after maturity, without prejudice to Payee; and if
this Note shall be collected by legal proceedings or through a probate or
bankruptcy court, or shall be placed in the hands of an attorney for
collection after default or maturity, the undersigned agrees to pay all costs
of collection, including reasonable attorneys' fees. No delay or omission on
the part of Payee in the exercise of any right or remedy will operate as a
waiver thereof, and no single or partial exercise by Payee of any right or
remedy will preclude other or further exercise thereof or the exercise of any
other right or remedy.
6. Usury Savings. All agreements between the undersigned and the Payee,
whether now existing or hereafter arising and whether written or oral, are
hereby limited so that in no contingency or event whatsoever, whether by
reason of demand or acceleration of the maturity hereof or otherwise, shall
the amount contracted for, charged, received, paid or agreed to be paid to the
holder hereof for the use, forbearance, or detention of the funds evidenced
hereby or otherwise, or for the performance or payment of any covenant or
obligation contained in any instrument securing the payment hereof, exceed the
maximum amount permissible under applicable law. If, from any circumstance
whatsoever, interest would otherwise be payable to the holder hereof in excess
of the maximum lawful amount, the interest payable to the holder hereof shall
be reduced to the maximum amount permitted under applicable law; and if from
any circumstance the holder hereof shall ever receive anything of value deemed
interest by applicable law in excess of the maximum lawful amount, an amount
equal to any excessive interest shall be applied to the reduction of the
principal hereof and not to the payment of interest, or if such excessive
interest exceeds the unpaid balance of principal hereof, such excess shall be
refunded to the undersigned. All interest paid or agreed to be paid to the
holder hereof shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full period of the loan
evidenced hereby until payment in full of the principal (including the period
of any renewal or extension hereof) so that the interest hereon for such full
period shall not exceed the maximum amount permitted by applicable law.
7. Conversion Right.
(a) General. Upon the approval of the issuance of the Conversion Shares at
the meeting of stockholders of the Company contemplated by Section 9 hereof by
a majority of the votes cast with respect to such matter, or by consent in
lieu of such meeting (the "Requisite Stockholder Approval"), all but not less
than all of the principal amount, interest and any other costs due hereunder
shall automatically be converted, without any further action on the part of
the Company or the Payee, into the right to receive a number of shares of
Common Stock equal to the amount so converted divided by $1.35 (the
"Conversion Price"). Upon receipt of the Requisite Stockholder Approval, the
Company shall deliver a duly signed and completed notice of such conversion
(the "Conversion Notice") to the offices of the Payee at the address set forth
on the signature page hereto, accompanied by a written request for immediate
delivery to the Company of the Note. As promptly as practicable after receipt
of the Note, the Company will execute and deliver to the Payee or, if
applicable, any designee of Payee a certificate or certificates representing
the number of full shares of Common Stock issuable upon conversion (which
certificate shall be issued in the name of Payee or any other person
designated by Payee in the applicable Conversion Notice and executed on behalf
of the Company by a duly authorized officer), together with payment in lieu of
any fraction of a share. Notwithstanding the foregoing, such conversion shall
be deemed to have been effected immediately prior to the close of business on
the date the Requisite Stockholder Approval is received. All shares of Common
Stock issued upon conversion of this Note (the "Conversion Shares") or upon
the exercise of the Interest Warrants will be validly issued, fully paid and
non-assessable and the issuance of such shares will not be subject to any
lien, security interest, claim, charge, right of another, defect in title and
encumbrance of any kind or character (other than as imposed by the Securities
Act of 1933, as amended) or preemptive right of any other holder of capital
stock of the Company. Holders of Conversion Shares will not be
A-3
<PAGE>
entitled to receive any dividends payable to holders of Common Stock as of any
record time or date before the close of business on the Conversion Date. No
fractional shares will be issued upon conversion of this Note, but, in lieu
thereof, an appropriate amount will be paid in cash by the Company based upon
the Conversion Price. The Payee will not be required to pay any taxes or
duties in respect of the issue or delivery of Common Stock on conversion, but
will be required to pay any tax or duty which may be payable in respect of any
transfer involved in the issue or delivery of the Common Stock in a name other
than that of the Payee.
(b) Reclassification, Consolidation, Merger or Sale of Assets. In the event
that the Company shall be a party to any transaction (including without
limitation (i) any recapitalization or reclassification of the Common Stock
(other than a change in par value, or from par value to no par value, or from
no par value to par value), (ii) any combination or subdivision of Common
Stock into a lesser or greater number of shares of Common Stock, (iii) any
consolidation of the Company with, or merger of the Company into, any other
person, (iv) any merger of another person into the Company (other than a
merger which does not result in a reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock of the Company), or (v) any
sale or transfer of all or substantially all of the assets of the Company or
any compulsory share exchange) pursuant to which the Common Stock is converted
into the right to receive other securities, cash or other property, then
lawful provision shall be made as part of the terms of such transaction
whereby Payee shall have the right thereafter to convert this Note only into
the kind and amount of securities, cash and other property receivable upon
such transaction by a holder of the number of shares of Common Stock into
which this Note could have been converted immediately prior to such
transaction. The entity formed by such consolidation or resulting from such
merger or which acquires such assets or which acquires the Company's shares,
as the case may be, shall make provision in its certificate or articles of
incorporation or other constituent document to establish such right. The above
provisions shall similarly apply to successive transactions of the foregoing
type.
(c) Common Stock Dilutions. In the event that prior to the issuance of the
Conversion Shares the Company issues or agrees to issue additional shares of
Common Stock pursuant to a stock split or stock dividend, or dividend or
distribution of rights to purchase stock, then the number of Conversion Shares
and the Conversion Price therefore shall be adjusted proportionately. For
purposes of this Note, all shares of the Company's stock that are reserved for
issuance (other than shares of stock that are to be issued to the Payee) as of
the date of this Note shall be deemed to have been issued for the purpose of
calculating the number of Conversion Shares and the applicable Conversion
Price. The Company hereby covenants and agrees with Payee that it will not
declare or pay or make any dividend or distribution in cash or property prior
to the issuance of the Conversion Shares.
(d) Reservation of Shares; Etc. The Company shall at all times reserve and
keep available, free from preemptive rights out of its authorized and unissued
stock, solely for the purpose of effecting the conversion of this Note, such
number of shares of its Common Stock as shall from time to time be sufficient
to effect the conversion of all amounts payable under this Note from time to
time. The Company shall from time to time, in accordance with the laws of the
State of Delaware, increase the authorized number of shares of Common Stock if
at any time the number of shares of authorized and unissued Common Stock shall
not be sufficient to permit the conversion of all the amounts payable under
this Note from time to time.
(e) Prior Notice of Certain Events. In the event:
(i) the Company establishes a record date to determine the holders of
Common Stock who are entitled to (A) receive any dividend or other
distribution (other than a dividend payable in shares of Common Stock), (B)
participate in a redemption or repurchase of the then-outstanding shares of
Common Stock, or (C) vote in connection with any of the transactions
identified in clauses (ii), (iii), (iv) or (v) below; or
(ii) the Company shall (A) declare any dividend (or any other
distribution) on its Common Stock, other than a dividend payable in shares
of Common Stock or (B) declare or authorize a redemption or repurchase of
the then-outstanding shares of Common Stock; or
(iii) the Company shall authorize the granting to all holders of Common
Stock of rights or warrants to subscribe for or purchase any shares of
stock of any class or series or of any other rights or warrants; or
A-4
<PAGE>
(iv) of any reclassification of Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par
value), or of any other capital reorganization or of any consolidation or
merger to which the Company is a party, or of the sale or transfer of all
or substantially all of the assets of the Company or of any compulsory
share exchange whereby the Common Stock is converted into other securities,
cash or other property; or
(v) of the voluntary or involuntary dissolution, liquidation or winding
up of the Company or such event is likely to occur; then the Company shall
cause to be mailed to the Payee, at its address as provided to the Company
from time to time by written notice of Payee, a notice stating (x) the date
on which a record (if any) is to be taken with respect to clause (i) above,
(y) the date on which any transaction or event contemplated in any of
clauses (i) through and including clause (v) above is expected to become
effective or the date of the anticipated closing of the public offering,
and (z) the time, if any is fixed, as to when the holders of record of
Common Stock shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon any such reclassification,
reorganization, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding up. Each notice of an event specified
in clause (i) above shall be sent at least five (5) days prior to the
record date specified therein and each notice of an event specified in
clauses (ii) through and including (v) above shall be delivered at least
twenty (20) days prior to the proposed closing of such transaction.
8. Purchase of Assets to Satisfy Note.
(a) Right to Purchase. Any provision in this Note to the contrary
notwithstanding, in the event the Company does not receive the Requisite
Stockholder Approval within six (6) months from the date hereof, then the
Company shall promptly notify Payee in writing of such (the "Company Notice")
and Payee shall have the right to purchase from the Company an undivided
interest in (i) all of the Company's current producing and non-producing
properties (the "Reserve Assets") as identified in the latest reserve report
provided by Miller and Lents, Ltd., or (ii) certain of the Company's producing
or non-producing properties mutually agreed upon by the Company and Payee (the
"Other Assets," and together with the Reserve Assets, the "Assets"). Payee
must exercise its right to purchase the Assets by giving written notice (the
"Payee Notice") to the Company within sixty (60) days after receipt of the
Company Notice.
