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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-2
CURRENT REPORT PURSUANT To SECTION 13 OR 15 (d) of
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) July 21, 1995
- ------------------------------------------------ -------------
MAGNUM PETROLEUM, INC.
(Exact name of Registrant as specified in its Charter)
Nevada 1-12508 87-0462881
(State of Incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
41-625 Eclectic Way, Suite G-1, Palm Desert, California 92211
(Address of principal executive offices) (Zip Code)
46-600 Cook Street, Suite 160, Palm Desert, California
(Former address changed since last report)
(619) 341-1520
(Registrant's telephone number, including area code)
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Page 1 of 56 pages contained in the sequential numbering system.
1
<PAGE>
CURRENT REPORT OF EVENTS
Item 2. Acquisition of Assets.
- ------- ----------------------
Magnum Petroleum, Inc., (the "Registrant") executed on July 21, 1995, a
definitive agreement (the "Original Agreement") to acquire all of the assets,
subject to the existing liabilities, of Hunter Resources, Inc. ("Hunter")
[Commission File No.1- 1705]. Pursuant to the Original Agreement and on the date
it was executed, the Registrant issued to Hunter 2,750,000 shares of its
restricted common stock as consideration for the assets acquired. Under the
terms of the Original Agreement, approval of the transaction was subject to
Hunter's shareholders approval. On December 19, 1995 to be effective December
22, 1995, the Registrant completed the acquisition under a revised definitive
agreement executed by voting shareholders owning in excess of 50 per cent of the
outstanding shares of Hunter. Under the terms of the revised agreement, the
Registrant issued an additional 2,335,077 shares of restricted common stock and
111,825 shares of its Series C preferred stock to Hunter. Collectively, the
common stock and preferred stock issued in the acquisition are referred herein
as the "Magnum Shares".
On July 7, 1995, the Registrant entered into a letter of intent (the "Letter")
to exchange the Magnum Shares for all the assets of Hunter, subject to the
associated liabilities, and filed a Form 8-K with respect thereto, with the
Commission. The Letter required that the Original Agreement be approved by
Hunter shareholders and the board of directors of each of the two companies. On
July 21, 1995, the Board approval was received from each board of directors, the
Original Agreement was signed, the Registrant issued the shares provided for
under the Original Agreement to Hunter, and Hunter assigned all its assets,
subject to the associated liabilities, to the Registrant. On December 19, 1995
to be effective December 22, 1995, the Registrant completed the acquisition
under a revised definitive agreement executed by voting shareholders owning in
excess of 50 per cent of the outstanding shares of Hunter. Under the terms of
the revised agreement, the Registrant issued an additional 2,335,077 shares of
restricted common stock and 111,825 shares of its Series C preferred stock to
Hunter. Hunter's assets consisted of stock in wholly owned subsidiaries and
stock ownership interests in Limited Liability Companies (the "Hunter
Subsidiaries"). The Hunter Subsidiaries are engaged in four principal activities
enumerated as follows:
1) the acquisition, production and sale of crude oil, condensate and
natural gas;
2) the gathering, transmission, and marketing of natural gas;
3) managing and operating producing oil and natural gas properties;
and
4) providing consulting and exporting services to facilitate the
export of energy products from the United States to Latin
America.
The Registrant intends that the Hunter Subsidiaries will continue to operate in
a manner similar to that conducted by Hunter.
In negotiating the number of Magnum Shares to be issued by the Registrant 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), and the market
value of the Registrant's common shares, prior to the commencement of
negotiations through the date that the Letter was signed.
The Magnum Shares issued to Hunter represent approximately 44% of the
Registrant's common stock currently outstanding. After formal shareholder
approval and registration of the Magnum Shares, Hunter intends to liquidate and
distribute the Magnum Shares to Hunter shareholders, which number approximately
3,300 of record. After completion of the acquisition, every 3.916 shares of
Hunter's common stock will be exchanged for one of the Magnum Shares. Gary C.
Evans, Hunter's president and chief executive officer, will own, beneficially or
of record, approximately 14.75% of the Registrant's common stock and 17.89% of
its Series C Preferred stock after the Magnum Shares have been distributed to
the Hunter shareholders.
After execution of the Agreement, Lloyd T. Rochford, the current President,
Chief Executive and Financial Officer, and Chairman of the board of directors of
Registrant, resigned as an officer and remained as Chairman. Hunter's officers
appointed to the board were Matthew C. Lutz as Vice Chairman and Gary C. Evans.
Hunter directors James E. Upfield, Gerald Bolfing and Oscar Lindenmann were also
appointed to the board. The Registrant appointed Mr. Evans President and Chief
Executive Officer. Mr. Lutz was appointed Exploration and Business Development
Manager and William C. Jones was appointed Secretary.
2
<PAGE>
Item 7. Financial Statements and Exhibits
a] Financial Statements of Businesses Acquired:
Accountants' Report of Hein+Associates LLP, dated April 14, 1995
Audited Consolidated Balance Sheet of Hunter Resources, Inc. and
Subsidiaries as of December, 1994
Audited Consolidated Statements of Operations for Hunter Resources,
Inc. and Subsidiaries for the Years Ended December 31, 1994 and
1993
Audited Consolidated Statements of Stockholders' Equity for Hunter
Resources, Inc. and Subsidiaries for the Years Ended December 31,
1994 and 1993
Audited Consolidated Statements of Cash Flows for Hunter Resources,
Inc. and Subsidiaries for the Years Ended December 31, 1994 and
1993
Unaudited Consolidated Balance Sheet of Hunter Resources, Inc. and
Subsidiaries as of September 30, 1995
Unaudited Consolidated Statements of Operations for Hunter Resources,
Inc. and Subsidiaries for the Quarters and Nine Months Ended
September 30, 1995 and 1994
Unaudited Consolidated Statements of Cash Flows for Hunter Resources,
Inc. and Subsidiaries for the Quarters and Nine Months Ended
September 30, 1995 and 1994
b] Pro Forma Financial Information:
Consolidated Pro Forma Financial Information (unaudited)
Consolidated Pro Forma Balance Sheet at September 30, 1995 (unaudited)
Consolidated Pro Forma Statement of Operations For the Twelve Months
Ended December 31, 1994 (unaudited)
Consolidated Pro Forma Statement of Operations For the Nine Months
Ended September 30, 1995 (unaudited)
Notes to Pro Forma Consolidated Statements of Operations (unaudited)
c] Restated Consolidated Financial Statements:
Accountants' Report of HANSEN, BARNETT & MAXWELL, a Professional
Corporation, dated March 26, 1995, except for Note 2, as to which
the date is September 29, 1995
Audited Restated Consolidated Balance Sheet of Magnum Petroleum, Inc.
and Subsidiary as of December 31, 1994 and Unaudited Consolidated
Balance Sheet of Magnum Petroleum, Inc. and Subsidiary as of
September 30, 1995
Audited Consolidated Statements of Operations for Magnum Petroleum,
Inc. and Subsidiary for the Years Ended December 31, 1994 and
1993 and Unaudited Consolidated Statements of Operations for
Magnum Petroleum, Inc. and Subsidiary for the Nine Months Ended
September 30, 1995 and 1994
Audited Consolidated Statements of Stockholders' Equity for Magnum
Petroleum, Inc. and Subsidiary for the Years Ended December 31,
1994 and 1993 and Unaudited
Consolidated Statements of Stockholders' Equity for Magnum Petroleum,
Inc. and Subsidiary for the Nine Months Ended September 30, 1995
Audited Consolidated Statements of Cash Flows for Magnum Petroleum,
Inc. and Subsidiary for the Years Ended December 31, 1994 and
1993 and Unaudited
Consolidated Statements of Cash Flows for Magnum Petroleum, Inc. and
Subsidiary for the Nine Months Ended September 30, 1995
3
<PAGE>
d] Exhibits:
Sequential
Page Number or Location
-----------------------
Agreement and Plan of Reorganization and
Plan of Liquidation dated July 21,1995 *
Amendment to Agreement and Plan of Reorganization
and Plan of Liquidation dated December 19, 1995. **
* Incorporated by reference to Form 8-K/A dated July 21, 1995, filed on
October 3, 1995.
** Incorporated by reference to Registration Statement on Form S-4 filed on
March 12, 1996.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DATED: September 9, 1996 MAGNUM PETROLEUM, INC.
BY: /s/ Gary C. Evans
-------------------
Gary C. Evans
President
5
<PAGE>
Independent Auditor's Report
To the Shareholders and Board of Directors of Hunter Resources, Inc.
We have audited the consolidated balance sheet of Hunter Resources, Inc. and
Subsidiaries as of December 31, 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows 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
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hunter
Resources, Inc. and Subsidiaries as of December 31, 1994, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1994 and 1993, in conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Certified Public Accountants
April 14, 1995
Dallas, Texas
6
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
<S> <C>
ASSETS December 31,
CURRENT ASSETS: 1994
---------------------
Cash $ 25,000
Notes and accounts receivable, net: Trade (less allowance for doubtfut
accounts of $105,000) 579,000
Affiliates 124,000
Prepaids 32,000
--------------
TOTAL CURRENT ASSETS 760,000
--------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, full cost method 6,874,000
Pipeline 699,000
Other property 216,000
--------------
7,789,000
Accumulated depreciation, depletion, amortization and impairment (4,713,000)
--------------
PROPERTY AND EQUIPMENT, NET 3,076,000
--------------
Excess of cost of investments in subsidiaries over net assets acquired, net 1,000,000
Accounts and notes receivable, net: Trade 6,000
Affiliates 86,000
Deposits and other assets 7,000
TOTAL ASSETS $ 4,935,000
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 553,000
Suspended revenue interests 675,000
Notes payable, current 311,000
--------------
TOTAL CURRENT LIABILITIES 1,539,000
Long-term debt, less current portion 540,000
Other liabilitilies 114,000
--------------
TOTAL LIABILITIES 2,193,000
--------------
Commitments and contingencies (Notes 5 and 7) -
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 1,000,000 shares authorized for each Class A,B,C;
90,000 shares (Class A, Series 1) issued and outstanding 90,000
Common stock, $.10 par value; 100,000,000 shares authorized;
17,466,000 shares issued and outstanding 1,747,000
Capital in excess of par value 1,621,000
Accumulated deficit (706,000)
--------------
2,752,000
Less 22,000 shares of treasury stock at cost (10,000)
--------------
TOTAL STOCKHOLDERS' EQUITY 2,742,000
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,935,000
==============
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIAIRIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1994 1993
---------------------------------
<S> <C> <C>
REVENUES:
Gas gathering and marketing $ 443,000 $ 509,000
Oil and gas sales 581,000 499,000
Oil field services and commissions 1,122,000 763,000
Interest 26,000 26,000
Other 184,000 209,000
---------------------------------
TOTAL REVENUES 2,356,000 2,006,000
---------------------------------
EXPENSES:
Purchases of natural gas 262,000 295,000
Pipeline operations 76,000 92,000
Lease operating 412,000 300,000
Cost of services 654,000 376,000
Depreciation, depletion,
amortization and impairment 263,000 270,000
General and administrative 513,000 602,000
Interest 44,000 39,000
Legal settlement expenses 117,000 -
---------------------------------
TOTAL EXPENSES 2,341,000 1,974,000
---------------------------------
INCOME BEFORE INCOME TAXES 15,000 32,000
INCOME TAX BENEFIT - 54,000
---------------------------------
NET INCOME (LOSS) 15,000 86,000
PREFERRED DIVIDENDS (9,000) (9,000)
---------------------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 6,000 $ 77,000
=================================
NET INCOME (LOSS) PER SHARE * *
=================================
(Primary and fully diluted)
*Less than $.01 per share
The accompanying notes are an integral part of these statements.
