As filed with the Securities and Exchange Commission on September 27, 1996
Registration No. 333-2290
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
Form S-4
REGISTRATION STATEMENT
AMENDMENT NO. 3
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 244 pages numbered
sequentially. The Exhibit Index may be found
on Page 152.
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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 8, 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 __, 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.
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
<PAGE>
$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). 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
====== ====== ===== =====
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<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.
61
<PAGE>
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.
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
$ - $ - $ 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 154
10.4 Employment Agreement for Matthew C. Lutz 160
10.5 Credit Agreement dated June 28, 1996 among Wells Fargo 165
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 239
24.1 Consent of Hansen, Barnett & Maxwell as 241
Accountants
24.2 Consent of Hein + Associates LLP as 243
Accountants
* 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
- ----------- -------- -----------
10.3 Employment Agreement for Gary C. Evans 154
10.4 Employment Agreement for Matthew C. Lutz 160
10.5 Credit Agreement dated June 28, 1996 among 165
Wells Fargo Bank (Texas), N.A. et al and the
Company
21.1 Subsidiaries of the Registrant 239
24.1 Consent of Hansen, Barnett & Maxwell as 241
Accountants
24.2 Consent of Hein + Associates LLP as 243
Accountants
<PAGE>
EXHIBIT 10.3
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
This Agreement ("Agreement") is entered into as of the first day of
December, 1990, between Gary C. Evans ("Employee") and Intramerican Corporation,
a Pennsylvania corporation ("Employer"), WITNESSETH:
WHEREAS, the Chairman of the Board of Directors of Employer has offered
Employee employment in consideration for the compensation and the other mutual
benefits hereinafter set forth, and Employee is willing to accept employment on
these terms.
NOW, THEREFORE, in consideration of the mutual promises hereinafter
contained and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, it is agreed:
1. EMPLOYMENT. Employer employs Employee and Employee accepts employment
from Employer upon the terms and conditions specified in this Agreement.
2. TERM. Subject to the provisions regarding termination specified in
Sections 9, 10 and 11, the initial term of this Agreement shall begin on January
1, 1991, and shall terminate on December 31, 1994 (the "Initial Term"). This
Agreement shall thereafter be automatically renewed for successive one (1) year
terms, unless otherwise terminated as provided in this Agreement.
3. COMPENSATION. For all services rendered by Employee under this
Agreement, Employer shall initially pay Employee $9,583.33 per month (the "Basic
Salary"). The Basic Salary may be increased or decreased as the Board of
Directors of Employer may from time to time determine. The Basic Salary shall be
in addition to providing group medical and dental insurance, a four-wheel drive
vehicle for his business and personal use and any other fringe benefits provided
to Employee at the discretion of the Board of Directors of Employer.
4. BONUS. Pursuant to Article 3.02 of the Plan and Agreement of
Reorganization and Merger ("Merger Agreement) between Employer and others dated
December 21 , 1990, the Surviving Corporation, as defined therein, shall succeed
to the rights, damages or awards of the Peko Suit which accrue to Sunbelt. With
respect to any monetary benefits realized by the Surviving Corporation as a
result of its continuing involvement in the Peko Suit, Gary C. Evans shall
receive a cash bonus equal to all monetary sums payable to the Surviving
Corporation by any party to the action, including legal fees or other
reimbursements, less reimbursements and benefits payable to the Surviving
Corporation in accordance with Article 3.02 of the Merger Agreement. This bonus
is not exclusive and is in addition to any bonus that might be awarded to
Employee by the Board of Directors from time to time.
5. EXPENSES. Subject to the rules and procedures Employer may specify from
time to time, Employer shall also reimburse Employee for all reasonable expenses
incurred by Employee on behalf of Employer. Employee shall submit to Employer
vouchers, receipts and invoices for such expenses incurred, and Employer shall
pay such amount or reimburse Employee therefor within a reasonable time
thereafter.
6. DUTIES. Employee is engaged as President and Chief Operating Officer of
Employer. The specific duties of Employee shall be determined from time to time
by the Board of Directors of Employer.
7. EMPLOYMENT SERVICE. Employee shall comply with all policies, standards
and regulations of Employer now or hereafter promulgated. So long as Employee is
employed by Employer, Employee shall not directly, either as an Employee,
Employer, consultant,
<PAGE>
agent, principal, partner, corporate officer, director or in any other
individual or representative capacity, engage in or participate in any business
that is in direct competition with the business of Employer.
8. VACATIONS AND DAYS OFF. Employee may take reasonable vacations and days
off agreeable to Employer and Employee.
9. TERMINATION AFTER NOTICE. Either Employee or Employer may terminate the
employment of Employee upon written notice given thirty (30) days after the end
of the Initial Term or any renewal thereof. Under this paragraph 9, the Employee
shall be entitled to six (6) months severance pay.
10. TERMINATION WITHOUT NOTICE. Employer may terminate the employment of
Employee hereunder without prior notice:
A. (i) if Employee fails or refuses to perform the usual, customary
duties of his employment in a prompt, faithful and diligent
manner as judged in the sole discretion of Employer's Board of
Directors;
(ii) if Employee materially breaches this Agreement;
(iii)if Employee materially fails or refuses to comply with the
policies, standards and regulations of Employer established
from time to time; or
(iv) for "other good cause" (as defined below).
B. The term "other good cause" as used in this Agreement shall
include, but shall not necessarily be limited to, habitual impertinence,
pattern of conduct that tends to hold Employer up to ridicule in the
community, conduct disloyal to Employer, conviction of any crime of moral
turpitude, and substantial dependence, as judged by the Board of Directors
of Employer, on alcohol or any controlled substance. "Controlled substance"
means a drug, immediate precursor or other substance listed in Schedules
I-V or Penalty Groups 14 of the Texas Controlled Substances Act, as
amended, or a drug, immediate precursor or other substance listed in
Schedules I-V of the Federal Comprehensive Drug Abuse Prevention and
Control Act of 1970, as amended.
C. If the employment of Employee is terminated pursuant to this
Section 10, Employer shall pay to Employee any compensation or benefits
earned or vested, but not paid, to Employee prior to termination. The
payment shall be in full and complete discharge of any and all liabilities
and obligations of Employer to Employee hereunder, and Employee shall be
entitled to no further benefits under this Agreement.
11. TERMINATION UPON DEATH OR DISABILITY.
A. The employment of Employee shall terminate upon the death of
Employee. Except for any other benefits that may have accrued to Employee,
Employer shall pay to the estate of Employee the compensation that would
otherwise have been payable to Employee through the date on which death
occurs. Employer shall have no additional financial obligation under this
Agreement to Employee or his estate.
B. If Employee becomes permanently disabled because of sickness,
physical or mental disability, or any other reason, so that it reasonably
appears that he will be unable to complete his duties under this Agreement,
the Employer shall have the option to immediately terminate this Agreement
by giving a minimum of ninety (90) days written notice of
<PAGE>
termination to the Employee. Such termination shall be without prejudice to
any right or remedy to which the Employer may be entitled either at law, in
equity, or under this Agreement.
12. CONFIDENTIALITY. Employee recognizes and acknowledges that, by virtue
of his employment, he will become familiar with confidential information
including trade secrets pertaining to the business of Employer and that Employer
would suffer irreparable injury if this information were divulged. Therefore,
Employee agrees to keep in strict secrecy any confidence during employment and
after termination, for any reason, any and all information Employee acquires or
to which he has access during his employment by Employer that has not been
publicly disclosed by Employer and is not a matter of common knowledge in the
fields of work of Employer (the "Confidential Information"). The Confidential
Information shall include, but shall not be limited to, trade secrets, technical
data, mailing lists, the names of suppliers and customers. Except with the prior
written approval of Employer or in response to court order, Employee shall
neither (i) directly or indirectly, disclose any of the Confidential Information
at any time to any person except authorized personnel of Employer nor (ii) use
the Confidential Information in any way. In addition to, and not in limitation
of the foregoing, all data, drawings and other records and written material
prepared or compiled by Employee or furnished to Employee while in the employ of
Employer shall be the sole and exclusive property of Employer, and none of the
data, drawings or other records, or copies thereof, shall be retained by
Employee after termination for any reason of his employment.
13. COVENANT NOT TO COMPETE. Employee covenants and agrees that, upon
termination of his employment, whether by termination of this Agreement, by
wrongful discharge, or otherwise, Employee shall not directly or indirectly,
enter into or engage generally in direct competition with Employer in the oil
and gas industry, either as an individual on his own or as a partner or joint
venturer, or as an employee or agent for any person, or as an officer, director
or shareholder or otherwise, for a period of six (6) months after the date of
termination of his employment hereunder. This covenant on the part of Employee
shall be construed as an Agreement independent of any other provision of this
Agreement; the existence of any claim or cause of action of Employee against
Employer, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by Employer of this covenant. Employee
covenants and agrees not to use or attempt to use the Gruy name outside his
employment by Employer.
14. ENFORCEMENT. Employer agrees that damages at law alone will be
insufficient remedy to Employer if Employee violates the terms of Sections 7, 12
and 13 of this Agreement, and that Employer would suffer irreparable damage as a
result of violation. Accordingly, it is agreed that if there is a breach or
threatened breach, Employer shall be entitled, upon application to a court of
competent jurisdiction, to obtain injunctive relief to enforce the provisions of
Sections 7, 12 and 13. Employer shall be entitled to recover its reasonable
attorneys' fees incurred in enforcing any provision of this Agreement whether at
law or in equity. Injunctive relief shall be in addition to any other rights or
remedies available to Employer, including damages at law.
15. CONTINUING EFFECT. The provisions of Sections 12 and 13 of this
Agreement shall continue to be binding upon Employee in accordance with their
terms, notwithstanding termination of Employee's employment hereunder for any
reason.
<PAGE>
16. REPURCHASE OPTION. Upon the death or voluntary resignation of Employee
as a full-time employee of Employer (the "triggering event"), Employer shall
have the option to purchase all of the shares of common stock and preferred
stock of Employer owned by Employee at such time. Employer shall have thirty
(30) days after the triggering event to exercise such option by giving notice to
Employee or Employee's estate, and by paying, in cash, within ten (10) days
after such notice, the value of such stock as hereinafter set forth. Should
Employer fail to timely give notice or timely pay, then this option to purchase
shall terminate. Upon the triggering event due to the death of Employee, the
value to be paid for the common stock shall be the greater of the: (i) average
price of the Employer's common stock over the thirty (30) consecutive trading
days preceding the triggering event using the closing price if the common stock
is trading on a stock exchange or the NASDAQ National Market System, or the
average of the bid and asked price if trading over-the-counter, or (ii) book
value ("book value" shall mean the Employer's consolidated total assets, less
the sum of [consolidated total liabilities, equity capital attributable to
outstanding preferred stock and minority interests] determined in accordance
with GAAP) of the common stock for the most recent quarter as shown in the
Corporation's Form 10-Q. Upon the triggering event due to the voluntary
resignation of Employee, the value to be paid for the common stock shall be the
lesser of the: (i) average price of the Employer's common stock over the thirty
(30) consecutive trading days preceding the triggering event using the closing
price if the common stock is trading on the stock exchange or the NASDAQ
national market system, or the average of the bid and asked price if trading
over-the-counter, or (ii) book value of the common stock for the most recent
quarter as shown in the Corporation's Form 10-Q. In no event will the common
stock be valued at less than $.1875 per share. Employer's preferred stock shall
be valued at One Dollar t$1.00) per share, plus the value of any accrued but
unpaid dividends. This repurchase option will expire in its entirety at the end
of the Initial Term of this Agreement.
17. WAIVER OF BREACH. The waiver by Employer of a breach of any of the
provisions of this Agreement by Employee shall not be construed as a waiver of
any subsequent breach by Employee.
18. BINDING EFFECT: Assignment. As allowed by law, the rights and
obligations of the Employer under this Agreement shall inure to the benefit or
and shall be binding upon the successors and assigns of Employer and Employee
hereby agrees to the assignment of this contract if same is necessary by
Employer.
19. INVALID PROVISIONS. It is understood and agreed that in the event any
paragraph, provision or clause of this Agreement or any combination thereof is
found to be unenforceable at law, in equity, or under any presently existing or
hereafter enacted legislation, regulation or order of the United States, any
state or subdivision thereof or any municipality, those findings shall not in
any way affect the other paragraphs, provisions or clauses in this Agreement,
which shall continue in full force and effect.
20. ATTORNEY'S FEES. In the event it becomes necessary for either party to
enforce this Agreement in a court of law, the prevailing party shall be entitled
to reasonable attorneys' fees.
21. MISCELLANEOUS. This Agreement shall be deemed to be performed in Dallas
County, Texas, and shall be construed and enforced in accordance with the laws
of the State of Texas. This Agreement contains the entire Agreement of the
parties and supersedes all prior agreements and understandings, oral or written,
with respect to the subject matter hereof. This Agreement may be changed only by
an Agreement in writing signed by the party against whom any waiver, change,
amendment, modification or discharge is sought. The headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
<PAGE>
interpretation of this Agreement. Any notice required or permitted to be given
under this Agreement to Employer shall be sufficient if in writing and if sent
by certified or registered mail, first class, return receipt requested, to the
principal place of business of Employer. Any notice required or permitted to be
given under this Agreement to Employee shall be sufficient if in writing and if
sent by certified or registered mail, first class, return receipt requested, to
Employee at his last known address. Employee shall be solely responsible for
notifying Employer of his address on the date of this Agreement and all
subsequent changes of address. When the context in which words are used in this
Agreement indicate that such is the intent, words in the singular shall include
plural and vice versa and words in the masculine gender shall include the
feminine and neuter genders and vice versa.
IN WITNESS WHEREOF, the parties have executed this Agreement effective the day
and year first above written.
EMPLOYER:
INTRAMERICAN CORPORATION
By: /s/ David A. Nelson
-----------------------
David A. Nelson, Chairman &
Chief Executive Officer
EMPLOYEE:
/s/ Gary C, Evans
- -----------------
Gary C. Evans, President & Chief
Operating Officer
<PAGE>
EXHIBIT 10.4
<PAGE>
CONSULTING AND ADVISORY AGREEMENT
This Consulting and Advisory Agreement ("Agreement") is made and entered into as
of this 22nd day of September, 1993, by and between Matthew C. Lutz ("Lutz") and
Hunter Resources, Inc. ("Hunter"), a Pennsylvania Corporation.
Recitals
--------
A. Lutz is experienced as an exploration geologist in the oil and gas
industry. Lutz has played a key role in his thirty-six (36) year career in
building exploration and production organizations and providing the necessary
strategy for growth within the company's where he has been employed. Lutz is
also experienced in dealing with industry partners, banks, financial
institutions, and equity investors as it pertains to energy transactions and
investments in the oil and gas industry.
B. Lutz is experienced at evaluating oil and gas exploration and production
transactions and determining fair and equitable trades by and between buyers and
sellers of oil and gas properties and exploration and development plays within
the energy industry.
C. Lutz is experienced at making executive/board of director level
presentations and decisions in addition to providing market analysts and
broker/dealer interviews concerning the energy industry and the current
activities of the company's wherein he has been employed.
D. Hunter is an energy development and management company engaged in three
principal activities: (i) the production and sale of crude oil, condensate and
natural gas; (ii) the gathering, transmission, and marketing of natural gas; and
(iii) the business of managing and operating producing oil and natural gas
properties for non-operating interest owners.
E. Hunter's wholly owned subsidiary, Gruy Petroleum Management Co. ("Gruy")
is a name well known and respected within the petroleum business, being the
surname of the founder.
F. Hunter desires to avail itself from time to time of Lutz's experience
and advice. Hunter desires to enter into this Agreement with Lutz and Lutz is
willing to provide consulting and advisory services to Hunter and Gruy under the
terms and conditions of this Agreement.
NOW, THEREFORE, for and in consideration of the mutual promises and covenants
contained herein and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. ENGAGEMENT. Hunter hereby retains Lutz as its Vice Chairman of the Board of
Directors and Business Development Manager. Lutz will be eligible for the
minimum compensation and benefits provided to all Board of Directors. Lutz
hereby agrees to make himself available to render his professional advice
and reasonable assistance to Hunter and Hunter's Chief Executive Officer
under the general terms and conditions hereinafter set forth.
2. DUTIES. During the term of this Agreement, Lutz agrees to assist and advise
Hunter upon Hunter's reasonable requests in the following general areas;
however, it is expressly understood by the parties hereto that Lutz will
not have any day-to-day responsibilities:
a) Preliminary review of energy transactions with Hunter's Chief
Executive Officer to determine the feasibility of same;
b) assistance in the detailed analysis of energy transactions from a
geological and explorationist point of view;
c) assistance in the preparation and presentation of the geological and
explorational materials included in investment memorandums and other
similar matters as may be required by industry partners, bankers,
financial institutions, stock analysts and equity investors;
d) provide assistance in the negotiating process and the review of final
documents required for closing of any specific transaction; e)
strategic consulting including, but not limited to:
i) Periodic strategic planning sessions; ii) analysis of potential
mergers, acquisitions or significant events; iii) assistance in
implementation of the company's overall strategy as it relates to
its acquisition efforts in the energy industry; and fl such other
general assistance and advice that may be mutually agreed upon.
3. COMPENSATION. The incentive compensation to Lutz for entering into this
Agreement and for the assistance and advice that he may render will be the
issuance by Hunter of 200,000 shares of "qualified" common stock options
with a term of five years and an exercise price of .1875 per share
(attached hereto is the Stock Option Agreement; all the terms of which are
incorporated herein as reference).
Upon the completion and closing of transactions by Hunter, wherein Lutz
performed "Duties" as outlined in this Agreement, compensation will be due
and payable to Lutz. The form of compensation may include, but not be
limited to, working interests, overriding royalty interests, net profits
interest, and reversionary interests in the oil and gas properties
acquired. Additionally, restricted common stock, restricted preferred
stock, common stock options, etc., may be offered to Lutz as the form of
compensation based upon the level of performance of Lutz's "Duties" as
outlined herein. Lutz and Hunter's Chief Executive Officer will negotiate a
fair and equitable form of compensation and submit same to Hunter's Board
of Directors for review and approval.
An example of a fee schedule typically paid on oil and gas transactions
that are presented from and are the exclusive knowledge of the broker, is
as follows:
Purchase Price of Transaction Percent
----------------------------- -------
First Million Dollars 3%
Second Million Dollars 2%
Third Million Dollars 1%
In Excess of Three Million Dollars 1/2% of 1%
<PAGE>
4. Office Space. Hunter will provide Lutz office space to be used at his
discretion in its corporate headquarters presently located at 5100 North
O'Connor Blvd., Suite 600, Irving, Texas 75039. Lutz will have access to a
telephone for unlimited business purposes and the use of secretarial and
support personnel from Hunter's existing staff of employees.
5. Expenses. Hunter will reimburse Lutz for Lutz's actual out-of-pocket
expenses incurred in the performance of his consulting and advisory
services which may include travel, hotels, meals, long distance charges,
postage, printing, photocopying, courier services, messenger services, and
other similar costs upon submission of appropriate documentation supporting
such costs. Any cost in excess of One Thousand Dollars ($1,000.00) must be
pre-approved by the Chief Executive Officer of Hunter or it shall not be
subject to reimbursement in Hunter's discretion. Hunter understands that in
some cases the provider of certain services and goods may ask for payment
in advance and for some major disbursements, invoices from outside
providers will be sent directly to Hunter. Approval of a budget for a
particular project by Hunter shall be authorization to incur the expenses
detailed in such budget.
6. Term. This Agreement shall be for a term of three (3) years unless sooner
terminated as provided in Paragraph 7 below.
7. Termination. This Agreement shall terminate:
a) if there has been a material breach of this Agreement and such breach
has not been cured by the alleged breaching party on or before thirty
(30) days from the date of the receipt of a written notice from the
non-breaching party detailing the breach;
b) at the end of three (3) years of the date of this Agreement and any
renewals and extension thereof;
c) resignation by Lutz;
d) death or disability of Lutz to such an extent that he cannot perform
the duties outlined in this Agreement.
It is expressly understood by the parties hereto that any earned but unpaid
compensation due to Lutz (as outlined in the Compensation Section) prior to
the termination of this Agreement, shall inure to the benefit and shall be
binding upon the successors and assigns of Lutz.
8. Accuracy of Information and Indemnification. Hunter agrees to timely
furnish to Lutz truthful and accurate information in all respects. Hunter
agrees to cooperate with Lutz in the performance of Lutz's consulting
services. Hunter will have final approval of all brochures, offering
memorandums. geological presentations, etc.
In connection with this Agreement, Hunter, for itself and its subsidiaries
hereby covenants and agrees to indemnify and hold harmless Lutz from and
against any and all damage, claim or liability, as a result of any breach
of this Agreement; provided that Hunter shall have no obligation to
indemnify Lutz with respect to any act or omission of Lutz, that
constitutes gross negligence or willful misconduct.
9. Conflicts of Interest. Lutz hereby agrees not to engage in the management
of oil and gas properties, field consulting services or expert witness
consulting or any other activity that in any way competes with Hunter or
its subsidiaries without first obtaining the prior written approval of the
Chief Executive Officer of Hunter during the term of this Agreement, which
approval shall not be unreasonably withheld.
10. Miscellaneous.
3
<PAGE>
a) Assignability. Unless otherwise agreed to in writing by both parties
hereto, the rights, obligations and benefits established by this
Agreement shall be nonassignable by either of the parties hereto and
any such attempt of assignment shall be null and void and of no effect
whatsoever.
b) Board of Director Approval. This Agreement is subject to the approval
of the Board of Directors of Hunter at the next scheduled Board of
Directors meeting (presently scheduled for September 14, 1993).
Compensation due to Lutz under Paragraph 3 will require the
affirmative vote of the majority of the Board of Directors of Hunter
at which time Lutz must abstain from voting.
c) Entire Agreement. This Agreement contains the entire agreement of the
parties with respect to the subject matter hereof, and may not be
changed except by a writing signed by the party against whom
enforcement or discharge is sought.
d) Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the other party.
e) Construction of Language. The language used in this Agreement shall be
construed as a whole according to its fair meaning, and not strictly
for nor against either party
f) Captions and Headings. The paragraph headings throughout this
Agreement are for convenience and referenced only, and shall in no way
be deemed to define, limit or add to the meaning of any provision of
this Agreement.
g) State Law. This Agreement, its interpretation, and its application
shall be governed by the laws of the State of Texas.
h) Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, and such counterparts shall
together constitute one and the same instrument.
i) Costs. In the event of any legal proceeding between any of the parties
to enforce or defend the terms and rights set forth in this Agreement,
the prevailing party or parties shall be paid all costs of such legal
proceeding, including but not limited to, attorney fees by the other
party or parties.
j) Notices and Waivers. Any notice or waiver required or permitted to be
given by the parties hereto shall be in writing and shall be deemed to
have been given, when delivered, three (3) business days after being
mailed by certified or registered mail, faced during regular business
hours of the recipient and there is conformation of receipt, or sent
by prepaid full rate telegram to the following addresses:
To Lutz: Mr. Matthew C. Lutz
604 Bellah
Irving, Texas 75062
Phone No. (214) 570-5904
To Hunter Mr. Gary C. Evans
President
Hunter Resources, Inc.
5100 N. O'Connor Blvd., Suite 600
Irving, TX 75039
Phone No. (214) 401-0752
Fax No. (214) 401-3111
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as
of the day and year first above written notwithstanding the actual date of
signatures.
MATTHEW C. LUTZ
By: /s/ Matthew C. Lutz
-----------------------
Matthew C. Lutz
HUNTER RESOURCES, INC.
By: /s/ Gary C. Evans
--------------------
Gary C. Evans, President and
Chief Executive Officer
STATE OF TEXAS
COUNTY OF DALLAS
BEFORE ME, the undersigned authority, on this day personally appeared GARY C.
EVANS, President and Chief Executive Officer of Hunter Resources, Inc., a
Pennsylvania Corporation, known to me to be the person whose name is subscribed
to the foregoing instrument, and acknowledged to me that he had executed the
same for the purposes and consideration therein expressed. in the capacity
therein stated, and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE. this the 22nd day of September. 1993.
/s/ Nicki J. Lutz
- -----------------
Notary Public in and for
the State of Texas
STATE OF TEXAS
COUNTY OF DALLAS
BEFORE ME, the undersigned authority, on this day personally appeared MATTHEW C.
LUTZ, known to me to be the person whose name is subscribed to the foregoing
instrument, and acknowledged to me that he had executed the same for the
purposes and consideration therein expressed.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 22nd day of September, 1993.
/s/ Francis P. Evans
- ----------------------
Notary Public in and for
the State of Texas
<PAGE>
EXHIBIT 10.5
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (the "Agreement"), dated as of June 28, 1996, is
among MAGNUM PETROLEUM, INC., a corporation duly organized and validly existing
under the laws of the State of Nevada ("Borrower"), each of the banks or other
lending institutions which is or which may from time to time become a signatory
hereto or any successor or assignee thereof, WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION, a national banking association, as an issuing bank (in such
capacity, together with its successors in such capacity, an "Issuing Bank") and
as agent for itself, the Co-Agent, the Issuing Banks and the other Banks (in
such capacity, together with its successors in such capacity, the "Agent"), and
BANQUE PARIBAS, as co-agent (in such capacity, the "Co-Agent").
R E C I T A L S:
The Borrower has requested that the Banks extend credit to the Borrower in
the form of (i) revolving credit advances and letters of credit not to exceed an
aggregate principal amount of the lesser of the Borrowing Base (hereinafter
defined) or $100,000,000 outstanding at any time, and (ii) a term loan in the
principal amount of $8,000,000. The Banks are willing to make such extensions of
credit to the Borrower upon the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I
Definitions
Section 1.1 Definitions. As used in this Agreement, the following terms
have the following meanings:
"Acquired Properties" means the real and personal property
acquired by Borrower and one or more of the Guarantors pursuant to the
Acquisition.
