As filed with the Securities and Exchange Commission on May ___, 1996
Registration No. 333-2290
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
Form S-4
REGISTRATION STATEMENT
AMENDMENT NO. 1
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) Identification 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)
William C. Jones
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
<TABLE>
<CAPTION>
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 <F1> offering price <F1> fee
======================= ======================= ====================== ======================= ======================
<S> <C> <C> <C> <C>
Common Stock 5,660,077 $ 3.125 $17,687,741 $6,099
Preferred Stock 111,825 $10.50 $ 1,174,163 $ 405
Total $6,504
<FN>
<F1> Estimated pursuant to Rule 457(h) solely for purpose of calculating
registration fee.
</FN>
</TABLE>
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 114 pages numbered sequentially.
<PAGE>
HUNTER RESOURCES, INC.
600 East Las Colinas Boulevard, Suite 1200
Irving, Texas 75039
Notice of Special Meeting of Shareholders
to be Held on ___________, 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 _________, 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 ______, 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 common stock of Hunter, therefore, approval of these proposals at
the shareholder meeting is assured.
Each shareholder is entitled to one vote for each share held on the
record date. There were ______ shares outstanding and entitled to vote on
_________, 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
William C. Jones, Secretary
Irving, Texas
________, 1996
<PAGE>
HUNTER RESOURCES, INC.
Information Statement and Prospectus
This Information Statement and Prospectus 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 _________, 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 have executed
the Agreement and Plan of Reorganization and Plan of Liquidation. Therefore,
approval of these proposals is assured. 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 ______, 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. In addition, 359,316 shares of Magnum
Common Stock and 111,825 shares of Magnum Series C Preferred Stock will be
exchanged for Hunter's 90,000 shares of Preferred Stock ("Hunter Preferred
Shares"). 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_______ __, 1996
i
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION......................................................... 2
SUMMARY ..................................................................... 3
The Special Meeting.................................................. 4
Sale of Hunter's Assets.............................................. 4
The Plan of Liquidation.............................................. 4
Market Prices........................................................ 5
The Parties.......................................................... 5
Recommendations of the Boards of Directors and
Reasons for Sale of Hunter's Assets............................... 6
Risk Factors......................................................... 7
Regulatory Approval.................................................. 7
Federal Income Tax Consequences...................................... 7
RISK FACTORS.................................................................. 9
SELECTED PROFORMA CONSOLIDATED FINANCIAL INFORMATION......................... 12
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA................................ 12
MAGNUM PETROLEUM,INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL
DATA................................................................ 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF MAGNUM................................................ 14
HUNTER RESOURCES, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED
FINANCIAL DATA...................................................... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF HUNTER................................................ 18
INTRODUCTION................................................................. 21
NO SOLICITATION OF PROXIES................................................... 21
VOTING RIGHTS AND VOTES REQUIRED............................................. 21
THE SPECIAL MEETING.......................................................... 21
Date, Time and Place................................................ 21
Purposes ........................................................... 21
Dissenter's Right of Appraisal...................................... 22
THE SALE OF HUNTER'S ASSETS.................................................. 22
Agreement and Plan of Reorganization and Plan of Liquidation.........22
History of and Reasons for the Transaction...........................23
Recommendation of the Hunter Board...................................24
PLAN OF LIQUIDATION.......................................................... 24
General............................................................. 24
Number of Magnum Shares to be Distributed........................... 24
Distributions to Shareholders....................................... 24
Procedures for Exchanging Shares.................................... 24
INFORMATION CONCERNING MAGNUM................................................ 25
Business Development................................................ 26
Business of Company................................................. 26
Acquisition of Additional Properties................................ 27
ii
<PAGE>
Drilling Agreements and Operation of Wells.......................... 27
Timing of Acquisitions/Operations................................... 28
Gas Gathering, Transmission and Marketing........................... 28
Petroleum Management and Consulting Services........................ 28
Insurance........................................................... 28
Competition and Markets...................................................... 29
Business Risks and Regulation....................................... 29
Employees........................................................... 30
Properties.......................................................... 30
Legal Proceedings................................................... 34
Submission of Matters to a Vote of Security Holders................. 34
Market for Common Equity and Related Shareholder Matters............ 34
Directors, Executives Officers, Promoters and Control Persons....... 35
Executive Compensation.............................................. 38
Security Ownership of Certain Beneficial Owners and Management...... 39
Certain Relationships and Related Transactions...................... 39
INFORMATION CONCERNING HUNTER................................................ 40
Description of Business............................................. 40
Employees and Management............................................ 41
Properties.......................................................... 43
Competition......................................................... 46
Business Risks and Regulations...................................... 47
Legal Proceedings................................................... 48
Submission of Matters to a Vote of Security Holders................. 48
Market for Hunter's Common Stock and Related Shareholder Matters.... 48
Directors and Executive Officers.................................... 50
Executive Compensation.............................................. 51
Security Ownership of Management and Principal Shareholders......... 53
Certain Relationships and Related Transactions...................... 54
DESCRIPTION OF MAGNUM'S SECURITIES........................................... 55
INTEREST OF HUNTER'S OFFICERS AND DIRECTORS IN THE TRANSACTION............... 61
FEDERAL INCOME TAX CONSEQUENCES.............................................. 62
LEGAL OPINION................................................................ 63
EXPERTS .................................................................... 63
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION AND PLAN OF
LIQUIDATION.................................................. Exhibit A
AGREEMENT AND PLAN OF REORGANIZATION AND PLAN OF LIQUIDATION.......... Exhibit B
iii
<PAGE>
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
<PAGE>
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 principle 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. In addition, 359,316 shares of Magnum
Common Stock and 111,825 shares of Magnum Series C Preferred 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 _________, 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_______ shares of Common Stock and shares of Preferred Stock
outstanding and entitled to vote on _________, 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
<PAGE>
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.
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, 359,316 shares of Magnum Common Stock and 111,825
shares of Magnum Series C Preferred Stock will be exchanged for all of the
Hunter Preferred Stock. See "Market Prices" contained in this Summary for the
current market prices of both the Hunter and Magnum Common Stock.
4
<PAGE>
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.
MARKET PRICES
The last reported sales price of Magnum Common Stock on _________, 1996 as
reported by the American Stock Exchange was $___.
The last reported sales price of Hunter Common Stock on _________, 1996 as
reported by the Boston Stock Exchange was $___.
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. export services to facilitate Latin American trade in energy
products. Hunter's operations are conducted in five states, predominantly in the
Southwestern region of the continental United States and Mexico.
5
<PAGE>
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. See "Information About
Magnum".
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. Hunter's assets primarily consisted of
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;
and (iv) an increased borrowing base due to existing oil and gas properties that
could be added to Hunter's existing bank line of credit.
6
<PAGE>
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.
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.
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.
7
<PAGE>
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."
8
<PAGE>
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 $5,244,899 at December 31, 1995. 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. INSUFFICIENT OPERATING INCOME TO PAY DIVIDENDS/PRIOR ALLOCATED REVENUES.
Magnum has not had sufficient operating income from its current properties to
pay all dividends required on the Series C Preferred Stock. Revenues so
allocated will not be available for the payment of dividends on Common Stock or
Series C Preferred Stock and may have an adverse effect on Magnum's ability to
pay such dividends. See "Description of Securities". The annual dividend
requirement is $687,500 for dividends on 625,000 shares of Series C Preferred
Stock currently outstanding. In order for Magnum to expand its oil and gas
reserve base and generate increased revenues from oil and gas so as to be able
to meet the dividend payments on the outstanding preferred securities and
generate any net earnings per share of Common Stock, it must make significant
capital expenditures for the acquisition of additional producing properties, and
additional development work on existing properties which would result in a more
significant return on investment than has been experienced historically. There
is no assurance Magnum will be able to acquire properties with proven reserves
that would generate enough revenues and cash flow at a cost that will be
economically beneficial to Magnum. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
4. DEPENDENCE UPON KEY PERSONNEL/CONFLICTS OF INTEREST. Magnum is
substantially dependent upon a few key individuals who comprise the management
of Magnum. 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".
5. 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
offset 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.
6. UNCERTAINTIES INHERENT IN CURRENT OIL AND GAS MARKET. World and domestic
market and economic conditions, availability of 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>
7. 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.
8. 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.
9. 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.
10. 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."
11. 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.
12. 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 will only be 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 the Series C Preferred Stock. See "Market for Common Equity and
Related Shareholder Matters."
13. VOLATILITY OF STOCK PRICES. During the two most recent fiscal years and
subsequent interim period, bid quotations and trading prices of the common stock
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.
10
<PAGE>
14. 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 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 11,607,958 shares are presently
issued and outstanding, 37,275 shares are reserved for issuance upon conversion
of the Series B Preferred Shares that are to convert to common as of December
31, 1995, 1,875,000 shares are reserved for issuance upon conversion of the
Series C Preferred Shares which remain outstanding, 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.
15. 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.
16. 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 substantially all of the assets of Hunter,
which consisted of stock of wholly-owned 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 is recorded on the "purchase method" based upon the estimated
value of the consideration (the common stock issued) that Magnum paid for the
Acquisition. As the acquisition was recorded at December 31, 1995, no selected
pro forma consolidated balance sheet information was necessary.
In addition, Hunter has adjusted the pro forma consolidated statement of
operations information for the acquisition by Hunter on March 31, 1995 of the
Arrington oil and gas properties, the October 25, 1995 acquisition of the Reef
oil and gas properties and the November 9, 1995 acquisition of the Tana oil and
gas properties as if the acquisitions had been consummated at the beginning of
1995. The Arrington, Reef and Tana acquisitions were previously reported on
amended Forms 8-K filed by Hunter September 26, 1995, December 5, 1995 and
January 23, 1996, respectively.
The selected pro forma statement of operations information is 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 and Tana acquisitions were filed in amended
Forms 8-K as referenced above.
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
(Unaudited)
<TABLE>
<CAPTION>
Magnum Hunter Arrington Reef Tana Proforma Combined
Historical Historical Historical Historical Historical Adjustments Pro Forma
--------------------------------------------------------------------------------------------
Year Ended December 31, 1995
- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenues $ 800,945 $ 2,967,000 $ 123,000 $ 937,000 $ 1,636,000 $ 11,000 $ 6,474,945
Net Income (Loss) (968,272) (682,000) 91,000 693,000 1,073,000 (1,270,000) (1,063,272)
Preferred Dividends (617,220) (9,000) (83,173) (709,393)
Net Income (Loss)
Applicable to Common Stock $(1,585,492) $ (691,000) $ 91,000 $ 693,000 $ 1,073,000 $(1,353,173) $ (1,772,665)
Net Income Per Share $ (.28) $ (.04) $ (.16)
Weighted Average Shares
Outstanding 11,163,896
</TABLE>
12
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1995 1994 <F1> 1993<F1> 1992<F2> 1991<F2>
<S> <C> <C> <C> <C> <C>
Total Revenues $ 648,574 $ 745,182 $ 331,077 $ 476,483 -
Loss From Continuing Operations (968,272) (546,382) (707,364) (471,908) (144,061)
Discontinued Operations - - 13,638 - -
Net Loss (968,272) (546,382) (693,726) (471,908) (144,061)
Dividends Applicable to Preferred Shares 617,220 579,325 109,090 12,858 -
Net Loss Applicable to Common Shares (1,585,492) (1,125,707) (802,816) (484,766) (144,061)
Loss Per Common Share from Continuing Operations (0.28) (0.27) (0.28) (0.15) (0.06)
Loss Per Common Share (0.28) (0.27) (0.28) (0.15) (0.06)
Total Assets 40,064,800 9,574,582 8,084,587 4,848,632 677,230
Long-Term Obligations 11,300,815 11,675 30,191 283,641 -
Shareholder's Equity 24,496,006 8,645,309 7,508,164 4,133,795 21,373
Cash Dividends Per Share of Common Stock None None None None None
<FN>
<F1>Totals are restated using the Full Cost method of accounting for oil and gas
activities.
<F2>Using the Successful Efforts method of accounting for oil and gas
activities.
</FN>
</TABLE>
13
<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 closed 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
to Hunter 2,750,000 shares of newly issued restricted common stock in exchange
for substantially all of the assets of Hunter subject to its associated
liabilities. Hunter's assets primarily consisted of stock in wholly-owned
subsidiaries and stock ownership interests in limited liability companies
("Hunter Subsidiaries").
On December 19, 1995 to be effective December 22, 1995, 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 50 percent of the common stock of Hunter and provided for the
issuance to Hunter of an additional 2,335,077 shares of newly issued restricted
common stock and 111,825 shares of Series C preferred stock. Therefore, the
total consideration paid by 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 completed by Magnum Hunter Production, Inc. ("Magnum
Hunter"), a Hunter Subsidiary. Hunter and its subsidiaries are 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 that the "full cost" method of
accounting was preferable to the "successful efforts" method of accounting for
its oil and gas 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 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 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.
