As filed with the Securities and Exchange Commission on October 11, 1996
Registration No. 333-2290
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
Form S-4
REGISTRATION STATEMENT
AMENDMENT NO. 4
Under
THE SECURITIES ACT OF 1933
MAGNUM PETROLEUM, INC.
(Name of small business issuer in its charter)
Nevada 1311 87-0462881
- ----------------------------- ---------------------------- -------------------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) dentification No.)
600 East Las Colinas Blvd., Suite 1200, Irving,
----------------------------------------------
Texas 75039 (Address and telephone number of
principal executive offices)
600 East Las Colinas Blvd., Suite 1200, Irving,
-----------------------------------------------
Texas 75039 (Address of principal place of business or intended
principal place of business)
Morgan F. Johnston, Esq.
600 East Las Colinas Blvd., Suite 1200
Irving, Texas 75039
(214) 401-0752
-----------------------------------------------
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this form as to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed
class of Amount maximum maximum Amount of
securities to be to be offering price aggregate registration
registered registered per share (1) offering price (1) fee
- ----------------- ----------- ---------------- ------------------ --------------
Common Stock 5,085,077 $3.125 $17,687,741 $6,099
Preferred Stock 111,825 $10.50 $1,174,163 $405
Total $6,504
================= =========== ================ ================== ==============
(1) Estimated pursuant to Rule 457(h) solely for purpose of calculating
registration fee.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Page number 1 of 167 pages numbered
sequentially. The Exhibit Index may be found
on Page 150.
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HUNTER RESOURCES, INC.
600 East Las Colinas Boulevard, Suite 1200
Irving, Texas 75039
Notice of Special Meeting of Shareholders
to be Held on October 31, 1996
A Special Meeting of Shareholders of Hunter Resources, Inc. ("Hunter") will be
held at the Cigna Tower, 600 East Las Colinas Boulevard, Suite 1200 Irving,
Texas 75039, on October 31, 1996 at 10:00 a.m., local time, to consider and act
upon:
(1) The sale of substantially all of Hunter's assets pursuant to an
amended definitive agreement ("Agreement and Plan of Reorganization
and Plan of Liquidation") with Magnum Petroleum, Inc., ("Magnum")
dated December 19, 1995;
(2) A plan to liquidate Hunter and distribute the Magnum shares of common
and preferred stock received pursuant to the Agreement and Plan of
Reorganization and Plan of Liquidation to shareholders of Hunter; and
(3) Transacting such other business as may properly come before the
meeting or any adjournment or postponement thereof.
Magnum has proposed, and the Board of Directors of Hunter have approved an
Agreement and Plan of Reorganization and Plan of Liquidation, under which Magnum
will acquire all of Hunter's assets and will assume all of its associated
liabilities, without recourse, and in consideration, Magnum will issue to
Hunter, 5,085,077 shares of Magnum Common Stock and 111,825 shares of Magnum
Series C Preferred Stock collectively ("Magnum Shares"). The Magnum Shares
received by Hunter will subsequently be distributed to Hunter's shareholders as
described herein.
A copy of the Agreement and Plan of Reorganization and Plan of Liquidation, as
amended, is attached as Exhibit A to the accompanying Information Statement and
Prospectus and is incorporated herein by reference.
The Board of Directors has fixed September 27, 1996 as the record date (the
"Record Date") for the determination of shareholders entitled to notice of, and
to vote at, the Meeting and any adjournment or postponement thereof. Only
holders of record of Hunter Resources, Inc. Common Stock, par value $.10 per
share, and holders of record of the Hunter Resources, Inc. Preferred Stock, no
par value, at the close of business on the Record Date are entitled to vote on
all matters coming before the Meeting or any adjournment or postponement
thereof. A complete list of shareholders entitled to vote at the Meeting will be
maintained in Hunter's offices at 600 East Las Colinas Boulevard, Suite 1200,
Irving, Texas, for ten days prior to the Meeting.
The affirmative vote of the holders of at least a majority of the shares
entitled to vote is required for approval of the sale of all of the assets of
Hunter and to liquidate Hunter and distribute the Magnum Shares received
pursuant to the Agreement and Plan of Reorganization and Plan of Liquidation.
The amendment was executed by Hunter Shareholders holding over 50 percent of the
stock of Hunter entitled to vote, therefore, approval of these proposals at the
shareholder meeting is assured. As the amendment was executed on December 19,
1995 by Hunter shareholders holding over 50 percent of the stock of Hunter
entitled to vote, the transaction was consummated on December 31, 1995 and
Hunter and its subsidiaries were consolidated in Magnum's financial statements
beginning December 31, 1995.
Each shareholder is entitled to one vote for each share held on the record date.
There were 18,504,663 shares outstanding and entitled to vote on September 27,
1996.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY
By Order of the Board of Directors
Morgan F. Johnston, Secretary
Irving, Texas
October 14, 1996
<PAGE>
INFORMATION STATEMENT OF HUNTER RESOURCES, INC.
COMBINED WITH A PROSPECTUS OF MAGNUM PETROLEUM, INC.
Maximum number of shares of Common Stock of Magnum Petroleum, Inc. offered
hereby is 5,085,077.
Maximum number of shares of Series C Preferred Stock of Magnum Petroleum, Inc.
offered hereby is 111,825.
This Information Statement of Hunter Resources, Inc. and Prospectus of Magnum
Petroleum, Inc. is furnished in connection with the Information Statement of
Hunter Resources, Inc., a Pennsylvania corporation ("Hunter") for use at a
Special Meeting of Shareholders ("Hunter Shareholders") to be held at the Cigna
Tower, 600 East Las Colinas Boulevard, Suite 1200, Irving, Texas 75039, on
October 31, 1996 at 10:00 a.m., local time, or at any adjournment or
adjournments thereof. At the Special Meeting, the Hunter Shareholders will be
asked to consider and act upon a proposal to (i) sell substantially all of the
assets of Hunter to Magnum Petroleum, Inc. ("Magnum"), a Nevada corporation,
pursuant to an Agreement and Plan of Reorganization and Plan of Liquidation
dated as of December 19, 1995, as amended, between Hunter and Magnum (the
"Agreement and Plan of Reorganization and Plan of Liquidation") and (ii)
liquidate Hunter and distribute the Magnum Shares received pursuant to the
Agreement and Plan of Reorganization and Plan of Liquidation to shareholders of
Hunter. Hunter's assets primarily consist of stock in wholly-owned subsidiaries
and capital stock membership in limited liability companies ("Hunter
Subsidiaries"). A copy of the Agreement and Plan of Reorganization and Plan of
Liquidation is attached as Exhibit A. The affirmative vote of the holders of at
least a majority of the shares entitled to vote (including shares held by
officers and directors) is required for the approval of the transaction.
The Board of Directors of Hunter have approved and shareholders of Hunter owning
in excess of fifty percent (50%) of the shares entitled to vote executed the
Agreement and Plan of Reorganization and Plan of Liquidation on December 19,
1995. Therefore, approval of these proposals is assured. As such, additional
shares were issued to Hunter and the transaction was consummated on December 31,
1995. The Magnum Shares received by Hunter will be subsequently distributed to
Hunter Shareholders as described herein. See "The Sale of Hunter's Assets".
The Board of Directors has fixed September 27, 1996 as the record date (the
"Record Date") for the determination of Hunter Shareholders entitled to notice
of, and to vote at, the Meeting and any adjournment or postponement thereof.
Only holders of record of Hunter Common Stock, par value $.10 per share, and
holders of record of Hunter's Preferred Stock, no par value, at the close of
business on the Record Date are entitled to vote on all matters coming before
the Meeting or any adjournment or postponement thereof. A complete list of
Hunter Shareholders entitled to vote at the Meeting will be maintained in
Hunter's offices at 600 East Las Colinas Boulevard, Suite 1200, Irving, Texas,
for ten days prior to the Meeting.
Hunter will exchange one share of Magnum Common Stock which Hunter receives
pursuant to the Agreement and Plan of Reorganization and Plan of Liquidation for
every 3.916 shares of Hunter Common Stock, par value $.10 (the "Hunter Common
Shares") held by Hunter Shareholders. Preferred shareholders of Hunter will
receive 1.241 shares of Magnum Series C preferred stock and 3.987 shares of
Magnum common stock for every share of Hunter Preferred Stock. See "Plan of
Liquidation" for additional information.
This Information Statement and Prospectus constitutes both the Information
Statement of Hunter for use at the Special Meeting of Shareholders of Hunter,
and the Prospectus relating to the distribution of the Magnum Shares for Hunter
Common Shares and Hunter Preferred Shares held by Hunter's Shareholders.
See "Risk Factors" on page 9 for certain information that should be considered
by Hunter Shareholders in deciding to approve the Agreement and Plan of
Reorganization and Plan of Liquidation.
THE SECURITIES TO WHICH THIS INFORMATION STATEMENT AND PROSPECTUS RELATE HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
INFORMATION STATEMENT AND PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Information Statement and Prospectus is October 10, 1996
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION........................................................ 2
SUMMARY .................................................................... 3
The Special Meeting...................................................... 3
Sale of Hunter's Assets.................................................. 4
The Plan of Liquidation.................................................. 5
Market Prices............................................................ 5
The Parties.............................................................. 5
Recommendations of the Boards of Directors and Reasons for
Sale of Hunter's Assets.................................................. 7
Risk Factors............................................................. 7
Regulatory Approval...................................................... 7
Federal Income Tax Consequences...........................................8
RISK FACTORS................................................................. 9
SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION........................12
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF MAGNUM.....................................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF HUNTER.....................................................19
INTRODUCTION.................................................................22
NO SOLICITATION OF PROXIES...................................................22
VOTING RIGHTS AND VOTES REQUIRED............................................ 22
THE SPECIAL MEETING..........................................................22
Date, Time and Place.....................................................22
Purposes ................................................................22
Dissenter's Right of Appraisal...........................................23
THE SALE OF HUNTER'S ASSETS..................................................23
Agreement and Plan of Reorganization and Plan of Liquidation.............23
History of and Reasons for the Transaction...............................24
Recommendation of the Hunter Board......................................25
PLAN OF LIQUIDATION..........................................................26
General..................................................................26
Number of Magnum Shares to be Distributed................................26
Distributions to Shareholders............................................26
Procedures for Exchanging Shares.........................................26
INFORMATION CONCERNING MAGNUM................................................27
Business Development.....................................................27
Business of Company......................................................28
Acquisition of Additional Properties.....................................29
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Drilling Agreements and Operation of Wells..........................30
Timing of Acquisitions/Operations...................................30
Gas Gathering, Transmission and Marketing...........................31
Petroleum Management and Consulting Services........................31
Insurance...........................................................31
Competition ........................................................32
Business Risks and Regulation.......................................32
Employees...........................................................34
Series C Convertible Preferred Stock................................34
Properties..........................................................34
Legal Proceedings...................................................38
Submission of Matters to a Vote of Security Holders.................39
Market for Common Equity and Related Shareholder Matters............39
Directors, Executives Officers, Promoters and Control Persons.......40
Executive Compensation..............................................42
Security Ownership of Certain Beneficial Owners and Management......43
Certain Relationships and Related Transactions......................44
INFORMATION CONCERNING HUNTER................................................45
Description of Business.............................................45
Employees and Management............................................47
Properties..........................................................48
Competition.........................................................52
Business Risks and Regulations......................................52
Legal Proceedings...................................................54
Submission of Matters to a Vote of Security Holders.................54
Market for Hunter's Common Stock and Related Matters................54
Directors and Executive Officers....................................55
Executive Compensation..............................................57
Security Ownership of Management and Principal Shareholders.........59
Certain Relationships and Related Transactions......................60
DESCRIPTION OF MAGNUM'S SECURITIES...........................................61
DIFFERENCE BETWEEN PENNSYLVANIA AND NEVADA CORPORATE LAW.....................67
INTEREST OF HUNTER'S OFFICERS AND DIRECTORS IN THE TRANSACTION...............74
FEDERAL INCOME TAX CONSEQUENCES..............................................75
LEGAL OPINION................................................................76
EXPERTS ....................................................................76
INDEX TO FINANCIAL STATEMENTS...............................................F-1
ii
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AVAILABLE INFORMATION
Magnum and Hunter are each subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith file reports and
other information with the Securities and Exchange Commission (the
"Commission"). In addition, Magnum has filed with the Commission a Registration
Statement (which term shall encompass any amendments thereto) on Form S-4 with
respect to the securities offered thereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information contained in the Registration Statement. The Registration Statement
and the exhibits thereto may be inspected at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at 7 World Trade
Center, New York, New York 10048 and Suite 1400, Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60611. Copies of such material can also
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE OFFERED BY THIS
PROSPECTUS OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION.
2
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SUMMARY
The following summary is qualified in its entirety by the detailed information
and financial statements appearing elsewhere in this Information Statement and
Prospectus.
This Information Statement and Prospectus concerns: (i) the Special Meeting of
Hunter Shareholders to consider the sale of the principal assets of Hunter to
Magnum; (ii) the issuance of 5,085,077 shares of Magnum Common Stock and 111,825
shares of Magnum Series C Preferred Stock to Hunter in consideration of the sale
of the Hunter Subsidiaries; and (iii) the plan to liquidate Hunter by
distributing such Magnum Shares in exchange for all of the outstanding common
and preferred stock of Hunter on the basis of one Magnum Common Share for every
3.916 shares of Hunter Common Stock and 111,825 shares of Magnum Series C
Preferred Stock and 359,316 shares of Magnum Common Stock will be exchanged for
the Hunter Preferred Stock.
THE SPECIAL MEETING
Date, Time and Place
- --------------------
A Special Meeting of Shareholders of Hunter will be held at the Cigna Tower, 600
East Las Colinas Boulevard, Suite 1200 Irving, Texas 75039, on October 31, 1996,
at 10:00 a.m., local time.
Record Date and Shares Outstanding on the Record Date
- -----------------------------------------------------
Only holders of record of Hunter Common Stock, par value $.10 per share, and
holders of record of Hunter Preferred Stock, no par value, at the close of
business on the Record Date are entitled to vote on all matters coming before
the Meeting or any adjournment or postponement thereof.
Each Shareholder is entitled to one vote for each share held on the record date.
There were 18,504,663 shares of Common Stock 90,133 and shares of Preferred
Stock outstanding and entitled to vote on September 27, 1996.
Purpose of the Special Meeting
- ------------------------------
At the Special Meeting, the shareholders will be asked to consider and act upon
a proposal to (i) sell all of the assets of Hunter to Magnum pursuant to the
Agreement and Plan of Reorganization and Plan of Liquidation and (ii) liquidate
Hunter and distribute the Magnum Shares of Common and Preferred Stock received
pursuant to the Agreement and Plan of Reorganization and Plan of Liquidation to
shareholders of Hunter.
3
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Required Vote
- -------------
The affirmative vote of the holders of at least a majority of the shares of
Common Stock and Preferred Stock outstanding is required for approval of the
sale of all of the assets of Hunter and to liquidate Hunter and distribute the
Magnum Shares of Common and Preferred Stock received pursuant to the Agreement
and Plan of Reorganization and Plan of Liquidation.
On December 19, 1995 to be effective December 22, 1995, Magnum and Hunter
entered into an Agreement and Plan of Reorganization and Plan of Liquidation, as
amended. The amendment was executed by Hunter Shareholders holding over fifty
percent (50%) of the common stock of Hunter, therefore, approval of these
proposals at the shareholder meeting is assured. Officers and directors of
Hunter owning 39.8% of the shares entitled to vote executed the amendment. Upon
approval, the transaction will be finalized and the Magnum Shares received by
Hunter under the Agreement and Plan of Reorganization and Plan of Liquidation
will be distributed to Hunter Shareholders as set forth below.
SALE OF HUNTER'S ASSETS
Magnum has proposed and the Board of Directors of Hunter have approved the
Agreement and Plan of Reorganization and Plan of Liquidation, under which Magnum
will acquire all of Hunter's Subsidiaries and will assume all of the respective
liabilities associated therewith, without recourse, and in consideration, Magnum
has issued 5,085,077 shares of Magnum Common Stock and 111,825 shares of Magnum
Series C Preferred Stock to Hunter. The Magnum Shares received by Hunter will be
subsequently distributed to Hunter Shareholders as described herein. See "Sale
of Hunter's Assets".
The Board of Directors of Hunter has determined that the terms of the Agreement
and Plan of Reorganization and Plan of Liquidation, as amended, are fair and in
the best interests of Hunter Shareholders.
The Agreement and Plan of Reorganization and Plan of Liquidation, as amended,
provides for the purchase by Magnum of all of the assets of Hunter. The assets
sold to Magnum consisted of Hunter's capital stock ownership in wholly-owned
subsidiaries and capital stock membership interests in limited liability
companies. The Agreement requires Magnum to assume all of Hunter's contractual
obligations in connection with the operation of Hunter. Such obligations and
liabilities include, but are not limited to, current or past payables, salaries,
suppliers, known real or contingent liabilities, and any other obligations of
the respective companies acquired, as of the date the transaction is
consummated. As the amendment was executed on December 19, 1995 by Hunter
shareholders holding over 50 percent of the stock of Hunter entitled to vote,
the required additional Magnum shares were issued to Hunter and the transaction
was consummated on December 22, 1995. Hunter and its subsidiaries were
consolidated in Magnum's financial statements beginning December 31, 1995.
4
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THE PLAN OF LIQUIDATION
Hunter, upon the terms and conditions set forth herein and in the related Letter
of Transmittal, will exchange one share of the Magnum Common Stock which Hunter
will receive pursuant to the Agreement and Plan of Reorganization and Plan of
Liquidation for every 3.916 shares of Hunter Common Stock held by shareholders.
In addition, 111,825 shares of Magnum Series C Preferred Stock will be exchanged
for all of the Hunter Preferred Stock and 359,316 shares of Magnum Common Stock.
See "Market Prices" contained in this Summary for the current market prices of
the respective Hunter and Magnum Common Stock.
The exchange was determined after consideration of the relative market value of
Magnum's and Hunter's net respective assets. In determining these ultimate
values, a substantial portion of the worth of each company was derived from the
value of Magnum's and Hunter's proved oil and gas reserves and a lesser extent,
Hunter's gas gathering and property management and consulting business. For
further information concerning the estimated value of Magnum's and Hunter's oil
and gas reserves, see Information Concerning Magnum-Properties on page 37,
Infromation Concerning Hunter-Properties on page 51, and Magnum's and Hunter's
Supplemental Information on Oil and Gas Producting Activities on pages F-26
through F-28 and on pages F-42 through F-43.
MARKET PRICES
The last reported sales price of Magnum Common Stock on September 20, 1996 as
reported by the American Stock Exchange was $4.625.
The last reported sales price of Hunter Common Stock on September 20, 1996 as
reported by the Boston Stock Exchange was $.75.
THE PARTIES
Hunter
- ------
Hunter (formerly Intramerican Corporation) was formed in 1922 as East Utah
Mining Company, a Utah corporation, for the purpose of exploring and developing
mining properties in Utah and Colorado. In 1980, its corporate name was changed
to Intramerican Oil and Minerals, Inc., and it was re-incorporated in the state
of Pennsylvania. Simultaneously, it acquired producing oil and gas properties
from previously formed limited partnerships. The mining properties were sold in
1986 with the proceeds used to repay bank debt. Its corporate name was changed
to Intramerican Corporation effective October 1, 1990. Effective December 1,
1990, Sunbelt Energy, Inc. and Subsidiaries merged with a subsidiary. Following
two years of combined operations and in conjunction with changes in executive
management during 1992, the corporate name was changed to Hunter Resources,
Inc., effective November 10, 1992, to better emphasize Hunter's involvement in
the energy resources business.
Hunter is an energy development and management company with business objectives
in four principal activities: (i) the production and sale of crude oil,
condensate and natural gas, (ii) the gathering, transmission and marketing of
natural gas, (iii) the business of managing and operating producing oil and
natural gas properties for non-operating interest owners and (iv) providing
consulting and U.S.
5
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export services to facilitate Latin American trade in energy products. Hunter's
operations are conducted in six states, predominantly in the Southwestern region
of the continental United States and Mexico.
Magnum
- ------
Magnum was incorporated under the laws of the State of Nevada on February 10,
1989 originally under the name Master Ventures, Inc. and registered a public
offering of its securities in 1989. Subsequently, Magnum became engaged in the
oil and gas business and changed its name to Magnum Petroleum, Inc. on October
1, 1990. Magnum is qualified to do business in the states of California,
Oklahoma, New Mexico, and Texas. During the past three years, Magnum's primary
focus has been the acquisition and drilling of oil and gas prospects and raising
working capital through the private and public sale of its common and preferred
stock.
The business purpose of Magnum is to engage in the acquisition, exploration,
drilling, development and operation of oil and gas properties; to acquire other
interests in oil and/or gas production; to produce and market oil and/or gas
from prospects; and to engage in and perform any and all acts and activities
customary in connection therewith, or incident thereto, within the United
States. In most instances, Magnum acts as operator of record of the oil and gas
properties in which it has acquired an interest.
On June 28, 1996, Magnum closed on the purchase of 469 natural gas wells and 427
miles of a gas gathering pipeline system from Meridian Oil Inc. ("Meridian"), a
wholly-owned subsidiary of Burlington Resources, Inc. The net purchase price
after certain purchase price adjustments was approximately $35 million for all
of Meridian's interest in certain gas wells and a gas gathering system located
in the Panhandle of Texas and Western Oklahoma, more commonly referred to as the
"Panoma Properties."
The current daily production volumes from the Magnum owned wells is
approximately 14 million cubic feet per day with total delivery, including third
party gas purchased by the gathering system, of almost 19 million cubic feet per
day. The Company has estimated the monthly cash flow from the acquisition of the
Panoma Properties to be approximately $500,000 per month. The existing wells and
gas gathering system are located in three fields, the West Panhandle Field, the
East Panhandle Field, and the South Erick Field, all located in Gray, Wheeler,
Collingsworth and Donley Counties, Texas and Beckham and Greer Counties,
Oklahoma. Magnum's wholly-owned subsidiary, Gruy Petroleum Management Co., has
become the operator of all wells, the gas gathering pipeline system, and
associated assets. See "Information About Magnum".
6
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RECOMMENDATIONS OF THE BOARDS OF DIRECTORS AND REASONS FOR SALE OF HUNTER'S
ASSETS
Hunter.
- -------
Hunter's Board of Directors unanimously recommends to Hunter's Shareholders that
the shareholders approve the sale of substantially all of Hunter's assets to
Magnum pursuant to the Agreement and Plan of Reorganization and Plan of
Liquidation.
On December 19, 1995, Hunter closed an amended definitive agreement to combine
(the "Business Combination") with Magnum. Pursuant to the definitive agreement,
Magnum has issued to Hunter 5,085,077 shares of newly issued restricted Common
Stock of Magnum and 111,825 shares of Series C Preferred Stock ("Magnum Shares")
in exchange for substantially all of the assets of Hunter subject to its
associated liabilities. As the amendment was executed on December 19, 1995 by
Hunter shareholders holding over 50 percent of the stock of Hunter entitled to
vote, the required additional Magnum shares were issued to Hunter and the
transaction consummated on December 22, 1995. Hunter's assets primarily
consisted of capital stock in wholly-owned subsidiaries and stock ownership
interests in limited liability companies.
The Board of Directors of Hunter considered that the transaction with Magnum
would result in, among other things, the following: (i) combined cash of
approximately $2 million; (ii) upon liquidation of Hunter, Hunter shareholders
will receive Magnum Shares listed upon the American Stock Exchange where common
shares of Magnum have historically traded in a range of $2.25 to $5.25 per share
and where daily volumes have historically approximated 20,000 shares; (iii) no
additional bank indebtedness would be incurred as a result of the transaction;
(iv) an increased borrowing base due to existing oil and gas properties that
could be added to Hunter's existing bank line of credit; and (v) a reduction in
total general and administrative expenses of the combined entities due to the
resignation of all Magnum personnel.
MAGNUM.
On July 21, 1995 and December 19, 1995, the Board of Directors of Magnum (the
"Magnum Board") without dissent approved the acquisition of Hunter's assets
pursuant to the Agreement and Plan of Reorganization and Plan of Liquidation and
such amendment thereto.
RISK FACTORS
See "Risk Factors" for certain information that should be considered by Hunter
Shareholders in approving the sale of Hunter's assets and in liquidating Hunter.
REGULATORY APPROVAL
No consent of any state or federal regulatory organization will be required in
connection with the transactions described herein.
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FEDERAL INCOME TAX CONSEQUENCES
The sale of substantially all of the assets of Hunter pursuant to the Agreement
and Plan of Reorganization and Plan of Liquidation with Magnum will be accorded
tax-free treatment under ss.368(a)(1)(C) of the Internal Revenue Code of 1986,
as amended.
FEDERAL INCOME TAX CONSEQUENCES TO HUNTER
Since Hunter received Magnum Shares solely in exchange for its assets, Hunter
will not recognize a gain or loss on the transfer of its assets to Magnum.
Hunter's basis in the Magnum Shares will be equal to its basis in the Hunter
Subsidiaries transferred to Magnum. Hunter will recognize no gain or loss on the
distribution of "qualified property" to its shareholders "in pursuance of the
plan of reorganization." The term "qualified property" means the Magnum Shares,
thus Hunter will not recognize a gain or loss on the distribution of the Magnum
Shares to its shareholders.
FEDERAL INCOME TAX CONSEQUENCES TO THE SHAREHOLDERS UPON LIQUIDATION
Hunter Shareholders will not recognize gain or loss upon the redemption of their
Hunter stock in exchange for Magnum Shares. Hunter Shareholders will recognize
gain or loss to the extent they receive cash for fractional shares. Hunter
Shareholders receiving Magnum Shares retain the same tax basis for the Magnum
Shares that they had in Hunter stock surrendered.
FEDERAL INCOME TAX CONSEQUENCES TO MAGNUM
Magnum will not recognize gain or loss upon the issuance of the Magnum Shares.
Magnum's basis in the Hunter Subsidiaries transferred from Hunter is the same as
Hunter's basis in such assets which does not necessarily reflect the dollar
amount of such assets recorded on Magnum's financial statements.
HUNTER RECOMMENDS THAT EACH SHAREHOLDER CONTACT HIS OR HER OWN TAX
ADVISORS CONCERNING HIS OR HER OWN TAX SITUATION AND POTENTIAL INCOME
TAX LIABILITY AS A RESULT OF THE TRANSACTION. See "Federal Income Tax
Consequences."
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RISK FACTORS
There are certain risks associated with the distribution of the Magnum Shares to
Hunter Shareholders. Among the significant risks are the following:
1. LIMITED OPERATING HISTORY/OPERATING LOSSES. Magnum has only a
limited recent history of operations and was, until March 31, 1992 considered to
be a development stage enterprise. Magnum has incurred operating losses and had
accumulated a deficit of $5,642,000 at June 30, 1996. Magnum's ability to
continue business, maintain its financing arrangements and pay dividends would
be adversely affected by continued operating losses. Any improvement in the
financial condition of Magnum will be dependent upon improvement in the
development of new oil and gas reserves, revenues from the sale of oil and gas
production, increases in commodity pricing and reduction in operating expenses.
There is no assurance that such improvements will occur.
2. COMMON STOCK SUBORDINATE TO PREFERRED STOCK. The Magnum Common Stock to be
distributed is subordinate to all outstanding classes of preferred stock of
Magnum in the payment of dividends and other distributions made with respect to
the stock, including distributions upon liquidation or dissolution of Magnum.
Magnum has previously issued three separate series of Preferred Stock (Series A,
B and C), which, in the aggregate, have substantial liquidation preferences and
annual dividend requirements, all of which must be satisfied before Magnum can
pay dividends or make other distributions with respect to Common Stock. See
"Description of Securities".
3. DEPENDENCE UPON KEY PERSONNEL. Magnum is substantially dependent upon a few
key individuals who comprise the management of Magnum; specifically, Gary C.
Evans and Matthew C. Lutz. As compared to many other public oil and gas
companies, Magnum does not have a depth of managerial and technical personnel.
Accordingly, there is a greater likelihood that loss of the services of any of
these individuals would have a material adverse impact upon Magnum. See "Certain
Relationships and Related Transactions". Both Mr. Evans and Mr. Lutz have
employment agreements with Magnum. Mr. Evans' agreement terminates December 31,
1996 and continues thereafter on a year to year basis and provides for a salary
of $150,000 per annum. Mr. Lutz's agreement terminates September 30, 1996 and
continues thereafter on a year to year basis and provides for a salary of
$48,000 per annum in addition to participation rights in certain exploration
projects. Both agreements provide that the same benefits supplied to other
Magnum employees shall be available to the employee. The employment agreements
also contain, among other things, covenants by the employee that in the event of
termination, he will not associate with a business that competes with Magnum for
a period of one year after cessation of employment. Magnum also has key man life
insurance on Mr. Evans in the amount of $1,000,000.
4. RISK OF LOSS FROM UNSUCCESSFUL PROSPECTS. The oil and gas business
is very speculative and involves a high degree of risk. No combination of
experience, knowledge and scientific evaluation can overcome the risk of
investment so as to assure a profit to a company in the oil and gas industry.
There can be no assurance that revenues derived from proved properties will
exceed the cost of acquiring and developing such properties. Magnum will be
involved in additional development work on its existing properties, including
reworking existing wells to increase production and/or drilling offset wells to
existing production. There is no assurance Magnum will not expend substantial
sums for such acquisition and development, only to determine that a well is
nonproductive or a property is not commercially producible, in which case the
amounts invested in such prospect may be totally lost. The ultimate success of a
prospect may not be known until substantially all development costs have been
incurred.
5. UNCERTAINTIES INHERENT IN CURRENT OIL AND GAS MARKET. World and
domestic market and economic conditions, availability of gas transmission lines
or the existence of price control regulations may affect the price of, or the
ability to market the oil and gas produced. There is substantial uncertainty as
to the prices at which oil and gas produced by Magnum may be sold, and it is
possible that under some market conditions, the production and sale of oil and
gas from some or all of Magnum's properties may not be economical, resulting in
a reduction in the value of Magnum's reserves. The availability of a ready
market for oil and gas and the prices obtained for such oil and gas depend upon
numerous factors beyond the control of Magnum, including competition from other
oil and gas suppliers and national and international economic and political
developments. See "Business - Competition and Markets."
9
<PAGE>
6. ENVIRONMENTAL REGULATION. Magnum is subject to numerous federal, state
and local environmental laws and regulations governing the oil and gas business,
including petroleum spills, noise pollution, air quality, disposal of water,
preservation of wildlife and other eco-system preservation. Magnum's drilling
and operating activities may expose it to potential liability for pollution or
other damage to the environment. Compliance with all statutes and regulations
relating to environmental matters to which Magnum is subject may cause delays in
drilling and completion of wells and/or additional expenses. Magnum does carry
certain environmental impairment liability insurance coverage where available
and maintains bonds as required by state law, but there is no assurance this
protection would be adequate to cover any actual losses or liabilities which may
arise from such hazards.
7. OTHER GOVERNMENT REGULATION. The oil and gas industry is subject to
federal, state and local governmental regulations. These jurisdictions are
empowered to enact legislation or regulations which limit or otherwise control
the methods and rates of oil and gas production, the pricing and marketing of
oil and gas, and the taxation of oil and gas. Since energy policies are
uncertain and constantly changing, no prediction can be made with respect to the
ultimate effect on the business of Magnum of governmental policies such as price
controls, taxes, drilling restrictions, etc.
8. NEED FOR DEVELOPMENT OF ADDITIONAL RESERVES. Magnum's future success
depends upon its continuing ability to find or acquire additional oil and gas
reserves that are economically recoverable. Except to the extent that Magnum
conducts successful exploration or development activities or acquires properties
containing proved reserves, the proved reserves of Magnum will generally decline
as reserves are produced. There can be no assurance that Magnum will be able to
discover additional commercial quantities of oil and gas, or that Magnum will be
able to continue to acquire oil and gas reserves at prices which it considers
economically advisable.
9. WRITE DOWNS AND LIMITATIONS ON ACCURACY OF RESERVE ESTIMATES. Oil and
gas reserve estimates are based on subjective engineering judgment and are
necessarily imprecise. In addition, any estimates of future net revenues and the
present value thereof are based on price and cost assumptions provided by Magnum
as its best estimate. To the extent these estimates of quantities, prices and
costs prove incorrect, or Magnum is unsuccessful in expanding its oil and gas
reserve base with its capital expenditure program, or declines in oil and gas
prices occur, then write downs in reserve estimates and the capitalized costs
associated with Magnum's oil and gas assets could occur again in the future. See
"Properties - Reserves."
10. UNCERTAINTIES OF TITLE. Although Magnum will attempt, where practical,
to obtain legal title opinions from reputable counsel, title to natural resource
properties is subject to questions of law as well as facts and circumstances
which are not always readily discoverable of record or otherwise which can
adversely affect validity of title.
11. NO ASSURANCE OF DIVIDENDS. Magnum does not currently pay cash dividends
on its Common Stock and does not anticipate paying such dividends at any time in
the future. Holders of shares of Series C Preferred Stock have only been
entitled to receive cash dividends when, as and if declared by the Board of
Directors of Magnum out of funds legally available therefor. While historically,
Magnum has declared and paid dividends on the Series C Preferred Stock, except
upon conversion or redemption, Magnum has no obligation in the future to pay
dividends on any security. See "Market for Common Equity and Related Shareholder
Matters."
12. VOLATILITY OF STOCK PRICES. During the two most recent fiscal years and
subsequent interim period, bid quotations and trading prices of the common stock
of Magnum as traded on the American Stock Exchange, have ranged from $2.25 to
$5.25 per share. The market prices of Magnum's Common Stock, Series C Preferred
Stock and Warrants are subject to significant fluctuation in response to
variations in operating results of Magnum and other factors such as investor
perceptions of Magnum and the stock market in general. Additionally, the supply
and demand for petroleum products, interest rates, general economic conditions
as well as those specific to the oil and gas industry, international political
conditions, particularly in oil producing countries, developments with regard to
Magnum's drilling activities, future acquisitions, financial condition and
management decisions.
13. POTENTIAL ISSUANCE OF ADDITIONAL PREFERRED AND COMMON STOCK. Magnum is
authorized to issue up to 10,000,000 shares of preferred stock, the rights and
preferences of which may be designated in series by the Board of Directors.
Except for certain restrictions requiring the approval of Series C Preferred
Shareholders, such designations may be made
10
<PAGE>
without shareholder approval. A total of 625,000 shares were designated as
Series C Preferred Stock in addition to 216,000 shares of Series A Preferred and
248,000 shares of Series B Preferred previously designated. The designation and
issuance of other series of preferred stock will create additional securities
which may have dividend and liquidation preferences over the Common Stock.
Magnum is also authorized to issue up to 50,000,000 shares of common stock, of
which 13,275,379 shares are presently issued and outstanding, 20,750 shares are
reserved for issuance upon conversion of the Series B Preferred Shares that were
to convert to common as of December 31, 1995, and 854,176 shares are reserved
for issuance upon exercise of the Warrants. The issuance of additional common
stock in the future after completion of this offering will reduce the
proportionate ownership and voting rights of common stock presently outstanding
or issuable upon conversion/exercise.
On June 5, 1996, Magnum called for redemption 208,333 shares of its Series C
preferred stock at $10.50 per share, as provided by the terms of the certificate
of designations, plus accrued dividends with an extended redemption date of July
10, 1996. Terms of the preferred stock provide for the option by the holder to
convert the preferred shares into common stock at the rate of three (3) shares
of common stock for each share of Series C preferred stock. At June 30, 1996,
57,400 shares of the preferred stock had converted into 172,200 shares of Magnum
common stock. An additional, 3,527 shares of common stock were issued for
accrued dividends to conversion date. Subsequent to June 30, 1996, but prior to
July 11, 1996, an additional 236,992 shares of the preferred stock were
converted for 732,223 shares of common stock including accrued dividends paid in
common stock. Additionally, 8,224 shares of preferred stock were redeemed for
cash in the amount of $88,860.
On July 11, 1996, Magnum called for the redemption the remaining 322,384 shares
of its Series C preferred stock. The redemption price was $10.50 per share, plus
accrued dividends of $.141 per share from July 1, 1996 through the extended
redemption date of August 16, 1996, for a total redemption price of $10.641 per
share. The Series C preferred shares could be converted, at the option of the
holder, at any time prior to August 16, 1996 into common stock. 302,492 shares
of Series C preferred stock were converted into 938,451 shares of common stock
including the accrued dividends paid in common stock. Additionally, 19,892
shares of preferred stock were redeemed for cash in the amount of $210,431.
While Magnum continues to negotiate with five separate institutional investors
concerning the funding of up to $15 million in participating preferred stock, it
is likely that within the next sixty days, Magnum will complete a transaction
with one institution for this funding. The structure of this transaction will
probably be in two forms. The first $10 million will be structured as a
mandatory redeemable (non-convertible) preferred stock bearing interest at
approximately 9% per annum and providing the institutional investor the ability
to participate by owning an overriding royalty interest in up to six development
and waterflood projects owned by Magnum in West Texas and Western Oklahoma. The
remaining $5 million will most likely be structured as a convertible preferred
stock at a price equal to a 25% premium over the price of the common stock at
the time of issuance. The purpose for the $15 million offering is to fund the
capital cost necessary to fully develop the six development and waterflood
projects and to reduce Magnum's existing senior bank indebtedness.
14. SHARES ELIGIBLE FOR FUTURE SALE. All 2,465,191 shares of common
stock owned by members of Magnum's existing management or their affiliates are
"restricted securities" and under certain circumstances may in the future be
sold in compliance with Rule 144 adopted under the Securities Act of 1933, as
amended. Rule 144 provides, among other things, that persons holding restricted
securities for a period of two years may each sell in brokerage transactions
every three months an amount equal to 1% of Magnum's total outstanding shares or
the weekly reported volume of trading during the four calendar weeks preceding
the filing of a notice of proposed sale, whichever is greater. All 2,465,191
shares held by Magnum's management and their affiliates are eligible for resale
pursuant to Rule 144. No prediction can be made as to the effect, if any, that
sales of such shares or the availability of such shares for sale will have on
Magnum market prices prevailing from time to time. Nevertheless, the possibility
that substantial amounts of common stock may be sold in the public market may
adversely affect prevailing as well as future market prices for Magnum shares
being issued in the proposed transaction and could also impair Magnum's ability
to raise capital through the sale of its equity securities in the future.
15. LACK OF INDEPENDENT APPRAISAL BY INVESTMENT BANKER ENGAGED BY
MAGNUM. Magnum has not engaged an investment banker or independent advisor to
evaluate the fairness of the terms of the Agreement and Plan of Reorganization
and Plan of Liquidation. Each shareholder must evaluate all of the information
contained herein concerning the transaction based upon his/her individual
investment objectives and concerns. Accordingly, each shareholder should consult
with his/her own investment advisors and consultants in evaluating the merits of
this transaction.
11
<PAGE>
SELECTED 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 stock of subsidiary corporations and capital stock ownership 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 to a third
party investment banking firm, Kachina Capital Corporation ("Kachina") as
payment of fees directly related to the Acquisition for assisting in the
structuring and negotiations of the terms of the Acquisition. Kachina
distributed a total of 250,000 of the shares to a former director and a former
officer of the Company for their assistance in completing the acquisition. The
Acquisition was recorded on the "purchase method" based upon the estimated value
of the consideration (the common and preferred stock issued) that Magnum paid
for the Acquisition. As the Acquisition was recorded at December 31, 1995, no
selected pro forma consolidated balance sheet was necessary.
In addition, Hunter has adjusted the pro forma consolidated statement of
operations for 1995 for the acquisition by Hunter on March 31, 1995 of the
Arrington oil and gas properties, the October 18, 1995 acquisition of the
remaining seventy-five percent (75%) ownership interest in Midland Hunter
Petroleum Limited Liability Company ("Midland"), the October 25, 1995
acquisition of the Reef oil and gas properties, the November 9, 1995 acquisition
of the Tana oil and gas properties, the December 1, 1995 acquisition of the
Superior gas gathering pipelines and the June 28, 1996 acquisition of the
Meridian oil and gas properties and pipelines as if the acquisitions had been
consummated at the beginning of 1995. The Arrington, Midland, Reef, Tana,
Superior and Meridian acquisitions were previously reported on Forms 8-K or
amended Forms 8-K filed by Hunter or Magnum on September 26, 1995, July 24,
1996, January 8, 1996, January 24, 1996, August 21, 1996 and August 16, 1996,
respectively. Additionally, Magnum has adjusted the pro forma consolidated
statement of operations for the six months ended June 30, 1996 for the Meridian
acquisition as if the acquisition had been consummated at the beginning of 1996.
As the Meridian acquisition was recorded at June 30, 1996, no pro forma
consolidated balance sheet was necessary.
The selected pro forma statements of operations are presented as if the
Acquisition occurred at the beginning of the period. The selected pro forma
financial information is not necessarily indicative of the results that would
have occurred had the Acquisition occurred on the indicated dates.
The selected 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. The historical summaries of
revenues and operating expenses for the Arrington, Reef, Tana, Superior and
Meridian acquisitions were filed in Forms 8-K or amended Forms 8-K as referenced
above. The unaudited historical financial statements of Midland were filed in a
Form 8-K as referenced above.
<TABLE>
<CAPTION>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA <F1>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Magnum Hunter Arrington Midland Reef Tana Superior Meridian Pro Forma Combined
Historical Historical Historical Historical Historical Historical Historical Historical Adjustments Pro Forma
------------ ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- ------------
Year Ended
December 31, 1995
Total Revenues $ 800,945 $2,967,000 $ 123,000 $ 678,000 $ 937,000 $1,636,000 $2,248,000 $6,252,000 $ (159,000) $ 15,482,945
Net Income (Loss) (968,272) (682,000) 91,000 93,000 693,000 1,073,000 287,000 3,165,000 (7,680,000) (3,928,272)
Preferred
Dividends (617,220) (9,000) (83,173) (709,393)
Net Income (Loss)
Applicable to
Common Stock $(1,585,492) $ (691,000) $ 91,000 $ 93,000 $ 693,000 $1,073,000 $ 287,000 $3,165,000 $(7,763,173)$(4,637,665)
Net Loss
Per Share $ (.28) $ (.04) $ (.41)
Weighted
Average Shares
Outstanding 11,248,793
Meridian Pro Forma Combined
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- -----------
Six Months Ended June 30, 1996
Total Revenues $4,736,000 $3,505,000 $ 736,000 $8,997,000
Net Income (Loss) (57,000) 2,264,000 (2,442,000) (235,000)
Preferred Dividends (340,000) (340,000)
Net Income (Loss)
Applicable to Common Stock (397,000) 2,264,000 $(2,442,000) $ (575,000)
Net Loss Per Share $ (.03) $ (.05)
Weighted Average Shares
Outstanding 11,607,851
<FN>
<F1> Hunter and its subsidiaries were consolidated in Magnum's financial
statements beginning December 31, 1995. See note 3 to Magnum's
consolidated financial statements.
</FN>
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF MAGNUM
The following discussion and analysis should be read in conjunction with
Magnum's consolidated financial statements and the notes associated with them
contained elsewhere in this report. References in this discussion to shares of
common stock, regardless of when issued, reflect the number of such shares
outstanding after giving effect to the one for two reverse split of the common
stock of Magnum which occurred effective June 1, 1993. This discussion should
not be construed to imply that the results discussed herein will necessarily
continue into the future or that any conclusion reached herein will necessarily
be indicative of actual operating results in the future. Such discussion
represents only the best present assessment of management of Magnum.
On July 21, 1995, Magnum executed a definitive agreement to combine (the
"Business Combination") with Hunter Resources, Inc. ("Hunter"), subject to
Hunter shareholder approval. Pursuant to the definitive agreement, Magnum issued
(into escrow) 2,750,000 shares to Hunter of newly issued restricted common stock
in exchange for substantially all of the assets of Hunter subject to its
associated liabilities. Hunter's assets primarily consisted of stock in
wholly-owned subsidiaries and stock ownership interests in limited liability
companies ("Hunter Subsidiaries").
On December 19, 1995 to be effective December 22, 1995, Magnum and Hunter
entered into an Agreement and Plan of Reorganization and Plan of Liquidation, as
amended. The amendment was executed on December 19, 1995 by Hunter shareholders
holding over fifty percent (50%) of the common stock of Hunter and provided for
the issuance to Hunter of an additional 2,335,077 shares of newly issued
restricted common stock and 111,825 shares of Series C preferred stock.
Therefore, the total consideration paid by Magnum for the Hunter subsidiaries
was 5,085,077 shares of restricted common stock and 111,825 shares of Series C
preferred stock.
Hunter's shareholders have no dissenter rights. However, Hunter is required to
distribute an Information Statement and hold a special meeting of its
shareholders to formally approve the Agreement. Magnum shares issued in the
Business Combination are held in escrow pending formal shareholder approval of
the Agreement. Subsequent to the Business Combination, Magnum has conducted its
oil and gas operations and energy related acquisitions in conjunction with the
Hunter Subsidiaries. Acquisitions completed by Magnum and Hunter after the
initial agreement, were substantially completed by Magnum Hunter Production,
Inc. ("Magnum Hunter"), a Hunter Subsidiary. Hunter and its subsidiaries were
consolidated in Magnum's financial statements beginning December 31, 1995.
After the initial agreement with Hunter, management of Magnum discussed the
accounting method that Magnum had used since its inception. Generally accepted
accounting principles require a single method of accounting for oil and gas
activities be used in the presentation of Magnum's financial statements on a
consolidated basis. Management concluded based upon its historical and projected
activities that the "full cost" method of accounting was preferable to the
"successful efforts" method of accounting for its oil and gas production
activities. Magnum's auditors concurred with management's assessment and,
accordingly, the 1994 financial statements have been restated to reflect the
"full cost" method.
On October 18, 1995, Magnum Hunter closed on an acquisition (the "Midland"
acquisition) of the remaining seventy-five percent (75%) ownership interest in
an affiliated company from a joint venture partner. The purchase price of
$1,075,287 consisted of i) $300,000 in cash, ii) $300,000 represented by 85,131
shares of restricted common stock of Magnum valued at $3.52 per share and iii)
the assumption of existing bank indebtedness of $475,287. As additional
consideration, 50,000 warrants to purchase common stock of 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, Magnum Hunter closed on an acquisition (the "Reef"
acquisition) of domestic producing oil and gas properties. The purchase price
was comprised of $2.058 million cash, funded by an existing bank line of credit,
and $257,000 represented by 64,176 shares of restricted common stock of Magnum
valued at $4.00 per share. The acquisition had an effective date of August 1,
1995.
13
<PAGE>
On November 6, 1995, Magnum Hunter entered into an increased $20 million
revolving credit agreement with First Interstate Bank of Texas, N.A. ("FITX").
The previous line of credit was in the maximum amount of $10 million and was
entered into by Hunter prior to the business reorganization with 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 borrowing base was increased to $8.7 million with
outstanding borrowings bearing interest at prime plus one and one-half percent
(1 1/2%) per annum.
On November 9, 1995, Magnum Hunter closed on an acquisition (the "Tana"
acquisition) of domestic producing oil and gas properties for approximately
$4.229 million. The initial purchase price was comprised of $3.104 million cash,
funded by the bank line of credit, and a note payable to the previous owner in
the amount of $1.125 million secured by 610,170 shares of restricted common
stock of Magnum.
On December 1, 1995, Hunter Gas Gathering, Inc. a wholly-owned subsidiary of
Magnum, closed on an acquisition (the "Superior" acquisition) of two unregulated
gas gathering systems. The total consideration was $1 million cash, funded
substantially by the line of credit with FITX.