"Acquisition" means the acquisition by the Borrower or a
Guarantor of certain real and personal property from Meridian Oil
Company.
"Acquisition Documents" means all documents, instruments and
agreements executed and delivered in connection with the Acquisition.
"Additional Costs" has the meaning specified in Section 6.1.
"Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any
Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/16 of 1%) determined by the Agent to be
equal to the Eurodollar Rate for such Eurodollar Loan for
CREDIT AGREEMENT - Page 1
<PAGE>
such Interest Period divided by 1 minus the Reserve Requirement for
such Eurodollar Loan for such Interest Period.
"Affiliate" means, as to any Person, any other Person (a) that
directly or indirectly, through one or more intermediaries, controls
or is controlled by, or is under common control with, such Person; (b)
that directly or indirectly beneficially owns or holds five percent or
more of any class of voting stock of such Person; or (c) five percent
or more of the voting stock of which is directly or indirectly
beneficially owned or held by the Person in question. The term
"control" means the possession, directly or indirectly, of the power
to direct or cause direction of the management and policies of a
Person, whether through the ownership of voting securities, by
contract, or otherwise; provided, however, in no event shall the
Agent, the Co-Agent, the Issuing Bank or any Bank be deemed an
Affiliate of the Borrower or any of its Subsidiaries.
"Agent Fee Letter" means the letter agreement dated June 27, 1996
between the Agent and the Borrower.
"Applicable Base Rate Margin" means (i) 0% during any period in
which the aggregate outstanding amount of Revolving Credit Loans is
less than 75% of the Borrowing Base; or (ii) .25% during any period in
which the aggregate outstanding amount of Revolving Credit Loans is
greater than or equal to 75% of the Borrowing Base. The initial
Applicable Base Rate Margin shall be .25%.
"Applicable Eurodollar Margin" means (i) 1.5% during any period
in which the aggregate outstanding amount of Revolving Credit Loans is
less than 25% of the Borrowing Base; (ii) 1.75% during any period in
which the aggregate outstanding amount of Revolving Credit Loans is
greater than or equal to 25% but less than 50% of the Borrowing Base;
(iii) 2.0% during any period in which the aggregate outstanding amount
of Revolving Credit Loans is greater than or equal to 50% but less
than 75% of the Borrowing Base; and (iv) 2.25% during any period in
which the aggregate outstanding amount of Revolving Credit Loans is
greater than or equal to 75% of the Borrowing Base. Notwithstanding
the foregoing, during any period in which the Term Loans are
outstanding, each Applicable Eurodollar Margin shall be increased by
.25%. The initial Applicable Eurodollar Margin shall be 2.50%.
"Applicable Lending Office" means for each Bank and each Type of
Loan, the Lending Office of such Bank (or of an Affiliate of such
Bank) designated for such Type of Loan below its name on the signature
pages hereof or such other office of such Bank (or of an Affiliate of
such Bank) as such Bank may from time to time specify to the Borrower
and the Agent as the office by which its Loans of such Type are to be
made and maintained.
"Applicable Rate" means the Applicable Revolving Rate or
Applicable Term Rate, as the case may be.
CREDIT AGREEMENT - Page 2
<PAGE>
"Applicable Revolving Rate" means: (a) during the period that a
Revolving Credit Loan is a Base Rate Loan, the Base Rate plus the
Applicable Base Rate Margin; and (b) during the period that a
Revolving Credit Loan is a Eurodollar Loan, the Adjusted Eurodollar
Rate plus the Applicable Eurodollar Margin.
"Applicable Term Rate" means with respect to the Term Loans: (a)
during the period prior to November 1, 1996, the Base Rate plus 2.25%;
(b) during the period commencing on November 1, 1996 until and
including December 31, 1996, the Base Rate plus 3.0%; and (c) for each
quarter thereafter commencing with the quarter ending March 31, 1997,
the Base Rate plus 3.25%, which percentage shall increase by .25% per
quarter.
"Assignee" has the meaning assigned to it in Section 15.8(b).
"Assigning Bank" has the meaning assigned to it in Section
15.8(b).
"Assignment and Acceptance" means an assignment and acceptance
entered into by a Bank and its assignee and accepted by the Agent
pursuant to Section 15.8, in substantially the form of Exhibit "G"
hereto.
"Bank" means each bank or other lending institution that is or
that may from time to time become a signatory hereto, any successor or
assignee thereof and solely for the purposes of the Security
Documents, any Person holding Swap Obligations of the Borrower that
was previously a signatory to this Agreement.
"Base Rate" means, for any day, a rate per annum (rounded
upwards, if necessary, to the next 1/16 of 1%) equal to the greater of
(a) the Prime Rate in effect on such day, or (b) the Federal Funds
Effective Rate in effect on such day plus 1/2 of 1%. For purposes
hereof: "Prime Rate" shall mean the rate of interest per annum
publicly announced from time to time by the Agent as its prime rate in
effect at its Principal Office; and "Federal Funds Effective Rate"
shall mean, for any day, the weighted average of the rates on
overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published on the
next succeeding Business Day by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day which is a Business
Day, the average of the quotations for the day of such transactions
received by the Agent from three federal funds brokers of recognized
standing selected by it. If for any reason the Agent determines (which
determination shall be conclusive absent manifest error) that it is
unable to ascertain the Federal Funds Effective Rate, for any reason,
including the inability or failure of the Agent to obtain sufficient
quotations in accordance with the terms hereof, the Base Rate shall be
determined without regard to clause (b) of the first sentence of this
definition, as appropriate, until the circumstances giving rise to
such inability no longer exist. Any change in the Base Rate due to a
change in the Prime Rate or the Federal Funds Effective Rate shall be
effective on the effective day of such change in the Prime Rate or the
Federal Funds Effective Rate, respectively.
CREDIT AGREEMENT - Page 3
<PAGE>
"Base Rate Loans" means Loans the interest rates on which are
determined on the basis of the rates referred to in the definition of
"Base Rate" in this Section 1.1.
"Beneficial Owner" shall be determined in accordance with Rules
13d-3 and 13d-5 promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended and as it may be
amended from time to time, or any successor provision thereto, except
that a Person shall be deemed to have "beneficial ownership" of all
shares that such Person has the right to acquire, whether such right
is exercisable immediately or only after the passage of time.
"Borrower Pledge Agreement" means the Pledge Agreement of the
Borrower in favor of the Agent for the benefit of itself, the
Co-Agent, the Banks and the Issuing Banks, in substantially the form
of Exhibit "D-1" hereto, as the same may be amended, supplemented, or
modified.
"Borrowing Base" means an amount of indebtedness which can be
adequately supported by the value of oil and gas reserves and assets,
contracts and throughput attributable to the Mortgaged Properties
owned by Borrower and its Subsidiaries in which the Agent holds a
perfected, first priority Lien, the values of which shall be
determined and redetermined by the Banks, in the exercise of their
sole discretion, in accordance with the terms hereof and their
customary practices and standards for the valuation of similar
property. The initial Borrowing Base shall be $40,000,000.
"Borrowing Base Deficiency" means as of any date, that the
aggregate outstanding Revolving Credit Loans plus the Letter of Credit
Liabilities exceed the Borrowing Base as determined by the Banks
pursuant to Section 2.8 and as reduced from time to time pursuant to
Sections 2.8(c) and 5.5(b).
"Borrowing Base Deficiency Rate" means, the lesser of (a) the
Maximum Rate, or (b) the Applicable Rate in effect from day to day,
plus two percent.
"Borrowing Base Reduction Amount" means (a) prior to May 1, 1997,
$1,500,000, and (b) commencing on May 1, 1997 and thereafter,
$1,250,000.
"Business Day" means (a) a day other than Saturday, Sunday or day
on which commercial banks in Dallas or Houston, Texas are not
authorized or required to close, and, (b) with respect to all
borrowings, payments, Conversions, Continuations, Interest Periods,
and notices in connection with Eurodollar Loans, any day which is a
Business Day described in clause (a) above and which is also a day on
which dealings in Dollar deposits are carried out in the London
interbank market.
"Capital Lease Obligations" means, as to any Person, the
obligations of such Person to pay rent or other amounts under a lease
of (or other agreement conveying the right to use) real and/or
personal property, which obligations are required to be classified and
accounted for as a capital lease on a balance sheet of such Person
under GAAP. For
CREDIT AGREEMENT - Page 4
<PAGE>
purposes of this Agreement, the amount of such Capital Lease
Obligations shall be the capitalized amount thereof, determined in
accordance with GAAP.
"Change in Control" shall mean an occurrence where (a) any
Person, or any Persons acting together in a manner which would
constitute a "group" (a "Group") for purposes of Section 13(d) of the
Securities Exchange Act of 1934, as amended and as it may be amended
from time to time, or any successor provision thereto, together with
any Affiliates thereof, (i) become the Beneficial Owners of capital
stock of the Borrower through a purchase, merger or other acquisition
transaction, entitling such Person or Persons and its or their
Affiliates to exercise more than 50% of the total voting power of all
classes of the Borrower's capital stock entitled to vote generally in
the election of directors or (ii) shall succeed in having sufficient
of its or their nominees who are not supported by a majority of the
then current board of directors of the Borrower elected to the board
of directors of the Borrower such that such nominees, when added to
any existing directors remaining on the board of directors of the
Borrower after such election who are Affiliates of or acting in
concert with any such Persons, shall constitute a majority of the
board of directors of the Borrower, (b) a plan is adopted relating to
the liquidation or dissolution of the Borrower, (c) the Borrower shall
consolidate with or merge into any other Person or convey, transfer or
lease its properties and assets substantially as an entirety to any
Person other than a Subsidiary, or any other Person shall consolidate
with or merge into the Borrower (other than, in the case of this
clause (c), pursuant to any consolidation or merger where Persons who
are Beneficial Owners of the Borrower's capital stock entitled to vote
generally in the election of directors immediately prior thereto
become the Beneficial Owners of shares of capital stock of the
surviving corporation entitling such Persons to exercise more than 50%
of the total voting power of all classes of such surviving
corporation's capital stock entitled to vote generally in the election
of directors or persons holding similar positions), (d) Gary C. Evans
shall fail to own 10% or more of the outstanding capital stock of
Borrower entitling him to exercise at least 10% of the total voting
power of all classes of the Borrower's capital stock entitled to vote
generally in the election of directors, or (e) a material change in
the management of the Borrower shall occur. Without limiting the
foregoing, a material change in management of the Borrower shall be
deemed to have occurred if Gary C. Evans ceases to be actively
involved in the day to day management of the Borrower.
"Closing Date" means the date on which the closing of the loan
transactions contemplated by this Agreement occurs.
"Co-Agent Fee Letter" means the letter agreement dated June 27,
1996, between the Co-Agent and the Borrower.
"Code" means the Internal Revenue Code of 1986, as amended, and
the regulations promulgated and rulings issued thereunder.
"Collateral" has the meaning specified in Section 7.1.
CREDIT AGREEMENT - Page 5
<PAGE>
"Commitments" means, as to each Bank, its Revolving Credit
Commitment and its Term Loan Commitment.
"Consolidated Current Assets" means, at any particular time, all
amounts which in conformity with GAAP, would be included as current
assets on a consolidated balance sheet of the Borrower.
"Consolidated Current Liabilities" means, at any particular time,
all amounts which, in conformity with GAAP, would be included as
liabilities on a consolidated balance sheet of the Borrower; provided,
however, that the current portion of long-term Debt shall be excluded
from the calculation of current liabilities.
"Consolidated EBITDA" means, for any period, the sum of the
following for the Borrower determined on a consolidated basis in
accordance with GAAP and without duplication: (i) Consolidated Net
Income for such period before provision for income taxes, plus (ii)
depreciation, depletion, amortization and other non-cash charges,
which in determining Consolidated Net Income for such period were
deducted from gross income, plus (iii) Interest Expense for such
period.
"Consolidated Interest Coverage Ratio" means, at any particular
time, the ratio of (a) Consolidated EBITDA to (b) Interest Expense.
"Consolidated Net Income" means, for any period, the consolidated
net income of Borrower and its Subsidiaries for such period determined
in accordance with GAAP provided that there shall be excluded
therefrom: (a) any net income (or net loss) of any Person in which
Borrower has an ownership interest other than the Subsidiaries, except
to the extent that any such income has actually been received by the
Borrower in the form of cash dividends or similar distributions; (b)
any net gains on the sale or other disposition, not in the ordinary
course of business, of investments and other capital assets, provided
that there shall also be excluded any related charges for taxes
thereon and other costs associated with the sale or other disposition
thereof; and (c) any net gain arising from the collection of proceeds
of any insurance policy.
"Consolidated Net Worth" means, at any particular time, all
amounts which, in conformity with GAAP, would be included as
stockholders' equity on a consolidated balance sheet of the Borrower.
"Consolidated Tangible Net Worth" means, at any particular time,
all amounts which, in conformity with GAAP, would be included as
Consolidated Net Worth; provided, however, there shall be excluded
therefrom: (a) any amount at which shares of capital stock of the
Borrower appear as an asset on the Borrower's balance sheet, (b)
goodwill, including any amounts, however designated, that represent
the excess of the purchase price paid for assets or stock over the
value assigned thereto, (c) patents, trademarks, trade names, and
copyrights, (d) deferred expenses (excluding bank related fees and
expenses), (e) loans and advances, other than travel and expense
related advances to any stockholder, director, officer, or employee of
the Borrower or any Affiliate of the
CREDIT AGREEMENT - Page 6
<PAGE>
Borrower not made in the ordinary course of business, and (f) all
other assets which are properly classified as intangible assets.
"Contingent Liabilities" means, as applied to any Person, those
direct or indirect liabilities of that Person with respect to any
Debt, lease, dividend, letter of credit or other obligation (the
"primary obligations") of another Person (the "primary obligor"),
including, without limitation, any obligation of such Person, whether
or not contingent, (a) to purchase, repurchase or otherwise acquire
such primary obligations or any property constituting direct or
indirect security therefor, or (b) to advance or provide funds (i) for
the payment or discharge of any such primary obligation, or (ii) to
maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency or any balance sheet
item, level of income or financial condition of the primary
obligation, or (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of
such primary obligation, or (d) otherwise to assure or hold harmless
the owner of any such primary obligation against loss in respect
thereof. The amount of any Contingent Liabilities shall be deemed to
be an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Contingent Liabilities are made
or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by the Borrower in good
faith.
"Continue," "Continuation," and "Continued" shall refer to the
continuation pursuant to Section 5.2 of a Eurodollar Loan as a
Eurodollar Loan from one Interest Period to the next Interest Period.
"Convert," "Conversion," and "Converted" shall refer to a
conversion pursuant to Section 5.2 or Article VI of one Type of Loan
into another Type of Loan.
"Current Ratio" means, at any particular time, the ratio of
Consolidated Current Assets to Consolidated Current Liabilities.
"Debt" means as to any Person at any time (without duplication):
(a) all obligations of such Person for borrowed money, (b) all
obligations of such Person evidenced by bonds, notes, debentures, or
other similar instruments, (c) all obligations of such Person to pay
the deferred purchase price of property or services, except trade
accounts payable of such Person arising in the ordinary course of
business that are not past due by more than 90 days, (d) all Capital
Lease Obligations of such Person, (e) all obligations secured by a
Lien existing on property owned by such Person, whether or not the
obligations secured thereby have been assumed by such Person or are
non-recourse to the credit of such Person, (f) all Contingent
Liabilities and all reimbursement obligations of such Person (whether
contingent or otherwise) in respect of letters of credit, bankers'
acceptances, surety or other bonds and similar instruments, and (g)
all liabilities of such Person in respect of unfunded vested benefits
under any Plan.
"Default" means an Event of Default or the occurrence of an event
or condition which with notice or lapse of time or both would become
an Event of Default.
CREDIT AGREEMENT - Page 7
<PAGE>
"Default Rate" means the lesser of (i) the Maximum Rate, or (ii)
the sum of the Applicable Revolving Rate or Applicable Term Rate, as
the case may be, in effect from day to day, plus two percent.
"Determination Date" means each January 1, April 1, July 1 and
October 1 of each year, commencing October 1, 1996.
"Dollars" and "$" mean lawful money of the United States of
America.
"Eligible Assignee" means any commercial bank, savings and loan
association, savings bank, finance company, insurance company, pension
fund, mutual fund, or other financial institution (whether a
corporation, partnership, or other entity) approved by the Agent,
which approval shall not be unreasonably withheld or delayed, and
unless an Event of Default has occurred and is continuing, reasonably
approved by Borrower to the extent required in Section 15.8, such
approval by Borrower not to be unreasonably withheld or delayed.
"Engineering Reports" shall have the meaning specified in
subsection 2.8(a).
"Environmental Laws" means any and all federal, state, and local
laws, regulations, and requirements pertaining to health, safety, or
the environment, including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. ss. 9601 et seq., the Resource Conservation and Recovery Act of
1976, 42 U.S.C. ss. 6901 et seq., the Occupational Safety and Health
Act, 29 U.S.C. ss. 651 et seq., the Clean Air Act, 42 U.S.C. ss. 7401
et seq., the Clean Water Act, 33 U.S.C. ss. 1251 et seq., and the
Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq., as such
laws, regulations, and requirements may be amended or supplemented
from time to time.
"Environmental Liabilities" means, as to any Person, all
liabilities, obligations, responsibilities, Remedial Actions, losses,
damages, punitive damages, consequential damages, treble damages,
costs, and expenses (including, without limitation, all reasonable
fees, disbursements and expenses of counsel, expert and consulting
fees and costs of investigation and feasibility studies), fines,
penalties, sanctions, and interest incurred as a result of any claim
or demand, by any Person, whether based in contract, tort, implied or
express warranty, strict liability, criminal or civil statute,
including any Environmental Law, permit, order or agreement with any
Governmental Authority or other Person, arising from environmental,
health or safety conditions or the Release or threatened Release of a
Hazardous Material into the environment, resulting from the past,
present, or future operations of such Person or its Affiliates.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations and published
interpretations thereunder.
"ERISA Affiliate" means any corporation or trade or business
which is a member of the same controlled group of corporations (within
the meaning of Section 414(b) of the
CREDIT AGREEMENT - Page 8
<PAGE>
Code) as the Borrower or is under common control (within the meaning
of Section 414(c) of the Code) with the Borrower.
"Eurodollar Loans" means Loans the interest rates on which are
determined on the basis of the rates referred to in the definition of
"Adjusted Eurodollar Rate" in this Section 1.1.
"Eurodollar Rate" means, for any Eurodollar Loan for any Interest
Period therefor, the rate per annum (rounded upwards, if necessary, to
the nearest 1/16 of 1%) at which the Reference Bank is offered Dollar
deposits at or about 10:00 A.M., New York City time, two Business Days
prior to the first day of such Interest Period in the interbank
eurodollar market where the eurodollar and foreign currency and
exchange operations in respect of its Eurodollar Loans are then being
conducted for delivery on the first day of such Interest Period for a
number of days comprised therein and in an amount comparable to the
principal amount of the Eurodollar Loan to which such Interest Period
relates.
"Event of Default" has the meaning specified in Section 13.1.
"Excluded Subsidiaries" means Cushing Disposal, Inc. and Hunter
Butcher International Limited Liability Company.
"Federal Funds Rate" means, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to
the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by
Federal funds brokers on such day, as published by the Federal Reserve
Bank of New York on the Business Day next succeeding such day,
provided that (a) if the day for which such rate is to be determined
is not a Business Day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next preceding Business Day as
so published on the next succeeding Business Day, and (b) if such rate
is not so published on such next succeeding Business Day, the Federal
Funds Rate for any day shall be the average rate charged to Wells
Fargo on such day on such transactions as determined by the Agent.
"GAAP" means generally accepted accounting principles, applied on
a consistent basis, as set forth in Opinions of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and/or in statements of the Financial Accounting Standards
Board and/or their respective successors and which are applicable in
the circumstances as of the date in question. Accounting principles
are applied on a "consistent basis" when the accounting principles
applied in a current period are comparable in all material respects to
those accounting principles applied in a preceding period.
"Gas Gathering Systems" means those certain gas gathering systems
consisting of all equipment, assets, rights-of-way, surface leases,
contracts and related assets more particularly described on Schedule
1.1 attached hereto.
CREDIT AGREEMENT - Page 9
<PAGE>
"Governmental Authority" means any nation or government, any
state or political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory, or administrative
functions of or pertaining to government.
"Guarantor" means each present and future Subsidiary (other than
the Excluded Subsidiaries) of Borrower.
"Hazardous Material" means any substance, product, waste,
pollutant, material, chemical, contaminant, constituent, or other
material which is or becomes listed, regulated, or addressed under any
Environmental Law, including, without limitation, asbestos, petroleum,
and polychlorinated biphenyls.
"Hydrocarbons" means all oil, gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, carbon dioxide, liquid
hydrocarbons, gaseous hydrocarbons, and all other minerals, and all
products obtained, refined or processed therefrom.
"Interest Expense" means, for any period, all interest on Debt
(including the interest portion of payments under Capital Lease
Obligations and any capitalized interest) of Borrower and its
Subsidiaries (determined on a consolidated basis) paid or accrued
during such period, provided that there shall be added to "Interest
Expense" any fees or commissions payable in connection with any
letters of credit during such period.
"Interest Period" means, with respect to any Eurodollar Loan,
each period commencing on the date such Loan is made or Converted from
a Base Rate Loan or, in the case of each subsequent, successive
Interest Period applicable to a Eurodollar Loan, the last day of the
next preceding Interest Period with respect to such Loan, and ending
on the numerically corresponding day in the first, second or third
calendar month thereafter, as the Borrower may select as provided in
Section 5.1 or 5.2 hereof, except that each such Interest Period which
commences on the last Business Day of a calendar month (or on any day
for which there is no numerically corresponding day in the appropriate
subsequent calendar month) shall end on the last Business Day of the
appropriate subsequent calendar month.
Notwithstanding the foregoing: (a) each Interest Period which would
otherwise end on a day which is not a Business Day shall end on the
next succeeding Business Day (or, if such succeeding Business Day
falls in the next succeeding calendar month, on the next preceding
Business Day); (b) any Interest Period which would otherwise extend
beyond the Revolving Credit Termination Date shall end on the
Revolving Credit Termination Date; (c) no more than six Interest
Periods for Eurodollar Loans shall be in effect at the same time; (d)
no Interest Period for any Eurodollar Loans shall have a duration of
less than one month and, if the Interest Period for any Eurodollar
Loans would otherwise be a shorter period, Eurodollar Loans shall not
be available hereunder; and (e) no Interest Period may extend beyond a
principal repayment date unless, after giving effect thereto, the
aggregate principal amount of the Eurodollar Loans having Interest
Periods that end after such principal payment date shall be equal to
or less than the Loans to be outstanding hereunder after such
principal payment date.
CREDIT AGREEMENT - Page 10
<PAGE>
"Issuing Bank" means, with respect to any Letter of Credit, Wells
Fargo or any of its Affiliates or, with the approval of the Agent, any
other Bank which chooses to be an Issuing Bank hereunder, in its
capacity as issuer of each Letter of Credit, and any successor Issuing
Bank appointed pursuant to the terms of Section 4.9.
"L/C Application" has the meaning specified in Section 4.1.
"L/C Documents" has the meaning specified in Section 4.1.
"LC Participation" means, with respect to any Bank at any time,
the amount of the participating interest held by such Bank in respect
of a Letter of Credit.
"Letter of Credit" means any standby letter of credit issued by
an Issuing Bank for the account of the Borrower pursuant to Article
IV.
"Letter of Credit Liabilities" means, at any time, the aggregate
face amounts of all outstanding Letters of Credit.
"Letter of Credit Request Form" means a certificate, in
substantially the form of Exhibit "C" hereto, properly completed and
signed by the Borrower requesting issuance of a Letter of Credit.
"Lien" means any lien, mortgage, security interest, tax lien,
financing statement, pledge, charge, hypothecation, assignment,
preference, priority, or other encumbrance of any kind or nature
whatsoever (including, without limitation, any conditional sale or
title retention agreement), whether arising by contract, operation of
law, or otherwise.
"Loan Documents" means this Agreement and all promissory notes,
security agreements, pledge agreements, deeds of trust, mortgages, fee
letters, assignments, guaranties, letters of credit, letter of credit
applications and other instruments, documents, and agreements executed
and delivered pursuant to or in connection with this Agreement, as
such instruments, documents, and agreements may be amended, modified,
renewed, extended, or supplemented from time to time.
"Loan Request Form" means a certificate, in substantially the
form of Exhibit "B" hereto, properly completed and signed by the
Borrower requesting a Loan.
"Loans" means the Revolving Credit Loans and the Term Loans.
"Majority Banks" means at any time while no Loans or Letter of
Credit Liabilities are outstanding, Banks having at least 50% of the
aggregate amount of the Commitments and, at any time while Loans or
Letter of Credit Liabilities are outstanding, Banks holding at least
50% of the outstanding aggregate principal amount of the Loans and LC
Participations.
CREDIT AGREEMENT - Page 11
<PAGE>
"Material Subsidiary" means each Subsidiary that is designated as
a "Material Subsidiary" on Schedule 9.14 attached hereto and any
direct or indirect Subsidiary of Borrower that the Agent hereafter
designates by written notice to the Borrower as a "Material
Subsidiary."
"Maximum Rate" means, at any time and with respect to any Bank,
the maximum rate of interest under applicable law that such Bank may
charge the Borrower. The Maximum Rate shall be calculated in a manner
that takes into account any and all fees, payments, and other charges
in respect of the Loan Documents that constitute interest under
applicable law. Each change in any interest rate provided for herein
based upon the Maximum Rate resulting from a change in the Maximum
Rate shall take effect without notice to the Borrower at the time of
such change in the Maximum Rate. For purposes of determining the
Maximum Rate under Texas law, the applicable rate ceiling shall be the
indicated rate ceiling described in, and computed in accordance with,
Article 5069-1.04, Vernon's Texas Civil Statutes.