(b) Determination of Purchase Price. Payee shall have the right to determine
the percentage of the undivided interest in the Assets purchased pursuant
hereto, provided that (i) subject to the provisions of clause (ii) of this
Section 8(b), the amount of Assets purchased hereunder shall be limited to an
amount sufficient to satisfy both the borrowing base assigned to such Assets
by the Company's senior lender and the Company's obligations under this Note,
and (ii) in the event Payee elects to purchase less than the undivided
percentage interest in the Assets provided for in clause (i), the purchase
price of the interest purchased shall be an amount equal to a minimum of
$500,000 or some multiple thereof. The price of the Assets purchased pursuant
to this Section 8 shall be the price reflected in a reserve report as of the
date of receipt of the Payee Notice, at a present value discount of 15% using
either (i) the price deck given such Assets by the lender on the Company's
senior credit facility, or (ii) to the extent applicable, the price at which
such Assets are hedged. The Company shall also provide a reserve report as of
the date of closing on the sale of the Assets hereunder.
(c) Allocation of Proceeds. The proceeds of any sale of Assets pursuant
hereto shall be applied first to any required principal reduction under the
Company's senior credit facility, next to the cancellation of accrued, unpaid
and past due interest under this Note, and finally to satisfaction of
principal outstanding under this Note.
(d) Terms and Conditions of Sale; Closing. The terms and conditions of any
sale of Assets hereunder will be as is customary for the sale of similar
assets or properties. The closing of any sale of Assets hereunder must occur
no later than 60 days from the receipt by the Company of the Payee Notice. The
Company hereby covenants and agrees that it will take all actions necessary to
validly transfer to Payee the undivided interest of any Assets purchased by
Payee pursuant to this Section 8.
A-5
<PAGE>
9. Stockholder Approval; Proxy Statement. The Company shall take all actions
necessary or desirable in accordance with its certificate of incorporation,
bylaws, the rules of the NASDAQ National Market and other applicable laws,
rules and regulations to call one or more meetings of its stockholders (the
"Stockholders' Meeting") to be held as promptly as practicable after the date
hereof for obtaining the approval of the stockholders to the Share Issuance
contemplated by the Securities Purchase Agreement. The Company and Payee shall
consult with each other in connection with the Stockholders' Meeting. The
Company shall use commercially reasonable efforts to cause its Board of
Directors (a) to recommend to the Company's stockholders approval of the
issuance of the Conversion Shares, (b) not to withdraw, modify or change such
recommendation, (c) to continue to recommend to the stockholders of the
Company the approval of such matters, and (d) to continue to solicit approval
from the stockholders of the Company.
10. Amendments, Waivers, Etc. No provision of this Note may be waived,
changed, modified or discharged without an agreement in writing signed by the
party against whom enforcement of such waiver, change, modification or
discharge is sought, and then such waiver, change, modification or discharge
shall be effective only in the specific instance and for the specific purpose
for which given.
11. Successors and Assigns. This Note and all provisions hereof shall be
binding upon the Company and all of its successors and assigns, except that
the Company shall not have the right to assign its rights or obligations
hereunder (other than by operation of law) without the prior written consent
of Payee. Payee may not, without the consent of or notice to the Company,
sell, transfer or otherwise assign (with or without recourse to Payee), at any
time, any or all of its rights and obligations under this Note.
12. Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY LAW, EACH OF
THE PARTIES HERETO IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS
NOTE OR ANY OTHER MATTER ARISING IN CONNECTION HEREUNDER.
13. Notices. All notices and other communications provided to the Company or
the Payee shall be in writing or by facsimile and addressed or delivered to it
at its respective address set forth on the signature page hereto or at such
other address as may be designated by the Company or the Payee, as the case
may be, from time to time in a notice complying as to delivery with the terms
of this clause to the other parties. Any notice, if mailed and properly
addressed with postage prepaid, shall be deemed given when received (except
notices sent by express overnight mail via a reputable carrier shall be deemed
given when receipt is promised by such carrier); any notice, if transmitted by
facsimile, shall be deemed given when transmitted and receipt confirmed; and
any notice, if delivered personally, shall be deemed given when received.
14. Headings. Article, section and paragraph headings are for reference only
and do not affect the interpretation or meaning of any provisions of this
Note.
15. Severability. The Company intends and believes that each provision in
this Note comports with all applicable local, state and Federal laws and
judicial decisions. However, if any provision or provisions, or if any portion
of any provision or provisions, in this Note is found by a court of law to be
in violation of any applicable local, state or Federal ordinance, statute,
law, administrative or judicial decision, or public policy, and if such court
should declare such portion, provision or provisions of this Note to be
illegal, invalid, unlawful, void or unenforceable as written, then it is the
intent of all parties hereto that such portion, provision or provisions shall
be given force to the fullest possible extent that they are legal, valid and
enforceable, that the remainder of this Note shall be construed as if such
illegal, invalid, unlawful, void or unenforceable portion, provision or
provisions were not contained therein, and that the rights, obligations and
interests of the Company and the Payee under the remainder of this Note shall
continue to be in full force and effect.
16. Applicable Law. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW
OF THE STATE OF DELAWARE AND THE LAWS OF THE UNITED STATES OF AMERICA
APPLICABLE TO TRANSACTIONS IN THE STATE OF DELAWARE.
A-6
<PAGE>
Executed as of the date first set forth above.
Miller Exploration Company
/s/ Kelly E. Miller
By: _________________________________
Kelly E. Miller
President
NOTICE ADDRESSES
If to the Company, to
Miller Exploration Company
3104 Logan Valley Road
Traverse City, Michigan 49685
Facsimile: (231) 941-8312
Attention: Kelly E. Miller
with a copy to
Vinson & Elkins L.L.P.
2001 Ross Avenue
Suite 3700
Dallas, Texas 75201
Facsimile: (214) 220-7716
Attention: Mark Early
If to Payee, to
Guardian Energy Management Corp.
2300 Harmon Road
Auburn Hills, Michigan 48326-1714
Facsimile: (248) 340-2258
Attention: Vice President--
Operations
with a copy to
Guardian Energy Management Corp.
2300 Harmon Road
Auburn Hills, Michigan 48326-1714
Facsimile: (248) 340-2175
Attention: Secretary
A-7
<PAGE>
ANNEX B-1
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE
THEREBY HAVE NOT BEEN AND WILL NOT BE, EXCEPT AS PROVIDED IN THE REGISTRATION
RIGHTS AGREEMENT REFERRED TO BELOW, REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES
LAW AND, ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT
BE RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER APPLICABLE
SECURITIES LAWS.
WARRANT
to Purchase 1,562,500 Shares of Common Stock of
MILLER EXPLORATION COMPANY
This Common Stock Purchase Warrant (the "Warrant") certifies that for value
received, Guardian Energy Management Corp., a Michigan corporation
("Guardian"), or its assigns, is entitled to subscribe for and purchase from
Miller Exploration Company, a Delaware corporation (the "Company"), in whole
or in part, 1,562,500 shares (the "Warrant Shares") of Common Stock, par value
$0.01 per share, of the Company ("Common Stock") at the Exercise Price (as
hereinafter defined), subject, however, to the provisions and upon the terms
and conditions hereinafter set forth This Warrant and all rights hereunder
shall expire at 5:00p.m., Traverse City, Michigan time, on the first
anniversary of the approval of the Conversion Shares by the stockholders of
the Company (the "Termination Date").
ARTICLE I
Exercise of Warrants
1.1 Term; Exercise Price. The Warrant represented hereby may be exercised by
the holder hereof, in whole or in part, at any time and from time to time
after the date hereof until 5:00p.m., Traverse City, Michigan time, on the
Termination Date (the "Term"). Subject to adjustment as provided in Article IV
hereof, the exercise price for shares of Common Stock under this Warrant shall
be $1.35 per share of Common Stock (the "Exercise Price").
1.2 Method of Exercise. To exercise this Warrant, the holder hereof shall
deliver to the Company, at the Warrant Office designated in Section 2.1
hereof, (i) a written notice in the form of the Subscription Notice attached
as Exhibit A hereto, stating therein the election of such holder to exercise
the Warrants in the manner provided in the Subscription Notice; and (ii)
payment in full of the Exercise Price in cash or by wire transfer or check for
all Warrant Shares purchased hereunder. This Warrant shall be deemed to be
exercised on the date of receipt by the Company of the Subscription Notice,
accompanied by payment for the Warrant Shares and surrender of this Warrant,
as aforesaid, and such date is referred to herein as the "Exercise Date". Upon
such exercise, the Company shall, as promptly as practicable and in any event
within five business days, issue and deliver to such holder a certificate or
certificates for the full number of the Warrant Shares purchased by such
holder hereunder. As permitted by applicable law, the person in whose name the
certificates for Common Stock are to be issued shall be deemed to have become
a holder of record of such Common Stock on the Exercise Date and shall be
entitled to all of the benefits of such holder on the Exercise Date, including
without limitation the right to receive dividends and other distributions for
which the record date falls on or after the Exercise Date and to exercise
voting rights.