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%).
14
<PAGE>
On November 9, 1995, Magnum Hunter closed on an acquisition of domestic
producing oil and gas properties for approximately $4.229 million. The initial
purchase price was comprised of $3.104 million cash, funded by the bank line of
credit, and a note payable to the previous owner in the amount of $1.125 million
secured by 610,170 shares of restricted common stock of Magnum.
On December 1, 1995, Magnum Hunter closed on an acquisition of two
unregulated gas gathering systems. The total consideration was $1 million cash,
funded substantially by the line of credit with FITX.
Results of Operations for the Years Ended 1995 and 1994
- -------------------------------------------------------
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 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.
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 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.
15
<PAGE>
Commitments
- -----------
As of December 31, 1995, 625,000 shares of Series C preferred stock remain
outstanding, entitled to receive, when, as and if declared by the Board of
Directors, a cumulative annual dividend of $1.10 per share, the payment of which
will require an aggregate cash distribution of $687,500 annually, as long as
such securities remain outstanding. Although not obligated to declare and pay
such dividends, to date Magnum has done so and fully intends to do so in the
future if adequate funds are available, until these securities are either
redeemed or converted into Common Stock. In order to have sufficient funds
available to pay dividends on the Series C Preferred Stock, the total revenues
generated by Magnum, less all other expenses of Magnum, must exceed the amount
of the dividends to be paid.
At December 31, 1995, Magnum had unproven oil and gas properties 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.
As discussed above, in March 1996 Magnum increased its available borrowing
base for its oil and gas properties under its line of credit arrangement to $9
million. Magnum's anticipated capital expenditures for 1996 on its existing
properties are not considered significant and would be financed by cash flow or
the available line of credit. At March 31, 1996, there remained approximately $1
million of available borrowings under the line of credit. In addition,
subsequent to December 31, 1995, Magnum entered into an arrangement with an
investment banking firm for a private placement of preferred stock for as much
as $15 million to be completed during 1996. Proceeds from the offering would be
utilized to develop a significant portion of Magnum's proved undeveloped
reserves. In the event Magnum is unsuccessful in raising the $15 million from
the preferred stock offering, Magnum will be able to meet its existing
obligations out of cash flow from operations and funds available from its
existing line of credit.
Inflation and Changing Prices
- -----------------------------
During 1995 and the past several years, Magnum experienced moderate
inflation in oil and natural gas prices with moderate increases in property
acquisition and development costs. The results of operations and cash flow of
Magnum will 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 an
increase in oil and natural gas finding costs, lease acquisition costs and
operating expenses.
16
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1995<F1> 1994 1993 1992 1991
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $ - $ 2,356,000 $ 2,006,000 $ 1,688,000 $ 2,876,000
Income from Continuing Operations - 15,000 86,000 (349,000) 49,000
Cumulative Effect of Change in Accounting
Principle - - - (240,000) -
Income (Loss) from Discontinued Operations (682,000) - - - 6,000
Extraordinary Item - - - - 40,000
Net Income (Loss) (682,000) 15,000 86,000 (589,000) 95,000
Dividends Applicable to Preferred Shares 9,000 9,000 9,000 18,000 12,000
Net Income (Loss)Applicable to Common Shares (691,000) 6,000 77,000 (607,000) 83,000
Income (Loss) per Common Share from
Continuing Operations - - - (0.02) -
Income (Loss) per Common Share (0.04) - - (0.04) -
Total Assets 2,162,000 4,935,000 4,442,000 3,920,000 4,495,000
Long-Term Obligations - 654,000 626,000 629,000 605,000
Shareholders' Equity 2,162,000 2,742,000 2,418,000 2,278,000 2,834,000
Cash Dividends Per Share of Common Stock None None None None None
- ----------------------------
<FN>
<F1> Hunter adopted the liquidation basis of accounting at December 31, 1995.
Accordingly, the 1995 results of operations have been netted and presented
as discontinued operations. Other prior years reflected above have not been
netted and shown as discontinued operations.
</FN>
</TABLE>
17
<PAGE>
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 closed a definitive agreement to combine (the
"Business Combination") with Hunter 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 ("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 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 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 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 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 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 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. Outstanding borrowings as of March 19, 1996 bear interest at
prime plus one percent (1%) per annum.
18
<PAGE>
On November 9, 1995, Magnum Hunter closed on an acquisition of domestic
producing oil and gas properties for approximately $4.229 million. The initial
purchase price was comprised of $3.104 million cash, funded by the bank line of
credit, and a note payable to the previous owner in the amount of $1.125 million
secured by 610,170 shares of restricted common stock of 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 of two
unregulated gas gathering systems. 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, 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.
Since all of Hunter's operating assets and liabilities were disposed of
effective December 31, 1995, Hunter's revenues and expenses for 1995 and 1994
have been netted and presented as discontinued operations. Hunter's revenues and
other operating information 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.
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.
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
to unidentifiable old liabilities on which Hunter has not had any inquiries.
19
<PAGE>
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 systems 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 largely for the 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 from 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 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 mostly 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 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 offerings 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 in 1996. Any
required sources of funds to that date will be provided by Magnum as a part of
the Business Combination.
20
<PAGE>
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
_________, 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_______ shares of Common and Preferred Stock outstanding and
entitled to vote on _________, 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.
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.
21
<PAGE>
Dissenter's Right of Appraisal
- ------------------------------
Pennsylvania corporate law (Business Corporation Law of 1988, Title 15,
Pennsylvania Consolidated Statutes"PaCSA") 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 PaCSA ss.1932(b). Further, dissenting shareholders
generally have the right to obtain payment of the fair value for their shares.
See PaCSA ss.1932(c). However, PaCSA further provides that holders of shares
entitled to notice of and to vote on a plan of asset transfer under PaCSA
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 PaCSA 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.
The description of the Agreement and Plan of Reorganization and Plan of
Liquidation set forth below does not purport to be complete, and is qualified in
its entirety by reference to the text of the Agreement and Plan of
Reorganization and Plan of Liquidation.
Agreement and Plan of Reorganization and Plan of Liquidation
- ------------------------------------------------------------
On July 21, 1995, Hunter closed a definitive agreement subject to Hunter
Shareholder approval, to combine (the "Business Combination") with Magnum.
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 restricted Magnum
common stock and 111,825 shares of Magnum Series C preferred stock. Therefore,
the total number of Magnum shares to be distributed for the acquisition of the
Hunter Subsidiaries will be 5,085,077 of common stock and 111,825 of Series C
preferred stock to Hunter's common and preferred shareholders.
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 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.
22
<PAGE>
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 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.
HISTORY OF AND REASONS FOR THE TRANSACTION
History
- -------
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, financing or other business combinations. Over
the past several years, the executive management and board of directors of have
considered other forms of business combinations and financings in lieu of
selling its assets to Magnum.
One of the alternatives that Hunter considered was a business combination
with a private company located in Dallas, Texas that would have created a
combined corporation of approximately $30 million in assets. The company being
considered in the business combination was involved in another business segment
of the energy industry which included the downstream marketing of gasoline
through the ownership of service stations located in Wichita Falls, Texas. After
several months of negotiation and careful consideration by the Chief Executive
Officer of Hunter it was determined that this specific business combination was
not in the best interest of the shareholders.
The executive management of Hunter and the board of directors also
considered raising additional equity by preparing a Private Placement Memorandum
which included an offering that was to be sold by NASD Broker-Dealers to raise
up to $5 million in a Class B Convertible Preferred Stock and Warrants to
purchase shares of Common Stock. The Private Placement Memorandum was completed
on May 3, 1995 and the Company was in the process of selling these securities
through two Broker-Dealers located in the Dallas area when the introduction was
made to the investment bankers representing Magnum. This contract lead to the
introduction and ultimate merger of the two companies and therefore the Private
Placement was canceled.
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 larger and
more acquisitions as well as projects with greater development and reserve
potential.
2. The recent and historical market trading ranges of Hunter's common stock
are 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 investors and potential
acquisition candidates due to a trading price of less than $1.00 per share.
23
<PAGE>
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.
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.
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.
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.
24
<PAGE>
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.
25
<PAGE>
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 ("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.
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.
26
<PAGE>
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.
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.
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 California, Oklahoma, New Mexico,
Kansas, Louisiana, Mississippi and Texas. At the present time, Magnum does not
intend to pursue its activities beyond those seven 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 six of the seven
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.
27
<PAGE>
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
over two hundred producing oil and gas wells. The properties in which Magnum has
acquired interests also contain proved undeveloped reserves that require
additional drilling, workovers, waterflooding or other forms of enhancement to
become productive. In addition to acquiring such properties, 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 an
overriding royalty for the benefit of the entity or person submitting prospects
to Magnum. These royalty interests do not share in any expense of drilling,
development, completion, operating and other costs incident to the production
and sale of oil and gas. Magnum seeks to acquire leasehold interests which will
create the maximum revenue interest attributable to the working interest owners
in leases acquired by Magnum.
The following information and factors are considered by the management in
connection with each decision 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.
28
<PAGE>
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.
Gas Gathering, Transmission and Marketing
-----------------------------------------
Hunter Gas Gathering, Inc. (formerly IOM, Gas, Inc.), a wholly owned
subsidiary of Magnum, 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 Gas Gathering, Inc. as
an added service to the producers from whom the Company acquires the gas.
Petroleum Management and Consulting Services
--------------------------------------------
Gruy Petroleum Management Co. ("Gruy") has a 37-year history of managing
properties for banks, financial institutions, bankruptcy trustees, estates,
individual investors, trusts and independent oil and gas companies. 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 five 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;
29
<PAGE>
(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.
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.
30
<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 note become final but are still pending judicial and FERC
final decisions.
FERC has issued Orders 636 and 636-A for the purpose of restructuring the
gas pipeline sales and transportation services in the United States to promote
competition in all phases of the gas industry. The impact of these FERC Orders
has significantly altered the traditional way natural gas has been purchased,
transported, and sold. The restructuring requirements that have emerged from the
administrative and judicial review process has varied significantly from those
previously in effect.
The price at which 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.
31
<PAGE>
Employees
---------
Magnum has a total of 14 employees, all of whom are employed full-time.
Three of Magnum's four officers are employed by Magnum on a full-time basis and
William C. Jones, Secretary, consults with Magnum on a part-time basis.
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.
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 on a promissory note payable to a bank.
Proved Oil and Gas Reserves.
----------------------------
Oil reserves are expressed in barrels (Bbl) and gas reserves are expressed
in thousands of cubic feet (Mcf). The following table sets forth proved reserves
considered to be economically recoverable under normal operating methods and
existing conditions, at prices and operating costs prevailing at the date
thereof.
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
-------------------------------------------------
32
<PAGE>
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.
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.
33
<PAGE>
Average Sales Price
For the Year Ended
December 31,
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Average Sales Price <F1>
0il (Bbl) $15.60 $14.20
====== ======
Natural Gas (Mcf) $ 1.46 $ 1.53
====== ======
Average Production Cost <F2>
Per equivalent barrel <F3> $ 5.69 $ 5.57
====== ======
Per dollar of sales $ 0.43 $ 0.44
====== ======
<FN>
<F1> Before deduction of production taxes.
<F2> Excludes depletion, depreciation and amortization. Production cost includes
lease operating expenses and production and ad valorem taxes, if
applicable.
<F3> Gas production is converted to equivalent barrels at the rate of six mcf of
gas per barrel, representing the estimated relative energy content of
natural gas and oil.
</FN>
</TABLE>
Productive Wells . The total gross and net wells, expressed separately for
oil and gas, as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Productive Wells<F2>
As of December 31,
1995
----
Gross<F1> Net<F1>
Location Oil Gas Total Oil Gas Total
- -------- --- --- ----- --- --- -----
<S> <C> <C> <C> <C> <C> <C>
Texas 133 19 152 44.19 8.87 53.06
Oklahoma 262 21 283 60.22 7.78 68.00
Mississippi 4 0 4 2.98 0 2.98
New Mexico 3 4 7 2.48 1.14 3.62
Kansas 2 0 2 1.74 0 1.74
California 14 0 14 1.05 0 1.05
---- --- ---- ------ ----- ------
418 44 462 112.66 17.79 130.45
=== == === ====== ===== ======
1994
----
Gross<F1> Net<F1>
Location Oil Gas Total Oil Gas Total
- -------- --- --- ----- --- --- -----
Texas 13 2 15 11.35 1.00 12.35
Oklahoma 19 2 21 15.90 1.80 17.70
California 15 0 15 1.30 0 1.30
-- - -- ------ ------ ------
47 4 51 28.55 2.80 31.35
== = == ===== ==== =====
<FN>
<F1> The number of gross wells is the total number of wells in which a
fractional working interest is owned. The number of net wells is the sum of
the fractional working interests owned by the Company in gross wells
expressed in whole numbers and decimal fractions thereof.