"Mortgaged Properties" means all right, title and interest of
Borrower and its Subsidiaries in and to (i) the Oil and Gas Properties
identified on Schedule 1.1(a) hereof and such other Oil and Gas
Properties as may from time to time become subject to the terms of
this Agreement or any Security Document; and (ii) the Gas Gathering
Systems and such other assets and properties as may from time to time
become subject to this Agreement or any Security Document.
"Multiemployer Plan" means a multiemployer plan defined as such
in Section 3(37) of ERISA to which contributions have been made by the
Borrower or any ERISA Affiliate and which is covered by Title IV of
ERISA.
"Net Cash Proceeds" means in connection with any issuance by the
Borrower or any of its Subsidiaries of equity or debt securities or
instruments or the incurrence of other loans other than as permitted
by Section 11.1, the cash proceeds received from such issuance, net of
all reasonable investment banking fees, legal fees, accountants' fees,
underwriting discounts and commissions and other customary fees and
expenses, actually incurred and satisfactorily documented in
connection therewith.
"New Properties" shall have the meaning specified in subsection
5.5(d) hereof.
"Notes" means the Revolving Credit Notes and the Term Notes.
"Obligated Party" means any Person who is or becomes party to any
agreement that guarantees or secures payment and performance of the
Obligations or any part thereof.
"Obligations" means all (a) Swap Obligations, and (b)
obligations, indebtedness, and liabilities of the Borrower to the
Agent, the Co-Agent, the Issuing Banks and the Banks, or any of them,
arising pursuant to any of the Loan Documents, now existing or
hereafter arising, whether direct, indirect, related, unrelated,
fixed, contingent, liquidated,
CREDIT AGREEMENT - Page 12
<PAGE>
unliquidated, joint, several, or joint and several, including, without
limitation, the obligations, indebtedness, and liabilities of the
Borrower under this Agreement and the other Loan Documents (including,
without limitation, all of Borrower's contingent reimbursement
obligations in respect of Letters of Credit), and all interest
accruing thereon and all attorneys' fees and other expenses incurred
in the enforcement or collection thereof.
"Oil and Gas Properties" means and includes, collectively, (a)
all Hydrocarbons prior to severance, and all leases, licenses and
other contracts or arrangements granting interests in Hydrocarbons or
proceeds of Hydrocarbons prior to severance, including without
limitation all fee mineral interests, oil, gas and other minerals,
leases, subleases, farmouts, royalties, overriding royalties, net
profits interests, production payments and similar mineral interests,
and all unsevered oil, gas, and other minerals in, under or
attributable to any of the foregoing properties and interests, (b) all
leases, licenses and other contracts or arrangements granting rights
to explore for Hydrocarbons on or under partially or completely
undeveloped acreage, and (c) all oil wells, gas wells, injection wells
and other wells and all production therefrom.
"Operating Lease" means any lease (other than a lease
constituting a Capital Lease Obligation) of real or personal property.
"Payment Notice" means a request for payment given pursuant to
Section 5.5 hereof.
"Payor" has the meaning assigned to it in Section 5.8.
"PBGC" means the Pension Benefit Guaranty Corporation or any
entity succeeding to all or any of its functions under ERISA.
"Permitted Debt" has the meaning specified in Section 11.1.
"Permitted Liens" has the meaning specified in Section 11.2.
"Person" means any individual, corporation, business trust,
association, company, partnership, joint venture, Governmental
Authority, or other entity.
"Plan" means any employee benefit or other plan established or
maintained by the Borrower or any ERISA Affiliate and which is covered
by Title IV of ERISA.
"Principal Office" means the principal office of the Agent,
presently located at 1000 Louisiana, Houston, Texas 77002.
"Prohibited Transaction" means any transaction set forth in
Section 406 of ERISA or Section 4975 of the Code.
CREDIT AGREEMENT - Page 13
<PAGE>
"Quarterly Payment Date" means the last day of each March, June,
September and December of each year, the first of which shall be
September 30, 1996.
"Reference Bank" means Wells Fargo.
"Register" has the meaning assigned to it in Section 15.8(d).
"Regulation D" means Regulation D of the Board of Governors of
the Federal Reserve System as the same may be amended or supplemented
from time to time.
"Regulatory Change" means, with respect to any Bank, any change
after the date of this Agreement in United States federal, state, or
foreign laws or regulations (including Regulation D) or the adoption
or making after such date of any interpretations, directives, or
requests applying to a class of banks including such Bank of or under
any United States federal or state, or any foreign laws or regulations
(whether or not having the force of law) by any court or governmental
or monetary authority charged with the interpretation or
administration thereof.
"Release" means, as to any Person, any release, spill, emission,
leaking, pumping, injection, deposit, disposal, disbursement,
leaching, or migration of Hazardous Materials into the indoor or
outdoor environment or into or out of property owned by such Person,
including, without limitation, the movement of Hazardous Materials
through or in the air, soil, surface water, ground water, or property.
"Remedial Action" means all actions required to (a) clean up,
remove, treat, or otherwise address Hazardous Materials in the indoor
or outdoor environment, (b) prevent the Release or threat of Release
or minimize the further Release of Hazardous Materials so that they do
not migrate or endanger or threaten to endanger public health or
welfare or the indoor or outdoor environment, or (c) perform
pre-remedial studies and investigations and post-remedial monitoring
and care.
"Reportable Event" means any of the events set forth in Section
4043 of ERISA.
"Required Banks" means at any time while no Loans or Letter of
Credit Liabilities are outstanding, Banks having at least 66-2/3% of
the aggregate amount of the Commitments and, at any time while Loans
or Letter of Credit Liabilities are outstanding, Banks holding at
least 66-2/3% of the outstanding aggregate principal amount of the
Loans and LC Participations.
"Required Payment" has the meaning assigned to it in Section 5.8.
"Reserve Requirement" means, for any Eurodollar Loan for any
Interest Period therefor, the average maximum rate at which reserves
(including any marginal, supplemental or emergency reserves) are
required to be maintained during such Interest Period under Regulation
D by member banks of the Federal Reserve System in New York City with
deposits exceeding $1,000,000,000 against "Eurocurrency Liabilities"
as such
CREDIT AGREEMENT - Page 14
<PAGE>
term is used in Regulation D. Without limiting the effect of the
foregoing, the Reserve Requirement shall reflect any other reserves
required to be maintained by such member banks by reason of any
Regulatory Change against (i) any category of liabilities which
includes deposits by reference to which the Adjusted Eurodollar Rate
is to be determined, or (ii) any category of extensions of credit or
other assets which include Eurodollar Loans.
"Revolving Credit Commitment" means, as to each Bank, the
obligation of such Bank to make Revolving Credit Loans and purchase
participations in Letters of Credit pursuant to Section 4.1 in an
aggregate principal amount at any one time outstanding up to but not
exceeding the amount set forth opposite the name of such Bank on the
signature pages hereof under the heading "Revolving Credit
Commitment," or in the Assignment and Acceptance pursuant to which
such Bank assumed its Revolving Credit Commitment, as applicable as
the same may be (a) reduced pursuant to Section 2.7 or terminated
pursuant to Section 2.7 or 13.2 and (b) reduced or increased from time
to time pursuant to assignments by or to such Bank pursuant to Section
15.8.
"Revolving Credit Loan" means, as to each Bank, the loans to be
made by such Bank pursuant to Section 2.1.
"Revolving Credit Note" means a promissory note of the Borrower
payable to the order of a Bank, in substantially the form of Exhibit
"A-1" hereto, and all extensions, renewals, and modifications thereof
and all substitutions therefor.
"Revolving Credit Termination Date" means 11:00 A.M. Houston,
Texas time on June 30, 2001, or such earlier date and time on which
the Revolving Credit Commitments terminate as provided in this
Agreement.
"RICO" means the Racketeer Influenced and Corrupt Organization
Act of 1970, as amended from time to time.
"Security Documents" means all mortgages, deeds of trust,
security agreements, guaranties, assignments of production and
financing statements or such other instruments securing or ensuring
payment and performance of the Obligations or any part thereof, as the
same may be amended, supplemented, or modified from time to time.
"Subsidiary" means any corporation, partnership, joint venture,
business trust or other legal entity in which the Borrower, either
directly or indirectly through one or more intermediaries, owns or
holds beneficial or record ownership of a majority of the outstanding
voting securities or equity interests therein.
"Subsidiary Guaranty Agreement" means the Guaranty Agreement of
the Subsidiaries (other than the Excluded Subsidiaries) in favor of
the Agent for the benefit of itself, the Co-Agent, the Banks and the
Issuing Banks, in substantially the form of Exhibit "E" hereto, as the
same may be amended, supplemented, or modified.
CREDIT AGREEMENT - Page 15
<PAGE>
"Subsidiary Pledge Agreement" means the Pledge Agreement of the
Subsidiaries (other than the Excluded Subsidiaries) in favor of the
Agent for the benefit of itself, the Co-Agent, the Banks and the
Issuing Banks, in substantially the form of Exhibit "D-2" hereto, as
the same may be amended, supplemented, or modified.
"Swap Obligations" shall mean any indebtedness, obligations and
liabilities owed by the Borrower to any Bank arising under financial
interest swap agreements entered into by Borrower to lock in interest
rates payable under this Agreement or commodity swap agreements or
similar contractual arrangements intended to hedge market price
fluctuations and interest rates applicable to this Agreement or crude
oil, natural gas or other Hydrocarbons; provided that (i) no such
commodity swap agreement shall be entered into which would require
Borrower to deliver, or make cash settlement payments based upon
quantities of Hydrocarbons which, in the aggregate for all such
agreements, would exceed 75% of the estimated production during the
term of such agreements from that portion of the Mortgaged Properties
consisting of proved developed producing reserves, and (ii) such
contracts shall not have a maturity exceeding two years, without the
prior consent of the Required Banks.
"Term Loan" means, as to each Bank, the term loan to be made by
such Bank pursuant to Section 3.1.
"Term Loan Commitments" means, as to each Bank, the obligation of
such Bank to make a Term Loan hereunder in the principal amount set
forth opposite the name of such Bank on the signature pages hereto
under the heading "Term Loan Commitment," or on the signature pages of
an Assignment and Acceptance, as applicable.
"Term Note" means a promissory note of the Borrower payable to
the order of a Bank, in substantially the form of Exhibit "A-2"
hereto, and all extensions, renewals, and modifications thereof and
all substitutions therefor.
"Type" means any type of Loan (i.e., Base Rate Loan or Eurodollar
Loan).
"UCC" means the Uniform Commercial Code as in effect in the State
of Texas.
"Wells Fargo" means Wells Fargo Bank, National Association.
Section 1.2 Other Definitional Provisions. All definitions contained in
this Agreement are equally applicable to the singular and plural forms of the
terms defined. The words "hereof," "herein," and "hereunder" and words of
similar import referring to this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. Unless otherwise
specified, all Article and Section references pertain to this Agreement. All
accounting terms not specifically defined herein shall be construed in
accordance with GAAP. Terms used herein that are defined in the UCC, unless
otherwise defined herein, shall have the meanings specified in the UCC.
CREDIT AGREEMENT - Page 16
<PAGE>
ARTICLE II
Revolving Credit Loans
Section 2.1 Revolving Credit Commitments. Subject to the terms and
conditions of this Agreement, each Bank severally agrees to make one or more
Revolving Credit Loans to the Borrower from time to time from the date hereof to
and including the Revolving Credit Termination Date in an aggregate principal
amount at any time outstanding up to but not exceeding the amount of such Bank's
Revolving Credit Commitment as then in effect, provided that the aggregate
amount of all Revolving Credit Loans at any time outstanding shall not exceed
the lesser of (i) the aggregate amount of the Revolving Credit Commitments minus
the outstanding Letter of Credit Liabilities or (ii) the Borrowing Base (as
reduced from time to time by the Borrowing Base Reduction Amount or otherwise
pursuant to the terms of this Agreement) minus the outstanding Letter of Credit
Liabilities. Subject to the foregoing limitations, and the other terms and
provisions of this Agreement, the Borrower may borrow, repay, and reborrow
hereunder the amount of the Revolving Credit Commitments by means of Base Rate
Loans and Eurodollar Loans and, until the Revolving Credit Termination Date, the
Borrower may Convert Loans of one Type into Loans of another Type. Loans of each
Type made by each Bank shall be made and maintained at such Bank's Applicable
Lending Office for Loans of such Type.
Section 2.2 Revolving Credit Notes. The obligation of the Borrower to
repay each Bank for Revolving Credit Loans made by such Bank and interest
thereon shall be evidenced by a Revolving Credit Note executed by the Borrower,
payable to the order of such Bank, in the principal amount of such Bank's
Revolving Credit Commitment, and dated the date hereof or such later date as may
be required with respect to transactions contemplated by Section 15.8.
Section 2.3 Repayment of Revolving Credit Loans. The Borrower shall
repay the unpaid principal amount of all Revolving Credit Loans on the Revolving
Credit Termination Date.
Section 2.4 Interest. The unpaid principal amount of the Revolving
Credit Loans shall bear interest at a varying rate per annum equal from day to
day to the lesser of (a) the Maximum Rate, or (b) the Applicable Revolving Rate.
If at any time the Applicable Revolving Rate for any Revolving Credit Loan shall
exceed the Maximum Rate, thereby causing the interest accruing on such Revolving
Credit Loan to be limited to the Maximum Rate, then any subsequent reduction in
the Applicable Revolving Rate for such Revolving Credit Loan shall not reduce
the rate of interest on such Revolving Credit Loan below the Maximum Rate until
the aggregate amount of interest accrued on such Revolving Credit Loan equals
the aggregate amount of interest which would have accrued on such Revolving
Credit Loan if the Applicable Revolving Rate had at all times been in effect.
Accrued and unpaid interest on the Revolving Credit Loans shall be due and
payable as follows:
CREDIT AGREEMENT - Page 17
<PAGE>
(i) in the case of Base Rate Loans, on each Quarterly Payment
Date and on the Revolving Credit Termination Date;
(ii) in the case of each Eurodollar Loan, on the last day of the
Interest Period with respect thereto or in the case of any Interest
Period that exceeds three months, on the last day of the third month
of the Interest Period and on the last day of the Interest Period with
respect thereto;
(iii) upon the payment or prepayment of any Revolving Credit Loan
or the Conversion of any Loan to a Loan of another Type (but only on
the principal amount so paid, prepaid, or Converted); and
(iv) on the Revolving Credit Termination Date.
Notwithstanding the foregoing, any outstanding principal of any Revolving Credit
Loan and (to the fullest extent permitted by law) any other amount payable by
the Borrower under this Agreement or any other Loan Document that is not paid in
full when due (whether at stated maturity, by acceleration, or otherwise) shall
bear interest at the Default Rate for the period from and including the due date
thereof to but excluding the date the same is paid in full. Interest payable at
the Default Rate shall be payable from time to time on demand.
Section 2.5 Use of Proceeds. The proceeds of Revolving Credit Loans
shall be used by the Borrower to refinance outstanding Debt owed to Wells Fargo,
finance oil and gas reserve acquisitions, develop property, support working
capital and for general corporate purposes.
Section 2.6 Commitment Fee. The Borrower agrees to pay to the Agent for
the account of each Bank a commitment fee on the daily average unused portion of
the amount available under such Bank's Revolving Credit Note pursuant to the
Borrowing Base (as reduced from time to time by the applicable Borrowing Base
Reduction Amount or otherwise pursuant to the terms of this Agreement) for the
period from and including the date of this Agreement to and including the
Revolving Credit Termination Date, at the rate of one-half percent per annum
based on a 360 day year and the actual number of days elapsed. Accrued
commitment fee shall be payable in arrears on each Quarterly Payment Date and on
the Revolving Credit Termination Date.
Section 2.7 Reduction or Termination of Revolving Credit Commitments.
The Borrower shall have the right to terminate in whole or reduce in part the
available Borrowing Base or the unused portion of the Revolving Credit
Commitments upon at least three Business Days' prior notice (which notice shall
be irrevocable) to the Agent specifying the effective date thereof, whether a
termination or reduction is being made, and the amount of any partial reduction,
provided, however, the Revolving Credit Commitment shall never be reduced below
an amount equal to the outstanding Letter of Credit Liabilities. Each partial
reduction shall be in the amount of $1,000,000 or an integral multiple thereof
and the Borrower shall simultaneously prepay the amount by which the unpaid
principal amount of the Revolving Credit Loans plus the outstanding Letter of
Credit Liabilities exceeds the lesser of (i) an amount equal to the Borrowing
Base, or (ii) the Revolving Credit Commitments (after giving effect to such
CREDIT AGREEMENT - Page 18
<PAGE>
notice) plus accrued and unpaid interest on the principal amount so prepaid. The
Borrowing Base and/or the Commitments may not be reinstated after they have been
terminated or reduced.
Section 2.8 Borrowing Base.
(a) The Borrowing Base shall be cumulative of all other
limitations contained in this Agreement and the other Loan Documents.
During the period from the Closing Date until the initial Determination
Date, the Borrowing Base shall be $40,000,000. The Borrowing Base shall
be redetermined quarterly on each Determination Date, commencing
October 1, 1996. Upon delivery of the engineering reserve evaluation
reports required by subsections 10.1(l) and (m) (collectively, the
"Engineering Reports") and such other reports, data and supplemental
information as may, from time to time, be reasonably requested by the
Agent and the Banks, together with a certificate from the chief
financial officer of Borrower that, to the best of such officer's
knowledge, after making due inquiry (A) the factual information upon
which such Engineering Reports are based is true and correct, (B) the
certificate identifies the Properties covered by the Engineering
Reports that have not been previously included in any prior Engineering
Report, and (C) no Mortgaged Properties have been sold since the last
Determination Date, on each Determination Date or on such other date as
otherwise permitted hereunder, the Agent shall redetermine the
Borrowing Base in accordance with its customary practices and standards
for loans secured by similar types of property. Within 45 days of its
receipt of the Engineering Reports, the Agent shall provide such
redetermined Borrowing Base in writing to the Banks. Within ten days
after their receipt of such information, the Banks shall give the Agent
written notice of whether the Banks approve of the Agent's proposed
Borrowing Base. If, for any reason, all of the Banks do not approve of
the proposed Borrowing Base, the Agent and the Banks shall consult with
one another to determine the Borrowing Base that will be approved by
all of the Banks. The Borrowing Base established pursuant to this
subsection shall be effective as of the ensuing Determination Date and
shall remain in effect until it is subsequently redetermined pursuant
to this subsection 2.8(a) or subsection 2.8(b) or is adjusted pursuant
to subsection 2.8(c).
(b) In addition to the determinations of the Borrowing Base
required pursuant to subsection 2.8(a), special determinations thereof
may be made for any reason (but not more than once during any twelve
month period by Majority Banks and once by the Borrower unless the
redetermination is being requested by the Borrower in connection with
the repayment of the Term Loan prior to December 31, 1996 in which
case, the Borrower may request two special determinations in a
twelve-month period) at the option of either (i) the Borrower or (ii)
Majority Banks. To request a special determination of the Borrowing
Base, the Person requesting such determination shall provide the Agent
and the Borrower with a written request of such determination. Any such
special determination of the Borrowing Base shall be made by the Banks
in consultation with one another using their customary standards for
oil and gas lending and shall be based upon the most recent Engineering
Reports delivered to the Banks by the Borrower and such other reports
and data as the Banks may reasonably request. The Agent shall notify
the Borrower of the redetermined Borrowing Base within forty-five days
of the Agent's
CREDIT AGREEMENT - Page 19
<PAGE>
receipt of the special determination request and the redetermined
Borrowing Base shall be effective upon such notification.
(c) The Borrowing Base shall automatically reduce by the
Borrowing Base Reduction Amount, effective as of the first day of each
November, February, May and August of each year commencing on November
1, 1996 until and including the Revolving Credit Termination Date.
ARTICLE III
Term Loans
Section 3.1 Commitments. Subject to the terms and conditions of this
Agreement, each Bank severally agrees to make a Term Loan to the Borrower in the
amount of such Bank's Term Loan Commitment in a single advance on or before June
28, 1996.
Section 3.2 Term Notes. The obligation of the Borrower to repay each
Bank for the Term Loan made by such Bank and interest thereon shall be evidenced
by a Term Note executed by the Borrower, payable to the order of such Bank, in
the principal amount of such Bank's Term Loan Commitment, and dated the date
hereof or such later date as may be required with respect to transactions
contemplated by Section 15.8.
Section 3.3 Repayment of Term Loans. The Borrower shall repay the
unpaid principal amount of the Term Loans on December 31, 1996; provided,
however, if the Borrower does not pay the Term Loans in full on or prior to
December 31, 1996, the outstanding principal amount of the Term Loans plus
accrued and unpaid interest thereon shall be due and payable in seven quarterly
installments, each in the principal amount of one-eighth of the aggregate
outstanding principal balance of the Term Loans on December 31, 1996, payable on
the last day of each March, June, September and December commencing on March 31,
1997, until and including September 30, 1998, with a final installment in the
amount of all outstanding principal of the Term Loans due and payable on
December 31, 1998.
Section 3.4 Interest. The unpaid principal amount of the Term Loans
shall bear interest at a varying rate per annum equal from day to day to the
lesser of (a) the Maximum Rate, or (b) the Applicable Term Rate. If at any time
the Applicable Term Rate for any Term Loan shall exceed the Maximum Rate,
thereby causing the interest accruing on such Term Loan to be limited to the
Maximum Rate, then any subsequent reduction in the Applicable Term Rate for such
Term Loan shall not reduce the rate of interest on such Term Loan below the
Maximum Rate until the aggregate amount of interest accrued on such Term Loan
equals the aggregate amount of interest which would have accrued on such Term
Loan if the Applicable Term Rate had at all times been in effect. Accrued and
unpaid interest on the Term Loans shall be due and payable on each Quarterly
Payment Date and on the final maturity date. Notwithstanding the foregoing, any
outstanding principal of any Term Loan and (to the fullest extent permitted by
law) any other amount payable by the Borrower under this Agreement or any other
Loan Document that is not paid in full when due (whether at stated maturity, by
acceleration, or otherwise) shall bear interest at the Default Rate for the
period from and including the due date
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thereof to but excluding the date the same is paid in full. Interest payable at
the Default Rate shall be payable from time to time on demand.
Section 3.5 Use of Proceeds. The proceeds of Term Loans shall be used by
the Borrower to provide short-term financing for the Acquisition.
ARTICLE IV
Letters of Credit
Section 4.1 Letters of Credit. Subject to the terms and conditions of
this Agreement, each Issuing Bank agrees to issue one or more Letters of Credit
for the account of the Borrower from time to time from the date hereof to and
including the Revolving Credit Termination Date; provided, however, that the
outstanding Letter of Credit Liabilities shall not at any time exceed the lesser
of (1) $10,000,000, (2) an amount equal to the aggregate amount of the Revolving
Credit Commitments minus the sum of the outstanding Revolving Credit Loans, or
(3) the Borrowing Base (as reduced from time to time) minus the sum of the
outstanding Revolving Credit Loans. Each Letter of Credit shall have an
expiration date not beyond the Revolving Credit Termination Date, shall be
payable in Dollars, must be satisfactory in form and substance to the applicable
Issuing Bank, and shall be issued pursuant to such documents and instruments
(including, without limitation, such Issuing Bank's standard application and
agreement for issuance of letters of credit as then in effect [each an "L/C
Application"]) as such Issuing Bank may require (collectively, the "L/C
Documents"). No Letter of Credit shall require any payment by the Issuing Bank
to the beneficiary thereunder pursuant to a drawing prior to the third Business
Day following presentment of a draft and any related documents to the Issuing
Bank.
Section 4.2 Participation by Banks. By the issuance of any Letter of
Credit and without any further action on the part of the applicable Issuing Bank
or any of the Banks in respect thereof, each Issuing Bank hereby grants to each
Bank and each Bank hereby irrevocably agrees to acquire from each Issuing Bank a
participation in each such Letter of Credit and the related Letter of Credit
Liabilities, effective upon the issuance thereof without recourse or warranty,
equal to such Bank's pro rata part (based on the Revolving Credit Commitments)
of such Letter of Credit and Letter of Credit Liabilities. Each Issuing Bank
shall provide a copy of each Letter of Credit to each other Bank promptly after
issuance. This agreement to grant and acquire participations is an agreement
between each Issuing Bank and the Banks, and neither Borrower nor any
beneficiary of a Letter of Credit shall be entitled to rely thereon. Borrower
agrees that each Bank purchasing a participation from any Issuing Bank pursuant
to this Section 4.2 may exercise all its rights to payment against Borrower
including the right of setoff, with respect to such participation as fully as if
such Bank were the direct creditor of Borrower in the amount of such
participation.
Section 4.3 Procedure for Issuing Letters of Credit. Each Letter of
Credit shall be issued on at least five Business Days prior notice from the
Borrower to the applicable Issuing Bank (with a copy to the Agent) by means of a
Letter of Credit Request Form describing the transaction proposed to be
supported thereby and specifying (a) the requested date of issuance (which shall
be a Business Day), (b) the face amount of the Letter of Credit, (c) the
expiration
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date of the Letter of Credit, (d) the name and address of the beneficiary and
the account party, and (e) the form of the draft and any other documents
required to be presented at the time of any drawing (such notice to set forth
the exact wording of such documents or to attach copies thereof). Such Issuing
Bank shall notify each Bank of the contents of each such notice on the day such
notice is received by such Issuing Bank if received by 11:00 a.m. Houston, Texas
time on a Business Day and otherwise on the next succeeding Business Day. Upon
fulfillment of the applicable conditions precedent contained in Article VIII,
such Issuing Bank shall make the applicable Letter of Credit available to
Borrower or, if so requested by Borrower, to the beneficiary of the Letter of
Credit.
Section 4.4 Reimbursements; Payments Constitute Revolving Credit Loans.
