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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
Form 10-K/A
AMENDMENT NO. 2
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ________________
Commission File Number: 0-23431
MILLER EXPLORATION COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Delaware 38-3379776
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3104 Logan Valley Road, Traverse City, Michigan 49685-0348
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (231) 941-0004
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, $0.01 Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Number of shares outstanding of the registrant's Common Stock, $0.01 par value
(excluding shares of treasury stock) as of March 20, 2000: 12,704,208
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant as of March 20, 2000: $17,468,286
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Company's May 26, 2000 annual
meeting of stockholders are incorporated by reference in Part III of this Form
10-K
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1
This Amendment No. 2 to the Annual Report on Form 10-K of Miller
Exploration Company (the "Company") amends and restates in its entirety Items 7,
7A and 8 of Part II and Item 14 of Part IV of the Annual Report on Form 10-K of
the Company filed with the Securities and Exchange Commission on March 24, 2000
(the "Form 10-K") to conform with definitive proxy information filed by the
Company on November 13, 2000. Capitalized terms used herein and not otherwise
defined shall have the meaning assigned to such terms in the Form 10-K.
PART II
Item 7. Management's Discussion and Analysis of financial condition and Results
of Operations.
Overview
Miller is an independent oil and gas exploration, development and
production company that has developed a base of producing properties and
inventory of prospects concentrated primarily in Mississippi and Montana.
The Company was organized in connection with the Combination Transaction.
The Combined Assets consist of MOC, interests in oil and natural gas properties
from the Affiliated entities and interests in such properties owned by certain
business partners and investors, including AHC, Dan A. Hughes, Jr. and SASI
Minerals Company. No assets other than those in which MOC or the Affiliated
Entities had an interest were part of the combined Assets. The Company and the
owners of the Combined Assets entered into separate agreements that provided
for the issuance of approximately 6.9 million shares of the Company's Common
Stock and the payment of $48.8 million (net of post-closing adjustments) in cash
to certain participants in the Combination Transaction in exchange for the
Combined Assets. The issuance of the shares and the cash payment were completed
upon consummation of the Company's Offering.
The Combination Transaction closed on February 9, 1998 in connection with
the closing of the Offering. The Offering, including the sale of an additional
62,500 shares of Common Stock by the Company on March 9, 1998 pursuant to the
exercise of the underwriters' over-allotment option, resulted in net proceeds to
the Company of approximately $40.4 million after expenses.
For further discussion of the Offering and the Combination Transaction, see
Note 1 to the Consolidated Financial Statements.
The Company uses the full cost method of accounting for its oil and natural
gas properties. Under this method, all acquisition, exploration and development
costs, including any general and administrative costs that are directly
attributable to the Company's acquisition, exploration and development
activities, are capitalized in a "full cost pool" as incurred. The Company
records depletion of its full cost pool using the unit-of-production method. SEC
Regulation S-X, Rule 4-10 requires companies reporting on a full cost basis to
apply a ceiling test wherein the capitalized costs within the full cost pool,
net of deferred income taxes, may not exceed the net present value of the
Company's proved oil and gas reserves plus the lower of cost or market of
unproved properties. Any such excess costs should be charged against earnings.
Using unescalated period-end prices at December 31, 1999, of $2.38 per Mcfe, the
Company would have recognized a non-cash impairment of oil and gas properties in
the amount of approximately $1.2 million pre-tax. However, on the basis of the
improvements in pricing experienced subsequent to period-end of $2.80 per Mcfe,
the Company has determined that a writedown is not required. At December 31,
1998, the Company recorded a non-cash ceiling writedown of $35.1 million. The
writedown was the combined result of a large downward revision in oil and gas
reserve quantities and depressed commodity prices. Disappointing 2-D seismic-
supported drilling results and drilling cost overruns also contributed to the
cost ceiling writedown. The Company based its ceiling test determination on a
price of $1.78 per Mcfe, which represented the March 1999 closing commodity
prices. Had the Company used unescalated period-end prices at December 31, 1998,
of $1.92 per Mcfe the Company would have recognized a cost ceiling writedown of
$31.1 million.
2
Results of Operations
The following table summarizes production volumes, average sales prices and
average costs for the Company's oil and natural gas operations for the periods
presented (in thousands, except per unit amounts):
Year Ended December 31,
---------------------------------------------
1999 1998 1997
------- -------- --------
Production volumes:
Crude oil and condensate (Mbbls).................................... 255.9 247.6 47.4
Natural gas (MMcf).................................................. 7,593.8 8,953.3 2,241.2
Natural gas equivalent (MMcfe)...................................... 9,129.2 10,438.7 2,525.9
Revenues:
Natural gas......................................................... $17,266 $ 18,336 $ 5,819
Crude oil and condensate............................................ 3,465 2,646 964
Operating expenses:
Lease operating expenses and production taxes....................... $ 1,704 $ 3,363 $ 1,478
Depletion, depreciation and amortization............................ 16,066 15,933 2,520
General and administrative.......................................... 2,776 2,815 1,952
Interest expense...................................................... $ 3,519 $ 1,635 $ 1,200
Net income (loss)..................................................... $(1,982) $(41,800) $ 28
Average sales prices:
Crude oil and condensate ($ per Bbl)................................ $ 13.54 $ 10.69 $ 20.33
Natural gas ($ per Mcf)............................................. 2.27 2.05 2.60
Natural gas equivalent ($ per Mcfe)................................. 2.27 2.01 2.69
Average costs ($ per Mcfe):
Lease operating expenses and production taxes....................... $ 0.19 $ 0.32 $ 0.58
Depletion, depreciation and amortization............................ 1.76 1.53 1.00
General and administrative.......................................... 0.30 0.27 0.77
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations (Continued)
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Year Ended December 31, 1999 compared to Year Ended December 31, 1998
Oil and natural gas revenues for the year ended December 31, 1999
decreased 1% to $20.7 million from $21.0 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 15% to 7,594 MMcf from 8,953 MMcf for the year ended December 31,
1998. This decrease is attributable to the sales of the Company's Antrim Shale
gas properties in Michigan and certain non-strategic properties in Texas and
Louisiana that occurred earlier in 1999. The combined proceeds from these
property sales amounted to $7.6 million of which $7.1 million was applied to the
Company's outstanding debt balance. The 23% decrease in natural gas production
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 increased only 3% to 256 MBbls from 248 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 27% to $13.54 per barrel during the year ended December 31, 1999 from
$10.69 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 49% to $1.7 million from $3.4 million for the year
ended December 31, 1998. This decrease was primarily comprised of an
approximate $1.0 million reduction in lease operating expenses attributable to
properties in Texas, Louisiana and Michigan that were sold in 1999. Savings of
approximately $0.5 million in 1999 compared to 1998 resulted from fewer well
workovers in 1999 compared to 1998 and more efficient use of the Company's field
operations personnel and much less dependence on contract pumping services.
There was also an approximate $0.3 million decrease in production taxes
associated with the sale of producing properties in 1999 mentioned above
partially offset by a $0.1 million increase in taxes attributable to new wells
in Mississippi and Michigan that commenced to initial production during 1999.
Depreciation, depletion and amortization ("DD&A") expense for the year
ended December 31, 1999 decreased 1% to $16.1 million from $16.0 million for the
year ended December 31, 1998.
General and administrative expense for the year ended December 31, 1999
of $2.8 million was unchanged from the same period in 1998. Although general and
administrative expense actually decreased by $0.4 million for 1999 compared to
1998 due to a cost reduction plan approved by the board of directors in March
1999, fees received as reimbursement of general and administrative expense costs
also decreased by $0.4 million, leaving reported general and administrative
expense for the year ended December 31, 1999 unchanged from the level reported
for the same period of the prior year.