On June 26, 1996, Magnum received a commitment from Wells Fargo Bank, N.A., as
Agent, and Banque Paribas, as Co-agent, (hereinafter collectively referred to as
"Banks") for a new credit facility for the benefit of Magnum and several
wholly-owned subsidiaries. The purpose of the new line of credit is to i)
refinance the Company's existing indebtedness with First Interstate Bank of
Texas, N.A. (a wholly-owned subsidiary of Wells Fargo Bank, N.A.), ii) finance
the acquisition of oil and gas reserves including the $35.4 million Panoma
Property acquisition, as discussed below, from Meridian Oil Inc. ("Meridian"), a
wholly-owned subsidiary of Burlington Resources, Inc., iii) future property
development, and iv) working capital support and general corporate purposes. The
credit facility is subject to a "Borrowing Base" determination established from
time-to-time by the Banks based upon proven oil and gas reserves and gas
gathering assets owned by Magnum and its subsidiaries. The availability under
the Company's existing credit facility was $16 million and has now been
increased to $48 million based upon the acquisition of the Panoma Properties.
The new credit facility gives the Company the flexibility to choose a range of
either "LIBOR" or "Prime" based interest rates options. At June 30, 1996, $40
million was outstanding under the revolving credit note agreements with interest
at eight percent (8%) (Libor plus two and one-half percent (2 1/2%)).
Additionally, $8 million was outstanding under term notes with interest at ten
and one-half percent (10 1/2%) (Prime plus 2.25 percent). Terms of the revolving
credit notes provide for a maturity date of June 28, 2001 with no required
principal payments until maturity, provided the future Borrowing Base
determinations established from time-to-time by the Banks do not exceed the then
outstanding principal balance. Terms of the term notes provide for a maturity
date of December 31, 1996 with the option to payoff the remaining principal
balance at that date in eight quarterly installments beginning March 31, 1997.
On June 28, 1996, Magnum closed on the purchase of 469 natural gas wells and
approximately 427 miles of a gas gathering pipeline system from Meridian. The
net purchase price after certain purchase price adjustments was approximately
$35,350,000, funded by a loan from Magnum's principal lending financial
institutions. As the purchase was not completed until the end of the second
quarter of 1996, the Statements of Operations for 1996 do not include any
operating results for the purchased properties. The purchase price was allocated
based on estimated fair market values resulting in the recording of $29,560,000
as oil and gas properties and $5,790,000 as pipelines. The gas wells and gas
gathering system are located in the Panhandle of Texas and Western Oklahoma and
are more commonly referred to as the "Panoma Properties."
The current daily production volumes from the Magnum owned wells is
approximately 14 million cubic feet per day with total delivery, including third
party gas purchased by the gathering system, of almost 19 million cubic feet per
day. The Company has estimated the monthly cash flow from the acquisition of the
Panoma Properties to be approximately $500,000 per month. The existing wells and
gas gathering system are in three fields, the West Panhandle Field, the East
Panhandle Field, and the South Erick Field, all located in Gray, Wheeler,
Collingsworth and Donley Counties, Texas and Beckham and Greer Counties,
Oklahoma. Magnum's wholly-owned subsidiary, Gruy Petroleum Management Co., has
become the operator of all wells, the gas gathering pipeline system, and
associated assets.
14
<PAGE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED 1995 AND 1994
Magnum incurred a net loss applicable to common shares of $1,585,492 (including
dividend payments of $617,220) for the year ended December 31, 1995, compared to
a net loss applicable to common shares of $1,125,707 (including dividend
payments of $579,325) for the same period of the preceding year. The increased
loss during 1995 represents a 41% increase over 1994 and occurred partially as a
result of Magnum's efforts during the third quarter of 1995 being channeled
towards the acquisition of Hunter.
Total revenue for the year ended December 31, 1995 declined to $648,574 from
$745,182 in 1994. Revenue from oil and gas sales decreased 15.5 percent during
1995 to $616,596 compared to $729,478 in 1994. The sharp decline in oil and gas
revenue is largely attributable to a substantial decline in oil production
volumes from the South Tonkawa prospect after initial flush production in 1994.
Quantities of oil and gas produced during 1995 totaled 29,972 barrels of oil at
a weighted average price of $15.60 per barrel and 102,056 mcf of gas at a
weighted average price of $1.46 per mcf. Quantities of oil and gas produced
during 1994 totaled 41,835 barrels of oil at a weighted average price of $14.20
per barrel and 88,176 mcf of gas at a weighted average price of $1.53 per mcf.
Oil and gas production expenses declined slightly from $317,761 in 1994 to
$267,513 in 1995. On an equivalent barrel basis, the production expense
increased slightly to $5.69 per barrel in 1995 from $5.57 in 1994. Depreciation
and depletion rose from $243,180 in 1994 to $421,101 in 1995 as a result of an
increase in the depletable book value of Magnum's properties and a reduction of
the estimated proved undeveloped reserves of two of Magnum's base properties
after further evaluation of the properties at the 1995 year-end.
General and administrative expenses ("G&A") were significantly higher for the
year ended December 31, 1995 due to Magnum's increase in staff in the first half
of 1995 over the 1994 period. Interest income is higher in the 1995 period over
the 1994 period as a result of increased funds available for investment in the
1995 period.
Magnum declared a dividend on its Series "B" and Series "C" cumulative preferred
stock for each quarter during 1995 and 1994. For 1995 and 1994, dividends on the
Series "B" and Series "C" cumulative preferred shares totaled $617,220 and
$579,325, respectively.
RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS IN 1996 AND 1995
As discussed above, Magnum completed a business combination with Hunter, which
for accounting purposes, was recorded under the purchase method of accounting.
Hunter's operations were consolidated with those of Magnum beginning December
31, 1995. As such, the comparison of the increases in the 1996 interim and six
month periods over the comparable 1995 periods are, unless otherwise stated, the
result of the Hunter operating activities.
Magnum incurred an operating profit of $256,000 for the six month period ended
June 30, 1996 versus an operating loss of $427,000 during the previous year.
This $676,000 improvement in operations can be directly attributed to the
acquisition of Hunter completed for accounting purposes as of December 31, 1995,
and to a lesser extent, improved oil and gas sale prices.
Magnum incurred a net loss after payment of dividends on preferred stock of
$397,000 during the six month period ended June 30, 1996, compared to a net loss
of $653,000 for the same period of the preceding year. The loss per common share
improved to $0.03 from $0.12, partially the result of the increase in the number
of common shares used in the per share calculation due to the Hunter
acquisition.
Total revenues increased 1,313% from $322,000 during the six month period of
1995 to $4,550,000 during 1996. During the six month period ended June 30, 1996,
revenue from oil and gas sales increased 834% to $2,821,000 from total oil and
gas sales of $302,000 for the same period of the prior year. For the first six
months of 1996, Magnum sold 89,838 barrels of oil and 488,154 mcf of gas. In
comparison, during the same six month period of 1995, Magnum sold 16,665 barrels
of oil and 34,541 mcf of gas. The average oil price of $15.73 per barrel in 1995
increased to $19.31 per barrel in the 1996 period. The average gas price of
$2.22 per mcf in 1996 increased from $1.44 per mcf in 1995.
Gas gathering and marketing activities, which have all resulted from the
combination with Hunter, provided revenues of $1,528,000 and a net profit from
these activities of $214,000. Expenses associated with this business segment
were
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$190,000 and $1,124,000, representing pipeline operating expenses and purchase
of natural gas from third parties, respectively.
Revenues from oil field services and commissions were $201,000 in the 1996
period as compared to $20,000 in the 1995 period. Related cost of services
expense of $327,000 and $10,000 for the 1996 and 1995 period, respectively, were
recognized resulting in a net loss in 1996 from these activities of $126,000 as
compared to a net profit in 1995 of $10,000.
Lease operating expenses amounted to $1,126,000 in 1996 as compared to $93,000
in the 1995 period. On an equivalent barrel basis, the expense was $6.62 per
barrel and $4.37 per barrel for the respective 1996 and 1995 periods.
Depreciation and depletion rose to $1,084,000 in 1996 versus $103,000 in 1995
due to the increased oil and gas activities from the combination with Hunter.
General and administrative expense declined $100,000 to $443,000 in the 1996
period as compared to $543,000 in 1995 due to a reduction in professional and
promotional expenses incurred in 1996. A gain on sale of $143,000 related to the
Company's securities previously held for resale was recognized in the second
quarter of 1996.
Interest expense rose to $499,000 in 1996 from $3,000 in 1995 primarily as a
result of commercial bank indebtedness assumed in the combination with Hunter
and additional property acquisitions completed in 1996, funded with new bank
indebtedness. Preferred dividends increased to $340,000 in 1996 from $293,000 in
1995 due to the issuance of additional Series C preferred stock as a result of
the combination with Hunter.
LIQUIDITY AND CAPITAL RESOURCES
For 1995, Magnum had a net decrease in cash of $100,853 as the proceeds received
from the sale of stock were principally used for oil and gas acquisition and
development and for the payment of dividends and payables. Magnum's operating
activities used net cash of $849,342 principally as a result of the net loss
from operations and the payoff of a substantial amount of accounts payable.
Investing activities used net cash of $2,006,724 largely from acquisition and
development of oil and gas properties and advances made to Magnum Hunter for
acquisition costs and working capital. Financing activities accounted for net
cash provided of $2,755,213 principally from the proceeds from the issuance of
preferred and common stock mentioned above. Partially offsetting the proceeds
from the stock issuances was the payment of preferred dividends of $583,495.
Accounts receivable balances as of December 31, 1995 and June 30, 1996 include
balances attributable to the activities of others where the Company serves as
contract operator.
During 1994, operating activities provided net cash of $31,943 while Magnum used
$1,646,161 of net cash in investing activities, consisting mostly of payments to
purchase property and equipment, and $126,613 of net cash was used in financing
activities, which was primarily the result of dividends paid on preferred stock.
Magnum had a net decrease of cash for the year of $1,740,831 as the cash
received from its offerings in 1993 was used largely to acquire oil and gas
properties.
COMMITMENTS
On June 5, 1996, Magnum called for redemption 208,333 shares of its Series C
preferred stock at $10.50 per share, as provided by the terms of the certificate
of designations, plus accrued dividends with an extended redemption date of July
10, 1996. Terms of the preferred stock provide for the option by the holder to
convert the preferred shares into common stock at the rate of three (3) shares
of common stock for each share of Series C preferred stock. At June 30, 1996,
57,400 shares of the preferred stock had converted into 172,200 shares of Magnum
common stock. An additional, 3,527 shares of common stock were issued for
accrued dividends to conversion date. Subsequent to June 30, 1996, but prior to
July 11, 1996, an additional 236,992 shares of the preferred stock were
converted for 732,223 shares of common stock including accrued dividends paid in
common stock. Additionally, 8,224 shares of preferred stock were redeemed for
cash in the amount of $88,860.
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On July 11, 1996, Magnum called for the redemption the remaining 322,384 shares
of its Series C preferred stock. The redemption price was $10.50 per share, plus
accrued dividends of $.141 per share from July 1, 1996 through the extended
redemption date of August 16, 1996, for a total redemption price of $10.641 per
share. The Series C preferred shares could be converted, at the option of the
holder, at any time prior to August 16, 1996 into common stock. 302,492 shares
of Series C preferred stock were converted into 938,451 shares of common stock
including the accrued dividends paid in common stock. Additionally, 19,892
shares of preferred stock were redeemed for cash in the amount of $210,431.
After both redemption calls, Magnum converted 596,884 shares of its Series C
preferred stock into common stock and redeemed 28,116 shares of its Series C
preferred stock.
At December 31, 1995, Magnum had unproven oil and gas properties with a carrying
value of $842,889 located in predominately three prospects. Such properties will
be evaluated further in 1996 and decisions made as to the development of such
properties. If Magnum elects to not develop the properties, the properties would
be made available for sale and any remaining costs would be transferred to the
proven category and depleted over time based on Magnum's production and reserve
base existing at that time.
In 1995 and prior years, Magnum has been successful in raising capital through
the issuance of preferred and common stock. During 1995, Magnum received
proceeds of $249,000 from the purchase of 20,750 shares of Series C preferred
stock from the exercise of representatives' warrants. In addition, the exercise
of 833,324 common stock purchase warrants resulted in net proceeds after
offering costs of $2,840,860.
Prior to the business combination with Hunter, Magnum's anticipated capital
expenditures for 1996 on its existing properties were not considered significant
and would be financed by existing working capital. However, due to the business
combination with Hunter, Magnum now has a budget of approximately $2 million for
exploration and production activities during 1996. Magnum has already spent
approximately $300,000 for the drilling of six gas wells in the south Texas
region. The remaining exploration budget of $1.7 million has been reallocated to
development projects, specifically proved undeveloped locations associated with
the Meridian acquisition properties. The source of financing for such projects
has and will continue to be a combination of the following: i) existing
available cash, ii) Magnum's bank line of credit, iii) third party investors,
iv) seller financing through production payments and v) new equity capital. At
August 13, 1996, there remained approximately $1.3 million of available
borrowings under Magnum's senior bank line of credit.
Subsequent to December 31, 1995, Magnum entered into an exclusive arrangement
with an investment banking firm specialized in raising capital for energy
companies for a private placement of preferred stock for as much as $15 million
to be completed during 1996. While Magnum continues to negotiate with five
separate institutional investors concerning the funding of up to $10 million in
participating preferred stock, it is likely that within the next sixty days,
Magnum will complete a transaction with one institution for this funding. The
structure of this transaction will probably be in two forms. The first $5
million will be structured as a mandatory redeemable (non-convertible) preferred
stock bearing interest at approximately 9% per annum and providing the
institutional investor the ability to participate by owning an overriding
royalty interest in up to six development and waterflood projects owned by
Magnum in West Texas and Western Oklahoma. The remaining $5 million will most
likely be structured as a convertible preferred stock at a price equal to a 25%
premium over the price of the common stock at the time of issuance. The purpose
for the $10 million offering is to fund the capital cost necessary to fully
develop the six development and waterflood projects and to reduce down Magnum's
existing senior bank indebtedness. In the event Magnum is unsuccessful in
raising the new capital from this preferred stock offering, Magnum will be able
to meet its obligations for the remainder of 1996 out of cash flow from
operations and funds available from its senior bank line of credit.
INFLATION AND CHANGING PRICES
During 1995 and the past several years, Magnum experienced minimal inflation in
oil and natural gas prices with moderate increases in property acquisition and
development costs. During 1996, Magnum has experienced somewhat greater
increases in the commodity prices of the natural resources produced from its
properties. The results of operations
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and cash flow of Magnum has been and will continue to be effected to a certain
extent by the volatility in oil and gas prices. Should Magnum experience a
significant increase in oil and natural gas prices over a prolonged period, it
would expect that there would also be a corresponding increase in oil and
natural gas finding costs, lease acquisition costs and operating expenses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF HUNTER
The following discussion and analysis should be read in conjunction with
Hunter's consolidated financial statements and the notes associated with them
contained elsewhere in this report. This discussion should not be construed to
imply that the results discussed herein will necessarily continue into the
future or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment of management of Hunter.
On July 21, 1995, Magnum executed a definitive agreement to combine with Hunter
(the "Business Combination"), subject to Hunter Shareholder approval. Pursuant
to the definitive agreement, Magnum issued to Hunter 2,750,000 shares of newly
issued Magnum restricted common stock in exchange for substantially all of the
assets of Hunter subject to its associated liabilities. Hunter's assets
primarily consisted of stock in wholly-owned Subsidiaries and stock ownership
interests in limited liability companies (the "Hunter Subsidiaries").
On December 19, 1995 to be effective December 22, 1995, Magnum and Hunter
entered into an Agreement and Plan of Reorganization and Plan of Liquidation, as
amended. The amendment was executed on December 19, 1995 by Hunter shareholders
holding in excess of fifty percent (50%) of the outstanding common stock of
Hunter and one hundred percent (100%) of the outstanding preferred stock of
Hunter. The amended agreement provided for the issuance to Hunter of an
additional 2,335,077 shares of newly issued Magnum restricted common stock and
111,825 shares of Magnum Series C preferred stock. In summary, the total
consideration paid by Magnum for the Hunter Subsidiaries was 5,085,077 shares of
Magnum restricted common stock and 111,825 shares of Magnum Series C preferred
stock.
As stated, the amended agreement was executed by Hunter Shareholders owning in
excess of fifty percent (50%) of the outstanding common stock of Hunter and one
hundred percent (100%) of the outstanding preferred stock of Hunter. According
to Pennsylvania law, Hunter Shareholders have no dissenter rights. However,
Hunter is required to distribute an Information Statement and hold a special
meeting of its shareholders to formally approve the agreement. Subsequent to the
Business Combination, Magnum has conducted its oil and gas operations and energy
related acquisitions in conjunction with the Hunter Subsidiaries. Existing
management of Hunter has taken over all day to day operations of Magnum.
Acquisitions completed by Magnum and Hunter after the initial agreement, were
primarily completed by Magnum Hunter Production, Inc. ("Magnum Hunter"), a
Hunter Subsidiary. Hunter and its subsidiaries were consolidated into Magnum's
financial statements beginning December 31, 1995, so, no operating assets and
liabilities are included in Hunter's balance sheet as of December 31, 1995.
Hunter's balance sheet at that date is presented as a "Statement of Net Assets
in Liquidation" because the only asset is the investment in Magnum Shares, which
will ultimately be distributed to Hunter Shareholders.
On March 31, 1995, Hunter closed on an acquisition (the "Arrington" acquisition)
of domestic producing oil and gas properties for $1.4 million. The purchase
price was comprised of $1.2 million cash, $200,000 in restricted common stock of
Hunter valued at $.3875 per share, and had an effective date of January 1, 1995.
Additionally, the seller was granted a put option, guaranteed by Hunter's
President, for Hunter to buy back the restricted common stock for $200,000. In
April 1996 the put option expired unexercised.
On October 18, 1995, Magnum Hunter closed on an acquisition (the "Midland"
acquisition) of the remaining seventy-five percent (75%) ownership interest in
an affiliated company from a joint venture partner. The purchase price of
$1,075,287 consisted of i) $300,000 in cash, ii) $300,000 represented by 85,131
shares of restricted common stock of Magnum valued at $3.52 per share and iii)
the assumption of existing bank indebtedness of $475,287. As additional
consideration, 50,000 warrants to purchase common stock of 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, Magnum Hunter closed on an acquisition (the "Reef"
acquisition) of domestic producing oil and gas properties. The purchase price
was comprised of $2.058 million cash, funded by an existing bank line of credit,
and
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$257,000 represented by 64,176 shares of Magnum restricted common stock valued
at $4.00 per share. The acquisition had an effective date of August 1, 1995.
On November 6, 1995, Magnum Hunter entered into an increased $20 million
revolving credit agreement with First Interstate Bank of Texas, N.A. ("FITX").
The previous line of credit was in the maximum amount of $10 million and was
entered into by Hunter prior to the Business Combination 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. At that time, the available combined borrowing base was increased
to $8.7 million of which $7.8 million represented the portion attributable to
the oil and gas properties. In March 1996, the oil and gas property borrowing
base was increased to $9.0 million while the gas gathering borrowing base
remained unchanged. At the time of the borrowing base redetermination,
outstanding borrowings were to bear interest at prime plus one percent (1%) per
annum.
On November 9, 1995, Magnum Hunter closed on an acquisition (the "Tana"
acquisition) of domestic producing oil and gas properties for approximately
$4.229 million. The initial purchase price was comprised of $3.104 million cash,
funded by the bank line of credit, and a note payable to the previous owner in
the amount of $1.125 million secured by 610,170 shares of restricted common
stock of Magnum. The promissory note due to the previous owner was repaid in
full in March 1996, funded by Hunter's existing line of credit, and the
restricted common stock of Magnum securing such obligation was subsequently
canceled.
On December 1, 1995, Magnum Hunter closed on an acquisition (the "Superior"
acquisition) of two unregulated gas gathering systems located in Texas and
Louisiana. The total consideration was approximately $1 million cash, funded
substantially by the line of credit with FITX.
RESULTS OF OPERATIONS.
As discussed in Notes 1 and 3 to the consolidated financial statements, a vital
part of the definitive agreement for the Business Combination with Magnum is a
provision for the liquidation of Hunter upon formal shareholder approval of the
definitive agreement and the exchange of Magnum shares for outstanding Hunter
shares. As a result, Hunter has changed its basis of accounting at and for
periods subsequent to December 31, 1995, to the liquidation basis of accounting.
Under this method of accounting, assets are to be restated to estimated net
realizable value and liabilities are to be stated at their estimated settlement
value. As Hunter's only remaining asset is its investment in Magnum shares which
are ultimately to be distributed to Hunter's shareholders in exchange for
existing shares of Hunter, no liquidation basis adjustments to Hunter's assets
and liabilities were necessary at December 31, 1995 and June 30, 1996.
Since all of Hunter's operating assets and liabilities were disposed of
effective December 31, 1995, Hunter's revenues and expenses for the first six
months of 1996 and 1995, and for the years ended December 31, 1995 and 1994 have
been netted and presented as discontinued operations. Hunter's revenues and
other operating information for the year ended December 31, 1995 and 1994 from
its industry segments are presented in Note 10. The following discussions of
results of operations for the years ended 1995 and 1994 is presented with
respect to the normal components presented on a going concern basis. The terms
of the Business Combination provided for Magnum's assumption of any expenses of
Hunter incurred through Hunter's liquidation date. Accordingly, Hunter's
statement of operations for the first six months of 1996 included no revenues or
expenses. Further, it is anticipated Hunter will not report any revenues or
expenses for any subsequent periods until liquidation.
Hunter incurred a net loss applicable to common shares of $691,000 (including
dividend payments of $9,000) for the year ended December 31, 1995, compared to
net income applicable to common shares of $6,000 (including dividend payments of
$9,000) for the same period of the preceding year. The loss during 1995 resulted
substantially from non-recurring non-cash items totaling $438,000 and a
substantial decline in Hunter's 1995 revenues from oil field service activities
as compared to 1994 activities. Of the 1995 noncash items, a $338,000 charge was
recorded as additional depreciation to adjust a pipeline gathering system to its
net realizable value. In addition, Hunter accrued $100,000 for potential
expenses to be incurred in settlement of certain pending litigation of one of
its subsidiaries.
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Total revenue for the year ended December 31, 1995 rose to $2,967,000 from
$2,356,000 in 1994. Revenue from oil and gas sales increased 180 percent during
1995 to $1,625,000 compared to $581,000 in 1994. The sharp rise in oil and gas
revenue is largely attributable to Hunter's acquisition of oil and gas
properties in 1995. Quantities of oil and gas produced during 1995 totaled
54,307 barrels of oil at a weighted average price of $16.09 per barrel and
445,886 mcf of gas at a weighted average price of $1.69 per mcf. Quantities of
oil and gas produced during 1994 totaled 24,605 barrels of oil at a weighted
average price of $13.70 per barrel and 127,854 mcf of gas at a weighted average
price of $1.90 per mcf.
Gas gathering and marketing revenues rose slightly to $469,000 in 1995 as
compared to $443,000 for 1994 as the revenues from the acquisition of two
gathering systems on December 1, 1995 offset the impact of lower marketing
revenue from Hunter's Schulter system in Oklahoma. The lower revenue from the
Schulter system was the result of a new gas contract entered into in late 1994
which provided for a lower sales price on certain wells outside of the dedicated
area. Oil field services revenue declined 50 percent to $565,000 in 1995 from
$1,122,000 in 1994 due to the loss in late 1994 of a contract for the operation
of approximately 400 wells. Interest and other income rose 47 percent in 1995 to
$308,000 from $210,000 in 1994 as a result of non-cash items related primarily
old unidentifiable liabilities of a Hunter subsidiary.
Lease operating expenses rose 85 percent to $762,000 in 1995 from $412,000 in
1994. On an equivalent barrel basis, the operating expense decreased to $5.92
per barrel in 1995 from $8.96 in 1994. The improvement is attributable to the
lower operating expense per barrel ratio on properties acquired in late 1995.
Depreciation and depletion rose to $919,000 in 1995 from $263,000 in 1994 as a
result of an increase in the depletable book value of Hunter's properties
acquired in 1995, the increase in production volumes, and a $338,000 non-cash
charge as additional depreciation to adjust a pipeline gathering system to its
net realizable value. Purchases of natural gas and pipeline operating expenses
rose 22 percent to $414,000 in 1995 versus $338,000 in 1994 primarily for the
similar reasons cited above for the increase in gas gathering and marketing
revenues. Cost of services declined 31 percent to $454,000 in 1995 from $654,000
in 1994 due to a reduction of staff in late 1994 as a result of the loss of a
contract for the operation of approximately 400 wells. General and
administrative expenses ("G&A") of $702,000 in 1995 as compared to $513,000 in
1994 were significantly higher due to Hunter's provision for noncash bad debt
expense of $165,000 for an increase in the allowance for doubtful accounts.
Interest expense of $292,000 in 1995 is higher in the 1995 period over $44,000
in the 1994 period as a result of increased borrowing in 1995 related to the oil
and gas properties acquired.
LIQUIDITY AND CAPITAL RESOURCES
For 1995, Hunter had a net decrease in cash of $25,000 primarily as the proceeds
received from borrowing activities were principally used for oil and gas and
pipeline acquisitions. Hunter's operating activities provided net cash of
$1,182,000 principally as a result of an increase in accounts payable and
amounts due to affiliates with a partially offsetting increase in notes and
accounts receivable, all largely the result of Hunter's increased activities in
the acquisition area. Investing activities used net cash of $9,251,000 largely
from acquisitions of oil and gas properties and pipelines. Financing activities
accounted for net cash provided of $8,044,000 principally from the proceeds from
borrowings under Hunter's line of credit utilized for acquisitions of oil and
gas properties and pipelines mentioned above. Partially offsetting the
borrowings were repayments made on bank debt obligations.
During 1994, operating activities provided net cash of $400,000 while Hunter
used $807,000 of net cash in investing activities, consisting primarily of
payments to purchase oil and gas properties, and $335,000 of net cash was
provided by financing activities, which was primarily the result of net proceeds
from debt borrowings and the sale of restricted common stock. Hunter had a net
decrease of cash for the year of $72,000 as the cash received from its operating
activities, borrowings and private placements of restricted common stock was
used largely to acquire oil and gas properties.
As discussed above, Hunter's capital stock ownership in subsidiaries and limited
liability companies were acquired by Magnum effective December 22, 1995.
Therefore, the Business Combination with Magnum left Hunter with no income
producing assets. Hunter's planned liquidation should occur prior to the end of
fiscal 1996. Any required sources of funds to that date will be provided by
Magnum as a part of the Business Combination.
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INTRODUCTION
This Information Statement and Prospectus is provided by the Board of Directors
of Hunter to the shareholders of Hunter in connection with a Special Meeting of
shareholders of Hunter and any adjournments or postponements thereof. The
Special Meeting will be held on the date, at the time and place, and for the
purposes set forth below under "The Special Meeting".
NO SOLICITATION OF PROXIES
The Board of Directors of Hunter is not soliciting proxies for use at the
Special Meeting.
VOTING RIGHTS AND VOTES REQUIRED
The affirmative vote of the holders of at least a majority of the shares of
Common Stock and Preferred Stock outstanding (including shares held by officers
and directors) is required for the approval of the transaction. Hunter's Board
of Directors recommends that Hunter shareholders vote for the proposed sale of
the Hunter Subsidiaries and the corresponding plan of liquidation of Hunter.
ON DECEMBER 19,1995 TO BE EFFECTIVE DECEMBER 22, 1995, MAGNUM AND HUNTER ENTERED
INTO AN AGREEMENT AND PLAN OF REORGANIZATION AND PLAN OF LIQUIDATION, AS
AMENDED. THE AMENDMENT WAS EXECUTED BY HUNTER SHAREHOLDERS HOLDING OVER FIFTY
PERCENT (50%) OF THE COMMON STOCK OF HUNTER, THEREFORE, APPROVAL OF THESE
PROPOSALS AT THE SHAREHOLDER MEETING IS ASSURED. "SEE INTEREST OF HUNTER'S
OFFICERS AND DIRECTORS IN THE TRANSACTION."
HOLDERS OF HUNTER COMMON STOCK ARE NOT ENTITLED TO APPRAISAL RIGHTS UNDER
PENNSYLVANIA LAW IN CONNECTION WITH THE SALE OF PREDOMINATELY ALL OF THE ASSETS
OF HUNTER.
THE SPECIAL MEETING
DATE, TIME AND PLACE
A Special Meeting of Shareholders of Hunter will be held at the Cigna Tower, 600
East Las Colinas Boulevard, Suite 1200 Irving, Texas 75039, on October 31, 1996
at 10:00 a.m., local time.
Only holders of record of Hunter Common Stock, par value $.10 per share, and
holders of record of Hunter Preferred Stock, no par value, at the close of
business on the Record Date are entitled to vote on all matters coming before
the Meeting or any adjournment or postponement thereof.
Each shareholder is entitled to one vote for each share held on the record date.
There were 18,504,663 shares of Common and 90,133 shares of Preferred Stock
outstanding and entitled to vote on September 27, 1996.
PURPOSES
At the Special Meeting, the shareholders will be asked to consider and act upon
a proposal to (i) sell the predominate assets of Hunter to Magnum pursuant to an
Agreement and Plan of Reorganization and Plan of Liquidation dated as of
December 19, 1995, as amended, between Hunter and Magnum (the "Agreement and
Plan of Reorganization and Plan of Liquidation") and (ii) liquidate Hunter and
distribute the Magnum Shares received pursuant to the Agreement and Plan of
Reorganization and Plan of Liquidation to the respective shareholders of Hunter.
THE HUNTER BOARD OF DIRECTORS, WITHOUT DISSENT, HAS APPROVED THE AGREEMENT AND
PLAN OF REORGANIZATION AND PLAN OF LIQUIDATION AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
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A representative of Hein + Associates, LLP, Hunter's independent auditors, will
be present at the Special Meeting of shareholders. Hunter has been informed that
the representative does not intend to make any statement to the shareholders at
the meeting, but will be available to respond to any appropriate questions from
shareholders.
DISSENTER'S RIGHT OF APPRAISAL
Pennsylvania corporate law (Business Corporation Law of 1988, "PBCL") provides
that, in general, shareholder approval is required of a plan of asset transfer
including a sale, lease, exchange or other disposition of all, or substantially
all, the property and assets, with or without the goodwill, of a business
corporation incorporated in Pennsylvania. See PBCL ss.1932(b). Further,
dissenting shareholders generally have the right to obtain payment of the fair
value for their shares. See PBCL ss.1932(c). However, PBCL further provides that
holders of shares entitled to notice of and to vote on a plan of asset transfer
under PBCL ss.1932(c) shall not have the right to obtain payment of the fair
value for shares voted in dissent of the plan of asset transfer if the shares to
be voted are either listed on a national securities exchange or held of record
by more than 2,000 shareholders. Since Hunter's shares are held of record by
more than 2,000 shareholders, shareholders voting against the transfer of assets
to Magnum will not be entitled to receive payment for their shares. See PBCL
ss.1571(b). Dissenting shareholders will receive shares of Magnum upon
liquidation of Hunter.
THE SALE OF HUNTER'S ASSETS
If approved by Hunter Shareholders at the Special Meeting, the sale of Hunter's
assets to Magnum will be consummated under the terms of the Agreement and Plan
of Reorganization and Plan of Liquidation. The consummation of the sale will be
followed by distribution of Magnum Shares to Hunter Shareholders pursuant to the
Agreement and Plan of Reorganization and Plan of Liquidation.
AGREEMENT AND PLAN OF REORGANIZATION AND PLAN OF LIQUIDATION
On July 21, 1995, Hunter executed a definitive agreement subject to Hunter
Shareholder approval, to combine with Magnum (the "Business Combination").
Pursuant to the definitive agreement, Magnum issued to Hunter 2,750,000 shares
of newly issued restricted common stock of Magnum in exchange for substantially
all of the assets of Hunter, subject to its liabilities. Hunter's assets
primarily consisted of capital stock in wholly-owned subsidiaries and capital
stock membership interests in limited liability companies ("Hunter
Subsidiaries").
On December 19, 1995 to be effective December 22, 1995, Magnum and Hunter
entered into an Agreement and Plan of Reorganization and Plan of Liquidation, as
amended. The amendment was executed by Hunter Shareholders holding over fifty
percent (50%) of the common stock of Hunter and provided for the issuance to
Hunter of an additional 2,335,077 shares of newly issued Magnum restricted
common stock and 111,825 shares of Magnum Series C preferred stock. Therefore,
the total number of Magnum shares to be distributed to Hunter's common and
preferred shareholders for the acquisition of the Hunter Subsidiaries will be
5,085,077 of common stock and 111,825 of Series C preferred stock. As the
amendment was executed on December 19, 1995 by Hunter shareholders holding over
50 percent of the common stock of Hunter, the transaction was consummated on
December 22, 1995 and the Hunter subsidiaries were consolidated in Magnum's
financial statements beginning December 31, 1995.
The Hunter Subsidiaries are engaged in four principal activities: (1) the
acquisition, production and sale of crude oil, condensate and natural gas; (2)
the gathering, transmission, and marketing of natural gas; (3) the business of
managing and operating producing oil and natural gas properties for interest
owners; and (4) providing consulting and U.S. export services to facilitate
Latin American trade in energy products. Magnum intends to continue to use and
manage the Hunter Subsidiaries and their underlying assets in the same manner as
conducted by Hunter.
The Magnum Shares and the interests in the Hunter Subsidiaries are held in
escrow pending shareholder approval of this proposal. Upon approval by the
shareholders, the Hunter Subsidiaries will become subsidiaries of Magnum and the
Business Combination will be completed.
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In negotiating the number of Magnum common and preferred shares to be issued to
Hunter for the acquisition of the Hunter Subsidiaries, consideration was given
to the value of the assets of each of the Hunter Subsidiaries, the proved oil
and gas reserves of the Hunter Subsidiaries (as applicable), the assumption of
existing liabilities, and the market value of Magnum common shares (prior to the
commencement of negotiations of the amended agreement through the date that the
definitive agreement was executed). For further information concerning the
estimated value of Magnum's and Hunter's Properties on page 51,and Magnum's and
Hunter's Supplemental Information on Oil and Gas Producing Activities on pages
F-26 through F-28 and on pages F-42 through F-43.On January 3, 1996, the day
preceding public announcement of closing the definitive agreement, the high and
low sales price for Hunter's common stock was $.34 and $.25 respectively. On the
same day, the high and low bid price for Magnum's common stock was $3.31 and
$3.13, respectively. In addition, the high and low bid price for Magnum's Series
C preferred stock were both $10.75.
As a result of the issuance of the Magnum common and preferred shares to Hunter,
Hunter is the owner of approximately 43.8% of Magnum's total issued and
outstanding common stock. After approval of the Business Combination at the
shareholder meeting, the Magnum common and preferred shares will be distributed
to Hunter Shareholders. See "Plan of Liquidation." Hunter shareholders are
expected to receive one Magnum common share for every 3.916 common shares of
Hunter exchanged. The common stock of Hunter will continue to trade on the
Boston Stock Exchange and Over-The-Counter market until the time of the
liquidation.
HISTORY OF AND REASONS FOR THE TRANSACTION
HISTORY
Over the past eighteen months, Hunter has sought to increase its capital base
and stimulate the market and trading activity in its common stock. Hunter's
Management and Board of Directors considered various methods for achieving
Hunter's objectives. Such methods included mergers, acquisitions, reverse stock
splits, financing or other business combinations. Hunter obtained a $10,000,000
line of credit with a major money center bank during the first half of 1995, but
Management realized that Hunter needed to expand its equity capital base to
complement the line of credit. Among the factors considered by the Board of
Directors and Management for entering into the Business Combination were:
1. The Board believed that Hunter needed substantial additional capital
to effectively compete in an increasingly concentrated market. Hunter competes
against other oil and gas companies in the search for, and obtaining of,
desirable properties. Many of Hunter's competitors are larger than Hunter and
have greater access to capital than does Hunter and may, therefore, have an
advantage. By increasing its capital base and financing alternatives, Hunter can
improve its competitiveness in seeking more acquisitions with a greater size as
well as projects with larger development and reserve potential.
2. The recent and historical market trading ranges of Hunter's common
stock are significantly below the amount the Board and Management believe to be
the underlying present value of Hunter. Furthermore, the recent and historical
stock market prices have not been attractive to either retail or institutional
investors and potential acquisition candidates due to a trading price of less
than $1.00 per share.
3. The historic lack of liquidity of Hunter's common stock discourages
potential investors from accumulating any significant ownership.
In June 1995, Hunter received an indication of interest from Magnum to consider
a business combination. The Board and Management carefully considered the
indication of interest and concluded that it would be in the best interests of
the shareholders to pursue a business combination with Magnum. On July 7, 1995,
Hunter entered into a Letter of Intent to proceed with a business reorganization
whereby Magnum would acquire substantially all of the assets of Hunter which
consisted of the Hunter Subsidiaries in exchange for shares of Magnum's common
stock.
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REASONS FOR THE SALE TRANSACTION
In reaching its conclusion, the Board considered that the Business Combination
would result in:
o Combined cash in July 1995 of approximately $2.0 million, and, if
certain issued and outstanding Magnum warrants are exercised, up to an
additional $4.7 million in cash.
o Upon liquidation, Hunter Shareholders will receive Magnum Shares
listed upon the American Stock Exchange where common shares of Magnum
have historically traded in a range of $2.25 to $5.25 per share.
o No additional indebtedness incurred as a result of the transaction.
o An increased borrowing base under existing lines of credit.
o Total assets at December 31, 1995 of approximately $40.1 million.
o Shareholders' equity at December 31, 1995 of approximately $24.5
million.
o Increased exploration and development opportunities.
o Improved market support and investment banking relationships.
o A combined in-depth management team in the fields of engineering,
geology, finance, and accounting.
o Enhanced industry reputation by improved ranking within the industry.
o General and administrative expenses for the combined companies would
be substantially reduced due to the consolidation of administrative
functions.
o Operating expenses of Magnum's properties will be reduced due to the
elimination of third party operating contracts which have been assumed
by Gruy Petroleum Management Company ("Gruy"), a Hunter Subsidiary.
The Hunter Board of Directors have concluded that the proposal by Magnum as
represented in the Agreement and Plan of Reorganization and Plan of Liquidation,
as amended, is fair because Hunter is ranked 218 by total assets in the Oil and
Gas Journal's OGJ 300 Company Index for 1994, a survey of the 281 publicly
traded oil and gas companies in the United States. Magnum is ranked 192 in the
same survey. Hunter was rated as number 229 and Magnum as 207 in the 1993
survey. Based upon the pro forma balance sheet for the combined companies, the
combined companies would have ranked 164 with assets of $23,759,356 or more than
two times the size of Magnum and almost six times the size of Hunter at the end
of 1994.
In addition, the existing cash held by Magnum will allow the combined companies
to accelerate their growth through acquisitions, a significant factor for Hunter
as it lacked the necessary capital resources to purchase desirable properties.
Finally, Management believed Hunter's assets were undervalued on its books and
records and the Business Combination allowed Hunter to book its assets at fair
market value.
RECOMMENDATIONS OF THE HUNTER BOARD
The Board of Directors of Hunter have reviewed and held significant discussions
concerning the Magnum proposal and unanimously agree that it provides a
reasonable alternative for Hunter and its shareholders. Hunter's Board of
Directors have concluded that the proposal by Magnum as represented in the
Agreement and Plan of Reorganization and Plan of Liquidation, as amended, is a
fair and equitable one and in the best interests of the Hunter Shareholders.
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PLAN OF LIQUIDATION
GENERAL
The Board of Directors of Hunter unanimously recommends to the shareholders that
they approve adoption of the plan of liquidation of Hunter. By resolution dated
July 21, 1995, the Directors approved a Plan of Liquidation as a part of the
Agreement and Plan of Reorganization and Plan of Liquidation with Magnum. (The
Plan of Liquidation is referred to hereafter as the "Plan".) The Plan is subject
to the approval of the shareholders of Hunter, which is the second matter to be
considered at the special meeting. The Plan provides basically that upon
adoption by the shareholders, Hunter will be dissolved, the common and preferred
shares received from Magnum upon transfer of the Hunter Subsidiaries to Magnum
will be distributed to the respective shareholders, and the corporate existence
of Hunter will be terminated in accordance with Pennsylvania law.
When the Plan is approved by the shareholders, the Board of Directors will
proceed in the following fashion:
NUMBER OF MAGNUM SHARES TO BE DISTRIBUTED
There will be 5,085,077 shares of Magnum Common Stock and 111,825 shares of
Magnum Series C preferred stock distributed to Hunter's common and preferred
shareholders. Common shareholders of Hunter are expected to receive one Magnum
common share for every 3.916 common shares of Hunter's common shares redeemed.
Preferred shareholders of Hunter are expected to receive 1.241 shares of Magnum
Series C preferred stock and 3.987 shares of Magnum common stock for every share
of Hunter preferred redeemed. The common stock of Hunter will continue to trade
on the Boston Stock Exchange and Over-The-Counter market until the time of the
liquidation.
DISTRIBUTIONS TO SHAREHOLDERS
The plan provides that the Magnum common and preferred shares will be
distributed to the shareholders as soon as practicable after approval of the
Plan by the shareholders at the meeting. The expenses of administering Hunter,
winding up Hunter's affairs, preparing all reports required by federal and state
law, the negotiation and payment of any claims against Hunter, as well as all
expenses and liabilities which continue to arise or be incurred during the
course of the liquidation process will be the obligation of Magnum.
Shareholders who exchange their Hunter Shares will not be obligated to pay
brokerage commissions, solicitation fees nor will they be subject to the Letter
of Transmittal or stock transfer taxes on the acquisition of Magnum Common and
Preferred Shares. Hunter will pay all charges and expenses of Securities
Transfer Corporation, the Exchange Agent, in connection with the distribution
and exchange.
PROCEDURES FOR EXCHANGING SHARES
To exchange Hunter Shares pursuant to the Agreement and Plan of Reorganization
and Plan of Liquidation, a properly completed and duly executed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents as may be required by Securities Transfer
Corporation, must be transmitted to and received by the Exchange Agent at its
address set forth on the back cover of this Prospectus and stock certificates
for Hunter Shares must be received by the Exchange Agent at such address.
The method of delivery of Hunter Shares and all other required documents is at
the election and risk of the tendering shareholder. If delivery is by U.S. mail,
registered mail with a return receipt requested and properly insured, is the
recommended method.
Notwithstanding any other provisions hereof, the Magnum Common and Preferred
Shares will be exchanged for Hunter Shares tendered pursuant to the Agreement
and Plan of Reorganization and Plan of Liquidation only after receipt by the
Exchange Agent of certificates for such Hunter Shares, a properly completed and
duly executed Letter of Transmittal (or facsimile thereof) and any other
required documents as the Company or the Exchange Agent may require on a case by
case basis.
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INFORMATION CONCERNING MAGNUM
BUSINESS DEVELOPMENT.
Magnum was incorporated under the laws of the State of Nevada on February 10,
1989, originally under the name Master Ventures, Inc., and registered a public
offering of its securities in 1989 pursuant to a Registration Statement on Form
S-18, Commission File No. 33-30298-D. Subsequently, Magnum became engaged in the
oil and gas business and changed its name to Magnum Petroleum, Inc. on October
1, 1990. Due to its operations in various states, Magnum is also registered as a
foreign corporation qualified to do business in the states of California,
Oklahoma and Texas. During the past three years, Magnum's primary focus has been
the acquisition and development of oil and gas properties and raising working
capital through both the private and public sale of its common and preferred
stock.
On November 12, 1993, a Registration Statement filed by Magnum on Form SB-2 was
declared effective by the Securities and Exchange Commission. Pursuant to such
offering a total of 517,500 Series C Units were sold at $10.00 per Unit. Magnum
realized net proceeds from such offering after commissions, legal and accounting
fees and printing and other costs of the offering, of approximately $4,376,158.
Each Series C Unit consisted of one share of Series C convertible, redeemable
preferred stock, $.001 par value, and three redeemable Warrants. The Series C
preferred stock is convertible at the option of the holder at any time into
three shares of Magnum's common stock. The shares of Series C preferred stock
will automatically convert into three shares of common stock if, during any
twenty consecutive trading days, the closing bid price of the common stock
equals or exceeds $5.00 per share. The Series C preferred stock became
redeemable on November 12, 1995 and will thereafter be redeemable, in whole or
in part at the option of Magnum upon thirty days notice at $10.50 per share,
plus accrued and unpaid dividends to the redemption date. Each Warrant entitles
the holder to purchase one share of Magnum's common stock at an exercise price
of $5.50 per share, until November 12, 1998. However, Magnum filed a post
effective amendment to such registration statement to update the prospectus,
which was declared effective November 15, 1994, and during the period from
November 15, 1994 through February 16, 1995, (the "Discount Period") Magnum
offered to holders of warrants a limited opportunity to exercise their warrants
during the Discount Period at a discounted exercise price of $4.00 per share.
During the Discount Period, 833,324 Warrants were exercised at $4.00 per share,
resulting in the receipt of $3,333,298 in gross proceeds by Magnum. The
remaining Warrants are callable and can be redeemed by Magnum for $.02 per
Warrant upon thirty days notice at any time after November 12, 1995, or earlier
if the closing bid price of the common stock equals or exceeds $6.75 for five
consecutive trading days.
On July 21, 1995, Magnum executed a definitive agreement to combine with Hunter
Resources, Inc. ("Hunter"), a Boston Stock Exchange publicly traded company,
subject to Hunter shareholder approval (the "Business Combination"). Pursuant to
the definitive agreement, Magnum issued to Hunter 2,750,000 shares of newly
issued restricted common stock in exchange for substantially all of the assets
of Hunter, subject to its liabilities. Hunter's assets primarily consisted of
capital stock ownership in wholly-owned subsidiaries and capital stock ownership
interests in limited liability companies (the "Hunter Subsidiaries").
On December 19, 1995 to be effective December 22, 1995, Magnum and Hunter
entered into an amended Agreement and Plan of Reorganization and Plan of
Liquidation. The amendment was executed by Hunter Shareholders holding in excess
of fifty percent (50%) of the outstanding common stock of Hunter and one hundred
percent (100%) of the outstanding preferred stock of Hunter. The amended
agreement provided for the issuance to Hunter of an additional 2,335,077 shares
of newly issued restricted common stock and 111,825 shares of Series C preferred
stock. In summary, the total consideration paid by Magnum for the Hunter
Subsidiaries was 5,085,077 shares of restricted common stock and 111,825 shares
of Series C preferred stock.
AS THE AMENDED AGREEMENT WAS EXECUTED BY HUNTER SHAREHOLDERS OWNING IN EXCESS OF
FIFTY PERCENT (50%) OF THE OUTSTANDING COMMON STOCK OF HUNTER AND ONE HUNDRED
PERCENT (100%) OF THE OUTSTANDING PREFERRED STOCK OF HUNTER AND HUNTER'S
MANAGEMENT HAS ASSUMED OPERATIONAL CONTROL OF THE COMBINED COMPANIES, ALL
SUBSEQUENT DISCUSSIONS AND DISCLOSURES IN THIS DOCUMENT WILL, UNLESS OTHERWISE
STATED, INCLUDE THE BUSINESS OPERATIONS OF THE HUNTER SUBSIDIARIES.
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The Hunter Subsidiaries are engaged in four principal activities: (1) the
acquisition, production and sale of crude oil, condensate and natural gas; (2)
the gathering, transmission, and marketing of natural gas; (3) the business of
managing and operating producing oil and natural gas properties for interest
owners; and (4) providing consulting and U.S. export services to facilitate
Latin American trade in energy products. Magnum intends to continue to use and
manage the Hunter Subsidiaries and their underlying assets in the similar manner
as previously conducted by Hunter.
Magnum Shares and the interests in the Hunter Subsidiaries are held in escrow
pending formal shareholder approval of the Business Combination at the Hunter
shareholder meeting.
In negotiating the number of common and preferred shares to be issued to Hunter
for the acquisition of the Hunter Subsidiaries, consideration was given to the
value of the assets of each of the Hunter Subsidiaries, the proved oil and gas
reserves of the Hunter Subsidiaries (as applicable), the assumption of existing
liabilities, and the market value of Magnum's common and preferred shares (prior
to the date of the amended agreement through the date that the definitive
agreement was executed and announced).
As a result of the issuance of the common and preferred shares to Hunter by
Magnum, Hunter is the owner of approximately 43.8% of Magnum's total issued and
outstanding common stock. After approval of the Business Combination at the
Hunter shareholder meeting, the common and preferred shares issued by Magnum
will be subsequently distributed to the respective Hunter shareholders.