Each payment by an Issuing Bank pursuant to a drawing under a Letter of Credit
shall constitute and be deemed a Base Rate Loan by each Bank to the Borrower
under such Bank's Revolving Credit Note and this Agreement as of the day and
time such payment is made by such Issuing Bank and in the amount of such Bank's
pro rata share of such payment; provided, however, if the applicable conditions
precedent contained in Section 8.2 are not satisfied on the date such payment is
made, the Borrower shall pay to the Agent for the account of the Issuing Bank,
prior to 11:00 a.m. Houston, Texas time on the Business Day immediately
following the date such payment is made by the Issuing Bank, the amount of such
payment, together with interest thereon at the Base Rate plus the Applicable
Base Rate Margin from the date such payment is made by the Issuing Bank. If the
Borrower fails to reimburse the Issuing Bank for such drawing prior to 11:00
a.m. Houston, Texas time on the Business Day following the date such payment is
made by the Issuing Bank, such amount shall bear interest at the Default Rate
for the period from and including the due date thereof to but excluding the date
the same is paid in full. Promptly on the Business Day immediately following the
date each payment is made by an Issuing Bank pursuant to a drawing under a
Letter of Credit and after receipt of notice from the Issuing Bank of the
Borrower's failure to reimburse the Issuing Bank for such payment and the amount
of such payment, each Bank will make available to the Agent for the account of
the Issuing Bank at the Principal Office in immediately available funds, such
Bank's pro rata share of such payment. Each Bank hereby agrees that its
obligation to participate in each Letter of Credit, and to pay or to reimburse
the Issuing Bank for its participating share of the drafts drawn or amounts
otherwise paid thereunder, is absolute, irrevocable and unconditional and shall
not be affected by any circumstances whatsoever (including, without limitation,
the occurrence or continuance of any Default or Event of Default), and that each
such payment shall be made without offset, abatement, withholding or other
reduction whatsoever.
Section 4.5 Letter of Credit Fee. The Borrower shall pay to the Agent
for the account of the Banks (to be shared ratably) a nonrefundable Letter of
Credit fee payable on the date each Letter of Credit is issued, renewed or
extended in an amount equal to the greater of (i) 1% per annum of the face
amount of such Letter of Credit, for the period during which such Letter of
Credit will remain outstanding, based on a 360 day year and the actual number of
days elapsed, or (ii) $350. A nonrefundable fee in the amount of 1/8% of the
face amount of such Letter of Credit shall be payable by the Borrower to the
applicable Issuing Bank for its own account. In addition to the foregoing fees,
the Borrower shall pay or reimburse the applicable Issuing Bank for such normal
and customary costs and expenses as are incurred or charged by such Issuing
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Bank in issuing, effecting payment under, amending or otherwise administering
any Letter of Credit.
Section 4.6 Obligations Absolute. The obligations of the Borrower under
this Agreement and the other Loan Documents (including without limitation the
obligation of the Borrower to reimburse the Issuing Bank for draws under any
Letter of Credit) shall be absolute, unconditional, and irrevocable, and shall
be performed strictly in accordance with the terms of this Agreement and the
other Loan Documents under all circumstances whatsoever, including without
limitation the following circumstances:
(a) Any lack of validity or enforceability of any Letter of
Credit or any other Loan Document;
(b) Any amendment or waiver of or any consent to departure from
any Loan Document;
(c) The existence of any claim, set-off, counterclaim, defense or
other rights which the Borrower, any Obligated Party, or any other
Person may have at any time against any beneficiary of any Letter of
Credit, the Issuing Bank, or any other Person, whether in connection
with this Agreement or any other Loan Document or any unrelated
transaction;
(d) Any statement, draft, or other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid, or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect whatsoever;
(e) Payment by the Issuing Bank under any Letter of Credit
against presentation of a draft or other document which does not
comply with the terms of such Letter of Credit; or
(f) Any other circumstance or happening whatsoever, whether or
not similar to any of the foregoing.
Section 4.7 Limitation of Liability. The Borrower assumes all risks of
the acts or omissions of any beneficiary of any Letter of Credit with respect to
its use of such Letter of Credit. Neither the Issuing Bank, the Agent, the
Co-Agent, any Bank nor any of their officers or directors shall have any
responsibility or liability to the Borrower or any other Person for: (a) the
failure of any draft to bear any reference or adequate reference to any Letter
of Credit, or the failure of any documents to accompany any draft at
negotiation, or the failure of any Person to surrender or to take up any Letter
of Credit or to send documents apart from drafts as required by the terms of any
Letter of Credit, or the failure of any Person to note the amount of any
instrument on any Letter of Credit, each of which requirements, if contained in
any Letter of Credit itself, it is agreed may be waived by the Issuing Bank, (b)
errors, omissions, interruptions, or delays in transmission or delivery of any
messages, (c) the validity, sufficiency, or genuineness of any draft or other
document, or any endorsement(s) thereon, even if any such draft, document or
endorsement should in fact prove to be in any and all respects invalid,
CREDIT AGREEMENT - Page 23
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insufficient, fraudulent, or forged or any statement therein is untrue or
inaccurate in any respect, (d) the payment by the Issuing Bank to the
beneficiary of any Letter of Credit against presentation of any draft or other
document that does not comply with the terms of the Letter of Credit, or (e) any
other circumstance whatsoever in making or failing to make any payment under a
Letter of Credit. The Issuing Bank may accept documents that appear on their
face to be in order, without responsibility for further investigation,
regardless of any notice or information to the contrary.
Section 4.8 Letter of Credit Documents. Certain additional provisions
regarding the obligations, liabilities, rights, remedies and agreements of the
Borrower and the Issuing Bank relative to the Letters of Credit shall be set
forth in the L/C Documents.
Section 4.9 Replacement of the Issuing Bank. Borrower may, with the
approval of Required Banks, appoint a successor Issuing Bank hereunder upon the
condition precedent that such successor Issuing Bank shall become a party to
this Agreement and expressly agree to be bound by the terms and conditions
contained in this Agreement pertaining to the Issuing Bank. Upon the appointment
of a successor Issuing Bank, the Issuing Bank replaced by such successor Issuing
Bank shall cease to issue Letters of Credit but shall continue to carry out its
obligations hereunder and shall continue to have the benefit of this Agreement
and the other Loan Documents with respect to the outstanding Letters of Credit
issued by it until all such Letters of Credit have expired and any drawings
thereunder have been reimbursed in full.
ARTICLE V
Borrowing Procedure; Payments
Section 5.1 Borrowing Procedure. The Borrower shall give the Agent
notice by means of a Loan Request Form of each requested Loan at least one
Business Day before the requested date of each Base Rate Loan and at least three
Business Days before the requested date of each Eurodollar Loan, specifying: (a)
the requested date of such Loan (which shall be a Business Day), (b) the amount
of such Loan, (c) whether such Loan is a Revolving Credit Loan or a Term Loan
and the Type of the Loan, and (d) in the case of a Eurodollar Loan, the duration
of the Interest Period for such Loan. The Agent at its option may accept
telephonic requests for Loans, provided that such acceptance shall not
constitute a waiver of the Agent's right to delivery of a Loan Request Form in
connection with subsequent Loans. Any telephonic request for a Loan by the
Borrower shall be promptly confirmed by submission of a properly completed Loan
Request Form to the Agent. Each Revolving Credit Loan shall be in a minimum
principal amount of $500,000 or an integral multiple thereof. The aggregate
principal amount of Eurodollar Loans having the same Interest Period shall be at
least equal to $500,000. The Agent shall notify each Bank of the contents of
each such notice. Not later than 12:00 P.M. Houston, Texas time on the date
specified for each Loan hereunder, each Bank will make available to the Agent at
the Principal Office in immediately available funds, for the account of the
Borrower, its pro rata share of each Loan. After the Agent's receipt of such
funds and subject to the other terms and conditions of this Agreement, the Agent
will make each Loan available to the Borrower by depositing the same, in
immediately available funds, in an account of the Borrower (designated by the
Borrower) maintained with the Agent at the Principal Office. All notices
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under this Section shall be irrevocable and shall be given not later than 12:00
P.M. Houston, Texas, time on the day which is not less than the number of
Business Days specified above for such notice.
Section 5.2 Conversions and Continuations. The Borrower shall have the
right from time to time to Convert all or part of a Loan of one Type into a Loan
of another Type or to Continue Eurodollar Loans as Eurodollar Loans by giving
the Agent written notice at least three Business Days before Conversion into a
Base Rate Loan and at least three Business Days before Conversion into or
Continuation of a Eurodollar Loan, specifying: (a) the Conversion or
Continuation date, (b) the amount of the Loan to be Converted or Continued, (c)
in the case of Conversions, the Type of Loan to be Converted into, and (d) in
the case of a Continuation of or Conversion into a Eurodollar Loan, the duration
of the Interest Period applicable thereto; provided that (i) Eurodollar Loans
may only be Converted on the last day of the Interest Period, and (ii) except
for Conversions into Base Rate Loans, no Conversions shall be made while a
Default has occurred and is continuing. The Agent shall promptly notify each
Bank of the contents of each such notice. All notices under this Section shall
be irrevocable and shall be given not later than 11:00 A.M. Houston, Texas time
on the day which is not less than the number of Business Days specified above
for such notice. If the Borrower shall fail to give the Agent the notice as
specified above for Continuation or Conversion of a Eurodollar Loan prior to the
end of the Interest Period with respect thereto, such Eurodollar Loan shall be
Converted automatically into a Base Rate Loan on the last day of the then
current Interest Period for such Eurodollar Loan.
Section 5.3 Method of Payment. All payments of principal, interest, and
other amounts to be made by the Borrower under this Agreement and the other Loan
Documents shall be made to the Agent at the Principal Office for the account of
each Bank's Applicable Lending Office in Dollars and in immediately available
funds, without setoff, deduction, or counterclaim, not later than 11:00 A.M.,
Houston, Texas time on the date on which such payment shall become due (each
such payment made after such time on such due date to be deemed to have been
made on the next succeeding Business Day). The Borrower shall, at the time of
making each such payment, specify to the Agent the sums payable by the Borrower
under this Agreement and the other Loan Documents to which such payment is to be
applied (and in the event that the Borrower fails to so specify, or if an Event
of Default has occurred and is continuing, the Agent may apply such payment to
the Obligations in such order and manner as it may elect in its sole discretion,
subject to Section 5.6 hereof). Each payment received by the Agent under this
Agreement or any other Loan Document for the account of a Bank shall be paid
promptly to such Bank, in immediately available funds, for the account of such
Bank's Applicable Lending Office. Whenever any payment under this Agreement or
any other Loan Document shall be stated to be due on a day that is not a
Business Day, such payment may be made on the next succeeding Business Day, and
such extension of time shall in such case be included in the computation of the
payment of interest and commitment fee, as the case may be.
Section 5.4 Voluntary Prepayment. The Borrower may, upon at least one
Business Day's prior notice to the Agent in the case of Base Rate Loans and at
least three Business Days' prior notice to the Agent in the case of Eurodollar
Loans, prepay the Loans in whole at any time or from time to time in part
without premium or penalty (except as set forth in Section 6.5) but
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with accrued interest to the date of prepayment on the amount so prepaid,
provided that (a) Eurodollar Loans may be prepaid only on the last day of the
Interest Period for such Loans, and (b) each partial prepayment shall be in the
principal amount of $500,000 or an integral multiple thereof. All notices under
this Section shall be irrevocable and shall be given not later than 11:00 A.M.
Houston, Texas, time on the day which is not less than the number of Business
Days specified above for such notice.
Section 5.5 Mandatory Prepayment or Addition of Collateral.
(a) If at any time a Borrowing Base Deficiency exists, the
Agent shall send the Borrower a Payment Notice and the Borrower shall
immediately prepay the outstanding Revolving Credit Loans by the amount
of the Borrowing Base Deficiency, plus accrued and unpaid interest on
the amount so prepaid in accordance with this Section 5.5 unless
Borrower exercises the option to increase the Collateral as provided by
Section 5.6. If within 30 days of the date Borrower receives a Payment
Notice the Borrower has not prepaid the Revolving Credit Loans by the
amount of the Borrowing Base Deficiency or complied with Section 5.6
hereof, the amount of the Borrowing Base Deficiency shall be due and
payable in six monthly installments, each in the amount of one-sixth of
the principal amount of the Borrowing Base Deficiency, plus accrued and
unpaid interest thereon, with the first such installment being due and
payable immediately (and in any event, within 33 days after Borrower
received the Payment Notice). During any period of time in which a
Borrowing Base Deficiency has occurred and is continuing, the
Obligations shall bear interest at the Borrowing Base Deficiency Rate.
(b) After a Borrowing Base has been determined, upon the sale
by the Borrower of any Mortgaged Property (other than the sale of
Hydrocarbons after severance in the ordinary course of business), the
Borrowing Base shall be reduced, effective on the date of consummation
of such sale, by an amount which the Borrower certifies in writing to
the Banks is the Borrowing Base value last assigned to such Mortgaged
Property according to the most recent Engineering Reports delivered to
the Banks; provided, however, that if the Banks, for any reason,
disagree with the proposed Borrowing Base value certified by the
Borrower, then the Banks shall determine, which determination shall be
conclusive absent manifest error, the Borrowing Base value last
assigned to such Mortgaged Property according to the most recent
Engineering Reports delivered to the Banks; provided, further, that no
such reduction to the Borrowing Base shall be required if the aggregate
net sales proceeds of all sales of Mortgaged Property occurring since
the last Determination Date do not exceed $1,000,000, and provided
further, that all such sales shall be subject to the provisions of
Section 11.8. The net proceeds received from the sale of such Mortgaged
Property shall on the first Business Day after receipt, be applied
first, to the extent that the sale of any such Mortgaged Property
causes a Borrowing Base Deficiency to exist, to the outstanding
Revolving Credit Loans in an amount required to eliminate the Borrowing
Base Deficiency, and second, to the outstanding Term Loans. So long as
no Default has occurred and is continuing, any remaining proceeds may
be retained by the Borrower.
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(c) If, subsequent to the Closing Date, unless the Required
Banks and the Borrower shall otherwise agree and except in connection
with up to $15,000,000 of Net Cash Proceeds received in connection with
the issuance of a new series of preferred stock in form and substance
similar to that described in the Weisser, Johnson offering memorandum
previously delivered to the Agent and the Banks, Borrower or any of its
Subsidiaries shall issue any capital stock, equivalent ownership
interests, warrants or options to purchase any of the foregoing, or
shall incur any Debt other than Permitted Debt, 100% of the Net Cash
Proceeds thereof shall on the first Business Day after receipt, be
applied first, to the extent any Borrowing Base Deficiency exists, in
an amount sufficient to eliminate any such Borrowing Base Deficiency
and second, to reduce the outstanding Term Loans until the Term Loans
are repaid in full. So long as no Default has occurred and is
continuing, any remaining Net Cash Proceeds may be retained by the
Borrower.
(d) Within ten days after Borrower has received a Payment
Notice, Borrower shall make a prepayment of principal on the Revolving
Credit Notes equal to the amount by which the outstanding principal
balance of the Revolving Credit Loans exceeds the Borrowing Base as of
such date. Provided, however, that if the Payment Notice and demand for
payment is made in connection with a quarterly redetermination of the
Borrowing Base no payment of the amount specified above shall be due if
Borrower has notified Lender in writing (within three days after
Borrower has received the Payment Notice) of Borrower's election to
comply with Section 5.6 hereof and has provided the Agent with complete
descriptions of the Oil and Gas Properties or other properties or
interests ("New Properties") which Borrower shall add or cause to be
added to the Collateral and subject to Liens in favor of the Agent for
purposes of Section 5.6 hereof.
Section 5.6 Borrower's Option to Increase Collateral. Within ten days
after the date on which the Agent receives notice of Borrower's election to
comply with this Section 5.6 in order to avoid a prepayment of amounts required
pursuant to Section 5.5 hereof, Borrower shall grant to the Agent for the
benefit of the Agent, Co-Agent, the Issuing Banks and the Banks, valid,
enforceable, perfected, first priority liens in the New Properties, subject to
Security Documents and accompanied by title opinions and/or other evidence of
title, each of which shall be in form and substance satisfactory to the Agent
and the Banks. In addition, Borrower shall deliver to the Agent upon request,
such other information, data, and reports describing the New Properties and the
reserves and production related thereto, as the Agent and the Banks shall
reasonably request. Within a reasonable period of time after the date on which
the Agent receives notice of Borrower's election hereunder, the Banks shall
redetermine (as of the immediately preceding Determination Date) and notify
Borrower of the Borrowing Base determined as if the New Properties were part of
the Collateral as of such Determination Date. Within ten Business Days after
receipt of such notice, Borrower shall make a prepayment of principal on the
Revolving Credit Loans equal to the amount (if any) by which the outstanding
principal balance of the Revolving Credit Loans, as of such Determination Date,
exceeds the Borrowing Base as of such Determination Date as determined by the
Banks pursuant to this Section 5.6. No redetermination to increase the Borrowing
Base shall be effective until the Agent has valid, perfected, enforceable first
priority Liens on the New Properties that are to be part of the Collateral.
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Section 5.7 Pro Rata Treatment. Except to the extent otherwise provided
herein: (a) each Loan shall be made by the Banks under Section 2.1 and 3.1 or
deemed made by the Banks under Section 4.4, each payment of commitment fee under
Section 2.6 and letter of credit fee under Section 4.5 (other than the 1/8%
fronting fee) shall be made for the account of the Banks, and each termination
or reduction of the Revolving Credit Commitments under Section 2.7 shall be
applied to the Revolving Credit Commitments of the Banks, pro rata according to
the respective unused Revolving Credit Commitments and each Letter of Credit
shall be deemed participated in by the Banks, pro rata according to the amounts
of their respective Revolving Credit Commitments; (b) the making, Conversion,
and Continuation of Loans of a particular Type (other than Conversions provided
for by Section 6.4) shall be made pro rata among the Banks holding Loans of such
Type according to the amounts of their respective Commitments; (c) each payment
and prepayment of principal of or interest on Loans by the Borrower of a
particular Type shall be made to the Agent for the account of the Banks holding
Loans of such Type pro rata in accordance with the respective unpaid principal
amounts of such Loans held by such Banks; and (d) Interest Periods for Loans of
a particular Type shall be allocated among the Banks holding Loans of such Type
pro rata according to the respective principal amounts held by such Banks.
Section 5.8 Non-Receipt of Funds by the Agent. Unless the Agent shall
have been notified by a Bank or the Borrower (the "Payor") prior to the date on
which such Bank is to make payment to the Agent of the proceeds of a Loan to be
made by it hereunder or the Borrower is to make a payment to the Agent for the
account of one or more of the Banks, as the case may be (such payment being
herein called the "Required Payment"), which notice shall be effective upon
receipt, that the Payor does not intend to make the Required Payment to the
Agent, the Agent may assume that the Required Payment has been made and may, in
reliance upon such assumption (but shall not be required to), make the amount
thereof available to the intended recipient on such date and, if the Payor has
not in fact made the Required Payment to the Agent, the recipient of such
payment shall, on demand, pay to the Agent the amount made available to it
together with interest thereon in respect of the period commencing on the date
such amount was so made available by the Agent until the date the Agent recovers
such amount at a rate per annum equal to the Federal Funds Rate for such period.
Section 5.9 Withholding Tax Exemption. Each Bank that is not
incorporated under the laws of the United States of America or a state thereof
agrees that it will deliver to the Borrower and the Agent two duly completed
copies of Form 1001 or 4224, certifying in either case that such Bank is
entitled to receive payments from the Borrower under any Loan Document without
deduction or withholding of any United States federal income taxes. Each Bank
which so delivers a Form 1001 or 4224 further undertakes to deliver to Borrower
and the Agent two additional copies of such form (or a successor form) on or
before the date such form expires or becomes obsolete or after the occurrence of
any event requiring a change in the most recent form so delivered by it, and
such amendments thereto or extensions or renewals thereof as may be reasonably
requested by the Borrower or the Agent, in each case certifying that such Bank
is entitled to receive payments from the Borrower under any Loan Document
without deduction or withholding of any United States federal income taxes,
unless an event (including without limitation any change in treaty, law or
regulation) has occurred prior to the date on which any such delivery would
otherwise be required which renders all such forms inapplicable or which
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would prevent such Bank from duly completing and delivering any such form with
respect to it and such Bank advises the Borrower and the Agent that it is not
capable of receiving such payments without any deduction or withholding of
United States federal income tax.
Section 5.10 Computation of Interest. Interest on the Eurodollar Loans
shall be computed on the basis of a year of 360 days and the actual number of
days elapsed (including the first day but excluding the last day) unless such
calculation would result in a usurious rate, in which case interest shall be
calculated on the basis of a year of 365 or 366 days, as the case may be.
Interest on Base Rate Loans and all other amounts payable by the Borrower
hereunder shall be computed on the basis of a year of 365 days and the actual
number of days elapsed (including the first day but excluding the last day).
ARTICLE VI
Yield Protection and Illegality
Section 6.1 Additional Costs.
(a) The Borrower shall pay directly to each Bank from time to
time such amounts as such Bank may determine to be necessary to
compensate it for any costs incurred by such Bank which such Bank
determines are attributable to its making or maintaining of any
Eurodollar Loans hereunder or its obligation to make any of such Loans
hereunder, or any reduction in any amount receivable by such Bank
hereunder in respect of any such Loans or such obligation (such
increases in costs and reductions in amounts receivable being herein
called "Additional Costs"), resulting from any Regulatory Change which:
(i) changes the basis of taxation of any amounts
payable to such Bank under this Agreement or its Notes in
respect of any of such Loans (other than taxes imposed on the
overall net income of such Bank or its Applicable Lending
Office for any Eurodollar Loans by the jurisdiction in which
such Bank has its principal office or such Applicable Lending
Office);
(ii) imposes or modifies any reserve, special
deposit, minimum capital, capital ratio, or similar
requirement relating to any extensions of credit or other
assets of, or any deposits with or other liabilities or
commitments of, such Bank (including any Eurodollar Loans or
any deposits referred to in the definition of "Eurodollar
Rate" in Section 1.1 hereof); or
(iii) imposes any other condition affecting this
Agreement or the Notes or any of such extensions of credit or
liabilities or commitments.
Each Bank will notify the Borrower of any event occurring after the
date of this Agreement which will entitle such Bank to compensation
pursuant to this Section 6.1(a) as promptly as practicable and in any
event, within 180 days, after it obtains knowledge thereof and
determines to request such compensation, and will designate a different
CREDIT AGREEMENT - Page 29
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Applicable Lending Office for the Loans affected by such event if such
designation will avoid the need for, or reduce the amount of, such
compensation and will not, in the sole opinion of such Bank, violate
any law, rule, or regulation or be in any way disadvantageous to such
Bank, provided that such Bank shall have no obligation to so designate
an Applicable Lending Office located outside the United States of
America. Borrower shall not be obligated to pay for any such amounts if
such Bank does not notify the Borrower that such additional amounts are
owing within 180 days of the date such Bank obtains knowledge thereof.
Each Bank will furnish the Borrower with a certificate setting forth
the basis and the amount of each request of such Bank for compensation
under this Section 6.1(a). If any Bank requests compensation from the
Borrower under this Section 6.1(a), the Borrower may, by notice to such
Bank (with a copy to the Agent) suspend the obligation of such Bank to
make or Continue making, or Convert Loans into, Loans of the Type with
respect to which such compensation is requested until the Regulatory
Change giving rise to such request ceases to be in effect (in which
case the provisions of Section 6.4 hereof shall be applicable).
(b) Without limiting the effect of the foregoing provisions of
this Section 6.1, in the event that, by reason of any Regulatory Change
that becomes effective after date hereof, any Bank either (i) incurs
Additional Costs based on or measured by the excess above a specified
level of the amount of a category of deposits or other liabilities of
such Bank which includes deposits by reference to which the interest
rate on Eurodollar Loans is determined as provided in this Agreement or
a category of extensions of credit or other assets of such Bank which
includes Eurodollar Loans or (ii) becomes subject to restrictions on
the amount of such a category of liabilities or assets which it may
hold, then, if such Bank so elects by notice to the Borrower (with a
copy to the Agent), the obligation of such Bank to make or Continue
making, or Convert Loans into, Eurodollar Loans hereunder shall be
suspended until such Regulatory Change ceases to be in effect (in which
case the provisions of Section 6.4 hereof shall be applicable).
(c) Determinations and allocations by any Bank for purposes of
this Section 6.1 of the effect of any Regulatory Change on its costs of
maintaining its obligations to make Eurodollar Loans or of making or
maintaining Eurodollar Loans or on amounts receivable by it in respect
of Eurodollar Loans, and of the additional amounts required to
compensate such Bank in respect of any Additional Costs, shall be
conclusive, provided that such determinations and allocations are made
on a reasonable basis.
Section 6.2 Limitation on Types of Loans. Anything herein to the contrary
notwithstanding, if with respect to any Eurodollar Loans for any Interest Period
therefor:
(a) The Agent determines (which determination shall be
conclusive) that quotations of interest rates for the relevant deposits
referred to in the definition of "Eurodollar Rate" in Section 1.1
hereof are not being provided in the relative amounts or for the
relative maturities for purposes of determining the rate of interest
for Eurodollar Loans as provided in this Agreement; or
CREDIT AGREEMENT - Page 30
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(b) Required Banks determine (which determination shall be
conclusive) and notify the Agent that the relevant rates of interest
referred to in the definition of "Eurodollar Rate" in Section 1.1
hereof on the basis of which the rate of interest for such Loans for
such Interest Period is to be determined do not accurately reflect the
cost to the Banks of making or maintaining Eurodollar Loans for such
Interest Period;
then the Agent shall give the Borrower prompt notice thereof specifying the
relevant amounts or periods, and so long as such condition remains in effect,
the Banks shall be under no obligation to make additional Eurodollar Loans or to
Convert Base Rate Loans into Eurodollar Loans and the Borrower shall, on the
last day(s) of the then current Interest Period(s) for the outstanding
Eurodollar Loans, either prepay such Eurodollar Loans or Convert such Eurodollar
Loans into Base Rate Loans in accordance with the terms of this Agreement.