8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Capital in Accumulated Treasury Stock Advances
Excess of Earnings to
Shares Amount Shares Amount Par Value (Deficit) Shares Amount Affiliates
------ ------ ------ ------ --------- --------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1992 180,000 $180,000 15,298,000 $1,530,000 $1,427,000 ($789,000) 22,000 ($10,000) ($60,000)
Net Income 86,000
Preferred dividends 9,000 (9,000)
Conversion of Preferred
Stock and issuance of
1992 preferred dividends (90,000) (90,000) 1,050,000 105,000 (15,000)
Stock issued for cash 100,000 10,000 12,000
Stock issued for liabilities 118,000 12,000 24,000
Payments and advances
with affiliates, net (4,000)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993 90,000 90,000 16,566,000 1,657,000 1,457,000 (712,000) 22,000 (10,000) (64,000)
Net Income 15,000
Preferred dividends 9,000 (9,000)
Stock issued for liabilities 241,000 24,000 36,000
Stock issued for cash 279,000 28,000 73,000
Stock issued for services 380,000 38,000 46,000
Payments and advances
with affiliates, net (64,000)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994 90,000 $ 90,000 17,466,000 $1,747,000 $1,621,000 ($706,000) 22,000 ($ 10,000) $ 0
====== ========= ========== ========== ========== ========== ====== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements
9
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 15,000 $ 86,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income tax (benefit) - (54,000)
Litigation accrual (27,000)
Common stock issued for services 84,000
Depreciation, depletion, amoritzation, and impairment 263,000 270,000
Reversal of allowances and payables (138,000) (80,000)
Change in assets and liabilities:
(Increase) decrease in notes and accounts
receivable, trade and affiliates (9,000) (350,000)
(Increase) decrease in other current assets 39,000 (52,000)
Increase (decrease) in accounts payable,
accrued liabilities and suspended revenue interests 121,000 341,000
---------------------------------------------------
Total adjustments 360,000 48,000
---------------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 375,000 134,000
---------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 23,000 290,000
Additions to property and equipment (830,000) (511,000)
Increase in long-term accounts receivable,
trade and affiliate (2,000) (4,000)
Other - 4000
---------------------------------------------------
NET CASH (USED FOR) INVESTING ACTIVITIES (809,000) (221,000)
---------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 493,000 548,000
Increase (decrease) in other liabilities 27,000 (70,000)
Payments on long-term debt (259,000) (363,000)
Proceeds from sale of stock 101,000 22,000
---------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 362,000 137,000
---------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (72,000) 50,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 97,000 47,000
---------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 25,000 $ 97,000
===================================================
</TABLE>
The accompanying notes are an integral part of these statements
10
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 3, 1994 AND 1993
(1) BUSINESS AND ORGANIZATION:
Hunter Resources, Inc. and Subsidiaries (the "Company"), formerly
Intramerican Corporation, a Pennsylvania Corporation, in engaged in the
acquisition, operation, and development of oil and gas properties; the
gathering, transmission and marketing of natural gas; and the management and
providing advisory consulting services on oil and gas properties for third
parties.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries and its pro-rata share of the assets,
liabilities, income and expenses of an oil and gas company in which the Company
owns less than a controlling interest. All significant intercompany transactions
and balances have been eliminated in consolidation.
OIL FIELD SERVICES AND DRILLING OPERATIONS
------------------------------------------
The Company receives management and consulting fees for drilling, operating and
providing related services to oil and gas wells. These fees are recognized as
earned.
OIL AND GAS PROPERTIES
----------------------
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 a provision for impairment is made of
the full-cost amortization base when appropriate. 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 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.
PIPELINES
---------
Pipelines are carried at cost. Depreciation is provided using the
straight-line method over an estimated useful life of 18 years. Gain or loss on
retirement or sale or other disposition of assets is included in income in the
period of disposition.
SERVICE EQUIPMENT AND OTHER
---------------------------
Service equipment and other property and equipment are carried at cost.
Depreciation is provided using the straight-line method over estimated useful
lives ranging from five to seven years. Gain or loss on retirement or sale or
other disposition of assets is included in income in the period of disposition.
11
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
INCOME TAXES
- ------------
The Company files a consolidated federal income tax return. The Company
applies Statement of Accounting Standards No. 109 (SFAS 109). As required by
SFAS 109, income taxes provided are 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 assetss and
liabilities represent the future tax return consequences of those differrences,
which will either be taxable or deductible when the assets anad 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.
INTANGIBLE ASSETS
- -----------------
The excess of cost over the fair value of net assets acquired (goodwill) is
amortized using the straight-line method. Approximately $1,158,000 is amortized
over a thirty year period and $37,000 is amortized over a five year period.
Accumulated amortization at December 31, 1994 was approximately $195,000.
EARNINGS PER SHARE
- ------------------
Per share information is based on the weighted average number of common stock
and common stock equivalent shares outstanding. Common equivalent shares arising
from dilutive stock options outstanding are computed using the treasury stock
method. Stock options and convertible securities were antidilutive at December
31, 1994 and 1993. The weighted average number of common stock and common stock
equivalent shares outstanding used in the calculation of primary net income per
share was 17,333,000 in 1994 and 16,083,000 in 1993.
(4) STATEMENTS OF CASH FLOWS:
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
The following disclosures provide supplemental information with respect to the
Company's statements of cash flows:
For the Year Ended
December 31,
Non-Cash Investing and Financing Activities 1994 1993
------------------------------------------- ----- ----
Oil and gas properties and service equipment
acquired in exchange for common stock $ - $ 50,000
========== ==========
Unpaid and disputed payables related to
oil and gas properties $ - $ 23,000
========== ==========
Stock issued in settlement of liabilities $ 60,000 $ 36,000
========== ==========
Other:
Interest paid $ 43,000 $ 40,000
========== ==========
(4) ACQUISITIONS AND SALES OF PROPERTY:
Including the Company's pro-rata interest in certain assets, the Company
acquired oil and gas producing properties with proved reserves, as estimated by
the Company's independent petroleum engineer, during 1994 and 1993 respectively,
of approximately 32,000 and 195,000 barrels of oil and 1,389,000 and 354,000 MCF
of natural gas (unaudited). The Company's costs of the property acquisitions
were approximately $749,000 and $534,000 for 1994 and 1993, respectively.
12
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
The Company sold oil and gas properties with proved reserves, as estimated by
the Company's independent petroleum engineer,during 1994 and 1993 respectively,
of approximately 1,000 and 29,000 barrels of oil and 33,000 and 10,000 MCF of
natural gas (unaudited). The net proceeds of approximately $23,000 and $290,000
were credited to oil and gas properties.
(5) LONG-TERM DEBT:
Long-term debt at December 31, 1994 consisted of the following:
<TABLE>
<CAPTION>
1994
----
<S> <C>
Banks:
Promissory note; collateralized by pipeline and oil and gas properties;
payable in monthly installments of $18,333 plus interest at prime plus
1.5% (10% at December 31, 1994) and all outstanding balances due
December 1997 $ 660,000 (a)(b)
Promissory note; collateralized by oil and gas properties; payable in
monthly installments of $5,500 through March 1, 1995, decreasing to
$4,500 including interest at prime plus 2% (11.66% at December 31,
1994), all remaining balances due at maturity in September, 1995. 104,000 (a)(c)
Note payable; interest at 7.25% collateralized by truck; payable in monthly
installments of $498 through July, 1996. 8,000 (a)
Other:
Note payable; non-interest bearing and uncollateralized; payable in monthly
installments of $1,000 through July 1, 2000. 70,000
Note payable; interest at 10%; payable in full in January 1995. 9,000 (a)
Less current portion (311,000)
$ 540,000
==========
</TABLE>
Maturities of long-term debt based on contractual requirements for the
years ending December 31 are as follows:
1995 $ 311,000
1996 277,000
1997 232,000
1998 12,000
1999 12,000
Thereafter 7,000
$ 851,000
(a) These notes payable are personally guaranteed by the Company's President.
(b) This note was refinanced with another bank in March, 1995. See Note 11
(c) This note includes certain covenants, the most restrictive of which is the
maintenance of at least a $200,000 net worth by a partially owned
subsidiary of the Company. The subsidiary is in compliance with the
covenant at December 31, 1994.
13
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(5) LONG-TERM DEBT (cont'd):
The Company and it's President are co-guarantors, along with the majority
owner of an oil and gas limited liability company (LLC), of bank loans totalling
$416,000 which are collateralized by the assets of the LLC. Only the Company's
25% pro rata share of this loan has been included in the Company's consolidated
financial statements.
(6) INCOME TAXES:
The components of the net deferred tax liability are as follows:
December 31, 1994
-----------------
Deferred tax liability $ (558,000)
Deferred tax assets 1,071,000
Valuation allowance (513,000)
-----------------
$ -
=================
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to a
significant portion of the deferred tax liability and deferred tax asset and
their approximate tax effects (utilizing a 37% combined federal and state income
tax rate) are as follows:
December 31, 1994
-----------------
Differences between book and tax basis
of oil and gas properties $ (558,000)
Differences between book and tax basis
of other assets 10,000
Percentage depletion carryforward 282,000
Net operating loss carryforwards 720,000
Other tax credit carryforwards 59,000
Valuation allowance on deferred tax assets 513,000
----------
Net deferred tax liability $ -
==========
14
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(6) INCOME TAXES (Continued):
There is no current tax provision for 1994 or 1993. Total deferred income tax
benefit attributable to continuing operations differed from the amounts computed
by applying the U.S. federal statutory tax rates to the pre-tax loss from
continuing operations as follows:
1994 1993
------- ------
Tax expense (benefit) at statutory tax rate $ 5,000 $ 11,000
Amortization of goodwill 15,000 19,000
Benefit of tax net operating loss carry-forward (20,000) (106,000)
Other - 21,000
---------- ---------
Deferred tax benefit $ - $(54,000)
========== ========
At December 31, 1994, for tax purposes, the Company had investment and
general business tax credit carryforwards of approximately $60,000, percentage
depletion carryforwards of approximately $760,000 and net operating loss
carryforwards of approximately $2,000,000. These carryforwards expire in 1995
through 2009. Upon the subsidiary merger with Sunbelt, Internal Revenue Code net
operating loss provisions were triggered resulting in limitations as to use of
the Company's and Sunbelt's net operating loss carryforwards. Accordingly, the
Company has a net operating loss carryforward annual limitation of $103,000 and
Sunbelt has an annual limitation of $95,000, which affect approximately
$1,690,000 of the net operating loss carryforwards.
(7) COMMITMENTS AND CONTINGENCIES:
A subsidiary of the Company was a defendant in litigation brought by Oklahoma
Gas & Electric Company against IOM Gas, Inc. (IOM) and another third party.
The plaintiff ("OG&E") alleged that the defendants, including IOM, delivered
certain volumes of natural gas to OG&E from specific leases that were not
dedicated to a certain twenty-year gas purchase contract. OG&E further alleged
that the price paid by it for such undedicated gas exceeded OG&E's cost of
alternative fuels; i.e. - spot market gas and coal. OG&E sought actual damages
from IOM in an amount of $1.7 million, plus exemplary damages, a declaration
that certain leases from which IOM delivered natural gas to OG&E were not
dedicated to the contract, that OG&E had no obligation to purchase gas from IOM
from leases not dedicated to the contract, and cancellation of the contract.
