U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1995 Commission File No.
1-12508
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to . ----------
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MAGNUM PETROLEUM, INC.
(Name of small business issuer in its charter)
Nevada 87-0462881
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
600 East Las Colinas Blvd., Suite 1200, Irving, Texas 75039
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code: (214) 401-0752
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock ($.002 par value) American Stock Exchange
Series C Preferred Stock ($.001 par value) American Stock Exchange
Securities registered under Section 12(g) of the Act: None
Check whether the Issuer (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 Issuer was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes X No___
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Issuer's revenues for its most recent fiscal year. $ 648,574
-----------
As of April 12, 1996, the aggregate market value of voting stock held by
non-affiliates, computed by reference to the average of the bid and asked price,
was $41,104,117.
The number of shares outstanding of the Issuer's common stock at March 31, 1996:
11,607,958
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1995 ANNUAL REPORT (S.E.C. FORM 10-KSB)
INDEX
Securities and Exchange Commission
Item Number and Description
PART I
Item 1 Business..............................................................3
Item 2 Properties - Oil and Gas Operations..................................12
Item 3 Legal Proceedings....................................................18
Item 4 Submission of Matters to a Vote of Security Shareholders.............18
PART II
Item 5 Market for the Company's Common Stock and Related Matters............19
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................20
Item 7 Consolidated Financial Statements and Unaudited
Supplemental Information....................................24
Item 8 Change in and Disagreement with Accountants
on Accounting and Financial Disclosure......................25
PART III
Item 9 Directors and Executive Officers of the Registrant...................26
Item 10 Executive Compensation...............................................30
Item 11 Security Ownership of Certain Beneficial Owners and Management.......31
Item 12 Certain Relationships and Related Transactions.......................32
PART IV AND SIGNATURES
Item 13 Exhibits, Financial Statement Schedules and Reports on Form 8-K......32
Signatures...........................................................34
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PART I
Item 1. Description of Business
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Business Development.
---------------------
Magnum Petroleum, Inc. (hereinafter referred to as the "Company") was
incorporated under the laws of the State of Nevada on February 10, 1989
originally under the name Master Ventures, Inc. and registered a public offering
of its securities in 1989 pursuant to a Registration Statement on Form S-18,
Commission File No. 33-30298-D. Subsequently, the Company became engaged in the
oil and gas business and changed its name to Magnum Petroleum, Inc. on October
1, 1990. Due to its operations in various states, the Company is also registered
as a foreign corporation qualified to do business in the states of California,
Oklahoma and Texas. During the past three years, the Company's primary focus has
been the acquisition and development of oil and gas properties and raising
working capital through both the private and public sale of its common and
preferred stock.
On November 12, 1993, a Registration Statement filed by the Company on Form
SB-2 was declared effective by the Securities and Exchange Commission. Pursuant
to such offering a total of 517,500 Series C Units were sold at $10.00 per Unit.
The Company realized net proceeds from such offering after commissions, legal
and accounting fees and printing and other costs of the offering, of
approximately $4,376,158. Each Series C Unit consisted of one share of Series C
convertible, redeemable preferred stock, $.001 par value, and three redeemable
Warrants. The Series C preferred stock is convertible at the option of the
holder at any time into three shares of the Company's common stock. The shares
of Series C preferred stock will automatically convert into three shares of
common stock if, during any twenty consecutive trading days, the closing bid
price of the common stock equals or exceeds $5.00 per share. The Series C
preferred stock became redeemable on November 12, 1995 and will thereafter be
redeemable, in whole or in part at the option of the Company upon thirty days
notice at $10.50 per share, plus accrued and unpaid dividends to the redemption
date. Each Warrant entitles the holder to purchase one share of the Company's
common stock at an exercise price of $5.50 per share, until November 12, 1998.
However, the Company filed a post effective amendment to such registration
statement to update the prospectus, which was declared effective November 15,
1994, and during the period from November 15, 1994 through February 16, 1995,
(the "Discount Period") the Company offered to holders of warrants a limited
opportunity to exercise their warrants during the Discount Period at a
discounted exercise price of $4.00 per share. During the Discount Period,
833,324 Warrants were exercised at $4.00 per share, resulting in the receipt of
$3,333,298 in gross proceeds by the Company. The remaining Warrants are callable
and can be redeemed by the Company for $.02 per Warrant upon thirty days notice
at any time after November 12, 1995, or earlier if the closing bid price of the
common stock equals or exceeds $6.75 for five consecutive trading days.
On July 21, 1995, the Company executed a definitive agreement to combine
with Hunter Resources, Inc. ("Hunter"), a Boston Stock Exchange publicly traded
company, subject to Hunter shareholder approval (the "Business Combination").
Pursuant to the definitive agreement, the Company issued to Hunter 2,750,000
shares of newly issued restricted common stock in exchange for substantially all
of the assets of Hunter subject to its liabilities. Hunter's assets primarily
consisted of capital stock ownership in wholly-owned subsidiaries and capital
stock ownership interests in limited liability companies ("Hunter
Subsidiaries").
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On December 19, 1995 to be effective December 22, 1995, the Company and
Hunter entered into an amended Agreement and Plan of Reorganization and Plan of
Liquidation. The amendment was executed by Hunter shareholders holding in excess
of fifty percent (50%) of the outstanding common stock of Hunter and one hundred
percent (100%) of the outstanding preferred stock of Hunter. The amended
Agreement provided for the issuance to Hunter of an additional 2,335,077 shares
of newly issued restricted common stock and 111,825 shares of Series C preferred
stock. In summary, the total consideration paid by Magnum for the Hunter
subsidiaries was 5,085,077 shares of restricted common stock and 111,825 shares
of Series C preferred stock.
As the amended Agreement was executed by Hunter shareholders owning in
excess of fifty percent (50%)of the outstanding common stock of Hunter and one
hundred percent (100%) of the outstanding preferred stock of Hunter, all
subsequent discussions and disclosures in this document will, unless otherwise
stated, include the business operations of the Hunter Subsidiaries.
The Hunter Subsidiaries are engaged in four principal activities: (1) the
acquisition, production and sale of crude oil, condensate and natural gas; (2)
the gathering, transmission, and marketing of natural gas; (3) the business of
managing and operating producing oil and natural gas properties for interest
owners; and (4) providing consulting and U.S. export services to facilitate
Latin American trade in energy products. The Company intends to continue to use
and manage the Hunter Subsidiaries and their underlying assets in the similar
manner as previously conducted by Hunter.
The Company shares and the interests in the Hunter Subsidiaries are held in
escrow pending formal shareholder approval of the Business Combination at the
Hunter shareholder meeting.
In negotiating the number of common and preferred shares to be issued to
Hunter for the acquisition of the Hunter Subsidiaries, consideration was given
to the value of the assets of each of the Hunter Subsidiaries, the proved oil
and gas reserves of the Hunter Subsidiaries (as applicable), the assumption of
existing liabilities, and the market value of the Company's common and preferred
shares (prior to the date of the amended agreement through the date that the
definitive agreement was executed and announced).
As a result of the issuance of the common and preferred shares to Hunter by
the Company, Hunter is the owner of approximately 43.8% of the Company's total
issued and outstanding common stock. After approval of the Business Combination
at the Hunter shareholder meeting anticipated in June 1996, the common and
preferred shares issued by the Company will be subsequently distributed to the
respective Hunter shareholders. Shareholders of Hunter common stock are expected
to receive one common share for every 3.916 common shares of Hunter redeemed.
Shareholders of Hunter preferred stock are expected to receive 1.241 shares of
Magnum Series C preferred stock and 3.987 shares of Magnum common stock for
every share of Hunter preferred redeemed.
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Effective December 31, 1995, Lloyd T. Rochford, the then current President,
Chief Executive Officer, Chief Financial Officer and a director of the Company,
resigned as an officer, but assumed the position of Chairman of the Company. In
addition, Stanley McCabe resigned as an officer of the Company but has also
remained as a director. A new board of directors was appointed for the Company
at this time. The new board consists of Lloyd T. Rochford as Chairman, Matthew
C. Lutz as Vice Chairman, Gary C. Evans, Stanley McCabe, James E. Upfield,
Gerald W. Bolfing and Oscar C. Lindemann. An audit committee was appointed
consisting of non-officer directors which include Oscar C. Lindemann, Gerald W.
Bolfing and Stanley McCabe. Mr. Evans was appointed President and Chief
Executive Officer of the Company. Mr. Lutz also was appointed Exploration and
Business Development Manager. Steven P. Smart was appointed Senior Vice
President and Chief Financial Officer and William C. Jones was appointed
Secretary.
Business of Company.
--------------------
General
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The business purpose of the Company is to engage in four principal
activities: (1) the acquisition, production and sale of crude oil, condensate
and natural gas; (2) the gathering, transmission, and marketing of natural gas;
(3) the business of managing and operating producing oil and natural gas
properties for interest owners; and (4) providing consulting and U.S. export
services to facilitate Latin American trade in energy products. In most
instances, the Company acts as operator of the oil and gas properties in which
it has acquired an interest.
The Company pursues its business through the acquisition of oil and gas
mineral leases, gas gathering systems, and producing oil and gas properties.
Based upon each specific mineral lease situation as well as geological and
engineering interpretations, the Company either develops its inventory of leases
through the drilling of an oil and/or gas well, redrills or recompletes an
existing well or manages and operates existing wells located on such leases for
the production of oil and/or gas reserves located thereon. The Company currently
has an interest in oil and gas mineral leases, gas gathering pipeline systems
and wells producing hydrocarbons that are located in the states of California,
Oklahoma, New Mexico, Kansas, Louisiana, Mississippi and Texas. At the present
time, the Company does not intend to pursue its activities beyond those seven
states; however, the Company will evaluate other opportunities for the
development of oil and gas reserves and related assets and given the right
circumstances, may become involved in these activities in states other than
those in which it is currently involved.
The Company currently acts as an "operator" of oil and gas properties,
through its wholly-owned subsidiary, Gruy Petroleum Management Co., in six of
the seven states mentioned above. In this capacity, the Company is responsible
for the daily activities of producing oil and/or gas from individual wells and
leases located within those states. The Company's functions are focused
primarily towards management of the properties to maximize profitability and
supervision of its field employees. Additionally, the Company contracts with
individuals doing business within the proximity of the wells, more commonly
referred to as "pumpers", for performing the various tasks that are required to
maintain the production of oil and/or gas of the wells. The Company is not a
user or refiner of the oil and/or gas produced, except as it may relate to the
operation of wells that may produce gas. Once extracted from the ground, the
Company either connects the production to a pipeline gathering system, in the
case of gas, or stores the crude oil in storage tanks located in the near
proximity of the producing field, for collection by an oil purchaser. The
properties that the Company operates are located in areas which are typically
serviced by more than one crude oil purchaser and a gas pipeline gathering
system is generally within a relatively close proximity of the natural gas being
produced.
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Since 1992, the Company has been actively involved in making acquisitions
of oil and gas and other related properties, entering into operating agreements
for such properties, and raising capital by selling its securities to make such
acquisitions. As a result, the Company now operates and holds working interests
in over two hundred producing oil and gas wells. The properties in which the
Company has acquired interests also contain proved undeveloped reserves that
require additional drilling, workovers, waterflooding or other forms of
enhancement to become productive. In addition to acquiring such properties, the
Company has engaged in exploration and development activities by drilling new
wells on such properties during the past several years.
Acquisition of Additional Properties
------------------------------------
The Company will continue to evaluate and select additional prospects and
leases for acquisition and development, which management considers appropriate
for the purposes of the Company. Such prospects may be located anywhere in the
United States. The principal purpose of the Company in such acquisitions will be
to seek and acquire properties which presently are producing oil and/or gas and
are generating sufficient revenues from such properties to provide the Company
with the potential to significantly increase cash flow.
To the extent the Company continues seeking additional acquisitions of
producing oil and gas properties, it competes with many other entities which
seek to acquire similar assets. The operations and expenditures on behalf of the
Company are minor in relation to total operations conducted and in comparison to
amounts expended by all entities operating within this industry. The total
number and identity of producing oil and gas properties and proved developed
leases acquired by the Company will depend upon, among other things, on a
combination of the total amount of capital available to the Company, the latest
geological and geophysical data available, and the continuation of a sufficient
supply of properties which may become available for purchase.
Because management is responsible for selecting additional acquisitions, it
continually engages in a process of reviewing and analyzing prospects submitted
by oil and gas operating companies, investment bankers, geologists, engineers
and others within the energy industry. In some circumstances, prospects may, in
addition to the usual royalty paid to the landowner, have the burden of an
overriding royalty for the benefit of the entity or person submitting prospects
to the Company.
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These royalty interests do not share in any expense of drilling,
development, completion, operating and other costs incident to the production
and sale of oil and gas. The Company seeks to acquire leasehold interests which
will create the maximum revenue interest attributable to the working interest
owners in leases acquired by the Company.
The following information and factors are considered by the management in
connection with each decision to acquire a Property for the Company:
(a) The amount of uncommitted funds then available;
(b) The current production and expected future cash flow therefrom;
(c) The geologic and geographic region in which the property is located;
and
(d) The nature and extent of geological and engineering data available
concerning the property.
Oil and gas production, prospects, and leases have been and will continue
to be acquired by the Company from various industry sources, including, without
limitation, landowners, lease brokers, operating companies, investment bankers
and other persons or companies engaged in the business of acquiring and dealing
in oil and gas properties. In that regard, leases which are purchased by the
Company may be whole or fractional interests in oil and gas properties, and if
fractional, a portion of the costs of development may be borne by the parties
possessing the remaining fractional interests. The Company may also from time to
time enter into joint ventures or farmout arrangements to acquire or develop
properties.
Drilling Agreements and Operation of Wells
------------------------------------------
In addition to acquiring producing oil and gas properties, the Company may
use its working capital and available line of credit for drilling and other
development on the properties in which the Company has acquired interests, to
the extent funds permit. The Company does not own drilling equipment and
consequently sub-contracts the drilling, redrilling or workover of wells for
which it is designated the operator. When the Company is acting as the operator,
it will typically enter into a drilling agreement with an independent drilling
contractor. The Company either compensates the drilling contractor on i) a
footage contract, ii) an hourly arrangement during the drilling, testing and
completion phase of each well, or iii) seeks a fixed price or turn-key
agreement. The drilling contractor is typically allowed to utilize other
selected independent contractors, each of which is experienced in providing
drilling related services in the area, to conduct certain activities on behalf
of the Company.