Section 6.3 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Bank or its Applicable
Lending Office to (a) honor its obligation to make Eurodollar Loans hereunder or
(b) maintain Eurodollar Loans hereunder, then such Bank shall promptly notify
the Borrower (with a copy to the Agent) thereof and such Bank's obligation to
make or maintain Eurodollar Loans and to Convert Base Rate Loans into Eurodollar
Loans hereunder shall be suspended until such time as such Bank may again make
and maintain Eurodollar Loans (in which case the provisions of Section 6.4
hereof shall be applicable).
Section 6.4 Treatment of Eurodollar Loans. If the Eurodollar Loans of
any Bank are to be Converted pursuant to Section 6.1 or 6.3 hereof, such Bank's
Eurodollar Loans shall be automatically Converted into Base Rate Loans on the
last day(s) of the then current Interest Period(s) for the Eurodollar Loans (or,
in the case of a Conversion required by Section 6.1(b) or 6.3 hereof, on such
earlier date as such Bank may specify to the Borrower with a copy to the Agent)
and, unless and until such Bank gives notice as provided below that the
circumstances specified in Section 6.1 or 6.3 hereof which gave rise to such
Conversion no longer exist:
(a) To the extent that such Bank's Eurodollar Loans have been
so Converted, all payments and prepayments of principal which would
otherwise be applied to such Bank's Eurodollar Loans shall be applied
instead to its Base Rate Loans;
(b) All Loans which would otherwise be made or Continued by
such Bank as Eurodollar Loans shall be made as or Converted into Base
Rate Loans and all Loans of such Bank which would otherwise be
Converted into Eurodollar Loans shall be Converted instead into (or
shall remain as) Base Rate Loans; and
If such Bank gives notice to the Borrower (with a copy to the Agent) that the
circumstances specified in Section 6.1 or 6.3 hereof which gave rise to the
Conversion of such Bank's Eurodollar Loans pursuant to this Section 6.4 no
longer exist (which such Bank agrees to do promptly upon such circumstances
ceasing to exist) at a time when Eurodollar Loans are outstanding, such Bank's
Base Rate Loans shall be automatically Converted, on the first day(s) of the
next succeeding Interest Period(s) for such outstanding Eurodollar Loans to the
extent necessary so that, after giving effect thereto, all Loans held by the
Banks holding Eurodollar
CREDIT AGREEMENT - Page 31
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Loans and by such Bank are held pro rata (as to principal amounts, Types, and
Interest Periods) in accordance with their respective Commitments.
Section 6.5 Compensation. The Borrower shall pay to the Agent for the
account of each Bank, upon the request of such Bank through the Agent, such
amount or amounts as shall be sufficient (in the reasonable opinion of such
Bank) to compensate it for any loss, cost, or expense incurred by it as a result
of:
(a) Any payment, prepayment or Conversion of a Eurodollar Loan
for any reason (including, without limitation, the acceleration of the
outstanding Loans pursuant to Section 13.2) on a date other than the
last day of an Interest Period for such Loan; or
(b) Any failure by the Borrower for any reason (including,
without limitation, the failure of any conditions precedent specified
in Article VIII to be satisfied) to borrow, Convert, or prepay a
Eurodollar Loan on the date for such borrowing, Conversion, or
prepayment, specified in the relevant notice of borrowing, prepayment,
or Conversion under this Agreement.
Without limiting the effect of the preceding sentence, such compensation shall
include an amount equal to the excess, if any, of (i) the amount of interest
which otherwise would have accrued on the principal amount so paid or Converted
or not borrowed for the period from the date of such payment, Conversion, or
failure to borrow to the last day of the Interest Period for such Loan (or, in
the case of a failure to borrow, the Interest Period for such Loan which would
have commenced on the date specified for such borrowing) at the applicable rate
of interest for such Loan provided for herein over (ii) the interest component
of the amount such Bank would have bid in the London interbank market for Dollar
deposits of leading banks and amounts comparable to such principal amount and
with maturities comparable to such period.
Section 6.6 Capital Adequacy. If after the date hereof, any Bank shall
have determined that the adoption or implementation of any applicable law, rule,
or regulation regarding capital adequacy, or any change therein, or any change
in the interpretation or administration thereof by any central bank or other
Governmental Authority charged with the interpretation or administration
thereof, or compliance by such Bank (or its parent) with any guideline, request,
or directive regarding capital adequacy (whether or not having the force of law)
of any central bank or other Governmental Authority, has or would have the
effect of reducing the rate of return on such Bank's (or its parent's) capital
as a consequence of its obligations hereunder or the transactions contemplated
hereby to a level below that which such Bank (or its parent) could have achieved
but for such adoption, implementation, change or compliance (taking into
consideration such Bank's policies with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time, within ten
(10) Business Days after demand by such Bank (with a copy to the Agent), the
Borrower shall pay to such Bank such additional amount or amounts as will
compensate such Bank (or its parent) for such reduction; provided, however,
Borrower shall not be liable for any such amounts unless the Bank to which such
amounts are due gives Borrower notice thereof within 180 days of the date that
such Bank obtains knowledge that such additional compensation is owing. A
certificate of such Bank claiming compensation under this Section and setting
forth the additional amount or amounts to
CREDIT AGREEMENT - Page 32
<PAGE>
be paid to it hereunder shall be conclusive, provided that the determination
thereof is made on a reasonable basis. In determining such amount or amounts,
such Bank may use any reasonable averaging and attribution methods.
Section 6.7 Additional Costs in Respect of Letters of Credit. If as a
result of any Regulatory Change there shall be imposed, modified, or deemed
applicable any tax, reserve, special deposit, or similar requirement against or
with respect to or measured by reference to Letters of Credit issued or to be
issued hereunder or the commitments to issue or participate in Letters of Credit
hereunder, and the result shall be to increase the cost to the Issuing Banks or
any Bank of issuing, maintaining or participating in any Letter of Credit or its
commitment to issue or participate in Letters of Credit hereunder or reduce any
amount receivable by any Issuing Bank or any Bank hereunder in respect of any
Letter of Credit (which increase in cost, or reduction in amount receivable,
shall be the result of such Issuing Bank's or such Bank's reasonable allocation
of the aggregate of such increases or reductions resulting from such event),
then, upon demand by such Issuing Bank or such Bank, the Borrower agrees to pay
such Issuing Bank or such Bank, from time to time as specified by such Issuing
Bank or such Bank, such additional amounts as shall be sufficient to compensate
such Issuing Bank or such Bank for such increased costs or reductions in amount.
A statement as to such increased costs or reductions in amount incurred by such
Issuing Bank or such Bank, submitted by such Issuing Bank or such Bank to the
Borrower, shall be conclusive as to the amount thereof, provided that the
determination thereof is made on a reasonable basis.
ARTICLE VII
Security
Section 7.1 Collateral. To secure full and complete payment and
performance of the Obligations, the Borrower shall execute and deliver or cause
to be executed and shall grant or cause to be granted to the Agent for the
benefit of itself, the Co-Agent, the Issuing Banks and the Banks, or confirm
that the Agent possesses, a perfected first priority Lien on all of the
following property whether now owned or hereafter acquired (which, together with
any other property and collateral which may now or hereafter secure the
Obligations or any part thereof, is sometimes herein called the "Collateral"):
(a) The Mortgaged Properties, which shall consist of
properties, constituting at least 80% of the present value of the
Borrower's and the Subsidiaries (other than the Excluded Subsidiaries)
proved reserves (whether developed or undeveloped).
(b) All Hydrocarbons which are derived from or attributable to
the Mortgaged Properties or which are purchased, exchanged or
transported in connection with the operation of the Gas Gathering
Systems.
(c) All accounts (including accounts in the form of joint
interest billings), contract rights and general intangibles, relating
to the sale, purchase, exchange, transportation or processing of
Hydrocarbons in connection with operation of the Gas Gathering Systems
or produced or to be produced from the Mortgaged Properties,
CREDIT AGREEMENT - Page 33
<PAGE>
including without limitation all operating agreements and oil or gas
purchase, sale and transportation contracts, together with all
accounts and proceeds attributable to the sale of Hydrocarbons
produced from the Mortgaged Properties or any portion thereof or sold
or transported in connection with the operation of the Gas Gathering
Systems.
(d) All personal property and fixtures pertaining, affixed or
incidental to, situated upon or used or useful in connection with all
or any part of the Mortgaged Properties and the operating, working or
developing thereof, including without limitation all surface or
subsurface machinery, equipment, facilities or other Property of
whatever kind or nature which are useful for the production,
treatment, storage or transportation of any Hydrocarbons, including,
but not by way of limitation, all oil wells, gas wells, water wells,
injection wells, other wells, casing, tubing, rods, pumps, pumping
units and engines, Christmas trees, derricks, separators, gun barrels,
flow lines, tanks, gas systems (for gathering, treating and
compression), water systems (for treating, disposal and injection),
power plants, poles, lines, transformers, starters and controllers,
machine shops, tools, storage yards and equipment stored therein,
buildings and camps, structures, field separators, liquid extraction
plants, plant compressors, field gathering systems, pipelines, tanks
and tank batteries, fixtures, valves, fittings, parts, engines,
boilers, meters, apparatus, appliances, tools, implements, cables,
wires, towers, telegraph, telephone and other communication systems,
roads, loading racks and shipping facilities.
(e) All logs, drilling reports, geophysical or geological data,
division orders, transfer orders, operating agreements, abstracts,
title opinions, files, records, memoranda and other written
information in the possession or control of the Borrower or its
Subsidiaries not subject to specific confidentiality agreements
binding upon Borrower or its Subsidiaries relating to any wells
included in the Mortgaged Properties.
(f) All accounts, accounts receivable, investment property,
chattel paper, documents, instruments, and general intangibles of the
Borrower and its Subsidiaries (other than the Excluded Subsidiaries),
whether now owned or hereafter acquired, and all products and proceeds
thereof, pursuant to the Borrower Pledge Agreement and the Subsidiary
Pledge Agreement.
(g) All of the outstanding capital stock of the Material
Subsidiaries, whether now owned or hereafter acquired, and all
products and proceeds thereof, pursuant to the Borrower Pledge
Agreement and the Subsidiary Pledge Agreement. The Agent shall retain
possession of the certificates evidencing the capital stock of the
Material Subsidiaries, together with stock powers duly executed in
blank.
(h) All products and proceeds of any and all of the foregoing and
all additions, substitutions, replacements, accessions and attachments
to any and all of the foregoing.
Section 7.2 Security Documents. Borrower and each Subsidiary shall
execute and cause to be executed such deeds of trust, mortgages and other
documents and instruments including without limitation Uniform Commercial Code
financing statements, as the Agent and the Banks, in their sole discretion, deem
necessary or desirable to create, evidence and perfect
CREDIT AGREEMENT - Page 34
<PAGE>
the Agent's Liens in the Collateral. Borrower, the Agent and the Banks agree
that Schedules 1.1 and 1.1(b) shall be amended and additional Security Documents
executed from time to time to reflect the addition of New Properties to the
Collateral, such amendment to be made upon the granting by Borrower or any
Subsidiary, as the case may be, to the Agent of valid, enforceable, perfected
first priority Liens on the New Properties pursuant to Section 5.6 hereof.
Section 7.3 Evidence of Title; Legal Opinions. On or before the 30 days
after the Closing Date, Borrower shall obtain and deliver, or cause to be
obtained and delivered, to the Agent (a) at the Agent's option, landman title
reviews, title opinions, reports and/or runsheets dated a current date,
addressed to the Agent, the Co-Agent, the Issuing Banks and the Banks and issued
by landmen and/or attorneys acceptable to the Agent competent in the examination
of land title, relating to those Mortgaged Properties identified by the Agent,
and showing that (i) Borrower has good and defensible title to such Mortgaged
Properties including all production of Hydrocarbons therefrom, and (ii) the
Security Documents create in favor of the Agent a perfected, first priority Lien
on such Mortgaged Properties including all production of Hydrocarbons therefrom;
(b) an opinion of outside legal counsel to the Borrower and the Guarantors
addressed to the Agent, the Co-Agent, the Issuing Banks and the Banks,
addressing the matters set forth in Exhibit "F" hereto and in form and substance
satisfactory to the Agent and the Banks; and (c) an opinion of Oklahoma legal
counsel addressed to the Agent, the Co-Agent, the Issuing Banks and the Banks as
to the enforceability and form of the mortgages to be filed in the State of
Oklahoma.
Section 7.4 Subsidiary Guaranty Agreement. Each Subsidiary (other than
the Excluded Subsidiaries) of Borrower, whether now owned or hereafter acquired,
shall guarantee the prompt payment and performance of the Obligations pursuant
to the Subsidiary Guaranty Agreement and shall execute a counterpart of the
Subsidiary Pledge Agreement.
Section 7.5 Setoff. If an Event of Default shall have occurred and is
continuing, the Agent, the Co-Agent, each Issuing Bank and each Bank are hereby
authorized at any time and from time to time, without notice to the Borrower
(any such notice being hereby expressly waived by the Borrower), to set off and
apply any and all deposits (general, time or demand, provisional or final) at
any time held and other indebtedness at any time owing by the Agent, the
Co-Agent, each Issuing Bank or such Bank to or for the credit or the account of
the Borrower against any and all of the obligations of the Borrower now or
hereafter existing under this Agreement, the Notes, or any other Loan Document,
irrespective of whether or not the Agent, the Co-Agent, such Issuing Bank or
such Bank shall have made any demand under this Agreement, the Notes or any
other Loan Document and although such obligations may be unmatured. The Agent,
the Co-Agent, each Issuing Bank and each Bank agree promptly to notify the
Borrower (with a copy to the Agent) after any such setoff and application,
provided that the failure to give such notice shall not affect the validity of
such setoff and application. The rights and remedies of the Agent, the Co-Agent,
each Issuing Bank and each Bank hereunder are in addition to other rights and
remedies (including, without limitation, other rights of setoff) which the
Agent, the Co-Agent, each Issuing Bank and each such Bank may have.
CREDIT AGREEMENT - Page 35
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ARTICLE VIII
Conditions Precedent
Section 8.1 Initial Loan. The obligation of each Bank to make its
initial Loan or of any Issuing Bank to issue the initial Letter of Credit is
subject to the condition precedent that the Agent shall have received on or
before the day of such Loan or issuance of all of the following, each dated
(unless otherwise indicated) the date hereof, in form and substance satisfactory
to the Agent:
(a) Resolutions. Resolutions of the Board of Directors of the
Borrower and each Obligated Party certified by its Secretary or an
Assistant Secretary which authorize the execution, delivery, and
performance by such Person of the Loan Documents to which such Person
is or is to be a party;
(b) Incumbency Certificate. A certificate of incumbency certified
by the Secretary or an Assistant Secretary of the Borrower and each
Obligated Party certifying the names of the officers of such Person
authorized to sign this Agreement and each of the other Loan Documents
to which such Person is or is to be a party (including the
certificates contemplated herein) together with specimen signatures of
such officers;
(c) Articles of Incorporation. The articles of incorporation of
the Borrower and each Obligated Party certified by the Secretary of
State of the state of incorporation of such Person and dated within 10
days prior to the date of the initial Loan or issuance of a Letter of
Credit;
(d) Bylaws. The bylaws of the Borrower and each Obligated Party
certified by the Secretary or an Assistant Secretary of such Person;
(e) Governmental Certificates. Certificates of (i) the
appropriate government officials of the state of incorporation of the
Borrower and each Obligated Party as to the existence and good
standing of such Person, and (ii) the appropriate government officials
in each jurisdiction where Borrower or any Obligated Party is
qualified to do business as to its good standing and qualification to
do business in such jurisdiction, each dated within ten (10) days
prior to the date of the initial Loan or issuance of a Letter of
Credit;
(f) Revolving Credit Notes. The Revolving Credit Notes executed
by the Borrower;
(g) Term Notes. The Term Notes executed by the Borrower;
(h) Borrower Pledge Agreement. The Borrower Pledge Agreement
executed by the Borrower;
(i) Subsidiary Pledge Agreement. The Subsidiary Pledge Agreement
executed by each Guarantor;
CREDIT AGREEMENT - Page 36
<PAGE>
(j) Financing Statements. Uniform Commercial Code financing
statements executed by the Borrower and each Guarantor covering the
Collateral;
(k) Subsidiary Guaranty Agreement. The Subsidiary Guaranty
Agreement executed by each Guarantor;
(l) Stock Certificates. The original certificates evidencing the
stock pledged by Borrower pursuant to the Borrower Pledge Agreement
and by Magnum Hunter Production, Inc. pursuant to the Subsidiary
Pledge Agreement, together with stock powers duly executed in blank by
such Persons;
(m) Mortgages. Mortgages and deeds of trust in form and substance
satisfactory to the Agent and the Banks covering the Mortgaged
Properties;
(n) Environmental Due Diligence. The completion of a satisfactory
review of all environmental matters by the Banks;
(o) Title. Evidence satisfactory in form and substance to the
Agent and the Banks that the Borrower and its Subsidiaries have good
and marketable title to Mortgaged Properties representing at least 80%
of the discounted present value of the initial Borrowing Base;
(p) Assignments of Notes and Liens. Assignments of Notes and
Liens executed by Wells Fargo for the benefit of the Agent and the
Banks;
(q) Fee Letters. The Agent Fee Letter and the Co-Agent Fee Letter
executed by Borrower and evidence that all fees due and payable
thereunder or under Section 15.1, to the extent incurred, have been
paid in full;
(r) Acquisition. A certificate from the president or chief
financial officer of Borrower certifying that all conditions precedent
to the consummation of the Acquisition shall have been satisfied, and
the Borrower's due diligence in connection with the Acquisition and
the terms and conditions contained in the Acquisition Documents shall
be satisfactory in form and substance to the Agent;
(s) Acquisition Documents. True, correct and complete copies of
all of the Acquisition Documents;
(t) Material Adverse Change. No material adverse change shall
have occurred since the date of the most recent financial statements
delivered by Borrower to the Agent, in the financial condition,
business, operations, or prospects of the Borrower or in its assets,
liabilities and properties and there shall be no material threatened
or pending litigation adversely affecting its property and no material
adverse change shall have occurred in the financial condition,
business, operations, or prospects of the business to be acquired
pursuant to the Acquisition;
CREDIT AGREEMENT - Page 37
<PAGE>
(u) Insurance Policies. Copies of all insurance policies required
by Section 10.5;
(v) UCC Searches. The results of a Uniform Commercial Code search
showing all financing statements and other documents or instruments on
file against the Borrower and the Guarantors in such jurisdictions as
the Agent shall determine, such searches to be as of a date no more
than 10 days prior to the date of the initial Loan or issuance of a
Letter of Credit;
(w) Lien Releases. Executed UCC-3 Termination Statements and
other Lien releases that release or assign to the Agent all Liens held
by holders of Debt not constituting Permitted Debt and all other Liens
that do not constitute Permitted Liens;
(x) Opinion of Counsel. A favorable opinion of Morgan Johnston,
legal counsel to the Borrower and the Subsidiaries, as to the matters
set forth in Exhibit "F" hereto, and such other matters as the Agent
may reasonably request; and
(y) Form U-1 Purpose Statement. A Form U-1 Purpose Statement duly
completed and executed by the Borrower.
Section 8.2 All Loans. The obligation of each Bank to make any Loan or
issue any Letter of Credit (including the initial Loan or issuance) is subject
to the following additional conditions precedent:
(a) Request for Loan or Letter of Credit. The Agent or the
Issuing Bank shall have received, in accordance with Section 5.1 or
4.3, as the case may be, a Loan Request Form or Letter of Credit
Request Form, dated the date of such Loan or Letter of Credit,
executed by an authorized officer of the Borrower;
(b) No Default. No Default shall have occurred and be continuing,
or would result from such Loan or Letter of Credit, as the case may
be;
(c) Representations and Warranties. All of the representations
and warranties contained in Article IX hereof and in the other Loan
Documents shall be true and correct on and as of the date of such Loan
with the same force and effect as if such representations and
warranties had been made on and as of such date; and
(d) Additional Documentation. The Agent shall have received such
additional approvals, opinions, or documents as the Agent or its legal
counsel, Winstead Sechrest & Minick P.C., may reasonably request.
CREDIT AGREEMENT - Page 38
<PAGE>
ARTICLE IX
Representations and Warranties
To induce the Agent, the Co-Agent, the Issuing Banks and the Banks to
enter into this Agreement, the Borrower represents and warrants to the Agent,
the Co-Agent, the Issuing Banks and the Banks that:
Section 9.1 Corporate Existence. The Borrower and each Subsidiary
(other than the Excluded Subsidiaries) (a) is a corporation duly organized,
validly existing, and in good standing under the laws of the jurisdiction of its
incorporation; (b) has all requisite corporate power and authority to own its
assets and carry on its business as now being or as proposed to be conducted;
and (c) is qualified to do business in all jurisdictions in which the nature of
its business makes such qualification necessary and where failure to so qualify
would have a material adverse effect on its business, condition (financial or
otherwise), operations, prospects, or properties. The Borrower has the corporate
power and authority to execute, deliver, and perform its obligations under this
Agreement and the other Loan Documents to which it is or may become a party.
Section 9.2 Financial Statements. The Borrower has delivered to the
Agent audited consolidated financial statements of the Borrower and its
Subsidiaries as at and for the fiscal year ended December 31, 1995, and
unaudited consolidated financial statements of the Borrower and its Subsidiaries
for the three month period ended March 31, 1996. Such financial statements are
true and correct, have been prepared in accordance with GAAP, and fairly and
accurately present, on a consolidated basis, the financial condition of the
Borrower and its Subsidiaries as of the respective dates indicated therein and
the results of operations for the respective periods indicated therein. Neither
the Borrower nor any of its Subsidiaries has any material contingent
liabilities, liabilities for taxes, unusual forward or long-term commitments, or
unrealized or anticipated losses from any unfavorable commitments except as
scheduled or referred to or reflected in such financial statements. There has
been no material adverse change in the business, condition (financial or
otherwise), operations, prospects, or properties of the Borrower or any of its
Subsidiaries since the effective date of the most recent audited financial
statements delivered to the Agent and the Banks.
Section 9.3 Corporate Action; No Breach. The execution, delivery, and
performance by the Borrower of this Agreement and the other Loan Documents to
which the Borrower is or may become a party and compliance with the terms and
provisions hereof and thereof have been duly authorized by all requisite
corporate action on the part of the Borrower and do not and will not (a) violate
or conflict with, or result in a breach of, or require any consent under (i) the
articles of incorporation or bylaws of the Borrower or any of the Subsidiaries,
(ii) any applicable law, rule, or regulation or any order, writ, injunction, or
decree of any Governmental Authority or arbitrator, or (iii) any agreement or
instrument to which the Borrower or any of the Subsidiaries is a party or by
which any of them or any of their property is bound or subject, or (b)
constitute a default under any such agreement or instrument, or result in the
creation or imposition of any Lien (except as provided in Article VII) upon any
of the revenues or assets of the Borrower or any Subsidiary.
CREDIT AGREEMENT - Page 39
<PAGE>
Section 9.4 Operation of Business. The Borrower and each of its
Subsidiaries possess all licenses, permits, franchises, patents, copyrights,
trademarks, and tradenames, or rights thereto, necessary to conduct their
respective businesses substantially as now conducted and as presently proposed
to be conducted, and the Borrower and each of its Subsidiaries are not in
violation of any valid rights of others with respect to any of the foregoing.
Section 9.5 Litigation and Judgments. Except as disclosed on Schedule 9.5
hereto, there is no action, suit, investigation, or proceeding before or by any
Governmental Authority or arbitrator pending, or to the knowledge of the
Borrower, threatened against or affecting the Borrower or any Subsidiary, that
would, if adversely determined, have a material adverse effect on the business,
condition (financial or otherwise), operations, prospects, or properties of the
Borrower or any Subsidiary or the ability of the Borrower to pay and perform the
Obligations. There are no outstanding judgments against the Borrower or any
Subsidiary.
Section 9.6 Rights in Properties; Liens. The Borrower and each Subsidiary
have good and indefeasible title to or valid leasehold interests in their
respective properties and assets, real and personal, including the properties,
assets, and leasehold interests reflected in the financial statements described
in Section 9.2, and none of the properties, assets, or leasehold interests of
the Borrower or any Subsidiary is subject to any Lien, except the Permitted
Liens.
Section 9.7 Enforceability. This Agreement constitutes, and the other Loan
Documents to which the Borrower is party, when delivered, shall constitute the
legal, valid, and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their respective terms, except as limited by
bankruptcy, insolvency, or other laws of general application relating to the
enforcement of creditors' rights.
Section 9.8 Approvals. No authorization, approval, or consent of, and no
filing or registration with, any Governmental Authority or third party is or
will be necessary for the execution, delivery, or performance by the Borrower of
this Agreement and the other Loan Documents to which the Borrower is or may
become a party or for the validity or enforceability thereof.
Section 9.9 Debt. The Borrower and its Subsidiaries have no Debt, except as
disclosed on Schedule 9.9 hereto.
Section 9.10 Taxes. The Borrower and each Subsidiary have filed all tax
returns (federal, state, and local) required to be filed, including all income,
franchise, employment, property, and sales tax returns, and have paid all of
their respective liabilities for taxes, assessments, governmental charges, and
other levies that are due and payable. The Borrower knows of no pending
investigation of the Borrower or any Subsidiary by any taxing authority or of
any pending but unassessed tax liability of the Borrower or any Subsidiary.