<F2> There were no producing wells in 1995 or 1994 that were producing from
multiple completion zones.
</FN>
</TABLE>
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 are
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.
34
<PAGE>
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.
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 a financial institution
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 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.
Legal Proceedings.
------------------
Gruy Petroleum Management Co. is involved in several legal and
administrative proceedings arising in the ordinary course of its oil and gas
management business, none of which are material in the opinion of Management.
Although the ultimate outcome of these proceedings cannot be ascertained at this
time, management believes that the ultimate resolution of these matters will be
favorable. See Note 11 to the Financial Statements (Item 7 of this Form 10-
KSB).
35
<PAGE>
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 March 31, 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 has been listed on the American
Stock Exchange Emerging Company Marketplace ("AMEX.EC") since November, 1993,
under the symbol MPM.EC. Prior to November, 1993 the Common Stock was quoted on
the National Association of Securities Dealers, Inc. OTC Bulletin Board under
the symbol MNMP. The Company's Series C Preferred Stock and Warrants previously
contained in the Units offered and sold pursuant to the Original Prospectus were
also approved for listing, upon issuance, on the AMEX.EC under the symbols
MPM.PR.EC and MPM.WS.EC, respectively. There is no assurance that the public
trading markets for the Company's securities will continue in the future. The
following table sets forth, for each calendar quarter during the last two fiscal
years and for the first quarter 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
(b) Holders.
As of December 31, 1995, there were approximately 600 record holders of the
Company's Common Stock.
(c) Dividends.
The Company has not previously paid any cash dividends on common stock and
does not anticipate or contemplate paying dividends on common stock in the
foreseeable future. Except for the payment of dividends at the stated rate on
the existing Series C Preferred Stock, it is the present intention of management
to utilize all available funds for the development of the Company's business. In
addition, the Company may not pay any dividends on common equity unless and
until all dividend rights on outstanding preferred stock have been satisfied.
The only other restrictions that limit the ability to pay dividends on common
equity or that are likely to do so in the future, are those restrictions imposed
by law or by certain credit agreements. Under Nevada corporate law, no dividends
or other distributions may be made which would render the Company insolvent or
reduce assets to less than the sum of its liabilities plus the amount needed to
satisfy outstanding liquidation preferences.
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.
36
<PAGE>
Term Positions
Name Age Served With Company
---- --- ------ ------------
Lloyd T. Rochford....... 49 Feb. 1989 Chairman of the Board
Matthew C. Lutz......... 61 Dec. 1995 Vice Chairman and Exploration and
Business Development Manager
Gary C. Evans........... 38 Dec. 1995 Director, President and Chief
Executive Officer
Gerald W. Bolfing....... 66 Dec. 1995 Director
Oscar C. Lindemann...... 74 Dec. 1995 Director
Stanley McCabe......... 62 Apr. 1995 Director
James E. Upfield........ 74 Dec. 1995 Director
Steven P. Smart........ 41 Dec. 1995 Chief Financial Officer
William C. Jones........ 56 Dec. 1995 Secretary
Lloyd T. Rochford, age 49, Chairman, has previously served as President and
a Director of 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 38, 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, 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.
37
<PAGE>
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 74, 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.
William C. Jones, age 56, is Magnum's Corporate Secretary. Mr. Jones
graduated from Texas Christian University in 1961 receiving a Bachelor of
Science degree with a major in accounting. He received a Juris Doctor from the
University of Tulsa and was admitted to the Oklahoma bar in 1968. After law
school, Mr. Jones gained experience as a staff tax attorney for major energy
companies and as a member of senior management for a publicly owned oil and gas
company. He generally represents emerging companies in securities, taxation, and
general corporate matters. He has participated as an investor, owner, and
manager of several energy ventures. His experience includes the negotiation and
documentation of mergers and acquisitions, preparation and registration of
equity placements, litigation of tax matters, documentation and registration of
offshore financing, and preparation of private placements.
(b) Identify Significant Employees.
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 Texas Society of Professional Engineers. Mr. Rothrock is a registered
Professional Engineer in the states of Texas and Oklahoma.
38
<PAGE>
Richard R. Frazier, age 48, 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.
Compliance with Section 16(a) of the Exchange Act
Magnum is not aware of any transactions in its outstanding securities by or
on behalf of any director, executive officer or ten percent holder, which would
require the filing of any report pursuant to Section 16(a) during the fiscal
year ended December 31, 1995, that was not filed with Magnum.
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
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name, Year Salary Bonus Other Number
Principal Annual Restricted Options LTP All Other
Position Compensation Stock SARs Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
L.T. Rochford 1995 $ 96,000 -0- $15,693 - - - -
======== === =======
CEO
1994 $ 60,000 -0- $25,244 - - - -
======== === =======
1993 $ 60,000 -0- $21,506 - - - -
======== === =======
</TABLE>
From April 1992 through the first half of 1995, 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.
39
<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
of Beneficial Percent of
Title of Class Ownership Class
---------------------------------------------------
Lloyd T. Rochford Common 257,939 Shares 2.22
Matthew C. Lutz Common 76,609 Shares 0.66
Gary C. Evans Common 1,712,166 Shares 14.75
Series C Preferred 111,825 Shares 17.89
Gerald W. Bolfing Common 350,050 Shares 3.02
Oscar C. Lindemann - - -
Stanley McCabe Common 67,150 Shares 0.58
James E. Upfield Common 28,090 Shares 0.24
All directors and officers
as a group Common 2,492,004 Shares 21.47
Series C Preferred 111,825 Shares 17.89
--------------------------------------
(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.
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.
40
<PAGE>
For his efforts in the acquisition of Hunter, Denny W. Nestripke, former
controller of Magnum, received 100,000 restricted shares of Magnum's common
stock after the Business Combination with Hunter Resources, Inc.
For his efforts in the acquisition of Hunter, Virden L. Parker, former
Director of Magnum, received 150,000 restricted shares of Magnum's common stock
after the Business Combination with Hunter Resources, Inc.
An investment banking firm received 325,000 restricted shares of Magnum's
common stock for assisting in the acquisition of Hunter.
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
41
<PAGE>
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 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.
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
William C. Jones, Secretary, consults with Hunter on a part-time basis.
<TABLE>
<CAPTION>
Held Office Position with the Registrant
Name Age Since or Registrant's Subsidiaries
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Gary C. Evans 38 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
William C. Jones 56 1995 Secretary
* Officer of Registrant's Subsidiary(s) only.
</TABLE>
42
<PAGE>
Gary C. Evans, age 38, 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 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.
43
<PAGE>
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.
William C. Jones, age 56, Corporate Secretary. Mr. Jones graduated from
Texas Christian University in 1961 receiving a Bachelor of Science degree with a
major in accounting. He received a Juris Doctor from the University of Tulsa and
was admitted to the Oklahoma bar in 1968. After law school, Mr. Jones gained
experience as a staff tax attorney for major energy companies and as a member of
senior management for a publicly owned oil and gas company. He generally
represents emerging companies in securities, taxation, and general corporate
matters. He has participated as an investor, owner, and manager of several
energy ventures. His experience includes the negotiation and documentation of
mergers and acquisitions, preparation and registration of equity placements,
litigation of tax matters, documentation and registration of offshore financing,
and preparation of private placements. Mr. Jones was appointed Secretary of
Magnum in December 1995.
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.
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.
44
<PAGE>
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,
<TABLE>
<CAPTION>
1995<F1> 1994
Oil (Bbls) Gas (Mcf) Oil (Bbls) Gas(Mcf)
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
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
========== ========== ========== =========
<FN>
<F1> Information here represents properties acquired by Magnum.
</FN>
</TABLE>
Definition of Reserves -- The reserve categories are summarized as follows:
Proved developed reserves are those quantities of crude oil, natural gas
and natural gas liquids which, upon analysis of geological and engineering data,
demonstrate with reasonable certainty to be recoverable in the future from known
oil and gas reservoirs under existing economic and operating conditions. This
classification includes: (a) proved developed producing reserves which are those
expected to be recovered from currently producing zones under continuation of
present operating methods; (b) proved developed non-producing reserves consist
of (i) reserves from wells which have been completed and tested but are not yet
producing due to lack of market or minor completion problems which are expected
to be corrected, and (ii) reserves currently behind the pipe in existing wells
and are expected to be productive due to both the well log characteristics and
analogous production in the immediate vicinity of the well.
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.
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,
<TABLE>
<CAPTION>
1995<F1> 1994
---- ----
<S> <C> <C>
Developed $17,062,871 $ 5,899,522
=========== ===========
Developed and Undeveloped $30,507,735 $ 7,994,297
=========== ===========
<FN>
<F1> Information here represents properties acquired by Magnum.
</FN>
</TABLE>
45
<PAGE>
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 costs attributable to Hunter's oil and
gas production for the periods indicated.
Average Sales Price
For the Year Ended
December 31,
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Average Sales Price<F1>
Oil (Bbl) $16.09 $13.70
====== ======
Natural Gas (Mcf) $ 1.69 $ 1.90
======= =======
Average Production Cost<F2>
Per equivalent barrel<F3> $ 5.92 $ 8.96
====== =======
Per dollar of sales 0.47 0.71
======= =======
<FN>
<F1> Before deduction of production taxes.
<F2> Excludes depletion, depreciation and amortization. Production cost includes
lease operating expenses and production and ad valorem taxes, if
applicable.
<F3> Gas production is converted to equivalent barrels at the rate of six mcf of
gas per barrel, representing the estimated relative energy content of
natural gas and oil.
</FN>
</TABLE>
Productive Wells
----------------
The total gross and net wells, expressed separately for oil and gas, as of
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Productive Wells<F2><F3>
As of December 31,
1995
Gross<F1> Net<F1>
Location Oil Gas Total Oil Gas Total
-------- --- --- ----- --- --- -----
<S> <C> <C> <C> <C> <C> <C>
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<F2>
As of December 31,
1994
Gross <F1> Net<F1>
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
=== == === ===== ==== =====
<FN>
<F1> The number of gross wells is the total number of wells in which a
fractional working interest is owned. The number of net wells is the sum of
the fractional working interests owned by the Company in gross wells
expressed in whole numbers and decimal fractions thereof.
<F2> There were no producing wells in 1995 or 1994 that were producing from
multiple completion zones.
<F3> Information here represents properties acquired by Magnum.
</FN>
</TABLE>
46
<PAGE>
Drilling Results.
-----------------
Hunter's drilling activities have been 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.
<TABLE>
<CAPTION>
Leasehold Acreage
As of December 31,
Developed Undeveloped
Gross Acres Net Acres Gross Acres Net Acres
----------- --------- ---------------------
<S> <C> <C> <C> <C>
1995<F1> 60,747 20,072 2,326 1,777
====== ====== ===== =====
1994 43,985 10,548 1,738 1,631
====== ====== ===== =====
<FN>
<F1> Information disclosed here represents properties acquired by Magnum.
</FN>
</TABLE>
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.
47
<PAGE>
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.
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.
48
<PAGE>
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.
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 March 31, 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
First Quarter Ended
March 31, 1996 3/4 1/4
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
49
<PAGE>
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
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 March 31, 1996:
Title of Class Number of Holders of Record
Common Stock--$.10 par value 3,275
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:
<TABLE>
<CAPTION>
Name Age Director Since Officer Since Position
---- --- -------------- ------------- --------
<S> <C> <C> <C> <C>
Gary C. Evans 38 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
</TABLE>
Mr. Evans, age 38, 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
Digital Communications Technology Corporation, an American Stock Exchange listed
Company. Mr. Evans was appointed President, Chief Executive Officer and a
Director of Magnum Petroleum, Inc. in December 1995.
Mr. 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 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.
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.
50
<PAGE>
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 74, 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.
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>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) * (f) (g) (h) (i)
Name, Year Salary Bonus Other Number
Principal Annual Restricted Options LTP All Other
Position Compensation Stock SARs Payouts Compensation
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 $250.00 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, options to purchase 100,000 shares of
common stock at $.1875 per share over a five year period were granted to each
director. In addition, in 1995 certain directors exercised options previously
granted to purchase 400,000 shares of common stock at $.1875 per share.
51
<PAGE>
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
options to purchase 100,000 shares of common stock at $.1875 per share over a
five year period. Also, in 1995 the Chairman exercised options 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 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 $.1875 per share.
At the discretion of the President, all employees of the Company are
eligible to receive options for the purchase of Common Stock under the Company's
Incentive Stock Option Plan (the "Plan"). As of December 31, 1995, 186,000 share
options were issued and 14,000 share options had been exercised under the Plan
by certain former employees.