The Company manages all day-to-day operations of the Company's wells,
leases and prospects for which it is the operator. While the Company may enter
into agreements with other parties for specific services, such agreements will
keep management functions within the control of the Company. The Company
utilizes its in-house technical personnel to provide geological, geophysical,
engineering and other services and when necessary, retains these services on a
contractual basis from within the industry. The Company reviews and analyzes all
prospects, drilling and logging data, engineering information and production
data, and monitors all expenditures made on behalf of the Company by any third
party engaged as a subcontractor.
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The Company will from time to time determine that it is in its best
interest to drill either exploratory or development wells on properties in which
it has acquired an ownership interest. Management will have the responsibility
to determine whether any well should, at any point, be abandoned. In the event
that a well is lost at any depth, either vertically or horizontally, by reason
of any accident or casualty, or if igneous rock or other impenetrable substances
are encountered, or loss of circulation or other conditions render further
drilling impractical by methods to be employed, the Company may elect to plug
and abandon a well and cease operations on the prospect or to plug and abandon a
well and commence drilling an additional well on the prospect.
Timing of Acquisitions/Operations
---------------------------------
The Company is continually evaluating the acquisition of additional proven
oil and gas properties and other oil and gas companies. Additionally, the
Company may commence drilling on existing prospects as it deems appropriate. The
Company believes that it has available suitable prospects and leases for future
development.
Gas Gathering, Transmission and Marketing
-----------------------------------------
Hunter Gas Gathering, Inc. (formerly IOM, Gas, Inc.), a wholly owned
subsidiary of the Company, owns and operates three gas gathering pipeline
systems located in the states of Oklahoma, Texas and Louisiana. Compression
services are provided by this subsidiary on all three systems through equipment
leases from third parties. The North Appleby system is located primarily in
Nacogdoches County, in East Texas. Approximately 39 wells are connected to the
system. Approximately 100 mmcf per month is delivered through the system into a
Natural Gas Pipeline Co. pipeline. The Schulter system is located in Okmulgee
County, Oklahoma. Approximately 10 mmcf per month is delivered from 38 wells
into the Enogex pipeline. The Longwood system is located in Caddo Parish,
Louisiana. Approximately 30 mmcf per month flows through the system from 28
wells, and the gas is delivered into the Koch-Gateway pipeline. A substantial
portion of the gas delivered through these systems is marketed by the Company as
an added service to the producers from whom the Company acquires the gas.
Petroleum Management and Consulting Services
--------------------------------------------
Gruy Petroleum Management Co. ("Gruy") has a 37-year history of managing
properties for banks, financial institutions, bankruptcy trustees, estates,
individual investors, trusts and independent oil and gas companies. The Company
provides drilling, completion, field inspections, joint interest billings,
revenue receipt and distribution services, regulatory filings with the
appropriate state and federal authorities, management of limited partnership
interests, gas marketing, environmental compliance services, expert witness
testimony and petroleum engineering services. Gruy manages, operates and
provides consulting services on oil and gas properties located in five states,
predominately within the Mid-Continent, West Texas, Eastern New Mexico and the
Gulf Coast regions of the United States.
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Insurance
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The Company maintains insurance coverage generally as follows:
(a) Employer's liability insurance in certain states covering injury or
death to any employee who may be outside the scope of the worker's
compensation statute;
(b) Commercial general liability insurance for bodily injury and property
damage, including property damage by blow-out and cratering, completed
operations, and broad form contractual liability with respect to any
contract into which the operator may enter into;
(c) Automobile liability insurance covering owned, non-owned and hired
automotive equipment;
(d) Umbrella liability insurance; and
(e) Operator's insurance covering the costs of controlling a blow-out, and
seepage and pollution liability, when deemed appropriate on certain
properties.
The Company attempts to obtain such insurance in amounts management
believes to be reasonable and standard. Such coverage will likely not fully
protect the Company from any specific casualty or loss. There is no assurance
such insurance will always be available to the Company and on terms the Company
can afford.
The Company is subject to, and to the best of its knowledge and belief is
currently in compliance with all bonding requirements (such as those relating to
plugging and abandonment) that are imposed by each of the states in which the
properties for which the Company acts as operator are located.
Competition.
------------
The oil and gas industry is a highly competitive industry. Competitors
include major oil companies, other independent oil and gas concerns, and
individual producers and operators, many of which have financing resources,
staffs and facilities substantially greater than those of the Company. In
addition, the Company frequently encounters competition in the acquisition of
oil and gas properties, gas gathering systems, and in its management and
consulting business. The principal means of competition are the amount and terms
of the consideration offered. When possible, the Company tries to avoid open
competitive bidding for acquisition opportunities. The principal means of
competition with respect to the sale of oil and natural gas production are
product availability and price. While it is not possible for the Company to
state accurately its position in the oil and gas industry, the Company believes
that it represents a minor competitive factor.
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Business Risks and Regulation.
------------------------------
The Company's operations are affected in various degrees by political
developments, federal and state laws, and regulations. In particular, oil and
gas production operations and economics are affected by price controls, tax and
other laws relating to the petroleum industry. They are all affected by the
changes in such laws, by changing administrative regulations, and by the
interpretation and application of such rules and regulations.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion. Numerous departments and agencies, both federal and
state, are authorized by statute to issue and have issued rules and regulations
binding on the oil and gas industry and its individual members, some of which
carry substantial penalties for the failure to comply. The regulatory burden on
the oil and gas industry increases the Company's cost of doing business and,
consequently, affects its profitability. Sales of crude oil, condensate and
natural gas liquids by the Company can be made at uncontrolled market prices.
Changing Oil and Natural Gas Prices and Markets -- The market for oil and
natural gas produced by the Company depends on factors beyond its control,
including the extent of domestic production and imports of oil and natural gas,
the proximity and capacity of natural gas pipelines and other transportation
facilities, demand for oil and natural gas, the marketing of competitive fuels,
and the effects of state and federal regulation of oil and natural gas
production and sales. The oil and gas industry as a whole also competes with
other industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
For over a decade, there has been a significant overall decline in the
demand for natural gas in the United States and in the prices paid for oil and
gas. The oversupply was caused primarily by a decrease in market demand and
unusually warm weather conditions. Seasonal variations exist to the extent that
the demand for natural gas is somewhat lower during the summer months than
during the winter season. Gas prices have been extremely volatile over the past
several years and it is not known whether or not a current surplus in natural
gas deliverability exists as has been the case over the past six (6) years.
Crude oil prices are affected by a variety of factors. Since domestic crude oil
price controls were lifted in 1981, the principal factors influencing the prices
received by producers of domestic crude oil have been the pricing and production
of the members of the Organization of Petroleum Exporting Countries ("OPEC").
While the Company cannot predict the future prices of oil and natural gas, the
potential for further price volatility is probable and the possibility of price
declines exist as has been experienced in the past.
The Company's production revenues and the carrying value of its oil and
natural gas properties are affected by changes in oil and natural gas prices.
Moreover, the Company's current borrowings under certain credit facilities, its
borrowing capacity and its ability to obtain additional capital in the future
are directly affected by oil and natural gas prices.
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Federal Regulation of Sales of Natural Gas -- Historically, the
transportation and sale for resale of gas in interstate commerce have been
regulated pursuant to the Natural Gas Act of 1938 (the "NGA). In addition, since
1978, maximum selling prices of certain categories of gas, whether sold in
interstate or intrastate commerce, have been regulated pursuant to the Natural
Gas Policy Act of 1978 (the "NGPA"). These statutes are administered by the
Federal Energy Regulatory Commission ("FERC"). The provisions of these acts and
regulations are complex. However, as a result of the enactment of the Natural
Gas Wellhead Decontrol Act of 1989 (the "Decontrol Act"), the remaining
restrictions imposed on the NGA and the NGPA with respect to "first sales"
terminate on the earlier of January 1, 1993 or the expiration of the applicable
contract. Any gas not otherwise deregulated prior to January 1, 1993 was
deregulated as of that date. The effect of the Decontrol Act is to remove all
remaining price controls under the NGPA and to remove all remaining FERC
certificate and abandonment jurisdiction otherwise applicable to producers under
the NGA.
Several major regulatory changes have been implemented by the FERC from
1985 to the present that affect the economics of natural gas production,
transportation and sales. In addition, the FERC continues to promulgate
revisions to various aspects of the rules and regulations affecting those
segments of the natural gas industry which remain subject to the FERC's
jurisdiction. The stated purpose of many of these regulatory changes is to
promote competition among the various sectors of the gas industry. The ultimate
impact of the complex and overlapping rules and regulations issued by the FERC
since 1985 cannot be predicted. In addition, many aspects of these regulatory
developments have note become final but are still pending judicial and FERC
final decisions.
FERC has issued Orders 636 and 636-A for the purpose of restructuring the
gas pipeline sales and transportation services in the United States to promote
competition in all phases of the gas industry. The impact of these FERC Orders
has significantly altered the traditional way natural gas has been purchased,
transported, and sold. The restructuring requirements that have emerged from the
administrative and judicial review process has varied significantly from those
previously in effect.
The price at which the Company's natural gas may be sold will continue to
be affected by a number of factors, including the price of alternate fuels such
as oil and coal and competition among various natural gas producers and
marketers.
Environmental Regulation -- Various federal, state and local laws and
regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, may affect the
Company's operations and costs as a result of the effect on oil and gas
exploration, development and production operations. At present, substantially
all of the Company's U.S. production of crude oil, condensate and natural gas is
in states having conservation laws and regulations. It is not anticipated that
the Company will be required in the near future to expend amounts that are
material in relation to its total capital expenditures program by reason of
environmental laws and regulations, but inasmuch as such laws and regulations
are frequently changed, the Company is unable to predict the ultimate cost of
compliance. The Company is able to control directly the operations of only those
wells for which it acts as operator. Notwithstanding the Company's lack of
control over wells operated by others, the failure of the operator to comply
with applicable environmental regulations may, in certain circumstances, be
attributable to the Company.
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State Regulation -- State statutes and regulations require permits for
drilling operations, drilling bonds and reports concerning operations. The
Railroad Commission of Texas regulates the production of oil and natural gas
produced by the Company in Texas. Similar regulations are in effect in all
states in which the Company produces oil and natural gas. Most states in which
the Company owns and operates properties have statutes, rules or regulations
governing conservation matters, including the unitization or pooling of oil and
gas properties, establishing of maximum rates or production from oil and gas
wells and the spacing of such wells. Many states also restrict production to the
market demand for oil and gas. Such statutes and regulations may limit the rate
at which oil and gas could otherwise be produced from the Company's properties.
Some states have enacted statutes prescribing ceiling prices for gas sold within
their state.
Many states have issued new regulations under authority of the Clean Air
Act Amendments of 1990, and such regulations are in the process of being
implemented. These regulations may require certain oil and gas related
installations to obtain federally enforceable operating permits and may require
the monitoring of emissions; however, the impact of these regulations on the
Company is expected to be minor. Several states have also adopted regulations on
the handling, transportation, storage, and disposal of naturally occurring
radioactive materials that are found in oil and gas operations.
Employees
---------
The Company has a total of 14 employees, all of whom are employed
full-time. Three of the Company's four officers are employed by the Company on a
full-time basis and William C. Jones, Secretary, consults with the Company on a
part-time basis.
Item 2. Properties
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General.
--------
The following tables summarize certain information regarding the estimated
proved oil and gas reserves as of December 31, 1995 and 1994 and estimated
future net revenues from oil and gas operations of the Company as of the same
dates. Such estimated reserves and future net revenues for 1995, as set forth
herein and the Supplemental Information to the Company's Consolidated Financial
Statements, are primarily based upon reports prepared in-house by registered
petroleum engineers and subsequently audited by James J. Weisman, Jr., an
independent registered petroleum engineer. The 1994 estimates were based upon
reports prepared by Hensley Consultants, Inc., an independent registered
petroleum engineering firm. All such reserves are located in the continental
United States.
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The reserve data herein represent only estimates that are based on
subjective determinations. Accordingly the estimates are expected to change as
additional information becomes available. Of necessity, estimates of oil and gas
reserves are projections based upon engineering and economic data. There are
uncertainties inherent in the interpretation of such data, and there can be no
assurance that the proved reserves set forth herein will ultimately be produced,
or that the estimated revenues will be realized within the periods indicated. It
should be noted that petroleum engineering is not an exact science but instead
involves estimates based upon many factors, some of which are known but most of
which are unknown.
Oil and gas prices used herein are based on the most current price
available at the time the respective reserve studies were prepared. The average
price used in the following estimates at December 31, 1995, was $17.50 per Bbl
of oil and $2.03 per Mcf of gas (includes higher prices received on "rich" or
"wet" BTU gas and condensate). Lease operating costs are based on historical
operating expense records.
The Company accounts for its oil and gas properties using the full cost
method, which requires the Company to compare the net capitalized costs of its
oil and gas properties to the present value of the projected cash flows from the
associated oil and gas reserves. Substantially all of the Company's oil and gas
properties are pledged as collateral on a promissory note payable to a bank.
Proved Oil and Gas Reserves.
----------------------------
Oil reserves are expressed in barrels (Bbl) and gas reserves are expressed
in thousands of cubic feet (Mcf). The following table sets forth proved reserves
considered to be economically recoverable under normal operating methods and
existing conditions, at prices and operating costs prevailing at the date
thereof.
<TABLE>
<CAPTION>
Proved Oil and Gas Reserves
As of December 31,
1995 1994
Oil (Bbls) Gas (Mcf) Oil (Bbls) Gas (Mcf)
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Proved Developed Reserves 1,681,841 8,796,748 239,795 394,872
Proved Undeveloped Reserves 2,085,898 5,275,168 1,020,725 4,519,335
--------- --------- --------- ---------
Total Proved Reserves 3,767,739 14,071,916 1,260,520 4,914,207
========= ========== ========= =========
</TABLE>
Definition of Reserves -- The reserve categories are summarized as follows:
Proved developed reserves are those quantities of crude oil, natural gas
and natural gas liquids which, upon analysis of geological and engineering data,
demonstrate with reasonable certainty to be recoverable in the future from known
oil and gas reservoirs under existing economic and operating conditions. This
classification includes: (a) proved developed producing reserves which are those
expected to be recovered from currently producing zones under continuation of
present operating methods; (b) proved developed non-producing reserves consist
of (i) reserves from wells which have been completed and tested but are not yet
producing due to lack of market or minor completion problems which are expected
to be corrected, and (ii) reserves currently behind the pipe in existing wells
and are expected to be productive due to both the well log characteristics and
analogous production in the immediate vicinity of the well.