The Agreement of Settlement between IOM and OG&E called for no payment by
either party, a release and discharge of all claims, and neither OG&E nor IOM
admit any wrongdoing or liability whatsoever. The existing Gas Purchase Contract
and associated amendments will remain in effect on the dedicated wells and
acreage for the remaining term (approximately 38 months). Additionally, OG&E has
provided IOM a new gas purchase contract on "undedicated" or "nonexclusive"
wells and acreage based upon a basket of spot market indexes with a volume cap
of 3,000,000 cubic feet per day. The Company incurred costs associated with this
litigation of $117,000, which were charged to operations in 1994.
15
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(7) COMMITMENTS AND CONTINGENCIES (Continued)
Gruy is currently involved in one lawsuit as a third party defendant. In
1986, Gruy performed an audit of oil and gas properties for a client. Subsequent
to the audit, Gruy's client sued the operator of the properties for an
accounting, fraud and conversion, and to recover expenses and revenue exceptions
defined by Gruy in the audit report. During the course of the above suit, the
operator sued Gruy for slander based upon information outlined in the audit
report. Both Gruy and the client subsequently sought sanctions against the
operator in the above suit for repeated discovery violations. On April 30, 1990,
the 112th Judicial District of the State of Texas issued an order including,
among other things, the striking of the operator's pleadings, answers and
counterclaims against Gruy and the client, and the awarding of $1,223,115 to the
client and $76,000 to Gruy. On November 27, 1991, the Court of Appeals for the
Eighth District of Texas issued an Opinion that the sanctions order was
interlocutory and non-appealable and the Court of Appeals did not have
jurisdiction, therefore, dismissal of the appeal was necessary for want of
jurisdiction. The Judgement from the Court of Appeals read as follows ... "Since
this Court lacks jurisdiction to consider the other points of error, it is
necessary for us to dismiss the appeal. However, we have in connection with the
order imposing sanctions, reviewed extensively the statements of facts and
transcripts of the record leading up to that order. We make no decision at this
time on the various points of error raising the propriety of the sanctions
imposed, but we do strongly suggest that the trial court review all of the
sanctions in the light of Transamerican Natural Gas Corporation v. Powell, 811
S.W.2d 913 (Tex. 1991) and Braden v. Downey, 811 S.W.2d 922 (Tex. 1991) before
proceeding further with the case." The appeal was dismissed for want of
jurisdiction. In August 1992, all parties met for an agreed mediation which was
unsuccessful. The case is presently set for trial the week of September 1, 1995.
The Company has an employment agreement with the President that requires
monthly salary payments of $9,583 through December 31, 1994. The agreement may
be terminated by the Company only with cause. Following December 31, 1994, the
agreement automatically renews for successive one year periods unless terminated
by either party. If the Company terminates the agreement, the President is
entitled to a severance payment of $57,500.
The Company incurred rental expense of $90,000 and $76,000 for the years
ended December 31, 1994 and 1993, respectively. The Company currently has a
non-cancelable lease agreement extending to November 1, 2002 on its corporate
headquarters. The future minimum payments under this lease effective November 1
of each year are as follows:
Lease Year Period Basic Annual Rent
---------- ------ -----------------
1 1994-1995 $ 111,000
2 1995-1996 113,000
3 1996-1997 113,000
4 1997-1998 115,000
5 1999-2000 115,000
6 2000-2001 123,000
7 2001-2002 123,000
Management anticipates that the combined cash flow from operations of the
oil and gas production, the property management and consulting business, and to
a lesser extent, its gas gathering system, will be sufficient to make all
required principal and interest payments on the Company's debt for the 1995
fiscal year. In addition, management believes the working capital deficit is
manageable with the anticipated cash flows from its existing lines of business.
Management recognizes that to continue meeting these objectives and to minimize
uncertainties concerning the ability of the Company to meet its obligations,
various cost control measures are necessary.
16
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(8) RELATED PARTY TRANSACTIONS:
On September 1, 1992, the Company entered into a Resignation Agreement (the
"Agreement") with the then Chairman of the Company. The Agreement provided for a
cash payment of $55,086 to the former Chairman in exchange for the cancellation
of the former Chairman's employment agreement with the Company. Additionally,
certain accounts receivable due from the former Chairman and a corporation
controlled by him, totaling $36,199 at August 31, 1992, have been
recharacterized as a note receivable bearing interest at 8% per annum and
maturing in a lump sum in December, 1995. The note is collateralized by a gas
gathering system and is classified as a current receivable at December 31, 1994.
At December 31, 1994, the Company had remaining accounts receivable from the
President of $31,000, substantially all recorded in the Sunbelt acquisition.
Affiliate receivables include $35,000 (after elimination) from non-consolidated
subsidiaries and $22,000 representing the Company's share of affiliate
receivables held by these subsidiaries and other balances of $35,000, of which
$31,000 represents advances during 1993 and 1994 to Oil Field Service, Inc.,
discussed below.
In 1991, the Company sold Sunbelt Well Service, Inc. to Oil Field Service, Inc.,
a company 100% owned by the President. Total amounts due the Company at December
31, 1994 included notes receivable of $55,000 and accounts receivable and
advances of $31,000, net of reserves of $20,000. The receivables are
collateralized by land and trade receivables.
17
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(9) EQUITY TRANSACTIONS AND STOCK OPTIONS:
Upon the merger of Sunbelt Energy, Inc. with a subsidiary of the Company, the
shareholders of Sunbelt received 5,585,000 shares of previously unissued and
currently unregistered common stock of the Company and 270,397 shares of Class
A, Series 1 preferred stock, designated as cumulative, convertible preferred
stock (CCP Stock), no par value. Neither the Company nor any other person has
any right to redeem shares of the CCP Stock until July 1, 1995. The CCP Stock
has voting rights of one vote per share and is entitled to preferred stock
dividends accruing from the date of issuance and payable in common stock of the
Company. At December 31, 1994, preferred convertible dividends in arrears
totalled $9,013 in aggregate of $.33 per common share, representing 26,928
shares of common stock. The CCP Stock can convert to common stock of the Company
by multiplying the number of shares being converted by a fraction equal to $1.00
divided by the lesser of the average trading price of the common stock of the
Company or the book value of the common stock, limited to 90% of the book value.
The remaining CCP stock at December 31, 1994 is expected to convert by the end
of 1995.
During 1990, the Board of Directors approved for each Director the option to
purchase 100,000 shares over the next ten years at an option price of $.1875 per
share. In 1990, the President was granted the option to purchase 250,000 shares
through December, 1995 at an option price of $.1875. During 1994 and 1993, no
stock options to management and directors were exercised. As of December 31,
1994, 850,000 options remain exercisable by existing directors. . As of December
31, 1994, 186,000 shares are available under the Company's Incentive Stock
Option Plan. During 1994, stock options for 14,000 shares were issued and
exercised under the Plan by certain former employees of the Company.
(10) SIGNIFICANT CUSTOMERS:
For the years ended December 31, 1994 and 1993, two customers, Oryx Energy
Company and Oklahoma Gas & Electric Company, accounted for the following
percentages of total revenues:
1994 1993
---- ----
Oklahoma Gas & Electric Company 19 % 25%
Oryx Energy Company 18 % -
(11) SUBSEQUENT EVENTS:
On March 31, 1995, the Company arranged a $10 million revolving credit facility
with First Interstate Bank of Texas, N.A. ("FITX"). The new credit facility is
subject to a "Borrowing Base" determination established from time to time by
FITX based upon proven oil and gas reserves and gas gathering system assets
owned by Hunter's subsidiary. The initial proceeds advanced under the facility
have been used to refinance existing indebtedness from another financial
institution and to fund the acquisition of new oil and gas reserves as described
below.
On March 31, 1995, the Company closed on an acquisition of domestic producing
oil and gas properties for $1.4 million from a Midland, Texas based independent.
The purchase price was comprised of $1.2 million cash, $200,000 in restricted
common stock of Hunter, and had an effective date of January 1, 1995. The
properties are concentrated in four fields in West Texas and Eastern New Mexico
and include ownership interest in 25 wells, 23 of which the Company or its
subsidiary have assumed operations. The properties have proved producing
reserves estimated by the Company's petroleum engineers of 28,472 barrels of
oil/condensate and 2.416 billion cubic feet of natural gas to the net interest
acquired. The future net revenues from these proved producing properties is
estimated at $3,622,880 with a discounted present worth at 10% of $1,960,533.
18
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(12) INDUSTRY SEGMENTS:
The Company and its subsidiaries are engaged in energy consulting services, oil
and gas production, and the gathering, transmission and marketing of natural
gas. The following table sets forth information by industry segment for the
years ended December 31, 1994 and 1993.
For the Years Ended
December 31,
1994 1993
---- ----
Operating revenues:
Gas gathering $ 443,000 $ 509,000
Energy consulting 1,122,000 763,000
Oil and gas production 581,000 499,000
------------ ------------
$2,146,000 $1,771,000
============ ============
Operating profit:
Gas gathering $ 61,000 $ 79,000
Energy consulting 383,000 308,000
Oil and gas production 35,000 51,000
------------ ------------
479,000 438,000
------------ ------------
Other income (expense):
Other income 184,000 209,000
Interest income 26,000 26,000
Interest expense (44,000) (39,000)
General and administrative (630,000) (602,000)
------------ ------------
(464,000) (406,000)
------------ ------------
Income (loss) before taxes and
cumulative effect of change
in accounting $ 15,000 $ 32,000
============ ============
Identifiable assets at end of period:
Gas gathering $ 476,000 $ 538,000
Energy consulting 1,348,000 1,274,000
Oil and gas production 3,111,000 2,630,000
------------- ------------
$ 4,935,000 $ 4,442,000
============= ============
Capital expenditures during period
(including capital leases and
non-cash additions):
Gas gathering $ 3,000 $ 9,000
Energy consulting 52,000 41,000
Oil and gas production 784,000 534,000
------------- ------------
$ 839,000 $ 584,000
============= ============
19
<PAGE>
[ BLANK PAGE ]
Following Pages Contain
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(Unaudited)
20
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
CAPITALIZED COSTS
- -----------------
Capitalized costs and accumulated depreciation, depletion, amortization and
impairment related to the Company's oil and gas properties, all of which were
evaluated, were as follows:
At December 31,
--------------------------------------
1994 1993
---- ----
Total evaluated capitalized costs $ 6,874,000 $ 6,115,000
Accumulated depreciation, depletion,
amortization and impairment (4,354,000) (4,221,000)
--------------------------------------
$ 2,520,000 $ 1,894,000
======================================
COST INCURRED
- -------------
Costs incurred by the Company with respect to its oil and gas producing
activities were as follows:
For the Years Ended
December 31,
--------------------------------------
1994 1993
---- ----
Property acquisition costs: $ 749,000 $ 517,000
Proved Properties (1) - -
Unproved Properties - - -
Exploration costs 35,000 17,000
--------------------------------------
Development costs $ 784,000 $ 534,000
======================================
(1) 1993 includes non-cash additions from issuance of stock of $50,000.
The amortization rates for capitalized property costs, determined on an overall
basis under the unit-of-production method, were $2.92 per equivalent barrel in
1994 and $4.51 in 1993.