3
Using unescalated period-end prices at December 31, 1999, of $2.38 per Mcfe,
the Company would have recognized a non-cash impairment of oil and gas
properties in the amount of approximately $1.2 million pre-tax. However, on
the basis of the improvement in pricing experienced subsequent to period-end
of $2.80 per Mcfe, the Company has determined that a writedown is not
required.
At December 31, 1998, the Company recorded a non-cash cost ceiling writedown
of $35.1 million. The writedown was the combined result of a large downward
revision in oil and gas reserve quantities and depressed commodity prices. The
large 8.2 Bcfe downward revision of the Company's proved oil and gas reserves at
December 31, 1998 was comprised of a 4.3 Bcfe reduction in proved undeveloped
reserves as a result of unsuccessful drilling activity and a 3.9 Bcfe reduction
in proved producing reserves. Proved producing reserves decreased as a result of
unanticipated pressure and production declines and by a reduction in the
economic lives of producing reserves caused by the lower commodity price being
realized at December 31, 1998. Disappointing 2-D seismic-supported drilling
results during 1998 and drilling cost overruns on two non-operated properties
also contributed to the cost ceiling writedown. The Company based its ceiling
test determination on a price of $1.78 per Mcfe, which represented the March
1999 closing commodity prices.
Interest expense for the year ended December 31, 1999 increased 115% to $3.5
million from $1.6 million for the year ended December 31, 1998. This substantial
interest expense increase is attributable to a higher average debt level in 1999
compared to 1998, due to substantial 3-D seismic acquisition costs, and
exploration and development activity in the third and fourth quarters of 1998
that increased the outstanding debt balance. Also contributing to higher
interest expense in 1999 was the interest expense associated with the Veritas
Note Payable, more fully discussed in Liquidity and Capital Resources below and
in Note 7, and the prime plus 3.5% interest rate that became effective with the
Second Amendment to the Credit Facility Agreement dated April 14, 1999, compared
to the previous libor based rate effective during 1998.
Net loss for the year ended December 31, 1999 decreased by $39.8 million to
$(2.0 million) from $(41.8 million) for the year ended December 31, 1998, as a
result of the factors described above.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Because of the significance of a series of related transactions entered into
concurrently with the Company's Initial Public Offering (the "Combination
Transaction") which occurred on February 9, 1998, the Company's operations for
1998 were significantly expanded in comparison to 1997. For additional
information regarding the Combination Transaction, see Note 1 to the
Consolidated Financial Statements.
Oil and natural gas revenues for the year ended December 31, 1998 increased
209% to $21.0 million from 6.8 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
4
Transactions" below). Production volumes for natural gas during the year ended
December 31, 1998 increased 300% to 8,953 MMcf from 2,241 MMcf for the year
ended December 31, 1997. Average natural gas prices decreased 21% to $2.05 per
Mcf for the year ended December 31, 1998 from $2.60 per Mcf for the year ended
December 31, 1997. Production volumes for oil during the year ended December 31,
1998 increased 422% to 248 MBbls from 47 MBbls for the year ended December 31,
1997. Average oil prices decreased 47% to $10.69 per barrel during the year
ended December 31, 1998 from $20.33 per barrel in the year ended December 31,
1997. The oil and gas industry suffered through a year of historically low oil
prices in 1998, caused by a global influx of crude oil supply brought on by
increased Middle-East exports combined with a weaker demand from Asian markets
that were experiencing an economic recession. The natural gas market also was
depressed as a result of abnormally mild winters caused by a strong El Nino
weather pattern that affected the United States during the past two heating
seasons. The Company would have experienced an even larger decrease in revenue
had it not been for the natural gas hedging gains of approximately $0.8 million
and the fact that only 12% of total operating revenues for 1998 were
attributable to oil production.
Lease operating expenses and production taxes for the year ended December
31, 1998 increased 128% to $3.4 million from $1.5 million for the year ended
December 31, 1997. Lease operating expenses and production taxes increased
primarily due to increased production as described above and to several
workover projects that were completed during the year in an attempt to enhance
production during a period of low commodity prices.
Depreciation, depletion and amortization ("DD&A") expense for the year ended
December 31, 1998 increased 540% to $16.0 million from $2.5 million for the
year ended December 31, 1997. This increase was due to a 53% increase in the
1998 depletion rate to $1.53 per Mcfe from $1.00 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 44% to $2.8 million from $2.0 million for the same period in 1997.
The rise in general and administrative costs is primarily attributable to
added expenses associated with the Company's initial year as a public company.
These incremental expenses include legal and professional fees paid to
attorneys and accountants, increased rents related to office facilities in
Mississippi and increased salaries and benefits due to additional financial,
technical, operational and administrative staff added during the year.
At December 31, 1998, the Company recorded a non-cash cost ceiling writedown
of $35.1 million, while no writedown was required in 1997.
Interest expense for the year ended December 31, 1998 increased 36% to $1.6
million from $1.2 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 $41.8
million from $(41.8) to $28,000 for the year ended December 31, 1997, as a
result of the factors described above.
Liquidity and Capital Resources
Liquidity
The Company's primary source of liquidity is cash generated from operations.
Net cash provided by operating activities was $12.9 million, $18.9 million and
$2.0 million in 1999, 1998 and 1997, respectively. The decrease in cash provided
in 1999 compared to 1998 was principally due to the reduced payables in 1999
because of an effort by the Company to more effectively manage its cash flow
requirements, including processing of payables on a more timely basis. The
increase in cash provided in 1998 compared to 1997 was principally due to the
increased income from operations in 1998, after the combination transaction in
February 1998, and the delayed payments of accounts payable in 1998 because of
cash flow constraints at year-end 1998.
Net cash provided by (used in) investing activities was $4.0 million, $(94.9)
million and $(5.9) million in 1999, 1998 and 1997, respectively. The decrease in
cash used in 1999 compared to 1998 was principally due to an increase in
property sales of $13.2 million in 1999, a decrease in exploration and
development expenditures of $37.6 million in 1999 and a decrease in the
acquisition of properties of $51.0 million in 1999. The increase in cash used in
1998 compared to 1997 was principally due to an increase in exploration and
development expenditures of $38.1 million in 1998 and an increase in the
acquisition of properties of $51.0 million.
Net cash provided by (used in) financing activities was $(13.2) million, $75.9
million and $3.6 million in 1999, 1998 and 1997, respectively. The decrease in
cash provided in 1999 compared to 1998 was principally due to an increase in
principal payments on long-term debt of $10.6 million in 1999, a decrease in
borrowings on long-term debt of $33.0 million in 1999 and a decrease in the
proceeds from the offering of common stock of $45.6 million in 1999. The
increase in cash provided in 1998 compared to 1997 was principally due to an
increase in borrowings on long-term debt of $32.0 million in 1998 and an
increase in the proceeds from the offering of common stock of $45.6 million in
1998, offset by an increase in principal payments on long-term debt of $4.6
million in 1998.
Capital Resources
Historically, the Company's primary sources of capital have been funds
generated by operations, and borrowings under our bank credit facility.
Concurrently with the Company's Initial Public Offering, the Company entered
into a credit facility with Bank of Montreal, Houston Agency. The credit
facility, as amended, required principal reductions and included certain
negative covenants that imposed limitations on the Company and its subsidiary
with respect to, among other things, distributions with respect to the Company's
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. The Company's obligations under the credit facility were
secured by a lien on all the Company's real and personal property. Commencing
April 1999, the interest rate under this facility was increased to Bank of
Montreal's prime plus 3.5%
The Company made principal payments of approximately $15.0 million for the
year ended December 31, 1999, under the credit facility. At December 31, 1999,
the outstanding debt balance under our credit facility with Bank of Montreal was
21.9 million.