13
<PAGE>
Proved undeveloped reserves are those reserves which may be expected either
from existing wells that will require an expenditure to develop or from
undrilled acreage adjacent to productive units which are reasonably certain of
production when drilled. Future development costs have been estimated to be
approximately $6,951,000 at December 31, 1995 with significant expenditures
expected to begin in 1996 and 1997.
No other estimates of total proven net oil or gas reserves have been filed
by the Company with, or included in any report to, any United States authority
or agency pertaining to the Company's individual reserves since the beginning of
the Company's last fiscal year.
Estimated Future Net Revenues.
------------------------------
The following table sets forth an estimate of future net revenues after
deducting applicable production and ad valorem taxes, future capital costs and
operating expenses, but before consideration of federal income taxes. The future
net revenues have been discounted at an annual rate of 10% to determine the
"present value". The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties. Estimates have been made in accordance with
current Securities and Exchange Commission guidelines concerning the use of
constant oil and gas prices and operating costs in reserve evaluations.
Estimated Discounted
Future Net Revenues
As of December 31,
1995 1994
---- ----
Developed $ 19,036,205 $ 5,337,427
============= ============
Developed and Undeveloped $ 37,209,330 $ 7,774,810
============= ============
14
<PAGE>
Oil and Gas Production.
--- -------------------
The following table sets forth the approximate net production attributable
to the Company's oil and gas interests for the periods indicated.
Net Production
For the Year Ended
December 31,
1995 1994
---- ----
Oil (Bbls) 29,972 41,835
====== ======
Natural Gas (Mcf) 102,056 88,176
======= ======
The following table sets forth, for the fiscal years 1995 and 1994: 1) the
weighted average sales price per barrel of oil and Mcf of gas shown separately;
and 2) the average lifting cost per unit of production of oil and gas are shown
together on an equivalent basis. Net quantities are the portion allocable to the
Company's interest in the property. The unit of production for purposes of
averaging costs is barrels. Mcf of gas is converted to barrels at the rate of 6
to 1.
<TABLE>
<CAPTION>
Average Sales Price
For the Year Ended
December 31,
1995 1994
---- ----
<S> <C> <C>
Average Sales Price<F1>
Oil (Bbl) $ 15.60 $ 14.20
======= =======
Natural Gas (Mcf) $ 1.46 $ 1.53
======= =======
Average Production Cost<F2>
Per equivalent barrel<F3> $ 5.69 $ 5.57
======= =======
Per dollar of sales $ 0.43 $ 0.44
======= =======
<FN>
<F1> Before deduction of production taxes.
<F2> Excludes depletion, depreciation and amortization. Production cost includes
lease operating expenses and production and ad valorem taxes, if
applicable.
<F3> Gas production is converted to equivalent barrels at the rate of six mcf of
gas per barrel, representing the estimated relative energy content of
natural gas and oil.
</FN>
</TABLE>
15
<PAGE>
PRODUCTIVE WELLS. The total gross and net wells, expressed separately for
oil and gas, as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Productive Wells<F2>
As of December 31,
1995
----
Gross<F1> Net<F1>
Location Oil Gas Total Oil Gas Total
- -------- --- --- ----- --- --- -----
<S> <C> <C> <C> <C> <C> <C>
Texas 133 19 152 44.19 8.87 53.06
Oklahoma 262 21 283 60.22 7.78 68.00
Mississippi 4 0 4 2.98 0 2.98
New Mexico 3 4 7 2.48 1.14 3.62
Kansas 2 0 2 1.74 0 1.74
California 14 0 14 1.05 0 1.05
---- --- ---- ------ ----- ------
418 44 462 112.66 17.79 130.45
=== == === ====== ===== ======
1994
----
Gross<F1> Net<F1>
Location Oil Gas Total Oil Gas Total
- -------- --- --- ----- --- --- -----
Texas 13 2 15 11.35 1.00 12.35
Oklahoma 19 2 21 15.90 1.80 17.70
California 15 0 15 1.30 0 1.30
-- - -- ------ ------ ------
47 4 51 28.55 2.80 31.35
== = == ===== ==== =====
<FN>
<F1> The number of gross wells is the total number of wells in which a
fractional working interest is owned. The number of net wells is the sum of
the fractional working interests owned by the Company in gross wells
expressed in whole numbers and decimal fractions thereof.
<F2> There were no producing wells in 1995 or 1994 that were producing from
multiple completion zones.
</FN>
</TABLE>
The Company does not own any properties outside the United States and all
of its properties are within a single geographic area as defined in SFAS No. 69.
Wells that produce both oil and gas are treated as oil wells herein.
Drilling Activity.
------------------
The Company did not engage in any drilling activities until 1992. During
1995, the Company participated in the drilling of two exploratory wells, both of
which are commercially productive wells. During 1994, the Company participated
in the drilling of three wells, two of which were commercially productive and
one non-commercial well. The Company also drilled a saltwater injection well.
These drilling activities resulted in a total of .6 net productive development
wells being net productive development wells being drilled in 1995 and .5 net
productive development wells being drilled in 1994.
16
<PAGE>
Developed and Undeveloped Acreage.
----------------------------------
The following tables set forth the approximate gross and net acres of
productive properties in which the Company had a leasehold interest as of
December 31, 1995 and 1994. "Gross" acres refers to the total acres in which the
Company has a working interest, and "net" refers to the sum of the fractional
working interests owned by or attributable to the Company in gross acres.
Developed acreage is that acreage spaced or assignable to productive wells.
Undeveloped acreage is considered to be that acreage on which wells have not
been drilled or completed to a point that would permit the production of
commercial quantities of oil and gas regardless of whether or not such acreage
contains proven reserves.
Leasehold Acreage
As of December 31,
Developed Undeveloped
--------- -----------
Gross Acres Net Acres Gross Acres Net Acres
1995 65,418 23,333 3,665 3,581
1994 4,550 3,224 14,592 6,006
Essentially all of the Company's oil and gas interests are working
interests or overriding royalty interests under standard onshore oil and gas
leases, rather than mineral ownership or fee title. The defensibility of the
Company's title to such interests in most cases is supported by written title
opinions. Substantially all of the Company's oil and gas properties are pledged
to a financial institution under certain credit agreements.
CUSHING DISPOSAL. On June 5, 1992, pursuant to a Stock Purchase Agreement,
the Company acquired all of the issued and outstanding capital stock of Cushing
Disposal, Inc. (hereinafter referred to as "Cushing"). Cushing operates a
saltwater disposal facility located approximately three miles north of Cushing,
Oklahoma. The facility has been in existence since 1985, is suitably located and
is easily accessible for haulers and vacuum truck companies in that area. The
facility is commercially licensed to dispose of non-toxic and non-hazardous
materials and primarily services the oil industry through the disposition of
salt water. The saltwater or other non-hazardous or non-toxic waste water is
being injected into a well with a casing size of 5 1/2 inches and a depth of
4249 feet. At this depth, the fluids are being injected into the "Arbuckle
Formation", which is the only formation known to the Company in an extended
surrounding area that will accept 4,000 Bbls of fluid per day. Furthermore, the
"Arbuckle Formation" is gravity fed, thus it requires no pressure when injecting
fluid through this well. In addition to operating Cushing as set forth above,
the Company uses the offices and real estate owned by Cushing, as a field office
and storage yard.
17
<PAGE>
Office Space.
-------------
The Company leases office space as follows:
Location Square Feet Lease Expires
-------- ----------- -------------
Irving (Las Colinas) Texas 7,439 November 1, 2001
Title of Properties.
--------------------
Title to the properties acquired by the Company is subject to royalty,
overriding royalty, carried and other similar interests, contractual
arrangements customary in the oil and gas industry, liens incident to operating
agreements, liens for current taxes not yet due and to other comparatively minor
encumbrances. The Company's oil and gas properties and gas gathering systems are
mortgaged to secure borrowings under its bank credit agreements.
Delivery Commitments.
---------------------
The Company is not obligated to provide any fixed or determinable quantity
of oil or gas in the future under existing contracts or agreements.
Item 3. Legal Proceedings.
- --------------------------
Gruy Petroleum Management Co. is involved in several legal and
administrative proceedings arising in the ordinary course of its oil and gas
management business, none of which are material in the opinion of Management.
Although the ultimate outcome of these proceedings cannot be ascertained at this
time, management believes that the ultimate resolution of these matters will be
favorable. See Note 11 to the Financial Statements (Item 7 of this Form 10-KSB).
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
The Company had no matters requiring a vote of security holders during the
fourth quarter of 1995 nor any as of March 31, 1996.
18
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
- -----------------------------------------------------------------
(a) Market information.
In March 1996, the Company' s Common Stock, Series C Preferred Stock and
Warrants graduated to a full listing on the American Stock Exchange.
Historically, the Common Stock of the Company has been listed on the American
Stock Exchange Emerging Company Marketplace ("AMEX.EC") since November, 1993,
under the symbol MPM.EC. Prior to November, 1993 the Common Stock was quoted on
the National Association of Securities Dealers, Inc. OTC Bulletin Board under
the symbol MNMP. The Company's Series C Preferred Stock and Warrants previously
contained in the Units offered and sold pursuant to the Original Prospectus were
also approved for listing, upon issuance, on the AMEX.EC under the symbols
MPM.PR.EC and MPM.WS.EC, respectively. There is no assurance that the public
trading markets for the Company's securities will continue in the future. The
following table sets forth, for each calendar quarter during the last two fiscal
years, the high and low trading prices for the Company's Common Stock on the
American Stock Exchange and the AMEX.EC, where applicable. Such bid price
quotations represent interdealer quotations, without retail markup, markdown or
commissions, and may not represent actual transactions.
Quarter Ended High Low
------------- ---- ---
March 31, 1994 $ 3.375 $ 2.50
June 30, 1994 $ 5.25 $ 2.25
September 30, 1994 $ 3.625 $ 2.625
December 31, 1994 $ 4.9375 $ 3.25
March 31, 1995 $ 5.00 $ 3.75
June 30, 1995 $ 4.6875 $ 3.375
September 30, 1995 $ 4.75 $ 3.3125
December 31, 1995 $ 4.1875 $ 2.8125
(b) Holders.
As of December 31, 1995, there were approximately 600 record holders of the
Company's Common Stock.
(c) Dividends.
The Company has not previously paid any cash dividends on common stock and
does not anticipate or contemplate paying dividends on common stock in the
foreseeable future. Except for the payment of dividends at the stated rate on
the existing Series C Preferred Stock, it is the present intention of management
to utilize all available funds for the development of the Company's business. In
addition, the Company may not pay any dividends on common equity unless and
until all dividend rights on outstanding preferred stock have been satisfied.
The only other restrictions that limit the ability to pay dividends on common
equity or that are likely to do so in the future, are those restrictions imposed
by law or by certain credit agreements. Under Nevada corporate law, no dividends
or other distributions may be made which would render the Company insolvent or
reduce assets to less than the sum of its liabilities plus the amount needed to
satisfy outstanding liquidation preferences.
19
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes associated with
them contained elsewhere in this report. References in this discussion to shares
of common stock, regardless of when issued, reflect the number of such shares
outstanding after giving effect to the one for two reverse split of the common
stock of the Company which occurred effective June 1, 1993. This discussion
should not be construed to imply that the results discussed herein will
necessarily continue into the future or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment of management of the
Company.
On July 21, 1995, the Company closed a definitive agreement to combine (the
"Business Combination") with Hunter Resources, Inc. ("Hunter"), subject to
Hunter shareholder approval. Pursuant to the definitive agreement, the Company
issued to Hunter 2,750,000 shares of newly issued restricted common stock in
exchange for substantially all of the assets of Hunter subject to its associated
liabilities. Hunter's assets primarily consisted of stock in wholly-owned
subsidiaries and stock ownership interests in limited liability companies
("Hunter Subsidiaries").
On December 19, 1995 to be effective December 22, 1995, the Company and
Hunter entered into an Agreement and Plan of Reorganization and Plan of
Liquidation, as amended. The amendment was executed on December 19, 1995 by
Hunter shareholders holding over 50 percent of the common stock of Hunter and
provided for the issuance to Hunter of an additional 2,335,077 shares of newly
issued restricted common stock and 111,825 shares of Series C preferred stock.
Therefore, the total consideration paid by the Company for the Hunter
subsidiaries was 5,085,077 shares of restricted common stock and 111,825 shares
of Series C preferred stock.
Hunter's shareholders have no dissenter rights. However, Hunter is required
to distribute an Information Statement and hold a special meeting of its
shareholders to formally approve the Agreement. The Company shares issued in the
Business Combination are held in escrow pending formal shareholder approval of
the Agreement. Subsequent to the Business Combination, the Company has conducted
its oil and gas operations and energy related acquisitions in conjunction with
the Hunter Subsidiaries. Acquisitions completed by the Company and Hunter after
the initial agreement, were completed by Magnum Hunter Production, Inc. ("Magnum
Hunter"), a Hunter Subsidiary. Hunter and its subsidiaries are consolidated in
the Company's financial statements beginning December 31, 1995.
20
<PAGE>
After the initial agreement with Hunter, management of the Company
discussed the accounting method that the Company had used since its inception.
Generally accepted accounting principles require a single method of accounting
for oil and gas activities be used in the presentation of the Company's
financial statements on a consolidated basis. Management concluded that the
"full cost" method of accounting was preferable to the "successful efforts"
method of accounting for its oil and gas activities. The Company's auditors
concurred with management's assessment and, accordingly, the 1994 financial
statements have been restated to reflect the "full cost" method.
On October 18, 1995, Magnum Hunter closed on an acquisition of the
remaining seventy-five percent (75%) ownership interest in an affiliated company
from a joint venture partner. The purchase price of $1,075,287 consisted of i)
$300,000 in cash, ii) $300,000 represented by 85,131 shares of restricted common
stock of the Company valued at $3.52 per share and iii) the assumption of
existing bank indebtedness of $475,287. As additional consideration, 50,000
warrants to purchase common stock of the Company were issued at exercise prices
ranging from $4.00 to $4.50 per share. The effective date of the acquisition was
July 1, 1995.