RESULTS OF OIL AND GAS PRODUCING ACTIVITIES
For the Years Ended
December 31,
-----------------------------
1994 1993
---- ----
Revenues $ 581,000 $ 499,000
Production costs, including severence
and ad valorem taxes (412,000) (300,000)
Depreciation, depletion, amortization,
and impairment (134,000) (148,000)
------------------------------
Results of operations for producing activities $ 35,000 $ 51,000
==============================
21
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
OIL AND GAS RESERVE INFORMATION
- -------------------------------
The estimates of proved oil and gas reserves utilized in the preparation of the
financial statements were prepared by an independent petroleum engineer in
accordance and with guidelines established by the Securities and Exchange
Commission and the Financial Accounting Standards Board, which require that
reserve reports be prepared under existing economic and operating conditions
with no provision for price and cost escalation except by contractual agreement.
The Company emphasizes that reserve estimates of new discoveries or undeveloped
properties are more imprecise than those of producing oil and gas properties.
Accordingly, these estimates are expected to change as future information
becomes available. All of the Company's reserves are located onshore in the
continental United States.
The following unaudited table sets forth proved oil and gas reserves at December
31, 1994 and 1993, together with the changes therein:
Oil Condensate
` and Natural Gas
Proved developed and undeveloped reserves: (BBLS) (MCF)
---------------------------------
Balance at January 1, 1993 508,426 1,773,810
Revisions of previous estimates (132,642) 6,531
Sales of minerals in place (29,384) (9,656)
Purchase of minerals in place 195,487 353,722
Production (22,642) (61,007)
---------------------------------
Balance at December 31, 1993 519,245 2,063,400
Revisions of previous estimates 603,629 (473,451)
Sales of minerals in place (626) (336,278)
Purchase of minerals in place 32,408 1,389,064
Production (24,605) (127,854)
---------------------------------
Balance at December 31, 1994 1,130,051 2,817,881
=================================
Proved developed reserves at December 31:
1993 152,000 749,000
=================================
1994 762,000 2,137,000
=================================
22
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves:
At December 31,
1994 1993
---- ----
Future Cash Flows $ 21,706,000 $ 11,658,000
Future Production Costs (7,312,000) (4,099,000)
Future Development Costs (1,953,000) (1,989,000)
---------------------------
Future Net Cash Flows, Before Income Tax 12,441,000 5,570,000
Future Income Tax Returns (3,121,000) (1,276,000)
---------------------------
Future Net Cash Flows 9,320,000 4,294,000
10% Discount to Reflect Timing of Net Cash Flows (3,355,000) (1,815,000)
---------------------------
Standardized Measure of Discounted Future
Net Cash Flows $ 5,965,000 $ 2,479,000
===========================
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Reserves:
<TABLE>
<CAPTION>
<S> <C> <C>
For the Year Ended
December 31,
-----------------------------------------------------
1994 1993
---- ----
Standardized measure, beginning of year $ 2,479,000 $ 3,148,000
Revisions:
Net Change in sales price, net of production costs (238,000) (1,320,000)
Revisions of quantity estimates 5,305,000 (679,000)
Accretion of discount 248,000 315,000
Changes in timing, future development and other (1,277,000) 105,000
Purchases of reserves in-place 840,000 989,000
Sales of reserves in-place (5,000) (117,000)
Extensions and discoveries, less related costs - -
Sales, net of production costs (169,000) (199,000)
Net changes in income taxes (1,218,000) 237,000
----------------------------------------------------
Standardized measure, end of year $ 5,965,000 $ 2,479,000
----------------------------------------------------
</TABLE>
23
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
September 30,
1995
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 87,000
Notes and accounts receivable, net: Trade (less reserve of $84,000) 852,000
Affiliates 79,000
Prepaids 91,000
-----------------------------------
TOTAL CURRENT ASSETS 1,109,000
-----------------------------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, full cost method 8,780,000
Pipeline 674,000
Other property 218,000
-----------------------------------
9,672,000
Accumulated depreciation, depletion, amortization and impairment (4,934,000)
-----------------------------------
4,738,000
PROPERTY AND EQUIPMENT, NET
Excess of cost of investments in subsidiaries over net assets acquired, net 963,000
Accounts and notes receivable, net: Trade -
Affiliates 86,000
Deposits and other assets 4,000
-----------------------------------
TOTAL ASSETS $ 6,900,000
-----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities: Trade $ 957,000
Affiliates 19,000
Suspended revenue interests 733,000
Notes payable, current 575,000
-----------------------------------
TOTAL CURRENT LIABILITIES 2,284,000
Deferred income tax 7,000
Long-term debt, less current portion 1,166,000
Production Payment Liability (Non-Recourse)
Other Liabilities 85,000
-----------------------------------
TOTAL LIABILITIES 3,847,000
-----------------------------------
Commitments and contingencies -
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 1,000,000 shares authorized for each Class A,B,C;
90,000 shares (Class A, Series 1) issued and outstanding 90,000
Common stock, $.10 par value; 100,000,000 shares authorized;
18,354,261 shares issued and outstanding 1,835,000
Capital in excess of par value 1,816,000
Accumulated deficit (668,000)
-----------------------------------
3,073,000
Less 22,000 shares of treasury stock at cost and put stock (20,000)
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,053,000
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,900,000
. ===================================
The accompanying notes are an integral part of these statements
24
</TABLE>
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
REVENUES:
Gas gathering and marketing $ 42,000 $ 111,000 $ 144,000 $ 362,000
Oil and gas sales 270,000 156,000 708,000 450,000
Oil field services and commissions 151,000 349,000 409,000 950,000
Interest 6,000 7,000 20,000 20,000
Other 161,000 15,000 271,000 132,000
----------------------------------------------------------------------------------
TOTAL REVENUES 630,000 638,000 1,552,000 1,914,000
----------------------------------------------------------------------------------
EXPENSES:
Purchases of natural gas 24,000 63,000 83,000 213,000
Pipeline operations 14,000 (3,000) 41,000 58,000
Lease operating 130,000 99,000 329,000 299,000
Cost of services 112,000 182,000 299,000 526,000
Depreciation, depletion,
amortization and impairment 108,000 77,000 284,000 242,000
General and administrative 154,000 186,000 349,000 510,000
Interest 59,000 12,000 129,000 33,000
----------------------------------------------------------------------------------
TOTAL EXPENSES 601,000 616,000 1,514,000 1,881,000
----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 29,000 22,000 38,000 33,000
FEDERAL INCOME TAX - - - -
----------------------------------------------------------------------------------
NET INCOME $ 29,000 $ 22,000 $ 38,000 $ 33,000
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
NET INCOME PER SHARE
(primary and fully diluted): * * * *
*Less than $.01 per share ==================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
25
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<C> <C> <C>
Nine Months Ended
September 30,
1995 1994
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 38,000 $ 33,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of assets (27,000) -
Common stock issued for service - 63,000
Depreciation, depletion, amortization, and impairment 284,000 242,000
Reversal of allowances and payables (200,000) (47,000)
Change in assets and liabilities
(Increase) decrease in notes and accounts
receivables, trade and affiliates (203,000) (157,000)
(Increase) decrease in other assets (56,000) (85,000)
Increase (decrease) in accounts payable,
accrued liabilities and suspended revenue 522,000 132,000
----------------------------------------
Total adjustments 320,000 148,000
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES ----------------------------------------
358,000 181,000
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 77,000 22,000
Additions to property and equipment (1,751,000) (186,000)
(Increase) decrease in long-term accounts receivable,
trade and affiliate 6,000 1,000
Other - (102,000)
----------------------------------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (1,668,000) (265,000)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,604,000 116,000
Increase (decrease) in other liabilities 420,000 20,000
Payments on long-term debt (1,708,000) (214,000)
Proceeds from sale of common stock 56,000 111,000
----------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,372,000 33,000
----------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 62,000 (51,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,000 97,000
----------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 87,000 $ 46,000
----------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements
26
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1995
(1) MANAGEMENT'S REPRESENTATION
The consolidated balance sheet as of September 30, 1995, the consolidated
statements of operations for the three and nine month periods ended September
30, 1995 and 1994, and the consolidated statements of cash flows for the nine
month periods then ended are unaudited. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary have
been made to present fairly the financial position, results of operations and
changes in cash flows for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the December 31, 1994 annual report on Form 10-KSB for
Hunter Resources, Inc. (the "Company"). The results of operations for the nine
month period ended September 30, 1995 are not necessarily indicative of the
operating results for the full year.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain items
have been reclassified to conform with the current presentation.
(2) SIGNIFICANT EVENTS
Magnum Petroleum, Inc. Merger
-----------------------------
On July 7, 1995, Hunter Resources, Inc. entered into a Letter of Intent to
proceed with a business reorganization whereby Magnum Petroleum, Inc.
(Commission File No. 1-12508, "Magnum") would acquire all of the assets of
Hunter Resources, Inc. under a stock exchange. The Registrant, on July 21, 1995,
announced the closing of a definitive agreement to combine with Magnum. Pursuant
to the definitive agreement, Magnum has issued to Registrant 2,750,000 shares of
newly issued restricted common stock of Magnum ("Magnum Shares") in exchange for
all of the assets of the Registrant, subject to its liabilities. The
Registrant's assets consisted of stock in wholly owned subsidiaries and
interests in limited liability companies ("Hunter Subsidiaries").
Magnum intends to continue to use and manage the Hunter Subsidiaries and their
underlying assets in the same manner as previously conducted by the Registrant.
The companies considered the value of the underlying assets, future prospects,
and the market value of Magnum's common stock in determining the consideration
paid by Magnum in the exchange.
As a result of the issuance of the Magnum Shares to the Registrant, the
Registrant is the owner of approximately 30.3% of Magnum's total issued and
outstanding common stock. The Registrant intends to liquidate and distribute all
of the Magnum Shares to its shareholders. A Special Meeting of the shareholders
of the Registrant will be held to approve the transaction between the Registrant
and Magnum and the subsequent liquidation of the Registrant. Officers, directors
and other affiliates of the Registrant, representing over 50% of Registrant's
issued and outstanding common shares, intend to vote in favor of the
transaction. The Registrant has filed an Information Statement with the
Securities and Exchange Commission and will provide such Information Statement
to its shareholders before the Special Meeting. The Magnum Shares and interests
in the Subsidiaries are held in escrow pending shareholder approval of the
transaction. Shareholders of Registrant are expected to receive one Magnum
common share for every 7.234 common shares of Registrant redeemed, after
registration of the Magnum Shares by Magnum. The common stock of Registrant will
continue to trade on the Boston Stock Exchange and Over-The-Counter market until
the time of the liquidation.
Lloyd T. Rochford, the current President, Chief Executive and Financial Officer
and a director of Magnum, shall resign as an officer and remain as Chairman of
the combined companies. Registrant directors to be appointed to the new board
of the combined companies are Matthew C. Lutz as Vice Chairman, Gary C. Evans
and James E. Upfield. Mr. Evans shall be appointed President and Chief Executive
Officer of the combined companies. Mr. Lutz also will be appointed Exploration
and Business Development Manager.
The Registrant and Magnum, through the Hunter Subsidiaries, have conducted their
oil and gas operations and activities regarding energy related acquisitions in
conjunction with one another.
27
<PAGE>
Other Items
On April 7, 1994, the Company was awarded a Production and Services Management
Contract between its wholly-owned subsidiary, Gruy Petroleum Management Co., and
Oryx Energy Company ("Oryx"), for the management and operation of certain oil
and gas producing properties. The contract, effective April 1, 1994, covered
Oryx properties consisting of onshore producing properties in ten states, one
gas processing plant, one offshore platform and two inland water platforms. The
total number of wells in the management contract was approximately 400. These
oil and gas properties were ultimately sold by Oryx and effective November 1,
1994, the contract terminated.