The following tables present the options granted and exercised by executive
officers during 1995:
Option Grants in 1995
Individual Grants
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Percent of Total
Options/SARs
Options/ Granted to
SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/SH) Date
- --------------------- ----------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Gary C. Evans
Chairman, President & 100,000 25% $.1875 4/27/2000
CEO
Matthew C. Lutz
Vice Chairman 100,000 25% $.1875 4/27/2000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Option Exercises in 1995 and December 31, 1995 Option Values
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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>
52
<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 March 31, 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.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percentage of
Beneficial Owner Beneficial Ownership Outstanding Shares (2)
- ---------------- -------------------- ----------------------
<S> <C> <C>
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
</TABLE>
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 March 31, 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.
Percentage
Name of Amount and Nature of of Outstanding
Beneficial Owner Beneficial Ownership 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) 5,180,686 shares directly owned; ii) 350,000 shares underlying
stock options; and iii) 66,667 shares held by a company controlled by Mr.
Evans' wife.
(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.
53
<PAGE>
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 accounts receivable from
the President personally 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.
54
<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.
Dividends
---------
Holders of shares of Series C Preferred Stock will be 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 will accrue and be cumulative from the date of first issuance of the
Series C Preferred Stock and will be 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 will be 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
55
<PAGE>
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 will
be 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 will be 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 will not be
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 will have 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 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.
56
<PAGE>
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 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.
57
<PAGE>
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.
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.
58
<PAGE>
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, 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.
A comparison of material differences between Pennsylvania and Nevada
corporate law 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>
Proposed by Resolution of Proposed by Resolution of Board of Directors
1.Amendment of Articles Board of Directors
of Incorporation OR
Petition of shareholders Approval by a majority of votes
entitled to cast at least
10% of all votes entitled
to be cast.
2.Shareholder Meetings Approved by a majority of votes. Called by Board of Directors.
Called by Board of Directors.
OR
By shareholders entitled tocast
at least 20% of all votes entitled
to be cast.
59
<PAGE>
3.Liabilities of Directors Under provisions of the Articles of
Incorporation and By-Laws of Hunter, The General Corporation Law of Nevada
each person who is or was a director or permits provisions in the articles, by-laws or
officer of Hunter will be indemnified resolutions approved by shareholders which
by Hunter as a matter of right to the limit liability of directors for breach of
extent permitted or authorized by law. fiduciary duty of certain specified
The effects of the Articles of circumstances. Magnum's by-laws indemnify
Incorporation, By-Laws, and other its Officers and Directors to the full extent
applicable law may be summarized as permitted by Nevada law. The by-laws
follows: with certain exceptions eliminate any
(a) Under Pennsylvania law, to the personal in liability of a Director to Magnum
extent that such a person is successful or its shareholders for monetary damages for the
on the merits in defense of a suit or breach of a Director's fiduciary duty and therefore
proceeding brought against him by a Director cannot be held liable for damages to
reason of the fact that he is a Magnum or its shareholders for gross negligence
director or officer of Hunter, he shall or lack of due care in carrying out his fiduciary
be indemnified against expenses duties as a Director. Magnum's Articles provide for
(including attorney's fees) reasonably indemnification to the full extent permitted under
incurred in connection with such action. law which excludes all liability, damages and costs
(b) In other circumstances, a or expenses arising from or in connection with
director of Hunter may be indemnified service for, unemployment by, or other affiliation
against expenses (including attorney's with Magnum to the maximum extent and under all
fees) judgments, fines and amounts circumstances permitted by law. Nevada law permits
paid in settlement actually and indemnification if a director or officer acts in
reasonably incurred by him in good faith in a manner reasonable believed to
connection with such action, suit or be in, or not opposed to, the best interest's of
proceeding if he acted in good faith the corporation. A director or officer must be
and in a manner he reasonably believed indemnified as to any matter in which he
to be in and not opposed to the best successfully defends himself. Indemnification
interest of Hunter, and, with respect is prohibited as to any matter in which the
to a criminal action or proceeding, director or officer is adjudged liable to the
had no reasonable cause to believe corporation. Insofar as indemnification for
his conduct was unlawful; however, liabilities arising under the Securities Act may
in any action or suit by or in the be permitted to directors, officers, and
right of Hunter to procure a judgment controlling persons of Magnum pursuant to
in its favot, such person will not be the foregoing provisions or otherwise, Magnum has
indemnified if he has been adjudged been advised that in the opinion of the Securities
to be liable to Hunter unless and only and Exchange Commission, such indemnification is
to the extent that the court in which against public policy as expressed in the Act and
such action or suit was brought is, therefore, unenforceable.
determines upon application that,
despite the adjudication of liability
but in view of all the circumstances
of the case, such person is fairly
and reasonably entitled to indemity
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.
</TABLE>
60
<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 are or will 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:
Amount and Percent
Nature of
Title of Class of Beneficial Class
Ownership
------------------------------------------------------------
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
61
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
General
-------
The following summary of the anticipated federal income tax consequences to
Hunter and to its shareholders of the proposed sale of assets and liquidation 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 the Internal Revenue Code of 1986 (the "Code"), as presently in
effect, the rules and regulations promulgated thereunder, current administrative
interpretations, and court decisions. 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's 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. See ss.361 of the Code. Hunter's basis in the Magnum Shares will be
equal to its basis in the assets transferred to Magnum. See ss.358 of the Code.
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. 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 the NOL of Hunter and the Hunter Subsidiaries will be limited after
the Business Combination.
Federal Income Tax Consequences to the Shareholders upon Liquidation
--------------------------------------------------------------------
Shareholders will not recognize gain or loss upon the redemption of their
Company stock in exchange for Magnum Shares. Shareholders will recognize gain or
loss to the extent they receive cash for fractional shares. See ss.354(a)(1) of
the Code. Company shareholders receiving Magnum Shares retain the same tax basis
for the Magnum Shares that they had in Hunter stock surrendered. See ss.358 of
the Code. 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. See ss.358(a)(1) of the Code.
Allocation of basis among the Magnum Shares is determined under regulations to
the Code. See ss.358(b)(1) of the Code and Treas. Regs. ss.1.358-2. If Hunter
stock was held as a capital asset, then the Magnum Shares will tack the holding
period of Hunter stock exchanged. See ss.1223 of the Code. The shareholders of
Hunter must file pursuant to ss.1.368-3(b) of the Regulations with his or her
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.
62
<PAGE>
Federal Income Tax Consequences to Magnum
-----------------------------------------
Magnum will not recognize gain or loss upon the issuance of the Magnum
Shares. See ss.1032 of the Code. 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. See ss.362(b) of the Code. Magnum's holding period for the assets
received from Hunter includes the period for such assets in the hands of Hunter.
See ss.1223 of the Code. 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 and 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.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Pro Forma Consolidated Financial Information for Magnum.....................F-2
Pro Forma Consolidated Statement of Operations
for the Year Ended December 31, 1995 (unaudited)..........................F-3
Notes to Pro Forma Consolidated Financial Information.......................F-4
Consolidated Financial Statements of Magnum
Independent Auditor's Report - 1995.........................................F-5
Report of Independent Accountants - 1994....................................F-6
Audited Consolidated Balance Sheet as of December 31, 1995 and 1994.........F-7
Audited Consolidated Statements of Operations
for the Years Ended December 31, 1995 and 1994............................F-8
Audited Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995 and 1994 ...................................F-9
Audited Consolidated Statements of Cash Flows
for the Years Ended December 31, 1995 and 1994............................F-10
Notes to Consolidated Financial Statements..................................F-11
Consolidated Financial Statements of Hunter
Independent Auditor's Report................................................F-25
Audited Consolidated Statement of Net Assets in Liquidation
as of December 31, 1995...................................................F-26
Audited Consolidated Statements of Operations
for the Years Ended December 31, 1995 and 1994............................F-27
Audited Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1995 and 1994................................F-28
Audited Consolidated Statements of Cash Flows
for the Years Ended December 31, 1995 and 1994............................F-29
Notes to Consolidated Financial Statements..................................F-30
F-1
<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 statements of
operations for the acquisition by Hunter on March 31, 1995 of the Arrington oil
and gas properties, the October 25, 1995 acquisition of the Reef oil and gas
properties and the November 9, 1995 acquisition of the Tana oil and gas
properties as if the acquisitions had been consummated at the beginning of 1995.
The Arrington, Reef and Tana acquisitions were previously reported on amended
Forms 8-K filed by Hunter on September 26, 1995, January 8, 1996 and January 24,
1996, respectively.
The pro forma statements of operations are presented as if the Acquisition
occurred at the beginning of the period. 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 and Tana were filed in
amended Forms 8-K as referenced above.
F-2
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Twelve Months ended December 31, 1995
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Magnum Hunter Arrington Reef Tana Pro forma Combined
Historical Historical Historical Historical Historical Adjustments Pro forma
----------------------------------------------------------------------------------------------
Revenues:
Gas gathering and marketing $ $ 469,000 $ $ $ $ $ 469,000
Oil and gas sales 616,596 1,625,000 123,000 937,000 1,636,000 4,937,596
Oil field services and commissions 565,000 (A) 11,000 576,000
Other oil and gas related services 31,978 31,978
Interest 152,371 27,000 179,371
Other 281,000 281,000
----------------------------------------------------------------------------------------------
TOTAL REVENUES
800,945 2,967,000 123,000 937,000 1,636,000 11,000 6,474,945
----------------------------------------------------------------------------------------------
Expenses:
Purchases of natural gas 329,000 329,000
Pipeline operations 85,000 85,000
Lease operating 267,513 762,000 32,000 244,000 563,000 1,868,513
Cost of services 454,000 454,000
Costs related to other services 26,134 26,134
Depreciation, depletion,
amortization and impairment 421,101 919,000 (B) 1,057,000 2,397,101
General and administrative 977,070 702,000 (C) (314,000) 1,365,070
Interest 1,882 298,000 (D) 538,000 837,882
Other 75,517 100,000 175,517
----------------------------------------------------------------------------------------------
TOTAL EXPENSES
1,769,217 3,649,000 32,000 244,000 563,000 1,281,000 7,538,217
----------------------------------------------------------------------------------------------
NET INCOME (LOSS) (968,272) (682,000) 91,000 693,000 1,073,000 (1,270,000) (1,063,272)
PREFERRED DIVIDENDS (617,220) (9,000) (E) (83,173) (709,393)
----------------------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE $ (1,585,492) $ (691,000) $ 91,000 $ 693,000 $ 1,073,000 $ (1,353,173) $(1,772,665)
TO COMMON SHARES ----------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ (.28) $ (.04) $ (.16)
----------------------------------------------------------------------------------------------
(primarily and fully diluted)
</TABLE>
See Notes to Pro Forma Consolidated Financial Information
F-3
<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. For purposes of
this computation it was assumed that the combination of Magnum and
Hunter and the Arrington, Reef and Tana acquisitions occurred at the
beginning of the period. Magnum's combined oil and gas reserve
estimates as of December 31, 1995 served as the base for the depletion
computation for the Magnum and Hunter combination and the three
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, while the Tana
acquisition accounted for $15,000. Also reflects estimated reductions
of general and administrative costs of $340,000 from the combination
with Hunter as follows:
Salaries and employee benefits $239,000
Travel and Entertainment 60,000
Rent and other office expense 41,000
----------
$340,000
========
D) To reflect the additional interest expense associated with the
financed portion of the Arrington, Reef and Tana acquisitions. For
this purpose, the Arrington, Reef and Tana acquisitions were assumed
to have occurred at the beginning of the period and for the same
amounts when actually closed later in 1995. Interest rates were
assumed to be prime plus one and one-half percent as in effect
throughout the period per Magnum's principal lending institution. The
estimated interest expense for the Arrington acquisition amounted to
$32,000 for the year ended December 31, 1995. The Reef acquisition
amounted to $189,000, while the Tana acquisition amounted to $317,000.
E) To reflect preferred stock dividends associated with the preferred
shares issued as a part of Magnum's acquisition of Hunter.
F-4
<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-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Magnum Petroleum, Inc.