On October 25, 1995, Magnum Hunter closed on an acquisition of domestic
producing oil and gas properties. The purchase price was comprised of $2.058
million cash, funded by an existing bank line of credit, and $257,000
represented by 64,176 shares of restricted common stock of the Company valued at
$4.00 per share. The acquisition had an effective date of August 1, 1995.
On November 6, 1995, Magnum Hunter entered into an increased $20 million
revolving credit agreement with First Interstate Bank of Texas, N.A. ("FITX").
The previous line of credit was in the maximum amount of $10 million and was
entered into by Hunter prior to the business reorganization with the Company.
The new line of credit facility is secured by oil and gas properties and gas
gathering system assets subject to a borrowing base determination established
from time to time by FITX. The combined borrowing base was increased to $8.7
million with outstanding borrowings bearing interest at prime plus one and
one-half percent (1 1/2%).
On November 9, 1995, Magnum Hunter closed on an acquisition of domestic
producing oil and gas properties for approximately $4.229 million. The initial
purchase price was comprised of $3.104 million cash, funded by the bank line of
credit, and a note payable to the previous owner in the amount of $1.125 million
secured by 610,170 shares of restricted common stock of the Company.
On December 1, 1995, Magnum Hunter closed on an acquisition of two
unregulated gas gathering systems. The total consideration was $1 million cash,
funded substantially by the line of credit with FITX.
Results of Operations for the Years Ended 1995 and 1994
-------------------------------------------------------
The Company incurred a net loss applicable to common shares of $1,585,492
(including dividend payments of $617,220) for the year ended December 31, 1995,
compared to a net loss applicable to common shares of $1,125,707 (including
dividend payments of $579,325) for the same period of the preceding year. The
increased loss during 1995 represents a 41% increase over 1994 and occurred
partially as a result of the Company's efforts beginning the third quarter of
1995 being channeled towards the acquisition of Hunter.
21
<PAGE>
Total revenue for the year ended December 31, 1995 declined to $648,574
from $745,182 in 1994. Revenue from oil and gas sales decreased 15.5 percent
during 1995 to $616,596 compared to $729,478 in 1994. The sharp decline in oil
and gas revenue is largely attributable to a substantial decline in oil
production volumes from the South Tonkawa prospect after initial flush
production in 1994. Quantities of oil and gas produced during 1995 totaled
29,972 barrels of oil at a weighted average price of $15.60 per barrel and
102,056 mcf of gas at a weighted average price of $1.46 per mcf. Quantities of
oil and gas produced during 1994 totaled 41,835 barrels of oil at a weighted
average price of $14.20 per barrel and 88,176 mcf of gas at a weighted average
price of $1.53 per mcf.
Oil and gas production expenses declined slightly from $317,761 in 1994 to
$267,513 in 1995. On an equivalent barrel basis, the production expense
increased slightly to $5.69 per barrel in 1995 from $5.57 in 1994. Depreciation
and depletion rose from $243,180 in 1994 to $421,101 in 1995 as a result of an
increase in the depletable book value of the Company's properties and a
reduction of the estimated proved undeveloped reserves of two of the Company's
base properties after further evaluation of the properties at year-end.
General and administrative expenses ("G&A") were significantly higher for
the year ended December 31, 1995 due to the Company's increase in staff in the
first half of 1995 over the 1994 period. Interest income is higher in the 1995
period over the 1994 period as a result of increased funds available for
investment in the 1995 period.
The Company declared a dividend on its Series "B" and Series "C" cumulative
preferred stock for each quarter during 1995 and 1994. For 1995 and 1994,
dividends on the Series "B" and Series "C" cumulative preferred shares totaled
$617,220 and $579,325, respectively.
Liquidity and Capital Resources.
- --------------------------------
For 1995, the Company had a net decrease in cash of $100,853 as the
proceeds received from the sale of stock were principally used for oil and gas
acquisition and development and for the payment of dividends and payables. The
Company's operating activities used net cash of $849,342 principally as a result
of the net loss from operations and the payoff of a substantial amount of
accounts payable. Investing activities used net cash of $1,106,912 largely from
acquisition and development of oil and gas properties. Financing activities
accounted for net cash provided of $1,765,401 principally from the proceeds from
the issuance of preferred and common stock mentioned above. Partially offsetting
the proceeds from the stock issuances were advances made to Magnum Hunter for
acquisition costs and working capital of $1,034,417 and the payment of preferred
dividends of $583,495.
During 1994, operating activities provided net cash of $31,943 while the
Company used $1,646,161 of net cash in investing activities, consisting mostly
of payments to purchase property and equipment, and $126,613 of net cash was
used in financing activities, which was primarily the result of dividends paid
on preferred stock. The Company had a net decrease of cash for the year of
$1,740,831 as the cash received from its offerings in 1993 was used largely to
acquire oil and gas properties.
22
<PAGE>
Commitments.
- ------------
As of December 31, 1995, 625,000 shares of Series C preferred stock remain
outstanding, entitled to receive, when, as and if declared by the Board of
Directors, a cumulative annual dividend of $1.10 per share, the payment of which
will require an aggregate cash distribution of $687,500 annually, as long as
such securities remain outstanding. Although not obligated to declare and pay
such dividends, to date the Company has done so and fully intends to do so in
the future if adequate funds are available, until these securities are either
redeemed or converted into Common Stock. In order to have sufficient funds
available to pay dividends on the Series C Preferred Stock, the total revenues
generated by the Company, less all other expenses of the Company, must exceed
the amount of the dividends to be paid.
In 1995 and prior years, the Company has been successful in raising capital
through the issuance of preferred and common stock. During 1995, the Company
received proceeds of $249,000 from the purchase of 20,750 shares of Series C
preferred stock from the exercise of representatives' warrants. In addition, the
exercise of 833,324 common stock purchase warrants resulted in net proceeds
after offering costs of $2,840,860.
As discussed above, in March 1996 the Company increased its available
borrowing base for its oil and gas properties under its line of credit
arrangement to $9 million. At March 31, 1996, there remained approximately $1
million of available borrowings under the line of credit. In addition,
subsequent to December 31, 1995, the Company entered into an arrangement with an
investment banking firm for a private placement of preferred stock for as much
as $15 million to be completed during 1996. Proceeds from the offering would be
utilized to develop a significant portion of the Company's proved undeveloped
reserves. In the event the Company is unsuccessful in raising the $15 million
from the preferred stock offering, the Company will be able to meet its existing
obligations out of cash flow from operations and funds available from its
existing line of credit.
23
<PAGE>
Item 7. Consolidated Financial Statements and Unaudited Supplemental Information
- --------------------------------------------------------------------------------
Index to Consolidated Financial Statements
Page
Independent Auditor's Report - 1995..........................................F-1
Independent Auditor's Report - 1994..........................................F-2
Financial Statements:
Consolidated Balance Sheet at December 31, 1995 and 1994.....................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994.............................................F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995 and 1994.................................F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995 and 1994.......................................F-6
Notes to Consolidated Financial Statements...................................F-7
Supplemental Information (Unaudited)........................................F-22
24
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Magnum Petroleum, Inc.
We have audited the accompanying consolidated balance sheet of Magnum Petroleum,
Inc. and Subsidiaries as of December 31, 1995, and the related consolidated
statements of operations, cash flows, and stockholders' equity for the year then
ended. 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 audit.
We conducted our audit 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
misstatements. 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 audit provides 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 Magnum Petroleum, Inc. and
Subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for oil and gas producing operations from the successful
efforts method to the full cost method.
/s/ Hein + Associates LLP
HEIN + ASSOCIATES LLP
Dallas, Texas
April 3, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Magnum Petroleum, Inc.
We have audited the accompanying consolidated balance sheet of Magnum Petroleum,
Inc. and Subsidiary as of December 31, 1994, and the related consolidated
statements of operations, cash flows, and stockholders' equity for the years
ended December 31, 1994 and 1993. 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
misstatements. 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 Magnum Petroleum, Inc. and
Subsidiary as of December 31, 1994, and the results of their operations and
their cash flows for the years ended December 31, 1994 and 1993, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for oil and gas producing operations from the successful
efforts method to the full cost method.
/s/ Hansen, Barnett & Maxwell
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 26, 1995, except for Note 2,
as to which the date is September 29, 1995
F-2
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,543,666 $ 1,644,519
Securities available for sale 101,640 23,375
Accounts receivable
Trade, net of allowance of $134,158 in 1995 1,246,652 72,783
Due from affiliates 115,961 -
Other 22,368 -
Note receivable from affiliate 120,758 -
Note receivable - 319,206
Costs in excess of billings on uncompleted drilling contracts - 54,590
Current portion of long-term note receivable 200,955 -
----------- ------------
TOTAL CURRENT ASSETS 3,352,000 2,114,473
----------- ------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method
Unproved 842,889 700,344
Proved 36,256,428 7,932,496
Pipelines 1,087,310 -
Other property 145,957 169,285
----------- ------------
TOTAL PROPERTY, PLANT and EQUIPMENT 38,332,584 8,802,125
Accumulated depreciation, depletion and impairment (1,928,078) (1,547,647)
----------- ------------
NET PROPERTY, PLANT AND EQUIPMENT 36,404,506 7,254,478
----------- ------------
OTHER ASSETS
Deposits and other assets 118,007 8,971
Investments in securities - 66,660
Long-term notes receivable, net of imputed interest 190,287 -
Funds segregated for settlement of note payable - 130,000
------------ ------------
TOTAL ASSETS $ 40,064,800 $ 9,574,582
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,229,562 $ 551,911
Accrued liabilities 53,433 48,183
Dividends payable 177,304 143,579
Suspended revenue payable 793,680 -
Current maturities of long-term debt 2,014,000 173,925
--------- -------
TOTAL CURRENT LIABILITIES 4,267,979 917,598
--------- -------
LONG-TERM LIABILITIES
Long-term debt 7,597,597 11,675
Production payment liability 288,235 -
Other 289,983 -
Deferred income taxes 3,125,000 -
COMMITMENTS AND CONTINGENCIES (Note 12) - -
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 authorized
216,000 designated as Series A; 80,000 shares issued
and outstanding 80 80
925,000 designated as Series B; 62,050 and 64,050
shares issued and outstanding, respectively 62 64
625,000 designated as Series C; 625,000 and 501,725
shares issued and outstanding, respectively
(liquidation preference of $6,250,000 at
December 31, 1995 625 504
Common stock - $.002 par value; 50,000,000 shares authorized
11,598,183 and 4,537,045 shares issued and outstanding
respectively 23,196 9,074
Additional paid-in capital 29,659,992 12,606,305
Deferred costs of warrant exercise offering - (240,281)
Accumulated deficit (5,244,899) (3,659,407)
Receivable from stockholders (250) (62,500)
Unrealized gain (loss) on investments 57,200 (8,528)
------ ------
TOTAL STOCKHOLDERS' EQUITY 24,496,006 8,645,309
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,064,800 $ 9,574,582
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1995 1994
---- ----
<S> <C> <C>
OPERATING REVENUE
Oil and gas sales $ 616,596 $ 729,478
Other oil and gas related services 31,978 15,704
------ ------
TOTAL OPERATING REVENUE 648,574 745,182
------- -------
OPERATING COSTS AND EXPENSES
Oil and gas production 267,513 317,761
Costs related to other services 26,134 6,631
Depreciation and depletion 421,101 243,180
General and administrative 977,070 768,838
------- -------
TOTAL OPERATING COSTS AND EXPENSES 1,691,818 1,336,410
--------- ---------
OPERATING LOSS (1,043,244) (591,228)
INTEREST INCOME 152,371 51,506
INTEREST EXPENSE (1,882) (6,660)
LOSS ON DISPOSITION OF ASSETS (75,517) -
------- --------
NET LOSS (968,272) (546,382)
DIVIDENDS APPLICABLE TO PREFERRED
SERIES B AND SERIES C SHARES 617,220 579,325
------- -------
NET LOSS APPLICABLE TO COMMON SHARES $(1,585,492) (1,125,707)
----------- ----------
LOSS PER COMMON SHARE $ (0.28) $ (0.27)
COMMON SHARES USED IN PER SHARE CALCULATION 5,606,669 4,166,822
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 672,050 $ 673 3,472,345 $ 6,945 $ 10,499,891
Conversion of 10,500 shares
of Series B and 40,025 shares of Series C
preferred stock to common stock (50,525) (51) 125,325 251 (200)
Issuance of Series C preferred stock 24,250 24 290,976
Issued for notes receivable 150,000 300 187,200
Adjustment of price of stock previously issued for
notes receivable (187,500)
Issued to acquire oil and gas properties 613,000 1,226 1,232,274
Issued in exchange for Series B production
certificates, net of $42,924 offering costs 176,375 352 583,664
Costs incurred in warrant offering
Interest accrued on receivable
Payments received on receivable
Dividends declared on preferred stock
Net loss
Unrealized loss on investments
-------------------------------------------------------------------
Balance at December 31, 1994 645,775 646 4,537,045 9,074 12,606,305
-------------------------------------------------------------------
Conversion of 2,000 shares of Series B and 9,300
shares of Series C preferred stock to common stock (11,300) (12) 28,900 58 (46)
Issuance from exercise of warrants 833,324 1,667 3,331,629
Costs incurred in warrant offering
Offset warrant offering costs (490,769)
Issuance of Series C preferred stock 20,750 21 248,979
Issued to acquire oil and gas properties 386,615 773 1,378,431
Issued as compensation to directors 5,000 10 17,490
Issued for services 22,222 44 84,400
Issued to directors for collateral 125,000 250
Sale of investment shares
Payments received on receivable 111,825 112
Acquisition of Hunter Resources, Inc. for Series C
preferred stock and common stock 5,660,077 11,320 12,483,573
Dividends declared on preferred stock
Net loss
Unrealized gain on investments
---------------------------------------------------------------
Balance at December 31, 1995 767,050 $ 767 11,598,183 $ 23,196 $ 29,659,992
===============================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5.1
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
<TABLE>
<CAPTION>
Deferred Unrealized
Costs of Receivable Gain (Loss)
Warrant Accumulated from On
Offering Deficit Stockholder Investments
----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ - $(2,533,700) $ (465,645) $ -
Conversion of 10,500 shares
of Series B and 40,025 shares of Series C
preferred stock to common stock
Issuance of Series C preferred stock
Issued for notes receivable
Adjustment of price of stock previously issued for
notes receivable
Issued to acquire oil and gas properties
Issued in exchange for Series B production
certificates, net of $42,924 offering costs
Costs incurred in warrant offering (240,281)
Interest accrued on receivable (11,355)
Payments received on receivable 414,500
Dividends declared on preferred stock (579,325)
Net loss (546,382)
Unrealized loss on investments (8,528)
----------------------------------------------------------
Balance at December 31, 1994 (240,281) (3,659,407) (62,500) (8,528)
----------------------------------------------------------
Conversion of 2,000 shares of Series B and 9,300
shares of Series C preferred stock to common stock
Issuance from exercise of warrants
Costs incurred in warrant offering (250,488)
Offset warrant offering costs 490,769
Issuance of Series C preferred stock
Issued to acquire oil and gas properties
Issued as compensation to directors
Issued for services
Issued to directors for collateral (250)
Sale of investment shares 8,528
Payments received on receivable 62,500
Acquisition of Hunter Resources, Inc. for Series C
preferred stock and common stock
Dividends declared on preferred stock (617,220)
Net loss (968,272)
Unrealized gain on investments 57,200
----------------------------------------------------------
Balance at December 31, 1995 $ - $(5,244,899) $ (250) $ 57,200
==========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5.2
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1995 1994
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (968,272) $ (546,382)
Adjustments to reconcile net loss to cash provided by (used for)
operating activities:
Depreciation and depletion 421,101 243,180
Common stock issued for services 101,944 -
Loss on sale of assets 75,517 -
Interest accrued on notes receivable from stockholders - (11,355)
Other 14,935 29,631
Changes in certain assets and liabilities
Accounts receivable (36,769) (27,724)
Costs in excess of billings on uncompleted drilling contracts 54,590 (54,590)
Deposits and other assets 349 33,117
Accounts payable and accrued liabilities (512,737) 366,066
-------------- -----------
Net Cash Provided By (Used By) Operating Activities $ (849,342) $ 31,943
-------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 88,475 650,041
Additions to property and equipment (1,244,128) (1,945,093)
Loan made for promissory note receivable (120,758) (319,206)
Payments received on promissory notes receivable 334,442 -
Purchase of securities available for sale (30,338) (31,903)
Obligations and property acquisitions funded in Hunter acquisition (1,034,417) -
-------------- -----------
Net Cash Used By Investing Activities (2,006,724) (1,646,161)
-------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock,
net of offering costs 3,331,808 145,594
Payments received on notes receivable from shareholders 62,500 414,500
Payments of principal on notes payable (185,600) (46,663)
(Increase) decrease in segregated funds for payments of notes payable 130,000 (130,000)
Dividends paid (583,495) (510,044)
-------------- -----------
Net Cash Provided By (Used By) Financing Activities 2,755,213 (126,613)
-------------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (100,853) (1,740,831)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,644,519 3,385,350
-------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,543,666 $ 1,644,519
============== ===========
</TABLE>
F-6
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
- -------------------------------------
Magnum Petroleum, Inc. (the "Company") is incorporated under the laws of
the state of Nevada. The Company is engaged in the acquisition, operation and
development of oil and gas properties, the gathering, transmission and marketing
of natural gas, providing management and advisory consulting services on oil and
gas properties for third parties, and providing consulting and U.S. export
services to facilitate Latin American trade in energy products. In conjunction
with the above activities, the Company is licensed to operate a commercial salt
water disposal facility in the state of Oklahoma and owns and operates oil and
gas properties in six states, predominantly in the Southwest region of the
United States. In addition, the Company owns and operates three gathering
systems located in Texas, Louisiana and Oklahoma.