On March 31, 1995, the Company closed an acquisition of domestic producing oil
and gas properties for $1.4 million from a Midland, Texas based independent. The
purchase price was comprised of $1.2 million cash, $200,000 in restricted common
stock of Hunter, and had an effective date of January 1, 1995. The properties
are concentrated in four fields in West Texas and Eastern New Mexico and include
ownership interest in 25 wells, 23 of which the Company or its subsidiary have
assumed operations.
On August 21, 1995, the Company's wholly-owned subsidiary signed a definitive
agreement for the purchase of four unregulated gas gathering systems. The
systems are located in Texas, Louisiana and New Mexico. The total cash
consideration is $1.2 million with closing scheduled for November 27, 1995. The
acquisition has an effective date of August 1, 1995.
On October 18, 1995, the Registrant's wholly-owned subsidiary closed on an
acquisition of the remaining 75 per cent ownership interest in an affiliated
company from a joint venture partner. The purchase price of $1,075,287 consisted
of a) $300,000 in cash, b) $300,000 represented by 85,131 shares of restricted
common stock of Magnum valued at $3.52 per share and c) the assumption of
existing bank indebtedness of $475,287. As additional consideration, 50,000
warrants to purchase common stock of Magnum 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, the Registrant's wholly-owned subsidiary closed on an
acquisition of domestic producing oil and gas properties. The purchase price was
comprised of $2.107 million cash, funded by an existing bank line of credit, and
$225,000 represented by 64,176 shares of restricted common stock of Magnum
valued at $4.00 per share. The acquisition had an effective date of August 1,
1995.
On November 6, 1995, the Registrant's wholly-owned subsidiary 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 the Company prior to the business
reorganization with Magnum. 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 current
borrowing base has been increased to $8.7 million with outstanding borrowings
bearing interest at prime plus 1.5 percent.
On November 9, 1995, the Registrant's wholly-owned subsidiary closed on an
acquisition of domestic producing oil and gas properties for approximately $4.5
million as adjusted for operations from the effective date (August 1, 1995) to
closing date. The purchase price was comprised of $3.375 million of cash, funded
by the Registrant's 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 Magnum.
28
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
Pro Forma Consolidated Financial Information
Magnum Petroleum, Inc. ("Magnum") and Hunter Resources, Inc. ("Hunter") entered
into a letter of intent dated July 7, 1995 and subsequently entered into an
amended definitive agreement dated December 19, 1995 to be effective December
22, 1995, whereby Magnum acquired all of the assets of Hunter, which consisted
of subsidiary corporations and interests in limited liability companies (the
"Acquisition"). Magnum issued 5,085,077 shares of its restricted common stock
and 111,825 shares of its Series C preferred stock to Hunter and issued 575,000
shares of restricted common stock as payment of fees directly related to the
Acquisition. The Acquisition is recorded on the "purchase method" based upon the
estimated value of the consideration (the common stock issued) that Magnum paid
for the Acquisition.
In addition, the Company has also adjusted the pro forma consolidated statements
of operations for the acquisition by Hunter on March 31, 1995 of the Arrington
oil and gas properties, the October 25, 1995 acquisition of the Reef oil and gas
properties and the November 9, 1995 acquisition of the Tana oil and gas
properties as if the acquisitions had been consummated at the beginning of each
respective period presented. The Arrington, Reef and Tana acquisitions were
previously reported on amended Forms 8-K filed by Hunter September 26, 1995, and
December 5, 1995 and January 23, 1996, respectively.
The pro forma balance sheet is presented as if the Acquisition had occurred on
September 30, 1995. The pro forma statements of operations are presented as if
the Acquisition occurred at the beginning of the respective periods. The pro
forma financial information is not necessarily indicative of the results that
would have occurred had the Acquisition occurred on the indicated dates.
The pro forma financial information should be read in conjunction with the
financial statements of each of the entities that are a party to the
Acquisition, and are contained in this document.
29
<PAGE>
<TABLE>
<CAPTION>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1995
(unaudited)
Magnum Pro Forma Combined
Historical Adjustments Pro Forma
------------------------------------------------------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,383,539 A $ 87,000 $ 2,470,539
Notes and accounts receivable, net:
Trade (less reserve of $84,000) 118,994 A 686,000 804,994
Affiliates A 79,000 79,000
Other 9,845 9,845
Note receivable 91,929 91,929
Prepaids A 91,000 91,000
Current portion of notes receivable 84,000 84,000
------------------------------------------------------
TOTAL CURRENT ASSETS 2,688,307 943,000 3,631,307
PROPERTY AND EQUIPMENT
Oil and gas properties 10,640,485 A 14,276,005 31,547,373
D 86,883
E 2,315,000
F 4,229,000
Pipeline A 75,000 75,000
Other property 74,272 A 83,000 157,272
------------------------------------------------------
10,714,757 21,064,888 31,779,645
Accumulated depreciation, depletion, amortization and impairment (1,638,377) (1,638,377)
------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 9,076,380 21,064,888 30,141,268
Excess of cost of investments in subsidiaries over net assets acquired, net B 975,000 1,886,000
L 911,000
Cash and deposits - restricted 200,000 A 200,000
Accounts and notes receivable, net: Affiliates 86,000 86,000
Other 81,138 D 81,138
Costs related to corporations acquired 86,883 (86,883) -
Investment in securities 44,440 A 44,440
Deposits and other assets 8,347 4,000 12,347
TOTAL ASSETS $ 12,185,495 $ 23,897,005 $ 36,082,500
=====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 124,203 A $ 1,076,000 $ 1,200,203
Suspended revenue interests A 733,000 733,000
Dividends payable 146,552 146,552
Current maturities of long-term debt A 575,000 2,991,000
E 515,000
F 1,901,000
------------------------------------------------------
TOTAL CURRENT LIABILITIES 270,755 4,800,000 5,070,755
Deferred income tax A 7,000 918,000
L 911,000
Long-term debt, less current portion A 1,166,000 5,037,000
E 1,543,000
F 2,328,000
Production Payment Liability (Non-Recourse) A 305,000 305,000
Other Liabilities A 85,000 85,000
------------------------------------------------------
TOTAL LIABILITIES 270,755 11,145,000 11,415,755
------------------------------------------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY: 655 C 112 767
Preferred stock 18,119 D (6,650) 22,917
Common stock C 11,320
E 128
Capital in excess of par value 24,421,728 D (7,491,300) 29,414,001
C 12,483,573
E 256,872
Investment in corporation being acquired (7,497,950) D 7,497,950
Receivable from stockholders (500,000) (500,000)
Retained deficit (4,527,812) (4,527,812)
------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 11,914,740 12,752,005 24,666,745
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,185,495 $ 23,897,005 $ 36,082,500
======================================================
See notes to Pro Forma Consolidated Financial Statements
30
</TABLE>
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
For the Twelve Months ended December 31, 1994
--------------------------------------------------------------------------------------------------
Magnum Hunter Arrington Reef Tana Pro forma Combined
Historical Historical Historical Historical Historical Adjustments Pro forma
--------------------------------------------------------------------------------------------------
Revenues:
Gas gathering and marketing $ $ 443,000 $ $ $ $ $ 443,000
Oil and gas sales 729,478 581,000 563,000 1,446,000 3,176,000 6,495,478
Oil field services and Commissions 1,122,000 (G) 48,000 1,170,000
Other oil and gas related services 15,704 15,704
Interest 51,506 26,000 77,506
Other 184,000 184,000
---------------------------------------------------------------------------------------------------
TOTAL REVENUES
796,688 2,356,000 563,000 1,446,000 3,176,000 48,000 8,385,688
---------------------------------------------------------------------------------------------------
Expenses:
Purchases of natural gas 262,000 262,000
Pipeline operations 76,000 76,000
Lease operating 317,761 412,000 153,000 327,000 674,000 1,883,761
Cost of services 654,000 654,000
Cost related to other services 6,631 6,631
Depreciation, depletion,
amortization and impairment 243,180 263,000 (H) 1,844,378 2,350,558
General and administrative 768,838 513,000 (I) 38,000 1,319,838
Interest 6,660 44,000 (J) 543,000 593,660
Legal settlement expenses 117,000 117,000
---------------------------------------------------------------------------------------------------
TOTAL EXPENSES
1,343,070 2,341,000 153,000 327,000 674,000 2,425,378 7,263,448
---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (546,382) 15,000 410,000 1,119,000 2,502,000 (2,377,378) 1,122,240
PREFERRED DIVIDENDS (579,325) (9,000) (K) (123,000) (711,325)
---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK
$ (1,125,707) $ 6,000 $ 410,000 $ 1,119,000 $ 2,502,000 $ (2,500,378) $ 410,915
---------------------------------------------------------------------------------------------------
NET INCOME PER SHARE
(primarily and fully diluted) $ (.11) $ - $ .04
---------------------------------------------------------------------------------------------------
See notes to Pro Forma Consolidated Financial Statements
31
</TABLE>
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
or the Nine Months ended September 30, 1995
-------------------------------------------------------------------------------------------------
Magnum Hunter Arrington Reef Tana Pro forma Combined
Historical Historical Historical Historical Historical Adjustments Pro forma
-------------------------------------------------------------------------------------------------
Revenues:
Gas gathering and marketing $ $ 144,000 $ $ $ $ $ 144,000
Oil and gas sales 459,000 708,000 123,000 859,000 1,495,000 3 ,644,000
Oil field services and commissions 409,000 (G) 11,000 420,000
Other oil and gas related services 26,097 26,097
Interest 120,022 20,000 140,022
Other 271,000 271,000
-------------------------------------------------------------------------------------------------
TOTAL REVENUES
605,119 1,552,000 123,000 859,000 1,495,000 11,000 4,645,119
-------------------------------------------------------------------------------------------------
Expenses:
Purchases of natural gas 83,000 83,000
Pipeline operations 41,000 41,000
Lease operating 144,656 329,000 32,000 225,000 531,000 1,261,656
Cost of services 299,000 299,000
Costs related to other services 26,178 26,178
Depreciation, depletion,
amortization and impairment 137,807 284,000 (H) 1,007,465 1,429,272
General and administrative 689,133 349,000 (I) 26,000 1,064,133
Interest 2,956 129,000 (J) 493,000 624,956
Other 32,879 32,879
-------------------------------------------------------------------------------------------------
TOTAL EXPENSES
1,033,609 1,514,000 32,000 225,000 531,000 1,526,465 4,862,074
-------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (428,490) 38,000 91,000 634,000 964,000 (1,515,465) (216,955)
PREFERRED DIVIDENDS (439,915) (K) (92,256) (532,171)
-------------------------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE
TO COMMON SHARES $ (868,405) $ 38,000 $ 91,000 $ 634,000 $ 964,000 $ (1,607,721) $ (749,126)
==================================================================================================
NET INCOME PER SHARE
(primarily and fully diluted) $ (.07) $ - $ (.07)
--------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY.
Notes to Pro Forma Consolidated Financial Information
A) To adjust the Hunter assets and liabilities acquired to estimated fair market
value ("FMV"). Adjustments to the net book value of Hunter's assets and
liabilities were made as follows:
Accumulated
DD&A FMV
Eliminated Adjustment
--------------------------------
Notes and accounts receivable $ - $ (166,000)
Oil and gas properties (4,548,000) 5,582,888
Pipeline (251,000) (599,000)
Other property (135,000) (135,000)
Accounts payable and accrued liabilities - (100,000)
--------------------------------
Total $ (4,934,000) $ 4,582,888
--------------------------------
B) To record the excess of the consideration paid for Hunter over the
estimated value of Hunter's identifiable assets.Such excess was
$975,000.