On April 14, 1999, the Company and BMO entered into the Second Amendment to
the Credit Facility. The Second Amendment stipulated, among other things, that
the Company submit a revised reserve report to BMO by October 1, 1999 for a
re-determination of the borrowing base and pay a $300,000 re-determination fee.
On October 29, 1999, the re-determination fee was paid, and the Company and
BMO entered into the Third Amendment to the Credit Facility which included: (i)
terms requiring the Company to make principal payments to BMO during the period
beginning with October 1999 through February 2000, (ii) terms requiring that all
outstanding borrowings bear interest at BMO's prime rate plus 3.5%; (iii)
revision or waiver of certain negative covenant provisions through September 30,
2000; (iv) a requirement to submit a revised reserve report to BMO by April 1,
2000 for a re-determination of the borrowing base; (v) a requirement that all
proceeds from the sales of proved or unproved oil and gas properties, prior to
the re-determination date, must be used to reduce the principal amount
outstanding under the Credit Facility; and (vi) a requirement for an amendment
fee payable to BMO in an amount equal to 2% of the oustanding 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; ii) requirement of a $1.0 million principal payment
by March 31, 2000. At the April re-determination date, the Company may be
required to make additional payments of principal to the extent its outstanding
borrowings exceed the borrowing base. To the extent that additional payments are
required, management believes these would be fulfilled from available cash
flows, and would not have a material adverse effect on the Company's operating
results, financial condition or liquidity.
On April 14, 1999, the Company issued a $4.7 million note payable to one of
its suppliers, Veritas DGC Land, Inc. (the "Veritas Note Payable"), for the
outstanding balance due to Veritas for past services provided in 1998 and 1999.
The balance due Veritas was $4.7 million at December 31, 1999, and has been
classified as long-term debt in the accompanying financial statements. The
principal obligation under the Veritas Note Payable is due on April 15, 2001.
Management plans to fulfill the principal obligation under the Veritas Note
Payable from available cash flows, property sales and other financing sources.
On April 14, 1999, the Company also entered into an agreement (the "Warrant
Agreement") to issue warrants to Veritas that entitle Veritas to purchase shares
of the Company's Common Stock in lieu of receiving cash payments for the accrued
interest obligations under the Veritas Note Payable. The Warrant Agreement
requires the Company to issue warrants to Veritas in conjunction with the
signing of the Warrant Agreement, as well as on the six and, at the Company's
option, 12 and 18 month anniversaries of the Warrant Agrrement. The warrants to
be issued must equal 9% of the then current outstanding principal balance of the
Veritas Note Payable. The number of shares to be issued upon exercise of the
warrants issued on April 14, 1999, and on the six-month anniversary was
determined based upon a five-day weighted average closing price of the Company's
Common Stock at April 14, 1999. The exercise price of each warrant is $0.01 per
share. On April 14, 1999, warrants exercisable for 322,752 shares of Common
Stock were issued to Veritas in connection with execution of the Veritas Note
Payable. On October 14, 1999, the six-month anniversary of the Warrant
Agreement, warrants exercisable for another 322,752 shares of Common Stock were
issued to Veritas.
The Company has the option, in lieu of issuing warrants, to make a cash
payment to Veritas at the 12 and 18 month anniversaries equivalent to 9% of
the then current principal balance of the Veritas Note Payable. The number of
shares to be issued on the 12 and 18 month anniversaries will be based upon a
five-day weighted average closing price of the Company's common stock at April
14, 2000. Under the terms of the Warrant Agreement, all warrants issued will
expire on April 15, 2002. In addition, the Company also entered into an
agreement with Veritas that (i) requires the Company to file a registration
statement with the SEC to register shares of Common Stock that are issuable
upon exercise of the above warrants and (ii) grants certain piggy-back
registration rights in connection with the warrants.
In connection with the closing of the AHC acquisition on February 9, 1998, the
Company has a non-interest bearing note payable to AHC (the "AHC Note Payable")
of $2.5 million (at December 31, 1999) which is payable on the annual
anniversary dates of the closing as follows: $1.0 million in 2000 and $1.5
million in 2001. The Company has obtained a 60-day extension of the $1.0
million payment from February 2000 to April 2000.
At December 31, 1999, the Company had a working capital deficit of $0.7
million (excluding the current portion of long-term debt). Management plans to
meet these working capital requirements from available cash flows, property
sales and other financing sources.
The Company has budgeted capital expenditures of approximately an unrisked
$7.4 million for 2000. Capital expenditures will be used to fund drilling and
development activities, the shooting of a new 3-D seismic survey and leasehold
acquisitions and extensions in the Company's project areas. The actual amounts
of capital expenditures and number of wells drilled may differ significantly
from such estimates. Actual capital expenditures for the year ended December 31,
1999 were approximately $10.3 million. The Company intends to fund its 2000
budgeted capital expenditures through operational cash flow.
The Company's revenues, profitability, future growth and ability to borrow
funds or obtain additional capital, and the carrying value of its properties,
substantially are dependent on prevailing prices of oil and natural gas. The
Company cannot predict future oil and natural gas price movements with
certainty. A return to the significantly lower oil and gas prices experienced in
1998 and early 1999, as compared to historical averages, would likely have an
adverse effect on the Company's financial condition, liquidity, ability to
finance capital expenditures and results of operations. Lower oil and natural
gas prices also may reduce the amount of reserves that can be produced
economically by the Company.
The Company has experienced and expects to continue to experience substantial
working capital requirements primarily due to the Company's active exploration
and development program. At December 31, 1999 and 1998, the Company had a
working capital deficit of $0.7 million and $5.4 million (excluding the current
portion of long-term debt), respectively. While we believe that cash flow from
operations and substantially increased commodity prices should allow us to
implement our present business strategy through 2000, additional debt or equity
financing may be required during 2000 and in the future to fund our growing
exploration program. A significant decline in commodity prices or the failure to
obtain additional capital resources could have a material adverse effect on the
Company, including curtailment of our exploration and development program and
other activities.
Risk Management Activities and Derivative Transactions
The Company uses a variety of derivative instruments ("derivatives") to
manage exposure to fluctuations in commodity prices and interest rates. To
qualify for hedge accounting, derivatives must meet the following criteria:
(i) the item to be hedged exposes the Company to price or interest rate risk;
and (ii) the derivative reduces that exposures 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 portion of its production,
provide only partial price protection against declines in oil and natural gas
prices and limit potential gains from future increases in prices. Such hedging
arrangements may expose the Company to risk of financial loss in certain
circumstances, including instances where production is less than expected, the
Company's customers fail to purchase contracted quantities of oil or natural gas
or a sudden unexpected event materially impacts oil or natural gas prices. For
financial reporting purposes, gains and losses related to hedging are recognized
as oil and natural gas revenues during the period the hedged transactions occur.
The Company expects that the amount of hedge contracts that it has in place will
vary from time to time.
The Company's hedging strategy is to maximize its return on investment through
hedging a portion of its activities relating to oil and natural gas price
volatility. While this strategy should help the Company reduce its
6
exposure to price risks, it also limits the Company's potential gains from
increases in market prices for natural gas. The Company intends to continue to
hedge up to 50% of its oil and natural gas production to retain a portion of the
potential for greater upside from increases in natural gas prices, while
limiting to some extent the Company's exposure to declines in natural gas
prices. For the years ended December 31, 1999, 1998 and 1997 the Company had
hedged 45%, 36% and 1% of its oil and natural gas production, and as of December
31, 1999, the Company had 0.9 Bcfe of open oil and natural gas contracts for the
months of January 2000 through March 2000. For the years ended December 31,
1999, 1998 ad 1997, we had approximately $(0.3) million 1997, $0.8 million and
$0.03 million, respectively of hedging gains (losses) which are included in
natural gas revenues in the consolidated statements of operations.