Shareholders of Hunter common stock are expected to receive one common share for
every 3.916 common shares of Hunter redeemed. Shareholders of Hunter preferred
stock are expected to receive 1.241 shares of Magnum Series C preferred stock
and 3.987 shares of Magnum common stock for every share of Hunter preferred
redeemed.
Effective December 31, 1995, Lloyd T. Rochford, the then current President,
Chief Executive Officer, Chief Financial Officer and a director of Magnum,
resigned as an officer, but assumed the position of Chairman of Magnum. In
addition, Stanley McCabe resigned as an officer of Magnum but has also remained
as a director. A new board of directors was appointed for Magnum at this time.
The new board consists of Lloyd T. Rochford as Chairman, Matthew C. Lutz as Vice
Chairman, Gary C. Evans, Stanley McCabe, James E. Upfield, Gerald W. Bolfing and
Oscar C. Lindemann. An audit committee was appointed consisting of non-officer
directors which include Oscar C. Lindemann, Gerald W. Bolfing and Stanley
McCabe. Mr. Evans was appointed President and Chief Executive Officer of Magnum.
Mr. Lutz also was appointed Exploration and Business Development Manager. Steven
P. Smart was appointed Senior Vice President and Chief Financial Officer and
William C. Jones was appointed Secretary.
On June 28, 1996, Magnum closed on the purchase of 469 natural gas wells and 427
miles of a gas gathering pipeline system from Meridian Oil Inc. ("Meridian"), a
wholly-owned subsidiary of Burlington Resources, Inc. The net purchase price
after certain purchase price adjustments was approximately $35 million for all
of Meridian's interest in certain gas wells and a gas gathering system located
in the Panhandle of Texas and Western Oklahoma, more commonly referred to as the
"Panoma Properties."
The current daily production volumes from the Magnum owned wells is
approximately 14 million cubic feet per day with total delivery, including third
party gas purchased by the gathering system, of almost 19 million cubic feet per
day. The Company has estimated the net cash flow from the acquisition of the
Panoma Properties to be approximately $500,000 per month. The existing wells and
gas gathering system are located in three fields, the West Panhandle Field, the
East Panhandle Field, and the South Erick Field, all located in Gray, Wheeler,
Collingsworth and Donley Counties, Texas and Beckham and Greer Counties,
Oklahoma. Magnum's wholly-owned subsidiary, Gruy Petroleum Management Co., has
become the operator of all wells, the gas gathering pipeline system, and
associated assets.
BUSINESS OF COMPANY
The business purpose of Magnum following the Business Combination is to engage
in four principal activities: (1) the acquisition, production and sale of crude
oil, condensate and natural gas; (2) the gathering, transmission, and marketing
of natural gas; (3) the business of managing and operating producing oil and
natural gas properties for interest owners; and (4) providing consulting and
U.S. export services to facilitate Latin American trade in energy products. In
most instances, Magnum acts as operator of the oil and gas properties in which
it has acquired an interest.
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Magnum pursues its business through the acquisition of oil and gas mineral
leases, gas gathering systems, and producing oil and gas properties. Based upon
each specific mineral lease situation as well as geological and engineering
interpretations, Magnum either develops its inventory of leases through the
drilling of an oil and/or gas well, redrills or recompletes an existing well or
manages and operates existing wells located on such leases for the production of
oil and/or gas reserves located thereon. Magnum currently has an interest in oil
and gas mineral leases, gas gathering pipeline systems and wells producing
hydrocarbons that are located in the states of Oklahoma, New Mexico, Kansas,
Louisiana, Mississippi and Texas. At the present time, Magnum does not intend to
pursue its activities beyond those six states; however, Magnum will evaluate
other opportunities for the development of oil and gas reserves and related
assets and given the right circumstances, may become involved in these
activities in states other than those in which it is currently involved.
Magnum currently acts as an "operator" of oil and gas properties, through its
wholly-owned subsidiary, Gruy Petroleum Management Co., in all six states
mentioned above. In this capacity, Magnum is responsible for the daily
activities of producing oil and/or gas from individual wells and leases located
within those states. Magnum's functions are focused primarily towards management
of the properties to maximize profitability and supervision of its field
employees. Additionally, Magnum contracts with individuals doing business within
the proximity of the wells, more commonly referred to as "pumpers", for
performing the various tasks that are required to maintain the production of oil
and/or gas of the wells. Magnum is not a user or refiner of the oil and/or gas
produced, except as it may relate to the operation of wells that may produce
gas. Once extracted from the ground, Magnum either connects the production to a
pipeline gathering system, in the case of gas, or stores the crude oil in
storage tanks located in the near proximity of the producing field, for
collection by an oil purchaser. The properties that Magnum operates are located
in areas which are typically serviced by more than one crude oil purchaser and a
gas pipeline gathering system is generally within a relatively close proximity
of the natural gas being produced.
Since 1992, Magnum has been actively involved in making acquisitions of oil and
gas and other related properties, entering into operating agreements for such
properties, and raising capital by selling its securities to make such
acquisitions. As a result, Magnum now operates and holds working interests in
approximately 1,000 producing oil and gas wells. The properties in which Magnum
has acquired interests often contain proved undeveloped reserves that require
additional drilling, workovers, waterflooding or other forms of enhancement to
become productive. In addition to acquiring such properties, Magnum has engaged
in exploration and development activities by drilling new wells on such
properties during the past several years.
ACQUISITION OF ADDITIONAL PROPERTIES
Magnum will continue to evaluate and select additional prospects and leases for
acquisition and development which management considers appropriate for the
purposes of Magnum. Such prospects may be located anywhere in the United States.
The principal purpose of Magnum in such acquisitions will be to seek and acquire
properties which presently are producing oil and/or gas and are generating
sufficient revenues from such properties to provide Magnum with the potential to
significantly increase cash flow.
To the extent Magnum continues seeking additional acquisitions of producing oil
and gas properties, it competes with many other entities which seek to acquire
similar assets. The operations and expenditures on behalf of Magnum are minor in
relation to total operations conducted and in comparison to amounts expended by
all entities operating within this industry. The total number and identity of
producing oil and gas properties and proved developed leases acquired by Magnum
will depend upon, among other things, a combination of the total amount of
capital available to Magnum, the latest geological and geophysical data
available, and the continuation of a sufficient supply of properties which may
become available for purchase.
Because management is responsible for selecting additional acquisitions, it
continually engages in a process of reviewing and analyzing prospects submitted
by oil and gas operating companies, investment bankers, geologists, engineers
and others within the energy industry. In some circumstances, prospects may, in
addition to the usual royalty paid to the landowner, have the burden of a net
profits interest or an overriding royalty for the benefit of the entity or
person submitting prospects to Magnum. These net profits and royalty interests
do not share in any expense of drilling, development, completion, operating and
other costs incident to the production and sale of oil and gas. Magnum seeks
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to acquire leasehold interests which will create the maximum net revenue
interest attributable to the working interest owners in such leases.
The following information and factors are considered by management in connection
with most decisions to acquire a property for Magnum:
(a) The amount of uncommitted funds then available;
(b) The current production and expected future cash flow therefrom;
(c) The geologic and geographic region in which the property is located;
and
(d) The nature and extent of geological and engineering data available
concerning the property.
Oil and gas production, prospects, and leases have been and will continue to be
acquired by Magnum from various industry sources, including, without limitation,
landowners, lease brokers, operating companies, investment bankers and other
persons or companies engaged in the business of acquiring and dealing in oil and
gas properties. In that regard, leases which are purchased by Magnum may be
whole or fractional interests in oil and gas properties, and if fractional, a
portion of the costs of development may be borne by the parties possessing the
remaining fractional interests. Magnum may also from time to time enter into
joint ventures or farmout arrangements to acquire or develop properties.
DRILLING AGREEMENTS AND OPERATION OF WELLS
In addition to acquiring producing oil and gas properties, Magnum may use its
working capital and available line of credit for drilling and other development
on the properties in which Magnum has acquired interests, to the extent funds
permit. Magnum does not own drilling equipment and consequently sub-contracts
the drilling, redrilling or workover of wells for which it is designated the
operator. When Magnum is acting as the operator, it will typically enter into a
drilling agreement with an independent drilling contractor. Magnum either
compensates the drilling contractor on a) a footage contract, b) an hourly
arrangement during the drilling, testing and completion phase of each well, or
c) seeks a fixed price or turn-key agreement. The drilling contractor is
typically allowed to utilize other selected independent contractors, each of
which is experienced in providing drilling related services in the area, to
conduct certain activities on behalf of Magnum.
Magnum manages all day-to-day operations of Magnum's wells, leases and prospects
for which it is the operator. While Magnum may enter into agreements with other
parties for specific services, such agreements will keep management functions
within the control of Magnum. Magnum utilizes its in-house technical personnel
to provide geological, geophysical, engineering and other services and when
necessary, retains these services on a contractual basis from within the
industry. Magnum reviews and analyzes all prospects, drilling and logging data,
engineering information and production data, and monitors all expenditures made
on behalf of Magnum by any third party engaged as a subcontractor.
Magnum will from time to time determine that it is in its best interest to drill
either exploratory or development wells on properties in which it has acquired
an ownership interest. Management will have the responsibility to determine
whether any well should, at any point, be abandoned. In the event that a well is
lost at any depth, either vertically or horizontally, by reason of any accident
or casualty, or if igneous rock or other impenetrable substances are
encountered, or loss of circulation or other conditions render further drilling
impractical by methods to be employed, Magnum may elect to plug and abandon a
well and cease operations on the prospect or to plug and abandon a well and
commence drilling an additional well on the prospect.
TIMING OF ACQUISITIONS/OPERATIONS
Magnum is continually evaluating the acquisition of additional proven oil and
gas properties and other oil and gas companies. Additionally, Magnum may
commence drilling on existing prospects as it deems appropriate. Magnum believes
that it has available suitable prospects and leases for future development.
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GAS GATHERING, TRANSMISSION AND MARKETING
Hunter Gas Gathering, Inc. (formerly IOM, Gas, Inc.), a wholly owned subsidiary
of Magnum, owns and operates four gas gathering pipeline systems located in the
states of Oklahoma, Texas and Louisiana. Compression services are provided by
this subsidiary on all four systems through either existing ownership of the
equipment or leases from third parties. The North Appleby system is located
primarily in Nacogdoches County, in East Texas. Approximately 39 wells are
connected to the system. Approximately 100 mmcf per month is delivered through
the system into a Natural Gas Pipeline Co. pipeline. The Schulter system is
located in Okmulgee County, Oklahoma. Approximately 10 mmcf per month is
delivered from 38 wells into the Enogex pipeline. The Longwood system is located
in Caddo Parish, Louisiana. Approximately 30 mmcf per month flows through the
system from 28 wells, and the gas is delivered into the Koch-Gateway pipeline. A
substantial portion of the gas delivered through these systems is marketed by
Hunter Gas Gathering, Inc. as an added service to the producers from whom the
Company acquires the gas.
The Panoma gathering system consists of approximately four hundred twenty-seven
(427) total miles of pipeline. The four main trunklines run east and west for
approximately 66 miles with the east end starting in Beckham Co., Oklahoma and
the west end starting in Gray Co., Texas. Trunk "A" has approximately fourteen
(14) miles of sixteen (16) inch pipeline in Gray Co., Texas transporting West
Panhandle gas to Panoma Plant #1. Trunk "B" has approximately thirty (30) miles
of sixteen (16) inch pipeline beginning in Collingsworth Co., Texas and ending
at Panoma Plant #1. This line transport gas from the East Panhandle Field. Trunk
"C" has approximately twenty-two (22) miles of sixteen (16) inch pipe beginning
in Beckham Co., Oklahoma and ending at Panoma Plant #2. This line transports gas
from the South Eric Field. The Panoma Plant #2 discharge line is approximately
twenty-eight (28) miles of sixteen (16) inch pipeline beginning at Panoma Plant
#2 and ending at Panoma Plant #1. This line serves as a discharge line for
Panoma Plant #2 for compressed South Eric and East Panhandle gas and runs
parallel to Trunk "B".
The Panoma gathering system also consists of four (4) compressor stations.
Panoma Plant #1 consists of five (5) - 2,000 horsepower compressors with
dehydration and treating equipment. Panoma Plant #2 consists of three (3) - 600
horsepower compressors. Trunk Line "A" station consists of one (1) - 650
horsepower compressor. Lateral "B-1" Station consists of one (1) - 90 horsepower
compressor. Gas throughout for the Panoma gathering system is approximately 500
MMCF per month.
PETROLEUM MANAGEMENT AND CONSULTING SERVICES
Gruy Petroleum Management Co. ("Gruy") has a 37-year history of managing
properties for banks, financial institutions, bankruptcy trustees, estates,
individual investors, trusts and independent oil and gas companies. Magnum
provides drilling, completion, field inspections, joint interest billings,
revenue receipt and distribution services, regulatory filings with the
appropriate state and federal authorities, management of limited partnership
interests, gas marketing, environmental compliance services, expert witness
testimony and petroleum engineering services. Gruy manages, operates and
provides consulting services on oil and gas properties located in six states,
predominately within the Mid-Continent, West Texas, Eastern New Mexico and the
Gulf Coast regions of the United States.
INSURANCE
Magnum maintains insurance coverage generally as follows:
(a) Employer's liability insurance in certain states covering injury or
death to any employee who may be outside the scope of the worker's
compensation statute;
(b) Commercial general liability insurance for bodily injury and property
damage, including property damage by blow-out and cratering, completed
operations, and broad form contractual liability with respect to any
contract into which the operator may enter into;
(c) Automobile liability insurance covering owned, non-owned and hired
automotive equipment;
(d) Umbrella liability insurance; and
(e) Operator's insurance covering the costs of controlling a blow-out, and
seepage and pollution liability, when deemed appropriate on certain
properties.
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Magnum attempts to obtain such insurance in amounts management believes to be
reasonable and standard. Such coverage will likely not fully protect Magnum from
any specific casualty or loss. There is no assurance such insurance will always
be available to Magnum and on terms Magnum can afford.
Magnum is subject to, and to the best of its knowledge and belief is currently
in compliance with all bonding requirements (such as those relating to plugging
and abandonment) that are imposed by each of the states in which the properties
for which Magnum acts as operator are located.
COMPETITION
The oil and gas industry is a highly competitive industry. Competitors include
major oil companies, other independent oil and gas concerns, and individual
producers and operators, many of which have financing resources, staffs and
facilities substantially greater than those of Magnum. In addition, Magnum
frequently encounters competition in the acquisition of oil and gas properties,
gas gathering systems, and in its management and consulting business. The
principal means of competition are the amount and terms of the consideration
offered. When possible, Magnum tries to avoid open competitive bidding for
acquisition opportunities. The principal means of competition with respect to
the sale of oil and natural gas production are product availability and price.
While it is not possible for Magnum to state accurately its position in the oil
and gas industry, Magnum believes that it represents a minor competitive factor.
BUSINESS RISKS AND REGULATION.
Magnum's operations are affected in various degrees by political developments,
federal and state laws, and regulations. In particular, oil and gas production
operations and economics are affected by price controls, tax and other laws
relating to the petroleum industry. They are all affected by the changes in such
laws, by changing administrative regulations, and by the interpretation and
application of such rules and regulations.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion. Numerous departments and agencies, both federal and
state, are authorized by statute to issue and have issued rules and regulations
binding on the oil and gas industry and its individual members, some of which
carry substantial penalties for the failure to comply. The regulatory burden on
the oil and gas industry increases Magnum's cost of doing business and,
consequently, affects its profitability. Sales of crude oil, condensate and
natural gas liquids by Magnum can be made at uncontrolled market prices.
Changing Oil and Natural Gas Prices and Markets -- The market for oil and
natural gas produced by Magnum depends on factors beyond its control, including
the extent of domestic production and imports of oil and natural gas, the
proximity and capacity of natural gas pipelines and other transportation
facilities, demand for oil and natural gas, the marketing of competitive fuels,
and the effects of state and federal regulation of oil and natural gas
production and sales. The oil and gas industry as a whole also competes with
other industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
For over a decade, there has been a significant overall decline in the demand
for natural gas in the United States and in the prices paid for oil and gas. The
oversupply was caused primarily by a decrease in market demand and unusually
warm weather conditions. Seasonal variations exist to the extent that the demand
for natural gas is somewhat lower during the summer months than during the
winter season. Gas prices have been extremely volatile over the past several
years and it is not known whether or not a current surplus in natural gas
deliverability exists as has been the case over the past six (6) years. Crude
oil prices are affected by a variety of factors. Since domestic crude oil price
controls were lifted in 1981, the principal factors influencing the prices
received by producers of domestic crude oil have been the pricing and production
of the members of the Organization of Petroleum Exporting Countries ("OPEC").
While Magnum cannot predict the future prices of oil and natural gas, the
potential for further price volatility is probable and the possibility of price
declines exists as has been experienced in the past.
Magnum's production revenues and the carrying value of its oil and natural gas
properties are affected by changes in oil and natural gas prices. Moreover,
Magnum's current borrowings under certain credit facilities, its borrowing
capacity and its ability to obtain additional capital in the future are directly
affected by oil and natural gas prices.
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<PAGE>
Federal Regulation of Sales of Natural Gas -- Historically, the transportation
and sale for resale of gas in interstate commerce have been regulated pursuant
to the Natural Gas Act of 1938 (the "NGA). In addition, since 1978, maximum
selling prices of certain categories of gas, whether sold in interstate or
intrastate commerce, have been regulated pursuant to the Natural Gas Policy Act
of 1978 (the "NGPA"). These statutes are administered by the Federal Energy
Regulatory Commission ("FERC"). The provisions of these acts and regulations are
complex. However, as a result of the enactment of the Natural Gas Wellhead
Decontrol Act of 1989 (the "Decontrol Act"), the remaining restrictions imposed
on the NGA and the NGPA with respect to "first sales" terminate on the earlier
of January 1, 1993 or the expiration of the applicable contract. Any gas not
otherwise deregulated prior to January 1, 1993 was deregulated as of that date.
The effect of the Decontrol Act is to remove all remaining price controls under
the NGPA and to remove all remaining FERC certificate and abandonment
jurisdiction otherwise applicable to producers under the NGA.
Several major regulatory changes have been implemented by the FERC from 1985 to
the present that affect the economics of natural gas production, transportation
and sales. In addition, the FERC continues to promulgate revisions to various
aspects of the rules and regulations affecting those segments of the natural gas
industry which remain subject to the FERC's jurisdiction. The stated purpose of
many of these regulatory changes is to promote competition among the various
sectors of the gas industry. The ultimate impact of the complex and overlapping
rules and regulations issued by the FERC since 1985 cannot be predicted. In
addition, many aspects of these regulatory developments have not become final
but are still pending judicial and FERC final decisions.
FERC has issued Orders 636 and 636-A for the purpose of restructuring the gas
pipeline sales and transportation services in the United States to promote
competition in all phases of the gas industry. The impact of these FERC Orders
has significantly altered the traditional way natural gas has been purchased,
transported, and sold. The restructuring requirements that have emerged from the
administrative and judicial review process has varied significantly from those
previously in effect.
The price at which Magnum's natural gas may be sold will continue to be affected
by a number of factors, including the price of alternate fuels such as oil and
coal and competition among various natural gas producers and marketers.
Environmental Regulation -- Various federal, state and local laws and
regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, may affect Magnum's
operations and costs as a result of the effect on oil and gas exploration,
development and production operations. At present, substantially all of Magnum's
U.S. production of crude oil, condensate and natural gas is in states having
conservation laws and regulations. It is not anticipated that Magnum will be
required in the near future to expend amounts that are material in relation to
its total capital expenditures program by reason of environmental laws and
regulations, but inasmuch as such laws and regulations are frequently changed,
Magnum is unable to predict the ultimate cost of compliance. Magnum is able to
control directly the operations of only those wells for which it acts as
operator. Notwithstanding Magnum's lack of control over wells operated by
others, the failure of the operator to comply with applicable environmental
regulations may, in certain circumstances, be attributable to Magnum.
State Regulation -- State statutes and regulations require permits for drilling
operations, drilling bonds and reports concerning operations. The Railroad
Commission of Texas regulates the production of oil and natural gas produced by
Magnum in Texas. Similar regulations are in effect in all states in which Magnum
produces oil and natural gas. Most states in which Magnum owns and operates
properties have statutes, rules or regulations governing conservation matters,
including the unitization or pooling of oil and gas properties, establishing of
maximum rates or production from oil and gas wells and the spacing of such
wells. Many states also restrict production to the market demand for oil and
gas. Such statutes and regulations may limit the rate at which oil and gas could
otherwise be produced from Magnum's properties. Some states have enacted
statutes prescribing ceiling prices for gas sold within their state.
Many states have issued new regulations under authority of the Clean Air Act
Amendments of 1990, and such regulations are in the process of being
implemented. These regulations may require certain oil and gas related
installations to obtain federally enforceable operating permits and may require
the monitoring of emissions; however, the impact of these regulations on Magnum
is expected to be minor. Several states have also adopted regulations on the
handling, transportation, storage, and disposal of naturally occurring
radioactive materials that are found in oil and gas operations.
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<PAGE>
EMPLOYEES
Magnum has a total of 30 employees, all of whom are employed full-time. Four of
Magnum's five senior officers are employed by Magnum on a full-time basis and
Morgan F. Johnston, General Counsel and Secretary, consults with Magnum on a
part-time basis.
SERIES C CONVERTIBLE PREFERRED STOCK
On June 5, 1996, Magnum called for redemption 208,333 shares of its Series C
preferred stock at $10.50 per share, as provided by the terms of the certificate
of designations, plus accrued dividends with an extended redemption date of July
10, 1996. Terms of the preferred stock provide for the option by the holder to
convert the preferred shares into common stock at the rate of three (3) shares
of common stock for each share of Series C preferred stock. At June 30, 1996,
57,400 shares of the preferred stock had converted into 172,200 shares of Magnum
common stock. An additional, 3,527 shares of common stock were issued for
accrued dividends to conversion date. Subsequent to June 30, 1996, but prior to
July 11, 1996, an additional 236,992 shares of the preferred stock were
converted for 732,223 shares of common stock including accrued dividends paid in
common stock. Additionally, 8,224 shares of preferred stock were redeemed for
cash in the amount of $88,860.
On July 11, 1996, Magnum called for the redemption the remaining 322,384 shares
of its Series C preferred stock. The redemption price was $10.50 per share, plus
accrued dividends of $.141 per share from July 1, 1996 through the extended
redemption date of August 16, 1996, for a total redemption price of $10.641 per
share. The Series C preferred shares could be converted, at the option of the
holder, at any time prior to August 16, 1996 into common stock. 302,492 shares
of Series C preferred stock were converted into 938,451 shares of common stock
including the accrued dividends paid in common stock. Additionally, 19,892
shares of preferred stock were redeemed for cash in the amount of $210,431.
After both redemption calls, Magnum converted 596,884 shares of its Series C
preferred stock into common stock and redeemed 28,116 shares of its Series C
preferred stock.
PROPERTIES
GENERAL.
The following tables summarize certain information regarding the estimated
proved oil and gas reserves as of December 31, 1995 and 1994 and estimated
future net revenues from oil and gas operations of Magnum as of the same dates.
Such estimated reserves and future net revenues for 1995, as set forth herein
and the Supplemental Information to Magnum's Consolidated Financial Statements,
are primarily based upon reports prepared in-house by registered petroleum
engineers and subsequently audited by James J. Weisman, Jr., an independent
registered petroleum engineer. The 1994 estimates were based upon reports
prepared by Hensley Consultants, Inc., an independent registered petroleum
engineering firm. All such reserves are located in the continental United
States.
The reserve data herein represent only estimates that are based on subjective
determinations. Accordingly the estimates are expected to change as additional
information becomes available. Of necessity, estimates of oil and gas reserves
are projections based upon engineering and economic data. There are
uncertainties inherent in the interpretation of such data, and there can be no
assurance that the proved reserves set forth herein will ultimately be produced,
or that the estimated revenues will be realized within the periods indicated. It
should be noted that petroleum engineering is not an exact science but instead
involves estimates based upon many factors, some of which are known but most of
which are unknown.
Oil and gas prices used herein are based on the most current price available at
the time the respective reserve studies were prepared. The average price used in
the following estimates at December 31, 1995, was $17.50 per Bbl of oil and
$2.03 per Mcf of gas (includes higher prices received on "rich" or "wet" BTU gas
and condensate). Lease operating costs are based on historical operating expense
records.
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<PAGE>
Magnum accounts for its oil and gas properties using the full cost method, which
requires Magnum to compare the net capitalized costs of its oil and gas
properties to the present value of the projected cash flows from the associated
oil and gas reserves. Substantially all of Magnum's oil and gas properties are
pledged as collateral under a credit facility to a commercial bank group.
PROVED OIL AND GAS RESERVES.
Oil reserves are expressed in barrels (Bbl) and gas reserves are expressed in
thousands of cubic feet (Mcf). The following table sets forth proved reserves
considered to be economically recoverable under normal operating methods and
existing conditions, at prices and operating costs prevailing at the date
thereof.
Proved Oil and Gas Reserves
As of December 31,
1995 1994
Oil (Bbls) Gas (Mcf) Oil (Bbls) Gas (Mcf)
----------- ------------ ----------- -----------
Proved Developed Reserves 1,681,841 8,796,748 239,795 394,872
Proved Undeveloped Reserves 2,085,898 5,275,168 1,020,725 4,519,335
----------- ------------ ----------- -----------
Total Proved Reserves 3,767,739 14,071,916 1,260,520 4,914,207
=========== ============ =========== ===========
Definition of Reserves -- The reserve categories are summarized as follows:
Proved developed reserves are those quantities of crude oil, natural gas and
natural gas liquids which, upon analysis of geological and engineering data,
demonstrate with reasonable certainty to be recoverable in the future from known
oil and gas reservoirs under existing economic and operating conditions. This
classification includes: (a) proved developed producing reserves which are those
expected to be recovered from currently producing zones under continuation of
present operating methods; (b) proved developed non-producing reserves consist
of (i) reserves from wells which have been completed and tested but are not yet
producing due to lack of market or minor completion problems which are expected
to be corrected, and (ii) reserves currently behind the pipe in existing wells
and are expected to be productive due to both the well log characteristics and
analogous production in the immediate vicinity of the well.
Proved undeveloped reserves are those reserves which may be expected either from
existing wells that will require an expenditure to develop or from undrilled
acreage adjacent to productive units which are reasonably certain of production
when drilled. Future development costs have been estimated to be approximately
$6,951,000 at December 31, 1995 with significant expenditures expected to begin
in 1996 and 1997.
No other estimates of total proven net oil or gas reserves have been filed by
Magnum with, or included in any report to, any United States authority or agency
pertaining to Magnum's individual reserves since the beginning of Magnum's last
fiscal year.
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<PAGE>
ESTIMATED FUTURE NET REVENUES.
The following table sets forth an estimate of future net revenues after
deducting applicable production and ad valorem taxes, future capital costs and
operating expenses, but before consideration of federal income taxes. The future
net revenues have been discounted at an annual rate of 10% to determine the
"present value". The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties. Estimates have been made in accordance with
current Securities and Exchange Commission guidelines concerning the use of
constant oil and gas prices and operating costs in reserve evaluations.
Estimated Discounted
Future Net Revenues
As of December 31,
1995 1994
---- ----
Developed $19,036,205 $5,337,427
=========== ==========
Developed and Undeveloped $37,209,330 $7,774,810
=========== ==========
OIL AND GAS PRODUCTION.
The following table sets forth the approximate net production attributable to
Magnum's oil and gas interests for the periods indicated.
Net Production
For the Year Ended
December 31,
1995 1994
Oil (Bbls) 29,972 41,835
======== ======
Natural Gas (Mcf) 102,056 88,176
======= ======
The following table sets forth, for the fiscal years 1995 and 1994: 1) the
weighted average sales price per barrel of oil and Mcf of gas shown separately;
and 2) the average lifting cost per unit of production of oil and gas are shown
together on an equivalent basis. Net quantities are the portion allocable to
Magnum's interest in the property. The unit of production for purposes of
averaging costs is barrels. Mcf of gas is converted to barrels at the rate of 6
to 1.
Average Sales Price
For the Year Ended
December 31,
1995 1994
Average Sales Price (1)
Oil (Bbl) $15.60 $14.20
====== ======
Natural Gas (Mcf) $ 1.46 $ 1.53
======= =======
Average Production Cost(2)
Per equivalent barrel(3) $ 5.69 $ 5.57
======= =======
Per dollar of sales $ 0.43 $ 0.44
======= =======
- --------------------
(1) Before deduction of production taxes.
(2) Excludes depletion, depreciation and amortization. Production cost
includes lease operating expenses and production and ad valorem taxes,
if applicable.
(3) Gas production is converted to equivalent barrels at the rate of six
mcf of gas per barrel, representing the estimated relative energy
content of natural gas and oil.
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<PAGE>
PRODUCTIVE WELLS . The total gross and net wells, expressed separately for oil
and gas, as of December 31, 1995 and 1994 are as follows:
Productive Wells(2)
As of December 31,
1995
Gross(1) Net(1)
Location Oil Gas Total Oil Gas Total
- -------- --- --- ----- --- --- -----
Texas 133 19 152 44.19 8.87 53.06
Oklahoma 262 21 283 60.22 7.78 68.00
Mississippi 4 0 4 2.98 0 2.98
New Mexico 3 4 7 2.48 1.14 3.62
Kansas 2 0 2 1.74 0 1.74
California 14 0 14 1.05 0 1.05
--- --- ---- ------ ----- ------
418 44 462 112.66 17.79 130.45
=== == === ====== ===== ======
1994
----
Gross(1) Net(1)
Location Oil Gas Total Oil Gas Total
- -------- --- --- ----- --- --- -----
Texas 13 2 15 11.35 1.00 12.35
Oklahoma 19 2 21 15.90 1.80 17.70
California 15 0 15 1.30 0 1.30
-- - -- ----- ---- -----
47 4 51 28.55 2.80 31.35
== = == ===== ==== =====
(1) The number of gross wells is the total number of wells in which a
fractional working interest is owned. The number of net wells is the
sum of the fractional working interests owned by Magnum in gross wells
expressed in whole numbers and decimal fractions thereof.
(2) There were no producing wells in 1995 or 1994 that were producing from
multiple completion zones.
The Company does not own any properties outside the United States. Wells that
produce both oil and gas are treated as oil wells herein.
DRILLING ACTIVITY.
Magnum did not engage in any drilling activities until 1992. During 1995, Magnum
participated in the drilling of two exploratory wells, both of which were
commercially productive wells. During 1994, Magnum participated in the drilling
of three wells, two of which were commercially productive and one non-commercial
well. Magnum also drilled a saltwater injection well. These drilling activities
resulted in a total of .6 net productive development wells being net productive
development wells being drilled in 1995 and .5 net productive development wells
being drilled in 1994.
DEVELOPED AND UNDEVELOPED ACREAGE.
The following tables set forth the approximate gross and net acres of productive
properties in which Magnum had a leasehold interest as of December 31, 1995 and
1994. "Gross" acres refers to the total acres in which Magnum has a working
interest, and "net" refers to the sum of the fractional working interests owned
by or attributable to Magnum in gross acres. Developed acreage is that acreage
spaced or assignable to productive wells. Undeveloped acreage is considered to
be that acreage on which wells have not been drilled or completed to a point
that would permit the production of commercial quantities of oil and gas
regardless of whether or not such acreage contains proven reserves.
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Leasehold Acreage
As of December 31,
Developed Undeveloped
--------- -----------
Gross Acres Net Acres Gross Acres Net Acres
1995 65,418 23,333 3,665 3,581
1994 4,550 3,224 14,592 6,006
Essentially all of Magnum's oil and gas interests are working interests or
overriding royalty interests under standard onshore oil and gas leases, rather
than mineral ownership or fee title. The defensibility of Magnum's title to such
interests in most cases is supported by written title opinions. Substantially
all of Magnum's oil and gas properties are pledged to financial institutions
under certain credit agreements.
CUSHING DISPOSAL. On June 5, 1992, pursuant to a Stock Purchase Agreement,
Magnum acquired all of the issued and outstanding capital stock of Cushing
Disposal, Inc. (hereinafter referred to as "Cushing"). Cushing operates a
commercial saltwater disposal facility located approximately three miles north
of Cushing, Oklahoma. The facility has been in existence since 1985, is suitably
located and is easily accessible for haulers and vacuum truck companies in that
area. The facility is commercially licensed to dispose of non-toxic and
non-hazardous materials and primarily services the oil industry through the
disposition of salt water. The saltwater or other non-hazardous or non-toxic
waste water is being injected into a well with a casing size of 5 1/2 inches and
a depth of 4249 feet. At this depth, the fluids are being injected into the
"Arbuckle Formation", which is the only formation known to Magnum in an extended
surrounding area that will accept 4,000 Bbls of fluid per day. Furthermore, the
"Arbuckle Formation" is gravity fed, thus it requires no pressure when injecting
fluid through this well. In addition to operating Cushing as set forth above,
Magnum uses the offices and real estate owned by Cushing, as a field office and
storage yard.
OFFICE SPACE.
Magnum leases office space as follows:
LOCATION SQUARE FEET LEASE EXPIRES
Irving (Las Colinas) Texas 7,439 November 1, 2001
TITLE OF PROPERTIES.
Title to the properties acquired by Magnum is subject to royalty, overriding
royalty, carried and other similar interests, contractual arrangements customary
in the oil and gas industry, liens incident to operating agreements, liens for
current taxes not yet due and to other comparatively minor encumbrances.
Magnum's oil and gas properties and gas gathering systems are mortgaged to
secure borrowings under its bank credit agreements.
DELIVERY COMMITMENTS
Magnum is not obligated to provide any fixed or determinable quantity of oil or
gas in the future under existing contracts or agreements. Magnum has utilized
price derivatives to hedge approximately 50 percent of its gas production and 60
percent of its oil production for the remainder of 1996 and approximately 25
percent of its gas production for calender year 1997.
LEGAL PROCEEDINGS.
Gruy Petroleum Management Co. is involved in several legal and administrative
proceedings arising in the ordinary course of its oil and gas management
business, none of which are material in the opinion of Management. Although the
ultimate outcome of these proceedings cannot be ascertained at this time,
management believes that the ultimate resolution of these matters will be
favorable.
38
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Magnum had no matters requiring a vote of security holders during the fourth
quarter of 1995 nor any as of June 30, 1996.
MARKET FOR MAGNUM'S COMMON STOCK AND RELATED MATTERS
(a) MARKET INFORMATION.
In March 1996, the Company' s Common Stock, Series C Preferred Stock and
Warrants graduated to a full listing on the American Stock Exchange.
Historically, the Common Stock of the Company had been listed on the American
Stock Exchange Emerging Company Marketplace ("AMEX.EC") since November, 1993,
under the symbol MPM.EC. Prior to November, 1993 the Common Stock was quoted on
the National Association of Securities Dealers, Inc. OTC Bulletin Board under
the symbol MNMP. The Company's Series C Preferred Stock and Warrants previously
contained in the Units offered and sold pursuant to the Original Prospectus were
also approved for listing, upon issuance, on the AMEX.EC under the symbols
MPM.PR.EC and MPM.WS.EC, respectively. There is no assurance that the public
trading markets for the Company's securities will continue in the future. The
following table sets forth, for each calendar quarter during the last two fiscal
years and for the first two quarters of 1996, the high and low trading prices
for the Company's Common Stock on the American Stock Exchange and the AMEX.EC,
where applicable. Such bid price quotations represent interdealer quotations,
without retail markup, markdown or commissions, and may not represent actual
transactions.
Quarter Ended High Low
March 31, 1994 $ 3.375 $ 2.50
June 30, 1994 $ 5.25 $ 2.25
September 30, 1994 $ 3.625 $ 2.625
December 31, 1994 $ 4.9375 $ 3.25
March 31, 1995 $ 5.00 $ 3.75
June 30, 1995 $ 4.6875 $ 3.375
September 30, 1995 $ 4.75 $ 3.3125
December 31, 1995 $ 4.1875 $ 2.8125
March 31, 1996 $ 3.6875 $ 2.625
June 30, 1996 $ 4.75 $ 3.00
As of June 30, 1996, there were approximately 700 record holders of the
Company's Common Stock.
The Company has not previously paid any cash dividends on common stock and does
not anticipate or contemplate paying dividends on common stock in the
foreseeable future. Except for the payment of dividends at the stated rate on
the existing Series C Preferred Stock, it is the present intention of management
to utilize all available funds for the development of the Company's business. In
addition, the Company may not pay any dividends on common equity unless and
until all dividend rights on outstanding preferred stock have been satisfied.
The only other restrictions that limit the ability to pay dividends on common
equity or that are likely to do so in the future, are those restrictions imposed
by law or by the Company's line of credit agreement. Specifically, no dividends
on any stock are allowed under the line of credit agreement other than on the
Company's existing Series C Preferred Stock and a proposed $10 million mandatory
redeemable preferred stock See Managements Discussion and Analysis of Financial
Condition and Results of Operations of Magnum. The Company is currently in
compliance with all covenants contained in the line of credit agreement. As of
July 11, 1996, all of the Series C Preferred Stock had been called for
redemption thereby eliminating any future dividend payments on that series.
Proposed terms of the mandatory redeemable preferred stock would call for a nine
percent (9%) dividend rate and a twelve and one-half percent (12.5%) overriding
royalty interest in the properties to be developed from the proceeds of the
offering. Under Nevada corporate law, no dividends or other distributions may be
made which would render the Company insolvent or reduce assets to less than the
sum of its liabilities plus the amount needed to satisfy outstanding liquidation
preferences.
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<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
(a) IDENTIFY DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth the directors, executive officers and other
significant employees of Magnum, their ages, and all offices and positions with
Magnum. Each director is elected for a period of one year and thereafter serves
until his successor is duly elected by the Shareholders and qualifies. Each of
Magnum's current directors will be nominated for re-election, with no additional
nominees being named.
Positions
Name Age Term Served With Company
- ----- --- ----------- ------------
Lloyd T. Rochford.......... 50 Feb. 1989 Chairman of the Board
Matthew C. Lutz............ 61 Dec. 1995 Vice Chairman and Exploration
and Business Development Manager
Gary C. Evans...............39 Dec. 1995 Director, President and Chief
Executive Officer
Gerald W. Bolfing.......... 66 Dec. 1995 Director
Oscar C. Lindemann......... 74 Dec. 1995 Director
Stanley McCabe............ 62 Apr. 1995 Director
James E. Upfield........... 75 Dec. 1995 Director
Steven P. Smart........... 41 Dec. 1995 Chief Financial Officer
LLOYD T. ROCHFORD, age 50, Chairman, has previously served as President
and a Director of Magnum since February 10, 1989 through December 31, 1995.
During a portion of this time and prior thereto, Mr. Rochford managed his own
private investments and operated a private company engaged in the finding,
producing and developing of oil and gas properties.
GARY C. EVANS, age 39, President, Chief Executive Officer and a
Director of Magnum since December 1995. Served as Chairman, President and Chief
Executive Officer of Hunter since September, 1992. Previously, President and
Chief Operating Officer of Hunter from December, 1990 to September, 1992.
Chairman and Chief Executive Officer of all of the Hunter's subsidiaries since
their formation or acquisition. From 1981 to 1985, Mr. Evans was associated with
the Mercantile Bank of Canada where he held various positions including Vice
President and Manager of the Energy Division of the southwestern United States.
As an oil and gas lending officer of a $4.5 billion Canadian bank, he initiated
and managed an energy loan portfolio in excess of $125 million. From 1978 to
1981, he served in various capacities with National Bank of Commerce (now
BancTexas) including its Credit Manager and Credit Officer. Mr. Evans serves on
the Board of Directors of S.O.I. Industries, Inc. and Digital Communications
Technology Corporation, two American Stock Exchange listed Companies.
MATTHEW C. LUTZ, age 61, Vice Chairman and Business Development Manager
of Magnum since December 1995. Mr. Lutz has held similar positions with Hunter
since September 1993. From 1984 through 1992, Mr. Lutz was Senior Vice President
of Exploration and on the Board of Directors of Enserch Exploration, Inc. with
responsibility for Magnum's worldwide oil and gas exploration and development
program. During his tenure, Enserch substantially increased its gas and oil
reserves while having among the lowest reserve replacement costs in the
industry. Prior to joining Enserch, Mr. Lutz spent twenty-eight years with Getty
Oil Company. He advanced through several technical, supervisory and managerial
positions which gave him various responsibilities including exploration,
production, lease acquisition, administration and financial planning. Mr. Lutz
played a major role in Getty's discoveries of reserves in the Onshore and
Offshore United States.
GERALD W. BOLFING, age 66, Director of Magnum since December 1995. Mr.
Bolfing was appointed a Director of Hunter in August 1993. He is an investor in
the oil and gas business and a past officer of one of Hunter's former
subsidiaries. From 1962 to 1980, Mr. Bolfing was a partner in Bolfing Food
Stores of Waco. During this time, he also joined American Service Company in
Atlanta, Georgia, from 1964 to 1965, and was active with Cable Advertising
Systems,
40
<PAGE>
Inc. of Kerrville, Texas from 1978 to 1981. He joined Magnum's well servicing
business in 1981 where he remained active until its divestiture in 1992.
OSCAR C. LINDEMANN, age 74, Director of Magnum since December 1995. Mr.
Lindemann was previously a Board of Director member of Hunter Resources, Inc.
having been appointed in November, 1995. Mr. Lindemann has over forty years
experience in the financial industry. Mr. Lindemann began his banking career
with the Texas Bank and Trust in Dallas, Texas in 1951. He served the bank until
1977 in many capacities, including Chief Executive Officer and Chairman of the
Board. Since leaving Texas Bank and Trust, he has served as Vice Chairman of
both the United National Bank and the National Bank of Commerce, also in Dallas.
Over many years, he has played a key role as an innovator and consultant to the
banking industry. He retired from active involvement in commercial banking in
1987. Mr. Lindemann is a former President of the Texas Bankers Association, and
State representative to the American Bankers Association. He was a Founding
Director and Board Member of VISA, and a member of the Reserve City Bankers
Association. He has served as an instructor at both the Southwestern Graduate
School of Banking at S.M.U. and the School of Banking of the South at L.S.U. He
has also served as a faculty member for four years in the College of Business at
the University of Texas in Austin teaching various banking subjects. Mr.
Lindemann is active in the United Fund in Dallas. He has served as Treasurer of
the American Red Cross, and Chairman of the Investment Committee of the American
Lutheran Church.
STANLEY MCCABE, age 62, Director of Magnum since July 21, 1995. Mr. McCabe
was appointed as Field Representative of Magnum on April 1, 1995. In 1989 Mr.
McCabe formed Stanton Oil & Gas, Ltd. and served as president and chief
executive officer. This company was formed as a drilling operator for joint
ventures with other industry partners and individual investors to explore for
oil and gas in Oklahoma and Texas. Mr. McCabe served as vice-president and
director of the Registrant from September 16, 1990 to July 10, 1992. From July,
1992 until April 1, 1995 he has acted as a consultant to Magnum and has managed
his own private investments.
JAMES E. UPFIELD, age 75, Director of Magnum since December 1995. Mr.
Upfield was appointed a Director of Hunter in August 1992. Mr. Upfield is
Chairman of Temtex Industries, Inc. (NASDAQ - "TMTX") based in Dallas, Texas, a
company that produces consumer hard goods, building materials and defense
products for the U.S. Government. In 1969, Mr. Upfield served on a select
Presidential Committee serving postal operations of the United States of
America. He later accepted the responsibility for the Dallas region which
encompassed the states of Texas and Louisiana. From 1959 to 1967, Mr. Upfield
was President of Baifield Industries and its predecessor, a company he founded
in 1949 which merged with Baifield in 1963. Baifield was engaged in prime
Government contracts for military systems and sub-systems in the production of
high strength-light weight metal products. In 1967, Baifield Industries, Inc.
was acquired by Automatic Sprinkler Corporation of America, where Mr. Upfield
remained until resigning in 1968 to pursue other business opportunities.
STEVEN P. SMART, age 41, is a Senior Vice President and Chief Financial
Officer of Magnum. Prior to joining Magnum, Mr. Smart was Controller for the
last three years for a publicly traded oil and gas company on the Vancouver
Stock Exchange. Prior to that time, Mr. Smart was Chief Financial Officer for a
privately held independent oil and gas company. Mr. Smart has more than nineteen
years of experience in the oil and gas industry including five years in the
audit department with Touche Ross (now Deloitte & Touche). Mr. Smart's
experience includes the areas of public reporting to the Securities and Exchange
Commission, energy industry tax issues, public and private partnership
reporting, and acquisitions. Mr. Smart is a Certified Public Accountant.
(b) IDENTIFY SIGNIFICANT OFFICERS OF SUBSIDIARIES.
R. RENN ROTHROCK, JR., age 52, has been Executive Vice President of Hunter
and President of Gruy since January 1994 after serving as Executive Vice
President and Chief Operating Officer from May 1988. Mr. Rothrock was Executive
Vice President and General Manager of Gruy Engineering Corporation from 1986
until May 1988. Over his 28-year career, Mr. Rothrock has also served as a
reservoir engineer and operations research engineer at Skelly Oil Company and as
an area engineer at Amerada Petroleum Corporation; the Engineering Editor of
PETROLEUM ENGINEER INTERNATIONAL MAGAZINE; Vice President and Energy Manager of
the First National Bank of Mobile, Alabama; Executive Vice President of Energy
Assets International Corporation, a public company that raised $170 million for
mezzanine financing of oil and gas ventures; and the producer and operator of
his own gas gathering and transportation system. Mr. Rothrock earned a BS in
Petroleum Engineering and a MS in Engineering from the University of Oklahoma.
He is a member of the Society of Professional Engineers of AIME, the National
Society of Professional Engineers, the National Academy of Forensic Engineers
and the
41
<PAGE>
Texas Society of Professional Engineers. Mr. Rothrock is a registered
Professional Engineer in the states of Texas and Oklahoma.
RICHARD R. FRAZIER, age 49, is President and Chief Operating Officer of
Magnum Hunter Production, Inc. and Gruy since January 1994. From 1977 to 1993,
Mr. Frazier was with Edisto Resources Corporation in Dallas, serving as
Executive Vice President Exploration and Production from 1983 to 1993, where he
had overall responsibility for its property acquisition, exploration, drilling,
production, gas marketing and engineering functions. He has been responsible for
hiring staff and coordinating efforts to evaluate, purchase and operate over
$400 million in oil and gas properties, consisting of 2,200 wells in 19 states.
From 1972 to 1976, Mr. Frazier served as District Production Superintendent and
Petroleum Engineer with HNG Oil Company (Now Enron Oil & Gas) in Midland, Texas.
Mr. Frazier's initial employment, from 1968 to 1971, was with Amerada Hess
Corporation as a Petroleum Engineer involved in numerous projects in Oklahoma
and Texas. Mr. Frazier graduated in 1970 from University of Tulsa with a
Bachelor of Science Degree in Petroleum Engineering. He is a registered
Professional Engineer in Texas and a member of Society of Petroleum Engineers
and many other professional organizations.
(c) FAMILY RELATIONSHIPS.
There is no family relationship which exists between any of the directors,
executive officers or significant employees.
(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
No present officer or director of Magnum; 1) has had any petition filed, within
the past five years, in Federal Bankruptcy or state insolvency proceedings on
such person's behalf or on behalf of any entity of which such person was an
officer or general partner within two years of filing; or 2) has been convicted
in a criminal proceeding within the past five years or is currently a named
subject of a pending criminal proceeding; or 3) has been the subject, within the
past five years, of any order, judgment, decree or finding (not subsequently
reversed, suspended or vacated) of any court or regulatory authority involving
violation of securities or commodities laws, or barring, suspending, enjoining
or limiting any activity relating to securities, commodities or other business
practice.
EXECUTIVE COMPENSATION.