1.3 Expense and Taxes. The Company shall pay all expenses and taxes
(including, without limitation, all documentary, stamp, transfer or other
transactional taxes) attributable to the preparation, issuance or delivery of
the Warrant and of the shares of Common Stock issuable upon exercise of the
Warrant.
B-1-1
<PAGE>
1.4 Reservation of Shares. The Company shall reserve at all times so long as
the Warrant remain outstanding, free from preemptive rights, out of its
treasury Common Stock or its authorized but unissued shares of Common Stock,
or both, solely for the purpose of effecting the exercise of the Warrant, a
sufficient number of shares of Company Stock to provide for the exercise of
the Warrant.
1.5 Valid Issuance. All shares of Common Stock that may be issued upon
exercise of the Warrant will, upon issuance by the Company, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens
and charges with respect to the issuance thereof and, without limiting the
generality of the foregoing, the Company shall take no action or fail to take
any action which will cause a contrary result.
1.6 No Fractional Share. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of this Warrant. If more
than one Warrant shall be presented for exercise at the same time by the same
holder, the number of full shares of Common Stock which shall be issuable upon
such exercise shall be computed on the basis of the aggregate number of whole
shares of Common Stock purchasable on exercise of the Warrant so presented. If
any fraction of a share of Common Stock would, except for the provisions of
this Section 1.6, be issuable on the exercise of this Warrant, the Company
shall pay an amount in cash calculated by it to be equal to the price of one
share of Common Stock as quoted on the NASDAQ National Market System at the
close of business on the date of such exercise multiplied by such fraction
computed to the nearest whole cent.
ARTICLE II
Transfer
2.1 Warrant Office. The Company shall maintain an office for certain
purposes specified herein (the "Warrant Office"), which office shall initially
be the Company's offices at 3104 Logan Valley Road, P.O. Box 348, Traverse
City, Michigan 49685-0348, and may subsequently be such other office of the
Company or of any transfer agent of the Common Stock in the continental United
States as to which written notice has previously been given to the holder
hereof. The Company shall maintain, at the Warrant Office, a register for the
Warrants in which the Company shall record the name and address of the person
in whose name this Warrant has been issued, as well as the name and address of
each permitted assignee of the rights of the registered owner hereof.
2.2 Limited Right of Transfer. This Warrant may not be directly or
indirectly sold, assigned, pledged, hypothecated, encumbered, transferred or
otherwise disposed of without the prior written consent of the Company;
provided, however, that Guardian may assign its interest in this Warrant to
one or more of the entities or individuals listed on Schedule 2.2 hereto upon
receipt by the Company of (a) evidence, in form and substance satisfactory to
the Company, that each such assignee is an "Accredited Investor" as defined
under Rule 501 of the Securities Act, or (b) an opinion of the Company's
counsel that such assignment can be made without registration under the
Securities Act.
2.3 Transfer of Warrant. The Company agrees to maintain at the Warrant
Office books for the registration and transfer of the Warrant. Subject to the
provisions of Section 2.2, the Company, from time to time, shall register the
transfer of the Warrant in such books upon surrender of this Warrant at the
Warrant Office properly endorsed or accompanied by appropriate instruments of
transfer and written instructions for transfer satisfactory to the Company.
Upon any such transfer and upon payment by the holder or its transferee of any
applicable transfer taxes, new Warrants shall be issued to the transferee and
the transferor (as their respective interests may appear) and the surrendered
Warrant shall be canceled by the Company. The Company shall pay all taxes
(other than securities transfer taxes) and all other expenses and charges
payable in connection with the transfer of the Warrant hereunder.
B-1-2
<PAGE>
ARTICLE III
Anti-Dilution
3.1 Reclassification, Consolidation, Merger or Sale of Assets. In the event
that the Company shall be a party to any transaction (including without
limitation (i) any recapitalization or reclassification of the Common Stock
(other than a change in par value, or from par value to no par value, or from
no par value to par value), (ii) any combination or subdivision of the Common
Stock into a lesser or greater number of shares of Common Stock, (iii) any
consolidation of the Company with, or merger of the Company into, any other
person, (iv) any merger of another person into the Company (other than a
merger which does not result in a reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock of the Company), or (v) any
sale or transfer of all or a material amount of all of the assets of the
Company or any compulsory share exchange) pursuant to which the Common Stock
is converted into the right to receive other securities, cash or other
property, then lawful provision shall be made as part of the terms of such
transaction whereby the holder of this Warrant shall receive upon the exercise
hereof the kind and amount of securities, cash and other property receivable
upon such transaction by a holder of the number of shares of Common Stock for
which the Warrant was exercisable immediately prior to such transaction. The
entity formed by such consolidation or resulting from such merger or which
acquires such assets or which acquires the Company's shares, as the case may
be, shall make provision in its certificate or articles of incorporation or
other constituent document to establish such right. The above provisions shall
similarly apply to successive transactions of the foregoing type.
3.2 Common Stock Dilutions. In the event that prior to exercise of this
Warrant the Company issues or agrees to issue additional shares of Common
Stock pursuant to a stock split or stock dividend, or dividend or distribution
of rights to purchase stock, then the number of shares to be issued pursuant
to the exercise of this Warrant and the Exercise Price therefore shall be
adjusted proportionately. In the event that prior to the exercise of this
Warrant the Company issues or agrees to issue cash or property pursuant to a
dividend or distribution, this Warrant shall represent the right to acquire,
in addition to the number of shares of Common Stock receivable upon exercise
of this Warrant, and without payment of any additional consideration therefor,
the amount of such cash or property which the holder hereof would have been
entitled to receive pursuant to such dividend or distribution had it been the
holder of record of the Common Stock receivable upon exercise of this Warrant
on the record date therefor. The Company agrees and covenants that it will
not, prior to the exercise of this Warrant, in connection with any plan for
the benefit of employees or directors (i) issue a number of shares of Common
Stock, securities exercisable for Common Stock or other Common Stock
equivalents (the "Plan Securities") which in the aggregate exceeds fifteen
percent (15%) of the total shares of Common Stock outstanding as of the date
thereof, and (ii) of the Plan Securities issued pursuant to clause (i) of this
Section 3.2, issue Plan Securities which in the aggregate are equal to,
convertible into or exercisable for more than 300,000 shares of Common Stock
for consideration, including any applicable exercise or conversion price,
which is below the price quoted for the Common Stock at the close of business
on the day prior to issuance of such Plan Securities.
3.3 Prior Notice of Certain Events. In the event:
(i) the Company establishes a record date to determine the holders of Common
Stock who are entitled to (A) receive any dividend or other distribution
(other than a dividend payable in shares of Common Stock), (B) participate in
a redemption or repurchase of the then-outstanding shares of Common Stock, or
(C) vote in connection with any of the transactions identified in clauses
(ii), (iii), (iv) or (v) below; or
(ii) the Company shall (A) declare any dividend (or any other distribution)
on its Common Stock, other than a dividend payable in shares of Common Stock
or (B) declare or authorize a redemption or repurchase of the then-outstanding
shares of Common Stock; or
(iii) the Company shall authorize the granting to all holders of Common
Stock of rights or warrants to subscribe for or purchase any shares of stock
of any class or series or of any other rights or warrants; or
B-1-3
<PAGE>
(iv) of any reclassification of Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value),
or of any other capital reorganization or of any consolidation or merger to
which the Company is a party, or of the sale or transfer of all or
substantially all of the assets of the Company or of any compulsory share
exchange whereby the Common Stock is converted into other securities, cash or
other property; or
(v) of the voluntary or involuntary dissolution, liquidation or winding up
of the Company or such event is likely to occur.
Then the Company shall cause to be mailed to the holder of this Warrant, at
its address as reflected in the Warrant Office transfer records, a notice
stating (A) the date on which a record (if any) is to be taken with respect to
clause (i) above, (B) the date on which any transaction or event contemplated
in any of clauses (i) through and including clause (v) above is expected to
become effective or the date of the anticipated closing of the public
offering, and (C) the time, if any is fixed, as to when the holders of record
of Common Stock shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon any such reclassification,
reorganization, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding up. Each notice of an event specified in
clause(i) above shall be sent at least five (5) days prior to the record date
specified therein and each notice of an event specified in clauses (ii)
through and including (v) above shall be delivered at least fifteen (15) days
prior to the proposed closing of such transaction.
ARTICLE IV
Miscellaneous
4.1 Entire Agreement. This Warrant, together with that certain registration
rights agreement of even date herewith by and between the Company and Guardian
(the "Registration Rights Agreement"), contain the entire agreement between
the holder hereof and the Company with respect to the Warrant Shares
purchasable upon exercise hereof and the related transactions and supersedes
all prior arrangements or understandings with respect thereto.
4.2 Governing Law; Venue. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF DELAWARE AND THE UNITED
STATES OF AMERICA FROM TIME TO TIME IN EFFECT.