Merger and Consolidation
- ------------------------
The accompanying financial statements include the accounts of the Company
and its existing wholly-owned subsidiary, Cushing Disposal, Inc.; and beginning
on December 31, 1995, the accounts of Hunter as described below. As more fully
discussed in Note 3, the Company entered into an amended definitive agreement on
December 19, 1995 to acquire all of the assets, subject to the existing
liabilities, of Hunter Resources, Inc. ("Hunter"). The purchase was accounted
for by the purchase method effective December 31, 1995. As such, the
accompanying consolidated financial statements for 1995 include the balance
sheet accounts of Hunter. However, the Statement of Operations for 1995 does not
include the operations of Hunter for 1995. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the consolidated financial statements of the
prior year to conform with the current presentation.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company has cash
deposits in excess of federally insured limits.
Investments
- -----------
In 1994, the Company adopted Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under
this standard, the equity securities held by the Company that have readily
determinable fair values are classified as current assets available-for-sale and
are measured at fair value. Unrealized gains and losses for these investments
are reported as a separate component of stockholders' equity. In 1994,
investments in equity securities for which sale within one year was restricted
by governmental securities regulations were classified as non-current assets.
F-7
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1995 the Company's available for sale securities had an
amortized cost basis of $44,440, gross unrelated gains reported in equity of
$57,200 and a fair market value of $101,640. During 1995, Securities were sold
for gross proceeds of $73,083 and the Company realized a gain of $19,370.
Suspended Revenues
- ------------------
Suspended revenue interests represent oil and gas sales payable to third
parties largely on properties operated by the Company. The Company distributes
such amounts to third parties upon receipt of signed division orders or
resolution of other legal matters.
Oil and Gas Producing Operations
- --------------------------------
The Company follows the full-cost method of accounting for oil and gas
properties, as prescribed by the Securities and Exchange Commission ("SEC").
Accordingly, all costs associated with acquisition, exploration and development
of oil and gas reserves, including directly related overhead costs, are
capitalized.
All capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the unit-of-production
method using estimates of proved reserves. Cost directly associated with the
acquisition and evaluation of unproved properties are excluded from the
amortization base until the related properties are evaluated. Such unproved
properties are assessed periodically and any provision for impairment is
transferred to the full-cost amortization base. Sales of oil and gas properties
are credited to the full-cost pool unless the sale would have a significant
effect on the amortization rate. Abandonments of properties are accounted for as
adjustments to capitalized costs with no loss recognized. The Company's unproved
properties excluded from the amortization base were $842,889 and $700,344 at
December 31, 1995 and 1994, respectively. These costs arose in 1994 and 1995 and
are expected to be evaluated and transferred into the amortization base over the
next twelve months.
The net capitalized costs are subject to a "ceiling test," which limits
such costs to the aggregate of the estimated present value of future net
revenues from proved reserves discounted at ten percent based on current
economic and operating conditions.
Drilling Operations
- -------------------
Fees from fixed-price contracts with other working interest owners to
drill, complete and place oil and gas wells into production less related costs
are accounted for as adjustments to oil and gas properties.
F-8
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pipelines
- ---------
Pipelines are carried at cost. Depreciation is provided using the
straight-line method over an estimated useful life of 15 years. Gain or loss on
retirement or sale or other disposition of assets is included in income in the
period of disposition.
Other Property
- --------------
Other property and equipment are carried at cost. Depreciation is provided
using the straight-line method over estimated useful lives ranging from five to
ten years. Gain or loss on retirement or sale or other disposition of assets is
included in income in the period of disposition.
Other Oil and Gas Related Services
- ----------------------------------
Other oil and gas related services consist largely of fees earned from the
Company's salt water disposal facility. Such fees are recognized in the month
the disposal service is provided.
Impact of Recently Issued Pronouncements
- ----------------------------------------
The Financial Accounting Standards Board (FASB) has issued Statement No.
121, "Accounting for Impairments of Long-Lived Assets". The Company intends to
adopt this standard in 1996. Management believes it will not have a material
impact on the Company's financial statements. The FASB has also issued Statement
No. 123, "Accounting for Stock-Based Compensation". The Company will adopt this
standard in 1996, also. At this time, management anticipates it will continue
accounting for stock based compensation in 1996 under guidance provided by the
existing standard but will provide pro forma disclosures as allowed by Statement
No. 123.
Income Taxes
- ------------
The Company files a consolidated federal income tax return. The Company
applies Statement of Financial Accounting Standards No. 109 (SFAS 109). As
required by SFAS 109, income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due, if any, plus net deferred taxes related primarily to differences between
the basis of assets and liabilities for financial and income tax reporting.
Deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred tax assets include
recognition of operating losses that are available to offset future taxable
income and tax credits that are available to offset future income taxes.
Valuation allowances are recognized to limit recognition of deferred tax assets
where appropriate. Such allowances may be reversed when circumstances provide
evidence that the deferred tax assets will more likely than not be realized.
F-9
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss Per Common Share
- ---------------------
Loss per common share is based on the weighted average number of shares of
common stock outstanding. Convertible securities and warrants were anti-dilutive
at December 31, 1995 and 1994 and were not included in the calculation of loss
per common share.
Deferred Cost of Warrant Exercise Offering
- ------------------------------------------
The Company incurred costs to update its registration statement relating to
Series C preferred stock that is convertible into common stock and relating to
common stock purchase warrants. The Company made an offer to the warrant holders
allowing them to exercise their warrants at a discount through February 16,
1995. As presented in Note 7, certain of the common stock purchase warrants were
exercised prior to the expiration of the discount period. The Company had
deferred direct costs as of December 31, 1994 of $240,281 related to the
discounted warrant exercise offering. Such costs and $250,488 incurred in 1995
were offset against the proceeds received in 1995 from the exercise of the
warrants.
Statements of Cash Flows
- ------------------------
During the year ended December 31, 1995, the Company changed its method of
accounting for cash flows from operating activities from the direct method to
the indirect method. Prior periods have been restated for the affects of the
change.
Use of Estimates and Certain Significant Estimates
- --------------------------------------------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates. Significant assumptions are required in the valuation of proved
oil and gas reserves, which as described above may affect the amount at which
oil and gas properties are recorded. It is at least reasonably possible those
estimates could be revised in the near term and those revisions could be
material.
NOTE 2--CHANGE IN ACCOUNTING METHOD
The Company accounted for its oil and gas producing activities using the
successful efforts method from inception through June 30, 1995. However, the
full cost method has subsequently been adopted. The Company is of the opinion
that the full cost method of accounting is preferable to the successful efforts
method of accounting for its oil and gas activities for the following reasons:
(1) The Company recently acquired the subsidiaries of Hunter (See note 3),
which comprise corporations engaged in oil and gas related activities
and which utilize the full cost method of accounting for these
activities. For both legal and accounting purposes, the
F-10
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company is the acquiring entity; however, the subsidiaries are
increasing their oil and gas activities and have more proved oil and
gas reserves than the Company. Furthermore, management of Hunter
became the management of the Company upon completion of the
acquisition. One of the Hunter subsidiaries specializes in the
management of oil and gas properties and all accounting functions and
financial reporting have been undertaken by the subsidiaries'
personnel. The individuals employed by the subsidiaries will comprise
the vast majority of the Company's employees and the Company believes
that by allowing these employees and Hunter's management to continue
to use the full cost method, it would greatly benefit in accurately
reporting on its oil and gas operations.
(2) The subsidiaries have established a relationship with lending sources
which the Company intends to continue to utilize and expand upon.
These sources are accustomed to evaluating the subsidiaries' financial
statements on the full cost method of accounting. The Company intends
to request additional borrowing arrangements from these lenders and
believes that it is desirable for these lending sources to review
financial statements prepared on a consistent basis.
(3) The Company occasionally engages in turnkey drilling activities and in
the sale of oil and/or gas prospects. The Company believes that these
activities are secondary to its primary oil and gas operations.
However, in accounting for these activities utilizing the successful
efforts method of accounting, 47% of the Registrant's operating
revenue during 1994 and 66% of its operating revenue on an unaudited
basis during the first six - months of 1995 came from such secondary
sources. Knowing that the successful efforts method permits the
recognition of revenue from such secondary sources, the Registrant has
sought for and has engaged in turnkey drilling activities and in the
sale of oil and/or gas prospects to effect the results of its
operations. The Company's use of the successful efforts method,
although allowed by generally accepted accounting principles, has
resulted in peaks and valleys in operating results for previous
accounting periods. The full cost method of accounting would require
that these activities be spread over a period of time, and if
profitable, recognized through a reduction of the cost per unit of oil
and gas produced. Thus the full cost method avoids the large variances
in revenue and associated expenses which the Registrant has previously
reported in its quarterly and annual financial statements.
The accompanying financial statements have been restated to apply the full
cost method retroactively. This change in accounting principle has no
significant effect on income taxes. The effect of the accounting change on net
loss and accumulated deficit as previously reported for the respective periods
is:
F-11
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1994
---------------
<S> <C>
Statement of Operations:
Net Loss as Previously Recorded $ (1,258,808)
Adjustment for Effect of Change in Accounting Principle that is Applied Retroactively $ 712,426
Net Loss as Adjusted $ (546,382)
Per Share Amounts:
Net Loss as Previously Reported $ (0.44)
Adjustment for Effect of Change in Accounting Principle that is Applied Retroactively $ 0.17
Net Loss as Adjusted $ (0.27)
Common Shares Used in Per Share Calculation $ 4,166,822
</TABLE>
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Statement of Accumulated Deficit:
Balance at Beginning of Period as Previously Reported $ (4,166,058) $ (2,327,925)
Add Adjustment for the Cumulative Effect on Prior Years
of Applying Retroactively the Full Cost Method $ 506,651 $ (205,775)
Balance at Beginning of Period, as Adjusted $ (3,659,407) $ (2,533,700)
Net Loss $ (968,272) $ (546,382)
Preferred Dividends $ (617,220) $ (579,325)
Balance at End of Year $ (5,244,899) $ (3,659,407)
The effect on 1995 operations of changing the accounting method was to increase
net loss and net loss per share by $307,000 and $.05, respectively.
F-12
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1994, the Company acquired three
properties through the issuance of both cash and common stock. One property was
acquired for $888,000, for which the Company paid $200,000 cash and issued
343,000 shares of its common stock, based on a value of $2.00 per share or
$686,000. Two other properties were acquired for a total of $692,500. In one
transaction, 150,000 shares were issued at $1.25 per share for $187,500 and in
the other transaction, 120,000 shares were issued at $3.00 per share for
$360,000. In the latter transaction, the Company committed to file a
registration statement relating to 40,000 shares, and has agreed to pay all
costs relating to the registration of these shares.
During 1994 the Company sold a 20% working interest in unproved oil and gas
mineral leases in which the Company has acquired an interest. The Company
received cash and 22,220 shares of the common stock of a publicly traded
corporation.