Section 9.11 Use of Proceeds; Margin Securities. Neither the Borrower nor
any Subsidiary is engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulations G, T, U, or X of the Board of
Governors of the Federal Reserve System), and no
CREDIT AGREEMENT - Page 40
<PAGE>
part of the proceeds of any Loan will be used to purchase or carry any margin
stock or to extend credit to others for the purpose of purchasing or carrying
margin stock.
Section 9.12 ERISA. The Borrower and each Subsidiary are in compliance
in all material respects with all applicable provisions of ERISA. Neither a
Reportable Event nor a Prohibited Transaction has occurred and is continuing
with respect to any Plan. No notice of intent to terminate a Plan has been
filed, nor has any Plan been terminated. No circumstances exist which constitute
grounds entitling the PBGC to institute proceedings to terminate, or appoint a
trustee to administer, a Plan, nor has the PBGC instituted any such proceedings.
Neither the Borrower nor any ERISA Affiliate has completely or partially
withdrawn from a Multiemployer Plan. The Borrower and each ERISA Affiliate have
met their minimum funding requirements under ERISA with respect to all of their
Plans, and the present value of all vested benefits under each Plan do not
exceed the fair market value of all Plan assets allocable to such benefits, as
determined on the most recent valuation date of the Plan and in accordance with
ERISA. Neither the Borrower nor any ERISA Affiliate has incurred any liability
to the PBGC under ERISA.
Section 9.13 Disclosure. No statement, information, report,
representation, or warranty made by the Borrower in this Agreement or in any
other Loan Document or furnished to the Agent, the Issuing Bank or any Bank in
connection with this Agreement or any transaction contemplated hereby contains
any untrue statement of a material fact or omits to state any material fact
necessary to make the statements herein or therein not misleading. There is no
fact known to the Borrower which has a material adverse effect, or which might
in the future have a material adverse effect, on the business, condition
(financial or otherwise), operations, prospects, or properties of the Borrower
or any Subsidiary that has not been disclosed in writing to the Agent, the
Issuing Bank and the Banks.
Section 9.14 Subsidiaries. The Borrower has no Subsidiaries other than
those listed on Schedule 9.14 hereto, and Schedule 9.14 sets forth the
jurisdiction of incorporation of each Subsidiary, the percentage of the
Borrower's ownership of the outstanding voting stock of each Subsidiary and
designates each Subsidiary that is a Material Subsidiary. All of the outstanding
capital stock of each Subsidiary has been validly issued, is fully paid, and is
nonassessable.
Section 9.15 Agreements. Neither the Borrower nor any Subsidiary is a
party to any indenture, loan, or credit agreement, or to any lease or other
agreement or instrument, or subject to any charter or corporate restriction
which could have a material adverse effect on the business, condition (financial
or otherwise), operations, prospects, or properties of the Borrower or any
Subsidiary, or the ability of the Borrower to pay and perform its obligations
under the Loan Documents to which it is a party. Neither the Borrower nor any
Subsidiary is in default in any respect in the performance, observance, or
fulfillment of any of the obligations, covenants, or conditions contained in any
agreement or instrument material to its business to which it is a party.
Section 9.16 Compliance with Laws. Neither the Borrower nor any
Subsidiary is in violation in any material respect of any law, rule, regulation,
order, or decree of any Governmental Authority or arbitrator.
CREDIT AGREEMENT - Page 41
<PAGE>
Section 9.17 Inventory. All inventory of the Borrower has been produced in
substantial compliance with all applicable laws, rules, regulations, and
governmental standards, including, without limitation, the minimum wage and
overtime provisions of the Fair Labor Standards Act, as amended (29 U.S.C.
ss.ss. 201-219), and the regulations promulgated thereunder.
Section 9.18 Investment Company Act. Neither the Borrower nor any
Subsidiary is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
Section 9.19 Public Utility Holding Company Act. Neither the Borrower nor
any Subsidiary is a "holding company" or a "subsidiary company" of a "holding
company" or an "affiliate" of a "holding company" or a "public utility" within
the meaning of the Public Utility Holding Company Act of 1935, as amended.
Section 9.20 Environmental Matters. Except as disclosed on Schedule 9.20
----------------------- -------------
hereto:
(a) The Borrower, each Subsidiary, and all of their respective
properties, assets, and operations are in compliance in all material
respects with all Environmental Laws. The Borrower is not aware of, nor
has the Borrower received notice of, any past, present, or future
conditions, events, activities, practices, or incidents which may
interfere with or prevent the compliance or continued compliance of the
Borrower and the Subsidiaries with all Environmental Laws;
(b) To the best of the Borrower's knowledge, the Borrower and
each Subsidiary have obtained all permits, licenses, and authorizations
that are required under applicable Environmental Laws, and have
received no notice that all such permits are not in good standing, or
that the Borrower and its Subsidiaries are not in compliance with all
of the terms and conditions of such permits;
(c) To the best of Borrower's knowledge, no Hazardous
Materials exist on, about, or within or have been used, generated,
stored, transported, disposed of on, or Released from any of the
properties or assets of the Borrower or any Subsidiary except in
amounts that would not violate applicable law. The use which the
Borrower and the Subsidiaries make and intend to make of their
respective properties and assets will not result in the use,
generation, storage, transportation, accumulation, disposal, or Release
of any Hazardous Material on, in, or from any of their properties or
assets except in amounts that would not violate applicable law;
(d) Neither the Borrower nor any of its Subsidiaries nor any
of their respective currently or previously owned or leased properties
or operations is subject to any outstanding or, to the best of its
knowledge, threatened order from or agreement with any Governmental
Authority or other Person or subject to any judicial or docketed
administrative proceeding with respect to (i) failure to comply with
Environmental Laws, (ii) Remedial Action, or (iii) any Environmental
Liabilities arising from a Release or threatened Release;
CREDIT AGREEMENT - Page 42
<PAGE>
(e) To the best of the Borrower's knowledge, there are no
conditions or circumstances associated with the currently or
previously owned or leased properties or operations of the Borrower or
any of its Subsidiaries that could reasonably be expected to give rise
to any Environmental Liabilities;
(f) Neither the Borrower nor any of its Subsidiaries is a
treatment, storage, or disposal facility requiring a permit under the
Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901 et seq.,
regulations thereunder or any comparable provision of state law. The
Borrower and its Subsidiaries are in substantial compliance with all
applicable financial responsibility requirements of all Environmental
Laws;
(g) Neither the Borrower nor any of its Subsidiaries has filed or
to the best of Borrower's knowledge, failed to file any notice
required under applicable Environmental Law reporting a Release; and
(h) The Borrower has received no notice that a Lien arising under
any Environmental Law has attached to any property or revenues of the
Borrower or its Subsidiaries.
ARTICLE X
Positive Covenants
The Borrower covenants and agrees that, as long as the Obligations or
any part thereof are outstanding or any Bank has any Commitment hereunder or any
Issuing Bank has any obligation to issue Letters of Credit hereunder, the
Borrower will perform and observe the following positive covenants:
Section 10.1 Reporting Requirements. The Borrower will furnish to the
Agent, the Co-Agent, each Issuing Bank and each Bank:
(a) Annual Financial Statements. As soon as available, and in
any event within 100 days after the end of each fiscal year of the
Borrower, beginning with the fiscal year ending December 31, 1996, (i)
a copy of the annual audit report of the Borrower and the Subsidiaries
for such fiscal year containing, on a consolidated basis, balance
sheets and statements of income, retained earnings, and cash flow as at
the end of such fiscal year and for the 12-month period then ended, in
each case setting forth in comparative form the figures for the
preceding fiscal year, all in reasonable detail and audited and
certified by independent certified public accountants of recognized
standing acceptable to the Agent, to the effect that such report has
been prepared in accordance with GAAP; and (ii) a certificate of such
independent certified public accountants to the Agent (A) stating that
to their knowledge no Default has occurred and is continuing, or if in
their opinion a Default has occurred and is continuing, a statement as
to the nature thereof, and (B) confirming the calculations set forth in
the officer's certificate delivered simultaneously therewith;
CREDIT AGREEMENT - Page 43
<PAGE>
(b) Quarterly Financial Statements. As soon as available, and in
any event within 50 days after the end of each of the quarters of each
fiscal year of the Borrower, a copy of an unaudited financial report
of the Borrower and the Subsidiaries as of the end of such fiscal
quarter and for the portion of the fiscal year then ended, containing,
on a consolidated basis, balance sheets and statements of income,
retained earnings, and cash flow, in each case setting forth in
comparative form the figures for the corresponding period of the
preceding fiscal year, all in reasonable detail certified by the chief
financial officer of the Borrower to have been prepared in accordance
with GAAP and to fairly and accurately present (subject to year-end
audit adjustments) the financial condition and results of operations
of the Borrower and the Subsidiaries, on a consolidated basis, at the
date and for the periods indicated therein;
(c) Certificate of No Default. Concurrently with the delivery
of each of the financial statements referred to in subsections 10.1(a)
and (b), a certificate of the chief executive officer or chief
financial officer of the Borrower (i) stating that to the best of such
officer's knowledge, no Default has occurred and is continuing, or if a
Default has occurred and is continuing, a statement as to the nature
thereof and the action that is proposed to be taken with respect
thereto, and (ii) showing in reasonable detail the calculations
demonstrating compliance with Article XII;
(d) Management Letters. Promptly upon receipt thereof, a copy of
any management letter or written report submitted to the Borrower or
any Subsidiary by independent certified public accountants with
respect to the business, condition (financial or otherwise),
operations, prospects, or properties of the Borrower or any
Subsidiary;
(e) Notice of Litigation. Promptly after the commencement
thereof, notice of all actions, suits, and proceedings before any
Governmental Authority or arbitrator affecting the Borrower or any
Subsidiary which, if determined adversely to the Borrower or such
Subsidiary, could have a material adverse effect on the business,
condition (financial or otherwise), operations, prospects, or
properties of the Borrower or such Subsidiary;
(f) Notice of Default. As soon as possible and in any event
within five days after the occurrence of each Default, a written
notice setting forth the details of such Default and the action that
the Borrower has taken and proposes to take with respect thereto;
(g) ERISA Reports. Promptly after the filing or receipt thereof,
copies of all reports, including annual reports, and notices which the
Borrower or any Subsidiary files with or receives from the PBGC or the
U.S. Department of Labor under ERISA; and as soon as possible and in
any event within five days after the Borrower or any Subsidiary knows
or has reason to know that any Reportable Event or Prohibited
Transaction has occurred with respect to any Plan or that the PBGC or
the Borrower or any Subsidiary has instituted or will institute
proceedings under Title IV of ERISA to terminate any Plan, a
certificate of the chief financial officer of the Borrower setting
forth the details as to
CREDIT AGREEMENT - Page 44
<PAGE>
such Reportable Event or Prohibited Transaction or Plan termination and
the action that the Borrower proposes to take with respect thereto;
(h) Reports to Other Creditors. Promptly after the furnishing
thereof, copies of any statement or report furnished to any other party
pursuant to the terms of any indenture, loan, or credit or similar
agreement and not otherwise required to be furnished to the Agent, the
Issuing Bank and the Banks pursuant to any other clause of this
Section;
(i) Notice of Material Adverse Change. As soon as possible and
in any event within five days after the occurrence thereof, written
notice of any matter that could have a material adverse effect on the
business, condition (financial or otherwise), operations, prospects, or
properties of the Borrower or any Subsidiary;
(j) Proxy Statements, Etc. As soon as available and in any
event within ten days of sending or filing with the Securities and
Exchange Commission or successor agency, one copy of each financial
statement, report, notice or proxy statement sent by the Borrower or
any Subsidiary to its stockholders generally and one copy of each
regular, periodic or special report, form (including, without
limitation, all 10-K and 10-Q filings), registration statement, or
prospectus filed by the Borrower or any Subsidiary with any securities
exchange or the Securities and Exchange Commission or any successor
agency;
(k) General Information. Promptly, such other information
concerning the Borrower or any Subsidiary as the Agent or any Bank may
from time to time reasonably request;
(l) Reserve Reports.
(i) On or before March 1 of each calendar year at
Borrower's expense, an annual report in form and substance
satisfactory to the Agent and the Banks prepared by an
independent third party engineering firm acceptable to the
Agent and the Banks dated as of December 31 of the preceding
year, reflecting the quantity of existing proven and producing
oil and gas reserves attributable to the Mortgaged Properties
and any New Properties added since the last such annual report
submitted to the Agent and the Banks, a projection of the rate
of production and net operating income with respect thereto as
of such date, and such other information as is customarily
obtained from and provided in such reports; and
(ii) On or before September 1 of each calendar year
at Borrower's expense, a report in form and substance
satisfactory to the Agent and the Banks prepared by Borrower
dated as of June 30 of such year, reflecting the quantity of
existing proven and producing oil and gas reserves
attributable to the Mortgaged Properties and any New
Properties submitted to the Agent and the Banks for the first
six months of such year, a projection of the rate of
production and net operating income with respect thereto as of
such date, and such other information as is customarily
obtained from and provided in such reports;
CREDIT AGREEMENT - Page 45
<PAGE>
(m) Gas Gathering System Evaluation Reports. On or before
March 15 of each calendar year at Borrower's expense, a report in form
and substance satisfactory to the Agent and the Banks prepared by
Borrower dated as of December 31 of the preceding year, reflecting the
quantity of existing proven and producing oil and gas reserves
connected to the Gas Gathering Systems, total throughput for the Gas
Gathering Systems for the previous twelve months, new wells connected
to the Gas Gathering Systems during such period of time and such other
information as the Agent and the Banks may request to evaluate the Gas
Gathering Systems, including, but not limited to, anticipated capital
costs for connecting new sources of supply to the Gas Gathering
Systems;
(n) Monthly Production and Lease Operating Statement. Within
60 days after the end of each calendar month commencing with the
calendar month ending June 30, 1996, a production statement which
identifies the most recent information available relating to the gross
volumes of Hydrocarbons produced from the Mortgaged Properties and a
statement of revenues and expenses attributable to the Mortgaged
Properties for such calendar month then ended, such production report
and statement of revenues and expenses to be in a form and substance
reasonably satisfactory to the Agent and the Banks; and
(o) Monthly Gas Gathering System Operating Report. Within 60
days after the end of each calendar month commencing with the calendar
month ending June 30, 1996, an operating report which identifies the
most recent information available relating to the Hydrocarbons
throughput of the Gas Gathering Systems, revenues and expenses
attributable to the Gas Gathering Systems for such calendar month then
ended and such other information as the Agent and the Banks may request
all in a form and substance reasonably satisfactory to the Agent and
the Banks.
Section 10.2 Maintenance of Existence; Conduct of Business. The
Borrower will preserve and maintain, and will cause each Subsidiary (other than
Excluded Subsidiaries) to preserve and maintain, its corporate existence and all
of its leases, privileges, licenses, permits, franchises, qualifications, and
rights that are necessary or desirable in the Borrower's reasonable business
judgment, and in the ordinary conduct of its business. The Borrower will
conduct, and will cause each Subsidiary to conduct, its business in an orderly
and efficient manner in accordance with good business practices.
Section 10.3 Maintenance of Properties. The Borrower will maintain,
keep, and preserve, and cause each Subsidiary (other than Excluded Subsidiaries)
to maintain, keep, and preserve, all of its properties (tangible and intangible)
necessary or useful in the proper conduct of its business in good working order
and condition.
Section 10.4 Taxes and Claims. The Borrower will pay or discharge, and
will cause each Subsidiary to pay or discharge, at or before maturity or before
becoming delinquent (a) all taxes, levies, assessments, and governmental charges
imposed on it or its income or profits or any of its property, and (b) all
lawful claims for labor, material, and supplies, which, if unpaid, might become
a Lien upon any of its property; provided, however, that neither the Borrower
nor any Subsidiary shall be required to pay or discharge any tax, levy,
assessment, or governmental
CREDIT AGREEMENT - Page 46
<PAGE>
charge which is being contested in good faith by appropriate proceedings
diligently pursued, and for which adequate reserves have been established.
Section 10.5 Insurance. The Borrower will maintain, and will cause each
of the Subsidiaries to maintain, insurance with financially sound and reputable
insurance companies in such amounts and covering such risks as is usually
carried by corporations engaged in similar businesses and owning similar
properties in the same general areas in which the Borrower and the Subsidiaries
operate, provided that in any event the Borrower will maintain and cause each
Subsidiary to maintain workmen's compensation insurance, property insurance,
comprehensive general liability insurance, products liability insurance, and
business interruption insurance reasonably satisfactory to the Agent and the
Banks. Each insurance policy covering Collateral shall provide that such policy
will not be cancelled or reduced without 30 days' prior written notice to the
Agent. In the event an Event of Default occurs and continues for a period of
ninety days, Borrower will cause, within five days, each insurance policy
covering Collateral to name the Agent as additional insured and loss payee for
the benefit of the Agent, the Co-Agent, the Banks and the Issuing Banks.
Section 10.6 Inspection Rights. Upon reasonable prior notice, oral or
written, and during ordinary business hours, the Borrower will permit, and will
cause each Subsidiary to permit, representatives of the Agent, the Co-Agent, the
Issuing Banks and each Bank to examine, copy, and make extracts from its books
and records, to visit and inspect its properties, and to discuss its business,
operations, and financial condition with its officers, employees, and
independent certified public accountants. Notwithstanding the foregoing,
following the occurrence of a Default, the foregoing restrictions relating to
notice and normal business hours shall not apply.
Section 10.7 Keeping Books and Records. The Borrower will maintain, and
will cause each Subsidiary to maintain, proper books of record and account in
which full, true, and correct entries in conformity with GAAP shall be made of
all dealings and transactions in relation to its business and activities.
Section 10.8 Compliance with Laws. The Borrower will comply, and will
cause each Subsidiary to comply, in all material respects with all applicable
laws, rules, regulations, orders, and decrees of any Governmental Authority or
arbitrator.
Section 10.9 Compliance with Agreements. The Borrower will comply, and
will cause each Subsidiary to comply, in all material respects with all
agreements, contracts, and instruments binding on it or affecting its properties
or business.
Section 10.10 Further Assurances. The Borrower will, and will cause
each Subsidiary (other than Excluded Subsidiaries) to, execute and deliver such
further agreements and instruments and take such further action as may be
requested by the Agent to carry out the provisions and purposes of this
Agreement and the other Loan Documents and, subject to Section 7.1, to create,
preserve, and perfect the Liens of the Agent for the benefit of the Agent, the
Co-Agent, the Issuing Banks and the Banks in the Collateral.
CREDIT AGREEMENT - Page 47
<PAGE>
Section 10.11 ERISA. The Borrower will comply, and will cause each
Subsidiary to comply, with all minimum funding requirements, and all other
material requirements, of ERISA, if applicable, so as not to give rise to any
liability thereunder.
Section 10.12 Subsidiary Security Agreement; Subsidiary Guaranty. The
Borrower shall cause each Person that becomes a Subsidiary (other than Excluded
Subsidiaries) after the date hereof to execute and deliver to the Agent a
counterpart of each of the Subsidiary Security Agreement and Subsidiary Guaranty
within 15 days after such Person becomes a Subsidiary. Contemporaneously with
the execution and delivery of any such counterpart of the Subsidiary Security
Agreement, Borrower shall deliver to the Agent the original certificates
evidencing all outstanding capital stock of such Subsidiary (other than Excluded
Subsidiaries), together with stock powers relating thereto duly executed in
blank and such other documents as the Agent may reasonably request.
Section 10.13 Collateral Maintenance; Additional Mortgages. As of each
Determination Date, the Borrower shall execute or cause to be executed
additional mortgages or deeds of trust to the extent necessary to provide the
Agent with first priority perfected liens on at least 75% of the present value
of the Borrower's and Subsidiaries' (other than the Excluded Subsidiaries)
proved reserves (whether developed or undeveloped). In the event that the
Mortgaged Properties in which the Agent has a first priority perfected Lien
shall at any time constitute less than 75% of the present value of the
Borrower's and the Subsidiaries' (other than Excluded Subsidiaries) proved
reserves, the Borrower shall upon request from the Agent, promptly execute or
cause to be executed additional mortgages and deeds of trust to the extent
required to increase such percentage to at least 80%. Such mortgages and deeds
of trust shall be accompanied by title opinions and/or other evidence of title
satisfactory in form and substance to the Agent and the Banks. In addition,
Borrower shall deliver to the Agent upon request, such other information, data
and reports relating to the property subject to the new mortgages and deeds of
trust and the reserves and production related thereto, as the Agent and the
Banks shall reasonably request.
Section 10.14 Hedge Agreement. Within 30 days after Agent's request,
the Borrower shall enter into and shall maintain such agreements or similar
contractual arrangements, in form and substance as are satisfactory to the
Banks, intended to hedge market price fluctuations of natural gas and that cover
at least 75% of its total projected production from the producing reserves
attributable to the West Panhandle, East Panhandle and South Erik Fields for a
period of at least 18 months beginning June 28, 1996.
ARTICLE XI
Negative Covenants
The Borrower covenants and agrees that, as long as the Obligations or
any part thereof are outstanding or any Bank has any Commitment hereunder or any
Issuing Bank has any obligation to issue Letters of Credit hereunder, the
Borrower will perform and observe the following negative covenants:
CREDIT AGREEMENT - Page 48
<PAGE>
Section 11.1 Debt. The Borrower will not incur, create, assume, or
permit to exist, and will not permit any Subsidiary (other than Excluded
Subsidiaries) to incur, create, assume, or permit to exist, any Debt, except the
following (herein referred to as "Permitted Debt"):
(a) Debt to the Agent, the Co-Agent, the Banks and the Issuing
Banks pursuant to the Loan Documents;
(b) Debt in an aggregate amount not to exceed $1,000,000 at any
time outstanding (including, without limitation, existing Debt
described on Schedule 2 hereto);
(c) Existing Debt described on Schedule 9.9 hereto;
(d) Debt owed by the Borrower to an Affiliate, provided that such
Debt is fully subordinated to the Obligations pursuant to a
subordination agreement satisfactory in form and substance to the
Agent; and
(e) Debt consisting of current liabilities for taxes and other
assessments incurred in the ordinary course of business that are not
delinquent.
Section 11.2 Limitation on Liens. The Borrower will not incur, create,
assume, or permit to exist, and will not permit any Subsidiary (other than
Excluded Subsidiaries) to incur, create, assume, or permit to exist, any Lien
upon any of its property, assets, or revenues, whether now owned or hereafter
acquired, except the following (herein referred to as "Permitted Liens"):
(a) Liens on the property described on Schedule 11.2 hereto to
secure Permitted Debt;
(b) Liens in favor of the Agent for the benefit of the Agent, the
Co-Agent, the Banks and the Issuing Banks;
(c) Encumbrances consisting of minor easements, zoning
restrictions, or other restrictions on the use of real property that
do not (individually or in the aggregate) materially affect the value
of the assets encumbered thereby or materially impair the ability of
the Borrower or the Subsidiaries to use such assets in their
respective businesses, and none of which is violated in any material
respect by existing or proposed structures or land use;
(d) Liens for taxes, assessments, or other governmental charges
which are not delinquent or which are being contested in good faith
and for which adequate reserves have been established;
(e) Liens of mechanics, materialmen, warehousemen, carriers, or
other similar statutory Liens securing obligations that are not yet
due and are incurred in the ordinary course of business;
CREDIT AGREEMENT - Page 49
<PAGE>
(f) Liens resulting from good faith deposits to secure
payments of workmen's compensation or other social security programs or
to secure the performance of tenders, statutory obligations, surety and
appeal bonds, bids, contracts (other than for payment of Debt), or
leases made in the ordinary course of business; and
(g) Liens created in connection with (i) a $300,000 production
payment made by Borrower to American Founders Life Insurance Company,
and (ii) with the prior written consent of the Required Banks, similar
arrangements.
Section 11.3 Mergers, Etc. The Borrower will not, and will not permit
any Subsidiary to, become a party to a merger or consolidation, or purchase or
otherwise acquire all or any part of the business or assets of any Person or any
shares or other evidence of beneficial ownership of any Person, or wind-up,
dissolve, or liquidate itself; provided, however, the Borrower and the
Subsidiaries shall be entitled to acquire the business or assets of any Person
or any shares or other evidence of beneficial ownership of any Person so long as
the total aggregate consideration - cash and noncash - for all such acquisitions
during any twelve-month period does not exceed $1,000,000 and no Default is then
continuing.
Section 11.4 Restricted Payments. The Borrower will not declare or pay
any dividends (other than dividends in the form of stock) or make any other
payment or distribution (whether in cash, property, or obligations) on account
of its capital stock, or redeem, purchase, retire, or otherwise acquire any of
its capital stock, or permit any of its Subsidiaries to purchase or otherwise
acquire any capital stock of the Borrower or another Subsidiary, or set apart
any money for a sinking or other analogous fund for any dividend or other
distribution on its capital stock or for any redemption, purchase, retirement,
or other acquisition of any of its capital stock, except so long as no Default
is continuing (i) dividends approved in writing by Required Banks as of each
Determination Date, (ii) dividends accrued and payable on the Series C Preferred
Stock of Borrower through the period ending September 30, 1996, and (iii)
dividends payable in connection with the issuance of a new series of preferred
stock similar in form and substance to the Weisser, Johnson offering memorandum
previously delivered to the Agent and the Banks.
Section 11.5 Investments. The Borrower will not make, and will not
permit any Subsidiary (other than Excluded Subsidiaries) to make, any advance,
loan, extension of credit, or capital contribution to or investment in, or
purchase or own, or permit any Subsidiary to purchase or own, any stock, bonds,
notes, debentures, or other securities of, (i) any Excluded Subsidiary in excess
of $50,000 in the aggregate per fiscal year of Borrower, or (ii) any Person in
excess of $250,000 in the aggregate per fiscal year of the Borrower, except:
(a) readily marketable direct obligations of the United States of
America or any agency thereof with maturities of one year or less from
the date of acquisition;
(b) fully insured certificates of deposit with maturities of one
year or less from the date of acquisition issued by any commercial
bank operating in the United States of America having capital and
surplus in excess of $250,000,000; and
CREDIT AGREEMENT - Page 50
<PAGE>
(c) commercial paper of a domestic issuer if at the time of
purchase such paper is rated in one of the two highest rating
categories of Standard and Poor's Corporation or Moody's Investors
Service, Inc.