4.3 Waiver and Amendment. Any term or provision of this Warrant may be
waived at any time by the party which is entitled to the benefits thereof and
any term or provision of this Warrant may be amended or supplemented at any
time by agreement of the holder hereof and the Company, except that any waiver
of any term or condition, or any amendment or supplementation, of this Warrant
shall be in writing. A waiver of any breach or failure to enforce any of the
terms or conditions of this Warrant shall not in any way effect, limit or
waiver a party's rights hereunder at any time to enforce strict compliance
thereafter with every term or condition of this Warrant.
4.4 Illegality. In the event that any one or more of the provisions
contained in this Warrant shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of this Warrant shall not, at the election of the party for whom
the benefit of the provision exists, be in any way impaired.
4.5 Copy of Warrant. A copy of this Warrant shall be filed among the records
of the Company.
4.6 Notice. Any notice or other document required or permitted to be given
or delivered to the holder hereof shall be in writing and delivered at, or
sent by telecopy or certified or registered mail to such holder at, the last
address shown on the books of the Company maintained at the Warrant Office for
the registration of this Warrant or at any more recent address of which the
holder hereof shall have notified the Company in writing. Any notice or other
document required or permitted to be given or delivered to the Company shall
be delivered
B-1-4
<PAGE>
at, or sent by facsimile transmission or certified or registered mail to, the
Warrant Office, or such other address within the continental United States of
America as shall have been furnished by the Company to the holder of this
Warrant.
4.7 Limitation of Liability; Not Stockholders. No provision of this Warrant
shall be construed as conferring upon the holder hereof the right to vote,
consent, receive dividends or receive notices (other than as herein expressly
provided) in respect of meetings of stockholders for the election of directors
of the Company or any other matter whatsoever as a stockholder of the Company.
No provision hereof, in the absence of affirmative action by the holder hereof
to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price of any shares of Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company
or by creditors of the Company.
4.8 Loss, Destruction, etc. of Warrant. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of
this Warrant, and in the case of any such loss, theft or destruction upon
delivery of a bond of indemnity or such other security in such form and amount
as shall be reasonably satisfactory to the Company, or in the event of such
mutilation upon surrender and cancellation of this Warrant, the Company will
make and deliver a new Warrant of like tenor, in lieu of such lost, stolen,
destroyed or mutilated Warrant. Any Warrant issued under the provisions of
this Section 4.8 in lieu of any Warrant alleged to be lost, destroyed or
stolen, or in lieu of any mutilated Warrant, shall constitute an original
contractual obligation on the part of the Company. This Warrant shall be
promptly canceled by the Company upon the surrender hereof in connection with
any exchange or replacement. The Company shall pay all taxes (other than
securities transfer taxes) and all other expenses and charges payable in
connection with the preparation, execution and delivery of Warrants pursuant
to this Section 4.8.
4.9 Compliance with Securities Act and Applicable Law. The Company shall not
be required to transfer this Warrant or to sell or issue Warrant Shares if
such transfer or issuance would constitute a violation by the Company of any
provisions of any law or regulation of any governmental authority. While the
Company is required to register the resale of the Warrant Shares by holder(s)
pursuant to the Registration Rights Agreement, in the event the Warrant Shares
issuable on exercise of this Warrant are not then registered under the Act,
the Company may imprint the following legend or any other legend which counsel
for the Company considers necessary or advisable to comply with the Securities
Act of 1933:
"The shares of stock represented by this certificate have not
been registered under the Securities Act of 1933 or under the
securities laws of any State and may not be sold, transferred or
otherwise disposed of except upon such registration or upon
receipt by the issuer, in form and substance satisfactory to the
issuer, of an opinion of the issuer's counsel that registration
is not required for such disposition."
4.10 Registration Rights. The Warrants Shares shall be entitled to such
registration rights under the Securities Act and under applicable state
securities laws as are specified in the Registration Rights Agreement.
4.11 Headings. The Article and Section and other headings herein are for
convenience only and are not a part of this Warrant and shall not affect the
interpretation thereof.
In Witness Whereof, the Company has caused this Warrant to be signed in its
name.
Dated: July 11, 2000
Miller Exploration Company
/s/ Kelly E. Miller
By: _________________________________
Name: Kelly E. Miller
Title:President
B-1-5
<PAGE>
EXHIBIT A
SUBSCRIPTION NOTICE
The undersigned, the holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented thereby for, and to purchase thereunder,
shares of the Common Stock covered by such Warrant, and herewith makes
payment in full for such shares pursuant to Section 1.2 of such Warrant, and
requests that certificates for such shares (and any other securities or other
property issuable upon such exercise) be issued in the name of, and delivered
to .
_____________________________________
Dated: ___________, ____.
B-1-6
<PAGE>
SCHEDULE 2.2
LIST OF APPROVED ASSIGNEES
Jordan Exploration Company LLC
Martin G. Lagina
Robert M. Boeve
Wayne Sterenberg
Craig Tester
Any Persons (as defined in the Securities Purchase Agreement dated as of
July 11, 2000 and entered into between Guardian and the Company) who control,
are controlled by or are under common control with any of the above Persons.
B-1-7
<PAGE>
ANNEX B-2
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE
THEREBY HAVE NOT BEEN AND WILL NOT BE, EXCEPT AS PROVIDED IN THE REGISTRATION
RIGHTS AGREEMENT REFERRED TO BELOW, REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES
LAW AND, ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT
BE RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER APPLICABLE
SECURITIES LAWS.
WARRANT
to Purchase 2,500,000 Shares of Common Stock of
MILLER EXPLORATION COMPANY
This Common Stock Purchase Warrant (the "Warrant") certifies that for value
received, Guardian Energy Management Corp., a Michigan corporation
("Guardian"), or its assigns, is entitled to subscribe for and purchase from
Miller Exploration Company, a Delaware corporation (the "Company"), in whole
or in part, 2,500,000 shares (the "Warrant Shares") of Common Stock, par value
$0.01 per share, of the Company ("Common Stock") at the Exercise Price (as
hereinafter defined), subject, however, to the provisions and upon the terms
and conditions hereinafter set forth This Warrant and all rights hereunder
shall expire at 5:00p.m., Traverse City, Michigan time, on the second
anniversary of the approval of the Conversion Shares by the stockholders of
the Company (the "Termination Date").
ARTICLE I
Exercise of Warrants
1.1 Term; Exercise Price. The Warrant represented hereby may be exercised by
the holder hereof, in whole or in part, at any time and from time to time
after the date hereof until 5:00 p.m., Traverse City, Michigan time, on the
Termination Date (the "Term"). Subject to adjustment as provided in Article IV
hereof, the exercise price for shares of Common Stock under this Warrant shall
be $2.50 per share of Common Stock (the "Exercise Price").
1.2 Method of Exercise. To exercise this Warrant, the holder hereof shall
deliver to the Company, at the Warrant Office designated in Section 2.1
hereof, (1) a written notice in the form of the Subscription Notice attached
as Exhibit A hereto, stating therein the election of such holder to exercise
the Warrants in the manner provided in the Subscription Notice; and (ii)
payment in full of the Exercise Price in cash or by wire transfer or check for
all Warrant Shares purchased hereunder. This Warrant shall be deemed to be
exercised on the date of receipt by the Company of the Subscription Notice,
accompanied by payment for the Warrant Shares and surrender of this Warrant,
as aforesaid, and such date is referred to herein as the "Exercise Date". Upon
such exercise, the Company shall, as promptly as practicable and in any event
within five business days, issue and deliver to such holder a certificate or
certificates for the full number of the Warrant Shares purchased by such
holder hereunder. As permitted by applicable law, the person in whose name the
certificates for Common Stock are to be issued shall be deemed to have become
a holder of record of such Common Stock on the Exercise Date and shall be
entitled to all of the benefits of such holder on the Exercise Date, including
without limitation the right to receive dividends and other distributions for
which the record date falls on or after the Exercise Date and to exercise
voting rights.
1.3 Expense and Taxes. The Company shall pay all expenses and taxes
(including, without limitation, all documentary, stamp, transfer or other
transactional taxes) attributable to the preparation, issuance or delivery of
the Warrant and of the shares of Common Stock issuable upon exercise of the
Warrant.
B-2-1
<PAGE>
1.4 Reservation of Shares. The Company shall reserve at all times so long as
the Warrant remain outstanding, free from preemptive rights, out of its
treasury Common Stock or its authorized but unissued shares of Common Stock,
or both, solely for the purpose of effecting the exercise of the Warrant, a
sufficient number of shares of Company Stock to provide for the exercise of
the Warrant.
1.5 Valid Issuance. All shares of Common Stock that may be issued upon
exercise of the Warrant will, upon issuance by the Company, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens
and charges with respect to the issuance thereof and, without limiting the
generality of the foregoing, the Company shall take no action or fail to take
any action which will cause a contrary result.
1.6 No Fractional Share. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of this Warrant. If more
than one Warrant shall be presented for exercise at the same time by the same
holder, the number of full shares of Common Stock which shall be issuable upon
such exercise shall be computed on the basis of the aggregate number of whole
shares of Common Stock purchasable on exercise of the Warrant so presented. If
any fraction of a share of Common Stock would, except for the provisions of
this Section 1.6, be issuable on the exercise of this Warrant, the Company
shall pay an amount in cash calculated by it to be equal to the price of one
share of Common Stock as quoted on the NASDAQ National Market System at the
close of business on the date of such exercise multiplied by such fraction
computed to the nearest whole cent.