During March of 1995, the Company acquired an additional fifty percent
(50%) working interest (for a total of 100% working interest) in a proved
undeveloped oil and gas property on which one well is located. The acquisition
cost of this additional interest was $410,000, of which $130,000 was paid in
cash and 80,000 shares of the Company's restricted common stock, valued at $3.50
per share, were issued. During April of 1995, the Company also acquired an
additional 40 percent working interest (for a total 90% working interest) in a
proved undeveloped property on which one well is located. The acquisition cost
of this additional interest was $480,000, of which $20,000 was paid in cash and
125,000 shares of the Company's restricted common stock were issued, valued at
$3.50 per share, and the transfer of securities held by the Company as an
investment in equity securities at December 31, 1994.
In October 1995, the Company issued 85,131 shares of common stock, valued
at $3.52 per share, in an acquisition completed by a Hunter subsidiary for the
remaining stock ownership interest in a limited liability company. Also, in
October 1995, the Company issued 64,176 shares of common stock, valued at $4.00
per share, in an acquisition of oil and gas properties completed by a Hunter
subsidiary. In December 1995, the Company issued 32,308 shares of common stock,
valued at $3.25 per share, in an acquisition of a proven undeveloped property by
a Hunter subsidiary.
The Company executed a definitive agreement on July 21, 1995 to acquire all
of the assets, subject to the existing liabilities of Hunter Resources, Inc.
("Hunter"). Pursuant to the agreement, the Company issued, subject to
shareholder approval, 2,750,000 shares of its restricted common stock to Hunter
in exchange for the assets acquired. In addition, 575,000 shares of restricted
common stock were issued to a third party as an additional cost of the
acquisition. The third party distributed a total of 250,000 of the shares to a
former director and a former officer of the Company for their assistance in
completing the acquisition.
F-13
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 19, 1995 to be effective December 22, 1995, the Company and
Hunter entered into an amended agreement. Under the terms of the amendment,
which was executed by Hunter shareholders representing over fifty percent (50%)
of the common stock of Hunter, an additional 2,335,077 shares of restricted
common stock and 111,825 shares of Series C preferred stock were issued to
Hunter. The acquisition was recorded under the "purchase method" of accounting,
based upon the estimated value of the shares issued of $12,495,005. The
operations of Hunter have been consolidated with those of the Company beginning
on December 31, 1995.
The following summary, prepared on a pro forma basis, presents the results
of operations for the year ended December 31, 1995 and 1994 as if the
acquisitions occurred as of the beginning of the respective years. The pro forma
information includes the effects of adjustments for increased general and
administrative expense, interest expense, depreciation, depletion and income
taxes:
(Unaudited)
1995 1994
Revenue........................................... $ 6,259,753 $ 8,385,688
Net Income (Loss) Applicable to Common Stock...... (1,899,596) 650,915
Net Income (Loss) Per Common Share................ $ (.16) $ .06
NOTE 4--NOTES RECEIVABLE
During July of 1994, the Company received an interest bearing note due on
May 1, 1995, in exchange for $319,206 paid by the Company. Interest in the
amount of $3,000 per month accrued through February 28, 1995 and was paid in
March 1995. For the remaining two months, interest in the amount of $4,500 per
month was accrued which, along with the principal amount, was paid during May
1995. The note was collateralized by securities, the fair market value of which
was less than the amount of the note.
On July 28, 1995, the Company received a non-interest bearing note
receivable in the amount of $223,500 in exchange for its interest in an oil and
gas property. Interest at 10 percent was inputed on the note resulting in a
discount of $28,366. The note provides for payments of $7,000 per month.
F-14
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--RELATED PARTY TRANSACTIONS
During June of 1993, the Company sold 250,000 shares of its common stock at
$2.00 per share for a total of $500,000. The purchasers made a 10% down payment
of $50,000 and executed notes for $450,000, payable in one year and bearing
interest at 6% per annum. During June of 1994, the Company renegotiated the
notes and entered into a verbal agreement with another individual whereby
$27,000 of interest due on the previous notes was accrued and a new principal
amount of $289,500, being a reduction of $160,500 from the original notes, was
agreed upon as the amount due to the Company. Additionally, the Company sold
this individual 40,000 shares of the Company's common stock at $1.25 per share
for net proceeds of $50,000. The full amount of the reduced purchase price was
paid during the third quarter of 1994; however, no interest was paid. The
Company does not intend to pursue the collection of the unpaid interest from any
of the parties involved. The net effect of the above transactions was that the
Company sold 300,000 shares of its common stock for $350,000 or approximately
$1.17 per share.
During June of 1994, the Company also issued 110,000 shares of its common
stock pursuant to an agreement to pay the Company within one year of the
issuance of the shares, $137,500 and interest at the rate of 5% per annum, which
is equivalent to $1.25 per share. Prior to December 31, 1994, the Company had
collected $75,000 and subsequently the balance of the note was paid. The Company
did not collect any interest due on the Note and does not intend to pursue the
collection thereof.
In conjunction with the acquisition of Hunter, the Company assumed a note
receivable with a balance of $120,758 at December 31, 1995 from an owner in an
affiliated limited liability company. The note provides for interest at ten
percent and has a due date of December 31, 1995, which has been extended to
April 30, 1996.
In connection with the acquisition of Hunter, the Company assumed a note
receivable from a company affiliated with the President of the Company in the
amount of $54,615 at December 31, 1995. This note bears interest at ten percent
and is due on demand. Additionally, trade accounts receivable from this
affiliated company were $51,346 at December 31, 1995.
In connection with the acquisition of Hunter, the Company assumed unsecured
accounts receivable from the President personally in the amount of $10,000 as of
December 31, 1995, which amount has been subsequently repaid.
A company owned by two former directors of the Company operated several of
the wells in which the Company has an interest. Operating fees paid this company
were $35,319 and $1,602 in 1995 and 1994, respectively. The operations of these
wells have been transferred to a subsidiary of Hunter. In addition, the related
company received a commission of $25,000 from the sale of an oil and gas
property to the Company in 1995.
F-15
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994 consisted of the following:
</TABLE>
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Banks
Promissory note, collateralized by pipelines and oil and gas
properties, payable in monthly installments for 1996 of $174,000
through October 1, 1996, then $171,000 thereafter plus interest at
prime plus one percent (total of 9.75% at December 31, 1995), assumed
in Hunter acquisition <F1> $ 9,554,597 $ -
Note payable, payable in monthly installments of $498 through July 1996
plus interest at 7.25 percent, collateralized by truck, assumed in
Hunter acquisition 3,000 -
Notes payable to banks, collateralized by vehicles, payable in monthly
installments of $1,075, including interest at 7.5% to 10.75%, through
April 1998. The notes were paid in full in 1995
or assumed by one of the Company's directors. - 29,165
Other
Notes payable, non-interest bearing and uncollateralized, payable in
monthly installments of $1,000 through July 1, 2000, assumed
in Hunter acquisition 54,000 -
Notes payable to purchase oil and gas property, the terms of which were
suspended in 1994 awaiting further development of the related property.
An agreement was entered into in 1995 to settle the note for $130,000.
Funds were segregated at December 31, 1994, in that amount, for
payment in 1995 - 130,000
Notes payable to purchase oil and gas property, payable in monthly
installments of $3,000, including interest at an imputed rate of 8% - 26,435
----------- -----------
Total Long-Term Debt 9,611,597 185,600
Less Current Portion 2,014,000 173,925
----------- -----------
Long-Term Debt $ 7,597,597 $ 11,675
=========== ===========
<FN>
<F1> The promissory note to bank is a borrowing under a $20,000,000 line of
credit on which there existed a borrowing base of approximately $8.7
million at December 31, 1995. The balance at December 31, 1995 includes
$1,125,000 due to the seller of certain oil and gas properties which was
refinanced in February, 1996 under the line of credit. The final principal
payments under the line of credit are due June 1, 2000. The amount that can
be borrowed under the line of credit is based upon a designated percentage
of oil and gas reserve values. The line of credit includes covenants, the
most restrictive of which require maintenance of a current ratio and
tangible net worth, as specifically defined in the loan agreement.
</FN>
</TABLE>
Maturities of long-term debt based on contractual requirements for the years
ending December 31, are as follows:
1996 $ 2,014,000
1997 2,508,000
1998 2,627,000
1999 2,151,000
2000 311,597
---------------
$ 9,611,597
F-16
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires the recognition of a liability or asset, net of a valuation allowance,
for the deferred tax consequences of all temporary differences between the tax
bases and the reported amounts of assets and liabilities, and for the future
benefit of operating loss carryforwards. The tax effects of significant
temporary differences and carryforwards are as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Property and equipment, including intangible drilling costs $ (5,890,000) $ (218,231)
------------- -----------
Total deferred tax liability (5,890,000) (218,231)
------------- -----------
Allowance for doubtful accounts 50,000 160
Depletion carryforwards 365,000
Operating loss carryforwards 2,350,000 1,135,089
------------- -----------
Total deferred tax assets 2,765,000 1,135,249
------------- -----------
Valuation allowance - (917,018)
------------- -----------
Net Deferred Tax Liability $ (3,125,000) $ -
============= ===========
</TABLE>
The Company and its subsidiaries have net operating loss carryforwards
(NOL) of approximately $6,400,000 that expire, if unused, in years 1996 through
2010. Approximately $1,700,000 of the NOL carries a limitation of approximately
$200,000 per year. In addition, the Company has depletion carryforwards of
approximately $1,000,000.
NOTE 8--STOCKHOLDERS' EQUITY
Shares of preferred stock may be issued in such series, with such
designations, preferences, stated values, rights, qualifications or limitations
as determined solely by the Board of Directors. Of the 10,000,000 shares of
$.001 par value preferred stock the Company is authorized to issue, 216,000
shares have been designated as Series A Preferred Stock, 925,000 shares have
been designated as Series B preferred stock, and 625,000 shares have been
designated as Series C Preferred Stock. Thus, 8,234,000 preferred shares have
been authorized for issuance but have not been issued nor have the rights of
these preferred shares been designated. No dividends can be paid on the common
stock until the dividend requirements of the preferred shares have been
satisfied.
Holders of the Series A preferred stock are entitled to receive dividends
only to the extent that funds are available from the West Dilley Prospect. Such
dividends are limited to $7.50 per share, in the aggregate. Dividend payments to
Series A preferred shareholders will be based on 50% of the net operating
revenue received by the working interest owners of the West Dilley Prospect. Due
to a decline in production from the well located on this prospect, the Company
has shut this well in and is no longer producing it. The Series A dividends are
not cumulative except for unpaid amounts due from this calculation. No dividends
have been paid on the Series A preferred stock. There is no aggregate annual
dividend requirement for the Series A preferred stock.
F-17
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Series B preferred stock was issued as a unit, comprised of 1,000
shares of Series B preferred stock and 2 production certificates. The Series B
preferred stockholders are entitled to receive cumulative dividends of $0.35
annually per share, payable quarterly. The holders of the units are entitled to
receive $10,000 per unit in dividends and in production payments. The production
payments were derived from 50% of the Company's net revenue from production of
oil and gas.
The Board of Directors declared dividends on the Series B preferred stock
of $21,893 and $25,172 for the years ended December 31, 1995 and 1994,
respectively.
Beginning June 15, 1994, the Company offered to exchange (the "Exchange
Offer") 1,250 shares of common stock for each Series B production certificate.
During 1994, 141.1 production certificates were exchanged for 176,375 shares of
common stock and the Series B preferred shareholders agreed to convert their
Series B preferred shares into common stock at December 31, 1995 if all
dividends were paid through that date. Most of the shares were converted in
early 1996.
Separate and apart from the Exchange Offer, two of the Company's officers
and directors (the "Officers") set aside 125,000 shares (the "Stock") of their
own common stock of the Company for a single individual (the "Individual") who
owned approximately 55% of the Series B Production certificates that were
exchanged. The Stock is being held by an independent party to this transaction
until fair market value of the Exchange Shares, when the Exchange Shares become
eligible for sale pursuant to Rule 144 of the Securities Act of 1933, is
determined. If the fair market value of the Exchange Shares is at least $5.00
per share, then the Stock will be returned to the Officers. If the value of the
Exchange Shares is less than $5.00 per share, the Individual will receive a
certain number of the shares as specified in the agreement. The Company issued
125,000 shares of its common stock to the Officers in exchange for their
assignment to the Company of all of the Officers' rights, title and interest in
the Stock. The Company has recorded the new shares issued at par value.
The Series C preferred stock is convertible at the option of the holder at
any time into three shares of common stock and, after November 12, 1994, will
automatically convert into common stock anytime the closing bid price of the
common stock equals or exceeds $5.00 per share for twenty consecutive trading
days. The Series C preferred stock is redeemable by the Company beginning
November 12, 1995, at $10.50 per share plus accrued and unpaid dividends. If
declared by the Board of Directors, dividends accrue at the annual rate of $1.10
per share, are cumulative from the date of first issuance and are paid quarterly
in arrears. The Board of Directors declared dividends on the Series C preferred
stock of $595,327 for the year ended December 31, 1995, and $554,153 for the
year ended December 31, 1994. During 1994, 40,025 Series C preferred shares were
converted into 120,075 shares of common stock and 24,250 shares of Series C
preferred stock were issued upon exercise of representatives' warrants. The
aggregate annual dividend requirements for the 625,000 shares of Series C
preferred stock outstanding at December 31, 1995 amounts to $687,500.
F-18
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The preferred shareholders are not entitled to vote except on those matters
in which the consent of the holders of preferred stock is specifically required
by Nevada law. If the Company were to liquidate prior to payment of the full
dividend requirements on the preferred stock, the preferred stock would receive
a liquidation preference from the liquidation proceeds. The Series A preferred
shareholders would receive an amount equal to the lesser of the proceeds from
the liquidation of the West Dilley Prospect or the remaining unpaid dividend.
The Series C preferred shareholders would receive a liquidation preference of
$10.00 per share, plus an amount equal to any accrued and unpaid dividends to
the payment date. On liquidation, holders of all series of the preferred stock
would be entitled to receive the par value, $.001 per share, in preference to
the common stock shareholders.