Interest Rate Hedge
The Company entered into an interest rate swap agreement, effective November
2, 1998, to exchange the variable rate interest payment obligation under the
Credit Facility without exchanging the underlying principal amount. This
agreement converts the variable rate debt to fixed rate debt to reduce the
impact of interest rate fluctuations. The notional amount is used to measure
interest to be paid or received and does not represent the exposure to credit
loss. The notional amount of the Company's interest rate swap was $25.0
million at December 31, 1998, and had a fair value of approximately $0.2
million. During March 1999, the Company terminated its interest rate swap
agreement and received $0.3 million, which is being recognized in earnings
ratably as the related outstanding loan balance is amortized.
Market Risk Information
The market risk inherent in the Company's derivatives is the potential loss
arising from adverse changes in commodity prices and interest rates. The
prices of oil and natural gas are subject to fluctuations resulting from
changes in supply and demand. To reduce price risk caused by the market
fluctuations, the Company's policy is to hedge (through the use of
derivatives) future production. Because commodities covered by these
derivatives are substantially the same commodities that the Company sells in
the physical market, no special correlation studies other than monitoring the
degree of convergence between the derivative and cash markets are deemed
necessary. The changes in market value of these derivatives have a high
correlation to the price changes of oil and natural gas.
A sensitivity analysis model was used to calculate the fair values of the
Company's derivatives rates in effect at December 31, 1999. The sensitivity
analysis involved increasing or decreasing the forward rates by a hypothetical
10% and calculating the resulting unfavorable change in the fair values of the
derivatives. The results of this analysis, which may differ from actual
results, showed this type of change would not have a material impact on the
fair value of the derivatives.
Effects of Inflation and Changes in Price
Crude oil and natural gas commodity prices have been volatile and
unpredictable during 1998 and 1999, with crude oil prices falling below $10
per Bbl and rising close to $30 per Bbl, and natural gas prices dropping below
$1 per Mcf and then climbing up above $3 per Mcf during this two-year time
period. These wide fluctuations have had a significant impact on the Company's
results of operations, cash flow and liquidity. Recent rates of inflation have
had a minimal effect on the Company.
Environmental and Other Regulatory Matters
The Company's business is subject to certain federal, state and local laws
and regulations relating to the exploration for, and the development,
production and transportation of, oil and natural gas, as well as
environmental and safety matters. Many of these laws and regulations have
become more stringent in recent years, often imposing greater liability on a
larger number of potentially responsible parties. Although the Company
believes it is in substantial compliance with all applicable laws and
regulations, the requirements imposed thereby frequently change and become
subject to interpretation, and the Company is unable to predict the ultimate
cost of compliance with these requirements or their effect on its operations.
Any suspensions, terminations or inability to meet applicable bonding
requirements could materially adversely affect the
7
Company's business, financial condition and results of operations. Although
significant expenditures may be required to comply with governmental laws and
regulations applicable to the Company, compliance has not had a material
adverse effect on the earnings or competitive position of the Company. Future
regulations may add to the cost of, or significantly limit, drilling activity.
Year 2000 Readiness Disclosure
The Company has completed its Year 2000 Readiness Plan ("Year 2000 Plan")
which focused on the Company's computer systems and any embedded computer
chips integrated into Company operated oil and gas production related
equipment. Implementation of the Year 2000 Plan included an assessment and
complete inventory of computer hardware/software systems plus oil and gas
production equipment. The Company identified, remediated and tested those
critical systems that were not year 2000 compliant to prevent any business
disruption.
The Company expensed the cost of software upgrades as incurred and utilized
Company personnel to execute the various phases of the Year 2000 Plan. The
total costs to implement the Year 2000 Plan was less than $10,000 and did not
have a material effect on the Company's financial position, liquidity or
results of operations.
The Company does not anticipate any year 2000 related matters to develop
subsequent to the 1999 year-end, but the Company will continue to monitor its
systems for any such developments.
New Accounting Standard
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
The Company has not yet quantified the impacts of adopting SFAS No. 133 on its
financial statements and has not determined the timing of or method of its
adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required hereunder is included in "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Risk Management
Activities and Derivative Transactions" in Item 7, which is incorporated by
reference in this Item 7A.
Item 8. Financial Statements and Supplementary Data.
The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on Page F-1.
8
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K.
Item 14(a)(1). Financial Statements. See "Index to Financial Statements" set
forth on page F-1.
Item 14(a)(2). Financial Statement Schedules. Financial statement schedules
have been omitted because they are either not required, not applicable or the
information required to be presented is included in the Company's financial
statements and related notes.
Item 14(a)(3). Exhibits. The following exhibits are filed as a part of this
report.
Exhibit
No. Description
------- -----------
2.1 Exchange and Combination Agreement dated November 12, 1997. Previously
filed as exhibit 2.1 to the Company's Registration Statement on Form
S-1 (333-40383), and here incorporated by reference.
2.2(a) Letter Agreement amending Exchange and Combination Agreement.
Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (333-40383), and here incorporated by reference.
2.2(b) Letter Agreement amending Exchange and Combination Agreement.
Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (333-40383), and here incorporated by reference.
2.2(c) Letter Agreement amending Exchange and Combination Agreement.
Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (333-40383), and here incorporated by reference.
2.3(a) Agreement for Purchase and Sale dated November 25, 1997 between
Amerada Hess Corporation and Miller Oil Corporation. Previously filed
as an exhibit to the Company's Registration Statement on Form S-1
(333-40383), and here incorporated by reference.
2.3(b) First Amendment to Agreement for Purchase and Sale dated January 7,
1998. Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (333-40383), and here incorporated by reference.
3.1(a) Certificate of Incorporation of the Registrant. Previously filed as an
exhibit to the Company's Registration Statement on Form S-1 (333-
40383), and here incorporated by reference.
3.1(b) Certificate of Amendment to Certificate of Incorporation. Previously
filed as an exhibit to the Company's Amended Annual Report on Form 10-
K/A for the year ended December 31, 1999, and here incorporated by
reference.
3.2 Bylaws of the Registrant. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, and here incorporated by reference.
4.3 Form of Specimen Stock Certificate. Previously filed as an exhibit to
the Company's Registration Statement on Form S-1 (333-40383), and here
incorporated by reference.
10.1(a) Stock Option and Restricted Stock Plan of 1997.* Previously filed as
an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, and here incorporated by reference.
10.1(b) Form of Stock Option Agreement.* Previously filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, and here incorporated by reference.
10.1(c) Form of Restricted Stock Agreement.* Previously filed as an exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997, and here incorporated by reference.
10.2 Form of Director and Officer Indemnity Agreement. Previously filed as
an exhibit to the Company's Registration Statement on Form S-1 (333-
40383), and here incorporated by reference.*
10.3 Lease Agreement between Miller Oil Corporation and C.E. and Betty
Miller, dated July 24, 1996. Previously filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-40383), and here
incorporated by reference.
10.4 Letter Agreement dated November 10, 1997, between Miller Oil
Corporation and C.E. Miller, regarding sale of certain assets.
Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (333-40383), and here incorporated by reference.
9
Exhibit
No. Description
------- -----------
10.5 Amended Service Agreement dated January 1, 1997, between Miller Oil
Corporation and Eagle Investments, Inc. Previously filed as an exhibit
to the Company's Registration Statement on Form S-1 (333-40383), and
here incorporated by reference.
10.6 Form of Registration Rights Agreement (included as Exhibit E to
Exhibit 2.1). Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (333-40383), and here incorporated
by reference.
10.7 Consulting Agreement dated June 1, 1996 between Miller Oil Corporation
and Frank M. Burke, Jr., with amendment. Previously filed as an
exhibit to the Company's Registration Statement on Form S-1 (333-
40383), and here incorporated by reference.