C) To record the issuance of 5,085,077 restricted shares of common stock
($.002 par value) and 111,825 shares of Series C preferred stock
($.001 par value) to Hunter for subsequent distribution to its common
and preferred shareholders. Additionally, 575,000 shares of
restricted common stock were issued as a direct cost to Magnum of
making the acquisition of the Hunter subsidiaries, which has resulted
in recording an estimated value of the net assets of $12,495,005. The
shares were valued based on the appropriate quoted value adjusted for
a one-third discount to account for the large number of shares issued
in the transaction compared to normal trading activity.
D) Eliminate original recording by Magnum of the Hunter acquisition and
to reclassify costs incurred related to the Hunter acquisition to oil
and gas properties.
E) To record Hunter's acquisition of oil and gas properties on October
25, 1995 for $2,315,000 comprised of $2,058,000 funded by a borrowing
from an existing line of credit and 64,176 shares of restricted
common stock of Magnum valued at $257,000.
F) To record Hunter's acquisition of oil and gas properties on November
9, 1995 for $4,229,000 funded by a $3,104,000 borrowing from an
existing line of credit and the issuance of a note payable to the
previous owner in the amount of $1,125,000.
G) To reflect overhead fee income charged to outside owners on the
acquired properties for which operating rights were also acquired.
The overhead fee income generated by the Arrington acquisition was
estimated at $43,000 and $7,000 for the year ended December 31, 1994
and the nine months ended September 30, 1995, respectively.
The remainder of $5,000 and $4,000 arose from the Reef acquisition.
H) To reflect additional depreciation and depletion on oil and gas
properties as recalculated using the full cost method.
33
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY.
Notes to Pro Forma Consolidated Financial Information
I) To reflect additional estimated general and administrative costs
associated with the increase in the number of properties and the
assumption of operator's duties on the acquired properties. The
estimated additional general and administrative expense for the
Arrington acquisition was $6,000 and $2,000 for the year ended
December 31, 1994 and the nine months ended September 30, 1995,
respectively. An additional $12,000 and $9,000, respectively, arose
from the Reef acquisition, while the Tana acquisition accounted for
$20,000 and $15,000, respectively.
J) To reflect the additional interest expense associated with the
financed portion of the acquisitions referred to in Notes E and F.
The estimated interest expense for the Arrington acquisition amounted
to $120,000 and $32,000 for the year ended December 31, 1994 and the
nine months ended September 30, 1995, respectively. The Reef
acquisition amounted to $169,000 and $170,000 for the respective
periods, while the Tana acquisition amounted to $254,000 and
$291,000, respectively.
K) To reflect preferred stock dividends associated with the preferred
shares issued as a part of Magnum's acquisition of Hunter.
L) To record the estimated deferred income taxes associated with
Magnum's acquisition of Hunter.
34
<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 accouting 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.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 26, 1995, except for Note 2,
as to which the date is September 29, 1995
35
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1995 December 31,
(unaudited) 1994
-------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,383,539 $ 1,644,519
Short term investments - 23,375
Trade accounts receivable, net of allowance for doubtful accounts of $500 118,994 72,783
Other receivable 9,845 -
Note receivable 91,929 319,206
Costs in excess of billings on uncompleted drilling contracts - 54,590
Current portion of long-term note receivable 84,000 -
-------------------------------------------
TOTAL CURRENT ASSETS 2,688,307 2,114,473
-------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method
Unproved - 700,344
Proved 10,640,485 7,932,496
Other property 74,272 169,285
TOTAL PROPERTY, PLANT AND EQUIPMENT 10,714,757 8,802,125
Accumulated depreciation, depletion and impairment (1,638,377 ) (1,547,647)
NET PROPERTY, PLANT AND EQUIPMENT 9,076,380 7,254,478
-------------------------------------------
OTHER ASSETS
Cash and deposits - restricted 200,000 -
Deposits and other assets 8,347 8,971
Costs related to corporations acquired 86,883 -
Investments in securities 44,440 66,660
Long-term note receivable, net of imputed interest 81,138 -
Funds segregated for settlement of note payable - 130,000
-------------------------------------------
TOTAL ASSETS $ 12,185,495 $ 9,574,582
===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: $ 120,844 $ 551,911
Trade accounts payable 3,359 48,183
Accrued liabilities 146,552 143,579
Dividends payable - 173,925
-------------------------------------------
Notes payable, current 270,755 917,598
-------------------------------------------
TOTAL CURRENT LIABILITIES
LONG-TERM NOTES PAYABLE - 11,675
-------------------------------------------
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; 513,175 and 501,725 shares issued and
outstanding, respectively 513 502
Common stock - $.002 par value; 50,000,000 shares authorized
9,059,269 and 4,537,045 shares issued and outstanding, respectively 18,119 9,074
Additional paid-in capital 24,421,728 12,606,305
Investment in corporations being acquired (7,497,950) -
Deferred costs of warrant exercise offering - (240,281)
Accumulated deficit (4,527,812) (3,659,407)
Receivable from stockholders (500,000) (62,500)
Unrealized loss on investments - (8,528)
-------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 11,914,740 8,645,309
-------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,185,495 $ 9,574,582
===========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
36
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
September 30, December 31,
-------------------------------------------------------------------
1995 1994
(unaudited) (unaudited) 1994 1993
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Oil and gas sales $ 459,000 $ 592,038 $ 729,478 $ 308,524
Other oil and gas related services 26,097 19,059 15,704 22,553
-------------------------------------------------------------------
TOTAL OPERATING REVENUE 485,097 611,097 745,182 331,077
-------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Oil and gas production 144,656 186,583 317,761 173,287
Costs related to other services 26,178 1,719 6,631 -
Depreciation and depletion 137,807 205,069 243,180 85,809
General and administrative 689,133 435,330 768,838 785,471
-------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 997,774 828,701 1,336,410 1,044,567
-------------------------------------------------------------------
OPERATING LOSS (512,677) (217,604) (591,228) (713,490)
INTEREST INCOME 120,022 69,664 51,506 32,425
INTEREST EXPENSE (2,956) (2,411) (6,660) (20,854)
DISPOSITION OF ASSETS (32,879) - - -
-------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (428,490) (150,351) (546,382) (701,919)
PROVISION FOR INCOME TAXES - - - (5,445)
LOSS FROM CONTINUING OPERATIONS (428,490) (150,351) (546,382) (707,364)
DISCONTINUED OPERATIONS
Loss from operations - - - (7,591)
Gain on disposal - - - 21,229
-------------------------------------------------------------------
NET LOSS (428,490) (150,351) (546,382) (693,726)
DIVIDENDS APPLICABLE TO PREFERRED
SERIES B AND SERIES C SHARES 439,915 435,715 579,325 109,090
-------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON SHARES $ (868,405) $ (586,066) $(1,125,707) $ (802,816)
===================================================================
LOSS PER COMMON SHARE
Loss from Continuing Operations $ (0.16) $ (0.15) $ (0.27) $ (0.28)
Gain (Loss) From Discontinued Operations $ - - - 21,229
------------------------------------------------------------------
$ (0.16) $ (0.15) $ (0.27) $ (0.28)
===================================================================
COMMON SHARES USED IN PER SHARE CALCULATION 5,383,238 3,998,220 4,166,822 2,913,470
===================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
37
<PAGE>
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Shares Amount Additional
Issued and at Par Paid-In
Outstanding Value Capital Total
---------------------------------------------------------
Preferred Stock - $0.001 par value
Series A
Balance- December 31, 1992, 1993, 1994 and September 30,1995 (un$udited) 80,000 80 $ 699,137 $ 699,217
Series B ---------------------------------------------------------
Balance - December 31, 1992 213,500 214 412,524 412,738
Issued for cash 35,000 35 594,635 594,670
Conversion into 521,858 common shares (173,950) (174) (335,417) (335,591)
----------------------------------------------------------
Balance - December 31, 1993 74,550 75 671,742 671,817
Conversion into 5,250 common shares (10,500) (11) (98,522) (98,533)
----------------------------------------------------------
Balance - December 31, 1994 64,050 64 573,220 573,284
Conversion into 1,000 common shares (2,000) (2) (21,021) (21,023)
----------------------------------------------------------
Balance - September 30, 1995 (unaudited) 62,050 62 552,199 552,261
Series C
Issued for cash, net of $798,842 offering costs 517,500 518 4,375,640 4,376,158
----------------------------------------------------------
Balance - December 31, 1993 517,500 518 4,375,640 4,376,158
Conversion into 120,075 common shares (40,025) (40) (337,887) (337,927)
Issued for cash upon exercise of representatives' warrants 24,250 24 290,976 291,000
----------------------------------------------------------
Balance - December 31, 1994 501,725 502 4,328,729 4,329,231
Conversion into 27,900 common shares (9,300) (9) (80,237) (80,246)
Issued for cash upon exercise of representatives' warrants 20,750 20 248,979 248,999
----------------------------------------------------------
Balance - September 30, 1995 (unaudited) 513,175 513 4,497,471 4,497,984
----------------------------------------------------------
Total Preferred Stock - September 30, 1995 (unaudited) 655,225 655 5,748,807 5,749,462
==========================================================
Common Stock - $0.002 par value
Balance - December 31, 1992 2,378,987 4,758 3,745,988 3,750,746
Issued for services 4,000 8 15,992 16,000
Issued for cash 340,000 680 99,800 100,480
Issued for notes receivable 250,000 500 499,500 500,000
Reacquired and canceled in sale of discontinued operations (62,500) (125) (62,375) (62,500)
Issued to acquire oil and gas property 40,000 80 119,920 120,000
Conversion of 173,950 Series B preferred shares to common 521,858 1,044 334,547 335,591
-----------------------------------------------------------
Balance - December 31, 1993 3,472,345 6,945 4,753,372 4,760,317
Issued for notes receivable 150,000 300 187,200 187,500
Adjustment of price of stock previously issued for notes receivable - - (187,500) (187,500)
Conversion of 10,500 Series B preferred shares to common 5,250 11 98,522 98,533
Conversion of 40,025 Series C preferred shares to common 120,075 240 337,687 337,927
Issued to acquire oil and gas properties 613,000 1,226 1,232,274 1,233,500
Issued in exchange for production certificates,
net of $42,824 offering costs 176,375 352 583,664 584,016
-----------------------------------------------------------
Balance - December 31, 1994 4,537,045 9,074 7,005,219 7,014,293
Conversion of 2,000 Series B preferred shares to common 1,000 2 21,021 21,023
Conversion of 9,300 Series C preferred shares to common 27,900 56 80,190 80,246
Issued for cash upon exercise of representatives' warrants
net of $490,769 offering costs 833,324 1,667 2,840,951 2,842,618
Issued to acquire oil and gas properties 205,000 410 717,090 717,500
Issued as compensation to directors 5,000 10 17,400 17,410
Issued to shareholders as collateral on Series B production certificates 125,000 250 499,750 500,000
Issued to acquire corporations 3,325,000 6,650 7,491,300 7,497,950
------------------------------------------------------------
Balance - September 30, 1995 (unaudited) 9,059,269 18,119 18,672,921 18,691,040
============================================================
Total Preferred Stock, Common Stock and Additional
Paid-In Capital - September 30, 1995 $ 18,774 $ 24,421,728 $ 24,440,502
==============================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
38
<PAGE>
MAGNUM PETROLEUM AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (unaudited)
<TABLE>
<CAPTION>
September 30,
1995 December 31,
(unaudited) ---------------------------------
-------------------------------------------------------
1994 1993
---------------------------------
<S> <C> <C> <C>
Total Preferred Stock, Common Stock and Additional Paid-In Capital $ 24,440,502 $ 12,616,025 $ 10,507,509
-------------------------------------------------------
Investment in corporations being acquired
Balance at Beginning of Period - - -
Acquisition of corporations (7,497,950) - -
-------------------------------------------------------
Balance at End of Period (7,497,950) - -
Deferred Cost of Warrant Offering
Balance at Beginning of Period (240,281) - -
Costs incurred (250,488) (240,281) -
Costs offset against proceeds of offering 490,769 - -
-------------------------------------------------------
Balance at End of Period - (240,281) -
-------------------------------------------------------
Accumulated Deficit
Balance at Beginning of Period (3,659,407) (2,533,700) (1,730,884)
Net Loss (428,490) (546,382) (693,726)
Dividends -------------------------------------------------------
Preferred stock, Series B (16,462) (25,173) (41,815)
Preferred stock, Series C (423,453) (554,152) (67,275)
-------------------------------------------------------
Total Dividends (439,915) (579,325) (109,090)
-------------------------------------------------------
Balance at End of Period (4,527,812) (3,659,407) (2,533,700)
-------------------------------------------------------
Receivable From Stockholders
Balance at Beginning of Period (62,500) (465,645) -
Common shares issued for receivable (500,000) (187,500) (500,000)
Adjustment of price of stock previously issued for notes receivable - 187,500 -
Interest accrued - (11,355) (15,645)
Payments received 62,500 414,500 50,000
-------------------------------------------------------
Balance at End of Period (500,000) (62,500) (465,645)
-------------------------------------------------------
Unrealized Loss on Investments
Balance at Beginning of Period (8,528) - -
Net Change 8,528 (8,528) -
-------------------------------------------------------
Balance at End of Period - (8,528) -
Total Stockholders' Equity at End of Period $ 11,914,740 $ 8,645,309 $ 7,508,164
=======================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
39
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------
1995 1994
-----------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (428,490) $ (150,351)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and depletion 137,807 205,069
Change in assets and liabilities
(Increase) decrease in short term investments 23,375 -
(Increase) decrease in accounts receivable (56,056) (1,102,499)
(Increase) decrease in notes receivable 62,139 -
(Increase) decrease in prepaid expenses - 11,090
(Increase) decrease in costs in excess of billings on
uncompleted drilling contracts 54,590 -
(Increase) decrease in deposits and other assets 624 16,327
Increase (decrease) in trade accounts payable (431,067) 462,075
Increase (decrease) in accrued liabilities (44,824) (113,519)
Increase (decrease) in dividends payable 2,973 63,779
-----------------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (678,929) (608,029)
-----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (1,215,797) (1,393,389)
Deposits for acquisition of properties and equipment (200,000) -
Costs related to corporations acquired (86,883) -
Purchase of securities - (29,361)
-----------------------------------------------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (1,502,680) (1,422,750)
-----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock,
net of offering costs 3,331,898 -
Payments received on notes receivable from shareholders 62,500 329,500
Payments of principal on notes payable, net (36,827) (24,842)
Dividends paid (436,942) (371,937)
-----------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 2,920,629 (67,279)
-----------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 739,020 (2,098,058)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,644,519 3,385,350
-----------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,383,539 $ 1,287,292
=====================================================
The accompanying notes are an integral part of these
consolidated financial statements.