We have audited the accompanying consolidated balance sheet of Magnum Petroleum,
Inc. and Subsidiary as of December 31, 1994, and the related consolidated
statements of operations, cash flows, and stockholders' equity for the years
ended December 31, 1994 and 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Magnum Petroleum, Inc. and
Subsidiary as of December 31, 1994, and the results of their operations and
their cash flows for the years ended December 31, 1994 and 1993, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for oil and gas producing operations from the successful
efforts method to the full cost method.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 26, 1995, except for Note 2,
as to which the date is September 29, 1995
F-6
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,543,666 $ 1,644,519
Securities available for sale 101,640 23,375
Accounts receivable
Trade, net of allowance of $134,158 in 1995 1,246,652 72,783
Due from affiliates 115,961 -
Other 22,368 -
Note receivable from affiliate 120,758 -
Note receivable - 319,206
Costs in excess of billings on uncompleted drilling contracts - 54,590
Current portion of long-term note receivable 200,955 -
----------- ------------
TOTAL CURRENT ASSETS 3,352,000 2,114,473
----------- ------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method
Unproved 842,889 700,344
Proved 36,256,428 7,932,496
Pipelines 1,087,310 -
Other property 145,957 169,285
----------- ------------
TOTAL PROPERTY, PLANT and EQUIPMENT 38,332,584 8,802,125
Accumulated depreciation, depletion and impairment (1,928,078) (1,547,647)
----------- ------------
NET PROPERTY, PLANT AND EQUIPMENT 36,404,506 7,254,478
----------- ------------
OTHER ASSETS
Deposits and other assets 118,007 8,971
Investments in securities - 66,660
Long-term notes receivable, net of imputed interest 190,287 -
Funds segregated for settlement of note payable - 130,000
------------ ------------
TOTAL ASSETS $ 40,064,800 $ 9,574,582
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,229,562 $ 551,911
Accrued liabilities 53,433 48,183
Dividends payable 177,304 143,579
Suspended revenue payable 793,680 -
Current maturities of long-term debt 2,014,000 173,925
--------- -------
TOTAL CURRENT LIABILITIES 4,267,979 917,598
--------- -------
LONG-TERM LIABILITIES
Long-term debt 7,597,597 11,675
Production payment liability 288,235 -
Other 289,983 -
Deferred income taxes 3,125,000 -
COMMITMENTS AND CONTINGENCIES (Note 12) - -
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 authorized
216,000 designated as Series A; 80,000 shares issued
and outstanding 80 80
925,000 designated as Series B; 62,050 and 64,050
shares issued and outstanding, respectively 62 64
625,000 designated as Series C; 625,000 and 501,725
shares issued and outstanding, respectively
(liquidation preference of $6,250,000 at
December 31, 1995 625 504
Common stock - $.002 par value; 50,000,000 shares authorized
11,598,183 and 4,537,045 shares issued and outstanding
respectively 23,196 9,074
Additional paid-in capital 29,659,992 12,606,305
Deferred costs of warrant exercise offering - (240,281)
Accumulated deficit (5,244,899) (3,659,407)
Receivable from stockholders (250) (62,500)
Unrealized gain (loss) on investments 57,200 (8,528)
------ ------
TOTAL STOCKHOLDERS' EQUITY 24,496,006 8,645,309
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,064,800 $ 9,574,582
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1995 1994
---- ----
<S> <C> <C>
OPERATING REVENUE
Oil and gas sales $ 616,596 $ 729,478
Other oil and gas related services 31,978 15,704
------ ------
TOTAL OPERATING REVENUE 648,574 745,182
------- -------
OPERATING COSTS AND EXPENSES
Oil and gas production 267,513 317,761
Costs related to other services 26,134 6,631
Depreciation and depletion 421,101 243,180
General and administrative 977,070 768,838
------- -------
TOTAL OPERATING COSTS AND EXPENSES 1,691,818 1,336,410
--------- ---------
OPERATING LOSS (1,043,244) (591,228)
INTEREST INCOME 152,371 51,506
INTEREST EXPENSE (1,882) (6,660)
LOSS ON DISPOSITION OF ASSETS (75,517) -
------- --------
NET LOSS (968,272) (546,382)
DIVIDENDS APPLICABLE TO PREFERRED
SERIES B AND SERIES C SHARES 617,220 579,325
------- -------
NET LOSS APPLICABLE TO COMMON SHARES $(1,585,492) (1,125,707)
----------- ----------
LOSS PER COMMON SHARE $ (0.28) $ (0.27)
COMMON SHARES USED IN PER SHARE CALCULATION 5,606,669 4,166,822
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-8
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 672,050 $ 673 3,472,345 $ 6,945 $ 10,499,891
Conversion of 10,500 shares
of Series B and 40,025 shares of Series C
preferred stock to common stock (50,525) (51) 125,325 251 (200)
Issuance of Series C preferred stock 24,250 24 290,976
Issued for notes receivable 150,000 300 187,200
Adjustment of price of stock previously issued for
notes receivable (187,500)
Issued to acquire oil and gas properties 613,000 1,226 1,232,274
Issued in exchange for Series B production
certificates, net of $42,924 offering costs 176,375 352 583,664
Costs incurred in warrant offering
Interest accrued on receivable
Payments received on receivable
Dividends declared on preferred stock
Net loss
Unrealized loss on investments
-------------------------------------------------------------------
Balance at December 31, 1994 645,775 646 4,537,045 9,074 12,606,305
-------------------------------------------------------------------
Conversion of 2,000 shares of Series B and 9,300
shares of Series C preferred stock to common stock (11,300) (12) 28,900 58 (46)
Issuance from exercise of warrants 833,324 1,667 3,331,629
Costs incurred in warrant offering
Offset warrant offering costs (490,769)
Issuance of Series C preferred stock 20,750 21 248,979
Issued to acquire oil and gas properties 386,615 773 1,378,431
Issued as compensation to directors 5,000 10 17,490
Issued for services 22,222 44 84,400
Issued to directors for collateral 125,000 250
Sale of investment shares
Payments received on receivable 111,825 112
Acquisition of Hunter Resources, Inc. for Series C
preferred stock and common stock 5,660,077 11,320 12,483,573
Dividends declared on preferred stock
Net loss
Unrealized gain on investments
---------------------------------------------------------------
Balance at December 31, 1995 767,050 $ 767 11,598,183 $ 23,196 $ 29,659,992
===============================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9.1
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
<TABLE>
<CAPTION>
Deferred Unrealized
Costs of Receivable Gain (Loss)
Warrant Accumulated from On
Offering Deficit Stockholder Investments
----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ - $(2,533,700) $ (465,645) $ -
Conversion of 10,500 shares
of Series B and 40,025 shares of Series C
preferred stock to common stock
Issuance of Series C preferred stock
Issued for notes receivable
Adjustment of price of stock previously issued for
notes receivable
Issued to acquire oil and gas properties
Issued in exchange for Series B production
certificates, net of $42,924 offering costs
Costs incurred in warrant offering (240,281)
Interest accrued on receivable (11,355)
Payments received on receivable 414,500
Dividends declared on preferred stock (579,325)
Net loss (546,382)
Unrealized loss on investments (8,528)
----------------------------------------------------------
Balance at December 31, 1994 (240,281) (3,659,407) (62,500) (8,528)
----------------------------------------------------------
Conversion of 2,000 shares of Series B and 9,300
shares of Series C preferred stock to common stock
Issuance from exercise of warrants
Costs incurred in warrant offering (250,488)
Offset warrant offering costs 490,769
Issuance of Series C preferred stock
Issued to acquire oil and gas properties
Issued as compensation to directors
Issued for services
Issued to directors for collateral (250)
Sale of investment shares 8,528
Payments received on receivable 62,500
Acquisition of Hunter Resources, Inc. for Series C
preferred stock and common stock
Dividends declared on preferred stock (617,220)
Net loss (968,272)
Unrealized gain on investments 57,200
----------------------------------------------------------
Balance at December 31, 1995 $ - $(5,244,899) $ (250) $ 57,200
==========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9.2
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1995 1994
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (968,272) $ (546,382)
Adjustments to reconcile net loss to cash provided by (used for)
operating activities:
Depreciation and depletion 421,101 243,180
Common stock issued for services 101,944 -
Loss on sale of assets 75,517 -
Interest accrued on notes receivable from stockholders - (11,355)
Other 14,935 29,631
Changes in certain assets and liabilities
Accounts receivable (36,769) (27,724)
Costs in excess of billings on uncompleted drilling contracts 54,590 (54,590)
Deposits and other assets 349 33,117
Accounts payable and accrued liabilities (512,737) 366,066
-------------- -----------
Net Cash Provided By (Used By) Operating Activities $ (849,342) $ 31,943
-------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 88,475 650,041
Additions to property and equipment (1,244,128) (1,945,093)
Loan made for promissory note receivable (120,758) (319,206)
Payments received on promissory notes receivable 334,442 -
Purchase of securities available for sale (30,338) (31,903)
Obligations and property acquisitions funded in Hunter acquisition (1,034,417) -
-------------- -----------
Net Cash Used By Investing Activities (2,006,724) (1,646,161)
-------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock,
net of offering costs 3,331,808 145,594
Payments received on notes receivable from shareholders 62,500 414,500
Payments of principal on notes payable (185,600) (46,663)
(Increase) decrease in segregated funds for payments of notes payable 130,000 (130,000)
Dividends paid (583,495) (510,044)
-------------- -----------
Net Cash Provided By (Used By) Financing Activities 2,755,213 (126,613)
-------------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (100,853) (1,740,831)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,644,519 3,385,350
-------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,543,666 $ 1,644,519
============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
- -------------------------------------
Magnum Petroleum, Inc. (the "Company") is incorporated under the laws of
the state of Nevada. The Company is engaged in the acquisition, operation and
development of oil and gas properties, the gathering, transmission and marketing
of natural gas, providing management and advisory consulting services on oil and
gas properties for third parties, and providing consulting and U.S. export
services to facilitate Latin American trade in energy products. In conjunction
with the above activities, the Company is licensed to operate a commercial salt
water disposal facility in the state of Oklahoma and owns and operates oil and
gas properties in six states, predominantly in the Southwest region of the
United States. In addition, the Company owns and operates three gathering
systems located in Texas, Louisiana and Oklahoma.
Merger and Consolidation
- ------------------------
The accompanying financial statements include the accounts of the Company
and its existing wholly-owned subsidiary, Cushing Disposal, Inc.; and beginning
on December 31, 1995, the accounts of Hunter as described below. As more fully
discussed in Note 3, the Company entered into an amended definitive agreement on
December 19, 1995 to acquire all of the assets, subject to the existing
liabilities, of Hunter Resources, Inc. ("Hunter"). The purchase was accounted
for by the purchase method effective December 31, 1995. As such, the
accompanying consolidated financial statements for 1995 include the balance
sheet accounts of Hunter. However, the Statement of Operations for 1995 does not
include the operations of Hunter for 1995. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the consolidated financial statements of the
prior year to conform with the current presentation.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company has cash
deposits in excess of federally insured limits.
Investments
- -----------
In 1994, the Company adopted Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under
this standard, the equity securities held by the Company that have readily
determinable fair values are classified as current assets available-for-sale and
are measured at fair value. Unrealized gains and losses for these investments
are reported as a separate component of stockholders' equity. In 1994,
investments in equity securities for which sale within one year was restricted
by governmental securities regulations were classified as non-current assets.
At December 31, 1995 the Company's available for sale securities had an
amortized cost basis of $44,440, gross unrelated gains reported in equity of
$57,200 and a fair market value of $101,640. During 1995, Securities were sold
for gross proceeds of $73,083 and the Company realized a gain of $19,370.
Suspended Revenues
- ------------------
Suspended revenue interests represent oil and gas sales payable to third
parties largely on properties operated by the Company. The Company distributes
such amounts to third parties upon receipt of signed division orders or
resolution of other legal matters.
Oil and Gas Producing Operations
- --------------------------------
The Company follows the full-cost method of accounting for oil and gas
properties, as prescribed by the Securities and Exchange Commission ("SEC").
Accordingly, all costs associated with acquisition, exploration and development
of oil and gas reserves, including directly related overhead costs, are
capitalized.
All capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the unit-of-production
method using estimates of proved reserves. Cost directly associated with the
acquisition and evaluation of unproved properties are excluded from the
amortization base until the related properties are evaluated. Such unproved
properties are assessed periodically and any provision for impairment is
transferred to the full-cost amortization base. Sales of oil and gas properties
are credited to the full- cost pool unless the sale would have a significant
effect on the amortization rate. Abandonments of properties are accounted for as
adjustments to capitalized costs with no loss recognized. The Company's unproved
properties excluded from the amortization base were $842,889 and $700,344 at
December 31, 1995 and 1994, respectively.
F-11
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These costs arose in 1994 and 1995 and are expected to be evaluated and
transferred into the amortization base over the next twelve months.
The net capitalized costs are subject to a "ceiling test," which limits
such costs to the aggregate of the estimated present value of future net
revenues from proved reserves discounted at ten percent based on current
economic and operating conditions.
Drilling Operations
- -------------------
Fees from fixed-price contracts with other working interest owners to
drill, complete and place oil and gas wells into production less related costs
are accounted for as adjustments to oil and gas properties.
Pipelines
- ---------
Pipelines are carried at cost. Depreciation is provided using the
straight-line method over an estimated useful life of 15 years. Gain or loss on
retirement or sale or other disposition of assets is included in income in the
period of disposition.