ARTICLE II
Transfer
2.1 Warrant Office. The Company shall maintain an office for certain
purposes specified herein (the "Warrant Office"), which office shall initially
be the Company's offices at 3104 Logan Valley Road, P.O. Box 348, Traverse
City, Michigan 49685-0348, and may subsequently be such other office of the
Company or of any transfer agent of the Common Stock in the continental United
States as to which written notice has previously been given to the holder
hereof. The Company shall maintain, at the Warrant Office, a register for the
Warrants in which the Company shall record the name and address of the person
in whose name this Warrant has been issued, as well as the name and address of
each permitted assignee of the rights of the registered owner hereof.
2.2 Limited Right of Transfer. This Warrant may not be directly or
indirectly sold, assigned, pledged, hypothecated, encumbered, transferred or
otherwise disposed of without the prior written consent of the Company;
provided, however, that Guardian may assign its interest in this Warrant to
one or more of the entities or individuals listed on Schedule 2.2 hereto upon
receipt by the Company of (a) evidence, in form and substance satisfactory to
the Company, that each such assignee is an "Accredited Investor" as defined
under Rule 501 of the Securities Act, or (b) an opinion of the Company's
counsel that such assignment can be made without registration under the
Securities Act.
2.3 Transfer of Warrant. The Company agrees to maintain at the Warrant
Office books for the registration and transfer of the Warrant. Subject to the
provisions of Section 2.2, the Company, from time to time, shall register the
transfer of the Warrant in such books upon surrender of this Warrant at the
Warrant Office properly endorsed or accompanied by appropriate instruments of
transfer and written instructions for transfer satisfactory to the Company.
Upon any such transfer and upon payment by the holder or its transferee of any
applicable transfer taxes, new Warrants shall be issued to the transferee and
the transferor (as their respective interests may appear) and the surrendered
Warrant shall be canceled by the Company. The Company shall pay all taxes
(other than securities transfer taxes) and all other expenses and charges
payable in connection with the transfer of the Warrant hereunder.
B-2-2
<PAGE>
ARTICLE III
Anti-Dilution
3.1 Reclassification, Consolidation, Merger or Sale of Assets. In the event
that the Company shall be a party to any transaction (including without
limitation (i) any recapitalization or reclassification of the Common Stock
(other than a change in par value, or from par value to no par value, or from
no par value to par value), (ii) any combination or subdivision of the Common
Stock into a lesser or greater number of shares of Common Stock, (iii) any
consolidation of the Company with, or merger of the Company into, any other
person, (iv) any merger of another person into the Company (other than a
merger which does not result in a reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock of the Company), or (v) any
sale or transfer of all or a material amount of all of the assets of the
Company or any compulsory share exchange) pursuant to which the Common Stock
is converted into the right to receive other securities, cash or other
property, then lawful provision shall be made as part of the terms of such
transaction whereby the holder of this Warrant shall receive upon the exercise
hereof the kind and amount of securities, cash and other property receivable
upon such transaction by a holder of the number of shares of Common Stock for
which the Warrant was exercisable immediately prior to such transaction. The
entity formed by such consolidation or resulting from such merger or which
acquires such assets or which acquires the Company's shares, as the case may
be, shall make provision in its certificate or articles of incorporation or
other constituent document to establish such right. The above provisions shall
similarly apply to successive transactions of the foregoing type.
3.2 Common Stock Dilutions. In the event that prior to exercise of this
Warrant the Company issues or agrees to issue additional shares of Common
Stock pursuant to a stock split or stock dividend, or dividend or distribution
of rights to purchase stock, then the number of shares to be issued pursuant
to the exercise of this Warrant and the Exercise Price therefore shall be
adjusted proportionately. In the event that prior to the exercise of this
Warrant the Company issues or agrees to issue cash or property pursuant to a
dividend or distribution, this Warrant shall represent the right to acquire,
in addition to the number of shares of Common Stock receivable upon exercise
of this Warrant, and without payment of any additional consideration therefor,
the amount of such cash or property which the holder hereof would have been
entitled to receive pursuant to such dividend or distribution had it been the
holder of record of the Common Stock receivable upon exercise of this Warrant
on the record date therefor. The Company agrees and covenants that it will
not, prior to the exercise of this Warrant, in connection with any plan for
the benefit of employees or directors (i) issue a number of shares of Common
Stock, securities exercisable for Common Stock or other Common Stock
equivalents (the "Plan Securities") which in the aggregate exceeds fifteen
percent (15%) of the total shares of Common Stock outstanding as of the date
thereof, and (ii) of the Plan Securities issued pursuant to clause (i) of this
Section 3.2, issue Plan Securities which in the aggregate are equal to,
convertible into or exercisable for more than 300,000 shares of Common Stock
for consideration, including any applicable exercise or conversion price,
which is below the price quoted for the Common Stock at the close of business
on the day prior to issuance of such Plan Securities.
3.3 Prior Notice of Certain Events. In the event:
(i) the Company establishes a record date to determine the holders of Common
Stock who are entitled to (A) receive any dividend or other distribution
(other than a dividend payable in shares of Common Stock), (B) participate in
a redemption or repurchase of the then-outstanding shares of Common Stock, or
(C) vote in connection with any of the transactions identified in clauses
(ii), (iii), (iv) or (v) below; or
(ii) the Company shall (A) declare any dividend (or any other distribution)
on its Common Stock, other than a dividend payable in shares of Common Stock
or (B) declare or authorize a redemption or repurchase of the then-outstanding
shares of Common Stock; or
(iii) the Company shall authorize the granting to all holders of Common
Stock of rights or warrants to subscribe for or purchase any shares of stock
of any class or series or of any other rights or warrants; or
B-2-3
<PAGE>
(iv) of any reclassification of Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value),
or of any other capital reorganization or of any consolidation or merger to
which the Company is a party, or of the sale or transfer of all or
substantially all of the assets of the Company or of any compulsory share
exchange whereby the Common Stock is converted into other securities, cash or
other property; or
(v) of the voluntary or involuntary dissolution, liquidation or winding up
of the Company or such event is likely to occur.
Then the Company shall cause to be mailed to the holder of this Warrant, at
its address as reflected in the Warrant Office transfer records, a notice
stating (A) the date on which a record (if any) is to be taken with respect to
clause (i) above, (B) the date on which any transaction or event contemplated
in any of clauses (i) through and including clause (v) above is expected to
become effective or the date of the anticipated closing of the public
offering, and (C) the time, if any is fixed, as to when the holders of record
of Common Stock shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon any such reclassification,
reorganization, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding up. Each notice of an event specified in
clause(i) above shall be sent at least five (5) days prior to the record date
specified therein and each notice of an event specified in clauses (ii)
through and including (v) above shall be delivered at least fifteen (15) days
prior to the proposed closing of such transaction.
ARTICLE IV
Miscellaneous
4.1 Entire Agreement. This Warrant, together with that certain registration
rights agreement of even date herewith by and between the Company and Guardian
(the "Registration Rights Agreement"), contain the entire agreement between
the holder hereof and the Company with respect to the Warrant Shares
purchasable upon exercise hereof and the related transactions and supersedes
all prior arrangements or understandings with respect thereto.
4.2 Governing Law; Venue. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF DELAWARE AND THE UNITED
STATES OF AMERICA FROM TIME TO TIME IN EFFECT.
4.3 Waiver and Amendment. Any term or provision of this Warrant may be
waived at any time by the party which is entitled to the benefits thereof and
any term or provision of this Warrant may be amended or supplemented at any
time by agreement of the holder hereof and the Company, except that any waiver
of any term or condition, or any amendment or supplementation, of this Warrant
shall be in writing. A waiver of any breach or failure to enforce any of the
terms or conditions of this Warrant shall not in any way effect, limit or
waiver a party's rights hereunder at any time to enforce strict compliance
thereafter with every term or condition of this Warrant.
4.4 Illegality. In the event that any one or more of the provisions
contained in this Warrant shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of this Warrant shall not, at the election of the party for whom
the benefit of the provision exists, be in any way impaired.
4.5 Copy of Warrant. A copy of this Warrant shall be filed among the records
of the Company.
4.6 Notice. Any notice or other document required or permitted to be given
or delivered to the holder hereof shall be in writing and delivered at, or
sent by telecopy or certified or registered mail to such holder at, the last
address shown on the books of the Company maintained at the Warrant Office for
the registration of this Warrant or at any more recent address of which the
holder hereof shall have notified the Company in writing.
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<PAGE>
Any notice or other document required or permitted to be given or delivered to
the Company shall be delivered at, or sent by facsimile transmission or
certified or registered mail to, the Warrant Office, or such other address
within the continental United States of America as shall have been furnished
by the Company to the holder of this Warrant.
4.7 Limitation of Liability; Not Stockholders. No provision of this Warrant
shall be construed as conferring upon the holder hereof the right to vote,
consent, receive dividends or receive notices (other than as herein expressly
provided) in respect of meetings of stockholders for the election of directors
of the Company or any other matter whatsoever as a stockholder of the Company.
No provision hereof, in the absence of affirmative action by the holder hereof
to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price of any shares of Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company
or by creditors of the Company.