40
</TABLE>
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------------
1994 1993
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Cash received from customers $ 892,458 $ 388,782
Cash paid to suppliers and employees (917,748) (964,043)
Interest received 40,151 16,780
Interest paid (16,035) (11,479)
Income taxes paid - (5,445)
-----------------------------------------
Net Cash Provided By (Used By) Operating Activities (1,174) (575,405)
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 650,041 133,094
Payments to purchase property and equipment (1,945,093) (1,248,839)
Purchase of short-term investments (31,903) -
Loan made for promissory note receivable (319,206) -
(Increase) Decrease in deposits and other assets 33,117 (27,734)
Decrease in other receivables - 26,487
Disposition of assets of discontinued assets - (12,490)
-----------------------------------------
Net Cash Used By Investing Activities (1,613,044) (1,129,482)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock,
net of offering costs 145,594 5,121,308
Proceeds from borrowings - 300,000
Payments received on notes receivable from shareholders 414,500 -
Payments of amounts due to affiliates - (30,000)
Payments of principal on notes payable (46,663) (374,456)
Increase in segregated funds for payments of notes payable (130,000) -
Dividends paid (510,044) (47,650)
Net Cash Provided By (Used By) Financing Activities (126,613) 4,969,202
-----------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,740,831) 3,264,315
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,385,350 121,035
-----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,644,519 $ 3,385,350
=========================================
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY
(USED BY) OPERATING ACTIVITIES
Net loss $ (546,382) $ (693,726)
Depreciation and depletion 243,180 85,809
Changes in certain assets and liabilities
Accounts receivable (27,724) (13,671)
Prepaid expenses - (94,875)
Costs in excess of billings on uncompleted drilling contracts (54,590) -
Accounts payable and accrued liabilities 366,066 53,311
Interest accrued on notes receivable from stockholders (11,355) (15,645)
Common stock issued for services - 16,000
Gain on sale of investments - -
Other 29,631 87,392
-----------------------------------------
$ (1,174) $ (575,405)
=========================================
</TABLE>
41
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1995
and with respect to the Nine Months Ended
September 30, 1995 and 1994 is unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
Magnum Petroleum, Inc. (the "Company") is incorporated under the laws of the
state of Nevada. The Company is engaged in the acquisition of oil and gas
mineral properties, the exploration and development of such properties by
drilling new wells and reworking existing wells, and operating wells for the
production of oil and gas. In conjunction with the above activities, the Company
is licensed to operate a commercial salt water disposal facility in the state of
Oklahoma and as an operator of oil and gas properties in the states of Oklahoma
and Texas. The Company also owns interests in oil and gas properties in these
states as well as New Mexico and California for which the Company is not the
operator.
Consolidation
- -------------
The accompanying consolidated financial statements include the accounts of
Magnum Petroleum, Inc. and its wholly-owned subsidiary, Cushing Disposal, Inc.
During the year ended December 31, 1993, the Company's investment in Magnum Real
Estate was disposed (see Note 4). Those operations are presented in the
statement of operations as discontinued operations for the period from January
1993 through June 1993. 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 current assets classified as available-for-sale and
are measured at fair value at the balance sheet date. Unrealized gains and
losses for these investments are reported as a separate component of
stockholders' equity. Investments in equity securities for which sale within one
year is restricted by governmental securities regulations are carried at
historical cost and are classified as non-current assets.
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 a provision for impairment is made to
the full-cost amortization base when appropriate. 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 that are excluded from the amortization base were
$867,096 and $700,344 at September 30, 1995 and December 31, 1994, respectively.
42
<PAGE>
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.
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.
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
and were not included in the calculation of loss per common share.
Segment Information
- -------------------
Losses from continuing operations resulted wholly from oil and gas operations
within the United States.
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 13, 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 related to the discounted warrant
exercise offering and offset the costs of the offering against the proceeds
received in 1995 from the exercise of the warrants.
Unaudited Information
- ---------------------
The accompanying financial information as of September 30, 1995 and for the nine
month periods ended September 30, 1995 and 1994 has been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Those financial statements reflect all adjustments,
consisting of normal recurring accruals which are, in the opinion of management,
necessary to fairly present such information in accordance with generally
accepted accounting principles.
During the nine months ended September 30, 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 not been restated for the effects of the
change.
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 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 will become the management of the Company after
43
<PAGE>
completion of the acquisition. One of the Hunter subsidiaries specializes in
the management of oil and gas properties and all future accounting functions
and financial reporting will be 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.
44
<PAGE>
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:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1994 December 31,
(Unaudited) 1994 1993
----------- ---- ----
Statement of Operations:
<S> <C> <C> <C>
Net Loss as Previously Recorded $ 146,300 $ (1,258,808) $ (1,489,929)
Adjustment For Effect of Change in
Accounting Principle that is Applied
Retroactively $ (296,651) $ 712,426 $ 796,203
Net Loss as Adjusted $ (150,351) $ (546,382) $ (693,726)
Per Share Amounts:
Net Loss as Previously Reported
$ (.07) $ (.44) $ (.55)
Adjustment For Effect of a Change in
Accounting Principle that is Applied
Retroactively $ (.08) $ .17 $ .27
Net Loss as Adjusted $ (.15) $ (.27) $ (.28)
Common Shares Used in Per
Share Calculation 3,998,220 4,166,822 2,913,470
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended
(Unaudited) December 31,
1995 1994 1994 1993
-------------- ------------ ------------- ------------
Statement of Accumulated Deficit:
<S> <C> <C> <C> <C>
Balance at Beginning of Period as
Previously Reported $ (4,166,058) $ (2,327,925) $ (2,327,925) $ (728,906)
Add Adjustment for the
Cumulative
Effect on Prior Years of Applying $ 506,651 $ (205,775) $ (205,775) $ (1,001,978)
Retroactively the Full Cost
Method
Balance at Beginning of Period,
as Adjusted $ (3,659,407) $ (2,533,700) $ (2,533,700) $ (1,730,884)
Net Loss $ (428,490) $ (150,351) $ (546,832) $ (693,726)
Preferred Dividends $ (439,915) $ (435,715) $ (579,325) $ (109,090)
Balance at End of Year $ (4,527,812) $ (3,119,766) $ (3,659,407) $ (2,533,700)
</TABLE>
NOTE 3--ACQUISITIONS AND DISPOSITIONS
The Company has acquired properties through the issuance of both cash and its
common stock. During the year ended December 31, 1993, the Company acquired one
property in this manner. The purchase price amounted to $460,000 of which
$350,000 was paid in cash and 40,000 shares of the Company's common stock was
issued, based on a value of $3.00 per share or $120,000.
During the year ended December 31, 1994, the Company acquired three properties
in the same manner. 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 50 percent 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
46
<PAGE>
<PAGE>
shares of the Company's restricted common stock, valued at $3.50 per share, were
issued and the transfer of securities, which comprise a portion of the Company's
investment in equity securities.
The following summary, prepared on a pro forma basis, presents the results of
operations for the year ended December 31, 1993 as if the acquisitions occurred
as of the beginning of that year. No producing properties were acquired during
1994; therefore, pro forma operations are unchanged from the 1994 historical
operations. The pro forma information includes the effects of adjustments for
increased general and administrative expense, interest expense, depreciation,
depletion and for income taxes:
(Unaudited)
Revenue.............................................. $861,660
Loss from Continuing Operations...................... (391,294)
Net Loss............................................. (377,656)
Net Loss Applicable to Common Shares................. (486,746)
Net Loss Per Common Share............................ $ (0.17)
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 as an additional cost of the acquisition.
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 50 percent 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 is to
be recorded under the "purchase method" of accounting.
NOTE 4--DISCONTINUED OPERATIONS
In June of 1992, the Company acquired all of the issued and outstanding shares
of a corporation, the only asset of which was undeveloped real estate. During
June of 1993, the Company sold this corporation to certain of its officers and
directors, who were the original owners of the real estate, for essentially the
same consideration that the Company paid to acquire this corporation which
included the return of 62,500 shares of the Company's common stock and the
settlement of a $52,000 obligation owed to the officers and directors.
Operations during the period that the Company owned the corporation are
reflected as Discontinued Operations in the Statement of Operations.
NOTE 5--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.