The following table contains information with respect to all cash compensation
paid or accrued by Magnum during the past three fiscal years to the Chief
Executive Officer of Magnum. No other officer individually received annual cash
compensation exceeding $100,000 during the past three years.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name, Year Salary Bonus Other Number
Principal Annual Restricted Options LTP All Other
Position Compensation Stock SARs Payouts Compensation
L.T. Rochford 1995 $ 96,000 -0- $15,693 - - - -
======== === =======
CEO
1994 $ 60,000 -0- $25,244 - - - -
======== === =======
1993 $ 60,000 -0- $21,506 - - - -
======== === =======
From April 1992 through the first half of 1995, Magnum provided Mr. Rochford
with a vehicle and has paid the insurance thereon. Such payments amounted to
approximately $17,389, $18,421 and $8,870 for the fiscal years ended December
31, 1993, 1994 and 1995, respectively. Pursuant to a Letter Agreement dated July
21, 1995, Mr. Rochford is to continue to receive a salary of $8,000 per month
until December 31, 1996. Additionally Mr. Rochford is provided with the same
benefits as other employees including health insurance coverage, the premiums of
which totaled $6,823 for the fiscal years ended December 31, 1995 and 1994.
42
<PAGE>
COMPENSATION OF DIRECTORS
Magnum has seven individuals who serve as directors, four of which are
independent. Three of these directors receive compensation with respect to their
services and in their capacities as executive officers of Magnum and no
additional compensation has historically been paid for their services to Magnum
as directors. The other four directors of Magnum are not employees of Magnum and
received no compensation for their services as directors. Two former directors
received 5,000 shares of common stock, valued at $3.50 per share, as
compensation for their services in 1995. For 1996, directors are to receive $500
per meeting as compensation for their services. Other than the compensation
stated herein, Magnum has not entered into any arrangement, including consulting
contracts, in consideration of the director's service on the board.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Magnum has not entered into any contracts or arrangements with any named
executive officer which would provide such individual with a form of
compensation resulting from such individual's resignation, retirement or any
other termination of such executive officer's employment with Magnum or its
subsidiary, or from a change-in-control of Magnum or a change in the named
executive officer's responsibilities following a change-in-control.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership after completion of the Business Combination of Magnum's
common and preferred stock with respect to each director of Magnum, each
beneficial owner of more than five percent of said securities, and all directors
and executive officers of Magnum as a group:
Amount and Nature
Title of of Beneficial Percent of
Class Ownership Class
--------- ------------------- -------------
Lloyd T. Rochford Common 257,939 Shares 2.22
Matthew C. Lutz Common 76,609 Shares (1) 0.66
Gary C. Evans Common 1,712,166 Shares (1) 14.75
Series C
Preferred 111,825 Shares (1) 17.89
Gerald W. Bolfing Common 321,960 Shares (1) 2.77
Oscar C. Lindemann - - -
Stanley McCabe Common 67,150 Shares 0.58
James E. Upfield Common 28,090 Shares (1) 0.24
All directors and
officers as a group Common 2,465,191 Shares 21.24
Series C
Preferred 111,825 Shares 17.89
- --------------------------------------
(1) Beneficial share ownership is derived from Hunter share holdings converted
to Magnum Shares using the appropriate conversion factor.
The foregoing amounts include all shares these persons are deemed to
beneficially own regardless of the form of ownership. There does not exist any
arrangement which may result in a change in control of Magnum.
43
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the acquisition of certain oil and gas properties on September 12,
1994, Stanley McCabe, former Field Representative of Magnum and a director of
Magnum, received 60,000 restricted shares of Magnum's common stock for locating
and evaluating the prospect for Magnum.
Management of the Company believes that while no independent determination was
made concerning the fairness and reasonableness of the terms, the terms and
conditions of the compensation are comparable and are at least as favorable as
could be obtained from an unrelated party. Management based this belief on the
fact that it is common in the industry to compensate a person for locating a
prospect, and based on the prior experience of Management, the amount of the fee
was consistent with those fees paid to third parties.
44
<PAGE>
INFORMATION CONCERNING HUNTER
DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Hunter, (formerly Intramerican Corporation) was formed in 1922 for the purpose
of exploring and developing mining properties (formerly as East Utah Mining
Company) in Utah and Colorado. In 1980, its name was changed to Intramerican Oil
and Minerals, Inc. and incorporated in Pennsylvania. Simultaneously, it acquired
producing oil and gas properties from previously formed limited partnerships.
The mining properties were sold in 1986 with the proceeds used to repay bank
debt. The corporate name was changed to Intramerican Corporation effective
October 1, 1990, to more accurately reflect its broader base of operations.
Effective December 1, 1990, Sunbelt Energy, Inc. and Subsidiaries ("Sunbelt")
merged with a subsidiary of Intramerican Corporation. Following two years of
combined operations and in conjunction with changes in executive management
during 1992, the corporate name was changed to Hunter Resources, Inc., effective
November 10, 1992, to better emphasize Intramerican Corporation's involvement in
the energy resources business.
Historically, Hunter has been an energy development and management company with
business objectives in four principal activities:(1) the acquisition, production
and sale of crude oil, condensate and natural gas; (2) the gathering,
transmission, and marketing of natural gas; (3) the business of managing and
operating producing oil and natural gas properties for interest owners; and (4)
providing consulting and U.S. export services to facilitate Latin American trade
in energy products. Hunter's operations have historically been conducted in five
states, predominately in the Southwest region of the continental United States,
and Mexico.
RECENT DEVELOPMENTS.
On July 21, 1995, Hunter executed a definitive agreement to combine with Magnum,
an American Stock Exchange publicly traded company, subject to Hunter
shareholder approval (the "Business Combination"). Pursuant to the definitive
agreement, Magnum issued to Hunter 2,750,000 shares of newly issued restricted
common stock in exchange for substantially all of the assets of Hunter subject
to its liabilities. Hunter's assets primarily consisted of capital stock
ownership in wholly-owned subsidiaries and capital stock ownership interests in
limited liability companies (the "Hunter Subsidiaries").
On December 19, 1995 to be effective December 22, 1995, Magnum and Hunter
entered into an amended Agreement and Plan of Reorganization and Plan of
Liquidation, as amended. The amendment was executed by Hunter shareholders
holding in excess of fifty percent (50%) of the outstanding common stock of
Hunter and one hundred percent (100%) of the outstanding preferred stock of
Hunter. The amended agreement provided for the issuance to Hunter of an
additional 2,335,077 shares of newly issued Magnum restricted common stock and
111,825 shares of Magnum Series C preferred stock. In summary, the total
consideration paid by Magnum for the Hunter subsidiaries was 5,085,077 shares of
restricted common stock and 111,825 shares of Series C preferred stock.
AS THE AMENDED AGREEMENT WAS EXECUTED BY HUNTER SHAREHOLDERS OWNING IN EXCESS OF
FIFTY PERCENT (50%)OF THE OUTSTANDING COMMON STOCK OF HUNTER AND ONE HUNDRED
PERCENT (100%) OF THE OUTSTANDING PREFERRED STOCK OF HUNTER, ALL SUBSEQUENT
DISCUSSIONS AND DISCLOSURES OF THE BUSINESS OF HUNTER IN THIS DOCUMENT INCLUDE
THE ASSETS AND ASSOCIATED LIABILITIES OF THE HUNTER SUBSIDIARIES THAT HAVE BEEN
SOLD AND TRANSFERRED TO MAGNUM IN THE BUSINESS COMBINATION.
In negotiating the number of Magnum common and preferred shares to be issued to
Hunter for the acquisition of the Hunter Subsidiaries, consideration was given
to the value of the assets of each of the Hunter Subsidiaries, the proved oil
and gas reserves of the Hunter Subsidiaries (as applicable), the assumption of
existing liabilities, and the market value of Magnum's common and preferred
shares (prior to the date of the amended agreement through the date that the
definitive agreement was executed and announced).
45
<PAGE>
As a result of the issuance of the common and preferred shares to Hunter by
Magnum, Hunter is the owner of approximately 43.8% of Magnum's total issued and
outstanding common stock. After approval of the Business Combination at the
Hunter shareholder meeting anticipated to be held in June 1996, the common and
preferred shares issued by Magnum will be subsequently distributed to the
respective Hunter shareholders and Hunter will be liquidated. Shareholders of
Hunter common stock are expected to receive one common share of Magnum for every
3.916 common shares of Hunter redeemed. Shareholders of Hunter preferred stock
are expected to receive 1.241 shares of Magnum Series C preferred stock and
3.987 shares of Magnum common stock for every share of Hunter preferred
redeemed.
GAS GATHERING, TRANSMISSION AND MARKETING.
Hunter Gas Gathering, Inc. (formerly IOM, Gas, Inc.), a wholly owned subsidiary
of Hunter, owns and operates three gas gathering pipeline systems located in the
states of Oklahoma, Texas and Louisiana. Compression services are provided by
this subsidiary on all three systems through leases of the equipment from third
parties. The North Appleby system is located primarily in Nacogdoches County, in
East Texas. Approximately 39 wells are connected to the system. Approximately
100 mmcf per month is delivered through the system into a Natural Gas Pipeline
Co. pipeline. The Schulter system is located in Okmulgee County, Oklahoma.
Approximately 10 mmcf per month is delivered from 38 wells into the Enogex
pipeline. The Longwood system is located in Caddo Parish, Louisiana.
Approximately 30 mmcf per month flows through the system from 28 wells, and the
gas is delivered into the Koch-Gateway pipeline. A substantial portion of the
gas delivered through these systems is marketed by Hunter as an added service to
the producers from whom Hunter acquires the gas.
PETROLEUM MANAGEMENT AND CONSULTING SERVICES.
Gruy Petroleum Management Co. ("Gruy") has a 37-year history of managing
properties for banks, financial institutions, bankruptcy trustees, estates,
individual investors, trusts and independent oil and gas companies. Hunter
provides drilling, completion, field inspections, joint interest billings,
revenue receipt and distribution services, regulatory filings with the
appropriate state and federal authorities, management of limited partnership
interests, gas marketing, environmental compliance services, expert witness
testimony and petroleum engineering services. Gruy manages, operates and
provides consulting services on oil and gas properties located in five states,
predominately within the Mid- Continent, West Texas, Eastern New Mexico and Gulf
Coast regions of the United States.
46
<PAGE>
EMPLOYEES AND MANAGEMENT.
Hunter has a total of 14 employees, all of whom are employed full-time. Seven of
Hunter's eight officers are employed by Hunter on a full-time basis and Morgan
F. Johnston, Secretary, consults with Hunter on a part-time basis.
Held Office Position with the Registrant
Name Age Since or Registrant's Subsidiaries
- ---- --- ----------- ----------------------------
Gary C. Evans 39 1990 Chairman, President and
Chief Executive Officer
Matthew C. Lutz 62 1993 Vice Chairman and Exploration
and Business Development
Manager
R. Renn Rothrock, Jr. 53 1986 Executive Vice President
Richard R. Frazier 49 1994 Senior Vice President and
Chief Operating Officer
Russell D. Talley 63 1991* Executive Vice President/
Drilling Manager
Steven P. Smart 41 1995 Senior Vice President and
Chief Financial Officer
David M. Keglovits 44 1977 Vice President/Controller
Assistant Secretary
* Officer of Registrant's Subsidiary(s) only.
GARY C. EVANS, age 39, Chairman, President and Chief Executive Officer of
Hunter since September, 1992. Previously, President and Chief Operating Officer
of Hunter from December, 1990 to September, 1992. Chairman and Chief Executive
Officer of all of the Hunter's subsidiaries since their formation or
acquisition. From 1981 to 1985, Mr. Evans was associated with the Mercantile
Bank of Canada where he held various positions including Vice President and
Manager of the Energy Division of the southwestern United States. As an oil and
gas lending officer of a $4.5 billion Canadian bank, he initiated and managed an
energy loan portfolio in excess of $125 million. From 1978 to 1981, he served in
various capacities with National Bank of Commerce (now BancTexas) including its
Credit Manager and Credit Officer. Mr. Evans serves on the Board of Directors of
S.O.I. Industries, Inc., and Digital Communications Technology Corporation, two
American Stock Exchange listed Companies. Mr. Evans was appointed President,
Chief Executive Officer and a Director of Magnum in December 1995.
MATTHEW C. LUTZ, age 61, Vice Chairman and Exploration and Business
Development Manager of Hunter since September 1993. From 1984 through 1992, Mr.
Lutz was Senior Vice President of Exploration and on the Board of Directors of
Enserch Exploration, Inc. with responsibility for Hunter's worldwide oil and gas
exploration and development program. During his tenure, Enserch substantially
increased its gas and oil reserves while having among the lowest reserve
replacement costs in the industry. Prior to joining Enserch, Mr. Lutz spent
twenty-eight years with Getty Oil Company. He advanced through several
technical, supervisory and managerial positions which gave him various
responsibilities including exploration, production, lease acquisition,
administration and financial planning. Mr. Lutz played a major role in Getty's
discoveries of reserves in the Onshore and Offshore United States. Mr. Lutz was
appointed Vice Chairman and Exploration and Business Development Manager of
Magnum in December 1995.
R. RENN ROTHROCK JR., age 53, President of Gruy Petroleum Management Co.
since January 1994. He previously was Executive Vice President and Chief
Operating Officer when he joined Gruy in May 1987. From November 1977 to
February 1981, Mr. Rothrock was Vice President and Energy Development Manager of
First National Bank of Mobile, Alabama. From 1981 to 1983, he served as
Executive Vice President of Energy Assets International, a public company that
raised $170 million for mezzanine financing of oil and gas ventures. From 1983
to 1986, he generated and managed his own producing wells, gas gathering and
transportation system in the State of Texas. In 1986, Mr. Rothrock structured
and negotiated the merger between Gruy Engineering Corporation and Energy Assets
International and served as Executive Vice President and General Manager of Gruy
Engineering Corporation until the purchase of Gruy Petroleum Management Co. by
Hunter Resources, Inc. in May 1988. Mr. Rothrock has served in various
engineering and management positions for both major
47
<PAGE>
and large independent oil and gas companies. He has been in charge of all
engineering functions including profit improvement in the district office of a
major oil company. He has also served as engineering editor of PETROLEUM
ENGINEER INTERNATIONAL where he was responsible for the technical content of all
material published in the magazine. Mr. Rothrock is a registered Professional
Engineer and member of the Society of Petroleum Engineers, National Academy of
Forensic Engineers and several other industry organizations. Mr. Rothrock earned
a BS in petroleum engineering in 1965 and a MS in engineering in 1969, both from
the University of Oklahoma.
RICHARD R. FRAZIER, age 49, Senior Vice President and Chief Operating
Officer Gruy Petroleum Management Co., since January 1994. From 1977 to 1993,
Mr. Frazier was with Edisto Resources Corporation in Dallas, serving as
Executive Vice President Exploration and Production from 1983 to 1993. Mr.
Frazier had overall responsibility for Hunter's property acquisition,
exploration, drilling, production, gas marketing and engineering functions. He
has been responsible for hiring staff and coordinating efforts to evaluate,
purchase and operate over $400 million in oil and gas properties, consisting of
2,200 wells in 19 states. From 1972 to 1976, Mr. Frazier served as District
Production Superintendent and Petroleum Engineer with HNG Oil Company (Now Enron
Oil & Gas) in Midland, Texas. Mr. Frazier's initial employment, from 1968 to
1971, was with Amerada Hess Corporation as a Petroleum Engineer involved in
numerous projects in Oklahoma and Texas. Mr. Frazier graduated in 1970 from
University of Tulsa with a Bachelor of Science Degree in Petroleum Engineering.
He is a registered Professional Engineer in Texas and a member of Society of
Petroleum Engineers and many other professional organizations.
RUSSELL D. TALLEY, age 63, Executive Vice President and Drilling Manager of
Gruy Petroleum Management Co., Houston Division, since January 1991. Mr. Talley
brings 33 years of international and domestic drilling and production experience
to Gruy. From 1959 to 1970, Mr. Talley worked for Diamond Shamrock Oil & Gas
Company in Amarillo, where he held substantial responsibilities in drilling,
production and workover programs. He supervised operations for more than 300
properties, and drilled and completed wells in the predominant oil and gas
basins of the Mid-Continent and portions of Canada. From 1970 to 1985, Mr.
Talley worked for Samedan Oil Corporation in Houston, where he became the
Manager of Offshore Drilling and Production. He managed all domestic and
Canadian drilling operations, supervised international operations in Ecuador,
the North Sea and Canada. From 1985 to 1987, Mr. Talley was vice president of
operations for Seagull Energy E & P, Inc. in Houston, where he was responsible
for all onshore and offshore drilling operations. In 1988 he established Texstar
Energy Operators, Inc., which was acquired by Gruy in 1991.
STEVEN P. SMART, age 41, Senior Vice President and Chief Financial Officer
of Hunter. Prior to joining Hunter, Mr. Smart was Controller for the last three
years for a publicly traded oil and gas company on the Vancouver Stock Exchange.
Prior to that time, Mr. Smart was Chief Financial Officer for a privately held
independent oil and gas company. Mr. Smart has more than nineteen years of
experience in the oil and gas industry including five years in the audit
department with Touche Ross (now Deloitte & Touche). Mr. Smart's experience
includes the areas of public reporting to the Securities and Exchange
Commission, energy industry tax issues, public and private partnership
reporting, and acquisitions. Mr. Smart is a Certified Public Accountant. Mr.
Smart was appointed Senior Vice President and Chief Financial Officer of Magnum.
DAVID M. KEGLOVITS, age 43, Vice President and Treasurer of Gruy Petroleum
Management Co. Mr. Keglovits joined Gruy in March 1977 as an accountant before
holding the positions of Assistant Controller, Controller and Chief Accounting
Officer. From December 1974 to December 1976, Mr. Keglovits was employed by Bell
Helicopter International in their financial management office in Tehran, Iran.
Mr. Keglovits is an Honors Graduate of the University of Texas at Austin,
earning a BBA in Accounting.
PROPERTIES
GENERAL.
The following tables summarize certain information regarding the estimated
proved oil and gas reserves as of December 31, 1995 and 1994 and estimated
future net revenues from oil and gas operations of Hunter as of December 31,
1995 and 1994. Such estimated reserves and future net revenues, as set forth
herein and the Supplemental Information to Hunter's Consolidated Financial
Statements, are primarily based upon reports prepared by James J. Weisman, Jr.,
an independent registered petroleum engineer. All such reserves are located in
the continental United States.
48
<PAGE>
The reserve data herein represent only estimates that are based on subjective
determinations. Accordingly, the estimates are expected to change as additional
information becomes available. Of necessity, estimates of oil and gas reserves
are projections based upon engineering and economic data. There are
uncertainties inherent in the interpretation of such data, and there can be no
assurance that the proved reserves set forth herein will ultimately be produced,
or that the estimated revenues will be realized within the periods indicated. It
should be noted that petroleum engineering is not an exact science but instead
involves estimates based upon many factors.
Oil and gas prices used herein are based on the most current price available at
the time the reserve study was prepared. The average price used in the following
estimates at December 31, 1995, was $17.50 per barrel of oil and $2.03 per Mcf
of gas (includes higher prices received on "rich" BTU gas and condensate). Lease
operating costs are based on historical operating expense records.
Hunter accounts for its oil and gas properties using the full cost method, which
requires Hunter to compare the net capitalized costs of its oil and gas
properties to the present value of the projected cash flows from the associated
oil and gas reserves.
PROVED OIL AND GAS RESERVES.
Oil reserves are expressed in barrels (Bbls) and gas reserves are expressed in
thousands of cubic feet (Mcf). The following table sets forth proved reserves
considered to be economically recoverable under normal operating methods and
existing conditions, at prices and operating costs prevailing at the date
thereof.
PROVED OIL AND GAS RESERVES
AS OF DECEMBER 31,
1995(1) 1994
Oil (Bbls) Gas (Mcf) Oil (Bbls) Gas(Mcf)
--------- ---------- --------- ---------
Proved Developed Reserves 1,434,070 7,884,429 761,615 2,137,089
Proved Undeveloped Reserves 1,688,312 3,088,869 368,436 680,792
--------- ---------- --------- ---------
TOTAL PROVED RESERVES 3,122,382 10,973,298 1,130,051 2,817,881
========= ========== ========= =========
- ------------------------
(1) Information disclosed here represents properties acquired by Magnum.
Definition of Reserves -- The reserve categories are summarized as follows:
Proved developed reserves are those quantities of crude oil, natural gas and
natural gas liquids which, upon analysis of geological and engineering data,
demonstrate with reasonable certainty to be recoverable in the future from known
oil and gas reservoirs under existing economic and operating conditions. This
classification includes: (a) proved developed producing reserves which are those
expected to be recovered from currently producing zones under continuation of
present operating methods; (b) proved developed non-producing reserves consist
of (i) reserves from wells which have been completed and tested but are not yet
producing due to lack of market or minor completion problems which are expected
to be corrected, and (ii) reserves currently behind the pipe in existing wells
and are expected to be productive due to both the well log characteristics and
analogous production in the immediate vicinity of the well.
Proved undeveloped reserves are those reserves which may be expected either from
existing wells that will require an expenditure to develop or from undrilled
acreage adjacent to productive units which are reasonably certain of production
when drilled. Future development costs have been estimated to be approximately
$5,889,000 at December 31, 1995 with significant expenditures expected to begin
in 1996 and 1997.
49
<PAGE>
No other estimates of total proven net oil or gas reserves have been filed by
Hunter with, or included in any report to, any United States authority or agency
pertaining to Hunter's individual reserves since the beginning of Hunter's last
fiscal year.
ESTIMATED FUTURE NET REVENUES.
The following table sets forth an estimate of future net revenues after
deducting applicable production and ad valorem taxes, future capital costs and
operating expenses, but before consideration of federal income taxes. The future
net revenues have been discounted at an annual rate of 10% to determine the
"present value". The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties. Estimates have been made in accordance with
current Securities and Exchange Commission guidelines concerning the use of
constant oil and gas prices and operating costs in reserve evaluations.
Estimated Discounted
Future Net Revenues
As of December 31,
1995(1) 1994
------- ----
Developed $17,062,871 $ 5,899,522
=========== ===========
Developed and Undeveloped $30,507,735 $ 7,994,297
=========== ===========
- -----------------------------
(1) Information disclosed here represents properties acquired by Magnum.
OIL AND GAS PRODUCTION.
The following table shows the approximate net production attributable to
Hunter's oil and gas interests for the periods indicated.
Net Production
For the Year Ended
December 31,
1995 1994
---- ----
Oil (Bbls) 54,307 24,605
======= =======
Natural Gas (Mcf) 445,886 127,854
======= =======
The following table shows the average sales price per barrel of oil and mcf of
natural gas and the average production osts attributable to Hunter's oil and gas
production for the periods indicated.
Average Sales Price
For the Year Ended
December 31,
1995 1994
---- ----
Average Sales Price (1)
Oil (Bbl) $16.09 $13.70
====== ======
Natural Gas (Mcf) $ 1.69 $ 1.90
======= =======
Average Production Cost (2)
Per equivalent barrel (3) $ 5.92 $ 8.96
====== =======
Per dollar of sales 0.47 0.71
======= =======
- -------------------
(1) Before deduction of production taxes.
(2) Excludes depletion, depreciation and amortization. Production cost includes
lease operating expenses and production and ad valorem taxes, if
applicable.
(3) Gas production is converted to equivalent barrels at the rate of six mcf of
gas per barrel, representing the estimated relative energy content of
natural gas and oil.
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<PAGE>
PRODUCTIVE WELLS
The total gross and net wells, expressed separately for oil and gas, as of
December 31, 1995 and 1994 are as follows:
PRODUCTIVE WELLS(2)(3)
AS OF DECEMBER 31,
1995
Gross (1) Net(1)
Location Oil Gas Total Oil Gas Total
- -------- --- --- ----- ---- --- -----
Texas 121 16 137 32.84 7.53 40.37
Oklahoma 241 19 260 43.82 5.98 49.80
Mississippi 4 0 4 2.98 0 2.98
New Mexico 3 4 7 2.48 1.14 3.62
Kansas 2 0 2 1.74 0 1.74
--- --- ---- ------ ----- -----
371 39 410 83.86 14.65 98.51
=== == === ====== ===== =====
Productive Wells (2)
As of December 31,
1994
Gross (1) Net (1)
Location Oil Gas Total Oil Gas Totals
- -------- --- --- ----- ---- --- ------
Texas 56 13 69 1.87 6.22 8.09
Oklahoma 246 20 266 12.17 3.44 15.61
Mississippi 4 - 4 2.98 - 2.98
--- --- ----- ----- ---- ------
306 33 339 17.02 9.66 26.68
=== == === ===== ==== =====
- --------------------
(1) The number of gross wells is the total number of wells in which a
fractional working interest is owned. The number of net wells is the sum of
the fractional working interests owned by Hunter in gross wells expressed
in whole numbers and decimal fractions thereof.
(2) There were no producing wells in 1995 or 1994 that were producing from
multiple completion zones.
(3) Information disclosed here represents properties acquired by Magnum.
DRILLING RESULTS.
Hunter's drilling activities were limited to workovers on existing wells during
1995 and 1994.
DEVELOPED AND UNDEVELOPED ACREAGE.
The following tables set forth the approximate gross and net acres of productive
properties in which Hunter has a working interest, and "net" refers to the sum
of the fractional working interests owned by or attributable to Hunter in gross
acres. Developed acreage is that acreage spaced or assignable to productive
wells. Undeveloped acreage is considered to be that acreage on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of oil and gas regardless of whether or not such acreage
contains proven reserves.
Leasehold Acreage
As of December 31,
Developed Undeveloped
Gross Acres Net Acres Gross Acres Net Acres
1995(1) 60,747 20,072 2,326 1,777
====== ====== ===== =====
1994 43,985 10,548 1,738 1,631
====== ====== ===== =====
51
<PAGE>
(1) Information disclosed here represents properties acquired by Magnum.
Essentially all of Hunter's oil and gas interests are working interests or
overriding royalty interests under standard onshore oil and gas leases, rather
than mineral ownership or fee title. The defensibility of Hunter's title to such
interests in most cases is supported by written title opinions. Substantially
all of Hunter's oil and gas properties are pledged to a financial institution
under certain credit agreements.
OFFICE SPACE.
Hunter leases office space as follows:
Location Square Feet Lease Expires
-------- ----------- -------------
Irving (Las Colinas), Texas 7,439 November 1, 2001
TITLE OF PROPERTIES.
Title to the properties acquired by Hunter is subject to royalty, overriding
royalty, carried and other similar interests, contractual arrangements customary
in the oil and gas industry, liens incident to operating agreements, liens for
current taxes not yet due and to other comparatively minor encumbrances.
Hunter's oil and gas properties and gas gathering systems are mortgaged to
secure borrowings under bank credit agreements assumed by Magnum in the Business
Combination.
COMPETITION.
The oil and gas industry is highly competitive. Competitors include major oil
companies, other independent oil and gas concerns, and individual producers and
operators, many of which have financing resources, staffs and facilities
substantially greater than those of Hunter. In addition, Hunter frequently
encounters competition in the acquisition of oil and gas properties, gas
gathering systems, and in its management and consulting business. The principal
means of competition are the amount and terms of the consideration offered. When
possible, Hunter tries to avoid open competitive bidding for acquisition
opportunities. The principal means of competition with respect to the sale of
oil and natural gas production are product availability and price. While it is
not possible for Hunter to state accurately its position in the oil and gas
industry, Hunter believes that it represents a minor competitive factor.
BUSINESS RISKS AND REGULATION.
Hunter's operations are affected in various degrees by political developments,
federal and state laws, and regulations. In particular, oil and gas production
operations and economics are affected by price controls, tax and other laws
relating to the petroleum industry. They are all affected by the changes in such
laws, by changing administrative regulations, and by the interpretation and
application of such rules and regulations.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion. Numerous departments and agencies, both federal and
state, are authorized by statute to issue and have issued rules and regulations
binding on the oil and gas industry and its individual members, some of which
carry substantial penalties for the failure to comply. The regulatory burden on
the oil and gas industry increases Hunter's cost of doing business and,
consequently, affects its profitability. Sales of crude oil, condensate and
natural gas liquids by Hunter can be made at uncontrolled market prices.
Changing Oil and Natural Gas Prices and Markets -- The market for oil and
natural gas produced by Hunter depends on factors beyond its control, including
the extent of domestic production and imports of oil and natural gas, the
proximity and capacity of natural gas pipelines and other transportation
facilities, demand for oil and natural gas, the marketing of competitive fuels,
and the effects of state and federal regulation of oil and natural gas
production and sales. The oil and gas industry as a whole also competes with
other industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
52
<PAGE>
For over a decade, there has been a significant overall decline in the demand
for natural gas in the United States and in the prices paid for oil and gas. The
oversupply was caused primarily by a decrease in market demand and unusually
warm weather conditions. Seasonal variations exist to the extent that the demand
for natural gas is somewhat lower during the summer months than during the
winter season. Gas prices have been extremely volatile over the past year and it
is not known whether or not a current surplus in natural gas deliverability
exists as has been the case over the past six (6) years. Crude oil prices are
affected by a variety of factors. Since domestic crude oil price controls were
lifted in 1981, the principal factors influencing the prices received by
producers of domestic crude oil have been the pricing and production of the
members of the Organization of Petroleum Exporting Countries ("OPEC"). While
Hunter cannot predict the future prices of oil and natural gas, the potential
for further price volatility is probable and the possibility of price declines
exists.
Hunter's production revenues and the carrying value of its oil and natural gas
properties are affected by changes in oil and natural gas prices. Moreover,
Hunter's current borrowings under certain credit facilities, its borrowing
capacity and its ability to obtain additional capital are directly affected by
oil and natural gas prices.
Federal Regulation of Sales of Natural Gas -- Historically, the transportation
and sale for resale of gas in interstate commerce have been regulated pursuant
to the Natural Gas Act of 1938 (the "NGA). In addition, since 1978, maximum
selling prices of certain categories of gas, whether sold in interstate or
intrastate commerce, have been regulated pursuant to the Natural Gas Policy Act
of 1978 (the "NGPA"). These statutes are administered by the Federal Energy
Regulatory Commission ("FERC"). The provisions of these acts and regulations are
complex. However, as a result of the enactment of the Natural Gas Wellhead
Decontrol Act of 1989 (the "Decontrol Act"), the remaining restrictions imposed
on the NGA and the NGPA with respect to "first sales" terminate on the earlier
of January 1, 1993 or the expiration of the applicable contract. Any gas not
otherwise deregulated prior to January 1, 1993 was deregulated as of that date.
The effect of the Decontrol Act is to remove all remaining price controls under
the NGPA and to remove all remaining FERC certificate and abandonment
jurisdiction otherwise applicable to producers under the NGA.
Several major regulatory changes have been implemented by the FERC from 1985 to
the present that affect the economics of natural gas production, transportation
and sales. In addition, the FERC continues to promulgate revisions to various
aspects of the rules and regulations affecting those segments of the natural gas
industry which remain subject to the FERC's jurisdiction. The stated purpose of
many of these regulatory changes is to promote competition among the various
sectors of the gas industry. The ultimate impact of the complex and overlapping
rules and regulations issued by the FERC since 1985 cannot be predicted. In
addition, many aspects of these regulatory developments have not become final
but are still pending judicial and FERC final decisions.
FERC has issued Orders 636 and 636-A for the purpose of restructuring the gas
pipeline sales and transportation services in the United States to promote
competition in all phases of the gas industry. The impact of these FERC Orders
has significantly altered the traditional way natural gas has been purchased,
transported, and sold. The restructuring requirements that have emerged from the
administrative and judicial review process has varied significantly from those
previously in effect.
The price at which Hunter's natural gas may be sold will continue to be affected
by a number of factors, including the price of alternate fuels such as oil and
coal and competition among various natural gas producers and marketers.
Environmental Regulation -- Various federal, state and local laws and
regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, may affect Hunter's
operations and costs as a result of the effect on oil and gas exploration,
development and production operations. At present, substantially all of Hunter's
U.S. production of crude oil, condensate and natural gas is in states having
conservation laws and regulations. It is not anticipated that Hunter will be
required in the near future to expend amounts that are material in relation to
its total capital expenditures program by reason of environmental laws and
regulations, but inasmuch as such laws and regulations are frequently changed,
Hunter is unable to predict the ultimate cost of compliance. Hunter is able to
control directly the operations of only those wells of which it acts as
operator. Notwithstanding Hunter's lack of control over wells operated by
others, the failure of the operator to comply with applicable environmental
regulations may, in certain circumstances, be attributable to Hunter.
53
<PAGE>
State Regulation -- State statutes and regulations require permits for drilling
operations, drilling bonds and reports concerning operations. The Railroad
Commission of Texas regulates the production of oil and natural gas produced by
Hunter in Texas. Similar regulations are in effect in all states in which Hunter
produces oil and natural gas. Most states in which Hunter owns and operates
properties have statutes, rules or regulations governing conservation matters,
including the unitization or pooling of oil and gas properties, establishing of
maximum rates or production from oil and gas wells and the spacing of such
wells. Many states also restrict production to the market demand for oil and
gas. Such statutes and regulations may limit the rate at which oil and gas could
otherwise be produced from Hunter's properties. Some states have enacted
statutes prescribing ceiling prices for gas sold within their state.
Many states have issued new regulations under authority of the Clean Air Act
Amendments of 1990, and such regulations are in the process of being
implemented. These regulations may require certain oil and gas related
installations to obtain federally enforceable operating permits and may require
the monitoring of emissions; however, the impact of these regulations on Hunter
is expected to be minor. Several states have also adopted regulations on the
handling, transportation, storage, and disposal of naturally occurring
radioactive materials that are found in oil and gas operations.
LEGAL PROCEEDINGS.
Gruy Petroleum Management Co. is involved in several legal and administrative
proceedings arising in the ordinary course of its oil and gas management
business, none of which are material in the opinion of Management. Although the
ultimate outcome of these proceedings cannot be ascertained at this time,
management believes that the ultimate resolution of these matters will be
favorable. See Note 6 to the Financial Statements (Item 7 of this Form 10-KSB).
SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS.
Hunter had no matters requiring a vote of security holders during the fourth
quarter of 1995 nor any as of June 30, 1996.
MARKET FOR HUNTER'S COMMON STOCK AND RELATED MATTERS.
Hunter's Common Stock is traded on the Boston Stock Exchange and the
over-the-counter market. No cash dividends have been declared or paid during the
past two years with respect to the Common Stock of Hunter. The table below
reflects inter-dealer prices without retail mark-up, mark-down or conversion,
and may not represent actual transactions. The following table indicates the
high and low sales price for the Company's Common Stock for each quarter during
the past two years and for the first quarter of 1996 as reported by the Boston
Stock Exchange:
High Low
---- ---
QUARTER ENDED
March 31, 1996 3/4 1/4
June 30, 1996 1 1/2
ENDING DECEMBER 31, 1995
Fourth Quarter 7/16 1/4
Third Quarter 1/2 5/16
Second Quarter 7/16 1/8
First Quarter 3/8 1/8
ENDING DECEMBER 31, 1994
Fourth Quarter 7/16 1/4
Third Quarter 11/16 5/16
Second Quarter 3/4 5/16
First Quarter 3/4 5/16
54
<PAGE>
Hunter has declared no dividends on its Common Stock during 1994, 1995 or
through March 31st of 1996. There are restrictions on Hunter with respect to
declaring dividends on its common stock due to certain loan agreement covenants
with its primary commercial bank.
The following table indicates the approximate number of holders of record of
Hunter's Common Stock as of June 30, 1996:
Title of Class Number of Holders of Record
-------------- ---------------------------
Common Stock--$.10 par value 3,248
Note:The approximate number of holders of record does not include participants
in securities position listings.
DIRECTORS AND EXECUTIVE OFFICERS OF HUNTER.
For information with regard to the Company's current executive officers located
in this document. The current directors of the Company (who serve for a term of
one year and until their successors are appointed) together with certain
information about them, are as follows:
Name Age Director Since Officer Since Position
Gary C. Evans 39 December 1990 December 1990 Chairman, President,
CEO, Director
Matthew C. Lutz 62 September 1993 September 1993 Vice Chairman and
Exploration and
Business Development
Manager
Gerald W. Bolfing 67 August 1993 N/A Director
Oscar Lindemann 74 November 1995 N/A Director
James E. Upfield 75 August 1992 N/A Director
MR. EVANS, age 39, Chairman, President and Chief Executive Officer of
Hunter since September, 1992. Previously, President and Chief Operating Officer
of Hunter from December, 1990 to September, 1992. Chairman and Chief Executive
Officer of all of the Hunter's subsidiaries since their formation or
acquisition. From 1981 to 1985, Mr. Evans was associated with the Mercantile
Bank of Canada where he held various positions including Vice President and
Manager of the Energy Division of the southwestern United States. As an oil and
gas lending officer of a $4.5 billion Canadian bank, he initiated and managed an
energy loan portfolio in excess of $125 million. From 1978 to 1981, he served in
various capacities with National Bank of Commerce (now BancTexas) including its
Credit Manager and Credit Officer. Mr. Evans serves on the Board of Directors of
S.O.I. Industries, Inc. and Digital Communications Technology Corporation, two
American Stock Exchange listed Companies. Mr. Evans was appointed President,
Chief Executive Officer and a Director of Magnum Petroleum, Inc. in December
1995.
MR. LUTZ, age 62, Vice Chairman and Exploration and Business Development
Manager of Hunter since September 1993. From 1984 through 1992, Mr. Lutz was
Senior Vice President of Exploration and on the Board of Directors of Enserch
Exploration, Inc. with responsibility for the company's worldwide oil and gas
exploration and development program. During his tenure, Enserch substantially
increased its gas and oil reserves while having among the lowest reserve
replacement costs in the industry. Prior to joining Enserch, Mr. Lutz spent
twenty-eight years with Getty Oil Company. He advanced through several
technical, supervisory and managerial positions which gave him various
responsibilities including exploration, production, lease acquisition,
administration and financial planning. Mr. Lutz played a major role in Getty's
discoveries of reserves in the Onshore and Offshore United States. Mr. Lutz was
appointed Vice Chairman and Business Development Manager of Magnum Petroleum,
Inc. in December 1995.
55
<PAGE>
MR. BOLFING, age 66, Director of Hunter since August 1993. He is an
investor in the oil and gas business and a past officer of one of Hunter's
former subsidiaries. From 1962 to 1980, Mr. Bolfing was a partner in Bolfing
Food Stores of Waco, Texas. During this time, he also joined American Service
Company in Atlanta, Georgia, from 1964 to 1965, and was active with Cable
Advertising Systems, Inc. of Kerrville, Texas from 1978 to 1981. He joined the
Company's former subsidiary which was engaged in the well servicing business in
1981 where he remained active until its divestiture in 1992. Mr. Bolfing was
appointed as a Director of Magnum Petroleum, Inc. in December 1995.
MR. LINDEMANN, age 74, Director of Hunter since November, 1995. Mr.
Lindemann has over forty years experience in the financial industry. Mr.
Lindemann began his banking career with the Texas Bank and Trust in Dallas,
Texas in 1951. He served the bank until 1977 in many capacities, including Chief
Executive Officer and Chairman of the Board. Since leaving Texas Bank and Trust,
he has served as Vice Chairman of both the United National Bank and the National
Bank of Commerce, also in Dallas. Over many years, he has played a key role as
an innovator and consultant to the banking industry. He retired from active
involvement in commercial banking in 1987. Mr. Lindemann is a former President
of the Texas Bankers Association, and State representative to the American
Bankers Association. He was a Founding Director and Board Member of VISA, and a
member of the Reserve City Bankers Association. He has served as an instructor
at both the Southwestern Graduate School of Banking at S.M.U. and the School of
Banking of the South at L.S.U. He has also served as a faculty member for four
years in the College of Business at the University of Texas in Austin teaching
various banking subjects. Mr. Lindemann is active in the United Fund in Dallas.
He has served as Treasurer of the American Red Cross, and Chairman of the
Investment Committee of the American Lutheran Church. Mr. Lindemann was
appointed as a Director of Magnum Petroleum, Inc. in December 1995.
MR. UPFIELD, age 75, Director of Hunter since August 1992. Mr. Upfield is
Chairman of Temtex Industries, Inc. (NASDAQ - "TMTX") based in Dallas, Texas, a
company that produces consumer hard goods, building materials and defense
products for the U.S. Government. In 1969, Mr. Upfield served on a select
Presidential Committee serving postal operations of the United States of
America. He later accepted the responsibility for the Dallas region which
encompassed the states of Texas and Louisiana. From 1959 to 1967, Mr. Upfield
was President of Baifield Industries and its predecessor, a company he founded
in 1949 which merged with Baifield in 1963. Baifield was engaged in prime
Government contracts for military systems and sub-systems in the production of
high strength-light weight metal products. In 1967, Baifield Industries, Inc.
was acquired by Automatic Sprinkler Corporation of America, where Mr. Upfield
remained until resigning in 1968 to pursue other business opportunities. Mr.
Upfield was appointed as a Director of Magnum Petroleum, Inc. in December 1995.
56
<PAGE>
EXECUTIVE COMPENSATION.
Compensation which the Company paid for services in all capacities for the year
ended December 31, 1995, to the executive officers of the Company is set forth
as follows:
</TABLE>
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) * (f) (g) (h) (i)
Name, Year Salary Bonus Other Number
Principal Annual Restricted Options LTP All Other
Position Compensation Stock SARs Payouts Compensation
Gary C. Evans, 1995 $110,833 $50,000 $1,816 - 100,000 - -
======== ======= ======
Chairman,
President, CEO 1994 $121,000 -0- $6,959 - - - -
======== === ======
1993 $113,500 -0- $8,659 - - - -
======== === ======
Matthew C. Lutz 1995 $ 21,000 -0- $-0- - 100,000 - -
======== === ======
Vice Chairman
1994 $ 37,225 -0- $-0- - - - -
======== === ======
1993 $ -0- -0- $-0 - - - -
======== ======= ======
</TABLE>
* Other Annual Compensation includes automobile allowances, payment for director
meetings, and insurance benefits.
Each outside director (non-officer) of the Company receives $500.00 plus
expenses for attendance at each Board of Directors meeting. Each outside
director elected prior to 1995 has previously been granted a stock option for
the purchase in whole or in part of 100,000 shares of restricted common stock of
the Company at a price of $0.1875 per share for a term of ten years from
election date or ninety days after termination or resignation as a Director,
whichever occurs first. During 1995, additional options to purchase 100,000
shares of common stock at $.1875 per share over a five year period were granted
to each director who exercised in whole their existing options. Therefore, in
1995 certain directors exercised options previously granted to purchase 400,000
shares of common stock at $.1875 per share.
The Chairman, President, and Chief Executive Officer has been granted stock
options totaling 350,000 shares exercisable under terms and conditions similar
to those granted to the outside directors. During 1995, the Chairman was granted
an additional option to purchase 100,000 shares of common stock at $.1875 per
share over a five year period if he exercised an existing 100,000 share option.
Therefore, in 1995 the Chairman exercised an option to purchase 100,000 shares
of common stock at $.1875 per share.
The Vice Chairman of the Board has a Consulting and Advisory Agreement (the
"Agreement") with the Company providing, among other things, for a compensation
plan in connection with his capacity as Business Development Manager of the
Company. The Agreement, which expires in September 1996, provides general
compensation guidelines to be considered in determining fees or other
consideration that could be provided to the Vice Chairman for his role in
arranging such transactions as oil and gas property acquisitions, mergers, the
obtaining of management contracts or other business directly attributable to his
efforts. Under the Agreement, Mr. Lutz provides his time and expertise without a
specific salary, but at the discretion of the CEO and the Board of Directors,
Mr. Lutz may earn compensation related to his specific accomplishments and
additionally is provided with office space and certain expense reimbursements.
The Agreement also provided for options to purchase 200,000 shares of restricted
common stock of the Company for a period of five years at an exercise price of
$0.1875 per share. During 1995, the Vice Chairman was granted an additional
option to purchase 100,000 shares of common stock at $.1875 per share over a
five year period if he exercised an existing option in a similar amount.
Therefore, in 1995 the Vice Chairman exercised an option to purchase 100,000
shares of common stock at $.1875 per share.
57
<PAGE>
At the discretion of the President, all employees of the Company are eligible to
receive options for the purchase of Common Stock under the Company's Incentive
Stock Option Plan (the "Plan"). As of December 31, 1995, 186,000 share options
were issued and 14,000 share options had been exercised under the Plan by
certain former employees.
The following tables present the options granted and exercised by executive
officers during 1995:
<TABLE>
<CAPTION>
OPTION GRANTS IN 1995
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(a) (b) (c) (d) (e)
Percent of Total
Options/SARs
Options/ Granted to
SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/SH) Date
- --------------------- ----------- ---------------- ---------------- ----------
Gary C. Evans
Chairman, President & 100,000 25% $.1875 4/27/2000
CEO
Matthew C. Lutz
Vice Chairman 100,000 25% $.1875 4/27/2000
- --------------------- ----------- ---------------- ---------------- ----------
</TABLE>
<TABLE>
<CAPTION>
OPTION EXERCISES IN 1995 AND DECEMBER 31, 1995 OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(a) (b) (c) (d) (e)
Shares Number of
Unexercised Value of Unexercised
Acquired Options/SARs In-the-Money Options/
at FY-End (#) SARs at FY End ($)
Name on Exercise (#) Value Realized ($) Exercisable/ Exercisable/
Unexercisable Unexercisable
- --------------------- --------------- ------------------ ------------- ---------------------
Gary C. Evans
Chairman, President & 100,000 $18,750 350,000 $65,625
CEO
Matthew C. Lutz
Vice Chairman 100,000 $18,750 200,000 $37,500
</TABLE>
58
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information reflecting the holdings of
each shareholder who was known to the Company to be the beneficial owner, as
defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended, of
five percent (5%) or more of the Common Stock or Preferred Stock of the Company
as of June 30, 1996. Unless otherwise indicated, each of the persons or entities
named below as beneficially owning the shares set forth opposite his or its name
has sole voting power and sole investment power with respect to such shares, and
the shares are directly owned.
Name and Address of Amount and Nature of Percentage of
Beneficial Owner Beneficial Ownership Outstanding Shares (2)
Gary C. Evans 5,647,759 Shares (1) 29.1%
600 East Las Colinas Blvd. 90,133 Preferred Shares (3) 100.0%
Suite 1200
Irving, Texas 75039
Jesse G. Edwards 1,537,261 Shares (4) 7.9%
1890 Valley View Lane
Tyler, Texas 75703
Gerald W. Bolfing 1,360,794 Shares (6) 7.0%
3613 Rockyledge
Waco, TX 76708
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the Common
Stock and Preferred Stock of the Company beneficially owned by each director and
nominee for director of the Company, and by all directors and officers as a
group as of June 30, 1996. Unless otherwise indicated, each of the persons named
below as beneficially owning the shares set forth opposite his or its name has
sole voting power and sole investment power with respect to such shares, and the
shares are directly owned.
Name of Amount and Nature of Percentage of
Beneficial Owner Beneficial Ownership Outstanding Shares (%)
Gary C. Evans 5,647,759 Shares (1) 29.1%
90,133 Pref. Shares (3) 100.0%
Matthew C. Lutz 500,000 Shares (5) 2.6%
Oscar Lindemann - - -
Gerald W. Bolfing 1,360,794 Shares (6) 7.0%
James E. Upfield 210,000 Shares (6) 1.1%
Steven P. Smart 5,000 Shares Nil
--------- ------
Directors and Officers 7,723,553 Shares 39.8%
as a Group ========= ======
90,133 Pref.-Shares-(3) 100.0%
========= ======
(1) Includes i) 5,231,092 shares directly owned; ii) 350,000 shares underlying
stock options; and iii) 66,667 shares held by a company controlled by Mr.
Evans' wife.
59
<PAGE>
(2) Outstanding shares for the purpose of calculating this percentage do not
include shares held by or for the account of the Company, but include
shares which can be acquired within sixty days by the exercise of stock
options or conversion rights.
(3) Mr. Evans is the owner of all of the outstanding Preferred Stock of the
Company with such stock being entitled to one vote per share. The Board of
Directors of the Company holds a proxy to vote Mr. Evans' Preferred Stock.
(4) Includes 30,000 shares held in the name of Mr. Edwards' wife.