10.8 $2,500,000 Promissory Note dated November 26, 1997 between Miller Oil
Corporation and the C.E. Miller Trust. Previously filed as an exhibit
to the Company's Registration Statement on Form S-1 (333-40383), and
here incorporated by reference.
10.9 Form of Indemnification and Contribution Agreement among the
Registrant and the Selling Stockholders. Previously filed as an
exhibit to the Company's Registration Statement on Form S-1 (333-
40383), and here incorporated by reference.
10.10 Credit Agreement between Miller Oil Corporation and Bank of Montreal
dated February 9, 1998. Previously filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, and here incorporated by reference.
10.11 Guaranty Agreement by Miller Exploration Company in favor of Bank of
Montreal dated February 9, 1998. Previously filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, and here incorporated by reference.
10.12 $75,000,000 Promissory Note of Miller Oil Corporation to Bank of
Montreal dated February 9, 1998. Previously filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, and here incorporated by reference.
10.13 Mortgage (Michigan) between Miller Oil Corporation and James Whitmore,
as trustee for the benefit of Bank of Montreal, dated February 9,
1998. Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, and here incorporated
by reference.
10.14 Mortgage, Deed of Trust, Assignment of Production, Security Agreement
and Financing Statement (Mississippi) between Miller Oil Corporation
and James Whitmore, as trustee for the benefit of Bank of Montreal,
dated February 9, 1998. Previously filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, and here incorporated by reference.
10.15 Mortgage, Deed of Trust, Assignment of Production, Security Agreement
and Financing Statement (Texas) between Miller Oil Corporation and
James Whitmore, as trustee for the benefit of Bank of Montreal, dated
February 9, 1998. Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, and
here incorporated by reference.
10.16 First Amendment to Credit Agreement among Miller Oil Corporation and
Bank of Montreal dated June 24, 1998. Previously filed as an exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and here incorporated by reference.
10.17 Second Amendment to Credit Agreement between Miller Oil Corporation
and Bank of Montreal dated April 14, 1999. Previously filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and here incorporated by reference.
10.18 Agreement between Eagle Investments, Inc. and Miller Oil Corporation,
dated April 1, 1999. Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, and
here incorporated by reference.
10.19 $4,696,040.60 Note between Miller Exploration Company and Veritas DGC
Land, Inc., dated April 14, 1999. Previously filed as an exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, and here incorporated by reference.
10.20 Warrant between Miller Exploration Company and Veritas DGC Land, Inc.,
dated April 14, 1999. Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, and
here incorporated by reference.
10
Exhibit
No. Description
------- -----------
10.21 Registration Rights Agreement between Miller Exploration Company and
Veritas DGC Land, Inc., dated April 14, 1999. Previously filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and here incorporated by reference.
10.22 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated March 16, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.23 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated May 18, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.24 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated May 27, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.25 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated June 30, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, and here incorporated by reference.
10.26 Agreement between Eagle Investments, Inc. and Miller Exploration
Company, dated October 18, 1999. Previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and here incorporated by reference.
10.27 Form of Equity Compensation Plan for Non-Employee Directors Agreement
dated December 7, 1998.**
10.28 Third Amendment to Credit Agreement among Miller Oil Corporation and
Bank of Montreal dated October 29, 1999.**
10.29 Form of Employment Agreement for Lew P. Murray dated
February 9, 1998.**
10.30 Form of Employment Agreement for Michael L. Calhoun dated
February 9, 1998.**
10.31 Form of Stock Option Agreement granted to Lew P. Murray dated
January 1, 2000.**
10.32 Fourth Amendment to Credit Agreement among Miller Oil Corporation and
Bank of Montreal dated March 20, 2000.**
11.1 Computation of Earnings per Share.
21.1 Subsidiaries of the Registrant. Previously filed as an exhibit to the
Company's Registration Statement on Form S-1 (333-40383), and here
incorporated by reference.
23.1 Consent of S.A. Holditch & Associates.
23.2 Consent of Miller and Lents, Ltd.
23.3 Consent of Arthur Andersen LLP.
24.1 Limited Power of Attorney.**
27.1 Financial Data Schedule.
- --------
* Management contract or compensatory plan or arrangement.
** Previously filed.
Item 14(b). The Company filed no reports on Form 8-K during the last
quarter of 1999.
11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated November 13, 2000 Miller Exploration Company
By: /s/ Deanna L. Cannon
-----------------------------
Deanna L. Cannon
Vice President -- Finance
12
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of Miller Exploration Company
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997.................................................... F-4
Consolidated Statements of Equity for the Years Ended December 31, 1999,
1998 and 1997.......................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Supplemental Quarterly Financial Data (unaudited)....................... F-25
F-1
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
MILLER EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
As of December 31,
------------------
1999 1998
-------- --------
(Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 3,712 $ 22
Restricted cash (Note 3)................................. 4 --
Accounts receivable...................................... 4,580 3,959
Inventories, prepaids and advances to operators.......... 640 978
-------- --------
Total current assets................................... 8,936 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........................................... $ 69,611 $ 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........... 6,164 3,565
-------- --------
Total current liabilities.............................. 13,136 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........................... $ 69,611 $ 85,968
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Year Ended
December 31,
---------------------------
1999 1998 1997
------- -------- --------
(Note 1) (Note 1)
REVENUES:
Natural gas...................................... $17,266 $ 18,336 $ 5,819
Crude oil and condensate......................... 3,465 2,646 964
Other operating revenues......................... 200 169 395
------- -------- -------
Total operating revenues....................... 20,931 21,151 7,178
------- -------- -------
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....................... 2,776 2,815 1,952
Cost ceiling writedown........................... -- 35,085 --
------- -------- -------
Total operating expenses....................... 20,546 57,196 5,950
------- -------- -------
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)
======= ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
Common Add'l
Stock Preferred Common Paid In Deferred Combined Retained
Warrants Stock Stock Capital Compensation Equity Deficit
-------- --------- ------ ------- ------------ -------- --------
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)
==== ===== ==== ======= ===== ====== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
MILLER EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Year Ended
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Note 1) (Note 1)
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)
Warrants and stock compensation................ 1,228 -- --
Changes in assets and liabilities--
Restricted cash.............................. (4) -- --
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................................. 2,599 2,962 34
-------- -------- -------
Net cash flows provided by operating
activities................................ 12,886 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................................... -- 45,601 873
Payments of dividends............................ -- -- (200)
-------- -------- -------
Net cash flows provided by (used in)
financing activities...................... (13,227) 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
======== ======== =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
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
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. Had the Company used unescalated period-end
prices at December 31, 1998 of $1.92 per Mcfe, the Company would have
recogized a cost ceiling writedown of $31.1 million.
F-8
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. Depreciation and amortization are calculated using straight-line and
accelerated methods over the estimated useful lives of the related assets. The
estimated useful lives for each category of fixed assets are: building and
improvement (10-20 years); office furniture and equipment (7-10 years) and
computer software and hardware (3-5 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.
Comprehensive Income
The Company did not have any other comprehensive income during 1999, 1998
and 1997.
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 interest 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. The amounts recorded as restricted cash in the Consolidated Balance
Sheets represent the Company's share of funds on deposit in the escrow accounts.
Once the agreed upon drilling procedure has been completed, any remaining funds
in the escrow accounts will be promptly returned to the respective joint
interest partners in the same proportions as the original contributions into the
escrow accounts.
(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.