Section 11.6 Limitation on Issuance of Subsidiaries' Capital Stock. The
Borrower will not permit any of its Subsidiaries (other than Excluded
Subsidiaries) to, at any time issue, sell, assign, or otherwise dispose of (a)
any of such Subsidiary's capital stock, (b) any securities exchangeable for or
convertible into or carrying any rights to acquire any of such Subsidiary's
capital stock, or (c) any option, warrant, or other right to acquire any of such
Subsidiary's capital stock.
Section 11.7 Transactions With Affiliates. The Borrower will not enter
into, and will not permit any Subsidiary (other than Excluded Subsidiaries) to
enter into, any transaction, including, without limitation, the purchase, sale,
or exchange of property or the rendering of any service, with any Affiliate of
the Borrower or such Subsidiary, except in the ordinary course of and pursuant
to the reasonable requirements of the Borrower's or such Subsidiary's business
and upon fair and reasonable terms no less favorable to the Borrower or such
Subsidiary than would be obtained in a comparable arm's-length transaction with
a Person not an Affiliate of the Borrower or such Subsidiary.
Section 11.8 Disposition of Assets. The Borrower will not sell, lease,
assign, transfer, or otherwise dispose of any of its assets, or permit any
Subsidiary (other than Excluded Subsidiaries) to do so with any of its assets,
except (a) dispositions of Hydrocarbons in the ordinary course of business, (b)
dispositions of obsolete, damaged, or worn out equipment, (c) sales or transfers
of assets from one Guarantor to another Guarantor, or (d) sales of assets having
an aggregate fair market value of 10% or less of the then current Borrowing Base
during any fiscal year.
Section 11.9 Sale and Leaseback. The Borrower will not enter into, and
will not permit any Subsidiary (other than Excluded Subsidiaries) to enter into,
any arrangement with any Person pursuant to which it leases from such Person
real or personal property that has been or is to be sold or transferred,
directly or indirectly, by it to such Person, except for any such arrangements
which do not exceed the aggregate amount of $500,000 for the Borrower and its
Subsidiaries during any fiscal year.
Section 11.10 Prepayment of Debt. The Borrower will not prepay, and
will not permit any Subsidiary (other than Excluded Subsidiaries) to prepay, any
Debt in excess of an aggregate amount of $50,000 during any fiscal year, except
the Obligations.
Section 11.11 Nature of Business. The Borrower will not, and will not
permit any Subsidiary (other than Excluded Subsidiaries) to, engage in any
business other than the oil and gas exploration and production, gas gathering,
pipeline and processing, and petroleum property management and consulting
businesses in which they are engaged on the date hereof.
Section 11.12 Environmental Protection. The Borrower will not, and will not
permit any of its Subsidiaries (other than Cushing Disposal, Inc.) to, (a) use
(or permit any tenant to use)
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any of their respective properties or assets for the handling, processing,
storage, transportation, or disposal of any Hazardous Material except in amounts
that will not violate applicable law, (b) conduct any activity that is likely to
cause a Release or threatened Release of any Hazardous Material, or (c)
otherwise conduct any activity or use any of their respective properties or
assets in any manner that is likely in any material respect to violate any
Environmental Law or create any Environmental Liabilities for which the Borrower
or any of its Subsidiaries would be responsible.
Section 11.13 Accounting. The Borrower will not, and will not permit
any of its Subsidiaries to, change its fiscal year or make any change (a) in
accounting treatment or reporting practices, except as required by GAAP and
disclosed to the Agent, or (b) in tax reporting treatment, except as required by
law and disclosed to the Agent.
ARTICLE XII
Financial Covenants
The Borrower covenants and agrees that, as long as the Obligations or
any part thereof are outstanding or any Bank has any Commitment hereunder or the
Issuing Bank has any obligation to issue Letters of Credit hereunder, the
Borrower will perform and observe the following financial covenants:
Section 12.1 Consolidated Interest Coverage Ratio. The Borrower will
not permit its Consolidated Interest Coverage Ratio to be less than 2.25 to 1.0,
calculated quarterly (beginning June 30, 1996) for the four quarters then ended
as of the last day of each March, June, September and December.
Section 12.2 Consolidated Tangible Net Worth. The Borrower will at all
times maintain Consolidated Tangible Net Worth in an amount not less than the
sum of (i) $20,000,000, plus (ii) 80% of the Consolidated Net Income (to the
extent positive) of Borrower for each fiscal year ending after December 31,
1995, calculated quarterly (beginning June 30, 1996) as of the last day of each
March, June, September and December.
Section 12.3 Current Ratio. Borrower will not permit its Current Ratio
to be less than 1.0 to 1.0, calculated quarterly (beginning June 30, 1996) as of
the last day of each March, June, September and December.
ARTICLE XIII
Default
Section 13.1 Events of Default. Each of the following shall be deemed an
"Event of Default":
(a) The Borrower shall fail to pay when due the Obligations or any
part thereof.
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(b) Any representation or warranty made or deemed made by the
Borrower or any Obligated Party (or any of their respective officers)
in any Loan Document or in any certificate, report, notice, or
financial statement furnished at any time in connection with this
Agreement shall be false, misleading, or erroneous in any material
respect when made or deemed to have been made.
(c) The Borrower shall fail to perform, observe, or comply
with any covenant, agreement, or term contained in Section 10.1(e),
(f), (h) or (i), 10.5, 10.6, 10.10, Article XI, or Article XII of this
Agreement (for which there shall be no grace); or the Borrower or any
Obligated Party shall fail to perform, observe, or comply with any
other covenant, agreement, or term contained in this Agreement or any
other Loan Document (other than those set forth in Section 10.1(e),
(f), (h) or (i), 10.5, 10.6, 10.10, Article XI or XII or the covenants
to pay the Obligations) and such failure shall continue for a period of
10 days.
(d) The Borrower, any Subsidiary, or any Obligated Party shall
commence a voluntary proceeding seeking liquidation, reorganization, or
other relief with respect to itself or its debts under any bankruptcy,
insolvency, or other similar law now or hereafter in effect or seeking
the appointment of a trustee, receiver, liquidator, custodian, or other
similar official of it or a substantial part of its property or shall
consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other
proceeding commenced against it or shall make a general assignment for
the benefit of creditors or shall generally fail to pay its debts as
they become due or shall take any corporate action to authorize any of
the foregoing.
(e) An involuntary proceeding shall be commenced against the
Borrower, any Subsidiary, or any Obligated Party seeking liquidation,
reorganization, or other relief with respect to it or its debts under
any bankruptcy, insolvency, or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official for it or a substantial part of its
property, and such involuntary proceeding shall remain undismissed and
unstayed for a period of sixty days.
(f) The Borrower, any Subsidiary, or any Obligated Party shall
fail to discharge within a period of 30 days after the commencement
thereof any attachment, sequestration, or similar proceeding or
proceedings involving an aggregate amount in excess of $100,000 against
any of its assets or properties.
(g) A final judgment or judgments for the payment of money in
excess of $100,000 in the aggregate shall be rendered by a court or
courts against the Borrower, any of its Subsidiaries, or any Obligated
Party and the same shall not be discharged (or provision shall not be
made for such discharge), or a stay of execution thereof shall not be
procured, within 30 days from the date of entry thereof and the
Borrower or the relevant Subsidiary or Obligated Party shall not,
within said period of 30 days, or such longer period during which
execution of the same shall have been stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal.
CREDIT AGREEMENT - Page 53
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(h) The Borrower, any Subsidiary, or any Obligated Party shall
fail to pay when due any principal of or interest on any Debt (other
than the Obligations) the amount of which individually or in the
aggregate exceeds $100,000, or the maturity of any such Debt shall have
been accelerated, or any such Debt shall have been required to be
prepaid prior to the stated maturity thereof, or any event shall have
occurred that permits (or, with the giving of notice or lapse of time
or both, would permit) any holder or holders of such Debt or any Person
acting on behalf of such holder or holders to accelerate the maturity
thereof or require any such prepayment.
(i) This Agreement or any other Loan Document shall cease to
be in full force and effect or shall be declared null and void or the
validity or enforceability thereof shall be contested or challenged by
the Borrower, any Subsidiary, any Obligated Party, or the Borrower or
any Obligated Party shall deny that it has any further liability or
obligation under any of the Loan Documents, or any lien or security
interest created by the Loan Documents shall for any reason cease to be
a valid, first priority perfected security interest in and lien upon
any of the Collateral purported to be covered thereby.
(j) Any of the following events shall occur or exist with
respect to the Borrower or any ERISA Affiliate: (i) any Prohibited
Transaction involving any Plan; (ii) any Reportable Event with respect
to any Plan; (iii) the filing under Section 4041 of ERISA of a notice
of intent to terminate any Plan or the termination of any Plan; (iv)
any event or circumstance that might constitute grounds entitling the
PBGC to institute proceedings under Section 4042 of ERISA for the
termination of, or for the appointment of a trustee to administer, any
Plan, or the institution by the PBGC of any such proceedings; or (v)
complete or partial withdrawal under Section 4201 or 4204 of ERISA from
a Multiemployer Plan or the reorganization, insolvency, or termination
of any Multiemployer Plan; and in each case above, such event or
condition, together with all other events or conditions, if any, have
subjected or could in the reasonable opinion of Required Banks subject
the Borrower to any tax, penalty, or other liability to a Plan, a
Multiemployer Plan, the PBGC, or otherwise (or any combination thereof)
which in the aggregate exceed or could reasonably be expected to exceed
$250,000.
(k) The Borrower or any of its Material Subsidiaries, or any
of their properties, revenues, or assets aggregating $100,000 or
greater, shall become the subject of an order of forfeiture, seizure,
or divestiture (whether under RICO or otherwise) and the same shall not
have been discharged (or provisions shall not be made for such
discharge) within 30 days from the date of entry thereof.
(l) A Change in Control shall occur.
Section 13.2 Remedies. If any Event of Default shall occur and be
continuing, the Agent may (and if directed by Required Banks, shall) do any one
or more of the following:
(a) Acceleration. Declare all outstanding principal of and
accrued and unpaid interest on the Notes and all other obligations of
the Borrower under the Loan Documents immediately due and payable, and
the same shall thereupon become immediately due and
CREDIT AGREEMENT - Page 54
<PAGE>
payable, without notice, demand, presentment, notice of dishonor,
notice of acceleration, notice of intent to accelerate, protest, or
other formalities of any kind, all of which are hereby expressly waived
by the Borrower.
(b) Termination of Commitments. Terminate the Commitments and the
obligation of the Issuing Banks to issue Letters of Credit hereunder
without notice to the Borrower.
(c) Judgment. Reduce any claim of the Agent, the Co-Agent, any
Issuing Bank or any Bank to judgment.
(d) Foreclosure. Foreclose or otherwise enforce any Lien granted
to the Agent for the benefit of itself, the Co-Agent, the Banks and
the Issuing Banks to secure payment and performance of the Obligations
in accordance with the terms of the Loan Documents.
(e) Rights. Exercise any and all rights and remedies afforded by
the laws of the State of Texas or any other jurisdiction, by any of
the Loan Documents, by equity, or otherwise.
Provided, however, that upon the occurrence of an Event of Default under
Subsection (d) or (e) of Section 13.1, the Commitments of all of the Banks and
the obligation of the Issuing Banks to issue Letters of Credit shall
automatically terminate, and the outstanding principal of and accrued and unpaid
interest on the Notes and all other obligations of the Borrower under the Loan
Documents shall thereupon become immediately due and payable without notice,
demand, presentment, notice of dishonor, notice of acceleration, notice of
intent to accelerate, protest, or other formalities of any kind, all of which
are hereby expressly waived by the Borrower.
Section 13.3 Letters of Credit. If any Event of Default shall occur and
be continuing, Borrower shall, if requested by the Agent for the Required Banks,
immediately deposit with and pledge to the Agent cash or cash equivalent
investments in an amount equal to the outstanding Letter of Credit Liabilities
as security for the Obligations.
Section 13.4 Performance by the Agent. If the Borrower shall fail to
perform any covenant or agreement in accordance with the terms of the Loan
Documents, the Agent may, at the direction of Required Banks, perform or attempt
to perform such covenant or agreement on behalf of the Borrower. In such event,
the Borrower shall, at the request of the Agent, promptly pay any amount
expended by the Agent or the Banks in connection with such performance or
attempted performance to the Agent at the Principal Office, together with
interest thereon at the Default Rate from and including the date of such
expenditure to but excluding the date such expenditure is paid in full.
Notwithstanding the foregoing, it is expressly agreed that neither the Agent,
the Issuing Bank nor any Bank shall have any liability or responsibility for the
performance of any obligation of the Borrower under this Agreement or any of the
other Loan Documents.
CREDIT AGREEMENT - Page 55
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ARTICLE XIV
The Agent
Section 14.1 Appointment, Powers and Immunities. In order to expedite
the various transactions contemplated by this agreement, Co-Agent, the Banks and
the Issuing Banks hereby irrevocably appoint and authorize Wells Fargo to act as
their Agent hereunder and under each of the other Loan Documents. Wells Fargo
consents to such appointment and agrees to perform the duties of the Agent as
specified herein. The Co-Agent, the Banks and the Issuing Banks authorize and
direct the Agent to take such action in their name and on their behalf under the
terms and provisions of the Loan Documents and to exercise such rights and
powers thereunder as are specifically delegated to or required of the Agent for
the Co-Agent, the Banks and the Issuing Banks, together with such rights and
powers as are reasonably incidental thereto. The Agent is hereby expressly
authorized to act as the Agent on behalf of itself, the Co-Agent, the other
Banks and the Issuing Banks:
(a) To receive on behalf of each of the Co-Agent, the Banks and
the Issuing Banks any payment of principal, interest, fees or other
amounts paid pursuant to this Agreement and the Notes and to
distribute to the Co-Agent, each Bank and/or each Issuing Bank its
share of all payments so received as provided in this Agreement;
(b) To receive all documents and items to be furnished under the
Loan Documents;
(c) To act as nominee for and on behalf of the Co-Agent, the
Banks and the Issuing Banks in and under the Loan Documents;
(d) To arrange for the means whereby the funds of the Banks are
to be made available to the Borrower;
(e) To distribute to the Co-Agent, the Banks and the Issuing
Banks information, requests, notices, payments, prepayments, documents
and other items received from the Borrower, the other Obligated
Parties, and other Persons;
(f) To execute and deliver to the Borrower, the other Obligated
Parties, and other Persons, all requests, demands, approvals, notices,
and consents received from the Co-Agent, the Banks and the Issuing
Banks;
(g) To the extent permitted by the Loan Documents, to exercise on
behalf of the Co-Agent, each Bank and each Issuing Bank all rights and
remedies of such Persons upon the occurrence of any Event of Default;
CREDIT AGREEMENT - Page 56
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(h) To accept, execute, and deliver the Borrower Pledge
Agreement, the Subsidiary Pledge Agreement, the Subsidiary Guaranty
and the other Security Documents as the secured party, including,
without limitation all UCC financing statements; and
(i) To take such other actions as may be requested by Required
Banks.
Neither the Agent nor any of its Affiliates, officers, directors,
employees, attorneys, or agents shall be liable for any action taken or omitted
to be taken by any of them hereunder or otherwise in connection with this
Agreement or any of the other Loan Documents except for its or their own gross
negligence or willful misconduct. Without limiting the generality of the
preceding sentence, the Agent (i) may treat the payee of any Note as the holder
thereof until the Agent receives written notice of the assignment or transfer
thereof signed by such payee and in form satisfactory to the Agent; (ii) shall
have no duties or responsibilities except those expressly set forth in this
Agreement and the other Loan Documents, and shall not by reason of this
Agreement or any other Loan Document be a trustee or fiduciary for any Bank or
Issuing Bank; (iii) shall not be required to initiate any litigation or
collection proceedings hereunder or under any other Loan Document except to the
extent requested by Required Banks; (iv) shall not be responsible to the Banks
or the Issuing Banks for any recitals, statements, representations or warranties
contained in this Agreement or any other Loan Document, or any certificate or
other document referred to or provided for in, or received by any of them under,
this Agreement or any other Loan Document, or for the value, validity,
effectiveness, enforceability, or sufficiency of this Agreement or any other
Loan Document or any other document referred to or provided for herein or
therein or for any failure by any Person to perform any of its obligations
hereunder or thereunder; (v) may consult with legal counsel (including counsel
for the Borrower), independent public accountants, and other experts selected by
it and shall not be liable for any action taken or omitted to be taken in good
faith by it in accordance with the advice of such counsel, accountants, or
experts; and (vi) shall incur no liability under or in respect of any Loan
Document by acting upon any notice, consent, certificate, or other instrument or
writing believed by it to be genuine and signed or sent by the proper party or
parties. As to any matters not expressly provided for by this Agreement, the
Agent shall in all cases be fully protected in acting, or in refraining from
acting, hereunder in accordance with instructions signed by Required Banks, and
such instructions of Required Banks and any action taken or failure to act
pursuant thereto shall be binding on all of the Banks; provided, however, that
the Agent shall not be required to take any action which exposes the Agent to
personal liability or which is contrary to this Agreement or any other Loan
Document or applicable law.
Section 14.2 Rights of Agent as a Bank. With respect to its Commitment,
the Loans made by it and the Notes issued to it, Wells Fargo in its capacity as
a Bank hereunder shall have the same rights and powers hereunder as any other
Bank and may exercise the same as though it were not acting as the Agent or an
Issuing Bank, and the term "Bank" or "Banks" shall, unless the context otherwise
indicates, include the Agent in its individual capacity. The Agent and its
Affiliates may (without having to account therefor to any Bank or any Issuing
Bank) accept deposits from, lend money to, act as trustee under indentures of,
provide merchant banking services to, and generally engage in any kind of
business with the Borrower, any of its
CREDIT AGREEMENT - Page 57
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Subsidiaries, any other Obligated Party, and any other Person who may do
business with or own securities of the Borrower, any Subsidiary, or any other
Obligated Party, all as if it were not acting as the Agent and without any duty
to account therefor to the Co-Agent, the Banks or the Issuing Banks.
Section 14.3 Sharing of Payments, Etc. If any Bank shall obtain any
payment of any principal of or interest on any Loan made by it under this
Agreement or payment of any other obligation under the Loan Documents then owed
by the Borrower or any other Obligated Party to such Bank, whether voluntary,
involuntary, through the exercise of any right of setoff, banker's lien,
counterclaim or similar right, or otherwise, in excess of its pro rata share,
such Bank shall promptly purchase from the other Banks participations in the
Loans held by them hereunder in such amounts, and make such other adjustments
from time to time as shall be necessary to cause such purchasing Bank to share
the excess payment ratably with each of the other Banks in accordance with its
pro rata portion thereof. To such end, all of the Banks shall make appropriate
adjustments among themselves (by the resale of participations sold or otherwise)
if all or any portion of such excess payment is thereafter rescinded or must
otherwise be restored. The Borrower agrees, to the fullest extent it may
effectively do so under applicable law, that any Bank so purchasing a
participation in the Loans made by the other Banks may exercise all rights of
setoff, banker's lien, counterclaim, or similar rights with respect to such
participation as fully as if such Bank were a direct holder of Loans to the
Borrower in the amount of such participation. Nothing contained herein shall
require any Bank to exercise any such right or shall affect the right of any
Bank to exercise, and retain the benefits of exercising, any such right with
respect to any other indebtedness or obligation of the Borrower.
Section 14.4 INDEMNIFICATION. THE BANKS HEREBY AGREE TO INDEMNIFY THE
AGENT FROM AND HOLD THE AGENT AND THE ISSUING BANKS HARMLESS AGAINST (TO THE
EXTENT NOT REIMBURSED UNDER SECTIONS 15.1 AND 15.2, BUT WITHOUT LIMITING THE
OBLIGATIONS OF THE BORROWER UNDER SECTIONS 15.1 AND 15.2), RATABLY IN ACCORDANCE
WITH THEIR RESPECTIVE COMMITMENTS, ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES,
DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES
(INCLUDING ATTORNEYS' FEES), AND DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER
WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE AGENT OR ANY
ISSUING BANK IN ANY WAY RELATING TO OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS
OR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY THE AGENT OR ANY ISSUING BANK
UNDER OR IN RESPECT OF ANY OF THE LOAN DOCUMENTS; PROVIDED, FURTHER, THAT NO
BANK SHALL BE LIABLE FOR ANY PORTION OF THE FOREGOING TO THE EXTENT CAUSED BY
THE AGENT'S OR SUCH ISSUING BANK'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
WITHOUT LIMITATION OF THE FOREGOING, IT IS THE EXPRESS INTENTION OF THE BANKS
THAT THE AGENT AND THE ISSUING BANKS SHALL BE INDEMNIFIED HEREUNDER FROM AND
HELD HARMLESS AGAINST ALL OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS,
CREDIT AGREEMENT - Page 58
<PAGE>
DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES), AND
DISBURSEMENTS OF ANY KIND OR NATURE DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE AGENT OR SUCH ISSUING
BANK. WITHOUT LIMITING ANY OTHER PROVISION OF THIS SECTION, EACH BANK AGREES TO
REIMBURSE THE AGENT AND EACH ISSUING BANK PROMPTLY UPON DEMAND FOR ITS PRO RATA
SHARE (CALCULATED ON THE BASIS OF THE COMMITMENTS) OF ANY AND ALL OUT-OF-POCKET
EXPENSES (INCLUDING ATTORNEYS' FEES) INCURRED BY THE AGENT OR SUCH ISSUING BANK
IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION,
MODIFICATION, AMENDMENT OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL
PROCEEDINGS, OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR
RESPONSIBILITIES UNDER, THE LOAN DOCUMENTS, TO THE EXTENT THAT THE AGENT OR SUCH
ISSUING BANK IS NOT REIMBURSED FOR SUCH EXPENSES BY THE BORROWER.
Section 14.5 Independent Credit Decisions. Each Bank agrees that it has
independently and without reliance on the Agent, the Co-Agent, any Issuing Bank
or any other Bank, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of the Borrower and decision to enter
into this Agreement and that it will, independently and without reliance upon
the Agent, the Co-Agent, any Issuing Bank or any other Bank, and based upon such
documents and information as it shall deem appropriate at the time, continue to
make its own analysis and decisions in taking or not taking action under this
Agreement or any of the other Loan Documents. The Agent shall not be required to
keep itself informed as to the performance or observance by the Borrower or any
Obligated Party of this Agreement or any other Loan Document or to inspect the
properties or books of the Borrower or any Obligated Party. Except for notices,
reports and other documents and information expressly required to be furnished
to the Banks by the Agent hereunder or under the other Loan Documents, the Agent
shall not have any duty or responsibility to provide the Issuing Banks or any
Bank with any credit, financial or other information concerning the affairs,
financial condition or business of the Borrower or any Obligated Party (or any
of their Affiliates) which may come into the possession of the Agent or any of
its Affiliates.
Section 14.6 Several Commitments. The Commitments and other obligations
of the Banks under this Agreement are several. The default by any Bank in making
a Loan in accordance with its Commitment shall not relieve the other Banks of
their obligations under this Agreement. In the event of any default by any Bank
in making any Loan, each nondefaulting Bank shall be obligated to make its Loan
but shall not be obligated to advance the amount which the defaulting Bank was
required to advance hereunder. In no event shall any Bank be required to advance
an amount or amounts which shall in the aggregate exceed such Bank's Commitment.
No Bank shall be responsible for any act or omission of any other Bank.
Section 14.7 Successor Agent. Subject to the appointment and acceptance of
a successor Agent as provided below, the Agent may resign at any time by giving
notice thereof to the
CREDIT AGREEMENT - Page 59
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Co-Agent, the Banks, the Issuing Banks and the Borrower and the Agent may be
removed at any time with or without cause by Required Banks. Upon any such
resignation or removal, Required Banks will have the right to appoint a
successor Agent. If no successor Agent shall have been so appointed by Required
Banks and shall have accepted such appointment within 30 days after the retiring
Agent's giving of notice of resignation or the Required Banks' removal of the
retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a
successor Agent, which shall be a commercial bank organized under the laws of
the United States of America or any State thereof and having combined capital
and surplus of at least $100,000,000. In the event the successor Agent is not at
the time of its appointment, a Bank hereunder, the Borrower shall have the right
to consent to the successor Agent, which consent shall not be unreasonably
withheld or delayed. Upon the acceptance of its appointment as successor Agent,
such successor Agent shall thereupon succeed to and become vested with all
rights, powers, privileges, immunities, and duties of the resigning or removed
Agent, and the resigning or removed Agent shall be discharged from its duties
and obligations under this Agreement and the other Loan Documents. After any
Agent's resignation or removal as Agent, the provisions of this Article XIV
shall continue in effect for its benefit in respect of any actions taken or
omitted to be taken by it while it was the Agent.
ARTICLE XV
Miscellaneous
Section 15.1 Expenses. The Borrower hereby agrees to pay on demand: (a)
all reasonable costs and expenses of the Agent in connection with the
preparation, negotiation, execution, and delivery of this Agreement and the
other Loan Documents and any and all amendments, modifications, renewals,
extensions, and supplements thereof and thereto, including, without limitation,
the reasonable fees and expenses of legal counsel for the Agent, (b) all costs
and expenses of the Agent, the Co-Agent and the Issuing Banks in connection with
any Default and the enforcement of this Agreement or any other Loan Document,
including, without limitation, the reasonable fees and expenses of legal counsel
for the Agent, the Co-Agent and the Issuing Banks, (c) all transfer, stamp,
documentary, or other similar taxes, assessments, or charges levied by any
Governmental Authority in respect of this Agreement or any of the other Loan
Documents, (d) all costs, expenses, assessments, and other charges incurred in
connection with any filing, registration, recording, or perfection of any
security interest or Lien contemplated by this Agreement or any other Loan
Document, and (e) all other reasonable costs and expenses incurred by the Agent
in connection with this Agreement or any other Loan Document, including, without
limitation, all reasonable costs, expenses, and other charges incurred following
the occurrence and during the continuance of a Default in connection with
obtaining any audit or appraisal in respect of the Collateral.