(5) Includes 200,000 shares underlying stock options.
(6) Includes 100,000 shares underlying stock options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the combination with the Company, Magnum assumed a note
receivable from a company affiliated with the President of the Company in the
amount of $54,615 at December 31, 1995. This note bears interest at ten percent
and is due on demand. Additionally, trade accounts receivable from this
affiliated company were $51,346 at December 31, 1995.
At December 31, 1995 , the Company had unsecured personal accounts receivable
from the President in the amount of $10,000 as of December 31, 1995, which
amount has been subsequently repaid.
At December 31, 1995, the Company had a note receivable with a balance of
$120,758 from an owner in an affiliated limited liability company. The note
provided for interest at ten percent and had a due date of December 31, 1995,
which was extended to June 30, 1996. The note was acquired by Magnum in the
combination with the Company.
60
<PAGE>
DESCRIPTION OF MAGNUM'S SECURITIES
The following statements are qualified in their entirety by reference to the
detailed provisions of Magnum's Articles of Incorporation and Bylaws.
Magnum is presently authorized to issue 50,000,000 shares of $.002 par value
Common Stock, and 10,000,000 shares of $.001 per value Preferred Stock. The
holders of common stock, including the shares of common stock offered hereby,
issuable upon conversion or exercise of the Series C Preferred Stock and
Warrants, are entitled to equal dividends and distributions, per share, with
respect to the common stock when, as and if declared by the Board of Directors
from funds legally available therefor. No holder of any shares of common stock
has a preemptive right to subscribe for any securities of Magnum nor are any
common shares subject to redemption or convertible into other securities of
Magnum. Upon liquidation, dissolution or winding up of Magnum, and after payment
of creditors and preferred Shareholders, if any, the assets will be divided
pro-rata on a share-for-share basis among the holders of the shares of common
stock. All shares of common stock now outstanding are fully paid, validly issued
and non-assessable. Holders of Magnum's common stock do not have cumulative
voting rights, so that the holders of more than 50% of the combined shares
voting for the election of directors may elect all of the directors, if they
choose to do so and, in that event, the holders of the remaining shares will not
be able to elect any members to the Board of Directors.
Under Magnum's Articles of Incorporation, as amended, the Board of Directors has
the power, without further action by the holders of the Common Stock, to
designate the relative rights and preferences of the preferred stock, and issue
the preferred stock in such one or more series as designated by the Board of
Directors. The designation of rights and preferences could include preferences
as to liquidation, redemption and conversion rights, voting rights, dividends or
other preferences, any of which may be dilutive of the interest of the holders
of the Common Stock or the Preferred Stock of the other series. The issuance of
Preferred Stock may have the effect of delaying or preventing a change in
control of Magnum without further shareholder action and may have adversely
effect the rights and powers, including voting rights, of the holders of Common
Stock. In certain circumstances, the issuance of preferred stock could depress
the market price of the Common Stock. The Board of Directors effects a
designation of each series of Preferred Stock by filing with the Nevada
Secretary of State a Certificate of Designation defining the rights and
preferences of each such series. Documents so filed are matters of public record
and may be examined in accordance with procedures of the Nevada Secretary of
State, or copies thereof may be obtained from Magnum.
In addition to the Series C Preferred Stock, the Board of Directors previously
designated a Series A Preferred Stock and issued 216,000 shares of such series,
of which 80,000 shares are presently outstanding. The Board of Directors also
previously designated a Series B Preferred Stock and issued 248,500 shares of
such series, of which only 74,550 shares remain outstanding. The other Series B
shares have been canceled as part of an offer Magnum has made to Series B
holders to convert their units into common stock, which terminated August 20,
1993. Shares of preferred stock in addition to Series A, Series B and Series C
may be designated by the Board of Directors and issued from time to time in one
or more series with such designations, voting powers, if any, preferences and
relative, participating, optional or other special rights, and such
qualifications, limitations and restrictions thereof, as may be determined by
resolution of the Board of Directors of Magnum. Within the limits of authorized
but unissued preferred stock, such additional series and shares of preferred
stock may be designated by the Board of Directors and issued without further
approval of the holders of Magnum's voting securities, except that so long as
any Series C Preferred Stock is outstanding, Magnum may not issue any more
series of stock having rights senior to the Series C Preferred Stock without the
approval of holders of at least 50% of the outstanding shares of Series C
Preferred Stock.
SERIES C CONVERTIBLE PREFERRED STOCK
The Series C Convertible Preferred Stock has been authorized by the Board of
Directors of Magnum as a series of Magnum's preferred stock, $.001 par value,
consisting of 625,000 shares. As of July 11, 1996, all of the Series C
Convertible Preferred Stock has been called for redemption thereby eliminating
any future dividend payments on this issue.
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DIVIDENDS
Holders of shares of Series C Preferred Stock have been entitled to receive,
when, as and if declared by the Board of Directors out of funds at the time
legally available therefor, cash dividends at an annual rate of $1.10 per share,
and no more, payable quarterly in arrears on March 31, June 30, September 30,
and December 31 of each year beginning December 31, 1993, except that if any
such date is a Saturday, Sunday or legal holiday, then such dividends shall be
payable on the next day that is not a Saturday, Sunday or legal holiday.
Dividends have accrued and have been cumulative from the date of first issuance
of the Series C Preferred Stock and have been payable to holders of record as
they appear on the stock books of Magnum on such record dates as are fixed by
the Board of Directors.
The Series C Preferred Stock has been junior as to dividends to any series or
class of Magnum's stock hereafter issued that ranks senior as to dividends to
the Series C Preferred Stock ("senior dividend stock"). If at any time Magnum
has failed to declare and pay or set apart for payment accrued and unpaid
dividends on any senior dividend stock, Magnum may not pay any dividend on the
Series C Preferred Stock. Magnum made a prior allocation of 50% of the net
operating revenues received by the working interest owners from the West Dilley
Prospect to pay dividends on the Series A Preferred Stock, and the revenues so
allocated will not be available to pay any dividends on the Series C Preferred
Stock. To the extent of such allocation, Series C Preferred Stock has been
junior to Series A Preferred Stock. There are presently 80,000 shares of Series
A Preferred Stock outstanding, which are entitled to an aggregate dividend in
the total amount of $7.50 per share, payable only from the allocation of 50% of
the Net Operating Revenue received by the working interest owners in the West
Dilley Prospect. Magnum owns 90% of the working interest in such prospect. The
dividend is cumulative to the extent accrued but not paid. To date no dividends
have accrued or been paid on the Series A Preferred Stock because the revenues
generated from such prospect which are allocable to the working interests have
not exceeded working interests costs, so no net operating revenue has yet been
generated that could be allocated to the payment of such dividends. Magnum also
made a prior allocation of 50% of net operating revenues from all oil and gas
produced from properties acquired or drilled after September 5, 1992 (which
constitutes most of Magnum's present properties as well as all future
acquisitions) and 50% of its remaining revenues from the West Dilley Prospect
(after the Series A allocation), to make production payments of the Series B
Production Certificates included in the Series B Units previously offered and
sold by Magnum. 74,550 shares of Series B Preferred Stock remain outstanding,
which are entitled to a cumulative annual dividend of $.35 per share ($26,093
total annually) until redeemed or converted, and twelve Series B Production
Certificates. Holders of the Certificates representing this right are entitled
to receive production payments from the 50% allocation of net operating
revenues. The Series B Preferred Stock will be automatically redeemed and
converted into common stock at the rate of one common share for two Series B
Preferred Stock, and the Series B Production Certificates will expire when the
sum of dividends paid with respect to the Series B Preferred Stock, plus
production payments made with respect to the Series B Production Certificates,
equals $10,000 (200%) of the original investment) per outstanding Series B Unit.
Recently, Magnum made an offer to Series B Unit holders to exchange each of
their Series B Production Certificates for 1,250 shares of Common Stock, and as
part of such exchange, to agree to convert their Series B Preferred Stock into
Common Stock not later than December 31, 1995. Pursuant to such offer, all but
twelve of the Series B Production Certificates were exchanged for Common Stock.
With only twelve Series B Production Certificates remaining outstanding, this
requires a total payback of $60,000, of which $3,500 has already been paid back
through dividends on the Series B Preferred Shares which are part of the same
Units. Until this payout is made, Series C Preferred Stock has been junior to
Series B Preferred Stock in the payment of dividends, and the revenues allocated
to make production payments on the Series B Production Certificates has not been
available for payment of dividends on the Series C Preferred Stock. Magnum made
its first dividend payment on the Class B Preferred Stock in January of 1993.
Subsequent dividend payments were made in April and July of 1993. The total
amount of dividend payments to date is $40,343, of which only $7,219 was paid
with respect to shares that remain outstanding. No production payments have been
made to date with respect to the Series B Production Certificates. The
Certificates are subject to a $175.00 annual servicing fee, and the revenue less
costs allocable to the Certificates have not exceeded such fee.
The Series C Preferred Stock has had priority as to dividends over the Common
Stock and any series or class of Magnum's stock hereafter issued that ranks
junior as to dividends to the Preferred Stock ("junior dividend stock"), and no
dividend (other than dividends payable solely in Common Stock or any other
series or class of Magnum's stock hereafter issued that ranks junior as to
dividends to the Series C Preferred Stock) may be declared, paid or set apart
for payment on, and no purchase, redemption or other acquisition may be made by
Magnum of, any Common Stock or junior dividend stock unless all accrued and
unpaid dividends on the Series C Preferred Stock have been declared and paid or
set apart for payment. Magnum may
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not pay dividends on any class or series of Magnum's stock having parity with
the Series C Preferred Stock as to dividends, if any such stock is hereafter
issued ("parity dividend stock"), unless it has declared and paid or set apart
for payment, or contemporaneously declares and pays or sets apart for payment,
all accrued and unpaid dividends for all prior periods on the Series C Preferred
Stock; and Magnum may not pay dividends on the Series C Preferred Stock unless
it has declared and paid or set apart for payment, or contemporaneously declares
and pays or sets apart for payment all accrued and unpaid dividends for all
prior periods on the parity dividend stock. Whenever all accrued dividends are
not paid in full on the Series C Preferred Stock or any parity dividend stock,
all dividends declared on the Series C Preferred Stock and such parity dividend
stock will be declared and made pro rata so that the amount of dividends
declared per share on the Series C Preferred Stock and such parity dividend
stock will bear the same ratio that accrued and unpaid dividends per share on
the Series C Preferred Stock and such parity dividend stock bear to each other.
The annual dividend rate on the Series C Preferred Stock is $1.10 per share. The
amount of dividends payable per share of Series C Preferred Stock for each
quarterly dividend will be computed by dividing the annual dividend amount by
four. The amount of dividends payable for the initial dividend period and any
period shorter than a full dividend period will be computed on the basis of a
365-day year. No interest will be payable in respect of any dividend payment on
the Series C Preferred Stock which may be in arrears.
REDEMPTION
The Preferred Stock may not be redeemed prior to two years after the date of
this Prospectus. Any shares of Series C Preferred Stock outstanding thereafter
are redeemable for cash, in whole or in part, at anytime, at the option of
Magnum, at $10.50 per share plus any accrued and unpaid dividends, whether or
not declared.
If fewer than all of the outstanding shares of Series C Preferred Stock are to
be redeemed, Magnum will select those to be redeemed pro rata or by lot. There
is no mandatory redemption or sinking fund obligation with respect to the Series
C Preferred Stock. In the event that Magnum has failed to pay accrued dividends
on the Series C Preferred Stock, it may not redeem any of the then outstanding
Series C Preferred Stock until all such accrued and unpaid dividends and the
then current quarterly dividend, pro-rated until the redemption date, have been
paid in full on all shares of Series C Preferred Stock.
Notice of redemption will be mailed at least 30 days but not more than 60 days
before the redemption date to each holder of record of Series C Preferred Stock
to be redeemed at the holder's address shown on the stock transfer books of
Magnum. After the redemption date, unless there shall have been a default in
payment of the redemption price, dividends will cease to accrue on the shares of
Series C Preferred Stock called the redemption, and all rights of the holders of
such Preferred Stock will terminate except the right to receive the redemption
without interest, which shall be paid within 10 days of the redemption date.
CONVERSION
Automatic Conversion. If, during the twenty consecutive trading days immediately
prior to November 12, 1994, or any twenty consecutive trading days thereafter,
the closing bid price for Magnum's Common Stock as quoted by any market maker in
the over-the-counter market bulletin board or on NASDAQ or any national
securities exchange, shall equal or exceed $5.00 per share, then the Series C
Preferred Stock will be automatically converted into Common Stock as described
below.
Optional Conversion. The holder of any shares of Series C Preferred Stock will
have the right, at the holder's option, to convert any or all such shares into
Common Stock. The Conversion Rate will be three shares of Common Stock per share
of Series C Preferred Stock, If the Series C Preferred Stock is called for
redemption, the conversion right will terminate at the close of business on the
business day prior to the date fixed for redemption (unless Magnum defaults in
the payment of the redemption price). Dividends, if any, declared and accrued
but unpaid at the date of conversion will be paid in cash upon conversion, or at
the option of Magnum will be converted into shares of Common Stock at the rate
of $3.33 per share. No fractional shares of Common Stock will be issued upon
conversion for accrued and unpaid dividends, if any, but in lieu thereof, the
amount of any such dividends will be paid in cash by Magnum. The Conversion
Price will be subject to adjustment in the event of the issuance of stock as a
dividend on the Common Stock, subdivisions or combinations of the
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Common Stock or similar events. Except as stated in the preceding sentence, the
Series C Preferred Stock does not have rights protecting against dilution
resulting from the sale of additional shares of Common Stock for less than the
Conversion Price or the current market price of Magnum's securities.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of Magnum, holders of
shares of Series C Preferred Stock are entitled to receive, out of legally
available assets, a liquidation preference of $10.00 per share, plus an amount
equal to any accrued and unpaid dividends to the payment date, and no more,
before any payment or distribution is made to the holders of Common Stock or any
series or class of Magnum's stock hereafter issued that ranks junior as to
liquidation rights to the Series C Preferred Stock. But the holders of Series C
Preferred Stock will not be entitled to receive the liquidation preference of
such shares until the liquidation preferences of Series A & B Preferred Stock,
and any other series or class of Magnum's stock hereafter issued that ranks
senior as to liquidation rights to the Series C Preferred Stock ("senior
liquidation stock") has been paid in full. The 80,000 shares of Series A
Preferred Stock which are presently outstanding have a liquidation preference of
the liquidation proceeds from Magnum's interest in the West Dilley Prospect. The
74,550 shares of Series B Preferred Stock which are outstanding are entitled to
a liquidation preference of $.001 per share, which would amount to $74.55 in the
aggregate. Series B Production Certificates are not entitled to any
distributions upon liquidation, dissolution or winding up. The holders of Series
C Preferred Stock and all other series or classes of Magnum's stock hereafter
issued that rank on a parity as to liquidation rights with the Series C
Preferred Stock are entitled to share ratably, in accordance with the respective
preferential amounts payable on such stock, in any distribution (after payment
of the liquidation preference of the senior liquidation stock) which is not
sufficient to pay in full the aggregate of the amounts payable thereon. After
payment in full of the liquidation preference of the shares of Series C
Preferred Stock, the holders of such shares will not be entitled to any further
participation in any distribution of assets by Magnum. Neither a consolidation,
merger or other business combination of Magnum with or into another corporation
or other entity nor a sale or transfer of all or part of Magnum's assets for
cash, securities or other property will be considered a liquidation, dissolution
or winding up of Magnum.
VOTING RIGHTS
The holders of the Series C Preferred Stock will have no voting rights except as
described below or required by law. In connection with any such vote, each
outstanding share of Series C Preferred Stock will be entitled to one vote
excluding shares held by Magnum or any entity controlled by Magnum, which shares
shall have no voting rights.
In the event a default is incurred in the payment of any dividend declared by
the Board of Directors on the Series C Preferred Stock and such default has not
been cured by the date of any annual (or special in lieu of annual) meeting of
shareholders at which directors are to be elected occurring at least one year
but less than two years after the date of such default, the holders of Series C
Preferred Stock shall have the right, voting as a class at such meeting, to
elect two members to Magnum's board of directors.
So long as any Series C Preferred Stock is outstanding, Magnum shall not,
without the affirmative vote of the holders of at least two-thirds of all
outstanding shares of Series C Preferred Stock, voting separately as a class,
(I) amend, alter or repeal any provision of the Articles of Incorporation or the
Bylaws of Magnum so as to affect adversely the relative rights, preferences,
qualification, limitations or restrictions of the Series C Preferred Stock, (ii)
authorize or issue, or increase the authorized amount of, any additional class
or series of stock or any security convertible into stock of such class or
series, senior to or on a parity with the Series C Preferred Stock as to
dividends or upon liquidation, dissolution or winding up of Magnum, (iii) effect
any reclassification of the Series C Preferred Stock, or (iv) effect a merger of
Magnum with any other corporation, exchange of shares or a sale of all or
substantially all of the assets of Magnum if the shareholders of Magnum
immediately prior to such merger, share exchange or sale will own less than 50%
of the shares of the surviving (in case of a merger) or acquiring (in the case
of an exchange of shares or a sale of assets) corporation immediately following
such merger, share exchange or sale. Holders of Series C Preferred Stock will
not have the right to vote for election of directors in any circumstance.
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OTHER PROVISIONS
Holders of Series C Preferred Stock shall be entitled to notice in the event of
(a) the granting by Magnum to all holders of its Common Stock of rights to
purchase any shares of capital stock or any other rights or (b) any
reclassification of the Common Stock, any consolidation of Magnum with, or
merger of Magnum into, any other persons, any merger of any person into Magnum
(other than a merger that does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock), or any sale or
transfer of all or substantially all of the assets of Magnum.
The shares of Series C Preferred Stock, are duly and validly issued, fully paid
and nonassessable. Magnum has reserved from its authorized but unissued Common
Stock a sufficient number of shares for issuance upon conversion of the Series C
Preferred Stock.
The holders of the shares of Series C Preferred Stock have no preemptive rights
with respect to any securities of Magnum.
WARRANTS
Each Warrant represents the right to purchase one share of Common Stock at an
initial exercise of $5.50 per share. The exercise price and the number of shares
issuable upon exercise of the Warrants are subject to adjustment in certain
events, to the extent that such events occur after the effective date of the
Warrant Agency Agreement, including the issuance of Common Stock as a dividend
on shares of Common Stock, subdivisions or combinations of the Common Stock or
similar events. Except as stated in the preceding sentence, the Warrants do not
contain provisions protecting against dilution resulting from the sale of
additional shares of Common Stock for less that the exercise price of the
Warrants or the current market price of Magnum's securities.
The Warrants are exercisable during the period ending November 12, 1998. Holders
of Warrants may exercise their Warrants for the purchase of shares of Common
Stock only if a current prospectus relating to such shares is then in effect and
only if such shares are qualified for sale, or deemed to be exempt from
qualifications, under applicable state securities law. Magnum will use its best
efforts to maintain a current prospectus relating to such shares of Common Stock
at all times when the market price of the Common Stock exceeds the exercise
price of the Warrants until the expiration date of the Warrants, although there
can be no assurance that Magnum will be able to do so. Whether a current
prospectus is in effect or not, the outstanding Warrants will be redeemable, in
whole or in part, at the option of Magnum, upon not fewer than 30 days notice,
at a redemption price equal to $.02 per Warrant beginning November 12, 1995, or
earlier if the closing bid price for the Common Stock on any national securities
exchange or automated interdealer quotation system or over-the-counter bulletin
board equals or exceeds $6.75 for five consecutive trading days. Although Magnum
would not normally do so, in the event it calls for redemption of the Warrants
at a time when a current prospectus is not in effect, warrant holders would have
no opportunity to exercise their warrants, and would be compelled to accept the
redemption price of $.02 per warrant. If Magnum should call for redemption of
the Warrants when a current prospectus is in effect, warrant holders will have a
minimum of 30 days in which to decide wether to exercise their warrants, after
which they will have to accept the redemption price.
Holders of Warrants will be entitled to notice in the event of (a) the granting
by Magnum to all holders of its Common Stock of rights to purchase any share of
capital stock or any other rights or (b) any reclassification of the Common
Stock, any consolidation of Magnum with, or merger of Magnum into any other
person or merger of any other person into Magnum (other than a merger that does
not result in any reclassification, conversion, exchange or cancellation of any
outstanding shares of Common Stock), or any sale or transfer of all or
substantially all of the assets of Magnum.
Magnum has reserved from its authorized unissued shares a sufficient number of
shares of Common Stock for issuance on exercise of the Warrants. During the
period in which a Warrant is exercisable, exercise of such Warrant may be
effected by delivery of the Warrant, duly endorsed for exercise and accompanied
by payment of the exercise price and any applicable taxes or governmental
charges, to the Warrant Agent. The shares of Common Stock issuable on exercise
of the Warrant will be, when issued in accordance with the Warrants, fully paid
and non-assessable.
For the life of the Warrants the holders thereof have the opportunity to profit
from a rise in the market for Magnum's Common Stock, with a resulting dilution
in the interest of all other shareholders. So long as the Warrants are
outstanding,
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the terms on which Magnum could obtain additional capital may be adversely
affected. The holders of such Warrants might be expected to exercise them at a
time when Magnum would, in all likelihood, be able to obtain any needed capital
by a new offering of securities on terms more favorable than those provided for
by such Warrants.
Except as described above, the holders of the Warrants have no rights at
Shareholders of Magnum until they exercise their Warrants.
INDEMNIFICATION
The General Corporation Law of Nevada permits provisions in the articles,
by-laws or resolutions approved by shareholders which limit liability of
directors for breach of fiduciary duty of certain specified circumstances.
Magnum's by-laws indemnify its Officers and Directors to the full extent
permitted by Nevada law. The by-laws with certain exceptions eliminate any
personal liability of a Director to Magnum or its shareholders for monetary
damages for the breach of a Director's fiduciary duty and therefore a Director
cannot be held liable for damages to Magnum or its shareholders for gross
negligence or lack of due care in carrying out his fiduciary duties as a
Director. Magnum's Articles provide for indemnification to the full extent
permitted under law which includes all liability, damages and costs or expenses
arising from or in connection with service for, unemployment by, or other
affiliation with Magnum to the maximum extent and under all circumstances
permitted by law. Nevada law permits indemnification if a director or officer
acts in good faith in a manner reasonable believed to be in, or not opposed to,
the best interest's of the corporation. A director or officer must be
indemnified as to any matter in which he successfully defends himself.
Indemnification is prohibited as to any matter in which the director or officer
is adjudged liable to the corporation. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers, and controlling persons of Magnum pursuant to the foregoing provisions
or otherwise, Magnum has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
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Differences between Pennsylvania and Nevada Corporate Law and the respective
companies Articles and By laws.
A comparison of material differences between Pennsylvania corporate law (the
"PBCL") and Nevada corporate law (the "NGCL") and the differences in the
relationship between shareholders and the companies that result from the
difference between the articles, by-laws and other governing documents follows:
<TABLE>
<CAPTION>
Hunter Magnum
(a Pennsylvania corporation) (a Nevada corporation)
<S> <C> <C>
1. Amendment of Articles Proposed by Resolution of Proposed by Resolution of Board of Directors
of Incorporation Board of Directors
OR
Petition of shareholders Approval by a majority of votes
entitled to cast at least
10% of all votes entitled
to be cast.
Approved by a majority of votes.
2. Shareholder Meetings Called by Board of Directors. Called by Board of Directors.
OR
By shareholders entitled to cast at least 20% of
all votes entitled to be cast.
3. Shareholder Action Under the PBCL, if the by-laws provide, any Under the NGCL, unless the articles of
Without a Meeting action required or permitted to be taken at any incorporation provide otherwise, any action
meeting of shareholders may be taken without required or permitted to be taken at any
a meeting if a consent setting forth the action meeting of shareholders may be taken without
so taken is signed by the holders of outstanding a meeting if a consent setting forth the action so
stock having not less than the minimum taken is signed by the holders of outstanding
number of votes that would be necessary to stock having not less than the minimum number
authorize or take such action at a meeting at of votes that would be necessary to authorize or
which all shares entitled to vote thereon were take such action at a meeting at which all shares
present and voted. Otherwise shareholders entitled to vote thereon were present and voted.
need unanimous consent. The by-laws do not Magnum's Articles of Incorporation do not
provide for less than unanimous consent. provide otherwise.
4. Mergers, Exchanges, Materially the same as the NGCL Under the NGCL, the holders of a majority of
Consolidations and the outstanding stock of the corporation entitled
Dissolutions to vote thereon may approve an agreement of
merger or exchange or the dissolution of a
corporation, unless the Board of Directors or
articles of incorporation require a greater vote.
The Magnum Articles of Incorporation and
Bylaws do not provide differently.
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5. Disposition of Assets Materially the same as the NGCL Under the NGCL, the sale, lease or exchange of
all, or substantially all, of the assets of a
corporation must be authorized by a resolution
adopted by the holders of a majority of the
outstanding stock of the corporation entitled to
vote thereon, provided, however, that the
articles of incorporation of the corporation may
require the vote of a larger proportion of the
shareholders and a separate vote or consent of
any class of shareholders. The Articles of
Incorporation of Magnum do not provide for a
different vote requirement.
6. Election and Removal of The Bylaws of Hunter provide that directors The Bylaws of Magnumr provide that directors
Directors may be elected at either annual or special may be elected at either annual or special
meetings of the shareholders by a majority meetings of the shareholders by a
vote of the shareholders present and may be majority vote of the shareholders present
removed from office, with or without cause, and may be removed from office, with or without
by the holders of a majority of the shares cause, by the holders of a majority of the shares
of common stock outstanding. of common stock outstanding.
7. Preemptive Rights Materially the same as NGCL Under the NGCL, shareholders of a Nevada
corporation have no preemptive rights unless
granted in the Articles. Articles do not provide
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8. Dissenter's Rights Materially the same as Nevada except that the Under the NGCL, unless the articles of
PBCL provides for appraisal rights in incorporation, bylaws or a resolution of the
connection with a sale, lease or exchange of board of directors provide otherwise,
assets. shareholders of a corporation have the right to
dissent from and obtain appraisal rights in
connection with any merger or exchange of the
corporation, but not in connection with a sale,
lease, or exchange of assets. Magnum has not
provided for appraisal rights in connection with a
sale, lease or exchange of assets. Further, under
the NGCL, after a corporation has received a demand
for payment by a dissenting shareholder, the
corporation must estimate the fair value of such
dissenting shareholder's shares, plus accrued
interest, and send such payment to the dissenting
shareholder. However, a dissenting shareholder can
notify the corporation of his own estimate of the
fair value of his shares and the amount of interest
due after the corporation has made or offered to make
payment for such shareholder's shares. If the
corporation receives a demand for payment with a
shareholder's own estimate of the fair value of his
shares and neither the corporation nor the
shareholder agrees upon the amount, the corporation
must file a petition in the district court in the
corporation's resident county asking for a finding
and determination of the fair market value of the
shareholder's shares. If the corporation fails to
file such a petition within 60 days after receiving
demand for payment, the corporation must pay each
dissenting shareholder whose demand remains unsettled
the amount demanded. All dissenting shareholders
whose demands remain unsettled must be made parties
to the proceeding initiated by the corporation, and
each dissenting shareholder who is a party to the
proceeding is entitled to a judgement by the court
for an amount the court finds is the fair value of
his shares, plus interest, which exceeds the amount
paid by the corporation.
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9. Distributions The PBCL provides that a distribution may not Same as the PBCL except that there is no
be made if, after giving effect thereto: (1) the provision for the Board to base its
corporation would be unable to pay its debts as determination that a distribution is not
they become due in the usual course of its prohibited on the current value of the assets and
business; or (2) the total assets of the liabilities of the corporation, either valued
corporation would be less than the sum of its separately or valued in segments or as an entity
total liabilities plus the amount that would be as a going concern.
needed, if the corporation were to be
dissolved to satisfy the preferential rights
upon dissolution of shareholders whose
preferential rights are superior to those
receiving the distribution. The board of
directors may base its determination that a
distribution is not prohibited under
subsection (2) on one or more of the
following: (1) the book values of the assets
and liabilities of the corporation. (2) a
valuation that takes into consideration
unrealized appreciation and depreciation or
other changes in value of the assets and
liabilities of the corporation; (3) the
current value of the assets and liabilities
of the corporation, either valued separately
or valued in segments or as an entirety as a
going concern; or (4) any other method that
is reasonable in the circumstances.
A distribution is defined as a direct or
indirect transfer of money or other property
(except its own shares or options, rights or
warrants to acquire its own shares) or
incurrence of indebtedness by a corporation
to or for the benefits of any or all of its
shareholders in respect of any of its shares
whether by dividend or by purchase,
redemption or other acquisition of its
shares or otherwise.
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10. Transaction With Materially the same as the NGCL The NGCL generally provides that no contract
Interested Directors or other transaction between a corporation and one
or more of its directors or officers is void or
voidable solely for this reason if any of the
following exist: (a) The fact of the common
directorship, office or financial interest is
disclosed or known to the board of directors or
committee and the board of committee authorizes,
approves or ratifies the contract or transaction
in good faith by a vote sufficient for the purpose
without counting the vote or votes of the common
or interested director or directors. (b) The fact
of the common directorship, office or financial
interest is disclosed or known to the stockholders,
and they approve or ratify the contract or
transaction in good faith by a majority vote of
stockholders holding a majority of the voting power.
(c) The contract or transaction is fair as to the
corporation at the time it is authorized or
approved.
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11. Restrictions on Certain While the PBCL has similar provisions as the Nevada has adopted a statutory provision which
Business Combinations NGCL regarding restrictions on certain is intended to curb abusive takeovers of Nevada
with Interested business combinations with interested corporations. Under the NGCL, business
Stockholders stockholders, the Hunter bylaws provide that combinations with interested stockholders are
such provisions of the PBCL shall not be not permitted for a period of five years
applicable to the company. following the date such stockholder became an
interested stockholder. The NGCL defines an
interested stockholder, generally, as a person
who owns 10% or more of the outstanding
shares of the corporation's voting stock.
In addition, the NGCL generally disallows the
exercise of voting rights with respect to "control
shares" of an "issuing corporation" held by an
"acquiring person," unless such voting rights are
conferred by a majority vote of the disinterested
stockholders. "Control shares" are the voting
shares of an issuing corporation acquired in
connection with the acquisition of a "controlling
interest". "Controlling interest" is defined in
terms of threshold levels of voting share
ownership, which thresholds, whenever each may
be crossed, trigger application of the voting bar
with respect to the shares newly acquired.
The NGCL also permits directors to resist a change
or potential change in control of the corporation
if the directors determine that the change or
potential change is opposed to or not in the best
interest of the corporation. As a result, the
Board of Directors of Magnum may have more
discretion than the Board of Directors of Hunter
in considering and responding to unsolicited
offers to purchase a controlling interest in
Magnum.
12. Right to Examine Voting The PBCL provides that voting listed may be The NGCL is similar to the PBCL except that to
Lists, Books and Records inspected at any lawfully called shareholder examine the books and records, a shareholder
of the Company meeting. In addition, the corporate records may must have been a shareholderfor at least 6 months
be examined by shareholders upon a written or over 5% or greater than the outstanding shares
demand stating a proper purpose. of the Company. In addition, a shareholder who
owns 15% or more of the outstanding shares of
the Company may inspect the financial records
of the Company.
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13. Liabilities Under provisions of the Articles of The General Corporation Law of Nevada permits
of Directors Incorporation and By-Laws of Hunter, each provisions in the articles, by-laws or resolutions
person who is or was a director or officer of approved by shareholders which limit liability of
Hunter will be indemnified by Hunter as a directors for breach of fiduciary duty of certain
matter of right to the extent permitted specified circumstances. Magnum's by-laws indemnify
or authorized by law. The effects of the its Officers and Directors to the full extent
Articles of Incorporation, By-Laws, and permitted by Nevada law. The by-laws with certain
other applicable law may be summarized as exceptions eliminate any personal liability of a
follows: Director to Magnum or its shareholders for monetary
(a) Under Pennsylvania law, to the damages for the breach of a Director's fiduciary
extent that such a person is successful on duty and therefore a Director cannot be held liable
the merits in defense of a suit or proceeding for damages to Magnum or its shareholders for gross
brought against him by reason of the fact negligence or lack of due care in carrying out his
that he is a director or officer of Hunter, fiduciary duties as a Director. Magnum's Articles
he shall be indemnified against expenses provide for indemnification to the full extent
(including attorney's fees) reasonably permitted under law which includes all liability,
incurred in connection with such action. damages and costs or expenses arising from or in
(b) In other circumstances, a director connection with service for, unemployment by, or
of Hunter may be indemnified against expenses other affiliation with Magnum to the maximum extent
(including attorney's fees) judgements, fines and under all circumstances permitted by law.
and amounts paid in settlement actually and Nevada law permits indemnification if a director or
reasonably incurred by him in connection officer acts in good faith in a manner reasonable
with such action, suit or proceeding if he believed to be in, or not opposed to, the best
acted in good faith and in a manner he interest's of the corporation. A director or
reasonably believed to be in and not opposed officer must be indemnified as to any matter in
to the best interest of Hunter, and, with which he successfully defends himself.
respect to a criminal action or proceeding, Indemnification is prohibited as to any matter in
had reasonable cause to believe his conduct which the director or officer is adjudged liable to
was unlawful; however in any action or suit the corporation. Insofar as indemnification for
by or in the right of Hunter to procure a liabilities arising under the Securities Act may be
judgement in its favor, such person will not permitted to directors, officers, and controlling
be indemnified if he has been adjudged to be persons of Magnum pursuant to the foregoing
liable to Hunter unless and only to the extent provisions or otherwise, Magnum has been advised that
that the court in which such action or suit was in the opinion of the Securities and Exchange
brought determines upon application that, despite Commission, such indemnification is against public
the adjudication of liability but in view of all policy as expressed in the Act and is, therefore,
the circumstances of the case, such person is unenforceable.
fairly and reasonably entitled to indemnity for
such expenses which such court deems proper. A
determination that indemnification of a director
or officer is proper will be made by a
disinterested majority of Hunter's Board of
Directors, by independent legal counsel, or by
the stockholders of Hunter.
(c) Hunter's By-Laws contain a provision
which eliminates, to the fullest extent permitted
by the State of Pennsylvania, the liability of
directors of Hunter from monetary damages arising
from any breach of fiduciary duties as a member
of Hunter's Board of Directors. This provision
will not eliminate liability for, among other
matters, breaches of duty of loyalty, acts or
omissions not in good faith or knowing violations
of law.
73
</TABLE>
<PAGE>
INTEREST OF HUNTER'S OFFICERS AND DIRECTORS IN THE TRANSACTION
Pursuant to the terms of the Agreement and Plan of Reorganization and Plan of
Liquidation, any officer or director who owns Hunter common stock will share in
the exchange of such stock for Magnum common stock. In addition, Gary C. Evans
will receive 359,316 shares of Magnum common stock and 111,825 shares of Magnum
Series C preferred stock in exchange for all of the issued and outstanding
shares of Hunter preferred stock.
All current officers of Hunter have become officers of Magnum.
Effective December 31, 1995, Lloyd T. Rochford, the then current President,
Chief Executive and Financial Officer and a director of Magnum, resigned as an
officer of Magnum but remains as Chairman of Magnum. In addition, Stan McCabe
resigned as an officer of Magnum but also remains as a director. A new board of
directors was appointed for Magnum. The new board consists of Lloyd T. Rochford
as Chairman, Matthew C. Lutz as Vice Chairman, Gary C. Evans, Stan McCabe, James
W. Upfield, Gerald W. Bolfing and Oscar C. Lindemann. An audit committee was
appointed consisting of James E. Upfield, Stan McCabe and Gerald Bolfing. Mr.
Evans was appointed President and Chief Executive Officer of Magnum. Mr. Lutz
also was appointed Exploration and Business Development Manager and William C.
Jones was appointed Secretary.
The following table sets forth certain information with respect to the
beneficial ownership, after completion of the Business Combination, of Magnum's
common and preferred stock with respect to each director of Magnum, each
beneficial owner of more than five percent of said securities, and all directors
and executive officers of Magnum as a group:
<TABLE>
<CAPTION>
Amount and Nature Percent
of Beneficial of
Title of Class Ownership Class
-----------------------------------------------------------------
<S> <C> <C> <C>
Lloyd T. Rochford Common 257,939 Shares 2.22
Matthew C. Lutz Common 76,609 Shares 0.66
Gary C. Evans Common 1,712,166 Shares 14.75
Series C Preferred 111,825 Shares 17.89
Gerald W. Bolfing Common 321,960 Shares 2.77
Oscar C. Lindemann - - -
Stanley McCabe Common 67,150 Shares 0.58
James E. Upfield Common 28,090 Shares 0.24
All directors and
officers as a group Common 2,465,191 Shares 21.24
Series C Preferred 111,825 Shares 17.89
</TABLE>
74
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
General
The following summary of the anticipated federal income tax consequences to
Magnum, Hunter and to Hunter Shareholders of the proposed sale of assets and
liquidation of Hunter is not intended as tax advice and is not intended to be a
complete description of the federal income tax consequences of the proposed
transactions. This summary is based upon an opinion rendered by Hein +
Associates, LLP, Certified Public Accountants and the Internal Revenue Code of
1986 (the "Code"), as presently in effect, the rules and regulations promulgated
thereunder, current administrative interpretations, and court decisions. A copy
of the opinion is attached as Exhibit 8.1. No assurance can be given that future
legislation, regulations, administrative interpretations or court decisions will
not significantly change these authorities (possibly with retroactive effect).
No rulings have been requested or received from the Internal Revenue Service
("IRS") as to the matters discussed and there is no intent to seek any such
ruling. Accordingly, no assurance can be given that the IRS will not challenge
the tax treatment of certain matters discussed or, if it does challenge the tax
treatment, that it will not be successful.
The discussion of federal income tax consequences set forth below is directed
primarily toward individual taxpayers who are citizens or residents of the
United States. However, because of the complexities of federal, state, and local
income tax laws, it is recommended that Hunter Shareholders consult their own
tax advisors concerning the federal, state, and local tax consequences of the
proposed transactions to them. Further, persons who are trusts, tax-exempt
entities, corporations subject to specialized federal income tax rules or
non-U.S. citizens or residents are particularly cautioned to consult their tax
advisors in considering the tax consequences of the proposed transactions.
The sale of substantially all of the assets of Hunter pursuant to the Agreement
and Plan of Reorganization and Plan of Liquidation with Magnum will be accorded
tax-free treatment under ss.368(a)(1)(C) of the Code. To qualify for tax-free
treatment, the transaction must be described as a "reorganization" under the
Code. In order for the transaction to be so classified, it must fall within one
of the statutory definitions of a reorganization in ss.368 and comply with
certain judicial and administrative rules, limitations, and tests. Once a
transaction is described as a reorganization, then several Code sections
affecting the tax treatment of the parties apply.
Federal Income Tax Consequences to Hunter
Since Hunter received Magnum Shares solely in exchange for the assets of Hunter,
Hunter will not recognize a gain or loss on the transfer of its assets to
Magnum. Hunter's basis in the Magnum Shares will be equal to its basis in the
assets transferred to Magnum. Hunter will recognize no gain or loss on the
distribution of "qualified property" to Hunter Shareholders "in pursuance of the
plan of reorganization." The term "qualified property" includes the Magnum
Shares, thus Hunter will not recognize a gain or loss on the distribution of the
Magnum Shares to Hunter Shareholders. As of December 31, 1995, Hunter and
certain of the Hunter Subsidiaries had a net operating loss ("NOL") carryforward
available of approximately $2 million. Section 382 of the Code limits the NOL
carryover of a loss corporation following an ownership change. After an
ownership change, the amount of taxable income that a corporation may offset by
an NOL carryforward is limited. Acquisition of the Hunter Subsidiaries by Magnum
is an ownership change, thus use of the NOL of Hunter and the Hunter
Subsidiaries will be limited after the Business Combination.
Federal Income Tax Consequences to the Shareholders upon Liquidation
Hunter Shareholders will not recognize gain or loss upon the redemption of their
Company stock in exchange for Magnum Shares. Hunter Shareholders will recognize
gain or loss to the extent they receive cash for fractional shares. Hunter
Shareholders receiving Magnum Shares retain the same tax basis for the Magnum
Shares that they had in Hunter stock surrendered. Where some gain or loss has
been recognized because of the receipt of cash, the basis is decreased by the
cash received and any loss recognized on the exchange, and increased by any gain
recognized. Allocation of basis among the Magnum Shares is determined under
regulations to the Code. If Hunter stock was held as a capital asset, then the
Magnum Shares will tack the holding period of Hunter stock exchanged. Hunter
Shareholders must file with his or her
75
<PAGE>
income tax return for the year in which the reorganization is consummated, a
statement which provides details relating to the property transferred,
securities received and liabilities, in any, assumed in the exchange.
Federal Income Tax Consequences to Magnum
Magnum will not recognize gain or loss upon the issuance of the Magnum Shares.
Magnum's basis in the assets transferred from Hunter is the same as Hunter's
basis in such assets which does not necessarily reflect the dollar amount of
such assets recorded on Magnum's financial statements. Magnum's holding period
for the assets received from Hunter includes the period for such assets in the
hands of Hunter. Following the reorganization, Magnum will be entitled to claim
percentage depletion with respect to production from those of its oil and gas
properties with respect to which Hunter was entitled to claim percentage
depletion before the reorganization.
LEGAL OPINION
The validity of the shares of Magnum Common Stock and Preferred Stock offered to
holders of Hunter Common Stock by this Information Statement and Prospectus will
be passed upon for Magnum by William C. Jones, Esq.
EXPERTS
The audited financial statements of Hunter as of December 31, 1995 and 1994 and
for the years ended December 31, 1995 and 1994 included in this Registration
Statement have been audited by Hein + Associates LLP, independent certified
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports. The audited financial statements of Magnum as of December 31, 1995
and for the year ended December 31, 1995 included in this Registration Statement
have been audited by Hein + Associates LLP, independent certified public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports. The consolidated financial statements of Magnum for the year ended
December 31, 1994, included in this Registration Statement, have been included
herein in reliance on the report, which includes an explanatory paragraph
concerning a change in Magnum's method of accounting for oil and gas producing
operations, of Hansen, Barnett & Maxwell, independent certified public
accountants, given on authority of that firm as experts in accounting and
auditing. The historical summaries of revenue and direct operating expenses for
the Arrington, Reef, Tana, and Meridian acquisitions included in the
Registration Statement have been audited by Hein + Associates LLP, independent
certified public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports. The historical summary of revenues and direct
operating expenses for the Arrington acquisition are for the years ended March
31, 1995 and 1994. The historical summaries of revenues and direct operating
expenses for the Reef and Tana acquisitions are for the year ended December 31,
1994 and the nine months ended September 30, 1995. The historical summary of
revenues and direct operating expenses for the Meridian acquisition are for the
years ended December 31, 1995 and 1994. The federal income tax consequences of
the Business Combination to holders of Hunter common stock and Hunter preferred
stock has been passed upon by Hein + Associates LLP, Dallas, Texas.
The reference to the reports of James L. Weisman, Jr., an independent petroleum
engineer, contained herein with respect to the proved reserves, the estimated
future net revenues from such proved reserves, and the discounted present values
of such estimated future net revenues as of December 31, 199 for Magnum and as
of December 31, 1994 for Hunter is made in reliance upon the authority of such
individual as an expert with respect to such matters.
The reference to the report of Hensley Consultants, Inc., independent petroleum
consultants, contained herein with respect to the proved reserves, the estimated
future net revenues from such proved reserves, and the discounted present values
of such estimated future net revenues as of December 31, 1994 for Magnum is made
in reliance upon the authority of such firm as experts with respect to such
matters.
76
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
<S> <C>
Pro Forma Consolidated Financial Information for Magnum Petroleum, Inc. and Subsidiaries....................F-3
Pro Forma Consolidated Statement of Operations
for the Year Ended December 31, 1995 (Unaudited).......................................................F-4
Pro Forma Consolidated Statement of Operations for the Six Months
Ended June 30, 1996 (Unaudited)........................................................................F-5
Notes to Pro Forma Consolidated Financial Information.......................................................F-6
Consolidated Financial Statements of Magnum
Independent Auditor's Report - 1995.........................................................................F-8
Report of Independent Certified Public Accountants - 1994...................................................F-9
Audited Consolidated Balance Sheet as of June 30, 1996 and December 31, 1995...............................F-10
Audited Consolidated Statements of Operations for the Six Months Ended
June 30, 1996 and 1995 and the Years Ended December 31, 1995 and 1994..................................F-11
Audited Consolidated Statements of Stockholders' Equity for the Six Months
Ended June 30, 1996 and the Years Ended December 31, 1995 and 1994 ....................................F-12
Audited Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995 and the Years Ended December 31, 1995 and 1994............................F-13
Notes to Consolidated Financial Statements.................................................................F-14
Consolidated Financial Statements of Hunter
Independent Auditor's Report...............................................................................F-29
Audited Consolidated Statement of Net Assets in Liquidation as of June 30, 1996 and December 31, 1995......F-30
Audited Consolidated Statements of Operations for the Six Months
Ended June 30, 1996 and 1995 and the Years Ended December 31, 1995 and 1994............................F-31
Audited Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 1996 and
the Years Ended December 31, 1995 and 1994.............................................................F-32
Audited Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995 and the Years Ended December 31, 1995 and 1994............................F-33
Notes to Consolidated Financial Statements.................................................................F-34
Arrington Acquisition Historical Financial Information
Independent Auditor's Report...............................................................................F-44
Historical Summary of Revenue and Direct Operating Expenses
for the Years Ended March 31, 1995 and 1994...........................................................F-45
Notes to Historical Summary of Revenues and Direct Operating Expenses
for Years Ended March 31, 1994 and 1995...............................................................F-46
Midland Acquisition Historical Financial Information
Historical Balance Sheets (Unaudited)
as of September 30, 1995 and December 31, 1994.........................................................F-48
Historical Statements of Operations (Unaudited)
for the Nine Months Ending September 30, 1995 and for the Year Ending December 31, 1994................F-49
Historical Statements of Cash Flows for the Nine Months Ending September 30, 1995 and the Year
Ending December 31, 1994...............................................................................F-50
Notes to Historical Financial Statements (Unaudited).......................................................F-51
F-1
<PAGE>
Reef Acquisition Historical Financial Information
Independent Auditor's Report...............................................................................F-53
Historical Summary of Revenues and Direct Operating Expenes
for the Year Ending December 31, 1994 and the Nine Months Ending September 30, 1995....................F-54
Notes to Historical Summary of Revenues and Direct Operating Expenses
for theYear Ending December 31, 1994 and the Nine Months Ending September 30, 1995.....................F-55
Tana Acquisition Historical Financial Information
Independent Auditor's Report...............................................................................F-57
Historical Summary of Revenues and Direct Operating Expenses
for the Year Ending December 31, 1994 and the Nine Months Ending September 30, 1995....................F-58
Notes to Historical Summary of Revenues and Direct Operating Expenses
for theYear Ending December 31, 1994 and the Nine Months Ending September 30, 1995.....................F-59
Superior Acquisition Historical Financial Information
Historical Summary of Revenues and Direct Operating Expenes (Unaudited)
for the Year Ending December 31, 1994 and the Nine Months Ending September 30, 1995....................F-61
Notes to Unaudited Historical Summary of Revenues and Direct Operating Expenses
for the Year Ending December 31, 1994 and the Nine Months Ending September 30, 1995....................F-62
Meridian Acquisition Historical Financial Information
Independent Auditor's Report...............................................................................F-63
Historical Summary of Revenues and Direct Operating Expenses
for the Years Ending December 31, 1995 and 1994 and the
Three Months Ending March 31, 1996 and 1995............................................................F-64
Notes to Historical Summary of Revenues and Direct Operating Expenses
for the Years Ending December 31, 1995 and 1994 and the
Three Months Ending March 31, 1996 and 1995............................................................F-65
</TABLE>
F-2
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
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 stock of subsidiary corporations and capital stock ownership 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 was recorded on the
"purchase method" based upon the estimated value of the consideration (the
common and preferred stock issued) that Magnum paid for the Acquisition. As the
Acquisition was recorded at December 31, 1995, no pro forma consolidated balance
sheet was necessary.