The Series C preferred stock was originally issued as a unit comprised of
one share of Series C preferred stock and warrants to purchase 3 shares of
common stock. A total of 1,687,500 warrants were issued and are exercisable at
$5.50 per share through November 12, 1998. The Company offered the holders of
the warrants a discount period commencing November 15, 1994 and ending February
16, 1995 during which time the warrants could be exercised at $4.00. During this
time, warrants were exercised for 833,324 shares of common stock. The exercise
of these warrants resulted in cash proceeds of $3,333,298 to the Company. The
warrants are redeemable by the Company at $0.02 per warrant upon 30 day notice
at any time after November 12, 1995 or earlier if the closing bid price of the
common stock equals or exceeds $6.75 for five consecutive trading days. At
December 31, 1995, 854,176 of the warrants remained outstanding.
The Company granted an unrelated company the right to acquire 100,000
shares of common stock under the terms of a consulting agreement. The rights
became exercisable at the rate of 3,325 shares in November 1994, 8,335 shares
per month from December 1994 through October 1995 and 4,990 shares in November
1995. The rights are exercisable at $4.125 per share. The rights expire in
November 1996 if not exercised by then. All of the rights were outstanding at
December 31, 1995 and 1994.
During 1995, 20,750 representatives' warrants were exercised at $12.00 per
warrant resulting in $249,000 of proceeds to the Company. Each warrant entitles
the holder to receive one share of Series C preferred stock and 3 common stock
warrants exercisable at $4.00 per share through February 1995 and $5.50
thereafter. 9,300 shares of Series C preferred stock and 2,000 shares of Series
B preferred stock have also been converted into 28,900 shares of common stock.
The Company issued 5,000 shares of common stock, valued at $3.50 per share to
its directors, which resulted in $17,500 of compensation expense in 1995. Also,
22,222 shares of common stock with a value of $3.80 per share were issued for
services.
NOTE 9--SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During 1994, the Company purchased oil and gas properties by issuing
613,000 shares of common stock valued at $1,233,500 along with cash in the
amount of $200,000. The Company issued 176,375 shares of its common stock,
valued at $584,016, in exchange for the production payment interests held by
production certificate holders. Shareholders converted 10,500 shares of Series B
preferred stock and 40,025 shares of Series C preferred stock into 5,250 and
120,075 shares of common stock, respectively. A vehicle with a carrying value of
$10,923 was sold to an officer of the Company with the officer assuming a
related note payable in the amount of $10,923. The Company received equity
securities with a fair value of $66,660 as partial payment for the sale of
property interests. The Company granted shareholders a $187,500 adjustment to
the price of common stock previously sold by reducing notes receivable from the
shareholders by that amount. Also in 1994, the Company issued 150,000 shares of
common stock in exchange for notes receivable from the purchasing shareholders
in the amount of $187,500.
F-19
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1995, as more fully described in Note 3, the Company issued common
stock and preferred stock valued at $12,495,005 in the acquisition of Hunter
Resources, Inc. assets. Oil and gas properties were acquired by issuing
$1,379,204 of common stock and $22,220 of marketable securities; preferred stock
was converted to common stock; and common stock was issued for a receivable from
a shareholder of $250. In addition $17,500 of common stock was issued as
compensation to directors and $84,444 of common stock was issued for services.
NOTE 10--ENVIRONMENTAL ISSUES
Being engaged in the oil and gas exploration and development business, the
Company may become subject to certain liabilities as they relate to
environmental clean up of well sites or other environmental restoration
procedures as they relate to the drilling of oil and gas wells and the operation
thereof. In the Company's acquisition of existing or previously drilled well
bores, the Company may not be aware of what environmental safeguards were taken
at the time such wells were drilled or during the time that such wells were
operated. Should it be determined that a liability exists with respect to any
environmental clean up or restoration, the liability to cure such a violation
would most likely fall upon the Company. In certain acquisitions the Company has
received contractual warranties that no such violations exist, while in other
acquisitions the Company has waived its rights to pursue a claim for such
violations from the selling party. No claim has been made nor has a claim been
asserted, nor is the Company aware of the existence of any liability which the
Company may have, as it relates to any environmental clean up, restoration or
the violation of any rules or regulations relating thereto.
NOTE 11-COMMITMENTS AND CONTINGENCIES
The Company assumed in the Hunter acquisition lease agreements for the use
of office space and office equipment. The office space lease extends through
November 2001 with an option to renew the lease for a three year term. The
office equipment lease extends until 1998. The leases have been classified as
operating leases. The following is a schedule by years of future minimum lease
payments required under the operating lease agreements:
Year Ended December 31:
1996..................................................$126,906
1997.................................................. 120,178
1998.................................................. 120,188
1999.................................................. 117,419
2000.................................................. 124,238
Thereafter............................................ 112,515
-------
Total Minimum Payments Required......................$721,444
========
F-20
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rental expense was $61,191 and $21,283 for 1995 and 1994, respectively.
At December 31, 1995, the Company is involved in litigation proceedings
arising in the normal course of business. The Company has accrued $100,000 as of
December 31, 1995 for potential expenses to be incurred in settlement of the
litigation. In the opinion of management, any additional liabilities resulting
from such litigation would not have a material effect on the Company's financial
condition.
NOTE 12-FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of accounts and notes receivable. The receivables are primarily from
companies in the oil and gas business or from individual oil and gas investors.
These parties are primarily located in the Southwestern regions of the United
States. No single receivable is considered to be sufficiently material as to
constitute a concentration. The Company does not ordinarily require collateral,
but in the case of receivables for joint operations, the Company often has the
ability to offset amounts due against the participant's share of production from
the related property. The Company believes the allowance for doubtful accounts
at December 31, 1995 is adequate.
Management estimates the market values of notes receivable and payable
based on expected cash flows and believes those market values approximate
carrying values at December 31, 1995. The market values of equity investments
are based upon quoted prices (see Note 1).
NOTE 13 - FOURTH QUARTER ADJUSTMENT
In the fourth quarter of 1995, due to downward revisions of the Company's
reserves at year-end, the Company made adjustments to depreciation and depletion
that impacted previously reported quarterly results. The effect of the
adjustments was to increase the reported net loss attributable to common
stockholders of $868,405 for the nine month period ended September 30, 1995 to a
net loss of approximately $1,046,000.
F-21
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Proved oil and gas reserves consist of those estimated quantities of crude
oil, natural gas, and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Estimates of petroleum reserves have been made by independent engineers.
These estimates include reserves in which the Company holds an economic interest
under production- sharing and other types of operating agreements. These
estimates do not include probable or possible reserves.
Estimated quantities of proved oil and gas reserves of the Company were as
follows:
Natural Gas
Oil (Thousand
(Barrels) Cubic Feet)
--------- ----------
December 31, 1994
Proved reserves.......................... 1,260,520 4,914,207
Proved developed reserves................ 239,795 394,872
========= ==========
December 31, 1995
Proved reserves.......................... 3,767,739 14,071,916
Proved developed reserves................ 1,681,841 8,796,748
========= ==========
The changes in proved reserves for the year ended December 31, 1995 and
1994 were as follows:
Natural Gas
Oil (Thousand
(Barrels) Cubic Feet)
Reserves at December 31, 1993............... 1,445,990 3,672,779
Purchase of minerals-in-place............... 368,448 2,337,359
Production.................................. (41,835) (88,176)
Revisions of estimates...................... (512,083) (1,007,755)
Reserves at December 31, 1994............... 1,260,520 4,914,207
Purchase of minerals-in-place............... 3,122,382 10,973,298
Extensions and discoveries................. 38,498 564,247
Production.................................. (29,972) (102,056)
Revisions of estimates...................... (623,689) (2,277,780)
Reserves at December 31, 1995............... 3,767,739 14,071,916
F-22
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The aggregate amounts of capitalized costs relating to oil and gas
producing activities and the related accumulated depreciation, depletion and
impairment as of December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Unproved oil and gas properties.......................$ 842,889 $ 700,344
Proved properties..................................... 36,256,428 7,932,496
---------- ---------
Gross Capitalized Costs............................... 37,099,317 8,632,840
Accumulated depreciation, depletion and impairment.... (1,914,602) (1,499,095)
---------- ----------
Net Capitalized Costs.................................$ 35,184,715 $ 7,133,745
============ ============
</TABLE>
Costs incurred in oil and gas producing activities, both capitalized and
expensed, during the years ended December 31, 1995 and 1994 were as follows:
1995 1994
---- ----
Property acquisition costs
Proved properties.................... $ 27,983,521 $ 1,737,543
Unproved properties.................. 142,545 -
Exploration costs.................... 340,411 -
Development costs......................... - 791,144
-------------- --------------
Total Costs Incurred...................... $ 28,466,477 $ 2,528,687
============== ==============
Results of operations from oil and gas producing activities for the years
ended December 31, 1995 and 1994 were as follows:
1995 1994
---- ----
Oil and gas production revenue...................$ 616,596 $ 729,478
Disposal services revenue........................ 31,978 15,704
Production costs................................. (293,647) (324,392)
Depreciation and depletion ...................... (421,101) (243,180)
Results of Operations for Producing Activities...$ (66,174) $ 177,610
F-23
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The standardized measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Future cash inflows........................................$ 95,068,694 $ 25,900,669
Future development and production costs.................... (37,746,877) (10,011,434)
----------- -----------
Future net cash flows, before income tax................... 57,321,817 15,889,235
Future income taxes........................................ (11,381,779) (3,679,963)
----------- ----------
Future Net Cash Flows...................................... 45,940,038 12,209,272
10% annual discount........................................ (16,120,359) (5,974,156)
- -- ----------- ----------
Standardized Measure of Discounted Future Net Cash Flows...$ 29,819,679 $ 6,235,116
============ =============
</TABLE>
The primary changes in the standardized measure of discounted estimated
future net cash flows for the years ended December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Purchases of minerals-in-place......................................... $ 30,507,745 $ 2,736,310
Extensions, discoveries and improved recovery, less related costs...... 582,001 162,944
Sales of oil and gas produced, net of production costs................. (350,083) (300,517)
Development costs incurred during the period........................... 467,192
Revision of prior estimates:
Net change in price and costs....................................... 4,864,688 (1,074,222)
Change in quantity estimates...................................... (7,637,000) (2,981,078)
Accretion of discount.................................................. 623,512 1,289,466
Net change in income taxes............................................. (5,006,300) (594,905)
---------- --------
Net Change............................................................. $ 23,584,563 $ (294,810)
============= ============
</TABLE>
Estimated future cash inflows are computed by applying year-end prices of
oil and gas to year-end quantities of proved reserves. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves at
the end of the year, based on year-end costs and assuming continuation of
existing economic conditions. Estimated future income tax expense is calculated
by applying year-end statutory tax rates to estimated future pre-tax net cash
flows related to proved oil and gas reserves, less the tax basis of the
properties involved.
Variances in future prices and costs are unpredictable and the leases for
such estimates may vary significantly. Accordingly, management believes that the
usefulness of these projections is limited.
F-24
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
There are not and have not been any disagreements between the Company and
their accountants on any matter of accounting principles or practices or
financial statement disclosure.
24
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
- --------------------------------------------------------------------
(a) Identify Directors and Executive Officers.
The following table sets forth the directors, executive officers and other
significant employees of the Company, their ages, and all offices and positions
with the Company. Each director is elected for a period of one year and
thereafter serves until his successor is duly elected by the stockholders and
qualifies. Each of the Company's current directors will be nominated for
re-election, with no additional nominees being named. Officers and other
employees serve at the will of the Board of Directors and have not entered into
any written employment agreements or contracts with the Company.
Term Positions
Name Age Served With Company
Lloyd T. Rochford....... 49 Feb. 1989 Chairman of the Board
Matthew C. Lutz......... 61 Dec. 1995 Vice Chairman and Exploration and
Business Development Manager
Gary C. Evans........... 38 Dec. 1995 Director, President and Chief
Executive Officer
Gerald W. Bolfing....... 66 Dec. 1995 Director
Oscar C. Lindemann.......74 Dec. 1995 Director
Stanley McCabe..........62 Apr. 1995 Director
James E. Upfield.........74 Dec. 1995 Director
Steven P. Smart.........41 Dec. 1995 Chief Financial Officer
William C. Jones.........56 Dec. 1995 Secretary
Lloyd T. Rochford, age 49, Chairman, has previously served as President and
a Director of the Company since February 10, 1989 through December 31, 1995.
During a portion of this time and prior thereto, Mr. Rochford managed his own
private investments and operated a private company engaged in the finding,
producing and developing of oil and gas properties.
Gary C. Evans, age 38, President, Chief Executive Officer and a Director of
the Company since December 1995. Previously served as Chairman, President and
Chief Executive Officer of Hunter since September, 1992. Previously, President
and Chief Operating Officer of Hunter from December, 1990 to September, 1992.
Chairman and Chief Executive Officer of all of the Hunter subsidiaries since
their formation or acquisition. From 1981 to 1985, Mr. Evans was associated with
the Mercantile Bank of Canada where he held various positions including Vice
President and Manager of the Energy Division of the southwestern United States.
As an oil and gas lending officer of a $4.5 billion Canadian bank, he initiated
and managed an energy loan portfolio in excess of $125 million. From 1978 to
1981, he served in various capacities with National Bank of Commerce (now
BancTexas) including its Credit Manager and Credit Officer. Mr. Evans serves on
the Board of Directors of S.O.I. Industries, Inc., and Digital Communications
Technology Corporation, two American Stock Exchange listed Companies.
25
<PAGE>
Matthew C. Lutz, age 61, Vice Chairman and Business Development Manager of
the Company since December 1995. Mr. Lutz has held similar positions with Hunter
since September 1993. From 1984 through 1992, Mr. Lutz was Senior Vice President
of Exploration and on the Board of Directors of Enserch Exploration, Inc. with
responsibility for the company's worldwide oil and gas exploration and
development program. During his tenure, Enserch substantially increased its gas
and oil reserves while having among the lowest reserve replacement costs in the
industry. Prior to joining Enserch, Mr. Lutz spent twenty-eight years with Getty
Oil Company. He advanced through several technical, supervisory and managerial
positions which gave him various responsibilities including exploration,
production, lease acquisition, administration and financial planning. Mr. Lutz
played a major role in Getty's discoveries of reserves in the Onshore and
Offshore United States.
Gerald W. Bolfing, age 66, Director of the Company since December 1995. Mr.