Other Property
- --------------
Other property and equipment are carried at cost. Depreciation is provided
using the straight-line method over estimated useful lives ranging from five to
ten years. Gain or loss on retirement or sale or other disposition of assets is
included in income in the period of disposition.
Other Oil and Gas Related Services
- ----------------------------------
Other oil and gas related services consist largely of fees earned from the
Company's salt water disposal facility. Such fees are recognized in the month
the disposal service is provided.
Impact of Recently Issued Pronouncements
- ----------------------------------------
The Financial Accounting Standards Board (FASB) has issued Statement No.
121, "Accounting for Impairments of Long-Lived Assets". The Company intends to
adopt this standard in 1996. Management believes it will not have a material
impact on the Company's financial statements. The FASB has also issued Statement
No. 123, "Accounting for Stock-Based Compensation". The Company will adopt this
standard in 1996, also. At this time, management anticipates it will continue
accounting for stock based compensation in 1996 under guidance provided by the
existing standard but will provide pro forma disclosures as allowed by Statement
No. 123.
Income Taxes
- ------------
The Company files a consolidated federal income tax return. The Company
applies Statement of Financial Accounting Standards No. 109 (SFAS 109). As
required by SFAS 109, income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due, if any, plus net deferred taxes related primarily to differences between
the basis of assets and liabilities for financial and income tax reporting.
Deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred tax assets include
recognition of operating losses that are available to offset future taxable
income and tax credits that are available to offset future income taxes.
Valuation allowances are recognized to limit recognition of deferred tax assets
where appropriate. Such allowances may be reversed when circumstances provide
evidence that the deferred tax assets will more likely than not be realized.
Loss Per Common Share
- ---------------------
Loss per common share is based on the weighted average number of shares of
common stock outstanding. Convertible securities and warrants were anti-dilutive
at December 31, 1995 and 1994 and were not included in the calculation of loss
per common share.
Deferred Cost of Warrant Exercise Offering
- ------------------------------------------
The Company incurred costs to update its registration statement relating to
Series C preferred stock that is convertible into common stock and relating to
common stock purchase warrants. The Company made an offer to the warrant holders
allowing them to exercise their warrants at a discount through February 16,
1995. As presented in Note 7, certain of the common stock purchase warrants were
exercised prior to the expiration of the discount period. The Company had
deferred direct costs as of December 31, 1994 of $240,281 related to the
discounted warrant exercise offering. Such costs and $250,488 incurred in 1995
were offset against the proceeds received in 1995 from the exercise of the
warrants.
F-12
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Cash Flows
- ------------------------
During the year ended December 31, 1995, the Company changed its method of
accounting for cash flows from operating activities from the direct method to
the indirect method. Prior periods have been restated for the affects of the
change.
Use of Estimates and Certain Significant Estimates
- --------------------------------------------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates. Significant assumptions are required in the valuation of proved
oil and gas reserves, which as described above may affect the amount at which
oil and gas properties are recorded. It is at least reasonably possible those
estimates could be revised in the near term and those revisions could be
material.
NOTE 2--CHANGE IN ACCOUNTING METHOD
The Company accounted for its oil and gas producing activities using the
successful efforts method from inception through June 30, 1995. However, the
full cost method has subsequently been adopted. The Company is of the opinion
that the full cost method of accounting is preferable to the successful efforts
method of accounting for its oil and gas activities for the following reasons:
(1) The Company recently acquired the subsidiaries of Hunter (See note 3),
which comprise corporations engaged in oil and gas related activities
and which utilize the full cost method of accounting for these
activities. For both legal and accounting purposes, the Company is the
acquiring entity; however, the subsidiaries are increasing their oil
and gas activities and have more proved oil and gas reserves than the
Company. Furthermore, management of Hunter became the management of
the Company upon completion of the acquisition. One of the Hunter
subsidiaries specializes in the management of oil and gas properties
and all accounting functions and financial reporting have been
undertaken by the subsidiaries' personnel. The individuals employed by
the subsidiaries will comprise the vast majority of the Company's
employees and the Company believes that by allowing these employees
and Hunter's management to continue to use the full cost method, it
would greatly benefit in accurately reporting on its oil and gas
operations.
(2) The subsidiaries have established a relationship with lending sources
which the Company intends to continue to utilize and expand upon.
These sources are accustomed to evaluating the subsidiaries' financial
statements on the full cost method of accounting. The Company intends
to request additional borrowing arrangements from these lenders and
believes that it is desirable for these lending sources to review
financial statements prepared on a consistent basis.
(3) The Company occasionally engages in turnkey drilling activities and in
the sale of oil and/or gas prospects. The Company believes that these
activities are secondary to its primary oil and gas operations.
However, in accounting for these activities utilizing the successful
efforts method of accounting, 47% of the Registrant's operating
revenue during 1994 and 66% of its operating revenue on an unaudited
basis during the first six months of 1995 came from such secondary
sources. Knowing that - the successful efforts method permits the
recognition of revenue from such secondary sources, the Registrant has
sought for and has engaged in turnkey drilling activities and in the
sale of oil and/or gas prospects to effect the results of its
operations. The Company's use of the successful efforts method,
although allowed by generally accepted accounting principles, has
resulted in peaks and valleys in operating results for previous
accounting periods. The full cost method of accounting would require
that these activities be spread over a period of time, and if
profitable, recognized through a reduction of the cost per unit of oil
and gas produced. Thus the full cost method avoids the large variances
in revenue and associated expenses which the Registrant has previously
reported in its quarterly and annual financial statements.
The accompanying financial statements have been restated to apply the
full cost method retroactively. This change in accounting principle
has no significant effect on income taxes. The effect of the
accounting change on net loss and accumulated deficit as previously
reported for the respective periods is:
F-13
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1994
---------------
<S> <C>
Statement of Operations:
Net Loss as Previously Recorded $ (1,258,808)
Adjustment for Effect of Change in Accounting Principle that is Applied Retroactively $ 712,426
Net Loss as Adjusted $ (546,382)
Per Share Amounts:
Net Loss as Previously Reported $ (0.44)
Adjustment for Effect of Change in Accounting Principle that is Applied Retroactively $ 0.17
Net Loss as Adjusted $ (0.27)
Common Shares Used in Per Share Calculation $ 4,166,822
</TABLE>
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Statement of Accumulated Deficit:
Balance at Beginning of Period as Previously Reported $ (4,166,058) $ (2,327,925)
Add Adjustment for the Cumulative Effect on Prior Years
of Applying Retroactively the Full Cost Method $ 506,651 $ (205,775)
Balance at Beginning of Period, as Adjusted $ (3,659,407) $ (2,533,700)
Net Loss $ (968,272) $ (546,382)
Preferred Dividends $ (617,220) $ (579,325)
Balance at End of Year $ (5,244,899) $ (3,659,407)
</TABLE>
The effect on 1995 operations of changing the accounting method was to increase
net loss and net loss per share by $307,000 and $.05, respectively.
F-14
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1994, the Company acquired three
properties through the issuance of both cash and common stock. One property was
acquired for $888,000, for which the Company paid $200,000 cash and issued
343,000 shares of its common stock, based on a value of $2.00 per share or
$686,000. Two other properties were acquired for a total of $692,500. In one
transaction, 150,000 shares were issued at $1.25 per share for $187,500 and in
the other transaction, 120,000 shares were issued at $3.00 per share for
$360,000. In the latter transaction, the Company committed to file a
registration statement relating to 40,000 shares, and has agreed to pay all
costs relating to the registration of these shares.
During 1994 the Company sold a 20% working interest in unproved oil and gas
mineral leases in which the Company has acquired an interest. The Company
received cash and 22,220 shares of the common stock of a publicly traded
corporation.
During March of 1995, the Company acquired an additional fifty percent
(50%) working interest (for a total of 100% working interest) in a proved
undeveloped oil and gas property on which one well is located. The acquisition
cost of this additional interest was $410,000, of which $130,000 was paid in
cash and 80,000 shares of the Company's restricted common stock, valued at $3.50
per share, were issued. During April of 1995, the Company also acquired an
additional 40 percent working interest (for a total 90% working interest) in a
proved undeveloped property on which one well is located. The acquisition cost
of this additional interest was $480,000, of which $20,000 was paid in cash and
125,000 shares of the Company's restricted common stock were issued, valued at
$3.50 per share, and the transfer of securities held by the Company as an
investment in equity securities at December 31, 1994.
In October 1995, the Company issued 85,131 shares of common stock, valued
at $3.52 per share, in an acquisition completed by a Hunter subsidiary for the
remaining stock ownership interest in a limited liability company. Also, in
October 1995, the Company issued 64,176 shares of common stock, valued at $4.00
per share, in an acquisition of oil and gas properties completed by a Hunter
subsidiary. In December 1995, the Company issued 32,308 shares of common stock,
valued at $3.25 per share, in an acquisition of a proven undeveloped property by
a Hunter subsidiary.
The Company executed a definitive agreement on July 21, 1995 to acquire all
of the assets, subject to the existing liabilities of Hunter Resources, Inc.
("Hunter"). Pursuant to the agreement, the Company issued, subject to
shareholder approval, 2,750,000 shares of its restricted common stock to Hunter
in exchange for the assets acquired. In addition, 575,000 shares of restricted
common stock were issued to a third party as an additional cost of the
acquisition. The third party distributed a total of 250,000 of the shares to a
former director and a former officer of the Company for their assistance in
completing the acquisition.
On December 19, 1995 to be effective December 22, 1995, the Company and
Hunter entered into an amended agreement. Under the terms of the amendment,
which was executed by Hunter shareholders representing over fifty percent (50%)
of the common stock of Hunter, an additional 2,335,077 shares of restricted
common stock and 111,825 shares of Series C preferred stock were issued to
Hunter. The acquisition was recorded under the "purchase method" of accounting,
based upon the estimated value of the shares issued of $12,495,005. The
operations of Hunter have been consolidated with those of the Company beginning
on December 31, 1995.
The following summary, prepared on a pro forma basis, presents the results
of operations for the year ended December 31, 1995 and 1994 as if the
acquisitions occurred as of the beginning of the respective years. The pro forma
information includes the effects of adjustments for decreased general and
administrative expense, and increased interest expense and depreciation and
depletion:
(Unaudited)
1995 1994
Revenue..................................... $6,259,753 $ 8,385,688
Net Income (Loss) Applicable to Common Stock.... (1,899,596) 650,915
Net Income (Loss) Per Common Share...............$ (.16) $ .06
F-15
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $120,758 at December 31, 1995 from an owner in an
affiliated limited liability company. The note provides for interest at ten
percent and has a due date of December 31, 1995, which has been extended to
April 30, 1996.
In connection with the acquisition of Hunter, the Company assumed a note
receivable from a company affiliated with the President of the Company in the
amount of $54,615 at December 31, 1995. This note bears interest at ten percent
and is due on demand. Additionally, trade accounts receivable from this
affiliated company were $51,346 at December 31, 1995.
In connection with the acquisition of Hunter, the Company assumed unsecured
accounts receivable from the President personally in the amount of $10,000 as of
December 31, 1995, which amount has been subsequently repaid.
A company owned by two former directors of the Company operated several of
the wells in which the Company has an interest. Operating fees paid this company
were $35,319 and $1,602 in 1995 and 1994, respectively. The operations of these
wells have been transferred to a subsidiary of Hunter. In addition, the related
company received a commission of $25,000 from the sale of an oil and gas
property to the Company in 1995.
F-16
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Banks
Promissory note, collateralized by pipelines and oil and gas
properties, payable in monthly installments for 1996 of $174,000
through October 1, 1996, then $171,000 thereafter plus interest at
prime plus one percent (total of 9.75% at December 31, 1995), assumed
in Hunter acquisition <F1> $ 9,554,597 $ -
Note payable, payable in monthly installments of $498 through July 1996
plus interest at 7.25 percent, collateralized by truck, assumed in
Hunter acquisition 3,000 -
Notes payable to banks, collateralized by vehicles, payable in monthly
installments of $1,075, including interest at 7.5% to 10.75%, through
April 1998. The notes were paid in full in 1995
or assumed by one of the Company's directors. - 29,165
Other
Notes payable, non-interest bearing and uncollateralized, payable in
monthly installments of $1,000 through July 1, 2000, assumed
in Hunter acquisition 54,000 -
Notes payable to purchase oil and gas property, the terms of which were
suspended in 1994 awaiting further development of the related property.
An agreement was entered into in 1995 to settle the note for $130,000.