4.8 Loss, Destruction, etc. of Warrant. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of
this Warrant, and in the case of any such loss, theft or destruction upon
delivery of a bond of indemnity or such other security in such form and amount
as shall be reasonably satisfactory to the Company, or in the event of such
mutilation upon surrender and cancellation of this Warrant, the Company will
make and deliver a new Warrant of like tenor, in lieu of such lost, stolen,
destroyed or mutilated Warrant. Any Warrant issued under the provisions of
this Section 4.8 in lieu of any Warrant alleged to be lost, destroyed or
stolen, or in lieu of any mutilated Warrant, shall constitute an original
contractual obligation on the part of the Company. This Warrant shall be
promptly canceled by the Company upon the surrender hereof in connection with
any exchange or replacement. The Company shall pay all taxes (other than
securities transfer taxes) and all other expenses and charges payable in
connection with the preparation, execution and delivery of Warrants pursuant
to this Section 4.8.
4.9 Compliance with Securities Act and Applicable Law. The Company shall not
be required to transfer this Warrant or to sell or issue Warrant Shares if
such transfer or issuance would constitute a violation by the Company of any
provisions of any law or regulation of any governmental authority. While the
Company is required to register the resale of the Warrant Shares by holder(s)
pursuant to the Registration Rights Agreement, in the event the Warrant Shares
issuable on exercise of this Warrant are not then registered under the Act,
the Company may imprint the following legend or any other legend which counsel
for the Company considers necessary or advisable to comply with the Securities
Act of 1933:
"The shares of stock represented by this certificate have not
been registered under the Securities Act of 1933 or under the
securities laws of any State and may not be sold, transferred or
otherwise disposed of except upon such registration or upon
receipt by the issuer, in form and substance satisfactory to the
issuer, of an opinion of the issuer's counsel that registration
is not required for such disposition."
4.10 Registration Rights. The Warrants Shares shall be entitled to such
registration rights under the Securities Act and under applicable state
securities laws as are specified in the Registration Rights Agreement.
4.11 Headings. The Article and Section and other headings herein are for
convenience only and are not a part of this Warrant and shall not affect the
interpretation thereof.
In Witness Whereof, the Company has caused this Warrant to be signed in its
name.
Dated: July 11, 2000
Miller Exploration Company
/s/ Kelly E. Miller
By: _________________________________
Name: Kelly E. Miller
Title:President
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<PAGE>
EXHIBIT A
SUBSCRIPTION NOTICE
The undersigned, the holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented thereby for, and to purchase thereunder,
shares of the Common Stock covered by such Warrant, and herewith makes
payment in full for such shares pursuant to Section 1.2 of such Warrant, and
requests that certificates for such shares (and any other securities or other
property issuable upon such exercise) be issued in the name of, and delivered
to .
_____________________________________
Dated: ___________, ____.
B-2-6
<PAGE>
SCHEDULE 2.2
LIST OF APPROVED ASSIGNEES
Jordan Exploration Company LLC
Martin G. Lagina
Robert M. Boeve
Wayne Sterenberg
Craig Tester
Any Persons (as defined in the Securities Purchase Agreement dated as of
July 11, 2000 and entered into between Guardian and the Company) who control,
are controlled by or are under common control with any of the above Persons.
B-2-7
<PAGE>
ANNEX B-3
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE
THEREBY HAVE NOT BEEN AND WILL NOT BE, EXCEPT AS PROVIDED IN THE REGISTRATION
RIGHTS AGREEMENT REFERRED TO BELOW, REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES
LAW AND, ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT
BE RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER APPLICABLE
SECURITIES LAWS.
WARRANT
to Purchase 9,000,000 Shares of Common Stock of
MILLER EXPLORATION COMPANY
This Common Stock Purchase Warrant (the "Warrant") certifies that for value
received, Guardian Energy Management Corp., a Michigan corporation
("Guardian"), or its assigns, is entitled to subscribe for and purchase from
Miller Exploration Company, a Delaware corporation (the "Company"), in whole
or in part, 9,000,000 shares (the "Warrant Shares") of Common Stock, par value
$0.01 per share, of the Company ("Common Stock") at the Exercise Price (as
hereinafter defined), subject, however, to the provisions and upon the terms
and conditions hereinafter set forth This Warrant and all rights hereunder
shall expire at 5:00 p.m., Traverse City, Michigan time, on the fourth
anniversary of the approval of the Conversion Shares by the stockholders of
the Company (the "Termination Date").
ARTICLE I
Exercise of Warrants
1.1 Term; Exercise Price. The Warrant represented hereby may be exercised by
the holder hereof, in whole or in part, at any time and from time to time
after the date hereof until 5:00 p.m., Traverse City, Michigan time, on the
Termination Date (the "Term"). Subject to adjustment as provided in Article IV
hereof, the exercise price for shares of Common Stock under this Warrant shall
be $3.00 per share of Common Stock (the "Exercise Price").
1.2 Method of Exercise. To exercise this Warrant, the holder hereof shall
deliver to the Company, at the Warrant Office designated in Section 2.1
hereof, (i) a written notice in the form of the Subscription Notice attached
as Exhibit A hereto, stating therein the election of such holder to exercise
the Warrants in the manner provided in the Subscription Notice; and (ii)
payment in full of the Exercise Price in cash or by wire transfer or check for
all Warrant Shares purchased hereunder. This Warrant shall be deemed to be
exercised on the date of receipt by the Company of the Subscription Notice,
accompanied by payment for the Warrant Shares and surrender of this Warrant,
as aforesaid, and such date is referred to herein as the "Exercise Date". Upon
such exercise, the Company shall, as promptly as practicable and in any event
within five business days, issue and deliver to such holder a certificate or
certificates for the full number of the Warrant Shares purchased by such
holder hereunder. As permitted by applicable law, the person in whose name the
certificates for Common Stock are to be issued shall be deemed to have become
a holder of record of such Common Stock on the Exercise Date and shall be
entitled to all of the benefits of such holder on the Exercise Date, including
without limitation the right to receive dividends and other distributions for
which the record date falls on or after the Exercise Date and to exercise
voting rights.
1.3 Expense and Taxes. The Company shall pay all expenses and taxes
(including, without limitation, all documentary, stamp, transfer or other
transactional taxes) attributable to the preparation, issuance or delivery of
the Warrant and of the shares of Common Stock issuable upon exercise of the
Warrant.
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<PAGE>
1.4 Reservation of Shares. The Company shall reserve at all times so long as
the Warrant remain outstanding, free from preemptive rights, out of its
treasury Common Stock or its authorized but unissued shares of Common Stock,
or both, solely for the purpose of effecting the exercise of the Warrant, a
sufficient number of shares of Company Stock to provide for the exercise of
the Warrant.
1.5 Valid Issuance. All shares of Common Stock that may be issued upon
exercise of the Warrant will, upon issuance by the Company, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens
and charges with respect to the issuance thereof and, without limiting the
generality of the foregoing, the Company shall take no action or fail to take
any action which will cause a contrary result.
1.6 No Fractional Share. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of this Warrant. If more
than one Warrant shall be presented for exercise at the same time by the same
holder, the number of full shares of Common Stock which shall be issuable upon
such exercise shall be computed on the basis of the aggregate number of whole
shares of Common Stock purchasable on exercise of the Warrant so presented. If
any fraction of a share of Common Stock would, except for the provisions of
this Section 1.6, be issuable on the exercise of this Warrant, the Company
shall pay an amount in cash calculated by it to be equal to the price of one
share of Common Stock as quoted on the NASDAQ National Market System at the
close of business on the date of such exercise multiplied by such fraction
computed to the nearest whole cent.
ARTICLE II
Transfer
2.1 Warrant Office. The Company shall maintain an office for certain
purposes specified herein (the "Warrant Office"), which office shall initially
be the Company's offices at 3104 Logan Valley Road, P.O. Box 348, Traverse
City, Michigan 49685-0348, and may subsequently be such other office of the
Company or of any transfer agent of the Common Stock in the continental United
States as to which written notice has previously been given to the holder
hereof. The Company shall maintain, at the Warrant Office, a register for the
Warrants in which the Company shall record the name and address of the person
in whose name this Warrant has been issued, as well as the name and address of
each permitted assignee of the rights of the registered owner hereof.
2.2 Limited Right of Transfer. This Warrant may not be directly or
indirectly sold, assigned, pledged, hypothecated, encumbered, transferred or
otherwise disposed of without the prior written consent of the Company;
provided, however, that Guardian may assign its interest in this Warrant to
one or more of the entities or individuals listed on Schedule 2.2 hereto upon
receipt by the Company of (a) evidence, in form and substance satisfactory to
the Company, that each such assignee is an "Accredited Investor" as defined
under Rule 501 of the Securities Act, or (b) an opinion of the Company's
counsel that such assignment can be made without registration under the
Securities Act.
2.3 Transfer of Warrant. The Company agrees to maintain at the Warrant
Office books for the registration and transfer of the Warrant. Subject to the
provisions of Section 2.2, the Company, from time to time, shall register the
transfer of the Warrant in such books upon surrender of this Warrant at the
Warrant Office properly endorsed or accompanied by appropriate instruments of
transfer and written instructions for transfer satisfactory to the Company.