Bolfing was appointed a Director of Hunter in August 1993. He is an investor in
the oil and gas business and a past officer of one of Hunter's former
subsidiaries. From 1962 to 1980, Mr. Bolfing was a partner in Bolfing Food
Stores of Waco. During this time, he also joined American Service Company in
Atlanta, Georgia, from 1964 to 1965, and was active with Cable Advertising
Systems, Inc. of Kerrville, Texas from 1978 to 1981. He joined the Company's
well servicing business in 1981 where he remained active until its divestiture
in 1992.
Oscar C. Lindemann, age 74, Director of the Company since December 1995.
Mr. Lindemann was previously a Board of Director member of Hunter Resources,
Inc. having been appointed in November, 1995. Mr. Lindemann has over forty years
experience in the financial industry. Mr. Lindemann began his banking career
with the Texas Bank and Trust in Dallas, Texas in 1951. He served the bank until
1977 in many capacities, including Chief Executive Officer and Chairman of the
Board. Since leaving Texas Bank and Trust, he has served as Vice Chairman of
both the United National Bank and the National Bank of Commerce, also in Dallas.
Over many years, he has played a key role as an innovator and consultant to the
banking industry. He retired from active involvement in commercial banking in
1987. Mr. Lindemann is a former President of the Texas Bankers Association, and
State representative to the American Bankers Association. He was a Founding
Director and Board Member of VISA, and a member of the Reserve City Bankers
Association. He has served as an instructor at both the Southwestern Graduate
School of Banking at S.M.U. and the School of Banking of the South at L.S.U. He
has also served as a faculty member for four years in the College of Business at
the University of Texas in Austin teaching various banking subjects. Mr.
Lindemann is active in the United Fund in Dallas. He has served as Treasurer of
the American Red Cross, and Chairman of the Investment Committee of the American
Lutheran Church.
26
<PAGE>
Stanley McCabe, age 62, Director of the Company since July 21, 1995. Mr.
McCabe was appointed as Field Representative of the Company on April 1, 1995. In
1989 Mr. McCabe formed Stanton Oil & Gas, Ltd. and served as president and chief
executive officer. This company was formed as a driller operator for joint
ventures with other industry partners and individual investors to explore for
oil and gas in Oklahoma and Texas. Mr. McCabe served as vice-president and
director of the Registrant from September 16, 1990 to July 10, 1992. From July,
1992 until April 1, 1995 he has acted as a consultant to the Company and has
managed his own private investments.
James E. Upfield, age 74, Director of the Company since December 1995. Mr.
Upfield was appointed a Director of Hunter in August 1992. Mr. Upfield is
Chairman of Temtex Industries, Inc. (NASDAQ - "TMTX") based in Dallas, Texas, a
company that produces consumer hard goods, building materials and defense
products for the U.S. Government. In 1969, Mr. Upfield served on a select
Presidential Committee serving postal operations of the United States of
America. He later accepted the responsibility for the Dallas region which
encompassed the states of Texas and Louisiana. From 1959 to 1967, Mr. Upfield
was President of Baifield Industries and its predecessor, a company he founded
in 1949 which merged with Baifield in 1963. Baifield was engaged in prime
Government contracts for military systems and sub-systems in the production of
high strength-light weight metal products. In 1967, Baifield Industries, Inc.
was acquired by Automatic Sprinkler Corporation of America, where Mr. Upfield
remained until resigning in 1968 to pursue other business opportunities.
Steven P. Smart, age 41, is a Senior Vice President and Chief Financial
Officer of the Company. Prior to joining the Company, Mr. Smart was Controller
for the last three years for a publicly traded oil and gas company on the
Vancouver Stock Exchange. Prior to that time, Mr. Smart was Chief Financial
Officer for a privately held independent oil and gas company. Mr. Smart has more
than nineteen years of experience in the oil and gas industry including five
years in the audit department with Touche Ross (now Deloitte & Touche). Mr.
Smart's experience includes the areas of public reporting to the Securities and
Exchange Commission, energy industry tax issues, public and private partnership
reporting, and acquisitions. Mr. Smart is a Certified Public Accountant.
William C. Jones, age 56, is the Company's Corporate Secretary. Mr. Jones
graduated from Texas Christian University in 1961 receiving a Bachelor of
Science degree with a major in accounting. He received a Juris Doctor from the
University of Tulsa and was admitted to the Oklahoma bar in 1968. After law
school, Mr. Jones gained experience as a staff tax attorney for major energy
companies and as a member of senior management for a publicly owned oil and gas
company. He generally represents emerging companies in securities, taxation, and
general corporate matters. He has participated as an investor, owner, and
manager of several energy ventures. His experience includes the negotiation and
documentation of mergers and acquisitions, preparation and registration of
equity placements, litigation of tax matters, documentation and registration of
offshore financing, and preparation of private placements.
27
<PAGE>
(b) Identify Significant Employees.
R. Renn Rothrock, Jr., age 52, has been Executive Vice President of Hunter
and President of Gruy Petroleum Management Co. since January 1994 after serving
as Executive Vice President and Chief Operating Officer from May 1988. Mr.
Rothrock was Executive Vice President and General Manager of Gruy Engineering
Corporation from 1986 until May 1988. Over his 28-year career, Mr. Rothrock has
also served as a reservoir engineer and operations research engineer at Skelly
Oil Company and as an area engineer at Amerada Petroleum Corporation; the
Engineering Editor of Petroleum Engineer International Magazine; Vice President
and Energy Manager of the First National Bank of Mobile, Alabama; Executive Vice
President of Energy Assets International Corporation, a public company that
raised $170 million for mezzanine financing of oil and gas ventures; and the
producer and operator of his own gas gathering and transportation system. Mr.
Rothrock earned a BS in Petroleum Engineering and a MS in Engineering from the
University of Oklahoma. He is a member of the Society of Professional Engineers
of AIME, the National Society of Professional Engineers, the National Academy of
Forensic Engineers and the Texas Society of Professional Engineers. Mr. Rothrock
is a registered Professional Engineer in the states of Texas and Oklahoma.
Richard R. Frazier, age 48, is President and Chief Operating Officer of
Magnum Hunter Production, Inc. and Gruy Petroleum Management Co. since January
1994. From 1977 to 1993, Mr. Frazier was with Edisto Resources Corporation in
Dallas, serving as Executive Vice President Exploration and Production from 1983
to 1993, where he had overall responsibility for its property acquisition,
exploration, drilling, production, gas marketing and engineering functions. He
has been responsible for hiring staff and coordinating efforts to evaluate,
purchase and operate over $400 million in oil and gas properties, consisting of
2,200 wells in 19 states. From 1972 to 1976, Mr. Frazier served as District
Production Superintendent and Petroleum Engineer with HNG Oil Company (Now Enron
Oil & Gas) in Midland, Texas. Mr. Frazier's initial employment, from 1968 to
1971, was with Amerada Hess Corporation as a Petroleum Engineer involved in
numerous projects in Oklahoma and Texas. Mr. Frazier graduated in 1970 from
University of Tulsa with a Bachelor of Science Degree in Petroleum Engineering.
He is a registered Professional Engineer in Texas and a member of Society of
Petroleum Engineers and many other professional organizations.
(c) Family Relationships.
There is no family relationship which exists between any of the directors,
executive officers or significant employees.
(d) Involvement in Certain Legal Proceedings.
No present officer or director of the Company; 1) has had any petition
filed, within the past five years, in Federal Bankruptcy or state insolvency
proceedings on such person's behalf or on behalf of any entity of which such
person was an officer or general partner within two years of filing; or 2) has
been convicted in a criminal proceeding within the past five years or is
currently a named subject of a pending criminal proceeding; or 3) has been the
subject, within the past five years, of any order, judgment, decree or finding
(not subsequently reversed, suspended or vacated) of any court or regulatory
authority involving violation of securities or commodities laws, or barring,
suspending, enjoining or limiting any activity relating to securities,
commodities or other business practice.
28
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Issuer is not aware of any transactions in its outstanding securities
by or on behalf of any director, executive officer or ten percent holder, which
would require the filing of any report pursuant to Section 16(a) during the
fiscal year ended December 31, 1995, that was not filed with the Issuer.
Item 10. Executive Compensation.
- --------------------------------
The following table contains information with respect to all cash
compensation paid or accrued by the Company during the past three fiscal years
to the Chief Executive Officer of the Company. No other officer individually
received annual cash compensation exceeding $100,000 during the past three
years.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name, Year Salary Bonus Other Number
Principal Annual Restricted Options LTP All Other
Position Compensation Stock SARs Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
L.T. Rochford 1995 $ 96,000 -0- $15,693 - - - -
======== === =======
CEO
1994 $ 60,000 -0- $25,244 - - - -
======== === =======
1993 $ 60,000 -0- $21,506 - - - -
======== === =======
</TABLE>
From April 1992 through the first half of 1995, the Company provided Mr.
Rochford with a vehicle and has paid the insurance thereon. Such payments
amounted to approximately $17,389, $18,421 and $8,870 for the fiscal years ended
December 31, 1993, 1994 and 1995, respectively. Pursuant to a Letter Agreement
dated July 21, 1995, Mr. Rochford is to continue to receive a salary of $8,000
per month until December 31, 1996. Additionally Mr. Rochford is provided with
the same benefits as other employees including health insurance coverage, the
premiums of which totaled $6,823 for the fiscal years ended December 31, 1995
and 1994.
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<PAGE>
Compensation of Directors
- -------------------------
The Company has seven individuals who serve as directors, four of which are
independent. Three of these directors receive compensation with respect to their
services and in their capacities as executive officers of the Company and no
additional compensation has historically been paid for their services to the
Company as directors. The other four directors of the Company are not employees.
Two former directors received 5,000 shares of common stock, valued at $3.50 per
share, as compensation for their services in 1995. For 1996, all independent
directors are to receive $500 per meeting as compensation for their services.
Other than the compensation stated herein, the Company has not entered into any
arrangement, including consulting contracts, in consideration of the director's
service on the board.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
- --------------------------------------------------------------------------------
The Company has not entered into any contracts or arrangements with any
named executive officer which would provide such individual with a form of
compensation resulting from such individual's resignation, retirement or any
other termination of such executive officer's employment with the Company or its
subsidiary, or from a change-in-control of the Company or a change in the named
executive officer's responsibilities following a change-in-control.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
The following table sets forth certain information with respect to the
beneficial ownership after completion of the Business Combination of the
Company's common and preferred stock with respect to each director of the
Company, each beneficial owner of more than five percent of said securities, and
all directors and executive officers of the Company as a group:
Amount and Nature
of Beneficial Percent of
Title of Class Ownership Class
---------------------------------------------------
Lloyd T. Rochford Common 257,939 Shares 2.22
Matthew C. Lutz Common 76,609 Shares 0.66
Gary C. Evans Common 1,712,166 Shares 14.75
Series C Preferred 111,825 Shares 17.89
Gerald W. Bolfing Common 350,050 Shares 3.02
Oscar C. Lindemann - - -
Stanley McCabe Common 67,150 Shares 0.58
James E. Upfield Common 28,090 Shares 0.24
All directors and officers
as a group Common 2,492,004 Shares 21.47
Series C Preferred 111,825 Shares 17.89
30
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The foregoing amounts include all shares these persons are deemed to
beneficially own regardless of the form of ownership. There does not exist any
arrangement which may result in a change in control of the Company.
Item 12. Certain Relationships and Related Transactions.
- --------------------------------------------------------
Pursuant to the acquisition of certain oil and gas properties on September
12, 1994, Stanley McCabe, former Field Representative of the Company and a
director of the Company, received 60,000 restricted shares of the Company's
common stock.
For his efforts in the acquisition of Hunter, Denny W. Nestripke, former
controller of the Company, received 100,000 restricted shares of the Company's
common stock after the Business Combination with Hunter Resources, Inc.
For his efforts in the acquisition of Hunter, Virden L. Parker, former
Director of the Company, received 150,000 restricted shares of the Company's
common stock after the Business Combination with Hunter Resources, Inc.
Item 13. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits to this report are all documents previously filed by the
Company pursuant to the Securities Act of 1933 and the Securities
Exchange Act of 1934 which are incorporated herein as exhibits to this
report by reference to registration statements and other reports.
Exhibits Index
Exhibit No. Document
3.1 & 4.1 Articles of Incorporation *
3.2 & 4.2 Articles of Amendment **
3.3 & 4.3 Articles of Amendment ***
3.4 & 4.4 By-Laws, as Amended ***
10.1 Agreement and Plan of Reorganization
and Plan of Liquidation ****
10.2 Amendment to Agreement and Plan
of Reorganization and Plan of Liquidation *****
16.1 Letter on change in certifying accountant ******
22.1 Subsidiaries of the registrant
* Incorporated by reference to Registration Statement on Form S-18, File No.
33-30298-D.
** Incorporated by reference to Form 10-K for the year ended December 31,
1990.
*** Incorporated by reference to Registration Statement on Form SB-2, File No.
33-66190.
**** Incorporated by reference to Form 8-K/A dated July 21, 1995, filed on
October 3, 1995.
*****Incorporated by reference to Form S-4 filed on March 12, 1996.
****** Incorporated by reference to Form 8-K/A dated November 1, 1996.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAGNUM PETROLEUM, INC.
By: /s/ Gary C. Evans
Gary C. Evans, President & CEO
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Lloyd T. Rochford Chairman April 11, 1996
Lloyd T. Rochford
/s/ Gary C. Evans Director, President and April 11, 1996
Gary C. Evans Chief Executive Officer
/s/ Matthew C. Lutz Vice Chairman April 11, 1996
Matthew C. Lutz
/s/ Gerald W. Bolfing Director April 11, 1996
Gerald W. Bolfing
/s/ Oscar C. Lindemann Director April 11, 1996
Oscar C. Lindemann
/s/ Stanley McCabe Director April 11, 1996
Stanley McCabe
/s/ James E. Upfield Director April 11, 1996
James E. Upfield
/s/ Steven P. Smart Senior Vice President and April 11, 1996
Steven P. Smart Chief Financial Officer
32
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EXHIBIT 22
Subsidiaries of Registrant
Cushing Disposal, Inc.
Gruy Petroleum Management Company
Hunter Butcher International Limited Liability Company, a Wyoming limited
liability company
Hunter Gas Gathering, Inc. (formerly IOM Gas, Inc.)
Inesco Corporation
Magnum Hunter Production, Inc. (formerly David H. Arrington Texas & New Mexico,
Inc.)
Midland Hunter Petroleum Limited Liability Company, a Wyoming limited liability
company
SPL Gas Marketing, Inc.
33
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