NOTE 6--RELATED PARTY TRANSACTIONS
The Company had a balance due to related parties as of December 31, 1992 of
$82,000 which was non-interest bearing and was unsecured. By June 1, 1993, a
$30,000 cash payment had been made to reduce the balance to $52,000. The
remaining balance was settled as part of the sale disclosed under Note 4 -
Discontinued Operations.
47
<PAGE>
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.
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:
December 31
----------- ----------
1994 1993
----------- ----------
Property and equipment, including
intangible drilling costs. . . . . . . . . . . . . $ (218,231) $ 57,567
----------- ----------
Total deferred tax liability . . . . . . . . . . . (218,231) 57,567
----------- ----------
Allowance for doubtful accounts . . . . . . . . . . 160 125
Operating loss carryforwards. . . . . . . . . . . . 1,135,089 447,767
----------- ----------
Total deferred tax assets . . . . . . . . . . . . . 1,135,249 447,892
----------- ----------
Valuation allowance . . . . . . . . . . . . . . . . (917,018) (505,459)
----------- ----------
Net Deferred Tax Liability $ - $ -
=========== ==========
The valuation allowance for the deferred tax asset increased $615,871 and
$377,350 during the years ended December 31, 1994 and 1993, respectively. The
provision for income taxes consisted of current state income taxes of none
during the year ended December 31, 1994 and $5,445 during the year ended
December 31, 1993.
The Company and its subsidiaries have $3,547,152 of operating loss carryforwards
that expire, if unused, in years 2005 through 2009.
48
<PAGE>
NOTE 8--STOCKHOLDERS' EQUITY
Effective June 1, 1993, the Company reduced the number of shares of common stock
authorized from 100,000,000 shares to 50,000,000 shares and changed the par
value of the common stock from $0.001 to $0.002 per share. At the same time the
Company reverse split its common stock whereby for every two $.001 par value
shares previously outstanding, one $.002 par value share was issued. The number
of shares of $0.001 par value preferred stock authorized was increased from
1,400,000 shares to 10,000,000 shares.
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.
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
$25,172 and $25,174 for the years ended December 31, 1994 and 1993,
respectively.
Beginning June 15, 1994, the Company offered to exchange 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 have been paid through that
date.
Separate and apart from the Exchange Offer, two of the Registrant's officers and
directors (the "Officers") gave 125,000 shares (the "Stock") of their own common
stock of the Registrant to a single individual (the "Individual") who owned
approximately 75% of the Series B Production certificates that were exchanged.
The Stock is being held by an independent party to this transaction, until it is
determined that the dollar amount that would have been received by the
Individual pursuant to payments in accordance with the Series B Production
certificates exchanged, is equal to or greater than the cash dividends received
and the 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. If
the Individual has received cash dividends and the fair market value of the
Exchange Shares meet the criteria described, then the Stock is returned to the
Officers. Inasmuch as the Officers received no benefit whatsoever, the
Registrant issued 125,000 shares of its common stock to the Officers in exchange
for their assignment to the Registrant of all of the Officers' rights, title and
interest in the Stock. The Company has recorded the new shares issued at $4 per
share for a total of $500,000 and an offsetting receivable from the individuals
in the same amount.
49
<PAGE>
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 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
$554,153 for the year ended December 31, 1994, and $67,275 for the year ended
December 31, 1993 ($0.13 per share) which relates to the period from the date of
issue of the stock through December 31, 1993. 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.
Thus, the aggregate annual dividend requirements for the 501,725 shares of
Series C preferred stock outstanding at December 31, 1994 amounts to $551,898.
Dividends declared on the Series C preferred stock were $439,915 and $435,715
for the nine month periods ended September 30, 1995 and 1994, respectively.
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 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. 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.
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 become
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,
1994 and at September 30, 1995.
During the nine month period ended September 30, 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.
During the nine month period ended September 30, 1995, common stock purchase
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. 9,300
shares of Series C preferred stock have also been converted into 27,900 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.
50
<PAGE>
NOTE 9--NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 --------------------------------------------------
(unaudited)
-----------------------------------------------------------------------
1994 1993
--------------------------------------------------
<S> <C> <C> <C>
Notes payable to purchase oil and gas property, the
terms of which were suspended in 1994 awaiting
further developed 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 $ 150,000
Notes payable to purchase oil and gas property,
payable in monthly installments of $3,000, including
interests at an imputed rate of 8% - 26,435 59,237
Notes payable to banks, secured by vehicles,
payable in monthly installments of $1,705, including
interest at 7.5% to 10.75, through April 1998 - 29,165 58,860
-----------------------------------------------------------------------
Total Notes Payable - 185,600 268,097
Less Current Portion - 173,925 237,906
-----------------------------------------------------------------------
Long-Term Notes Payable $ - $ 11,675 $ 30,191
=======================================================================
</TABLE>
As of September 30, 1995, all notes payable had been retired.
51
<PAGE>
NOTE 10--SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During 1993 the Company issued 40,000 shares of common stock to acquire oil and
gas property and equipment valued at $120,000, executed a $22,500 note payable
as partial payment for an automobile, and the received notes receivable in the
amount of $500,000 in exchange for issuing 250,000 shares of common stock.
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.
During the nine months ended September 30, 1995, property was acquired by
issuing $717,500 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 $500,000.
NOTE 11--ENVIRONMENTAL ISSUES
Being engaged in the oil and gas exploration and development business, the
Company may become subject to certain liabilities as they relate to
environmental clean up of well sites or other environmental restoration
procedures as they relate to the drilling of oil and gas wells and the operation
thereof. In the Company's acquisition of existing or previously drilled well
bores, the Company may not be aware of what environmental safeguards were taken
at the time such wells were drilled or during the time that such wells were
operated. Should it be determined that a liability exists with respect to any
environmental clean up or restoration, the liability to cure such a violation
would most likely fall upon the Company. In certain acquisitions the Company has
received contractual warranties that no such violations exist, while in other
acquisitions the Company has waived its rights to pursue a claim for such
violations from the selling party. No claim has been made nor has a claim been
asserted, nor is the Company aware of the existence of any liability which the
Company may have, as it relates to any environmental clean up, restoration or
the violation of any rules or regulations relating thereto.
NOTE 12-LEASE COMMITMENTS
The Company has entered into lease agreements for the use of automobiles and
office space. The automobile lease agreements are for a period of three years
with an option to purchase the automobiles at the end of the lease term. The
office space lease extends through March 1997 with an option to renew the lease
for a three year term. The leases have been classified as operating leases. The
following is a schedule by years of future minimum lease payments required under
the operating lease agreements:
Year Ended December 31:
1995..............................................$ 55,279
1996............................................. 58,868
1997............................................ 12,953
--------------
Total Minimum Payments Required...................$ 127,100
============
52
<PAGE>
The above minimum lease payments have not been reduced by $18,956 due in the
future under cancelable subleases from employees for use of automobiles.
Subsequent to September 30, 1995, the Company moved its offices and was
successful in relieving future minimum lease payments included in the above
table of $28,704 for 1995 and 1996, and $7,176 for 1997. The term of the new
office lease is less than one year.
The following is a schedule of rental expense for operating leases, except those
with terms of a month or less that were not renewed:
<TABLE>
<CAPTION>
For Nine Months Ended For Years Ended
September 30, December 31,
---------------------------------------------------------------------------------------------
1995 1994 1994 1993
(unaudited) (unaudited)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum rentals....................... $ 30,936 $ 30,816 $ 41,087 $ 13,278
Less: Sublease rentals................ 4,926 4,896 6,527 -
---------------------------------------------------------------------------------------------
Net Rental Expense.................... $ 26,010 $ 25,920 $ 34,560 $ 13,278
=============================================================================================
</TABLE>
53
<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:
<TABLE>
<CAPTION>
Natural Gas
Oil (Thousand
(Barrels) Cubic Feet)
---------------------------------------------------
<S> <C> <C>
December 31, 1993
Proved reserves............................................................ 1,445,990 3,672,779
Proved developed reserves.................................................. 385,196 776,744
---------------------------------------------------
December 31, 1994
Proved reserves............................................................ 1,260,520 4,914,207
Proved developed reserves.................................................. 239,795 394,872
---------------------------------------------------
The changes in proved reserves for the year ended December 31, 1994 and
1993 were as follows:
Natural Gas
Oil (Thousand
(Barrels) Cubic Feet)
---------------------------------------------------
Reserves at December 31, 1992................................................... 526,194 1,058,097
Purchase of minerals-in-place................................................... 584,188 2,420,765
Extensions and discoveries...................................................... 326,685 122,530
Production...................................................................... (14,469) (65,330)
Revisions of estimates.......................................................... 23,392 136,717
---------------------------------------------------
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
---------------------------------------------------
</TABLE>
54
<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, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
------------------------------------------------------------
<S> <C> <C>
Unproved oil and gas properties........................................ $ 700,344 $ -
Proved properties...................................................... 7,932,496 5,662,666
------------------------------------------------------------
Gross Capitalized Costs................................................ 8,632,840 5,662,666
Accumulated depreciation, depletion and impairment..................... (1,499,095) (1,257,760)
------------------------------------------------------------
Net Capitalized Costs.................................................. $ 7,133,745 $ 4,404,906
============================================================
</TABLE>
Costs incurred in oil and gas producing activities, both capitalized and
expensed, during the years ended December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
------------------------------------------------------------
<S> <C> <C>
Property acquisition costs
Proved properties................................................. $ 1,737,543 $ 972,884
Unproved properties............................................... - -
Development costs...................................................... 791,144 193,487
------------------------------------------------------------
Total Costs Incurred................................................... $ 2,528,687 $ 1,166,371
============================================================
</TABLE>
Results of operations from oil and gas producing activities for the years ended
December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
------------------------------------------------------------
<S> <C> <C>
Oil and gas production revenue......................................... $ 729,478 $ 308,524
Disposal services revenue.............................................. 19,205 22,443
Production costs....................................................... (287,382) (173,287)
Depreciation and depletion ............................................ (243,180) ( 85,809)
------------------------------------------------------------
Net Loss From Oil and Gas Producing Activities......................... $ 218,121 $ 71,871
============================================================
</TABLE>
55
<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, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
---------------------------------------------------------
<S> <C> <C>
Future cash inflows....................................................... $ 25,900,669 $ 24,213,585
Future development and production costs................................... (10,011,434) (10,388,656)
Future income taxes....................................................... (3,679,963) (3,085,058)
---------------------------------------------------------
Future Net Cash Flows..................................................... 12,209,272 10,739,871
10% annual discount....................................................... (5,974,156) (4,209,218)
---------------------------------------------------------
Standardized Measure of Discounted Future Net Cash Flows.................. $ 6,235,116 $ 6,530,653
=========================================================
</TABLE>
The primary changes in the standardized measure of discounted estimated future
net cash flows for the years ended December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
---------------------------------------------------------
<S> <C> <C>
Purchases of minerals-in-place............................................ $ 2,736,310 $ 5,091,353
Extensions, discoveries and improved recovery, less related costs......... 162,944 957,433
Sales of oil and gas produced, net of production costs.................... (300,517) (157,789)
Development costs incurred during the period.............................. 467,192 193,487
Revision of prior estimates:
Net change in price and production costs............................. (1,297,839) (1,554,138)
Change in future development costs................................... 223,617 (74,161)
Change in quantity estimates......................................... (2,981,078) 25,308
Accretion of discount..................................................... 1,289,466 920,870
Net change in income taxes................................................ (594,905) (1,945,188)
---------------------------------------------------------
Net Change................................................................ $ (294,830) $ 3,457,175
=========================================================
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.
56
<PAGE>
57
<PAGE>
</TABLE>