F-9
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):
1999 1998
------- --------
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
======= ========
The components of the provision of income taxes for the year ended December
31, 1999 and 1998 are as follows (in thousands):
1999 1998
------- ------
Currently payable........................................... $ -- $ --
Deferred to future periods.................................. (1,152) 4,120
------- ------
Total income taxes.......................................... $(1,152) $4,120
======= ======
F-10
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):
1999 1998
-------- --------
Deferred tax liabilities:
Unsuccessful well and lease costs.................... $ (3,576) $ (3,655)
Intangible drilling costs............................ (4,540) (3,923)
Financial statement carrying value in excess of tax
basis of purchased assets........................... (1,474) (1,503)
Other................................................ (1,326) (807)
Deferred tax assets:
Ceiling test writedown............................... 11,700 11,700
Net operating loss................................... 5,100 3,005
-------- --------
Net deferred tax assets................................ 5,884 4,817
Less: Valuation allowance.............................. (11,700) (11,700)
-------- --------
Net deferred tax liability............................. $ (5,816) $ (6,883)
======== ========
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 $15.0 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):
1999 1998
------- --------
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)
------- --------
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
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Net Production Payments
During 1995, the Company transferred a limited-term working interest, based
on specified volumes, in certain natural gas producing properties to Miller
Shale Limited Partnership ("MSLP"), an affiliated entity. Under the terms of
the agreement, the Company received payments equal to 97% of the net profits
from MSLP, as defined in the agreement, arising from the production of those
properties.
The payments received by the Company were reflected on a gross basis in the
accompanying consolidated financial statements and the associated proved
reserves also were reflected in the accompanying supplemental oil and gas
disclosures to the consolidated financial statements.
During 1995 and 1996, the Company also received advance cash payments from
MSLP of approximately $1.6 million. These proceeds were recorded as deferred
revenue, and were recognized in income as the natural gas volumes under the
agreement are delivered.
In June 1999, the Company sold its interest in the Antrim Shale properties
located in Michigan, which includes the above-referenced net production
payment stream for $4.5 million of which $4.0 million was used to reduce the
Company's outstanding Credit Facility balance (see Note 7). The remaining
deferred revenue discussed above has been credited to the Company's
capitalized cost pool.
(7) Long-Term Debt
The Company has entered into a credit facility (the "Credit Facility") with
Bank of Montreal, Houston Agency ("BMO"). The Credit Facility includes certain
negative covenants that impose limitations on the Company and its subsidiary
with respect to, among other things, distributions with respect to its capital
stock, limitations on financial ratios, the creation or incurrence of liens,
the incurrence of additional indebtedness, making loans and investments and
mergers and consolidations. The obligations of the Company under the Credit
Facility are secured by a lien on all real and personal property of the
Company. At December 31, 1999, $21.9 million was outstanding under the Credit
Facility.
On April 14, 1999, the Company and BMO entered into the Second Amendment to
the Credit Facility. The Second Amendment stipulated, among other things, that
the Company would submit a revised reserve report to BMO by October 1, 1999
for a re-determination of the borrowing base and pay a $300,000 re-
determination fee.
On October 29, 1999, the re-determination fee was paid, and the Company and
BMO entered into the Third Amendment to the Credit Facility which included:
(i) terms requiring the Company to make principal payments to BMO during the
period beginning with October 1999 through February 2000, (ii) terms requiring
that all outstanding borrowings bear interest at BMO's prime rate plus 3.5%;
(iii) revision or waiver of certain negative covenant provisions through
September 30, 2000; (iv) a requirement to submit a revised reserve report to
BMO by April 1, 2000 for a re-determination of the borrowing base; (v) a
requirement that all proceeds from the sales of proved or unproved oil and gas
properties, prior to the re-determination date, must be used to reduce the
principal amount outstanding under the Credit Facility; and (vi) a requirement
for an amendment fee payable to BMO in an amount equal to 2% of the
outstanding balance of the Credit Facility at the April re-determination date.
Final maturity of the Credit Facility was set at January 1, 2001. Total
principal payments of $5.1 million were made under the Third Amendment with
the remaining $1.9 million waived through letter agreements subsequent to
December 31, 1999.
On March 20, 2000, the Company entered into a Fourth Amendment with BMO
which continued all of the provisions of the Third Amendment with the
exception of the following changes: i) extension of the final maturity date of
the Credit Facility to April 1, 2001; and ii) requirement of a $1.0 million
principal payment by March 31, 2000. At the April re-determination date, the
Company may be required to make additional payments
F-12
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of principal to the extent its outstanding borrowings exceed the borrowing
base. To the extent that additional payments are required, management believes
these would be fulfilled from available cash flows, and would not have a
material adverse effect on the Company's operating results, financial
condition or liquidity.
On April 14, 1999, the Company issued a $4.7 million note payable to one of
its suppliers, Veritas DGC Land, Inc. (the "Veritas Note Payable"), for the
outstanding balance due to Veritas for past services provided in 1998 and
1999. The balance due Veritas was $4.7 million at December 31, 1999, and has
been classified as long-term debt in the accompanying financial statements.
The principal obligation under the Veritas Note Payable is due on April 15,
2001. Management plans to fulfill the principal obligation under the Veritas
Note Payable from available cash flows, property sales and other financing
sources.
On April 14, 1999, the Company also entered into an agreement (the "Warrant
Agreement") to issue warrants to Veritas that entitle Veritas to purchase
shares of the Company's Common Stock in lieu of receiving cash payments for
the accrued interest obligations under the Veritas Note Payable. The Warrant
Agreement requires the Company to issue warrants to Veritas in conjunction
with the signing of the Warrant Agreement, as well as on the six and, at the
Company's option, 12 and 18 month anniversaries of the Warrant Agreement. The
Company is required to prepay interest equivalent to 9% of the outstanding
principal balance at each of these dates. In accordance with the Warrant
Agreement, the Company used the five-day weighed average closing price of the
Company's stock at April 14, 1999, to determine the required number of warrants
that would be issued for this interest obligation on both April 14, 1999 and
October 14, 1999, respectively. The exercise price of each warrant is $0.01. As
a result of the requirement to prepay interest on the Veritas Note Payable, the
Company issued 322,752 warrants in lieu of paying cash, on both April 14, 1999
and October 14, 1999, respectively. The Company ratably recognizes the prepaid
interest into expense over the period that it relates. During 1999, the Company
recognized non-cash interest expense of approximately $600,000 related to the
Veritas Note Payable.
The Company has the option, in lieu of issuing warrants, to make a cash
payment to Veritas at the 12 and 18 month anniversaries equivalent to 9% of
the then current principal balance of the Veritas Note Payable. The number of
shares to be issued on the 12 and 18 month anniversaries will be based upon
the five-day weighted average closing price of the Company's common stock at
April 14, 2000. Under the terms of the Warrant Agreement, all warrants issued
will expire on April 15, 2002. In addition, the Company also entered into an
agreement with Veritas that (i) requires the Company to file a registration
statement with the SEC to register shares of Common Stock that are issuable
upon exercise of the above warrants and (ii) grants certain piggy-back
registration rights in connection with the warrants.
In connection with the closing of the AHC acquisition on February 9, 1998,
the Company has a non-interest bearing note payable to AHC (the "AHC Note
Payable") of $2.5 million (at December 31, 1999) which is payable on the
annual anniversary dates of the closing as follows: $1.0 million in 2000 and
$1.5 million in 2001. The Company has obtained a 60-day extension of the $1.0
million payment from February 2000 to April 2000.
The Company's long-term debt consisted of the following as of December 31,
1999 and 1998 (in thousands):
1999 1998
-------- -------
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
======== =======
F-13
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):
2000................................. $ 3,500
2001................................. 25,610
-------
$29,110
=======
(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, except for the non-interest bearing AHC Note Payable that has
a fair value of approximately $150,000 less than the carrying amount.