Funds were segregated at December 31, 1994, in that amount, for
payment in 1995 - 130,000
Notes payable to purchase oil and gas property, payable in monthly
installments of $3,000, including interest at an imputed rate of 8% - 26,435
----------- -----------
Total Long-Term Debt 9,611,597 185,600
Less Current Portion 2,014,000 173,925
----------- -----------
Long-Term Debt $ 7,597,597 $ 11,675
=========== ===========
<FN>
<F1> The promissory note to bank is a borrowing under a $20,000,000 line of
credit on which there existed a borrowing base of approximately $8.7
million at December 31, 1995. The balance at December 31, 1995 includes
$1,125,000 due to the seller of certain oil and gas properties which was
refinanced in February, 1996 under the line of credit. The final principal
payments under the line of credit are due June 1, 2000. The amount that can
be borrowed under the line of credit is based upon a designated percentage
of oil and gas reserve values. The line of credit includes covenants, the
most restrictive of which require maintenance of a current ratio and
tangible net worth, as specifically defined in the loan agreement.
</FN>
</TABLE>
Maturities of long-term debt based on contractual requirements for the years
ending December 31, are as follows:
1996 $ 2,014,000
1997 2,508,000
1998 2,627,000
1999 2,151,000
2000 311,597
---------------
$ 9,611,597
(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.
F-17
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires the recognition of a liability or asset, net of a valuation allowance,
for the deferred tax consequences of all temporary differences between the tax
bases and the reported amounts of assets and liabilities, and for the future
benefit of operating loss carryforwards. The tax effects of significant
temporary differences and carryforwards are as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Property and equipment, including intangible drilling costs $ (5,890,000) $ (218,231)
------------- -----------
Total deferred tax liability (5,890,000) (218,231)
------------- -----------
Allowance for doubtful accounts 50,000 160
Depletion carryforwards 365,000
Operating loss carryforwards 2,350,000 1,135,089
------------- -----------
Total deferred tax assets 2,765,000 1,135,249
------------- -----------
Valuation allowance - (917,018)
------------- -----------
Net Deferred Tax Liability $ (3,125,000) $ -
============= ===========
</TABLE>
The Company and its subsidiaries have net operating loss carryforwards
(NOL) of approximately $6,400,000 that expire, if unused, in years 1996 through
2010. Approximately $1,700,000 of the NOL carries a limitation of approximately
$200,000 per year. In addition, the Company has depletion carryforwards of
approximately $1,000,000.
NOTE 8--STOCKHOLDERS' EQUITY
Shares of preferred stock may be issued in such series, with such
designations, preferences, stated values, rights, qualifications or limitations
as determined solely by the Board of Directors. Of the 10,000,000 shares of
$.001 par value preferred stock the Company is authorized to issue, 216,000
shares have been designated as Series A Preferred Stock, 925,000 shares have
been designated as Series B preferred stock, and 625,000 shares have been
designated as Series C Preferred Stock. Thus, 8,234,000 preferred shares have
been authorized for issuance but have not been issued nor have the rights of
these preferred shares been designated. No dividends can be paid on the common
stock until the dividend requirements of the preferred shares have been
satisfied.
Holders of the Series A preferred stock are entitled to receive dividends
only to the extent that funds are available from the West Dilley Prospect. Such
dividends are limited to $7.50 per share, in the aggregate. Dividend payments to
Series A preferred shareholders will be based on 50% of the net operating
revenue received by the working interest owners of the West Dilley Prospect. Due
to a decline in production from the well located on this prospect, the Company
has shut this well in and is no longer producing it. The Series A dividends are
not cumulative except for unpaid amounts due from this calculation. No dividends
have been paid on the Series A preferred stock. There is no aggregate annual
dividend requirement for the Series A preferred stock.
The Series B preferred stock was issued as a unit, comprised of 1,000
shares of Series B preferred stock and 2 production certificates. The Series B
preferred stockholders are entitled to receive cumulative dividends of $0.35
annually per share, payable quarterly. The holders of the units are entitled to
receive $10,000 per unit in dividends and in production payments. The production
payments were derived from 50% of the Company's net revenue from production of
oil and gas.
The Board of Directors declared dividends on the Series B preferred stock
of $21,893 and $25,172 for the years ended December 31, 1995 and 1994,
respectively.
Beginning June 15, 1994, the Company offered to exchange (the "Exchange
Offer") 1,250 shares of common stock for each Series B production certificate.
During 1994, 141.1 production certificates were exchanged for
F-18
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
176,375 shares of common stock and the Series B preferred shareholders agreed to
convert their Series B preferred shares into common stock at December 31, 1995
if all dividends were paid through that date. Most of the shares were converted
in early 1996.
Separate and apart from the Exchange Offer, two of the Company's officers
and directors (the "Officers") set aside 125,000 shares (the "Stock") of their
own common stock of the Company for a single individual (the "Individual") who
owned approximately 55% of the Series B Production certificates that were
exchanged. The Stock is being held by an independent party to this transaction
until fair market value of the Exchange Shares, when the Exchange Shares become
eligible for sale pursuant to Rule 144 of the Securities Act of 1933, is
determined. If the fair market value of the Exchange Shares is at least $5.00
per share, then the Stock will be returned to the Officers. If the value of the
Exchange Shares is less than $5.00 per share, the Individual will receive a
certain number of the shares as specified in the agreement. The Company issued
125,000 shares of its common stock to the Officers in exchange for their
assignment to the Company of all of the Officers' rights, title and interest in
the Stock. The Company has recorded the new shares issued at par value.
The Series C preferred stock is convertible at the option of the holder at
any time into three shares of common stock and, after November 12, 1994, will
automatically convert into common stock anytime the closing bid price of the
common stock equals or exceeds $5.00 per share for twenty consecutive trading
days. The Series C preferred stock is redeemable by the Company beginning
November 12, 1995, at $10.50 per share plus accrued and unpaid dividends. If
declared by the Board of Directors, dividends accrue at the annual rate of $1.10
per share, are cumulative from the date of first issuance and are paid quarterly
in arrears. The Board of Directors declared dividends on the Series C preferred
stock of $595,327 for the year ended December 31, 1995, and $554,153 for the
year ended December 31, 1994. During 1994, 40,025 Series C preferred shares were
converted into 120,075 shares of common stock and 24,250 shares of Series C
preferred stock were issued upon exercise of representatives' warrants. The
aggregate annual dividend requirements for the 625,000 shares of Series C
preferred stock outstanding at December 31, 1995 amounts to $687,500.
The preferred shareholders are not entitled to vote except on those matters
in which the consent of the holders of preferred stock is specifically required
by Nevada law. If the Company were to liquidate prior to payment of the full
dividend requirements on the preferred stock, the preferred stock would receive
a liquidation preference from the liquidation proceeds. The Series A preferred
shareholders would receive an amount equal to the lesser of the proceeds from
the liquidation of the West Dilley Prospect or the remaining unpaid dividend.
The Series C preferred shareholders would receive a liquidation preference of
$10.00 per share, plus an amount equal to any accrued and unpaid dividends to
the payment date. On liquidation, holders of all series of the preferred stock
would be entitled to receive the par value, $.001 per share, in preference to
the common stock shareholders.
The Series C preferred stock was originally issued as a unit comprised of
one share of Series C preferred stock and warrants to purchase 3 shares of
common stock. A total of 1,687,500 warrants were issued and are exercisable at
$5.50 per share through November 12, 1998. The Company offered the holders of
the warrants a discount period commencing November 15, 1994 and ending February
16, 1995 during which time the warrants could be exercised at $4.00. During this
time, warrants were exercised for 833,324 shares of common stock. The exercise
of these warrants resulted in cash proceeds of $3,333,298 to the Company. The
warrants are redeemable by the Company at $0.02 per warrant upon 30 day notice
at any time after November 12, 1995 or earlier if the closing bid price of the
common stock equals or exceeds $6.75 for five consecutive trading days. At
December 31, 1995, 854,176 of the warrants remained outstanding.
The Company granted an unrelated company the right to acquire 100,000
shares of common stock under the terms of a consulting agreement. The rights
became exercisable at the rate of 3,325 shares in November 1994, 8,335 shares
per month from December 1994 through October 1995 and 4,990 shares in November
1995. The rights are exercisable at $4.125 per share. The rights expire in
November 1996 if not exercised by then. All of the rights were outstanding at
December 31, 1995 and 1994.
During 1995, 20,750 representatives' warrants were exercised at $12.00 per
warrant resulting in $249,000 of proceeds to the Company. Each warrant entitles
the holder to receive one share of Series C preferred stock and 3 common stock
warrants exercisable at $4.00 per share through February 1995 and $5.50
thereafter. 9,300 shares of Series C preferred stock and 2,000 shares of Series
B preferred stock have also been converted into 28,900 shares of common stock.
The Company issued 5,000 shares of common stock, valued at $3.50 per share to
its directors, which resulted in $17,500 of compensation expense in 1995. Also,
22,222 shares of common stock with a value of $3.80 per share were issued for
services.
F-19
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 10--ENVIRONMENTAL ISSUES
Being engaged in the oil and gas exploration and development business, the
Company may become subject to certain liabilities as they relate to
environmental clean up of well sites or other environmental restoration
procedures as they relate to the drilling of oil and gas wells and the operation
thereof. In the Company's acquisition of existing or previously drilled well
bores, the Company may not be aware of what environmental safeguards were taken
at the time such wells were drilled or during the time that such wells were
operated. Should it be determined that a liability exists with respect to any
environmental clean up or restoration, the liability to cure such a violation
would most likely fall upon the Company. In certain acquisitions the Company has
received contractual warranties that no such violations exist, while in other
acquisitions the Company has waived its rights to pursue a claim for such
violations from the selling party. No claim has been made nor has a claim been
asserted, nor is the Company aware of the existence of any liability which the
Company may have, as it relates to any environmental clean up, restoration or
the violation of any rules or regulations relating thereto.
NOTE 11-COMMITMENTS AND CONTINGENCIES
The Company assumed in the Hunter acquisition lease agreements for the use
of office space and office equipment. The office space lease extends through
November 2001 with an option to renew the lease for a three year term. The
office equipment lease extends until 1998. The leases have been classified as
operating leases. The following is a schedule by years of future minimum lease
payments required under the operating lease agreements:
Year Ended December 31:
1996................................................$126,906
1997................................................ 120,178
1998................................................ 120,188
1999............................................... 117,419
2000............................................... 124,238
Thereafter....................................... 112,515
Total Minimum Payments Required....................$721,444
Rental expense was $61,191 and $21,283 for 1995 and 1994, respectively.
At December 31, 1995, the Company is involved in litigation proceedings
arising in the normal course of business. The Company has accrued $100,000 as of
December 31, 1995 for potential expenses to be incurred in settlement of the
litigation. In the opinion of management, any additional liabilities resulting
from such litigation would not have a material effect on the Company's financial
condition.
F-20
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12-FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of accounts and notes receivable. The receivables are primarily from
companies in the oil and gas business or from individual oil and gas investors.
These parties are primarily located in the Southwestern regions of the United
States. No single receivable is considered to be sufficiently material as to
constitute a concentration. The Company does not ordinarily require collateral,
but in the case of receivables for joint operations, the Company often has the
ability to offset amounts due against the participant's share of production from
the related property. The Company believes the allowance for doubtful accounts
at December 31, 1995 is adequate.
Management estimates the market values of notes receivable and payable
based on expected cash flows and believes those market values approximate
carrying values at December 31, 1995. The market values of equity investments
are based upon quoted prices (see Note 1).
NOTE 13 - FOURTH QUARTER ADJUSTMENT
In the fourth quarter of 1995, due to downward revisions of the Company's
reserves at year-end, the Company made adjustments to depreciation and depletion
that impacted previously reported quarterly results. The effect of the
adjustments was to increase the reported net loss attributable to common
stockholders of $868,405 for the nine month period ended September 30, 1995 to a
net loss of approximately $1,046,000.