In addition, Hunter has adjusted the pro forma consolidated statement of
operations for 1995 for the acquisition by Hunter on March 31, 1995 of the
Arrington oil and gas properties, the October 18, 1995 acquisition of the
remaining seventy-five percent (75%) ownership interest in Midland Hunter
Petroleum Limited Liability Company ("Midland"), the October 25, 1995
acquisition of the Reef oil and gas properties, the November 9, 1995 acquisition
of the Tana oil and gas properties, the December 1, 1995 acquisition of the
Superior gas gathering pipelines and the June 28, 1996 acquisition of the
Meridian oil and gas properties and pipelines as if the acquisitions had been
consummated at the beginning of 1995. The Arrington, Midland, Reef, Tana,
Superior and Meridian acquisitions were previously reported on Forms 8-K or
amended Forms 8-K filed by Hunter or Magnum on September 26, 1995, July 24,
1996, January 8, 1996, January 24, 1996, August 21, 1996 and August 16, 1996,
respectively. Additionally, Magnum has adjusted the pro forma consolidated
statement of operations for the six months ended June 30, 1996 for the Meridian
acquisition as if the acquisition had been consummated at the beginning of 1996.
As the Meridian acquisition was recorded at June 30, 1996, no pro forma
consolidated balance sheet was necessary.
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. The historical summaries of
revenues and operating expenses for the Arrington, Reef, Tana, Superior and
Meridian acquisitions were filed in Forms 8-K or amended Forms 8-K as referenced
above. The unaudited historical financial statements of Midland were filed in a
Form 8-K as referenced above. The pro forma consolidated statement of operations
for the year ended December 31, 1995 includes the results of operations for the
Reef, Tana and Superior acquisitions from January 1, 1995 to the dates of
consolidation with the Company, which were the month ends closest to the dates
of acquisition noted above. The historical summaries of revenues and operating
expenses for these acquisitions report the results of operations through
September 30, 1995.
F-3
<PAGE>
<TABLE>
<CAPTION>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Twelve Months ended December 31, 1995
-------------------------------------------------------------------------------------------------------
Magnum Hunter Arrington Midland Reef Tana Superior Meridian Pro forma Combined
Hist- Hist- Hist- Hist- Hist- Hist- Hist- Hist- Adjustments Pro forma
orical orical orical orical orical orical orical orical
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Gas gathering and marketing $ $ 469,000 $ $ $ $ $2,212,000 $2,023,000 $ $ 4,704,000
Oil and gas sales 616,596 1,625,000 123,000 563,000 937,000 1,636,000 36,000 4,229,000 (F)(141,000) 9,624,596
Oil field services and
commissions 31,978 565,000 (A) 11,000 607,978
Interest 152,371 27,000 179,371
Other 281,000 115,000 (F) (29,000) 367,000
--------------------------------------------------------------------------------------------------------
TOTAL REVENUES 800,945 2,967,000 123,000 678,000 937,000 1,636,000 2,248,000 6,252,000 (159,000) 15,482,945
--------------------------------------------------------------------------------------------------------
Expenses:
Purchases of natural gas 329,000 1,587,000 1,916,000
Pipeline operations 85,000 374,000 1,606,000 2,065,000
Lease operating 267,513 762,000 32,000 405,000 244,000 563,000 1,481,000 (F)(101,000) 3,653,513
Cost of services 26,134 454,000 480,134
Depreciation, depletion,
amortization and impairment 421,101 919,000 102,000 (B)4,087,000 5,529,101
General and administrative 977,070 702,000 44,000 (C) 135,000 1,858,070
Interest 1,882 298,000 34,000 (D)3,400,000 3,733,882
Other 75,517 100,000 175,517
--------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 1,769,217 3,649,000 32,000 585,000 244,000 563,000 1,961,000 3,087,000 7,521,000 19,411,217
--------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (968,272) (682,000) 91,000 93,000 693,000 1,073,000 287,000 3,165,000 (7,680,000) (3,928,272)
PREFERRED DIVIDENDS (617,220) (9,000) (E) (83,173) (709,393)
--------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE
TO COMMON SHARES $ (1,585,492) $(691,000 $ 91,000 $ 93,000 $693,000 $1,073,000 $ 287,000 $3,165,000 $(7,763,173)$(4,637,665)
--------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE
(primarily and
fully diluted) $ (0.28) $ (0.04) $ (0.41)
--------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Pro Forma Consolidated Financial Information
F-4
<PAGE>
MAGNUM PETROLEUM, INC AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1996
------------------------------------------------------------------------------------
Magnum Meridian Pro Forma Combined
Historical Historical Adjustments Pro Forma
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Oil and gas sales $ 2,821,000 $ 2,689,000 $(G) 578,000 $ 6,088,000
Gas gathering and marketing 1,528,000 816,000 (G) 158,000 2,502,000
Oil field services and commissions 201,000 201,000
Gain on sale of assets 143,000 143,000
Interest income 31,000 31,000
Other income 12,000 12,000
------------------------------------------------------------------------------------
TOTAL REVENUES 4,736,000 3,505,000 736,000 8,977,000
------------------------------------------------------------------------------------
Expenses
Lease operating 1,126,000 663,000 (G) 151,000 1,940,000
Pipeline operating 190,000 578,000 (G) 117,000 885,000
Purchases of natural gas 1,124,000 1,124,000
Costs of services 327,000 327,000
Depreciation, depletion,
amortization and impairment 1,084,000 (B) 1,463,000 2,547,000
General and administrative 443,000 (C) 50,000 493,000
Interest expense 499,000 (D) 1,397,000 1,896,000
------------------------------------------------------------------------------------
TOTAL EXPENSES 4,793,000 1,241,000 3,178,000 9,212,000
------------------------------------------------------------------------------------
NET INCOME (LOSS) (57,000) 2,264,000 (2,442,000) (235,000)
PREFERRED DIVIDENDS (340,000) (340,000)
------------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE
TO COMMON SHARES $ (397,000) $ 2,264,000 $ (2,442,000) $ (575,000)
====================================================================================
NET INCOME PER SHARE
(primary and fully diluted) $ (0.03) $ (0.05)
====================================================================================
</TABLE>
F-5
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
Notes to Pro Forma Consolidated Financial Information
A) 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 $7,000 for
the year ended December 31, 1995. The remainder of $4,000 arose from the
Reef acquisition.
B) To reflect additional depreciation and depletion on oil and gas properties
as recalculated using the full cost method and depreciation of pipelines
using the straight-line method over a fifteen (15) year estimated life. For
purposes of this computation it was assumed that the combination of Magnum
and Hunter and the Arrington, Midland , Reef, Tana, Superior and Meridian
acquisitions occurred at the beginning of the period. Magnum's combined oil
and gas reserve estimates as of December 31, 1995 and June 30, 1996 served
as the base for the depletion computation for the Magnum and Hunter
combination and the other acquisitions.
C) 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 $2,000
for the year ended December 31, 1995. An additional $9,000 arose from the
Reef acquisition, $15,000 from the Tana acquisition, $20,000 from the
Superior acquisition and $100,000 from the Meridian acquisition. Also, the
adjustment for the year ended December 31, 1995 includes the elimination of
$11,000 related to the Midland acquisition as such amounts are included in
the Hunter historical amounts. For the six months ended June 30, 1996, the
adjustment reflects the estimated general and administrative costs from the
Meridian acquisition.
D) To reflect the additional interest expense associated with the financed
portion of the acquisitions. For this purpose, the Arrington, Reef, Tana,
Superior and Meridian acquisitions were assumed to have occurred at the
beginning of 1995 and for the same amounts when actually closed later in
1995 or 1996. Interest rates were assumed to be libor plus 2.5 percent in
effect currently per Magnum's principal lending institutions. The estimated
interest expense for the Arrington acquisition amounted to $32,000 for the
year ended December 31, 1995. The Reef acquisition amounted to $163,000,
the Tana acquisition amounted to $335,000, the Superior acquisition
amounted to $79,000 and the Meridian acquisition amounted to $2,800,000.
Also, the adjustment for the year ended December 31, 1995 includes the
elimination of $9,000 related to the Midland acquisition as such amounts
are included in the Hunter historical amounts. For the six months ended
June 30, 1996, the adjustment of $1,397,000 was attributable to the
Meridian debt and was computed assuming the Meridian acquisition occurred
at the beginning of 1996 using the same interest rate assumed in the 1995
interest adjustment. A one-eighth (1/8) percent change in the interest rate
would result in an increase or decrease in the interest adjustment of
approximately $55,000 and $22,000 for the year ended December 31, 1995 and
the six months ended June 30, 1996, respectively.
E) To reflect preferred stock dividends associated with the preferred shares
issued as a part of Magnum's acquisition of Hunter.
F) To eliminate amounts related to the Midland acquisition which are recorded
in the Hunter historical amounts.
G) To accrue estimated June 1996 operations from the properties acquired in
the Meridian acquisition. The historical amounts presented for the Meridian
acquisition are for the five months ended May 31, 1996. Actual results for
the month of June were not available from the seller. The estimate of June
operations is based on recent historical trends and as such, is considered
reasonable.
H) The following pro forma estimates of proved oil and gas reserves for the
combined properties were prepared by the Company in accordance 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 reserves are located onshore in
the continental United States.
F-6
<PAGE>
The following unaudited table sets forth the pro forma proved oil and gas
reserves for the combined properties at December 31, 1995, together with the
changes therein.
Oil and
Condensate Natural Gas
Proved developed and undeveloped reserves: (BBLS) (MCF)
---------------------------------
Balance at January 1, 1995 3,465,000 71,303,000
Revisions of previous estimates 536,000 (798,000)
Production (204,000) (5,257,000)
---------------------------------
Balance at December 31, 1995 3,797,000 65,248,000
=================================
Proved developed reserves at:
December 31, 1995 1,711,000 59,973,000
=================================
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves:
December 31, 1995
(Unaudited)
------------
Future Cash Flows $ 176,395,000
Future Development and Production Costs (72,197,000)
------------
Future Net Cash Flows, Before Income Tax 104,198,000
Future Income Tax Expenses (14,115,000)
------------
Future Net Cash Flows 90,083,000
10% Discount to Reflect Timing of Net Cash Flows (39,168,000)
------------
Standardized Measure of Discounted Future Net Cash Flows $ 50,915,000
============
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Reserves:
December 31, 1995
(Unaudited)
-----------------
Standardized measure, beginning of period $ 44,210,000
Revisions:
Net Change in sales price, net of production costs 11,505,000
Revisions of quantity estimates 2,826,000
Accretion of discount 4,421,000
Changes in timing, future development and other (4,363,000)
Extension and discoveries 582,000
Sales, net of production costs (5,559,000)
Net changes in income taxes (2,707,000)
-----------------
Standardized measure, end of period $ 50,915,000
=================
F-7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Magnum Petroleum, Inc.
We have audited the accompanying consolidated balance sheet of Magnum Petroleum,
Inc. and Subsidiaries as of December 31, 1995, and the related consolidated
statements of operations, cash flows, and stockholders' equity for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Magnum Petroleum, Inc. and
Subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for oil and gas producing operations from the successful
efforts method to the full cost method.
HEIN + ASSOCIATES LLP
Dallas, Texas
April 3, 1996
F-8
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Magnum Petroleum, Inc.
We have audited the accompanying consolidated statements of operations, cash
flows, and stockholders' equity of Magnum Petroleum, Inc. and Subsidiaries for
the year ended December 31, 1994. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of the operations and cash flows of Magnum
Petroleum, Inc. and Subsidiaries for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for oil and gas producing operations from the successful
efforts method to the full cost method.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 26, 1995, except for Note 2,
as to which the date is September 29, 1995
F-9
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-----------------------------------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,778,000 $ 1,543,666
Securities available for sale - 101,640
Accounts receivable
Trade, net of allowance of $134,158 1,609,000 1,246,652
Due from affiliates 162,000 115,961
Other - 22,368
Note receivable from affiliate 148,000 120,758
Note receivable 106,000 -
Other current assets 82,000 -
Current portion of long-term note receivable 204,000 200,955
-----------------------------------------
TOTAL CURRENT ASSETS 5,089,000 3,352,000
-----------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method
Unproved 864,000 842,889
Proved 68,280,000 36,256,428
Pipelines 6,882,000 1,087,310
Other property 218,000 145,957
-----------------------------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 76,244,000 38,332,584
Accumulated depreciation, depletion and impairment (3,002,000) (1,928,078)
-----------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 73,242,000 36,404,506
OTHER ASSETS
Deposits and other assets 509,000 118,007
Long-term notes receivable, net of imputed interest 147,000 190,287
-----------------------------------------
TOTAL ASSETS $ 78,987,000 $ 40,064,800
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and accrued liabilities $ 1,832,000 $ 1,282,995
Dividends payable 156,000 177,304
Suspended revenue payable 882,000 793,680
Current maturities of long-term debt 2,021,000 2,014,000
----------------------------------------
TOTAL CURRENT LIABILITIES 4,891,000 4,267,979
-----------------------------------------
LONG-TERM LIABILITIES
Long-term debt 46,056,000 7,597,597
Production payment liability 246,000 288,235
Other 4,000 289,983
Deferred income taxes 3,125,000 3,125,000
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 authorized
216,000 designated as Series A; 80,000 shares issued and outstanding - 80
925,000 designated as Series B; 41,500 and 62,050 shares issued and
outstanding, respectively - 62
625,000 designated as Series C; 567,600 and 625,000 shares issued and
outstanding, respectively (liquidation preference of $5,676,000) 1,000 625
Common stock - $.002 par value; 50,000,000 shares authorized
11,950,220 and 11,598,183 shares issued and outstanding, respectively 24,000 23,196
Additional paid-in capital 30,282,000 29,659,992
Accumulated deficit (5,642,000) (5,244,899)
Receivable from stockholders - (250)
Unrealized gain on investments - 57,200
----------------------------------------
TOTAL STOCKHOLDERS' EQUITY 24,665,000 24,496,006
----------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 78,987,000 $ 40,064,800
=========================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-10
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended For the Years Ended
June 30, December 31,
-----------------------------------------------------------------------
1996 1995 1995 1994
-----------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating Revenues:
Oil and gas sales $ 2,821,000 $ 302,000 $ 616,596 $ 729,478
Gas gathering and marketing 1,528,000 - - -
Oil field services and commissions 201,000 20,000 31,978 15,704
-----------------------------------------------------------------------
Total Operating Revenue 4,550,000 322,000 648,574 745,182
-----------------------------------------------------------------------
Operating Costs and Expenses:
Lease operating 1,126,000 93,000 267,513 317,761
Pipeline operating 190,000 - - -
Purchases of natural gas 1,124,000 - - -
Costs of services 327,000 10,000 26,134 6,631
Depreciation and depletion 1,084,000 103,000 421,101 243,180
General and administrative 443,000 543,000 977,070 768,838
-----------------------------------------------------------------------
Total Operating Costs and Expenses 4,294,000 749,000 1,691,818 1,336,410
-----------------------------------------------------------------------
Operating Profit (Loss) 256,000 (427,000) (1,043,244) (591,228)
Gain (loss) on dispostion of assets 143,000 (15,000) (75,517) -
Interest income 31,000 85,000 152,371 51,506
Other income 12,000 - - -
Interest expense (499,000) (3,000) (1,882) (6,660)
-----------------------------------------------------------------------
Net Loss (57,000) (360,000) (968,272) (546,382)
Dividends Applicable to Preferred Stock (340,000) (293,000) (617,220) (579,325)
-----------------------------------------------------------------------
Net Loss Applicable to Common Shares $ (397,000) $ (653,000) $ (1,585,492)$(1,125,707)
-----------------------------------------------------------------------
Loss Per Common Share $ (0.03) $ (0.12) $ (0.28)$ (0.27)
-----------------------------------------------------------------------
Common Shares Used in Per Share Calculation 11,658,958 5,413,989 5,606,669 4,166,822
-----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-11
<PAGE>
<TABLE>
<CAPTION>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Unreal-
Recei- ized
Deferred vable Gain
Additional Costs of Accum- from (Loss)On
Preferred Stock Common Stock Paid-In Warrant ulated Stock- Invest-
Shares Amount Shares Amount Capital Offering Deficit holder ments
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 672,050 $673 3,472,345 $ 6,945 $10,499,891 $ - $(2,533,700)$(465,645) $ -
Conversion of 10,500 shares of Series B
and 40,025 shares of Series C preferred stock
to common stock (50,525) (51) 125,325 251 (200)
Issuance of Series C preferred stock 24,250 24 290,976
Issued for notes receivable 150,000 300 187,200
Adjustment of price of stock previously issued
for notes receivable (187,500)
Issued to acquire oil and gas properties 613,000 1,226 1,232,274
Issued in exchange for Series B production
certificates, net of $42,924 offering costs 176,375 352 583,664 (240,281)
Costs incurred in warrant offering
Interest accrued on receivable (11,355)
Payments received on receivable 414,500
Dividends declared on preferred stock (579,325)
Net loss (546,382)
Unrealized loss on investments (8,528)
-----------------------------------------------------------------------------------------
Balance at December 31, 1994 645,775 646 4,537,045 9,074 12,606,305 (240,281) (3,659,407) (62,500) (8,528)
-----------------------------------------------------------------------------------------
Conversion of 2,000 shares of Series B and 9,300
shares of Series C preferred
stock to common stock (11,300) (12) 28,900 58 (46)
Issuance from exercise of warrants 833,324 1,667 3,331,629
Costs incurred in warrant offering (250,488)
Offset warrant offering costs 20,750 21 (490,769) 490,769
Issuance of Series C preferred stock 248,979
Issued to acquire oil and gas properties 386,615 773 1,378,431
Issued as compensation to directors 5,000 10 17,490
Issued for services 22,222 44 84,400
Issued to directors for collateral 125,000 250 (250)
Sale of investment shares 8,528
Payments received on receivable 111,825 112 62,500
Acquisition of Hunter Resources, Inc. for
Series C preferred stock and common stock 5,660,077 11,320 12,483,573
Dividends declared on preferred stock (617,220)
Net loss (968,272)
Unrealized gain on investments 57,200
-------------------------------------------------------------------------------------
Balance at December 31, 1995 767,050 $767 11,598,183 $23,196 $29,659,992 $ - $(5,244,899) $ (250) $57,200
-------------------------------------------------------------------------------------
Conversion of 20,550 shares of Series B
preferred stock to common stock (unaudited) (20,550) (20) 10,275 20
Conversion of 57,400 shares of Series C
preferred stock to common stock (unaudited) (57,400) (57) 172,200 344 (287)
Issued for accrued dividends (unaudited) 3,527 7 11,738
Issued to acquire oil and gas properties
(unaudited) 166,035 332 610,768
Sale of investment shares (unaudited) (57,200)
Dividends declared on preferred stock
(unaudited) (340,000)
Net Loss (unaudited) (57,000)
Rounding (unaudited) 310 101 (211) (101) 250
=========================================================================================
Balance at June 30, 1996 (Unaudited) 689,100 $1,000 11,950,220 $24,000 $30,282,000 $ - $(5,642,000) $ - $ -
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-12
<PAGE>
<TABLE>
<CAPTION>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended For the Years Ended
June 30, December 31,
---------------------------------------------------------
1996 1995 1995 1994
---------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (57,000) $ (360,000) $ (968,272) $ (546,382)
Adjustments to reconcile net loss to cash provided by (used for)
operating activities:
Depreciation and depletion 1,084,000 103,000 421,101 243,180
Common stock issued for services - 17,000 101,944 -
Loss on sale of assets (143,000) 15,000 75,517 -
Interest accrued on notes receivable from stockholders - - - (11,355)
Other - - 14,935 29,631
Changes in certain assets and liabilities
Securities available for sale - 23,000 (30,338) (31,903)
Accounts receivable (386,000) (43,000) (36,769) (27,724)
Notes receivable (93,000) 319,000 - -
Other current assets (82,000) (11,000) - -
Costs in excess of billings on uncompleted drilling contracts - 55,000 54,590 (54,590)
Deposits and other assets (401,000) 1,000 349 33,117
Accounts payable and accrued liabilities 549,000 (481,000) (512,737) 366,066
Suspended revenue payable 88,000 - - -
Other liabilities (286,000) - - -
---------------------------------------------------------
Net Cash Provided By (Used By) Operating Activities 273,000 (362,000) (879,680) 40
---------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 188,000 73,000 88,475 650,041
Additions to property and equipment (37,301,000) (1,128,000)(1,244,128) (1,945,093)
Loan made for promissory note receivable - - (120,758) (319,206)
Payments received on promissory notes receivable - - 334,442 -
Obligations and property acquisitions funded in Hunter acquisition - - (1,034,417) -
---------------------------------------------------------
Net Cash Used By Investing Activities (37,113,000) (1,055,000)(1,976,386) (1,614,258)
---------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock, net of offering - 3,332,000 3,331,808 145,594
Payments received on notes receivable from shareholders - 63,000 62,500 414,500
Proceeds from long-term debt borrowings 54,313,000 - (185,600) (46,663)
Payments of principal on notes payable (15,848,000) (167,000) - -
Production payment liability (42,000) - - -
(Increase) decrease in segregated funds for payments of note payable - 130,000 130,000 (130,000)
Dividends paid (349,000) (290,000) (583,495) (510,044)
---------------------------------------------------------
Net Cash Provided By (Used By) Financing Activities 38,074,000 3,068,000 2,755,213 (126,613)
---------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,234,000 1,651,000 (100,853) (1,740,831)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,544,000 1,645,000 1,644,519 3,385,350
--------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,778,000 $ 3,296,000 $1,543,666 $1,644,519
=========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-13
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
- -------------------------------------
Magnum Petroleum, Inc. (the "Company") is incorporated under the laws of the
state of Nevada. The Company is engaged in the acquisition, operation and
development of oil and gas properties, the gathering, transmission and marketing
of natural gas, providing management and advisory consulting services on oil and
gas properties for third parties, and providing consulting and U.S. export
services to facilitate Latin American trade in energy products. In conjunction
with the above activities, the Company is licensed to operate a commercial salt
water disposal facility in the state of Oklahoma and owns and operates oil and
gas properties in six states, predominantly in the Southwest region of the
United States. In addition, the Company owns and operates three gathering
systems located in Texas, Louisiana and Oklahoma.
Unaudited Information
- ---------------------
The financial statements as of June 30, 1996 and for the six months ended June
30, 1996 and 1995, are unaudited. In the opinion of management, all necessary
adjustments (which include only normal recurring adjustments) have been made to
present fairly the financial position, results of operations and changes in cash
flows for the unaudited periods.
Merger and Consolidation
- ------------------------
The accompanying financial statements include the accounts of the Company and
its existing wholly-owned subsidiary, Cushing Disposal, Inc.; and beginning on
December 31, 1995, the accounts of Hunter as described below. As more fully
discussed in Note 3, the Company entered into an amended definitive agreement on
December 19, 1995 to acquire all of the assets, subject to the existing
liabilities, of Hunter Resources, Inc. ("Hunter"). The purchase was accounted
for by the purchase method effective December 31, 1995. As such, the
accompanying consolidated financial statements for 1995 include the balance
sheet accounts of Hunter. However, the Statement of Operations for 1995 does not
include the operations of Hunter for 1995. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the consolidated financial statements of the
prior year to conform with the current presentation.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company has cash
deposits in excess of federally insured limits.
Investments
- -----------
In 1994, the Company adopted Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities. Under
this standard, the equity securities held by the Company that have readily
determinable fair values are classified as current assets available-for-sale and
are measured at fair value. Unrealized gains and losses for these investments
are reported as a separate component of stockholders' equity. In 1994,
investments in equity securities for which sale within one year was restricted
by governmental securities regulations were classified as non-current assets.
At December 31, 1995 the Company's available for sale securities had an
amortized cost basis of $44,440, gross unrealized gains reported in equity of
$57,200 and a fair market value of $101,640. During 1995, Securities were sold
for gross proceeds of $73,083 and the Company realized a gain of $19,370.
Suspended Revenues
- ------------------
Suspended revenue interests represent oil and gas sales payable to third parties
largely on properties operated by the Company. The Company distributes such
amounts to third parties upon receipt of signed division orders or resolution of
other legal matters.
Oil and Gas Producing Operations
- --------------------------------
The Company follows the full-cost method of accounting for oil and gas
properties, as prescribed by the Securities and Exchange Commission ("SEC").
Accordingly, all costs associated with acquisition, exploration and development
of oil and gas reserves, including directly related overhead costs, are
capitalized.
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are amortized on the unit-of-production method
using estimates of proved reserves. Costs directly associated with the
F-14
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
acquisition and evaluation of unproved properties are excluded from the
amortization base until the related properties are evaluated. Such unproved
properties are assessed periodically and any provision for impairment is
transferred to the full-cost amortization base. Sales of oil and gas properties
are credited to the full-cost pool unless the sale would have a significant
effect on the amortization rate. Abandonments of properties are accounted for as
adjustments to capitalized costs with no loss recognized. The Company's unproved
properties excluded from the amortization base were $864,000 and $842,889 at
June 30, 1996 and December 31, 1995, respectively. These costs arose in 1995 and
are expected to be evaluated and transferred into the amortization base over the
next twelve months.
The net capitalized costs are subject to a "ceiling test," which limits such
costs to the aggregate of the estimated present value of future net revenues
from proved reserves discounted at ten percent based on current economic and
operating conditions.
Drilling Operations
- -------------------
Fees from fixed-price contracts with other working interest owners to drill,
complete and place oil and gas wells into production less related costs are
accounted for as adjustments to oil and gas properties.
Pipelines
- ---------
Pipelines are carried at cost. Depreciation is provided using the straight-line
method over an estimated useful life of 15 years. Gain or loss on retirement or
sale or other disposition of assets is included in income in the period of
disposition.
Other Property
- --------------
Other property and equipment are carried at cost. Depreciation is provided using
the straight-line method over estimated useful lives ranging from five to ten
years. Gain or loss on retirement or sale or other disposition of assets is
included in income in the period of disposition.
Gas Gathering and Marketing Revenues
- ------------------------------------
The Company receives fees for the gathering of natural gas on its pipeline
system for the benefit of other parties. In addition, the gas connected to the
pipeline is sold to third parties resulting in marketing revenue. These revenues
are recognized as earned.
Other Oil and Gas Related Services
- ----------------------------------
Other oil and gas related services consist largely of fees earned from the
Company's salt water disposal facility. Such fees are recognized in the month
the disposal service is provided.
Impact of Recently Issued Pronouncements
- ----------------------------------------
The Financial Accounting Standards Board (FASB) has issued Statement No. 121,
"Accounting for Impairments of Long-Lived Assets". Except for oil and gas
properties which are governed by the full cost method, the Company intends to
adopt this standard in 1996. Management believes it will not have a material
impact on the Company's financial statements. The FASB has also issued Statement
No. 123, "Accounting for Stock-Based Compensation". The Company will adopt this
standard in 1996, also. At this time, management anticipates it will continue
accounting for stock based compensation in 1996 under guidance provided by the
existing standard but will provide pro forma disclosures as allowed by Statement
No. 123.
Income Taxes
- ------------
The Company files a consolidated federal income tax return. The Company applies
Statement of Financial Accounting Standards No. 109 (SFAS 109). As required by
SFAS 109, income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due, if any, plus net
deferred taxes related primarily to differences between the basis of assets and
liabilities for financial and income tax reporting. Deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets include recognition of operating
losses that are available to offset future taxable income and tax credits that
are available to offset future income taxes. Valuation allowances are recognized
to limit recognition of deferred tax assets where appropriate. Such allowances
may be reversed when circumstances provide evidence that the deferred tax assets
will more likely than not be realized.
F-15
<PAGE>
Loss Per Common Share
- ---------------------
Loss per common share is based on the weighted average number of shares of
common stock outstanding. Convertible securities and warrants were anti-dilutive
at June 30, 1996 and 1995 and December 31, 1995 and 1994 and were not included
in the calculation of loss per common share.
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
Deferred Cost of Warrant Exercise Offering
- ------------------------------------------
The Company incurred costs to update its registration statement relating to
Series C preferred stock that is convertible into common stock and relating to
common stock purchase warrants. The Company made an offer to the warrant holders
allowing them to exercise their warrants at a discount through February 16,
1995. As presented in Note 7, certain of the common stock purchase warrants were
exercised prior to the expiration of the discount period. The Company had
deferred direct costs as of December 31, 1994 of $240,281 related to the
discounted warrant exercise offering. Such costs and $250,488 incurred in 1995
were offset against the proceeds received in 1995 from the exercise of the
warrants.
Statements of Cash Flows
- ------------------------
During the year ended December 31, 1995, the Company changed its method of
accounting for cash flows from operating activities from the direct method to
the indirect method. Prior periods have been restated for the effects of the
change.
Use of Estimates and Certain Significant Estimates
- --------------------------------------------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates. Significant assumptions are required in the valuation of proved
oil and gas reserves, which as described above may affect the amount at which
oil and gas properties are recorded. It is at least reasonably possible those
estimates could be revised in the near term and those revisions could be
material.
NOTE 2--CHANGE IN ACCOUNTING METHOD
The Company accounted for its oil and gas producing activities using the
successful efforts method from inception through June 30, 1995. However, the
full cost method has subsequently been adopted. The Company is of the opinion
that the full cost method of accounting is preferable to the successful efforts
method of accounting for its oil and gas activities for the following reasons:
(1) The Company recently acquired the subsidiaries of Hunter (See note 3),
which comprise corporations engaged in oil and gas related activities and
which utilize the full cost method of accounting for these activities. For
both legal and accounting purposes, the Company is the acquiring entity;
however, the subsidiaries are increasing their oil and gas activities and
have more proved oil and gas reserves than the Company. Furthermore,
management of Hunter became the management of the Company upon completion
of the acquisition. One of the Hunter subsidiaries specializes in the
management of oil and gas properties and all accounting functions and
financial reporting have been undertaken by the subsidiaries' personnel.
The individuals employed by the subsidiaries will comprise the vast
majority of the Company's employees and the Company believes that by
allowing these employees and Hunter's management to continue to use the
full cost method, it would greatly benefit in accurately reporting on its
oil and gas operations.
(2) The subsidiaries have established a relationship with lending sources which
the Company intends to continue to utilize and expand upon. These sources
are accustomed to evaluating the subsidiaries' financial statements on the
full cost method of accounting. The Company intends to request additional
borrowing arrangements from these lenders and believes that it is desirable
for these lending sources to review financial statements prepared on a
consistent basis.
(3) The Company occasionally engages in turnkey drilling activities and in the
sale of oil and/or gas prospects. The Company believes that these
activities are secondary to its primary oil and gas operations. However, in
accounting for these activities utilizing the successful efforts method of
accounting, 47% of the Registrant's operating revenue during 1994 and 66%
of its operating revenue on an unaudited basis - during the first six
months of 1995 came from such secondary sources. Knowing that the
successful
F-16
<PAGE>
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
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
spread over a period of time, and if profitable, recognized through a
reduction of the cost per unit of oil and gas produced. Thus the full cost
method avoids the large variances in revenue and associated expenses which
the Registrant has previously reported in its quarterly and annual
financial statements.
The accompanying financial statements have been restated to apply the full cost
method retroactively. This change in accounting principle has no significant
effect on income taxes. The effect of the accounting change on net loss and
accumulated deficit as previously reported for the respective periods is:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1994
----------------------------
<S> <C>
Statement of Operations:
Net Loss as Previously Recorded $ (1,258,808)
Adjustment for Effect of Change in Accounting Principle that is Applied Retroactively $ 712,426
Net Loss as Adjusted $ (546,382)
Per Share Amounts:
Net Loss as Previously Reported $ (.44)
Adjustment for Effect of Change in Accounting Principle that is Applied Retroactively $ .17
Net Loss as Adjusted $ (.27)
Common Shares Used in Per Share Calculation 4,166,822
</TABLE>
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------
<S> <C> <C>
Statement of Accumulated Deficit:
Balance at Beginning of Period as Previously Reported $ (4,166,058) $ (2,327,925)
Add Adjustment for the Cumulative Effect on Prior Years
of Applying Retroactively the Full Cost Method $ 506,651 $ (205,775)
Balance at Beginning of Period, as Adjusted $ (3,659,407) $ (2,533,700)
Net Loss $ (968,272) $ (546,382)
Preferred Dividends $ (617,220) $ (579,325)
Balance at End of Year $ (5,244,899) $ (3,659,407)
The effect on 1995 operations of changing the accounting method was to increase
net loss and net loss per share by $307,000 and $.05, respectively.
</TABLE>
F-17
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
NOTE 3--ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1994, the Company acquired three properties
through the issuance of both cash and common stock. One property was acquired
for $888,000, for which the Company paid $200,000 cash and issued 343,000 shares
of its common stock, based on a value of $2.00 per share or $686,000. Two other
properties were acquired for a total of $692,500. In one transaction, 150,000
shares were issued at $1.25 per share for $187,500 and in the other transaction,
120,000 shares were issued at $3.00 per share for $360,000. In the latter
transaction, the Company committed to file a registration statement relating to
40,000 shares, and has agreed to pay all costs relating to the registration of
these shares.
During 1994 the Company sold a 20% working interest in unproved oil and gas
mineral leases in which the Company has acquired an interest. The Company
received cash and 22,220 shares of the common stock of a publicly traded
corporation.
During March of 1995, the Company acquired an additional fifty percent (50%)
working interest (for a total of 100% working interest) in a proved undeveloped
oil and gas property on which one well is located. The acquisition cost of this
additional interest was $410,000, of which $130,000 was paid in cash and 80,000
shares of the Company's restricted common stock, valued at $3.50 per share, were
issued. During April of 1995, the Company also acquired an additional 40 percent
working interest (for a total 90% working interest) in a proved undeveloped
property on which one well is located. The acquisition cost of this additional
interest was $480,000, of which $20,000 was paid in cash and 125,000 shares of
the Company's restricted common stock were issued, valued at $3.50 per share,
and the transfer of securities held by the Company as an investment in equity
securities at December 31, 1994.
In October 1995, the Company issued 85,131 shares of common stock, valued at
$3.52 per share, in an acquisition completed by a Hunter subsidiary for the
remaining stock ownership interest in a limited liability company. Also, in
October 1995, the Company issued 64,176 shares of common stock, valued at $4.00
per share, in an acquisition of oil and gas properties completed by a Hunter
subsidiary. In December 1995, the Company issued 32,308 shares of common stock,
valued at $3.25 per share, in an acquisition of a proven undeveloped property by
a Hunter subsidiary.
The Company executed a definitive agreement on July 21, 1995 to acquire all of
the assets, subject to the existing liabilities of Hunter Resources, Inc.
("Hunter"). Pursuant to the agreement, the Company issued, subject to
shareholder approval, 2,750,000 shares of its restricted common stock to Hunter
in exchange for the assets acquired. In addition, 575,000 shares of restricted
common stock were issued to a third party as an additional cost of the
acquisition. The third party distributed a total of 250,000 of the shares to a
former director and a former officer of the Company for their assistance in
completing the acquisition.
On December 19, 1995 to be effective December 22, 1995, the Company and Hunter
entered into an amended agreement. Under the terms of the amendment, which was
executed by Hunter shareholders representing over fifty percent (50%) of the
common stock of Hunter, an additional 2,335,077 shares of restricted common
stock and 111,825 shares of Series C preferred stock were issued to Hunter. The
acquisition was recorded under the "purchase method" of accounting, based upon
the estimated value of the shares issued of $12,495,005. The operations of
Hunter have been consolidated with those of the Company beginning on December
31, 1995.
On June 28, 1996, Magnum closed on the purchase of 469 natural gas wells and
approximately 427 miles of a gas gathering pipeline system from Meridian. The
net purchase price after certain purchase price adjustments was approximately
$35,350,000, funded by a loan from Magnum's principal lending financial
institutions. As the purchase was not completed until the end of the second
quarter of 1996, the Statements of Operations for 1996 do not include any
operating results for the purchased properties. The purchase price was allocated
based on estimated fair market values resulting in the recording of $29,560,000
as oil and gas properties and $5,790,000 as pipelines. The gas wells and gas
gathering system are located in the Panhandle of Texas and Western Oklahoma and
are more commonly referred to as the "Panoma Properties."
The following summary, prepared on a pro forma basis, presents the results of
operations for the six months ended June 30, 1996 and the years ended December
31, 1995 and 1994 as if the acquisitions occurred as of the beginning
F-18
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
of the respective years. The following proforma information includes the results
of operations for the Meridian acquisition as well as the other acquisitions
above for the six months ended June 30, 1996 and the year ended December 31,
1995. The pro forma information for the year ended December 31, 1994 includes
all the acquisitions above excluding the Meridian acquisition. The pro forma
information includes the effects of adjustments for increased interest expense
and depreciation and depletion:
<TABLE>
<CAPTION>
(Unaudited)
June 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue................................................ $ 8,977,000 $ 15,482,945 $ 8,385,688
Net Income (Loss) Applicable to Common Stock........... (575,000) (4,637,665) 650,915
Net Income (Loss) Per Common Share..................... $ (.05) $ (.41) $ .06
</TABLE>
NOTE 4--NOTES RECEIVABLE
During July of 1994, the Company received an interest bearing note due on May 1,
1995, in exchange for $319,206 paid by the Company. Interest in the amount of
$3,000 per month accrued through February 28, 1995 and was paid in March 1995.
For the remaining two months, interest in the amount of $4,500 per month was
accrued which, along with the principal amount, was paid during May 1995. The
note was collateralized by securities, the fair market value of which was less
than the amount of the note.
On July 28, 1995, the Company received a non-interest bearing note receivable in
the amount of $223,500 in exchange for its interest in an oil and gas property.
Interest at 10 percent was inputed on the note resulting in a discount of
$28,366. The note provides for payments of $7,000 per month.
NOTE 5--RELATED PARTY TRANSACTIONS
During June of 1993, the Company sold 250,000 shares of its common stock at
$2.00 per share for a total of $500,000. The purchasers made a 10% down payment
of $50,000 and executed notes for $450,000, payable in one year and bearing
interest at 6% per annum. During June of 1994, the Company renegotiated the
notes and entered into a verbal agreement with another individual whereby
$27,000 of interest due on the previous notes was accrued and a new principal
amount of $289,500, being a reduction of $160,500 from the original notes, was
agreed upon as the amount due to the Company. Additionally, the Company sold
this individual 40,000 shares of the Company's common stock at $1.25 per share
for net proceeds of $50,000. The full amount of the reduced purchase price was
paid during the third quarter of 1994; however, no interest was paid. The
Company does not intend to pursue the collection of the unpaid interest from any
of the parties involved. The net effect of the above transactions was that the
Company sold 300,000 shares of its common stock for $350,000 or approximately
$1.17 per share.
During June of 1994, the Company also issued 110,000 shares of its common stock
pursuant to an agreement to pay the Company within one year of the issuance of
the shares, $137,500 and interest at the rate of 5% per annum, which is
equivalent to $1.25 per share. Prior to December 31, 1994, the Company had
collected $75,000 and subsequently the balance of the note was paid. The Company
did not collect any interest due on the Note and does not intend to pursue the
collection thereof.
In conjunction with the acquisition of Hunter, the Company assumed a note
receivable with a balance of $174,235 and $120,758 at June 30, 1996 and December
31, 1995 from an owner in an affiliated limited liability company. The note
provides for interest at ten percent and had a due date of December 31, 1995,
which has been extended to August 31, 1996.
In connection with the acquisition of Hunter, the Company assumed a note
receivable from a company affiliated with the President of the Company in the
amount of $54,615 at December 31, 1995. This note bears interest at ten percent
F-19
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
and is due on demand. Additionally, trade accounts receivable from this
affiliated company were $51,346 at December 31, 1995 and June 30, 1996.
In connection with the acquisition of Hunter, the Company assumed unsecured
accounts receivable from the President personally in the amount of $10,000 as of
December 31, 1995, which amount was repaid in February 1996.
A company owned by two former directors of the Company operated several of the
wells in which the Company has an interest. Operating fees paid this company
were $400, $17,000, $35,319 and $1,602 in the six months ended June 30, 1996 and
1995 and the years ended December 31, 1995 and 1994, respectively. The
operations of these wells have been transferred to a subsidiary of Magnum. In
addition, the related company received a commission of $25,000 from the sale of
an oil and gas property to the Company in 1995.
NOTE 6--LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
--------------------------------------------
<S> <C> <C>
Banks
Promissory note, collateralized by pipelines and oil and gas
properties, payable in monthly installments for 1996 of $174,000
through October 1, 1996, then $171,000 thereafter plus interest at
prime plus one percent (total of 9.75% at December 31, 1995), assumed
in Hunter
acquisition (1) $ 9,554,597 $ -
Note payable, payable in monthly installments of $498 through July 1996
plus interest at 7.25 percent, collateralized by truck,
assumed in Hunter acquisition 3,000 -
Notes payable to banks, collateralized by vehicles, payable in monthly
installments of $1,075, including interest at 7.5% to 10.75%, through
April 1998. The notes were paid in full in 1995
or assumed by one of the Company's directors. - 29,165
Other
Notes payable, non-interest bearing and uncollateralized, payable in
monthly installments of $1,000 through July 1, 2000, assumed
in Hunter acquisition 54,000 -
Notes payable to purchase oil and gas property, the terms of which were
suspended in 1994 awaiting further development of the related property.
An agreement was entered into in 1995 to settle the note for $130,000.
Funds were segregated at
December 31, 1994, in that amount, for payment in 1995 - 130,000
Notes payable to purchase oil and gas property, payable in monthly
installments of $3,000, including interest at an imputed rate of 8% - 26,435
--------------------------------------------
Total Long-Term Debt 9,611,597 185,600
Less Current Portion 2,014,000 173,925
--------------------------------------------
Long-Term Debt $ 7,597,597 $ 11,675
============================================
F-20
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
Maturities of long-term debt based on contractual requirements for the years
ending December 31, are as follows:
1996 $ 2,014,000
1997 2,508,000
1998 2,627,000
1999 2,151,000
2000 311,597
---------------
$ 9,611,597
(1) The promissory note to bank is a borrowing under a $20,000,000 line of
credit on which there existed a borrowing base of approximately $8.7 million at
December 31, 1995. The balance at December 31, 1995 includes $1,125,000 due to
the seller of certain oil and gas properties which was refinanced in February,
1996 under the line of credit. The final principal payments under the line of
credit are due June 1, 2000. The amount that can be borrowed under the line of
credit is based upon a designated percentage of oil and gas reserve values. The
line of credit includes covenants, the most restrictive of which require
maintenance of a current ratio and tangible net worth, as specifically defined
in the loan agreement.
On June 26, 1996, Magnum received a commitment from Wells Fargo Bank, N.A., as
Agent, and Banque Paribas, as Co-agent, (hereinafter collectively referred to as
"Banks") for a new credit facility for the benefit of Magnum and several
wholly-owned subsidiaries. The purpose of the new line of credit is to 1)
refinance the Company's existing indebtedness with First Interstate Bank of
Texas, N.A. (a wholly-owned subsidiary of Wells Fargo Bank, N.A.), 2) finance
the acquisition of oil and gas reserves including the $35.4 million Panoma
Property acquisition from Meridian Oil Inc. ("Meridian"), a wholly-owned
subsidiary of Burlington Resources, Inc., 3) future property development, and 4)
working capital support and general corporate purposes. The credit facility is
subject to a "Borrowing Base" determination established from time-to-time by the
Banks based upon proven oil and gas reserves and gas gathering assets owned by
Magnum and its subsidiaries. The availability under the Company's existing
credit facility was $16 million and has now been increased to $48 million based
upon the acquisition of the Panoma Properties. The new credit facility gives the
Company the flexibility to choose a range of either "LIBOR" or "Prime" based
interest rates options. At June 30, 1996, the outstanding debt balance on the
credit facility notes was $48 million with no required principal payments due on
$40 million of the notes until June 30, 2001, when any remaining principal
balance will be due in full. The terms of the remaining notes of $8 million
require quarterly principal payments of $1 million beginning March 31, 1997.
NOTE 7--INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which requires the
recognition of a liability or asset, net of a valuation allowance, for the
deferred tax consequences of all temporary differences between the tax bases and
the reported amounts of assets and liabilities, and for the future benefit of
operating loss carryforwards. The tax effects of significant temporary
differences and carryforwards are as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Property and equipment, including intangible drilling costs $ (5,890,000) $ (218,231)
---------------------------------------------------------------
Total deferred tax liability (5,890,000) (218,231)
---------------------------------------------------------------
Allowance for doubtful accounts 50,000 160
Depletion carryforwards 365,000
Operating loss carryforwards 2,350,000 1,135,089
---------------------------------------------------------------
Total deferred tax assets 2,765,000 1,135,249
---------------------------------------------------------------
Valuation allowance - (917,018)
---------------------------------------------------------------
Net Deferred Tax Liability $ (3,125,000) $ -
===============================================================
</TABLE>
F-21
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
The Company and its subsidiaries have net operating loss carryforwards (NOL) of
approximately $6,400,000 that expire, if unused, in years 1996 through 2010.
Approximately $1,700,000 of the NOL carries a limitation of approximately
$200,000 per year. In addition, the Company has depletion carryforwards of
approximately $1,000,000.
NOTE 8--STOCKHOLDERS' EQUITY
Shares of preferred stock may be issued in such series, with such designations,
preferences, stated values, rights, qualifications or limitations as determined
solely by the Board of Directors. Of the 10,000,000 shares of $.001 par value
preferred stock the Company is authorized to issue, 216,000 shares have been
designated as Series A Preferred Stock, 925,000 shares have been designated as
Series B preferred stock, and 625,000 shares have been designated as Series C
Preferred Stock. Thus, 8,234,000 preferred shares have been authorized for
issuance but have not been issued nor have the rights of these preferred shares
been designated. No dividends can be paid on the common stock until the dividend
requirements of the preferred shares have been satisfied.
Holders of the Series A preferred stock are entitled to receive dividends only
to the extent that funds are available from the West Dilley Prospect. Such
dividends are limited to $7.50 per share, in the aggregate. Dividend payments to
Series A preferred shareholders will be based on 50% of the net operating
revenue received by the working interest owners of the West Dilley Prospect. Due
to a decline in production from the well located on this prospect, the Company
has shut this well in and is no longer producing it. The Series A dividends are
not cumulative except for unpaid amounts due from this calculation. No dividends
have been paid on the Series A preferred stock. There is no aggregate annual
dividend requirement for the Series A preferred stock.
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
$11,000, $21,893 and $25,172 for the six months ended June 30, 1995 and the
years ended December 31, 1995 and 1994, respectively.
Beginning June 15, 1994, the Company offered to exchange (the "Exchange Offer")
1,250 shares of common stock for each Series B production certificate. During
1994, 141.1 production certificates were exchanged for 176,375 shares of common
stock and the Series B preferred shareholders agreed to convert their Series B
preferred shares into common stock at December 31, 1995 if all dividends were
paid through that date. Most of the shares were converted in early 1996.
Separate and apart from the Exchange Offer, two of the Company's officers and
directors (the "Officers") set aside 125,000 shares (the "Stock") of their own
common stock of the Company for a single individual (the "Individual") who owned
approximately 55% of the Series B Production certificates that were exchanged.
The Stock is being held by an independent party to this transaction until fair
market value of the Exchange Shares, when the Exchange Shares become eligible
for sale pursuant to Rule 144 of the Securities Act of 1933, is determined. If
the fair market value of the Exchange Shares is at least $5.00 per share, then
the Stock will be returned to the Officers. If the value of the Exchange Shares
is less than $5.00 per share, the Individual will receive a certain number of
the shares as specified in the agreement. The Company issued 125,000 shares of
its common stock to the Officers in exchange for their assignment to the Company
of all of the Officers' rights, title and interest in the Stock. The Company has
recorded the new shares issued at par value.