Long-Term Debt
The interest rate on the Credit Facility is reset as BMO's prime rate
changes to reflect current market rates. Consequently, the carrying value of
the Credit Facility approximates fair value.
Hedging Arrangements
Refer to Note 9 for a description of the Company's price hedging
arrangements and the fair values of the arrangements.
(9) Risk Management Activities and Derivative Transactions
The Company uses a variety of derivative instruments to manage exposure to
fluctuations in commodity prices and interest rates. To qualify for hedge
accounting, derivatives must meet the following criteria: (i) the item to be
hedged exposes the Company to price or interest rate risk; and (ii) the
derivative reduces that exposure and is designated as a hedge.
Commodity Price Hedges
In 1997, the Company began using certain derivatives (e.g., NYMEX futures
contracts) for a portion of its oil and natural gas production to achieve a
more predictable cash flow, as well as to reduce the exposure to price
fluctuations. The Company's hedging arrangements apply to only a portion of
its production, provide only partial price protection against declines in oil
and natural gas prices and limit potential gains from future increases in
prices. Such hedging arrangements may expose the Company to risk of financial
loss in certain circumstances, including instances where production is less
than expected, the Company's customers fail to purchase contracted quantities
of oil or natural gas or a sudden unexpected event materially impacts oil or
natural gas prices. For financial reporting purposes, gains and losses related
to hedging are recognized as oil and natural gas revenues during the period
the hedged transactions occur. The Company expects that the amount of hedge
contracts that it has in place will vary from time to time. For the years
ended December 31, 1999, 1998 and 1997, the Company hedged 45%, 36% and 1% of
its oil and gas production, respectively, and as of December 31, 1999, the
Company had 0.9 Bcfe of open oil and natural gas contracts for the months of
January 2000 through March, 2000.
F-14
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest Rate Hedge
The Company entered into an interest rate swap agreement, effective November
2, 1998, to exchange the variable rate interest payment obligation under the
Credit Facility without exchanging the underlying principal amount. This
agreement converts the variable rate debt to fixed rate debt to reduce the
impact of interest rate fluctuations. The notional amount is used to measure
interest to be paid or received and does not represent the exposure to credit
loss. The notional amount of the Company's interest rate swap was $25.0
million at December 31, 1998, and had a fair value of approximately $0.2
million. During March 1999, the Company terminated its interest rate swap
agreement and received $0.3 million, which is being recognized in earnings
ratably as the related outstanding loan balance is amortized.
(10) Commitments and Contingencies
Leasing Arrangements
The Company leases its office building in Traverse City, Michigan from a
related party. The lease term is for five years beginning in 1996 and contains
an annual 4% escalation clause. The Company also leases office space in
Houston, Texas; Jackson, Mississippi; and Columbia, Mississippi; as well as
warehouse space in Columbia, Mississippi. The lease agreements in Houston and
Jackson were signed by the Company in September 1997 and April 1998,
respectively. Each lease has a five year term. The lease for office and
warehouse space in Columbia was assumed through the purchase of certain oil
and gas properties from AHC in February 1998, as more fully discussed in Note
1. The Columbia lease term ends in June 2001.
Future minimum lease payments required of the Company for years ending
December 31, are as follows (in thousands):
2000.................................... $259
2001.................................... 213
2002.................................... 147
2003.................................... 32
2004.................................... --
Thereafter.............................. --
----
$651
====
Total net rent expense under these lease arrangements was $255,078, $198,547
and $103,464 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Employee Benefit Plan
The Company has a qualified 401(k) savings plan (the "Plan") covering
substantially all eligible employees. The Plan provides for discretionary
matching contributions by the Company. Commencing in July 1998, matching
contributions have been in the form of Company stock. Contributions charged
against operations totaled $189,421, $66,359, and $64,348 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Tax Credit and Royalty Participation Programs
Various employees were eligible to participate in the Company's Tax Credit
and Royalty Participation Programs, which were designed to provide incentive
for certain key employees of the Company. Under the programs, the employees
were entitled to receive cash payments from the Company, based on overriding
royalty
F-15
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
working interests, fees, reimbursements and other financial items. These
payments to the employees, which were charged against operations, totaled
$54,611 and $134,916 for the years ended December 31, 1998 and 1997,
respectively. These programs were terminated upon the consummation of the
Offering in February 1998.
Other
The Company has been named as a defendant in a lawsuit filed June 1, 1999 by
Energy Drilling Company ("Energy Drilling"), in the Parish of Catahoula,
Louisiana arising from a blowout of the Victor P. Vegas #1 well that was
drilled and operated by the Company. Energy Drilling, the drilling rig
contractor on the well, is claiming damages related to their destroyed
drilling rig and related costs amounting to approximately $1.2 million, plus
interest, attorneys' fees and costs.
The Company has been named in lawsuit brought by Victor P. Vegas, the
landowner of the surface location of the blowout well referenced above. The
suit was filed July 20, 1999 in the Parish of Orleans, Louisiana, claiming
unspecified damages related to environmental and other matters.
The Company has been named in a lawsuit brought by Charles Strictland,
employee of BJ Services, Inc., on September 30, 1999. The suit is claiming
damages of $1.0 million for personal injuries allegedly suffered at a well
site operated by the Company.
The Company has been named in a lawsuit brought by Eric Parkinson, husband
and personal representative of the Estate of Kelly Anne Parkinson (deceased).
The amended complaint was filed December 13, 1999, in the County of Hillsdale,
Michigan, claiming an unspecified amount plus interest and attorney fees for
suffering the loss of the deceased care, comfort, society and support. Kelly
Anne Parkinson was killed in an automobile accident on February 2, 1999, while
traveling on a county road located next to land wherein the Company is lessee
of underground mineral rights. The plaintiff alleges that the accident was the
result of mud dragged on the road from the leased property and alleges that
the Company was negligent in its duty to conduct its operations at the site
with reasonable care.
The Company believes it has meritorious defenses to the claims discussed
above and intends to vigorously defend these lawsuits. The Company does not
believe that the final outcome of these matters will have a material adverse
effect on the Company's operating results, financial condition or liquidity.
Due to the uncertainties inherent in litigation, however, no assurances can be
given regarding the final outcome of each action. The Company currently
believes any costs resulting from the lawsuits mentioned above would be
covered by the Company's insurance.
(11) Stock-Based Compensation
During 1997, the Company adopted the Stock Option and Restricted Stock Plan
of 1997 (the "1997 Plan"). The Board of Directors contemplates that the 1997
Plan primarily will be used to grant stock options. However, the 1997 Plan
permits grants of restricted stock and tax benefit rights if determined to be
desirable to advance the purposes of the 1997 Plan. These stock options,
restricted stock and tax benefit rights are collectively referred to as
"Incentive Awards." Persons eligible to receive Incentive Awards under the
1997 Plan are directors, corporate officers and other full-time employees of
the Company and its subsidiaries. A maximum of 1.2 million shares of Common
Stock (subject to certain antidilution adjustments) are available for
Incentive Awards under the 1997 Plan. Upon consummation of the Offering in
February 1998, a total of 577,350 stock options were granted by the Company to
directors, corporate officers and other full-time employees of the Company,
and 109,500 shares of restricted stock were granted to certain employees. Also
in February 1998, the Company made a one-time grant of an aggregate of 272,500
stock options to certain officers pursuant to the terms of stock option
agreements entered into between the Company and the officers. During 1999 and
1998, incentive stock options of 25,000 and 54,600, respectively, were issued
to outside directors and new employees under the 1997 Plan.