Upon any such transfer and upon payment by the holder or its transferee of any
applicable transfer taxes, new Warrants shall be issued to the transferee and
the transferor (as their respective interests may appear) and the surrendered
Warrant shall be canceled by the Company. The Company shall pay all taxes
(other than securities transfer taxes) and all other expenses and charges
payable in connection with the transfer of the Warrant hereunder.
B-3-2
<PAGE>
ARTICLE III
Anti-Dilution
3.1 Reclassification, Consolidation, Merger or Sale of Assets. In the event
that the Company shall be a party to any transaction (including without
limitation (i) any recapitalization or reclassification of the Common Stock
(other than a change in par value, or from par value to no par value, or from
no par value to par value), (ii) any combination or subdivision of the Common
Stock into a lesser or greater number of shares of Common Stock, (iii) any
consolidation of the Company with, or merger of the Company into, any other
person, (iv) any merger of another person into the Company (other than a
merger which does not result in a reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock of the Company), or (v) any
sale or transfer of all or a material amount of all of the assets of the
Company or any compulsory share exchange) pursuant to which the Common Stock
is converted into the right to receive other securities, cash or other
property, then lawful provision shall be made as part of the terms of such
transaction whereby the holder of this Warrant shall receive upon the exercise
hereof the kind and amount of securities, cash and other property receivable
upon such transaction by a holder of the number of shares of Common Stock for
which the Warrant was exercisable immediately prior to such transaction. The
entity formed by such consolidation or resulting from such merger or which
acquires such assets or which acquires the Company's shares, as the case may
be, shall make provision in its certificate or articles of incorporation or
other constituent document to establish such right. The above provisions shall
similarly apply to successive transactions of the foregoing type.
3.2 Common Stock Dilutions. In the event that prior to exercise of this
Warrant the Company issues or agrees to issue additional shares of Common
Stock pursuant to a stock split or stock dividend, or dividend or distribution
of rights to purchase stock, then the number of shares to be issued pursuant
to the exercise of this Warrant and the Exercise Price therefore shall be
adjusted proportionately. In the event that prior to the exercise of this
Warrant the Company issues or agrees to issue cash or property pursuant to a
dividend or distribution, this Warrant shall represent the right to acquire,
in addition to the number of shares of Common Stock receivable upon exercise
of this Warrant, and without payment of any additional consideration therefor,
the amount of such cash or property which the holder hereof would have been
entitled to receive pursuant to such dividend or distribution had it been the
holder of record of the Common Stock receivable upon exercise of this Warrant
on the record date therefor. The Company agrees and covenants that it will
not, prior to the exercise of this Warrant, in connection with any plan for
the benefit of employees or directors (i) issue a number of shares of Common
Stock, securities exercisable for Common Stock or other Common Stock
equivalents (the "Plan Securities") which in the aggregate exceeds fifteen
percent (15%) of the total shares of Common Stock outstanding as of the date
thereof, and (ii) of the Plan Securities issued pursuant to clause (i) of this
Section 3.2, issue Plan Securities which in the aggregate are equal to,
convertible into or exercisable for more than 300,000 shares of Common Stock
for consideration, including any applicable exercise or conversion price,
which is below the price quoted for the Common Stock at the close of business
on the day prior to issuance of such Plan Securities.
3.3 Prior Notice of Certain Events. In the event:
(i) the Company establishes a record date to determine the holders of Common
Stock who are entitled to (A) receive any dividend or other distribution
(other than a dividend payable in shares of Common Stock), (B) participate in
a redemption or repurchase of the then-outstanding shares of Common Stock, or
(C) vote in connection with any of the transactions identified in clauses
(ii), (iii), (iv) or (v) below; or
(ii) the Company shall (A) declare any dividend (or any other distribution)
on its Common Stock, other than a dividend payable in shares of Common Stock
or (B) declare or authorize a redemption or repurchase of the then-outstanding
shares of Common Stock; or
(iii) the Company shall authorize the granting to all holders of Common
Stock of rights or warrants to subscribe for or purchase any shares of stock
of any class or series or of any other rights or warrants; or
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<PAGE>
(iv) of any reclassification of Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value),
or of any other capital reorganization or of any consolidation or merger to
which the Company is a party, or of the sale or transfer of all or
substantially all of the assets of the Company or of any compulsory share
exchange whereby the Common Stock is converted into other securities, cash or
other property; or
(v) of the voluntary or involuntary dissolution, liquidation or winding up
of the Company or such event is likely to occur.
Then the Company shall cause to be mailed to the holder of this Warrant, at
its address as reflected in the Warrant Office transfer records, a notice
stating (A) the date on which a record (if any) is to be taken with respect to
clause (i) above, (B) the date on which any transaction or event contemplated
in any of clauses (i) through and including clause (v) above is expected to
become effective or the date of the anticipated closing of the public
offering, and (C) the time, if any is fixed, as to when the holders of record
of Common Stock shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon any such reclassification,
reorganization, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding up. Each notice of an event specified in
clause (i) above shall be sent at least five (5) days prior to the record date
specified therein and each notice of an event specified in clauses (ii)
through and including (v) above shall be delivered at least fifteen (15) days
prior to the proposed closing of such transaction.
ARTICLE IV
Miscellaneous
4.1 Entire Agreement. This Warrant, together with that certain registration
rights agreement of even date herewith by and between the Company and Guardian
(the "Registration Rights Agreement"), contain the entire agreement between
the holder hereof and the Company with respect to the Warrant Shares
purchasable upon exercise hereof and the related transactions and supersedes
all prior arrangements or understandings with respect thereto.
4.2 Governing Law; Venue. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF DELAWARE AND THE UNITED
STATES OF AMERICA FROM TIME TO TIME IN EFFECT.
4.3 Waiver and Amendment. Any term or provision of this Warrant may be
waived at any time by the party which is entitled to the benefits thereof and
any term or provision of this Warrant may be amended or supplemented at any
time by agreement of the holder hereof and the Company, except that any waiver
of any term or condition, or any amendment or supplementation, of this Warrant
shall be in writing. A waiver of any breach or failure to enforce any of the
terms or conditions of this Warrant shall not in any way effect, limit or
waiver a party's rights hereunder at any time to enforce strict compliance
thereafter with every term or condition of this Warrant.
4.4 Illegality. In the event that any one or more of the provisions
contained in this Warrant shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of this Warrant shall not, at the election of the party for whom
the benefit of the provision exists, be in any way impaired.
4.5 Copy of Warrant. A copy of this Warrant shall be filed among the records
of the Company.
4.6 Notice. Any notice or other document required or permitted to be given
or delivered to the holder hereof shall be in writing and delivered at, or
sent by telecopy or certified or registered mail to such holder at, the last
address shown on the books of the Company maintained at the Warrant Office for
the registration of this Warrant or at any more recent address of which the
holder hereof shall have notified the Company in writing.
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<PAGE>
Any notice or other document required or permitted to be given or delivered to
the Company shall be delivered at, or sent by facsimile transmission or
certified or registered mail to, the Warrant Office, or such other address
within the continental United States of America as shall have been furnished
by the Company to the holder of this Warrant.
4.7 Limitation of Liability; Not Stockholders. No provision of this Warrant
shall be construed as conferring upon the holder hereof the right to vote,
consent, receive dividends or receive notices (other than as herein expressly
provided) in respect of meetings of stockholders for the election of directors
of the Company or any other matter whatsoever as a stockholder of the Company.
No provision hereof, in the absence of affirmative action by the holder hereof
to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price of any shares of Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company
or by creditors of the Company.
4.8 Loss, Destruction, etc. of Warrant. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of
this Warrant, and in the case of any such loss, theft or destruction upon
delivery of a bond of indemnity or such other security in such form and amount
as shall be reasonably satisfactory to the Company, or in the event of such
mutilation upon surrender and cancellation of this Warrant, the Company will
make and deliver a new Warrant of like tenor, in lieu of such lost, stolen,
destroyed or mutilated Warrant. Any Warrant issued under the provisions of
this Section 4.8 in lieu of any Warrant alleged to be lost, destroyed or
stolen, or in lieu of any mutilated Warrant, shall constitute an original
contractual obligation on the part of the Company. This Warrant shall be
promptly canceled by the Company upon the surrender hereof in connection with
any exchange or replacement. The Company shall pay all taxes (other than
securities transfer taxes) and all other expenses and charges payable in
connection with the preparation, execution and delivery of Warrants pursuant
to this Section 4.8.
4.9 Compliance with Securities Act and Applicable Law. The Company shall not
be required to transfer this Warrant or to sell or issue Warrant Shares if
such transfer or issuance would constitute a violation by the Company of any
provisions of any law or regulation of any governmental authority. While the
Company is required to register the resale of the Warrant Shares by holder(s)
pursuant to the Registration Rights Agreement, in the event the Warrant Shares
issuable on exercise of this Warrant are not then registered under the Act,
the Company may imprint the following legend or any other legend which counsel
for the Company considers necessary or advisable to comply with the Securities
Act of 1933:
"The shares of stock represented by this certificate have not
been registered under the Securities Act of 1933 or under the
securities laws of any State and may not be sold, transferred or
otherwise disposed of except upon such registration or upon
receipt by the issuer, in form and substance satisfactory to the
issuer, of an opinion of the issuer's counsel that registration
is not required for such disposition."