The Series C preferred stock is convertible at the option of the holder at any
time into three shares of common stock and, after November 12, 1994, will
automatically convert into common stock anytime the closing bid price of the
common stock equals or exceeds $5.00 per share for twenty consecutive trading
days. The Series C preferred stock is redeemable by the Company beginning
November 12, 1995, at $10.50 per share plus accrued and unpaid dividends. If
declared by the Board of Directors, dividends accrue at the annual rate of $1.10
per share, are cumulative from the date of first issuance and are paid quarterly
in arrears. The Board of Directors declared dividends on the Series C
F-22
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
preferred stock of $340,000 for the six months ended June 30, 1996, $282,000 for
the six months ended June 30, 1995, $595,327 for the year ended December 31,
1995, and $554,153 for the year ended December 31, 1994. During 1994, 40,025
Series C preferred shares were converted into 120,075 shares of common stock and
24,250 shares of Series C preferred stock were issued upon exercise of
representatives' warrants. The aggregate annual dividend requirements for the
625,000 shares of Series C preferred stock outstanding at December 31, 1995
amounts to $687,500.
The preferred shareholders are not entitled to vote except on those matters in
which the consent of the holders of preferred stock is specifically required by
Nevada law. If the Company were to liquidate prior to payment of the full
dividend requirements on the preferred stock, the preferred stock would receive
a liquidation preference from the liquidation proceeds. The Series A preferred
shareholders would receive an amount equal to the lesser of the proceeds from
the liquidation of the West Dilley Prospect or the remaining unpaid dividend.
The Series C preferred shareholders would receive a liquidation preference of
$10.00 per share, plus an amount equal to any accrued and unpaid dividends to
the payment date. On liquidation, holders of all series of the preferred stock
would be entitled to receive the par value, $.001 per share, in preference to
the common stock shareholders.
The Series C preferred stock was originally issued as a unit comprised of one
share of Series C preferred stock and warrants to purchase 3 shares of common
stock. A total of 1,687,500 warrants were issued and are exercisable at $5.50
per share through November 12, 1998. The Company offered the holders of the
warrants a discount period commencing November 15, 1994 and ending February 16,
1995 during which time the warrants could be exercised at $4.00. During this
time, warrants were exercised for 833,324 shares of common stock. The exercise
of these warrants resulted in cash proceeds of $3,333,298 to the Company. The
warrants are redeemable by the Company at $0.02 per warrant upon 30 day notice
at any time after November 12, 1995 or earlier if the closing bid price of the
common stock equals or exceeds $6.75 for five consecutive trading days. At June
30, 1996 and December 31, 1995, 854,176 of the warrants remained outstanding.
The Company granted an unrelated company the right to acquire 100,000 shares of
common stock under the terms of a consulting agreement. The rights became
exercisable at the rate of 3,325 shares in November 1994, 8,335 shares per month
from December 1994 through October 1995 and 4,990 shares in November 1995. The
rights are exercisable at $4.125 per share. The rights expire in November 1996
if not exercised by then. All of the rights were outstanding at June 30, 1996
and December 31, 1995.
During 1995, 20,750 representatives' warrants were exercised at $12.00 per
warrant resulting in $249,000 of proceeds to the Company. Each warrant entitles
the holder to receive one share of Series C preferred stock and 3 common stock
warrants exercisable at $4.00 per share through February 1995 and $5.50
thereafter. 9,300 shares of Series C preferred stock and 2,000 shares of Series
B preferred stock have also been converted into 28,900 shares of common stock.
The Company issued 5,000 shares of common stock, valued at $3.50 per share to
its directors, which resulted in $17,500 of compensation expense in 1995. Also,
22,222 shares of common stock with a value of $3.80 per share were issued for
services.
During the six months ended June 30, 1996, 20,550 shares of Series B preferred
stock were converted to 10,275 shares of common stock.
On June 5, 1996, Magnum called for the redemption of 208,333 shares of its
Series C preferred stock at $10.50 per share, as provided by the terms of the
certificate of designations, plus accrued dividends with an extended redemption
date of July 10, 1996. Terms of the preferred stock provide for the option by
the holder to convert the preferred shares into common stock at the rate of
three (3) shares of common stock for each share of Series C preferred stock. At
June 30, 1996, 57,400 shares of the preferred stock had converted into 172,200
shares of Magnum common stock. An additional, 3,527 shares of common stock were
issued for accrued dividends to conversion date. Subsequent to June 30, 1996, an
additional 236,992 shares of the preferred stock were converted for 732,223
shares of common stock, including accrued dividends paid in common stock.
Additionally, 8,224 shares of preferred stock were redeemed for $86,352 after
June 30, 1996.
On July 11, 1996, Magnum called for the redemption the remaining 322,384 shares
of its Series C preferred stock. The redemption price was $10.50 per share, plus
accrued dividends of $.141 per share from July 1, 1996 through the
F-23
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
extended redemption date of August 16, 1996, for a total redemption price of
$10.641 per share. The Series C preferred shares could be converted, at the
option of the holder, at any time prior to August 16, 1996 into common stock.
302,492 shares of Series C preferred stock were converted into 938,451 shares of
common stock including the accrued dividends paid in common stock. Additionally,
19,892 shares of preferred stock were redeemed for cash in the amount of
$210,431.
After both redemption calls, Magnum converted 596,884 shares of its Series C
preferred stock into common stock and redeemed 28,116 shares of its Series C
preferred stock.
NOTE 9--SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During 1994, the Company purchased oil and gas properties by issuing 613,000
shares of common stock valued at $1,233,500 along with cash in the amount of
$200,000. The Company issued 176,375 shares of its common stock, valued at
$584,016, in exchange for the production payment interests held by production
certificate holders. Shareholders converted 10,500 shares of Series B preferred
stock and 40,025 shares of Series C preferred stock into 5,250 and 120,075
shares of common stock, respectively. A vehicle with a carrying value of $10,923
was sold to an officer of the Company with the officer assuming a related note
payable in the amount of $10,923. The Company received equity securities with a
fair value of $66,660 as partial payment for the sale of property interests. The
Company granted shareholders a $187,500 adjustment to the price of common stock
previously sold by reducing notes receivable from the shareholders by that
amount. Also in 1994, the Company issued 150,000 shares of common stock in
exchange for notes receivable from the purchasing shareholders in the amount of
$187,500.
During 1995, as more fully described in Note 3, the Company issued common stock
and preferred stock valued at $12,495,005 in the acquisition of Hunter
Resources, Inc. assets. Oil and gas properties were acquired by issuing
$1,379,204 of common stock and $22,220 of marketable securities; preferred stock
was converted to common stock; and common stock was issued for a receivable from
a shareholder of $250. In addition $17,500 of common stock was issued as
compensation to directors and $84,444 of common stock was issued for services.
During 1996, the Company acquired oil and gas properties by issuing 166,035
shares of common stock valued at $611,000. Additionally, the Company paid
$475,000 for interest during the six months ended June 30, 1996.
NOTE 10--ENVIRONMENTAL ISSUES
Being engaged in the oil and gas exploration and development business, the
Company may become subject to certain liabilities as they relate to
environmental clean up of well sites or other environmental restoration
procedures as they relate to the drilling of oil and gas wells and the operation
thereof. In the Company's acquisition of existing or previously drilled well
bores, the Company may not be aware of what environmental safeguards were taken
at the time such wells were drilled or during the time that such wells were
operated. Should it be determined that a liability exists with respect to any
environmental clean up or restoration, the liability to cure such a violation
would most likely fall upon the Company. In certain acquisitions the Company has
received contractual warranties that no such violations exist, while in other
acquisitions the Company has waived its rights to pursue a claim for such
violations from the selling party. No claim has been made nor has a claim been
asserted, nor is the Company aware of the existence of any liability which the
Company may have, as it relates to any environmental clean up, restoration or
the violation of any rules or regulations relating thereto.
NOTE 11-COMMITMENTS AND CONTINGENCIES
The Company assumed in the Hunter acquisition lease agreements for the use of
office space and office equipment. The office space lease extends through
November 2001 with an option to renew the lease for a three year term. The
office equipment lease extends until 1998. The leases have been classified as
operating leases. The following is a schedule by years of future minimum lease
payments required under the operating lease agreements:
F-24
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED
Year Ended December 31:
1996..................................................$126,906
1997.................................................. 120,178
1998.................................................. 120,188
1999................................................. 117,419
2000................................................. 124,238
Thereafter......................................... 112,515
-------
Total Minimum Payments Required......................$721,444
========
Rental expense was $58,000, $31,000, $61,191 and $21,283 for the six months
ended June 30, 1996 and 1995 and the years ended December 31, 1995 and 1994,
respectively.
At December 31, 1995, the Company is involved in litigation proceedings arising
in the normal course of business. The Company has accrued $100,000 as of
December 31, 1995 for potential expenses to be incurred in settlement of the
litigation. In the opinion of management, any additional liabilities resulting
from such litigation would not have a material effect on the Company's financial
condition.
NOTE 12-FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of accounts and notes receivable. The receivables are primarily from
companies in the oil and gas business or from individual oil and gas investors.
These parties are primarily located in the Southwestern regions of the United
States. No single receivable is considered to be sufficiently material as to
constitute a concentration. The Company does not ordinarily require collateral,
but in the case of receivables for joint operations, the Company often has the
ability to offset amounts due against the participant's share of production from
the related property. The Company believes the allowance for doubtful accounts
at December 31, 1995 is adequate.
Management estimates the market values of notes receivable and payable based on
expected cash flows and believes those market values approximate carrying values
at December 31, 1995. The market values of equity investments are based upon
quoted prices (see Note 1).
NOTE 13 - FOURTH QUARTER ADJUSTMENT
In the fourth quarter of 1995, due to downward revisions of the Company's
reserves at year-end, the Company made adjustments to depreciation and depletion
that impacted previously reported quarterly results. The effect of the
adjustments was to increase the reported net loss attributable to common
stockholders of $868,405 for the nine month period ended September 30, 1995 to a
net loss of approximately $1,046,000.
F-25
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
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 and
Company employees. 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. The
estimated net interests in proved reserves are based upon subjective engineering
judgments and may be affected by the limitations inherent in such estimation.
The process of estimating reserves is subject to continual revision as
additional information becomes available as a result of drilling, testing,
reservoir studies and production history. There can be no assurance that such
estimates will not be materially revised in subsequent periods.
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, 1994
Proved reserves......................................................... 1,260,520 4,914,207
Proved developed reserves............................................... 239,795 394,872
=====================================================
December 31, 1995
Proved reserves......................................................... 3,767,739 14,071,916
Proved developed reserves............................................... 1,681,841 8,796,748
=====================================================
The changes in proved reserves for the year ended December 31, 1995 and
1994 were as follows:
Natural Gas
Oil (Thousand
(Barrels) Cubic Feet)
-----------------------------------------------------
Reserves at December 31, 1993................................................ 1,445,990 3,672,779
Purchase of minerals-in-place................................................ 368,448 2,337,359
Production................................................................... (41,835) (88,176)
Revisions of estimates....................................................... (512,083) (1,007,755)
-----------------------------------------------------
Reserves at December 31, 1994................................................ 1,260,520 4,914,207
Purchase of minerals-in-place................................................ 3,122,382 10,973,298
Extensions and discoveries.................................................. 38,498 564,247
Production................................................................... (29,972) (102,056)
Revisions of estimates....................................................... (623,689) (2,277,780)
----------------------------------------------------
Reserves at December 31, 1995................................................ 3,767,739 14,071,916
====================================================
</TABLE>
F-26
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depreciation, depletion and impairment as
of December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------
<S> <C> <C>
Unproved oil and gas properties....................................... $ 842,889 $ 700,344
Proved properties..................................................... 36,256,428 7,932,496
-------------------------------------------------------------
Gross Capitalized Costs............................................... 37,099,317 8,632,840
Accumulated depreciation, depletion and impairment.................... (1,914,602) (1,499,095)
-------------------------------------------------------------
Net Capitalized Costs................................................. $ 35,184,715 $ 7,133,745
=============================================================
</TABLE>
Costs incurred in oil and gas producing activities, both capitalized and
expensed, during the years ended December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------
<S> <C> <C>
Property acquisition costs
Proved properties................................................ $ 27,983,521 $ 1,737,543
Unproved properties.............................................. 142,545 -
Exploration costs................................................ 340,411 -
Development costs..................................................... - 791,144
-------------------------------------------------------------
Total Costs Incurred.................................................. $ 28,466,477 $ 2,528,687
=============================================================
</TABLE>
Results of operations from oil and gas producing activities for the years
ended December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------
<S> <C> <C>
Oil and gas production revenue........................................ $ 616,596 $ 729,478
Disposal services revenue............................................. 31,978 15,704
Production costs...................................................... (293,647) (324,392)
Depreciation and depletion ........................................... (421,101) (243,180)
-------------------------------------------------------------
Results of Operations for Producing Activities........................ $ (66,174) $ 177,610
=============================================================
</TABLE>
F-27
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The standardized measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------
<S> <C> <C>
Future cash inflows.................................................... $ 95,068,694 $ 25,900,669
Future development and production costs................................ (37,746,877) (10,011,434)
----------------------------------------------
Future net cash flows, before income tax............................... 57,321,817 15,889,235
Future income taxes.................................................... (11,381,779) (3,679,963)
----------------------------------------------
Future Net Cash Flows.................................................. 45,940,038 12,209,272
10% annual discount.................................................... (16,120,359) (5,974,156)
----------------------------------------------
Standardized Measure of Discounted Future Net Cash Flows............... $ 29,819,679 $ 6,235,116
==============================================
</TABLE>
The primary changes in the standardized measure of discounted estimated
future net cash flows for the years ended December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1995 1994
------------------------------------------------------------
<S> <C> <C>
Purchases of minerals-in-place......................................... $ 30,507,745 $ 2,736,310
Extensions, discoveries and improved recovery, less related costs...... 582,001 162,944
Sales of oil and gas produced, net of production costs................. (350,083) (300,517)
Development costs incurred during the period........................... 467,192
Revision of prior estimates:
Net change in price and costs....................................... 4,864,688 (1,074,222)
Change in quantity estimates...................................... (7,637,000) (2,981,078)
Accretion of discount.................................................. 623,512 1,289,466
Net change in income taxes............................................. (5,006,300) (594,905)
------------------------------------------------------------
Net Change............................................................. $ 23,584,563 $ (294,810)
============================================================
</TABLE>
Estimated future cash inflows are computed by applying year-end prices of oil
and gas to year-end quantities of proved reserves. Estimated future development
and production costs are determined by estimating the expenditures to be
incurred in developing and producing the proved oil and gas reserves at the end
of the year, based on year-end costs and assuming continuation of existing
economic conditions. Estimated future income tax expense is calculated by
applying year-end statutory tax rates to estimated future pre-tax net cash flows
related to proved oil and gas reserves, less the tax basis of the properties
involved.
The assumption used to compute the standardized measure are those prescribed
by the Financial Accounting Standards Board and as such, do not necessarily
reflect the Company's expectations of actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process are equally applicable to the standardized measure
computations since these estimates are the basis for the valuation process.
F-28
<PAGE>
Independent Auditor's Report
Board of Directors
Hunter Resources, Inc.
We have audited the consolidated statement of net assets in liquidation of
Hunter Resources, Inc. and subsidiaries as of December 31, 1995. In addition, we
have audited the consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1995 and 1994. 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.
As described in Note 3 to the consolidated financial statements, a majority of
the Company's stockholders approved a plan to dispose of the Company's operating
assets and liabilities as of December 22, 1995 and subsequently liquidate the
Company. As a result, the Company has changed its basis of accounting as of
December 31, 1995 from the going-concern basis to a liquidation basis.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets in liquidation of Hunter Resources, Inc.
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the years ended December 31, 1995 and 1994, in
conformity with generally accepted accounting principles applied on the bases
described in the preceding paragraph.
HEIN + ASSOCIATES LLP
April 3, 1996
Dallas, Texas
F-29
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION>
ASSET June 30, December 31,
1996 1995
----------------------------------
(Unaudited)
<S> <C> <C>
Investment in securities, at estimated market value $ 12,495,000 $ 12,495,000
----------------------------------
Total Assets $ 12,495,000 $ 12,495,000
==================================
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
<S> <C> <C>
Commitments and contingencies (Note 6)
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 $ 90,000
Common Stock, $.10 par value; 100,000,000 shares authorized;
18,454,000 shares issued and outstanding 1,845,000 1,845,000
Additional paid-in capital 1,834,000 1,834,000
Accumulated deficit 8,736,000 8,936,000
------------------------------------
12,505,000 12,705,000
Treasury stock (10,000) (210,000)
------------------------------------
Total Stockholders' Equity $ 12,495,000 $ 12,495,000
------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended For the Years Ended
June 30, December 31,
1996 1995 1995 1994
-------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
DISCONTINUED OPERATIONS
Income (loss) from operations $ - $ 9,000 $ (682,000) $ 15,000
Gain (loss) from disposition of assets (200,000) - 10,333,000 -
-------------------------------------------------------------
NET INCOME (LOSS) $ - $ 9,000 $ 9,651,000) $ 15,000
PREFERRED DIVIDENDS - - (9,000) (9,000)
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (200,000) $ 9,000 $ 9,642,000 $ 6,000
=============================================================
NET INCOME (LOSS) PER SHARE $ (0.01) $ * $ 0.53 $ *
=============================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 18,454,261 17,728,000 18,072,000 17,333,000
=============================================================
* Less than $.01 per share.
</TABLE>
The accompanying notes are an integral part of these statements
F-31
<PAGE>
<TABLE>
<CAPTION>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Capital in Treasury Stock Advances
Excess of Accumulated and Put Option to
Shares Amount Shares Amount Par Value (Deficit) Shares Amount Affiliates
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 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)
Common stock issued for liabilities 241,000 24,000 36,000
Common stock issued for cash 279,000 28,000 73,000
Common stock issued for services 380,000 38,000 46,000
Payments and advances
to affiliates, net 64,000
-----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 90,000 90,000 17,466,000 1,747,000 1,621,000 (706,000) 22,000 (10,000) -
Net loss 9,651,000
Preferred dividends 9,000 (9,000)
Common stock issued for cash 400,000 40,000 35,000
Common stock issued to acquire oil and
gas properties 588,000 58,000 169,000
Put stock issued for assets
acquired 516,000 (200,000)
-----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 90,000 90,000 18,454,000 1,845,000 1,834,000 8,936,000 538,000 (210,000) -
Expiration of put option (unaudited) (200,000) (516,000) 200,000
-----------------------------------------------------------------------------------------------
Balance June 30, 1996 (Unaudited) 90,000 $90,000 18,454,000 $1,845,000 $1,834,000 $ 8,736,000 22,000 $(10,000) $ -
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
F-32
<PAGE>
<TABLE>
<CAPTION>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended For the Years Ended
June 30, December 31,
1996 1995 1995 1994
------------------------------------------------------------
(Unaudited)(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $(200,000) $ 9,000 $ 9,651,000 $ 15,000
Adjustments to reconcile to net cash
provided by operating activities:
Litigation accrual - - 100,000 -
Common stock issued for services - - - 84,000
Depreciation, depletion, amortization, and impairment - 176,000 919,000 263,000
(Gain)loss on sale of assets 200,000 (27,000) (9,678,000) -
Adjustment of allowances and payables - (63,000) (35,000) (138,000)
Change in assets and liabilities:
(Increase) decrease in notes and accounts
receivable, trade and affiliates - (146,000) (620,000) (11,000)
(Increase) decrease in other current assets - (24,000) 32,000 39,000
(Increase) decrease in other assets - - (102,000) -
Increase (decrease) in accounts payable,
accrued liabilities and suspended revenue payable - 364,000 861,000 121,000
Increase (decrease) in due to affiliates - - 753,000 -
------------------------------------------------------------
Total adjustments - 280,000 1,881,000 358,000
------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES: - 289,000 1,199,000 373,000
------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment - 43,000 28,000 23,000
Additions to property and equipment - (1,574,000) (9,279,000) (830,000)
Increase (decrease) in long-term accounts receivables,
trade and affiliate - 14,000 - -
------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES: - (1,517,000) ( 9,251,000) (807,000)
------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 2,604,000 9,818,000 493,000
Increase (decrease) in other liabilities - 367,000 (17,000) 27,000
Payments on long-term debt - (1,535,000) (2,182,000) (259,000)
Proceeds from production payable - - 300,000 -
Payments on production payable - - (12,000) -
Proceeds from sale of stock - 38,000 75,000 101,000
Other - - 45,000 -
------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES - 1,474,000 8,027,000 362,000
------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIIVALENTS - 246,000 (25,000) (72,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR - 25,000 25,000 97,000
------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ - $ 271,000 $ - $ 25,000
============================================================
</TABLE>
The accompanying notes are an integral part of these statements
F-33
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(1) NATURE OF OPERATIONS AND PRESENTATION:
Hunter Resources, Inc. and Subsidiaries (the "Company"), formerly Intramerican
Corporation, a Pennsylvania Corporation, has historically been engaged in the
acquisition, operation, and development of oil and gas properties; the
gathering, transmission and marketing of natural gas; providing of management
and advisory consulting services on oil and gas properties for third parties;
and providing consulting and U.S. export services to facilitate Latin American
trade in energy products. The Company previously owned and operated oil and gas
properties in five states, predominantly in the Southwest region of the United
States. In addition, the Company owned and operated three gathering systems
located in Texas, Louisiana and Oklahoma.
As more fully discussed in Note 3, Magnum Petroleum, Inc. ("Magnum") entered
into an amended definitive agreement on December 19, 1995 to acquire
substantially all of the assets, subject to the existing liabilities, of the
Company. The assets consisted primarily of the capital stock ownership in
wholly-owned subsidiaries and capital stock ownership interests in limited
liability companies. The purchase was accounted for by the purchase method
effective December 31, 1995. As such, the accompanying consolidated financial
statements for 1995 do not include the balance sheet accounts of the Company and
its subsidiaries. However, the Statement of Operations for 1995 does include the
operations of the Company and its subsidiaries for 1995. A vital part of the
definitive agreement is a provision for the liquidation of the Company upon
formal shareholder approval of the agreement and the exchange of Magnum shares
for existing Company shares. As a result, the Company has changed its basis of
accounting as of and for periods subsequent to December 31, 1995 to the
liquidation basis of accounting.
(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 accounts
of an oil and gas limited liability company in which the Company owned less than
a controlling stock ownership interest until October 1995 when the Company
purchased the remaining stock ownership interest from a third party. The major
operating subsidiaries of the Company were Magnum Hunter Production, Inc., Gruy
Petroleum Management Company and Hunter Gas Gathering, Inc. All significant
intercompany transactions and balances 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. See Note
1.
FINANCIAL INSTRUMENTS
---------------------
The Company's investment in securities is classified as a financial instrument.
The estimated market value of this investment is based upon quoted prices that
have been discounted by management due to the significant amount of the
investment held by the Company.
The put option on common stock (Note 5) is also classified as a financial
instrument. The option is recorded as a $200,000 reduction of stockholders'
equity, but management estimated the market value of the put option as zero at
December 31, 1995 because the option subsequently expired unexercised in April
1996.
GAS GATHERING AND MARKETING REVENUES
------------------------------------
The Company receives fees for the gathering of natural gas on its pipeline
system for the benefit of other parties. In addition, the gas connected to the
pipeline is sold to third parties resulting in marketing revenue. These revenues
are recognized as earned.
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.
F-34
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
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 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
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 15 years. Gain or loss on retirement or
sale or other disposition of assets is included in income in the period of
disposition. During 1995, the Company recorded a $338,000 charge as additional
depreciation to adjust a gathering system to its net realizable value.
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 ten years. Gain or loss on retirement or sale or
other disposition of assets is included in income in the period of disposition.
IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS
----------------------------------------
The Financial Accounting Standards Board (FASB) has issued Statement No. 121,
"Accounting for Impairments of Long-Lived Assets" and Statement No. 123,
"Accounting for Stock-Based Compensation". Management believes neither of these
accounting standards will impact the Company's financial statements.
USE OF ESTIMATES AND CERTAIN SIGNIFICANT ESTIMATES
--------------------------------------------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates.
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 assets and
liabilities represent the future tax return consequences of those differences
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets include recognition of operating
losses that are available to offset future taxable income and tax credits that
are available to offset future income taxes. Valuation allowances are recognized
to limit recognition of deferred tax assets where appropriate. Such allowances
may be reversed when circumstances provide evidence that the deferred tax assets
will more likely than not be realized.
F-35
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
INTANGIBLE ASSETS
-----------------
The excess of cost over the fair value of net assets acquired (goodwill) has
been amortized using the straight-line method. Through December 31, 1995,
approximately $1,158,000 was being amortized over a thirty year period and
$37,000 was being amortized over a five year period.
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 June 30,
1996 and 1995 and December 31, 1995 and 1994.
(3) LIQUIDATION BASIS OF ACCOUNTING AND DISCONTINUED OPERATIONS:
Magnum executed a definitive agreement on July 21, 1995 to acquire substantially
all of the assets of the Company, subject to the existing liabilities. Pursuant
to the agreement, Magnum issued, subject to shareholder approval, 2,750,000
shares of its restricted common stock to the Company in exchange for the assets
acquired. In addition, 575,000 shares of Magnum restricted common stock were
issued to a third party investment banking firm as compensation and considered
an additional cost of the acquisition. The firm subsequently distributed a total
of 250,000 of the shares to a former director and a former officer of Magnum for
their assistance in completing the acquisition.
On December 19, 1995 to be effective December 22, 1995, Magnum and the Company
entered into an amended agreement. Under the terms of the amendment, which was
executed by Company shareholders representing over fifty percent (50%) of the
common stock of the Company and one hundred percent (100%) of the outstanding
preferred stock of the Company, an additional 2,335,077 shares of Magnum
restricted common stock and 111,825 shares of Magnum Series C preferred stock
were issued to the Company. Therefore, the total consideration paid by Magnum to
the Company for subsequent distribution to the Company's respective shareholders
was 5,085,077 shares of restricted common stock and 111,825 shares of Series C
preferred stock. The acquisition was recorded by Magnum under the "purchase
method" of accounting, based upon the estimated value of the shares issued of
$12,495,000. The operations of the Company have been consolidated with those of
Magnum beginning on December 31, 1995.
A vital part of the definitive agreement with Magnum is a provision for the
liquidation of the Company upon formal shareholder approval of the agreement and
the exchange of Magnum shares for existing Company shares. As a result, the
Company has changed its basis of accounting at and for periods subsequent to
December 31, 1995 to the liquidation basis of accounting. In accordance with the
liquidation basis of accounting, assets are to be restated to estimated net
realizable value and liabilities are to be stated at their estimated settlement
value. As the Company's only remaining asset is its investment in Magnum shares
which are ultimately to be distributed to the Company's shareholders in exchange
for existing shares of the Company, no liquidation basis adjustments to the
Company's assets and liabilities were necessary at June 30, 1996 and December
31, 1995. The Company's investment in securities of Magnum is recorded at June
30, 1996 and December 31, 1995 at $12,495,000, which represents the estimated
market value. As the stock put option expired unexercised in April 1996, the
deferred gain has been adjusted by $200,000 to reflect the expiration of the
option.
Since all of the Company's operating assets and liabilities were disposed of
effective December 31, 1995, the Company's revenues and expenses for the six
months ended June 30, 1996 and 1995 and the years ended December 31, 1995 and
1994 have been netted and presented as discontinued operations. The Company's
revenues and other operating information from its industry segments are
presented in Note 10.
(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:
F-36
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
For Six Months Ended For the Year Ended
June 30, December 31,
1996 1995 1995 1994
-------- -------- --------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Non-Cash Investing and Financing Activities
Oil and gas properties acquired in exchange for common stock $ - $ 227,000 $ 227,000 $ -
=========================================================
Oil and gas properties acquired in exchange for note payable $ - $ - $ 1,125,000 $ -
=========================================================
Net assets exchanged for stock of Magnum (including
unrealized appreciation of $10,333,000) $ - $ - $ 12,495,000 $ -
=========================================================
Stock issued in settlement of liabilities $ - $ - $ - $ 60,000
=========================================================
Other:
Interest paid $ - $ 70,000 $ 325,687 $ 43,000
=========================================================
</TABLE>
(5) ACQUISITIONS AND SALES OF PROPERTY:
In 1995, the Company closed an acquisition of domestic producing oil and gas
properties for $1.4 million. The purchase price was comprised of $1.2 million
cash and $200,000 in restricted common stock of Hunter, valued at $.3875 per
share. Additionally, the seller was granted a put option for the Company, which
was personally guaranteed by the Company's President, to buy back the Hunter
shares for $200,000 beginning March 31, 1996. The put option was assumed by
Magnum in the combination with Hunter and in April 1996 the put option expired
unexercised.
During 1995, the Company acquired the remaining seventy-five percent (75%)
ownership interest in an affiliated company from a joint venture partner. The
purchase price of $1,075,000 consisted of i) $300,000 in cash, ii) $300,000
represented by 85,131 shares of restricted common stock of Magnum valued at
$3.52 per share and iii) the assumption of existing bank indebtedness of
$475,000. 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.
Also in 1995, the Company acquired producing oil and gas properties for
$2,315,000 from a third party. The purchase price was comprised of $2,058,000
cash, funded by the Company's bank line of credit, and $257,000 represented by
64,176 shares of Magnum restricted common stock valued at $4.00 per share.
During 1995, the Company acquired producing oil and gas properties from a third
party for approximately $4,229,000. The initial purchase price was comprised of
$3,104,000 cash, funded by the Company's line of credit with a bank, and a note
payable to the previous owner of the properties in the amount of $1,125,000
secured by 610,170 shares of Magnum restricted common stock.
Additionally, in 1995 the Company acquired two unregulated gas gathering systems
from a publicly held company. The total consideration was $1,000,000, funded
substantially by the Company's line of credit with a bank.
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 of approximately 32,000
barrels of oil and 1,389,000 MCF of natural gas (unaudited). The Company's costs
of the property acquisitions were approximately $749,000 for 1994.
F-37
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
The Company sold oil and gas properties with proved reserves, as estimated by
the Company's independent petroleum engineer during 1994 of approximately 1,000
barrels of oil and 33,000 MCF of natural gas (unaudited). The net proceeds of
approximately $23,000 was credited to oil and gas properties.
(6) COMMITMENTS AND CONTINGENCIES:
A subsidiary of the Company was a defendant in litigation brought by Oklahoma
Gas & Electric Company against IOM Gas, Inc. ( IOM), now known as Hunter Gas
Gathering, Inc., and another third party, a company controlled by the Company's
former Chairman. A settlement agreement was executed in 1994 by the Company and
$117,000 was charged to operations representing the legal costs associated with
defending the Company's interest in the litigation.
At December 31, 1995, the Company is involved in litigation proceedings arising
in the normal course of business. The Company accrued $100,000 as of December
31, 1995 for potential legal expenses to be incurred in defending itself and
ultimate settlement of the litigation. In the opinion of management, any
additional liabilities resulting from such litigation would not have a material
effect on the Company's financial condition. As a part of the combination with
Magnum, any liability related to lawsuits was assumed by Magnum.
The Company had an employment agreement with the President that required minimum
monthly salary payments of $9,583 through December 31, 1994. The agreement may
be terminated by the Company only with cause. 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 had a non-cancelable lease agreement extending to November 1, 2001
on its corporate headquarters. In addition, the Company had a lease for office
equipment which extended until 1998. Both lease agreements were assumed by
Magnum in the combination with the Company. The Company incurred rental expense
of $57,000, $114,000 and $90,000 for the six months ended June 30, 1995 and the
years ended December 31, 1995 and 1994, respectively.
(7) 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 second
mortgage against a gas gathering system and was acquired by Magnum in the
combination with the Company.
At December 31, 1995 the Company had a note receivable from a company affiliated
with the President of the Company in the amount of $54,615. This note bears
interest at ten percent and is due on demand. Additionally, trade accounts
receivable from this affiliated company were $51,346 at December 31, 1995. These
receivables were assumed by Magnum in the combination with the Company.
At December 31, 1995, the Company had unsecured accounts receivable from the
President personally in the amount of $10,000 as of December 31, 1995, which
amount has been subsequently repaid.
The Vice Chairman of the Board has a Consulting and Advisory Agreement (the
"Agreement") with the Company providing, among other things, for a compensation
plan in connection with his capacity as Business Development Manager of the
Company. The Agreement, which expires in September 1996, provides general
compensation guidelines to be considered in determining fees or other
consideration that could be provided to the Vice Chairman for his role in
arranging such transactions as oil and gas property acquisitions, mergers, the
obtaining of management contracts or other business directly attributable to his
efforts. Under the Agreement, Mr. Lutz provides his time and expertise without
salary, but is provided with office space and certain expense reimbursements.
The Agreement also provided for options to purchase 200,000 shares of restricted
common stock of the Company for a period of five years at an exercise price of
$0.1875 per share. During 1995, the Vice Chairman was granted options to
purchase 100,000 shares of common stock at $.1875 per share over a five year
period. Also, in 1995 the Vice Chairman exercised options to purchase 100,000
shares of common stock at $.1875 per share.
F-38
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
At December 31, 1995, the Company had a note receivable with a balance of
$120,758 from a minority owner in an affiliated limited liability company. The
note provided for interest at ten percent and had a due date of December 31,
1995, which was extended to June 30, 1996. The note was acquired by Magnum in
the combination with the Company.
(8) 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. 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, 1995 and
1994, preferred convertible dividends in arrears totaled $9,013 for each year in
aggregate of $.38 and $.33 per common share, representing 23,478 and 26,928
shares of common stock, respectively. 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 preferred stock is to be exchanged in the combination with
Magnum.
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 as consideration for his
personal guarantee of the Company's indebtedness. Such option was extended until
December 31, 1996. In 1995, certain existing directors were granted options to
purchase 400,000 shares of common stock over a five year period at an option
price of $.1875 per share. During 1994, no stock options to management and
directors were exercised, however, 400,000 options were exercised by certain
directors in 1995. As of December 31, 1995, 500,000 options remain exercisable
by existing directors. As of December 31, 1995, 186,000 shares are available
under the Company's Incentive Stock Option Plan (the "Plan). During 1994, stock
options for 14,000 shares were issued and exercised under the Plan by certain
former employees of the Company.
In July 1995, the Company borrowed $300,000 under a production payment
obligation from a third party. As a part of the obligation, the Company also
issued to the third party warrants for the purchase of 100,000 shares of common
stock of the Company at $1.00 per share.
The warrants have a five year term.
(9) SIGNIFICANT CUSTOMERS:
For the year ended December 31, 1995, no single customer accounted for ten
percent or more of the Company's gross revenue. For 1994, two customers, Oryx
Energy Company and Oklahoma Gas & Electric Company, accounted for 18 percent and
19 percent of gross revenue, respectively.
F-39
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(10) INDUSTRY SEGMENTS:
The Company and its subsidiaries were engaged in energy consulting services,
oil and gas production, and the gathering, transmission and marketing of natural
gas until December 31, 1995 as described in Note 3. The following table sets
forth information by industry segment for the years ended December 31, 1995 and
1994.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1995 1994
------------ ------------
<S> <C> <C>
Operating revenues:
Gas gathering $ 469,000 $ 443,000
Energy consulting 565,000 1,122,000
Oil and gas production 1,625,000 581,000
------------- ------------
$ 2,659,000 $ 2,146,000
============= ============
Operating profit (loss):
Gas gathering <F1> $ (328,000) $ 61,000
Energy consulting 30,000 383,000
Oil and gas production 408,000 35,000
-------------- ------------
110,000 479,000
-------------- ------------
Depreciation, depletion and amortization
Gas Gathering <F1> 383,000 44,000
Energy consulting 81,000 85,000
Oil and gas production 455,000 134,000
-------------- -------------
919,000 263,000
-------------- -------------
Other income (expense):
Other income 281,000 184,000
Interest income 27,000 26,000
Interest expense (298,000) (46,000)
General and administrative (802,000) (630,000)
-------------- -------------
(792,000) (464,000)
-------------- -------------
Income (loss) from discontinued operations $ (682,000) $ 15,000
============= =============
Identifiable assets at end of period:
Gas gathering $ - $ 476,000
Energy consulting - 1,348,000
Oil and gas production - 3,111,000
------------- -------------
$ - $ 4,935,000
============= =============
Capital expenditures during period (including capital leases and non-cash
additions):
Gas gathering $ 1,020,000 $ 3,000
Energy consulting 25,000 52,000
Oil and gas production 9,587,000 784,000
-------------- -------------
$10,632,000 $ 839,000
============== =============
<FN>
<F1> Includes a writedown to a pipeline of $338,000 in 1995.
</FN>
</TABLE>
F-40
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
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:
<TABLE>
<CAPTION>
At December 31,
1995 1994
---------------------------------------------------------------------
<S> <C> <C>
Total evaluated capitalized costs $ - $ 6,874,000
Accumulated depreciation, depletion,
amortization and impairment - (4,354,000)
---------------------------------------------------------------------
$ - $ 2,520,000
=====================================================================
</TABLE>
COST INCURRED
- -------------
Costs incurred by the Company with respect to its oil and gas producing
activities were as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1995 1994
-------------------------------------------------------------------
<S> <C> <C>
Property acquisition costs:
Proved Properties <F1> $ 9,587,000 $ 749,000
Unproved Properties - -
Exploration costs - -
Development costs - 35,000
-------------------------------------------------------------------
$ 9,587,000 $ 784,000
===================================================================
<FN>
<F1> 1995 includes non-cash additions from issuance of stock of $228,000 and
issuance of a note payable to a seller of $1,125,000.
</FN>
</TABLE>
The amortization rates for capitalized property costs, determined on an
overall basis under the unit-of-production method, were $3.54 per equivalent
barrel in 1995 and $2.92 in 1994.
RESULTS OF OIL AND GAS PRODUCING ACTIVITIES
- -------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1995 1994
-------------------------------------------------------------------
<S> <C> <C>
Revenues $ 1,625,000 $ 581,000
Production costs, including severance
and for ad valorem taxes (762,000) (412,000)
Depreciation, depletion, amortization, and impairment (455,000) (134,000)
-------------------------------------------------------------------
Results of operations for producing activities $ 408,000 $ 35,000
===================================================================
</TABLE>
F-41
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
OIL AND GAS RESERVE INFORMATION
The estimates of proved oil and gas reserves utilized in the preparation of the
financial statements were prepared primarily 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, reserve 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, 1995 and 1994, together with the changes therein:
Oil and Natural
Condensate Gas
Proved developed and undeveloped reserves: (BBLS) (MCF)
------------------ ---------------
Balance at January 1, 1994 519,000 2,063,000
Revisions of previous estimates 604,000 (473,000)
Sales of minerals in place (1,000) (33,000)
Purchase of minerals in place 32,000 1,389,000
Production (24,000) (128,000)
------------------ --------------
Balance at December 31, 1994 1,130,000 2,810,000
Revisions of previous estimates 761,000 1,828,000
Sales of minerals in place (3,122,000) (10,973,000)
Purchase of minerals in place 1,285,000 6,781,000
Production (54,000) (446,000)
------------------ --------------
Balance at December 31, 1995 - -
================== ==============
Proved developed reserves at December 31:
1994 762,000 2,137,000
================== ==============
1995 - -
================== ==============
F-42
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Standardized Measure of Discounted Future Net Cash Flows Relating
to Proved Reserves:
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and as such, do not necessarily reflect
the Company's expectations of actual revenues to be derived from those reserves
nor their present worth. The limitations inherent in the reserve quantity
estimation process are equally applicable to the standardized measure
computations since these estimates are the basis for the valuation process.
<TABLE>
<CAPTION>
<S> <C> <C>
At December 31, At December 31,
1995 1994
---------------- --------------------
Future Cash Flows $ - $ 21,706,000
Future Production Costs - (7,312,000)
Future Development Costs - (1,953,000)
---------------- --------------------
Future Net Cash Flows, Before Income Tax - 12,441,000
Future Income Tax Expenses - (3,121,000)
________________ ____________________
Future Net Cash Flows
- 9,320,000
10% Discount to Reflect Timing of Net Cash Flows - (3,355,000)
---------------- --------------------
Standardized Measure of Discounted Future Net Cash Flows $ - $ 5,965,000
================ ====================
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating
to Proved Reserves:
<TABLE>
<CAPTION>
<S> <C> <C>
For the Year Ended For the Year Ended
December 31, December 31,
1995 1994
---------------- -------------------
Standardized measure, beginning of year $ 5,965,000 $ 2,479,000
Revisions:
Net Change in sales price, net production costs 2,978,000 (238,000)
Revisions of quantity estimates 9,460,000 5,305,000
Accretion of discount 597,000 248,000
Changes in timing, future development and other (4,622,000) (1,277,000)
Purchases of reserves in-place 14,895,000 840,000
Sales of reserves in-place (30,508,000) (5,000)
Sales, net of production costs (863,000) (169,000)
Net changes in income taxes 2,098,000 (1,218,000)
---------------- -------------------
Standardized measure, end of year $ - $ 5,965,000
================ ===================
</TABLE>
F-43
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Hunter Resources, Inc.
Irving, Texas
We have audited the accompanying Historical Summaries of Revenue and Direct
Operating Expenses of Properties Acquired March 31, 1995, for the years ended
March 31, 1995 and 1994. The Historical Summaries are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
Historical Summaries based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Historical Summaries are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Historical Summary. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall Historical Summary presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summaries were prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission ( for
inclusion in the Form 8-K/A of Hunter Resources, Inc.) as described in Note 2
and are not intended to be a complete presentation of the properties' revenues
and expenses.
In our opinion, the Historical Summaries referred to above present fairly, in
all material respects, the revenue and direct operating expenses of the
Properties Acquired March 31, 1995, for the years ending March 31, 1995 and
1994, in conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
August 15, 1995
Dallas, Texas
F-44
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
PROPERTIES ACQUIRED MARCH 31, 1995
Historical Summary of Revenue and Direct Operating Expenses for the
years ending March 31, 1994 and 1995
For the Years Ended
March 31,
1994 1995
-------------------- --------------------------
Oil and gas sales $ 671,000 $ 528,000
Direct lease operating (169,000) (145,000)
-------------------- --------------------------
Net Revenues $ 502,000 $ 383,000
==================== ==========================
See Notes to Historical Summary
F-45
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
Properties Acquired March 31, 1995
Notes to Historical Summary of Revenues and Direct Operating Expenses for Years
Ended March 31, 1994 and 1995
1. Basis of Presentation
The accompanying Historical Summary of Revenue and Direct Operating Expenses
relates to the operations of the oil and gas properties acquired by Hunter
Resources, Inc. (Company) on March 31, 1995 ("Arrington Acquisition"). The
properties were acquired in exchange for 516,129 shares of restricted common
stock valued at $200,000 and $1,213,000 in cash provided by a revolving credit
facility. Revenues are recorded when oil and gas is produced and direct
operating expenses are recorded when the related liability is incurred.
Depreciation and amortization of oil and gas properties and general and
administrative expenses have been excluded from operating expenses in the
accompanying historical summary because the amounts would not be comparable to
those resulting from proposed future operations.
2. The Historical Summary presented herein was prepared for the purposes of
complying with the financial statement requirements of a business acquisition to
be filed on Form 8-K/A as promulgated by Regulation S-X Rule 1-02(v) of the
Securities Exchange Act of 1934.
3. The following estimates of proved oil and gas reserves for the Arrington
properties were prepared by the Company in accordance 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 provisions 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 Arrington
reserves are located onshore in the continental United States.
The following unaudited table sets forth the proved oil and gas reserves for the
Arrington properties at March 31, 1994 and March 31, 1995, together with the
changes therein:
Oil and Condensate Natural Gas
Proved developed and undeveloped reserves: (BBLS) (MCF)
----------------------------------
Balance at April 1, 1993 41,000 2,034,000
Revisions of previous estimates (8,000) 14,000
Production (6,000) (279,000)
----------------------------------
Balance at March 31, 1994 27,000 1,769,000
Revisions of previous estimates 5,000 122,000
Production (4,000) (225,000)
----------------------------------
Balance at March 31, 1995 28,000 1,666,000
==================================
Proved developed reserves at:
March 31, 1994 27,000 1,769,000
==================================
March 31, 1995 28,000 1,666,000
==================================
F-46
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves:
<TABLE>
<CAPTION>
March 31, March 31,
1995 1994
----------------------------------------------------
<S> <C> <C>
Future Cash Flows $ 3,327,000 $ 3,629,000
Future Production Costs 1,271,000 (1,176,000)
Future Development Costs - -
----------------------------------------------------
Future Net Cash Flows, Before Income Tax 2,056,000 2,453,000
Future Income Tax Expenses (230,000) (309,000)
----------------------------------------------------
Future Net Cash Flows 1,826,000 2,084,000
10% Discount to Reflect Timing of Net Cash Flows (603,000) (688,000)
----------------------------------------------------
Standardized Measure of Discounted Future Net Cash Flows $ 1,223,000 $ 1,396,000
====================================================
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Reserves:
<TABLE>
<CAPTION>
March 31, March 31,
1995 1994
---------------------------------------------------
<S> <C> <C>
Standardized measure, beginning of year $ 1,396,000 $ 1,816,000
Revisions:
Net Change in sales price, net of production costs (87,000) (261,000)
Revisions of quantity estimates 195,000 (59,000)
Accretion of discount 140,000 182,000
Changes in timing, future development and other (131,000) 10,000
Sales, net of production costs (383,000) (502,000)
Net changes in income taxes 93,000 210,000
---------------------------------------------------
Standardized measure, end of year $ 1,223,000 $ 1,396,000
---------------------------------------------------
</TABLE>
F-47
<PAGE>
MIDLAND HUNTER PETROLEUM LIMITED LIABILITY COMPANY
(A Limited Liability Company)
HISTORICAL BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, December 31,
1995 1994
----------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 47,000 $ 43,000
Trade accounts receivable 77,000 96,000
Other current assets 12,000 12,000
----------------------------------------------------
TOTAL CURRENT ASSETS 136,000 151,000
----------------------------------------------------
PROPERTY AND EQUIPMENT
Oil and gas properties, full cost method 1,563,000 1,497,000
Accumulated depreciation, depletion, amortization and impairment (476,000) (375,000)
----------------------------------------------------
PROPERTY AND EQUIPMENT, NET 1,087,000 1,122,000
----------------------------------------------------
ORGANIZATION COSTS, NET 2,000 3,000
----------------------------------------------------
TOTAL ASSETS $ 1,225,00 $ 1,276,000
====================================================
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES
ACCOUNTS PAYABLE
Trade $ 170,000 $ 155,000
Affiliate 60,000 68,000
OTHER CURRENT LIABILITIES - 91,000
NOTES PAYABLE - CURRENT 204,000 283,000
----------------------------------------------------
TOTAL CURRENT LIABILITIES 434,000 597,000
----------------------------------------------------
LONG TERM DEBT, LESS CURRENT PORTION 191,000 170,000
----------------------------------------------------
TOTAL LIABILITIES 625,000 767,000
----------------------------------------------------
MEMBERS' EQUITY
PAID-IN CAPITAL 560,000 562,000
RETAINED EARNINGS (DEFICIT) 40,000 (53,000)
----------------------------------------------------
TOTAL MEMBERS' EQUITY 600,000 509,000
----------------------------------------------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 1,225,000 $ 1,276,000
====================================================
</TABLE>
See Notes to Historical Financial Statements
F-48
<PAGE>
MIDLAND HUNTER PETROLEUM LIMITED LIABILITY COMPANY
(A Limited Liability Company)
HISTORICAL STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Year Ended
September 30, December 31,
1995 1994
---------------------------------------------
REVENUES
Oil and gas revenues $ 563,000 $ 921,000
Other 115,000 -
---------------------------------------------
TOTAL REVENUES 678,000 921,000
---------------------------------------------
EXPENSES
Lease operations 405,000 693,000
Depreciation, depletion and
amortization 102,000 167,000
General and administrative 44,000 25,000
Interest 34,000 32,000
---------------------------------------------
TOTAL EXPENSES 585,000 917,000
---------------------------------------------
NET INCOME $ 93,000 $ 4,000
RETAINED EARNINGS:
Beginning of year (53,000) (57,000)
---------------------------------------------
Ending balance $ 40,000 $ (53,000)
=============================================
See Notes to Historical Financial Statements
F-49
<PAGE>
MIDLAND HUNTER PETROLEUM LIMITED LIABILITY COMPANY
(A Limited Liability Company)
HISTORICAL STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months Ended Year Ended
September 30, December 31,
1995 1994
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 93,000 $ 4,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 102,000 167,000
Changes in:
Trade accounts receivable 19,000 20,000
Accounts payable, trade and affiliates 7,000 12,000
Other current liabilities (91,000) -
-------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 130,000 203,000
=================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in oil and gas properties from receipt
of pre-acquisition revenues and property sales - 87,000
Investment in oil and gas properties (66,000) (274,000)
-------------------------------------------------
CASH USED BY INVESTING ACTIVITIES (66,000) (187,000)
-------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 138,000 239,000
Repayment of long-term debt (196,000) (222,000)
Member distributions (2,000) (38,000)
-------------------------------------------------
CASH USED BY FINANCING ACTIVITIES (60,000) (21,000)
-------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,000 (5,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 43,000 48,000
-------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 47,000 $ 43,000
=================================================
F-50
<PAGE>
</TABLE>
MIDLAND HUNTER PETROLEUM LIMITED LIABILITY COMPANY
(A Limited Liability Company)
NOTES TO HISTORICAL FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
-------
Midland Hunter Petroleum Limited Liability Company, a Limited Liability
Company (The Company) is a Wyoming Limited Liability Company formed
January 18, 1993. The Company is a joint venture established to acquire
and develop oil and gas properties. The Company's assets are located
in Texas and Oklahoma.