F-16
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Since the above stock options have been granted at market price, no
compensation cost has been recognized for stock options granted under the 1997
Plan. The restricted stock vests at cumulative increments of one-half of the
total number of restricted stock of Common Stock subject thereto, beginning on
the first anniversary of the date of grant. Because the shares of restricted
stock are subject to the risk of forfeiture during the vesting period,
compensation expense is recognized over the two-year vesting period as the
risk of forfeiture passes. In February 1999, 54,750 shares of restricted stock
vested, and the Company recognized compensation expense of approximately $0.2
million, accordingly.
On January 1, 2000, the Company granted 191,500 stock options to certain
employees with an exercise price of $0.01 per share. The right to exercise the
options shall vest and be exercisable when the normal trading average of the
stock on the market remains above the designated values for a period of five
consecutive trading days as follows:
Percentage
Five-Day Daily Average Target Vested
----------------------------- ----------
$2.00........................................................... 40%
$2.75........................................................... 30%
$3.50........................................................... 30%
When it is probable that the five-day stock price target price will be
attained (the "measurement date"), the Company will recognize compensation
expense for the difference between the quoted market price of the stock at this
measurement date less the $0.01 per share grant price times the number of
options that will vest. Management does not currently believe it is probable
that any of these targets will be attained so no compensation expense has been
recorded yet for these options.
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:
Restricted
Stock Options
---------- ----------------------
Number Number Average
of Shares of Shares Grant Price
---------- --------- -----------
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
======= ======== =====
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:
Assumption 1999 1998
---------- -------- --------
Dividend Yield............................................. 0% 0%
Risk-free interest rate.................................... 6.5% 5.5%
Expected Life.............................................. 10 years 10 years
Expected volatility........................................ 25.5% 25.7%
F-17
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes certain information for the options
outstanding at December 31, 1999:
Options
Options Outstanding Exercisable
-------------------------- ----------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Grant Grant
Grant Prices Shares Life Price Shares Price
------------ ------- --------- -------- ------- --------
$2.19 to $10.13.................. 761,750 9 years $7.89 147,350 $8.05
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):
As Reported Pro Forma
----------------- -----------------
1999 1998 1999 1998
------- -------- ------- --------
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)
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. Payments received from the operator for the Company's
proportionate share of crude oil and natural gas revenues amounted to $468,081,
$4,420,665 and $2,046,354 in 1999, 1998 and 1997, respectively.
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.
At December 31, 1999, 1998 and 1997, the amounts due from related parties were
$552, $501,184 and $1,353,325, respectively. At December 31, 1999, 1998 and
1997, the amounts payable to related parties were $604,410, $1,088,900 and
$2,494,449, respectively. All of the related party transactions were in the
normal course of business, under comparable terms as those with third parties,
and all amounts due from and payable to these related parties were settled in
cash after each respective balance sheet date.
During 1999, an affiliated entity purchased a working interest in certain
unproved oil and gas properties from the Company for $3.9 million. Based on the
Company's extensive leasing experience, knowledge of recent acquisitions of 2-D
and 3-D seismic data in the Mississippi Salt Basin and dealings with other
industry partners, the Company believes that the purchase price was
representative of the fair market value of these interests and that the terms
were consistent with those available to unrelated parties.
F-18
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Concentrations of Risk
The Company extends credit to various companies in the oil and gas industry
in the normal course of business. Within this industry, certain concentrations
of credit risk exist. The Company, in its role as operator of co-owned
properties, assumes responsibility for payment to vendors for goods and
services related to joint operations and extends credit to co-owners of these
properties.
This concentration of credit risk may be similarly affected by changes in
economic or other conditions and may, accordingly, impact the Company's
overall credit risk. The Company periodically monitors its customers' and co-
owners' financial conditions.
The Company also has a significant concentration of properties in the
Mississippi Salt Basin, which are affected by changes in economic and other
conditions, including but not limited to crude oil and natural gas prices and
operating costs.
(14) Non-Cash Activities
During 1999, the Company issued 38,479 shares of common stock as compensation
for 1998 director fees, as provided for under the Equity Compensation Plan for
Non-employee Directors; had 54,750 shares of its restricted stock vest;
reclassified approximately $1.5 from deferred revenue to capitalized oil and gas
properties as more fully discussed in Note 6; and beginning from April 14, 1999
interest expense on the Veritas Note Payable began to be provided for with
warrants in lieu of cash. 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, plus
$0.9 million incurred in 1999, for a total note payable of $4.7 million as
discussed in Note 1; and converted an accounts payable balance to Veritas DGC
Land, Inc. of $3.8 million into a note payable, (plus $0.9 million incurred in
1999 for a total Note Payable of $4.7 million) as discussed in Note 7. During
1997, the stockholders contributed approximately $7.6 million of notes payable
to MOC as capital. These non-cash activities have been excluded from the
consolidated statements of cash flows.
(15) Significant Customers
Revenues from certain customers accounted for more than 10% of total crude
oil and natural gas sales as follows:
For the Year
Ended
December 31,
--------------
1999 1998 1997
---- ---- ----
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%
F-19
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(16) Supplemental Financial Information on Oil and Gas Exploration,
Development and Production Activities (Unaudited)
The following information was prepared in accordance with the Supplemental
Disclosure Requirements of SFAS No. 69, "Disclosures About Oil and Gas
Producing Activities."
Users of this information should be aware that the process of estimating
quantities of "proved" and "proved developed" crude oil and natural gas
reserves is very complex, requiring significant subjective decisions in the
evaluation of all available geological, engineering and economic data for each
reservoir. The data for a given reservoir also may change substantially over
time as a result of numerous factors including, but not limited to, additional
development activity, evolving production history and continual reassessment
of the viability of production under varying economic conditions.
Consequently, material revisions to existing reserve estimates occur from time
to time. Although every reasonable effort is made to ensure that reserve
estimates reported represent the most accurate assessments possible, the
significance of the subjective decisions required and variances in available
data for various reservoirs make these estimates generally less precise than
other estimates presented in connection with financial statement disclosures.
Proved reserves represent estimated quantities of natural gas and crude oil
that geological and engineering data demonstrate, with reasonable certainty,
to be recoverable in future years from known reservoirs under economic and
operating conditions existing at the time the estimates were made.
Proved developed reserves are proved reserves expected to be recovered,
through wells and equipment in place and under operating methods being
utilized at the time the estimates were made.
The following estimates of proved reserves and future net cash flows as of
December 31, 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
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:
Total
---------------------
Oil (MBbl) Gas (Mmcf)
---------- ----------
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
====== ========
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
MILLER EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The future cash flows presented below are computed by applying year-end prices
to year-end quantities of proved crude oil and natural gas reserves. Future
production and development costs are computed by estimating the expenditures to
be incurred in developing and producing the Company's proved reserves, based on
year-end costs and assuming continuation of existing economic conditions. 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:
1999 1998 1997
------- -------- --------
(In thousands)
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
======= ======== ========
- --------
(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:
1999 1998 1997
-------- -------- --------
(In thousands)
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)
======== ======== ========
F-22
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:
1999 1998
-------- --------
(In thousands)
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
======== ========
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:
1999 1998 1997
------- -------- ------
(In thousands)
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
======= ======== ======
- --------
(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
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.
1999 1998 1997
------- -------- ------
(In thousands)
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
======= ======== ======
F-24
MILLER EXPLORATION COMPANY
SUPPLEMENTAL QUARTERLY FINANCIAL DATA
Unaudited Quarterly Financial Information
Quarter Ended
----------------------------------
June Sept.
March 31 30 30 Dec. 31
-------- ------ ------ --------
(In thousands, except per share
data)
1999
Total Operating Revenues................... $ 4,873 $4,851 $5,492 $ 5,715
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................... $ 4,118 $5,608 $5,649 $ 5,776
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................... $ 2,251 $1,481 $1,631 $ 1,815
Operating Income (Loss).................... 903 115 242 (32)
Net Income (Loss).......................... 721 (93) (290) (310)
F-25