4.10 Registration Rights. The Warrants Shares shall be entitled to such
registration rights under the Securities Act and under applicable state
securities laws as are specified in the Registration Rights Agreement.
4.11 Headings. The Article and Section and other headings herein are for
convenience only and are not a part of this Warrant and shall not affect the
interpretation thereof.
In Witness Whereof, the Company has caused this Warrant to be signed in its
name.
Dated: July 11, 2000
Miller Exploration Company
/s/ Kelly E. Miller
By: _________________________________
Name: Kelly E. Miller
Title:President
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<PAGE>
EXHIBIT A
SUBSCRIPTION NOTICE
The undersigned, the holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented thereby for, and to purchase thereunder,
shares of the Common Stock covered by such Warrant, and herewith makes
payment in full for such shares pursuant to Section 1.2 of such Warrant, and
requests that certificates for such shares (and any other securities or other
property issuable upon such exercise) be issued in the name of, and delivered
to .
_____________________________________
Dated: ___________, ____.
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<PAGE>
SCHEDULE 2.2
LIST OF APPROVED ASSIGNEES
Jordan Exploration Company LLC
Martin G. Lagina
Robert M. Boeve
Wayne Sterenberg
Craig Tester
Any Persons (as defined in the Securities Purchase Agreement dated as of
July 11, 2000 and entered into between Guardian and the Company) who control,
are controlled by or are under common control with any of the above Persons.
B-3-7
<PAGE>
ANNEX C
July 12, 2000
Mr. C. E. "Gene" Miller
Eagle Investments Inc.
P.O. Box 348
Traverse City, MI 49685-0348
Dear Gene,
After numerous discussions and detailed review, Miller Exploration
(hereinafter "MEXP") will agree to purchase the following interest from Eagle
Investments (hereinafter "Eagle"), subject to Board approval and (to the
extent necessary) shareholder approval. As you are aware, we both need to
present a purchase and sale agreement that would withstand the highest
scrutiny, due to the roles you play both in MEXP and Eagle.
Pursuant to the letter dated April 1, 1999 (attached as Exhibit "A"), MEXP
had specific restrictions regarding the right to repurchase and certain rights
which have now expired. Subject to the terms and conditions described below,
Eagle will contribute capital, extend said agreement, and modify certain
rights as detailed below. It is therefore agreed:
1) Eagle will infuse five hundred thousand ($500,000) dollars into MEXP in
exchange for common stock at $1.35/share. Eagle will wire said funds to
MEXP within five (5) business days of Board approval or shareholder
approval if required.
2) MEXP will purchase an undivided 50% of Eagle's non-producing leasehold
in the Mississippi Salt Basin pursuant to the interest represented in
Exhibit "B" for a purchase price of two million ($2,000,000) dollars.
Consideration will be paid in the form of MEXP common stock @
$1.35/share.
3) MEXP's purchase of the above will be subject to shareholder approval of
the Guardian Energy Management Corporation equity infusion of five
million ($5,000,000) dollars.
4) Eagle will be granted warrants as follows:
<TABLE>
<CAPTION>
Warrants Exercise Term
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<S> <C> <C>
781,250 $1.35/share 1 year from the date of shareholder approval
1,250,000 $2.50/share 2 years from the date of shareholder approval
</TABLE>
5) Eagle will be responsible for its proportionate share of the working
interest to drill the proposed wells on the salt domes pursuant to
Exhibit "B". Upon shareholder approval, MEXP will reimburse Eagle for
50% of its cost to drill and/or complete the respective wells.
6) MEXP's purchase will exclude any rights with respect to Eagle's
interest in the existing wellbores, specifically the Allar 32-6 and
Frost 5-11 #1 (Moselle Dome), Allar #6 (Midway Dome), Campbell #1
(Centerville Dome), and Fairchild#1 (Richmond Dome). In the event of a
side track, mechanical difficulties or development location, Eagle will
retain its rights in said proposed well(s).
7) MEXP will acquire all rights in the Langston #1 drilling unit (Kola
Dome), excepting the Sligo Formation, which is the current producing
zone in the Langston #1.
A) Eagle will reserve the Sligo formation rights in the 640-acre
drilling units immediately adjoining and abutting the Langston #1
drilling unit. In the event a subsequent well is proposed to the
Hosston formation, or a depth greater than the Sligo, Eagle will
only have the rights of participation to the extent of its retained
working interest in the deeper horizons. However, in the event that
the subsequent well(s) is completed in the Hosston or deeper
formation(s), and it is then determined within 120 days of reaching
total depth, that the zones tested are considered to be
unproductive or do not produce in paying quantities, and the well
is subsequently completed in the Sligo formation, Eagle will
participate, at its option, for its proportionate interest as if no
sale
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<PAGE>
had taken place to MEXP. Upon an election by Eagle to participate,
Eagle will reimburse MEXP for its proportionate cost of the
additional interest acquired as if the well had been drilled to the
Sligo formation. If the above 120-day term expires and the well is
subsequently completed in the Sligo formation, Eagle will participate
as if no sale had taken place to MEXP for its rights in the Sligo
formation completion without reimbursement for the drilling.
8) MEXP will have an exclusive right of first offer on any sales of
Eagle's assets, including the remaining non-producing leasehold as well
as the producing leasehold, in the counties which contain the existing
MEXP leasehold base. MEXP will have a period of 15days from receipt of
such offer to reject or accept the offer ("response period"). In the
event of rejection (or no response by MEXP before the end of the
response period), Eagle will be free and clear to sell or assign such
interest to any third party at the terms and conditions equal to or
greater than the terms offered to MEXP. The right of first offer will
include a notice from Eagle to MEXP its desire to sell the producing
and/or non-producing leasehold. At such time MEXP will have the right
to present an offer within the response period described. Additionally,
in the event Eagle receives an unsolicited offer from a third party,
which is acceptable to Eagle, Eagle will also give MEXP the right of
first refusal to accept the terms and conditions provided therein
within the response period. The right of first offer will expire on
December 31, 2000, unless extended by the mutual consent of both
parties.
9) The purchase contemplated will be subject to the approval of the
outside directors of MEXP. A copy of the Resolution approving said sale
will be provided to Eagle.
10) This letter agreement contains the entire agreement between the
parties with respect to the subject matter hereof, and there are no
promises, terms, conditions, or obligations other than those contained
herein.
11) This letter agreement and the rights and obligations of the party will
be governed and interpreted in accordance with the laws of the State
of Michigan without giving effect to principals of conflicts or laws.
If the above meets with your approval, we would appreciate you signing in
the space provided below. This offer must be accepted on or before July 15,
2000, or the proposal contained herein will be null and void.
Sincerely,
Miller Exploration Company
/s/ Kelly E. Miller
Kelly E. Miller
President and CEO
KEM/sc
Agreed to and accepted this day of
, 2000.
Eagle Investments Inc.
By: /s/ C. E. Miller
------------------------------------
C. E. "Gene" Miller, President
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MILLER EXPLORATION COMPANY
3104 Logan Valley Road Traverse City, Michigan 49685
Proxy for Special Meeting of Stockholders to be held , 2000.
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This proxy is solicited by the board of directors of Miller Exploration Company
The undersigned hereby appoints Kelly E. Miller and Deanna L. Cannon, and each
of them, proxies or proxy with full power of substitution and revocation as to
each of them, to represent the undersigned and to act and vote all of the shares
of common stock of Miller Exploration Company (the "Company") the undersigned is
entitled to vote at the Special Meeting of Stockholders of Miller Exploration
Company to be held on the day of , 2000, at a.m., local time, at
------- ------- ----
, on the following matters and in their
-------------------------------
discretion on any other matters which may come before the meeting or any
adjournments or postponements thereof. Receipt of the proxy statement dated
, 2000 is acknowledged.
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PLEASE MARK, SIGN AND DATE THE REVERSE SIDE OF THIS PROXY
AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
(continued on other side)
<PAGE>
<TABLE>
<CAPTION>
Please mark your
[X] vote as indicated in
this example
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR AGAINST ABSTAIN
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED 1 To approve the issuance of common [ ] [ ] [ ]
IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED. stock in connection with the transaction
IN THE ABSENCE OF SUCH DIRECTION, THIS PROXY WILL by and between Miller Exploration
BE VOTED "FOR" PROPOSAL 1 AND "FOR" PROPOSAL 2. Company and Guardian Energy
This proxy is solicited by the board of directors Management Corp.
of Miller Exploration Company
2 To approve the transaction by and [ ] [ ] [ ]
between Miller Exploration Company
and Eagle Investments, Inc.
Date: , 2000 Date: , 2000
------------------------------- ----------- --------------------------------- ------------ --------------
Signature Signature if held jointly
Please sign exactly as name appears herein, date and return promptly. When shares are held by joint tenants, both must sign. When
signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in
full corporate name by duly authorized officer and give title of officer. If a partnership, please sign in partnership name by
authorized person and give the title or capacity of person signing.
</TABLE>