Oil and Gas Properties
----------------------
The Company follows the full cost method of accounting for oil and gas
properties. 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. Investments
in unproved properties and major development projects are not amortized
until proved reserves associated with the projects can be determined or
until impairment occurs. If the results of an assessment indicate that the
properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.
In addition, the capitalized costs are subject to a "ceiling test", which
basically limits such costs to the aggregate of the "estimated present
value", discounted at 10%, of future net revenues from proved reserves,
based on current economic and operating conditions, plus the lower of cost
or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments
of capitalized costs with no gain or loss recognized, unless such
adjustments would significantly alter the relationship between capitalized
costs and proved reserves of oil and gas, in which case the gain or loss
is recognized in income. Abandonments of properties are accounted for as
adjustments of capitalized costs with no loss recognized.
Cash Equivalents
----------------
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
Organization Costs
------------------
Costs incurred in connection with formation of the Company have been
capitalized and are being amortized over a period of 60 months on the
straight-line basis.
Federal Income Taxes
--------------------
The Company is a partnership for income tax purposes. Income tax
liabilities and benefits resulting from the Company's activities are
attributed directly to the Company's Members and are not provided for in
the accompanying financial statements.
(2) MEMBERS' EQUITY
The Company is a limited liability company. Member contributions are made
based on opportunities available to the Company and Members are not
obligated to make future contributions. Profit and loss are allocated to
Members based on the initial contributions of Members, as defined.
Distributions to Members are made in accordance with allocated profit and
loss and provisions for preferential return of capital where Members have
made Excess Capital Contributions, as defined.
F-51
<PAGE>
MIDLAND HUNTER PETROLEUM LIMITED LIABILITY COMPANY
(A Limited Liability Company)
NOTES TO HISTORICAL FINANCIAL STATEMENTS
(Unaudited)
(3) SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS
Nine Months Ended Year Ended
September 30, December 31,
1995 1994
------------------------------------------
Cash Paid for Interest $ 34,000 $ 33,000
==========================================
(4) NOTES PAYABLE AND LONG-TERM DEBT
Long term debt at September 30, 1995 consists of a note payable to
International Bank of Commerce for $395,000 (current portion of $204,000).
This note bears interest at prime rate plus 2% (10.75% at September 30,
1995), is collateralized by property and equipment, assignment of death
value proceeds of life insurance of certain members of management and is
guaranteed by Members and the President of a Member. This note includes
certain covenants, the most restrictive of which is the maintenance of at
least a $200,000 net worth by the Company. The Company is in compliance
with the covenant at September 30, 1995. The note payable balance was paid
in full subsequent to September 30, 1995 by a Member.
At December 31, 1994, the Company also had a note payable to the seller of
an acquired property with a balance of $37,000 bearing interest at 10%,
due January, 1995. Such note was paid in full during 1995.
(5) RELATED PARTY TRANSACTIONS
Operations of the Company are managed by an affiliate of a Member. All oil
and gas properties operated by this affiliate are charged overhead
reimbursements in accordance with published industry guidelines.
Substantially all production revenues and expenses of the Company are
handled by this affiliate and are credited or charged by the affiliate to
the Company.
(6) RESERVE INFORMATION
Unaudited oil and gas reserve information as of December 31, 1994 and
September 30, 1995 is not presented here as such information is not
available.
F-52
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Hunter Resources, Inc.
Irving, Texas
We have audited the accompanying Historical Summaries of Revenue and Direct
Operating Expenses of Properties Acquired October 25, 1995, for the nine months
ended September 30, 1995 and the year ended December 31, 1994. The Historical
Summaries are the responsibility of the Company's management. Our responsibility
is to express an opinion on the Historical Summaries based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Historical Summaries are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Historical Summary. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall Historical Summary presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summaries were prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission ( for
inclusion in the Form 8-K/A of Hunter Resources, Inc.) as described in Note 2
and are not intended to be a complete presentation of the properties' revenues
and expenses.
In our opinion, the Historical Summaries referred to above present fairly, in
all material respects, the revenue and direct operating expenses of the
Properties Acquired October 25, 1995, for the nine months ended September 30,
1995 and the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
HEIN + ASSOCIATES LLP
November 22, 1995
Dallas, Texas
F-53
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
PROPERTIES ACQUIRED OCTOBER 25, 1995
Historical Summary of Revenues and Direct Operating Expenses for the
Year Ending December 31, 1994 and the Nine Months Ending September 30, 1995
Year Ended Nine Months Ended
December 31, September 30,
1994 1995
-----------------------------------------------
Oil and gas sales $ 1,446,000 $ 859,000
Direct operating expenses (327,000) (225,000)
-----------------------------------------------
Net revenues 1,119,000 $ 634,000
===============================================
See Notes to Historical Summary
F-54
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
Properties Acquired October 25, 1995
Notes to Historical Summary of Revenues and Direct Operating Expenses for Year
Ending December 31, 1994 and Nine Months Ending September 30, 1995
1. Basis of Presentation
The accompanying Historical Summary of Revenues and Direct Operating Expenses
relates to the operations of the oil and gas properties acquired by Hunter
Resources, Inc. (Company) on October 25, 1995 ("Reef" acquisition). The
properties were acquired in exchange for 64,176 shares of restricted common
stock of Magnum Petroleum, Inc. valued at $257,000 and $2,058,000 in cash
provided by a revolving credit facility. Revenues are recorded when oil and gas
is produced and direct operating expenses are recorded when the related
liability is incurred. Direct operating expenses include lease operating
expenses and production taxes. Depreciation and amortization of oil and gas
properties and general and administrative expenses have been excluded from
operating expenses in the accompanying historical summary because the amounts
would not be comparable to those resulting from proposed future operations.
2. The Historical Summary presented herein was prepared for the purposes of
complying with the financial statement requirements of a business acquisition to
be filed on Form 8-K/A as promulgated by Regulation S-B Item 3-10 of the
Securities Exchange Act of 1934.
3. The following estimates of proved oil and gas reserves for the Reef
properties were prepared by the Company 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 Reef
reserves are located onshore in the continental United States.
The following unaudited table sets forth the proved oil and gas reserves for the
Reef properties at December 31, 1994 and September 30, 1995, together with the
changes therein:
<TABLE>
<CAPTION>
<S> <C> <C>
Oil and Natural
Condensate Gas
Proved developed and undeveloped reserves: (BBLS) (MCF)
----------------------------------------
Balance at January 1, 1994 416,000 267,000
Revisions of previous estimates 64,000 109,000
Extensions and discoveries 13,000 -
Production (88,000) (46,000)
----------------------------------------
Balance at December 31, 1994 405,000 330,000
Revisions of previous estimates (17,000) (31,000)
Production (47,000) (24,000)
----------------------------------------
Balance at September 30, 1995 341,000 275,000
========================================
Proved developed reserves at:
December 31, 1994 405,000 330,000
========================================
September 30, 1995 341,000 275,000
========================================
</TABLE>
F-55
<PAGE>
<TABLE>
<CAPTION>
Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Reserves:
<S> <C> <C>
September 30, December 31,
1995 1994
-----------------------------------------
Future Cash Flows $ 5,873,000 $ 6,763,000
Future Production Costs (1,973,000) (2,073,000)
Future Development Costs - -
-----------------------------------------
Future Net Cash Flows, Before Income Tax 3,900,000 4,690,000
Future Income Tax Expenses (555,000) (831,000)
-----------------------------------------
Future Net Cash Flows 3,345,000 3,859,000
10% Discount to Reflect Timing of Net Cash Flows (1,099,000) (1,315,000)
-----------------------------------------
Standardized Measure of Discounted Future Net Cash Flows 2,246,000 2,544,000
=========================================
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves:
September 30, December 31,
1995 1994
-----------------------------------------
Standardized measure, beginning of period $ 2,544,000 $ 2,330,000
Revisions:
Net Change in sales price, net of production costs 115,000 734,000
Revisions of quantity estimates (205,000) 635,000
Accretion of discount 254,000 233,000
Changes in timing, future development and other (13,000) (73,000)
Sales, net of production costs 634,000) (1,119,000)
Net changes in income taxes 185,000 (196,000)
-----------------------------------------
Standardized measure, end of period $ 2,246,000 $ 2,544,000
=========================================
F-56
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Hunter Resources, Inc.
Irving, Texas
We have audited the accompanying Historical Summaries of Revenue and Direct
Operating Expenses of Properties Acquired November 9, 1995, for the nine months
ended September 30, 1995 and the year ended December 31, 1994. The Historical
Summaries are the responsibility of the Company's management. Our responsibility
is to express an opinion on the Historical Summaries based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Historical Summaries are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Historical Summary. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall Historical Summary presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summaries were prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission ( for
inclusion in the Form 8-K/A of Hunter Resources, Inc.) as described in Note 2
and are not intended to be a complete presentation of the properties' revenues
and expenses.
In our opinion, the Historical Summaries referred to above present fairly, in
all material respects, the revenue and direct operating expenses of the
Properties Acquired November 9, 1995, for the nine months ended September 30,
1995 and the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
HEIN + ASSOCIATES LLP
December 21, 1995
Dallas, Texas
F-57
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
PROPERTIES ACQUIRED NOVEMBER 9, 1995
Historical Summary of Revenues and Direct Operating Expenses for the
Year Ending December 31, 1994 and the Nine Months Ending September 30, 1995
<TABLE>
<CAPTION>
Year Ended Nine Months
1994 Ended 1995
------------------------------------------------------------
<S> <C> <C>
Oil and gas sales $ 3,176,000 $ 1,495,000
Direct operating expenses (674,000) (531,000)
------------------------------------------------------------
Net revenues $ 2,502,000 $ 964,000
============================================================
</TABLE>
See Notes to Historical Summary
F-58
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
Properties Acquired November 9, 1995
Notes to Historical Summary of Revenues and Direct Operating Expenses for Year
Ending December 31, 1994 and Nine Months Ending September 30, 1995
1. Basis of Presentation
The accompanying Historical Summary of Revenues and Direct Operating
Expenses relates to the operations of the oil and gas properties acquired by
Hunter Resources, Inc. (the "Company") on November 9, 1995 (the "Tana"
acquisition). The properties were acquired in exchange for $3,104,000 in cash,
funded by an existing bank line of credit, and a note payable to the previous
owner in the amount of $1,125,000 collaterialized by 610,170 shares of
restricted common stock of Magnum Petroleum, Inc. Revenues are recorded when oil
and gas is produced and direct operating expenses are recorded when the related
liability is incurred. Direct operating expenses include lease operating
expenses and production taxes. Depreciation and amortization of oil and gas
properties and general and administrative expenses have been excluded from
operating expenses in the accompanying historical summary because the amounts
would not be comparable to those resulting from proposed future operations.
2. The Historical Summary presented herein was prepared for the purposes of
complying with the financial statement requirements of a business acquisition to
be filed on Form 8-K/A as promulgated by Regulation S-B Item 3-10 of the
Securities Exchange Act of 1934.
3. The following estimates of proved oil and gas reserves for the Tana
properties were prepared by the Company 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 Tana
reserves are located onshore in the continental United States.
The following unaudited table sets forth the proved oil and gas reserves
for the Tana properties at December 31, 1994 and September 30, 1995, together
with the changes therein:
<TABLE>
<CAPTION>
Oil and Natural
Condensate Gas
Proved developed and undeveloped reserves: (BBLS) (MCF)
-------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1, 1994 719,000 4,125,000
Revisions of previous estimates 4,000 (284,000)
Production (112,000) (651,000)
-------------------------------------------------------------------------
Balance at December 31, 1994 611,000 3,190,000
Revisions of previous estimates (2,000) (11,000)
Production (47,000) (348,000)
-------------------------------------------------------------------------
Balance at September 30, 1995 562,000 2,831,000
=========================================================================
Proved developed reserves at:
December 31, 1994 264,000 2,146,000
=========================================================================
September 30, 1995 215,000 1,788,000
========================================================================
</TABLE>
F-59
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Reserves:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------------------------------------------------------
<S> <C> <C>
Future Cash Flows $ 15,216,000 $ 16,172,000
Future Production Costs (4,655,000) (4,925,000)
Future Development Costs (1,571,000) (1,571,000)
-------------------------------------------------------------
Future Net Cash Flows, Before Income Tax 8,990,000 9,676,000
Future Income Tax Expenses (1,666,000) (1,906,000)
-------------------------------------------------------------
Future Net Cash Flows 7,324,000 7,770,000
10% Discount to Reflect Timing of Net Cash Flows (1,570,000) (1,851,000)
-------------------------------------------------------------
Standardized Measure of Discounted Future Net Cash Flows $ 5,754,000 $ 5,919,000
=============================================================
Changes in Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Reserves:
September 30, December 31,
1995 1994
-------------------------------------------------------------
Standardized measure, beginning of period $ 5,919,000 $ 6,726,000
Revisions:
Net Change in sales price, net of production costs 442,000 1,047,000
Revisions of quantity estimates (43,000) (425,000)
Accretion of discount 592,000 673,000
Changes in timing, future development and other (381,000) (30,000)
Sales, net of production costs (964,000) (2,502,000)
Net changes in income taxes 189,000 430,000
-------------------------------------------------------------
Standardized measure, end of period $ 5,754,000 $ 5,919,000
=============================================================
</TABLE>
F-60
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
PROPERTIES ACQUIRED DECEMBER 1, 1995
Historical Summary of Revenues and Direct Operating Expenses for the
Year Ending December 31, 1994 and the Nine Months Ending September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
1994 1995
------------------------------------------------------------
<S> <C> <C>
Gas gathering and marketing $ 3,133,000 $ 1,797,000
Oil and gas sales 39,000 33,000
Purchases of natural gas (2,451,000) (1,287,000)
Pipeline operating expenses (494,000) (298,000)
------------------------------------------------------------
Net revenues $ 227,000 $ 245,000
------------------------------------------------------------
</TABLE>
See Notes to Unaudited Historical Summary
F-61
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
Properties Acquired December 1, 1995
Notes to Unaudited Historical Summary of Revenues and Direct Operating
Expenses for Year
Ending December 31, 1994 and Nine Months Ending September 30, 1995
1. Basis of Presentation
The accompanying Historical Summary of Revenues and Direct Operating
Expenses relates to the operations of the gathering systems acquired by Hunter
Resources, Inc. (the "Company") on December 1, 1995 (the "Superior"
acquisition). The properties were acquired in exchange for $1,000,000 in cash,
funded by an existing bank line of credit. Revenues are recorded when gas is
transported through the gathering systems and when oil and gas is sold. Direct
operating expenses are recorded when the related liability is incurred. Direct
operating expenses include purchases of natural gas and pipeline operating
expenses. Depreciation and amortization of oil and gas properties and general
and administrative expenses have been excluded from operating expenses in the
accompanying historical summary because the amounts would not be comparable to
those resulting from proposed future operations.
2. The Historical Summary presented herein was prepared for the purposes of
complying with the financial statement requirements of a business acquisition to
be filed on Form 8-K as promulgated by Regulation S-B Item 3-10 of the
Securities Exchange Act of 1934.
F-62
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Magnum Petroleum, Inc.
Irving, Texas
We have audited the accompanying Historical Summaries of Revenue and Direct
Operating Expenses of Properties Acquired June 28, 1996, for the years ended
December 31, 1994 and 1995. The Historical Summaries are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
Historical Summaries based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Historical Summaries are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Historical Summary. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall Historical Summary presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summaries were prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission (for
inclusion in the Form 8-K/A of Magnum Petroleum, Inc.) as described in Note 2
and are not intended to be a complete presentation of the properties' revenues
and expenses.
In our opinion, the Historical Summaries referred to above present fairly, in
all material respects, the revenue and direct operating expenses of the
Properties Acquired, June 28, 1996 in conformity with generally accepted
accounting principles.
HEIN + ASSOCIATES LLP
August 2, 1996
Dallas, Texas
F-63
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
PROPERTIES ACQUIRED JUNE 28, 1996
Historical Summary of Revenues and Direct Operating Expenses for the
Years Ending December 31, 1994 and 1995
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1996 1995 1995 1994
----------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Gas gathering $ 498,000 $ 523,000 $ 2,023,000 $ 2,036,000
Oil and gas sales 1,553,000 891,000 4,229,000 5,885,000
Lease operating expense (388,000) (336,000) (1,481,000) (1,761,000)
Pipeline operating expense (320,000) (415,000) (1,606,000) (1,542,000)
----------------------------------------------------------------------------------------------
Net Revenue $ 1,343,000 $ 663,000 $ 3,165,000 $ 4,618,000
==============================================================================================
</TABLE>
See Notes to Historical Summary
F-64
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
Properties Acquired June 28, 1996
Notes to Historical Summary of Revenues and Direct Operating Expenses for Years
Ending December 31, 1994 and 1995
1. Basis of Presentation
The accompanying Historical Summary of Revenues and Direct Operating
Expenses relates to the operations of the oil and gas properties and pipeline
gathering system acquired by Magnum Petroleum, Inc. (the "Company") on June 28,
1996 (the "Meridian" Properties). The properties and pipeline gathering system
were acquired in exchange for $35,350,000 in cash, funded by a new senior bank
line of credit. Revenues are recorded when gas is transported through the
gathering system and when oil and gas is sold. Direct operating expenses are
recorded when the related liability is incurred. Direct operating expenses
include pipeline operating expenses, lease operating expenses and production
taxes. Depreciation and amortization of oil and gas properties and general and
administrative expenses have been excluded from operating expenses in the
accompanying historical summary because the amounts would not be comparable to
those resulting from proposed future operations. Sales of natural gas
historically were made to an affiliated entity of Meridian.
2. The Historical Summary presented herein was prepared for the purposes of
complying with the financial statement requirements of a business acquisition to
be filed on Form 8-K/A as promulgated by Regulation S-B Item 3-10 of the
Securities Exchange Act of 1934.
3. Contingencies
Certain owners of a special overriding royalty on certain oil and gas
properties acquired by the Company have filed a claim against Meridian. The
claim involves a dispute over prices paid to the claimants. The Company was
indemnified in the Purchase and Sale Agreement by Meridian, the seller, against
this claim or any form of similar claim in the future. As of March 31, 1996, the
asserted claim would be approximately $621,000. As Meridian's indemnification
includes this claim as well as any future claim which could arise as it
specifically relates to this matter, the Company believes the claim will not
have a financial impact on its financial statements.
4. The following estimates of proved oil and gas reserves for the Meridian
properties were prepared by the Company in accordance 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 Meridian
reserves are located onshore in the continental United States.
F-65
<PAGE>
The following unaudited table sets forth the proved oil and gas reserves for the
Meridian properties at December 31, 1994 and 1995, together with the changes
therein:
<TABLE>
<CAPTION>
Oil and
Condensate Natural Gas
Proved developed and undeveloped reserves: (BBLS) (MCF)
-------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1, 1994 33,000 58,290,000
Revisions of previous estimates 1,000 451,000
Production (4,000) (4,721,000)
-------------------------------------------------------------------------
Balance at December 31, 1994 30,000 54,020,000
Revisions of previous estimates 1,000 1,516,000
Production (2,000) (4,360,000)
-------------------------------------------------------------------------
Balance at December 31, 1995 29,000 51,176,000
=========================================================================
Proved developed reserves at:
December 31, 1994 30,000 54,020,000
=========================================================================
December 31, 1995 29,000 51,176,000
=========================================================================
</TABLE>
F-66
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Reserves:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1995 1994
------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Future Cash Flows $ 82,741,000 $ 81,326,000
Future Production Costs (34,969,000) (34,450,000)
Future Development Costs - -
------------------------------------------------------------
Future Net Cash Flows, Before Income Tax 47,772,000 46,876,000
Future Income Tax Expenses (4,455,000) (4,141,000)
------------------------------------------------------------
Future Net Cash Flows 43,317,000 42,735,000
10% Discount to Reflect Timing of Net Cash Flows (19,666,000) (19,188,000)
------------------------------------------------------------
Standardized Measure of Discounted Future Net Cash Flows $ 23,651,000 $ 23,547,000
============================================================
Changes in Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Reserves:
December 31,
-------------------------------------------------------------
1995 1994
-------------------------------------------------------------
(Unaudited) (Unaudited)
Standardized measure, beginning of period $ 23,547,000 $ 34,583,000
Revisions:
Net Change in sales price, net of production costs 3,105,000 (19,950,000)
Revisions of quantity estimates 1,251,000 549,000
Accretion of discount 2,355,000 3,458,000
Changes in timing, future development and other (3,686,000) 2,339,000
Sales, net of production costs (2,748,000) (4,124,000)
Net changes in income taxes (173,000) 6,692,000
-------------------------------------------------------------
Standardized measure, end of period $ 23,651,000 $ 23,547,000
-------------------------------------------------------------
</TABLE>
F-67
<PAGE>
PART II
Indemnification of Directors and Officers.
The statutes, charter provisions, bylaws, contracts or other arrangements under
which controlling persons, directors or officers of the registrant are insured
or indemnified in any manner against any liability which they may incur in such
capacity are as follows:
(a) Section 78.751 of the Nevada Business Corporation Act provides that
each corporation shall have the following powers:
1. A corporation may indemnify any person who was or is a party or is
threatened to be made party to any threatened, pending or completed actions,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorney's fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, does not, of
itself create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action or
proceeding, he had proceeding, he had reasonable cause to believe that his
conduct was unlawful.
2. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorney's fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such person has been adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the corporation or for amount paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit was
brought or other court of competent jurisdiction, determines upon application
that in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such expenses as the court deems proper.
3. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in the defense
of any claim, issue or matter therein, he must be indemnified by the corporation
against expenses, including attorney's fees, actually and reasonably incurred by
him in connection with the defense.
4. Any indemnification under subsections 1 and 2, unless ordered by a
court or advanced pursuant to subsection 5, must be made by the corporation only
as authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances. That
determination must be made:
(a) By the shareholders;
(b) By the board of directors by majority vote or a quorum
consisting of directors who were not parties to the act,
suit or proceedings;
(c) If a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders,
by independent legal counsel, in a written opinion; or
(d) If a quorum consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by
independent legal counsel in a written opinion.
5. The certificate or articles of incorporation, the bylaws or an
agreement made by the corporation may provide that the expenses of officers and
directors incurred in defending a civil or criminal action, suit or proceeding
must be paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon receipt of an undertaking by
or on behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he is not entitled to be
indemnified by the corporation. The provisions of this subsection do not affect
any rights to advancement of expenses to which corporate personnel other than
director of officers may be entitled under any contract or otherwise by law.
6. The indemnification and advancement of expenses authorized in or ordered
by a court pursuant to this section:
77
<PAGE>
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled
under the certificate or articles of incorporation of any
bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, for either an action in his official
capacity or an action in another capacity while holding his
office, except that indemnification, unless ordered by a
court pursuant to subsection 2 or for the advancement of
expenses made pursuant to subsection 5, may not be made to
or on behalf of any director or officer if a final
adjudication establishes that his acts or omissions involved
intentional misconduct, fraud or a knowing violation of the
law and was material to the cause of action. Continues for a
person who has ceased to be a director, officer, employee or
agent and inures to the benefit of the heirs, executors and
administrators of such a person."
(b) The registrant's Articles of Incorporation limit liability
of its Officers and Directors to the full extent permitted
by the Nevada Business Corporation Act.
<TABLE>
<CAPTION>
Exhibits Index
- --------------
<S> <C> <C>
Sequential
Page Number
Exhibit No. Document Or Location
3.1 & 4.1 Articles of Incorporation *
3.2 & 4.2 Articles of Amendment **
3.3 & 4.3 Articles of Amendment ***
3.4 & 4.4 By-Laws, as Amended ***
5.1 & 24.3 Opinion & Consent of Counsel ****
8.1 Tax Opinion (Including Consent) ****
10.1 Agreement and Plan of Reorganization and *****
Plan of Liquidation
10.2 Amendment to Agreement and Plan of ****
Reorganization and Plan of Liquidation
10.3 Employment Agreement for Gary C. Evans ****
10.4 Employment Agreement for Matthew C. Lutz ****
10.5 Credit Agreement dated June 28, 1996 among Wells Fargo ****
Bank (Texas), N.A. et al and the Company
10.6 Puchase and Sale Agreement, dated May 17, 1996 between ******
Meridian Oil, Inc. and ConMag Energy Corporation
21.1 Subsidiaries of the Registrant ****
24.1 Consent of Hansen, Barnett & Maxwell as 152
Accountants
24.2 Consent of Hein + Associates LLP as
Accountants 154
24.3 Consent of Hensley Consultants, Inc. as a
Oil and Gas Consulting Service(Included in Exhibit 99.1)
24.4 Consent of James J. Weisman, Jr. as a
Consulting Petroleum Engineer (Included in Exhibit 99.2)
99.1 Hensley Consultants, Inc. Reserve Letter 156
99.2 James J. Weisman, Jr. Reserve Letter 162
* Incorporated by reference to Registration Statement on Form S-18, File No. 33-30298-D.
** Incorporated by reference to Form 10-K for the year ended December 31, 1990.
*** Incorporated by reference to Registration Statement on Form SB-2, File No. 33-66190.
**** Incorporated by reference to Registration Statement on Form S-4, File No. 333-2290.
***** Incorporated by reference to Form 8-K/A dated July 21, 1995, filed on October 3, 1995.
****** Incorporated by reference to Form 8-K dated June 28, 1996, filed July 12, 1996.
</TABLE>
Undertakings.
- -------------
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
78
<PAGE>
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(5) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
79
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irving, State of Texas on
September 24, 1996.
MAGNUM PETROLEUM, INC.
By: /s/ Gary C. Evans
- ---------------------------------
Gary C. Evans, President, CEO
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Lloyd T. Rochford Chairman and Director September 24, 1996
- -----------------------
Lloyd T. Rochford
/s/ Gary C. Evans Chief Executive Officer September 24, 1996
- ----------------------- President and Director
Gary C. Evans
/s/ Matthew C. Lutz Vice Chairman and Director September 24, 1996
- -----------------------
Matthew C. Lutz
/s/ Gerald W. Bolfing Director September 24, 1996
- -----------------------
Gerald W. Bolfing
/s/ Oscar C. Lindemann Director September 24, 1996
- -----------------------
Oscar C. Lindemann
/s/ Stanley McCabe Director September 24, 1996
- -----------------------
Stanley McCabe
/s/ James E. Upfield Director September 24, 1996
- -----------------------
James E. Upfield
/s/ Steven P. Smart Chief Financial Officer September 24, 1996
- -----------------------
Steven P. Smart
<PAGE>
Exhibit Index
-------------
Sequential
Page Number
Exhibit No. Document Or Location
- ----------- -------- -----------
24.1 Consent of Hansen, Barnett & Maxwell as
Accountants 152
24.2 Consent of Hein + Associates LLP as
Accountants 154
99.1 Hensley Consultants, Inc. Reserve Letter 156
99.2 James J. Weisman, Jr. Reserve Letter 162
<PAGE>
<EX-24.1>
EXHIBIT 24.1
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Magnum Petroleum, Inc.
We have issued our report dated March 26, 1995, except for Note 2 to the
consolidated financial statements as to which the date is September 29, 1995, on
the consolidated financial statements of Magnum Petroleum, Inc. and Subsidiaries
for the year ended December 31, 1994. We consent to the use of our report in
Amendment No.4 to the Registration Statement of Magnum Petroleum, Inc. on Form
S-4. We also consent to the use of our name and the statements with respect to
us as appearing under the heading "Experts" in the Registration Statement.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
October 9, 1996
<EX-24.1/>
<PAGE>
<EX-24.2>
EXHIBIT 24.2
<PAGE>
Exhibit 24.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in Amendment No. 4 to the Form S-4 Registration Statement
and Prospectus of Magnum Petroleum, Inc. of our reports, each of which are dated
April 3, 1996, accompanying the consolidated financial statements of Magnum
Petroleum, Inc. and Hunter Resources, Inc.; and our reports dated August 15,
1995, November 22, 1995, December 21, 1995 and August 2, 1996 accompanying the
historical summaries of revenues and direct operating expenses of the properties
acquired March 31, 1995, October 25, 1995, November 9, 1995 and June 28, 1996,
respectively, contained in such Registration Statement, and to the use of our
name and the statements with respect to us, as appearing under the heading
"Experts" in the Prospectus.
HEIN + ASSOCIATES LLP
Certified Public Accountants
October 9, 1996
Dallas, Texas
<EX-24.2/>
<PAGE>
<EX-99.1>
EXHIBIT 99.1
<PAGE>
Hensley Consultants, Inc.
10 East Third St., Suite 710
Tulsa, Oklahoma 74103
October 7, 1996
Ladies and Gentlemen:
This letter is written at the request of Magnum Petroleum, Inc., (the
"Company"). Reference is made to the Registration Statement on Form S-4 (No.
333-2290) filed by the Company with the Securities and Exchange Commission, as
amended to the date hereof (the "Registration Statement").
In this letter, reference will be made to our letter to the Company
dated March 16, 1995 in respect of the Company's reserves as of December 31,
1994 (the "Reserve Letter"), a copy of which is attached hereto.
In connection with the Registration Statement, we hereby Consent to the
inclusion of our name and our Reserve Letter in the Registration Statement.
Further, We hereby inform you of the following:
1. We are independent petroleum engineers with respect to the
Company. In connection with the Registration Statement and the
Reserve Letter, we are not employed on a contingent basis. At
the time of preparation of the Reserve Letter, we did not
have, and at the date hereof we do not have, any financial
interest in the Company. At such time we were not, and at the
date hereof, we are not connected with the Company as a
promoter, underwriter, director, officer, or employee.
2. The letter to the Company attached hereto is a true, correct,
and complete copy of the Reserve Letter as provided to the
Company on March 16, 1995. We are not aware of any additional
information that we believe is necessary to be disclosed in
the Reserve Letter in order to prevent the information set
forth therein from being misleading as of the date of the
reserve information therein (December 31, 1994). Further
information regarding the classification and definitions of
the reserves shown in the Reserve Letter is included in such
letter.
3. As of the date hereof, nothing has come to our attention which
would cause us to revise downward by any material amount, any
statement made, or opinion expressed by us in the Reserve
Letter, with respect to our estimates of the oil and gas
reserves and future net revenue attributable to the interest
of the Company in such properties.
Very truly yours,
/s/ Daniel R. Hensley
Daniel R. Hensley
Attachments
<PAGE>
HENSLEY CONSULTANTS, INC.
10 East Third St., Suite 710
Tulsa, Oklahoma 74103
Office (918) 584-8884
Fax (918) 584-8885
March 16, 1995
Magnum Petroleum, Inc.
42-600 Cook Street, Suite 160
Palm Desert, California 92211
Attention: Mr. Lloyd T. Rochford
President
RE: Appraisal of Certain Oil and Gas Properties owned by Magnum Petroleum, Inc.
Effective Date: December 31, 1994
Gentlemen:
As per your request, an appraisal is made of certain interests in properties
owned by Magnum Petroleum, Inc. This appraisal is based on Securities and
Exchange Commission guidelines (constant prices and costs - see Exhibit 1 in the
"Appendix"). The effective date is December 31, 1994. The results are summarized
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
RESERVE ESTIMATED NET CASH FLOW
CLASSIFICATION REMAINING RESERVES Pres. Worth
Proved Developed Gross Net Total Disc. @ 10%
Producing
Oil - Bbls 365,928 193,913 $ 1,308,006 $ 872,054
Gas - MCF 356,030 169,112
Non-Producing
Oil - Bbls 483,795 353,775 $ 7,678,137 $ 4,292,081
Gas - MCF 4,398,140 3,216,140
Proved Undeveloped
Non-Producing
Oil - Bbls 867,657 520,056 $ 9,504,726 $ 5,245,382
Gas - MCF 6,341,792 4,419,601
-------------------------------------------------------------------------------------------------
Total Proved Reserves
Oil - Bbls 1,717,380 1,067,744 $ 18,490,869 $ 10,409,517
Gas - MCF 11,095,962 7,804,853
</TABLE>
<PAGE>
APPRAISAL
INTERESTS IN CERTAIN OIL
AND GAS PROPERTIES
OWNED BY MAGNUM PETROLEUM, INC.
Effective Date: December 31, 1994
<PAGE>
The properties in this report are appraised as having Proved Developed
Producing, Proved Developed Non-Producing and Proved Undeveloped Non-Producing
reserves. Proved Developed Producing reserves are expected from completion
interval(s) currently open for production and under current economic conditions.
Proved Developed Non-Producing reserves are capable of production, but await
relatively minor reworks or equipment. Proved Undeveloped Non-Producing reserves
are undrilled areas that can be reasonably judged as commercially productive on
the basis of available geological, seismic and engineering data. The SEC
"DEFINITIONS FOR OIL AND GAS RESERVES" is included as Exhibit 1, in the
"APPENDIX" section of this report. Also included as Exhibit 2 in the "APPENDIX"
is the Society of Petroleum Engineers' more extensive "Definitions for Oil and
Gas Reserves". The reserves in this appraisal qualify under both sets of
definitions.
Enclosed under the tab entitled "SUMMARY FORECASTS" are the Grand Total, Proved
Developed Total, Proved Developed Producing Total, Proved Developed
Non-Producing Total, Proved Undeveloped Total and Proved Undeveloped
Non-Producing summary forecasts. These forecasts present annual gross and net
oil and gas production, sales income, operating expenses, net investment, net
cash flow and discounted net cash flow (at 10 percent).
Under the tab "VALUATION SUMMARY" is the one-line summary that ranks the wells
according to their Net Cash Flow. This one-line summary presents the total gross
and net production, sales expenses, capital costs, net cash flow and discounted
net cash flow for each well.
Behind the tab "RESERVE SUMMARY" is a one-line summary which shows the total
ultimate, cumulative and remaining gross oil and gas production, along with the
corresponding net oil and gas reserves for each well. Working and revenue
interests are also shown.
Enclosed behind the tab "LEASE FORECASTS" are individual well forecasts. These
forecasts show the yearly gross and net oil and gas production, sales income,
operating expenses, net investment, net cash flow and discounted net cash flow
(at 10 percent) for the economic life of the properties.
Under the tab "PRODUCTION HISTORIES" are the tabulations of the oil and gas
production histories of each wells.
ESTIMATION OF RESERVES
The reserves appraised in this report are estimated by decline curves,
volumetric calculations, material balance and analogy. Projection of production
decline trends to their economic limit are used to estimate reserves on wells
with adequate production histories. Volumetric calculations use log, fluid,
areal extent and other measured characteristics to estimate reserves. Material
balance is used for gas wells that produce with a pressure depletion type
reservoir mechanism. This method uses bottomhole pressures, gas deviation
factors and cumulative gas production to project a straight line. Providing the
basis of analogy, are wells in the immediate area having substantial production
histories. A further explanation is found in Exhibit 3 entitled "RESERVE
DETERMINATION METHODS" under the "APPENDIX" section of this report.
NET CASH FLOW
Net Cash Flow is the amount exclusive of Federal and State income taxes, which
will accrue to the appraised interests from continued operation of the
properties to depletion. This should not be
<PAGE>
construed as a fair market or trading value. No provision is made for the cost
of plugging and abandoning the wells nor the value of salvable equipment.
The income from oil is based on actual prices being received by the wells as of
the effective date, December 31, 1994. This price averages $13.27 per Barrel for
all the properties over their economic life. As per SEC guidelines, oil prices
are held constant.
The income from gas is based on actual prices being received by the wells as of
the effective date, December 31, 1993. This price averages $1.441 per MCF for
all the properties over their economic life. Gas prices are held constant. Both
oil and gas prices are adjusted for state severance taxes.
Operating expenses are based on actual and estimated costs furnished by your
staff. These expenses are also held constant.
Capital costs and the schedule of well work and locations are provided by your
staff, or the operator.
GENERAL
This appraisal is based on information furnished by you or obtained from
reliable, outside sources. The reserve estimates in this report are prepared
using accepted engineering and evaluation methods consistent with industry
standards. Information on working and net revenue interests, operating expenses,
and current or estimated oil and gas prices are accepted as correct. This
information has not been independently verified. Title or ownership is assumed
to be valid.
Representatives of this firm did not inspect the properties nor supervise well
tests. Many variables affect the projection of producing rates and the recovery
of oil and gas. Some major factors are prudent operations, necessary gas
compression, remedial work and market demand. The reserve estimates in this
report assume the wells will be operated prudently, using accepted oil and gas
industry practices. Actual production and future data may necessitate an
adjustment in the reserve estimates.
Price projections in this appraisal are estimated per Magnum Petroleum, Inc.'s
instructions. There is no assurance current oil and gas prices will be
maintained. There is no assurance projected future oil and gas prices will be
paid. Undeterminable facts and situations may occur causing the future cash flow
from the sale of oil and gas to vary from the estimates in this report.
This appraisal is prepared for Magnum Petroleum, Inc.'s exclusive use. The
appraisal, either in its entirety or any portion, should not be reproduced,
distributed or made available to any other person or company without the written
consent of Hensley Consultants, Inc.
Well data and worksheets are available for inspection.
Sincerely,
HENSLEY CONSULTANTS, INC.
/s/ Daniel R. Hensley
Daniel R. Hensley
<EX-99.1/>
<PAGE>
<EX-99.2>
EXHIBIT 99.2
<PAGE>
James J. Weisman, Jr.
1322 East Spring Valley
Richardson, Texas 75081
October 7, 1996
Ladies and Gentlemen:
This letter is written at the request of Magnum Petroleum, Inc. (the
"Company"). Reference is made to the Registration Statement on Form S-4 (No.
333-2290 ) filed by the Company. with the Securities and Exchange
Commission, as amended to the date hereof (the "Registration Statement").
In this letter, reference will be made to my letter to the Company
dated March 28, 1996, in respect of the Company's reserves as of December 31,
1995 (the "Reserve Letter "), a copy of which is attached hereto.
In connection with the Registration Statement, I hereby consent to the
inclusion of my name and the Reserve Letter in the Registration Statement.
Further, I hereby inform you of the following:
1. I am an independent petroleum engineer with respect to the
Company. In connection with the Registration Statement and the
Reserve Letter , I am not employed on a contingent basis. At
the time of preparation of the Reserve Letter , I did not
have, and at the date hereof I do not have, any financial
interest in the Company. At such time I was not, and at the
date hereof, I am not connected with the Company as a
promoter, underwriter, director, officer, or employee.
2. The letter to the Company attached hereto is a true, correct,
and complete copy of the Reserve Letter as provided to the
Company on March 28, 1996. I am not aware of any additional
information that I believe is necessary to be disclosed in the
Reserve Letter in order to prevent the information set forth
therein from being misleading as of the date of the reserve
information therein (December 31, 1995).
3. As of the date hereof, nothing has come to my attention which
would cause me to revise downward by any material amount, any
statement made, or opinion expressed by me in the Reserve
Letter , with respect to my estimates of the oil and gas
reserves and future net revenue attributable to the interest
of the Company in such properties.
Very truly yours,
/s/ James J. Weisman, Jr.
James J. Weisman, Jr.
<PAGE>
James J. Weisman, Jr.
- --------------------------------------------------------------------------------
1322 East Spring Valley o Richardson, Texas 75081 o (214) 234-8846
March 28, 1996
Mr. Gary C. Evans
President
Magnum Petroleum, Inc.
600 East Las Colinas Blvd.
Suite 1200
Irving, TX 75039
Re: Annual Reserve Report
Effective Date: December 31, 1995
Dear Mr. Evans:
At your request, I have audited significant portions of the annual reserve
report prepared by the engineering personnel of Magnum Petroleum, Inc. who have
estimated the total proved reserves for the Company as shown on the table below.
The scope of my detailed audit is discussed on page 2. An effective date of
December 31, 1995 was utilized. This report is based on the most recent
production and expense data supplied by the respective operator(s) of these
properties. Oil and gas prices were held constant, in accordance with the
guidelines of the Securities and Exchange Commission (SEC), at the price level
of the last available figures received by the Company on each property at the
end of calendar 1995.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Reserves Future Net Revenue
- --------------------------------------------------------------------------------------------------------------------------
Oil Gas(1) Present-Worth
Category (Barrels) (MCF) Total at 10%
- --------------------------------------------------------------------------------------------------------------------------
Proved Developed
Producing 1,297,389 8,735,547 $ 24,373,953 $ 15,497,586
Non-Producing 384,452 61,201 4,790,100 3,538,619
Proved Undeveloped 2,434,594 11,824,833 40,843,503 24,766,711
- --------------------------------------------------------------------------------------------------------------------------
Total Proved 4,116,435 20,621,581 $ 70,007,556 $ 43,802,916
</TABLE>
(1) Net gas reserves include the effect of gas consumed in operations.
Future net revenue (FNR) is calculated after deducting royalties, production and
ad valorem taxes, operating costs and future capital costs, but before
consideration of federal income tax. Discounted future net revenue (DFNR) is the
future net revenue discounted at the rate of ten (10%) percent per year.
For the purpose of this report, a field inspection of the properties has not
been performed nor has the mechanical operation or condition of the wells and
their related facilities been examined. I have not investigated possible
environmental liability related to the properties. No estimates have been made
of salvage value of the existing equipment or of costs to plug and abandon the
wells. Working and revenue interests for this evaluation were supplied by the
accounting records supplied to me by Magnum Petroleum, Inc., and have been
accepted as represented.
<PAGE>
Page 2
Gary C. Evans
March 26, 1996
All reserves estimates have been performed in accordance with sound engineering
principles and generally accepted industry practice. As in all aspects of oil
and gas evaluation, there are uncertainties inherent in the interpretation of
engineering data and all conclusions represent only informed professional
judgements The scope of properties audited in detail was limited to the top 39
properties in the Proved Developed Producing Category, which represents 81.9% of
the 10% Discounted FNR for that category. For the Proved Developed Non-Producing
Category (Behind Pipe Zones), each of the five properties were audited, or 100%
of the value. Of the Proved Undeveloped Reserve Category, all properties were
audited in detail, with the exception of the Beezley and Coker wells located in
East Texas, which were not reviewed. The total value audited in the Proved
Undeveloped category is $16,045,594, or 64.8% of the total. The weighted average
value audited for Total Proved category is 73.7%.
I am an independent consultant who has performed a significant number of reserve
evaluations for various clients. I do not own an interest in these properties
nor in the outstanding securities of Magnum Petroleum, Inc. All engineering
calculations and basic data used in the analysis are maintained on file in my
office and are available for review upon request.
Very truly yours,
/s/ James J. Weisman, Jr.
James J. Weisman, Jr.
Professional Engineer #59495
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James J. Weisman, Jr.
1322 East Spring Valley
Richardson, Texas 75081
October 7, 1996
Ladies and Gentlemen:
This letter is written at the request of Hunter Resources, Inc. (the
"Company"). Reference is made to the Registration Statement on Form S-4 (No.
333-2290 ) filed by Magnum Petroleum, Inc. with the Securities and Exchange
Commission, as amended to the date hereof (the "Registration Statement").
In this letter, reference will be made to my letter to the Company dated
March 31, 1995, in respect of the Company's reserves as of December 31, 1994
(the "Reserve Letter"), a copy of which is attached hereto.
In connection with the Registration Statement, I hereby consent to the
inclusion of my name and the Reserve Letter in the Registration Statement.
Further, I hereby inform you of the following:
1. I am an independent petroleum engineer with respect to the Company. In
connection with the Registration Statement and the Reserve Letter , I
am not employed on a contingent basis. At the time of preparation of
the Reserve Letter , I did not have, and at the date hereof I do not
have, any financial interest in the Company. At such time I was not,
and at the date hereof, I am not connected with the Company as a
promoter, underwriter, director, officer, or employee.
2. The letter to the Company attached hereto is a true, correct, and
complete copy of the Reserve Letter as provided to the Company on
March 31, 1995. I am not aware of any additional information that I
believe is necessary to be disclosed in the Reserve Letter in order to
prevent the information set forth therein from being misleading as of
the date of the reserve information therein (December 31, 1994).
3. As of the date hereof, nothing has come to my attention which would
cause me to revise downward by any material amount, any statement made,
or opinion expressed by me in the Reserve Letter , with respect to my
estimates of the oil and gas reserves and future net revenue
attributable to the interest of the Company in such properties.
Very truly yours,
/s/ James J. Weisman, Jr.
James J. Weisman, Jr.
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James J. Weisman, Jr.
- --------------------------------------------------------------------------------
1322 East Spring Valley o Richardson, Texas 75081 o (214) 234-8846
March 31, 1995
Mr. Gary C. Evans
President
Hunter Resources, Inc.
600 East Las Colinas Blvd.
Suite 1200
Irving, TX 75039
Re: Annual Reserve Report
Effective Date: December 31, 1994
Dear Mr. Evans:
At your request, I have determined the proved reserves for Hunter Resources,
Inc. as shown on the table below. An effective date of December 31, 1994 was
used. This report is based on the most recent production and expense data
supplied by the respective operator(s) of these properties. Oil and gas prices
are held constant at the level of the last available figures received by the
Company on each property at the end of calendar 1994, as represented by the
figures in your files.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
HUNTER RESOURCES, INC.
NET NET DFNR
CATEGORY OIL/BBLS GAS/MCF FNR 10%
- -------- -------- ------- --- ---
Producing 197,283 2,075,888 $ 3,184,344 $ 1,863,170
Undeveloped 368,436 680,792 3,521,541 2,094,775
Behind Pipe 564,332 61,201 5,735,334 4,036,352
Total Proved 1,130,051 2,817,881 $ 12,441,219 $ 7,994,297
</TABLE>
Future net revenue (FNR) is calculated after deducting royalties, production and
ad valorem taxes, operating costs and future capital costs, but before
consideration of federal income tax. Discounted future net revenue (DFNR) is the
future net revenue discounted at the rate of ten (10%) percent per year. For the
purpose of this report, no estimates were
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Mr. Gary C. Evans
Page 2
March 31, 1995
made of salvage value of the existing equipment or of costs to plug and abandon
the wells. Working and revenue interests for this evaluation were supplied by
the accounting records supplied to me by Hunter Resources, Inc., and have been
accepted as represented.
All reserves estimates have been performed in accordance with sound engineering
principles and generally accepted industry practice. As in all aspects of oil
and gas evaluation, there are uncertainties inherent in the interpretation of
engineering data and all conclusions represent only informed professional
judgements.
A visual inspection of the properties themselves was not considered necessary
for the purpose of this report. I am an independent consultant who has performed
a significant number of reserve evaluations for various clients. I do not own an
interest in these properties nor in the outstanding securities of Hunter
Resources, Inc. All engineering calculations and basic data used in the analysis
are maintained on file in my office and are available for review.
Very truly yours,
/s/ James J. Weisman, Jr.
-------------------------
James J. Weisman, Jr.
Professional Engineer #59495
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