Section 15.2 INDEMNIFICATION. THE BORROWER SHALL INDEMNIFY THE AGENT, THE
CO-AGENT, THE ISSUING BANKS AND EACH BANK AND EACH AFFILIATE THEREOF AND THEIR
RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AND AGENTS FROM, AND HOLD
EACH OF THEM
CREDIT AGREEMENT - Page 60
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HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES,
JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS' FEES) TO
WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR
RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION,
OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS
CONTEMPLATED BY THE LOAN DOCUMENTS, (C) ANY BREACH BY THE BORROWER OF ANY
REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE
LOAN DOCUMENTS, (D) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL,
REMOVAL, OR CLEANUP OF ANY HAZARDOUS MATERIAL LOCATED ON, ABOUT, WITHIN, OR
AFFECTING ANY OF THE PROPERTIES OR ASSETS OF THE BORROWER OR ANY SUBSIDIARY, OR
(E) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT
LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION, OR OTHER PROCEEDING
RELATING TO ANY OF THE FOREGOING. WITHOUT LIMITING ANY PROVISION OF THIS
AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE
PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION SHALL BE
INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES,
CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES
(INCLUDING ATTORNEYS' FEES) ARISING OUT OF OR RESULTING FROM THE SOLE OR
CONTRIBUTORY NEGLIGENCE OF SUCH PERSON.
Section 15.3 LIMITATION OF LIABILITY. NONE OF THE AGENT, THE CO-AGENT,
ANY ISSUING BANK, ANY BANK, OR ANY AFFILIATE, OFFICER, DIRECTOR, EMPLOYEE,
ATTORNEY, OR AGENT THEREOF SHALL HAVE ANY LIABILITY WITH RESPECT TO, AND THE
BORROWER HEREBY WAIVES, RELEASES, AND AGREES NOT TO SUE ANY OF THEM UPON, ANY
CLAIM FOR ANY SPECIAL OR PUNITIVE DAMAGES SUFFERED OR INCURRED BY THE BORROWER
IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR
ANY OF THE OTHER LOAN DOCUMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. THE BORROWER HEREBY WAIVES,
RELEASES, AND AGREES NOT TO SUE THE AGENT, THE CO-AGENT, ANY ISSUING BANK, OR
ANY BANK OR ANY OF THEIR RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES,
ATTORNEYS, OR AGENTS FOR PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM IN CONNECTION
WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT
OR ANY OF THE OTHER LOAN DOCUMENTS.
Section 15.4 No Duty. All attorneys, accountants, appraisers, and other
professional Persons and consultants retained by the Agent, the Co-Agent, the
Issuing Banks and the Banks
CREDIT AGREEMENT - Page 61
<PAGE>
shall have the right to act exclusively in the interest of the Agent, the
Co-Agent, the Issuing Banks and the Banks and shall have no duty of disclosure,
duty of loyalty, duty of care, or other duty or obligation of any type or nature
whatsoever to the Borrower or any of the Borrower's shareholders or any other
Person.
Section 15.5 No Fiduciary Relationship. The relationship between the
Borrower and each Bank is solely that of debtor and creditor, and neither the
Agent, the Co-Agent, any Issuing Bank nor any Bank has any fiduciary or other
special relationship with the Borrower, and no term or condition of any of the
Loan Documents shall be construed so as to deem the relationship between the
Borrower, the Agent, the Co-Agent, any Issuing Bank or any Bank to be other than
that of debtor and creditor.
Section 15.6 Equitable Relief. The Borrower recognizes that in the
event the Borrower fails to pay, perform, observe, or discharge any or all of
the Obligations, any remedy at law may prove to be inadequate relief to the
Agent, the Co-Agent, the Issuing Banks and the Banks. The Borrower therefore
agrees that if the Agent, the Co-Agent, the Issuing Banks or the Banks so
request, shall be entitled to temporary and permanent injunctive relief in any
such case without the necessity of proving actual damages.
Section 15.7 No Waiver; Cumulative Remedies. No failure on the part of
the Agent, the Co-Agent, any Issuing Bank or any Bank to exercise and no delay
in exercising, and no course of dealing with respect to, any right, power, or
privilege under this Agreement shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power, or privilege under this
Agreement preclude any other or further exercise thereof or the exercise of any
other right, power, or privilege. The rights and remedies provided for in this
Agreement and the other Loan Documents are cumulative and not exclusive of any
rights and remedies provided by law.
Section 15.8 Successors and Assigns.
(a) This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
assigns. The Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of the Agent
and all of the Banks. Any Bank may sell participations to one or more
banks or other institutions in or to all or a portion of its rights and
obligations under this Agreement and the other Loan Documents
(including, without limitation, all or a portion of its Commitments and
the Loans owing to it); provided, however, that (i) such Bank's
obligations under this Agreement and the other Loan Documents
(including, without limitation, its Commitments) shall remain
unchanged, (ii) such Bank shall remain solely responsible to the
Borrower for the performance of such obligations, (iii) such Bank shall
remain the holder of its Notes for all purposes of this Agreement, (iv)
the Borrower shall continue to deal solely and directly with such Bank
in connection with such Bank's rights and obligations under this
Agreement and the other Loan Documents, and (v) such Bank shall not
sell a participation that conveys to the participant the right to vote
or give or
CREDIT AGREEMENT - Page 62
<PAGE>
withhold consents under this Agreement or any other Loan Document,
other than the right to vote upon or consent to (A) any increase of
such Bank's Commitments, (B) any reduction of the principal amount of,
or interest to be paid on, the Loans of such Bank, (C) any reduction of
any commitment fee or other amount payable to such Bank under any Loan
Document, or (D) any postponement of any date for the payment of any
amount payable in respect of the Loans of such Bank.
(b) The Borrower and each of the Banks agree that any Bank
(the "Assigning Bank") may, with the Agent's consent and unless an
Event of Default has occurred, the Borrower's consent (except that no
consent shall be required with respect to assignments by the Banks
during the first six months after the date hereof, each of the Banks
agreeing to use reasonable efforts to keep the Borrower advised of any
potential assignees), which consent of the Borrower shall not be
unreasonably withheld or delayed, at any time assign to one or more
Eligible Assignees all, or a proportionate part of all, of its rights
and obligations under this Agreement and the other Loan Documents
(including, without limitation, its Commitments and Loans) (each an
"Assignee"); provided, however, that (i) each such assignment shall be
of a consistent, and not a varying, percentage of all of the assigning
Bank's Commitments, rights and obligations under this Agreement and the
other Loan Documents, (ii) except in the case of an assignment of all
of a Bank's rights and obligations under this Agreement and the other
Loan Documents, the amount of the Commitments of the assigning Bank
being assigned pursuant to each assignment (determined as of the date
of the Assignment and Acceptance with respect to such assignment) shall
in no event be less than $5,000,000, and (iii) the parties to each such
assignment shall execute and deliver to the Agent for its acceptance
and recording in the Register (as defined below), an Assignment and
Acceptance, together with the Notes subject to such assignment, and a
processing and recordation fee of $2,500, to be paid by the Assignee.
Upon such execution, delivery, acceptance, and recording, from and
after the effective date specified in each Assignment and Acceptance,
which effective date shall be at least five Business Days after the
execution thereof, or, if so specified in such Assignment and
Acceptance, the date of acceptance thereof by the Agent, (x) the
assignee thereunder shall be a party hereto as a "Bank" and, to the
extent that rights and obligations hereunder have been assigned to it
pursuant to such Assignment and Acceptance, have the rights and
obligations of a Bank hereunder and under the Loan Documents and (y)
the Bank that is an assignor thereunder shall, to the extent that
rights and obligations hereunder have been assigned by it pursuant to
such Assignment and Acceptance, relinquish its rights and be released
from its obligations under this Agreement and the other Loan Documents
(and, in the case of an Assignment and Acceptance covering all or the
remaining portion of a Bank's rights and obligations under the Loan
Documents, such Bank shall cease to be a party thereto).
(c) By executing and delivering an Assignment and Acceptance,
the Bank that is an assignor thereunder and the assignee thereunder
confirm to and agree with each other and the other parties hereto as
follows: (i) other than as provided in such Assignment and Acceptance,
such assigning Bank makes no representation or warranty
CREDIT AGREEMENT - Page 63
<PAGE>
and assumes no responsibility with respect to any statements,
warranties, or representations made in or in connection with the Loan
Documents or the execution, legality, validity, and enforceability,
genuineness, sufficiency, or value of the Loan Documents or any other
instrument or document furnished pursuant thereto; (ii) such assigning
Bank makes no representation or warranty and assumes no responsibility
with respect to the financial condition of the Borrower or any
Obligated Party or the performance or observance by the Borrower or any
Obligated Party of its obligations under the Loan Documents; (iii) such
assignee confirms that it has received a copy of the other Loan
Documents, together with copies of the financial statements referred to
in Section 9.2 and such other documents and information as it has
deemed appropriate to make its own credit analysis and decision to
enter into such Assignment and Acceptance; (iv) such assignee will,
independently and without reliance upon the Agent or such assignor and
based on such documents and information as it shall deem appropriate at
the time, continue to make its own credit decisions in taking or not
taking action under this Agreement and the other Loan Documents; (v)
such assignee confirms that it is an Eligible Assignee; (vi) such
assignee appoints and authorizes the Agent to take such action as agent
on its behalf and exercise such powers under the Loan Documents as are
delegated to the Agent by the terms thereof, together with such powers
as are reasonably incidental thereto; and (vii) such assignee agrees
that it will perform in accordance with their terms all of the
obligations which by the terms of the Loan Documents are required to be
performed by it as a Bank.
(d) The Agent shall maintain at its Principal Office a copy of
each Assignment and Acceptance delivered to and accepted by it and a
register for the recordation of the names and addresses of the Banks
and the Commitments of, and principal amount of the Loans owing to,
each Bank from time to time (the "Register"). The entries in the
Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrower, the Agent, the Issuing Bank and the
Banks may treat each Person whose name is recorded in the Register as a
Bank hereunder for all purposes under the Loan Documents. The Register
shall be available for inspection by the Borrower, the Issuing Bank or
any Bank at any reasonable time and from time to time upon reasonable
prior notice.
(e) Upon its receipt of an Assignment and Acceptance executed
by an assigning Bank and assignee representing that it is an Eligible
Assignee, together with any Note subject to such assignment, the Agent
shall, if such Assignment and Acceptance has been completed and is in
substantially the form of Exhibit "G" hereto, (i) accept such
Assignment and Acceptance, (ii) record the information contained
therein in the Register, and (iii) give prompt written notice thereof
to the Borrower. Within five (5) Business Days after its receipt of
such notice, the Borrower, at its expense, shall execute and deliver to
the Agent in exchange for the surrendered Notes new Notes to the order
of such Eligible Assignee in an amount equal to the Commitments assumed
by it pursuant to such Assignment and Acceptance and, if the assigning
Bank has retained a portion of its Commitments, new Notes to the order
of the assigning Bank in an amount equal to the
CREDIT AGREEMENT - Page 64
<PAGE>
Commitments retained by it hereunder (each such promissory note shall
constitute a "Note" for purposes of the Loan Documents). Such new Notes
shall be in an aggregate principal amount of the surrendered Notes,
shall be dated the effective date of such Assignment and Acceptance,
and shall otherwise be in substantially the form of Exhibits "A-1" and
"A-2" hereto.
(f) Any Bank may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this
Section, disclose to the assignee or participant or proposed assignee
or participant, any information relating to the Borrower or its
Subsidiaries furnished to such Bank by or on behalf of the Borrower or
its Subsidiaries, subject, however, to the provisions of Section 15.20.
Section 15.9 Survival. All representations and warranties made in this
Agreement or any other Loan Document or in any document, statement, or
certificate furnished in connection with this Agreement shall survive the
execution and delivery of this Agreement and the other Loan Documents, and no
investigation by the Agent, the Co-Agent, any Issuing Bank or any Bank or any
closing shall affect the representations and warranties or the right of the
Agent, the Co-Agent, any Issuing Bank or any Bank to rely upon them. Without
prejudice to the survival of any other obligation of the Borrower hereunder, the
obligations of the Borrower under Article VI and Sections 15.1 and 15.2 shall
survive repayment of the Notes and termination of the Commitments.
Section 15.10 ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTES, AND THE
OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG
THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS,
REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE
PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO.
Section 15.11 Amendments, Etc. No amendment or waiver of any provision
of this Agreement, the Notes, or any other Loan Document to which the Borrower
is a party, nor any consent to any departure by the Borrower therefrom, shall in
any event be effective unless the same shall be agreed or consented to by
Required Banks and the Borrower, and each such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, that no amendment, waiver, or consent shall, unless in writing
and signed by all of the Banks and the Borrower, do any of the following: (a)
increase the Commitments of the Banks or subject the Banks to any additional
obligations; (b) reduce the principal of, or interest on, the Notes or any fees
or other amounts payable to the Banks hereunder; (c) postpone any date fixed for
any payment of principal of, or interest on, the Notes or any fees or other
amounts payable to the Banks hereunder; (d) waive any of the conditions
specified in Article VIII; (e) change the percentage of the Commitments or of
the aggregate unpaid principal
CREDIT AGREEMENT - Page 65
<PAGE>
amount of the Notes or the number of Banks which shall be required for the Banks
or any of them to take any action under this Agreement; (f) change any provision
contained in this Section 15.11; or (g) release any Collateral or Obligated
Party. Notwithstanding anything to the contrary contained in this Section, no
amendment, waiver, or consent shall be made with respect to Article XIV hereof
without the prior written consent of the Agent and no amendment, waiver, or
consent shall be made with respect to Article IV hereof without the prior
written consent of the Issuing Banks.
Section 15.12 Maximum Interest Rate. No provision of this Agreement or
of any other Loan Document shall require the payment or the collection of
interest in excess of the maximum amount permitted by applicable law. If any
excess of interest in such respect is hereby provided for, or shall be
adjudicated to be so provided, in any Loan Document or otherwise in connection
with this loan transaction, the provisions of this Section shall govern and
prevail and neither the Borrower nor the sureties, guarantors, successors, or
assigns of the Borrower shall be obligated to pay the excess amount of such
interest or any other excess sum paid for the use, forbearance, or detention of
sums loaned pursuant hereto. In the event any Bank ever receives, collects, or
applies as interest any such sum, such amount which would be in excess of the
maximum amount permitted by applicable law shall be applied as a payment and
reduction of the principal of the indebtedness evidenced by the Notes; and, if
the principal of the Notes has been paid in full, any remaining excess shall
forthwith be paid to the Borrower. In determining whether or not the interest
paid or payable exceeds the Maximum Rate, the Borrower and each Bank shall, to
the extent permitted by applicable law, (a) characterize any non-principal
payment as an expense, fee, or premium rather than as interest, (b) exclude
voluntary prepayments and the effects thereof, and (c) amortize, prorate,
allocate, and spread in equal or unequal parts the total amount of interest
throughout the entire contemplated term of the indebtedness evidenced by the
Notes so that interest for the entire term does not exceed the Maximum Rate.
Section 15.13 Notices. All notices and other communications provided
for in this Agreement and the other Loan Documents to which the Borrower is a
party shall be given or made by telecopy or in writing and telecopied, mailed by
certified mail return receipt requested, or delivered to the intended recipient
at the "Address for Notices" specified below its name on the signature pages
hereof; or, as to any party at such other address as shall be designated by such
party in a notice to each other party given in accordance with this Section.
Except as otherwise provided in this Agreement, all such communications shall be
deemed to have been duly given when transmitted by telecopy, subject to
telephone confirmation of receipt, or when personally delivered or, in the case
of a mailed notice, when duly deposited in the mails, in each case given or
addressed as aforesaid; provided, however, notices to the Agent pursuant to
Article II, III and IV shall not be effective until received by the Agent.
Section 15.14 GOVERNING LAW; VENUE; SERVICE OF PROCESS. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS AGREEMENT
HAS BEEN ENTERED INTO IN DALLAS COUNTY, TEXAS, AND IT SHALL BE PERFORMABLE FOR
ALL PURPOSES IN DALLAS
CREDIT AGREEMENT - Page 66
<PAGE>
COUNTY, TEXAS. SUBJECT TO SECTION 15.20, ANY ACTION OR PROCEEDING AGAINST THE
BORROWER UNDER OR IN CONNECTION WITH ANY OF THE LOAN DOCUMENTS MAY BE BROUGHT IN
ANY STATE OR FEDERAL COURT IN DALLAS COUNTY, TEXAS. THE BORROWER HEREBY
IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B)
WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN
INCONVENIENT FORUM. THE BORROWER AGREES THAT SERVICE OF PROCESS UPON IT MAY BE
MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS
SPECIFIED OR DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 15.13.
NOTHING HEREIN OR IN ANY OF THE OTHER LOAN DOCUMENTS SHALL AFFECT THE RIGHT OF
THE AGENT, THE ISSUING BANK OR ANY BANK TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR SUBJECT TO SECTION 15.20, SHALL LIMIT THE RIGHT OF THE
AGENT, THE CO-AGENT, ANY ISSUING BANK OR ANY BANK TO BRING ANY ACTION OR
PROCEEDING AGAINST THE BORROWER OR WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS
IN OTHER JURISDICTIONS. ANY ACTION OR PROCEEDING BY THE BORROWER AGAINST THE
AGENT, THE CO-AGENT, ANY ISSUING BANK OR ANY BANK SHALL BE BROUGHT ONLY IN A
COURT LOCATED IN DALLAS COUNTY, TEXAS.
Section 15.15 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 15.16 Severability. Any provision of this Agreement held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Agreement and the effect thereof shall be
confined to the provision held to be invalid or illegal.
Section 15.17 Headings. The headings, captions, and arrangements used in
this Agreement are for convenience only and shall not affect the interpretation
of this Agreement.
Section 15.18 Construction. The Borrower, the Agent, the Co-Agent, the
Issuing Banks and each Bank acknowledge that each of them has had the benefit of
legal counsel of its own choice and has been afforded an opportunity to review
this Agreement and the other Loan Documents with its legal counsel and that this
Agreement and the other Loan Documents shall be construed as if jointly drafted
by the parties hereto.
Section 15.19 Independence of Covenants. All covenants hereunder shall
be given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitations of, another covenant shall
not avoid the occurrence of a Default if such action is taken or such condition
exists.
CREDIT AGREEMENT - Page 67
<PAGE>
Section 15.20 Treatment of Certain Information; Confidentiality. Each
Bank, the Co-Agent, each Issuing Bank and the Agent agree (on behalf of itself
and each of its affiliates, directors, officers, employees and representatives)
to keep confidential any non-public information supplied to it by Borrower
pursuant to this Agreement that Borrower identifies to such Bank, the Co-Agent,
each Issuing Bank or the Agent (as the case may be) as confidential at the time
Borrower so supplies such information, provided, that nothing herein shall limit
the disclosure of any such information (i) to the extent required by statute,
rule, regulation or judicial process, (ii) to counsel for any of the Banks, the
Co-Agent, each Issuing Bank or the Agent, (iii) to bank examiners, auditors or
accountants, (iv) to the Agent, the Co-Agent, any Issuing Bank or any other
Bank, (v) in connection with any litigation to which any one or more of the
Banks, the Co-Agent, any Issuing Bank or the Agent is a party, (vi) to a
subsidiary or affiliate of such Person, or (vii) to any assignee or participant
(or prospective assignee or participant) so long as such assignee or participant
(or prospective assignee or participant) first executes and delivers to the
respective Bank an acknowledgement to the effect that it is bound by the
provisions of this Section 15.20, which acknowledgement may be included as part
of the respective assignment or participation agreement pursuant to which such
assignee or participant acquires an interest in the Loans hereunder; and
provided, further, that in no event shall any Bank, any Issuing Bank, the
Co-Agent or the Agent be obligated or required to return any materials furnished
to it by the Borrower.
Section 15.21 Arbitration. The parties hereto agree to be bound by the
terms and provisions of the Agent's current arbitration program, which is
incorporated herein by reference and acknowledged as received by the parties
hereto, pursuant to which any and all deposits shall be resolved by mandatory
binding arbitration upon the request of any party.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
BORROWER:
MAGNUM PETROLEUM, INC.
By: /s/ Gary C. Evans
--------------------
Gary C. Evans
President
Address for Notices:
600 East Las Colinas Boulevard, Suite 1200
Irving, Texas 75039
Fax No.: (214) 401-3110
Telephone No.: (214) 401-0752
Attention: Gary C. Evans
CREDIT AGREEMENT - Page 68
<PAGE>
AGENT:
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
By: /s/ Charles D. Kirkham
-------------------------
Charles D. Kirkham
Vice President
Address for Notices:
Wells Fargo Bank (Texas), National Association
1000 Louisiana Street, 3rd Floor
Houston, Texas 77002
Fax No.: (713) 250-7912
Telephone No.: (713) 250-1856
Attention: Mary Austin Harlow
With a copy to:
Wells Fargo Bank (Texas), National Association
3535 Lincoln Plaza
500 North Akard
Dallas, Texas 75201
Fax No.: (713) 740-2815
Telephone No.: (713) 740-2882
Attention: Charles D. Kirkham
CREDIT AGREEMENT - Page 69
<PAGE>
CO-AGENT:
BANQUE PARIBAS
By: /s/ Barton D. Schouest
----------------------
Barton D. Schouest
Group Vice President
- and -
By: /s/ Mark M. Green
---------------------
Name: Mark M. Green
Title: Vice President
Address for Notices:
Banque Paribas
1200 Smith Street, Suite 3100
Houston, Texas 77002
Fax No.: (713) 659-5305
Telephone No.: (713) 659-4811
Attention: Leah Evans-Hughes
CREDIT AGREEMENT - Page 70
<PAGE>
ISSUING BANK:
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
By: /s/ Charles D. Kirkham
-------------------------
Charles D. Kirkham
Vice President
Address for Notices:
Wells Fargo Bank (Texas), National Association
1000 Louisiana Street, 3rd Floor
Houston, Texas 77002
Fax No.: (713) 250-7912
Telephone No.: (713) 250-1856
Attention: Mary Austin Harlow
With a copy to:
Wells Fargo Bank (Texas), National Association
3535 Lincoln Plaza
500 North Akard
Dallas, Texas 75201
Fax No.: (713) 740-2815
Telephone No.: (713) 740-2882
Attention: Charles D. Kirkham
CREDIT AGREEMENT - Page 71
<PAGE>
BANKS:
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
Revolving Credit Commitment: By: /s/ Charles D. Kirkham
- ---------------------------- --------------------------
Charles D. Kirkham
$50,000,000 Vice President
Term Loan Commitment: Address for Notices:
- --------------------- --------------------
$4,000,000 Wells Fargo Bank (Texas), National Association
1000 Louisiana Street, 3rd Floor
Houston, Texas 77002
Fax No.: (713) 250-7912
Telephone No.: (713) 250-1856
Attention: Mary Austin Harlow
With a copy to:
Wells Fargo Bank (Texas), National Association
3535 Lincoln Plaza
500 North Akard
Dallas, Texas 75201
Fax No.: (713) 740-2815
Telephone No.: (713) 740-2882
Attention: Charles D. Kirkham
CREDIT AGREEMENT - Page 72
<PAGE>
Lending Office for Base Rate Loans
1000 Louisiana Street, 3rd Floor
Houston, Texas 77002
Fax No.: (713) 250-7912
Telephone No.: (713) 250-1856
Attention: Mary Austin Harlow
Lending Office for Eurodollar Loans
1000 Louisiana Street, 3rd Floor
Houston, Texas 77002
Fax No.: (713) 250-7912
Telephone No.: (713) 250-1856
Attention: Mary Austin Harlow
CREDIT AGREEMENT - Page 73
<PAGE>
BANQUE PARIBAS
Revolving Credit Commitment: By: /s/ Barton D. Schouest
- ---------------------------- --------------------------
Barton D. Schouest
$50,000,000 Group Vice President
Term Loan Commitment: - and -
- --------------------
$4,000,000 By: /s/ Mark M. Green
---------------------
Name: Mark M. Green
Title: Vice President
Address for Notices:
1200 Smith Street, Suite 3100
Houston, Texas 77002
Fax No.: (713) 659-5305
Telephone No.: (713) 659-4811
Attention: Leah Evans-Hughes
Lending Office for Base Rate Loans:
1200 Smith Street, Suite 3100
Houston, Texas 77002
Fax No.: (713) 659-5305
Telephone No.: (713) 659-4811
Attention: Leah Evans-Hughes
Lending Office for Eurodollar Loans:
1200 Smith Street, Suite 3100
Houston, Texas 77002
Fax No.: (713) 659-5305
Telephone No.: (713) 659-4811
Attention: Leah Evans-Hughes
DA961720202
062796 v12
351:4839-120
CREDIT AGREEMENT - Page 74
<PAGE>
EXHIBIT 21.1
<PAGE>
EXHIBIT 21.1
SUBSIDIARY COMPANIES
Gruy Petroleum Management Co., a Texas Corporation
Magnum Hunter Production, Inc., a Texas Corporation
Hunter Gas Gathering, Inc., a Texas Corporation
ConMag Energy Corporation, a Texas Corporation
Rampart Petroleum, Inc., a Texas Corporation
Hunter Butcher International Limited Liability Company
<PAGE>
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.3 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
September 20, 1996
<PAGE>
EXHIBIT 24.2
<PAGE>
Exhibit 24.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in Amendment No. 3 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
September 20, 1996
Dallas, Texas
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