F-21
<PAGE>
MAGNUM PETROLEUM, INC. AND 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:
Natural Gas
Oil (Thousand
(Barrels) Cubic Feet)
--------- ----------
December 31, 1994
Proved reserves.......................... 1,260,520 4,914,207
Proved developed reserves................ 239,795 394,872
========= ==========
December 31, 1995
Proved reserves.......................... 3,767,739 14,071,916
Proved developed reserves................ 1,681,841 8,796,748
========= ==========
The changes in proved reserves for the year ended December 31, 1995 and
1994 were as follows:
Natural Gas
Oil (Thousand
(Barrels) Cubic Feet)
Reserves at December 31, 1993............... 1,445,990 3,672,779
Purchase of minerals-in-place............... 368,448 2,337,359
Production.................................. (41,835) (88,176)
Revisions of estimates...................... (512,083) (1,007,755)
Reserves at December 31, 1994............... 1,260,520 4,914,207
Purchase of minerals-in-place............... 3,122,382 10,973,298
Extensions and discoveries................. 38,498 564,247
Production.................................. (29,972) (102,056)
Revisions of estimates...................... (623,689) (2,277,780)
Reserves at December 31, 1995............... 3,767,739 14,071,916
F-22
<PAGE>
MAGNUM PETROLEUM, INC. AND 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:
1995 1994
---- ----
Property acquisition costs
Proved properties.................... $ 27,983,521 $ 1,737,543
Unproved properties.................. 142,545 -
Exploration costs.................... 340,411 -
Development costs......................... - 791,144
-------------- --------------
Total Costs Incurred...................... $ 28,466,477 $ 2,528,687
============== ==============
Results of operations from oil and gas producing activities for the years
ended December 31, 1995 and 1994 were as follows:
1995 1994
---- ----
Oil and gas production revenue...................$ 616,596 $ 729,478
Disposal services revenue........................ 31,978 15,704
Production costs................................. (293,647) (324,392)
Depreciation and depletion ...................... (421,101) (243,180)
Results of Operations for Producing Activities...$ (66,174) $ 177,610
F-23
<PAGE>
MAGNUM PETROLEUM, INC. AND 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-24
<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-25
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
DECEMBER 31, 1995
ASSET
Investment in securities, at estimated market value $ 12,495,000
Less deferred gain (10,333,000)
Net investments in securities ------------
2,162,000
------------
Total Assets $ 2,162,000
=================
STOCKHOLDERS' EQUITY
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
Common Stock, $.10 par value; 100,000,000 shares authorized;
18,454,000 shares issued and outstanding 1,845,000
Additional paid-in capital 1,834,000
Accumulated (deficit) (1,397,000)
-----------
2,372,000
Treasury stock and put option (210,000)
-----------
Total Stockholders' Equity 2,162,000
===========
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
1995 1994
------------ -----------
DISCONTINUED OPERATIONS
Income (loss) from operations $ (682,000) $ 15,000
------------ -----------
NET INCOME (LOSS) (682,000) 15,000
PREFERRED DIVIDENDS (9,000) (9,000)
------------ -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (691,000) $ 6,000
============ ===========
NET INCOME (LOSS) PER SHARE $ (0.04) $ *
------------ -----------
WEIGHTED AVERAGE SHARES OUTSTANDING 18,072,000 17,333,000
============ ===========
* Less than $.01 per share.
The accompanying notes are an integral part of these statements
F-27
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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 (682,000)
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)
Unrealized gain on investments
BALANCE, DECEMBER 31, 1995 90,000 $90,000 18,454,000 $1,845,000 $1,834,000 $(1,397,000) 538,000 $(210,000) $ -
====== ======= ========== ========== ========== ============ ======= ========== =======
</TABLE>
The accompanying notes are an integral part of these statements
F-28
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (682,000) $ 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 919,000 263,000
Gain on sale of assets (27,000) -
Adjustment of allowances and payables (35,000) (138,000)
Change in assets and liabilities:
(Increase) decrease in notes and accounts
receivable, trade and affiliates (620,000) (11,000)
(Increase) decrease in other current assets 32,000 39,000
(Increase) decrease in other assets (102,000) -
Increase (decrease) in accounts payable,
accrued liabilities and suspended revenue payable 861,000 121,000
Increase (decrease) in due to affiliates 753,000 -
Increase (decrease) in other liabilities (17,000) 27,000
------- ------
Total adjustments 1,864,000 385,000
--------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES: 1,182,000 400,000
--------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 28,000 23,000
Additions to property and equipment (9,279,000) (830,000)
---------- --------
NET CASH USED FOR INVESTING ACTIVITIES: (9,251,000) (807,000)
---------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 9,818,000 493,000
Payments on long tern debt (2,182,000) (259,000)
Proceeds from production payable 300,000 -
Payments on production payable (12,000) -
Proceeds from sale of stock 75,000 101,000
Other 45,000 -
---------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,044,000 335,000
--------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (25,000) (72,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,000 97,000
------ ------
CASH AND CASH EQUIVALENTS, END OF YEAR $ - $ 25,000
============== ===========
</TABLE>
The accompanying notes are an integral part of these statements
F-29
<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 estimates the market value of the put option as zero at
December 31, 1995 because the option subsequently expired unexercised.
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-30
<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.
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.
F-31
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
EARNINGS PER SHARE
------------------
Per share information is based on the weighted average number of common
stock and common stock equivalent shares outstanding. Common equivalent shares
arising from dilutive stock options outstanding are computed using the treasury
stock method. Stock options and convertible securities were antidilutive at
December 31, 1995 and 1994. The weighted average number of common stock and
common stock equivalent shares outstanding used in the calculation of primary
net income per share was 18,072,000 in 1995 and 17,333,000 in 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 December 31, 1995.
Since all of the Company's operating assets and liabilities were disposed
of effective December 31, 1995, the Company's revenues and expenses for 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:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
Non-Cash Investing and Financing Activities 1995 1994
------------------------------------------- ---- ----
<S> <C> <C>
Oil and gas properties acquired in exchange for common stock $ 227,000 $ -
============= =========
Oil and gas properties acquired in exchange for note payable $ 1,125,000 $ -
============= =========
Net assets exchanged for stock of Magnum (including $ 12,495,000 $ -
============= =========
unrealized appreciation of $10,333,000)
Stock issued in settlement of liabilities $ - $ 60,000
============= =========
Other:
------
Interest paid $ 325,687 $ 43,000
============= =========
</TABLE>
F-32
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(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.
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.
F-33
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
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 $114,000 and $90,000 for 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.
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 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.
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.
F-34
<PAGE>
HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
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.
(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-35
<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:
At December 31,
1995 1994
---- ----
Total evaluated capitalized costs $ - $ 6,874,000
Accumulated depreciation, depletion,
amortization and impairment - (4,354,000)
------------ -------------
$ - $ 2,520,00
============ =============
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-36
<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:
<TABLE>
<CAPTION>
Oil and Natural
Condensate Gas
Proved developed and undeveloped reserves: (BBLS) (MCF)
------ -----
<S> <C> <C>
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 - -
======= ========
</TABLE>
<TABLE>
<CAPTION>
Proved developed reserves at December 31:
<S> <C> <C>
1994 762,000 2,137,000
======= =========
1995 - -
======= =========
</TABLE>
F-37
<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>
At December 31,
1995 1994
---- ----
<S> <C> <C>
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>
For the Year Ended
December 31,
1995 1994
---- ----
<S> <C> <C>
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-38
<PAGE>
PART III
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:
(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
39
<PAGE>
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. (b) 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.
Exhibits Index
- --------------
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
10.1 Agreement and Plan of Reorganization and
Plan of Liquidation ****
10.2 Amendment to Agreement and Plan of
Reorganization and Plan of Liquidation
24.1 Consent of Hansen, Barnett & Maxwell as To be filed
Accountants
24.2 Consent of Hein + Associates LLP as
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 Form 8-K/A dated July 21, 1995, filed on
October 3, 1995.
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;
(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
40
<PAGE>
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.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and Hunter
being acquired involved therein, that was not subject of and included in the
registration statement when it became effective.
41
<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
May 8, 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 May 7, 1996
Lloyd T. Rochford
/s/ Gary C. Evans Director, President and May 7, 1996
Gary C. Evans Chief Executive Officer
/s/ Matthew C. Lutz Vice Chairman May 7, 1996
Matthew C. Lutz
/s/ Gerald W. Bolfing Director May 7, 1996
Gerald W. Bolfing
/s/ Oscar C. Lindemann Director May 7, 1996
Oscar C. Lindemann
/s/ Stanley McCabe Director May 7, 1996
Stanley McCabe
/s/ James E. Upfield Director May 7, 1996
James E. Upfield
/s/ Steven P. Smart Senior Vice President and May 7, 1996
Steven P. Smart Chief Financial Officer
42
<PAGE>
Exhibit 5.1
William C. Jones
25 Highland Park Village, No. 100, LB # 324
Dallas, Texas 75205
(214) 559-3658
Admitted in Oklahoma Only
May ___, 1996
Magnum Petroleum, Inc.
600 East Las Colinas Blvd., Suite 1200
Irving, Texas 75039
Gentlemen:
As your counsel, I have examined the Registration Statement on Form S-4, as
amended (registration #333-2290), filed by you with the Securities and Exchange
Commission which relates to 5,660,077 shares of your Common Stock, par value
$.002 ("Common Stock") and 111,825 shares of your Series C Preferred Stock
("Preferred Stock"), par value $.001.
In rendering this opinion, I have examined, among other things, your
Articles of Incorporation and Bylaws, both as in effect at the date hereof, and
the Registration Statement.
On the basis of the foregoing examination and upon consideration of
applicable law, I am of the opinion that the Common and Preferred Stock are
legally issued and outstanding, fully paid and non-assessable.
I hereby consent to the use of my name and the inclusion of this opinion in
the Registration Statement including the references to me in the prospectus
constituting a part of the Registration Statement.
Sincerely,
s/s William C. Jones
William C. Jones
Attorney At Law
WCJ:by
43
<PAGE>
Exhibit 10.2
AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
AND PLAN OF LIQUIDATION
This Amendment dated December 19, 1995, to that certain Agreement and Plan
of Reorganization and Plan of Liquidation for Hunter Resources, Inc., dated as
of the 21st day of July, 1995, between Magnum Petroleum, Inc. ("Magnum"), a
Nevada corporation, and Hunter Resources, Inc. ("Hunter"), a Pennsylvania
corporation.
WITNESSETH
Whereas, the parties have conducted combined operations since the Closing Date;
and
Whereas, the parties desire that the Effective Date shall be the date of this
Amendment;
Whereas, the parties desire to modify certain other terms of the Agreement and
Plan of Reorganization and Plan of Liquidation dated as of the 21st day of July,
1995 (the "Agreement");
Now, therefore, in consideration of the premises and of the mutual
covenants herein contained, the parties hereby agree to amend the Agreement as
follows:
1. THE SHARES OF MAGNUM'S COMMON STOCK BEING EXCHANGED. Article I, Section 1.2
shall be amended to provide:
Magnum shall issue 5,085,077 shares of its $.002 par value common stock
(the "Magnum Stock") as the total consideration for the assets delivered by
Hunter. Magnum shall register the Magnum Stock on a Form S-4 for the benefit of
Hunter shareholders.
2. EXCHANGE OF PREFERRED STOCK. Magnum shall exchange 111,825 shares of its
$.001 par value preferred stock designated as Series C for all 90,133 shares of
Hunter's outstanding preferred stock.
3. STOCK OPTION PLAN. Magnum agrees to establish an incentive stock option plan
under which a total of 1,200,000 shares of Magnum common stock will be reserved
for issuance upon exercise of options granted by the Board of Directors of
Magnum after the Effective Date.
4. APPROVAL OF HUNTER'S SHAREHOLDERS. Hunter shall prepare and file with the
Securities and Exchange Commission an Information Statement as described in
rules under the Securities Exchange Act of 1934, as amended. The Information
Statement shall describe the transactions contemplated by this agreement and the
liquidation of Hunter. Thereafter, Hunter shall give appropriate notice to its
shareholders and others holding any form of right to acquire common shares of
Hunter and to conduct a special meeting of its shareholders to approve the
matters described in the Information Statement. At the special meeting,
officers, directors, and other affiliates of Hunter agree to vote the shares of
Hunter set forth in Exhibit A entitled to vote to approve the transactions
contemplated in this Agreement and the liquidation of Hunter.
5. EFFECTIVE DATE. Article VII, Section 7.2 shall be amended to provide the
"Effective Date" shall be December 22 , 1995.
6. THE AGREEMENT. All other terms and conditions of the Agreement shall remain
the same.
44
<PAGE>
MAGNUM PETROLEUM, INC.
By /s/ Lloyd T. Rochford
Lloyd T. Rochford, President
HUNTER RESOURCES, INC.
By /s/ Gary C. Evans
Gary C. Evans, President
VOTING SHAREHOLDERS
- -------------------
/s/ Gary C. Evans /s/ Gerald W. Bolfing
Gary C. Evans Gerald W. Bolfing
/s/ James E. Upfield /s/ Matthew C. Lutz
James E. Upfield Matthew C. Lutz
/s/ Frances P. Evans /s/ Russell D. Talley
Frances P. Evans Russell D. Talley
By /s/ Richard R. Frazier /s/ James R. Renfro
Frazier Energy Corporation James R. Renfro
By /s/ Kevin Halter /s/ David H. Arrington
Halter Capital Corporation David H. Arrington
/s/ Jesse Edwards
Jesse Edwards
45
<PAGE>
EXHIBIT "A"
HUNTER RESOURCES, INC.
VOTING SHAREHOLDERS
Directors Shares/ Percentage
- --------- ------- ----------
Votes
-----
Gary C. Evans 5180686}
66667} 29.1
90133}
-----------
Gerald W. Bolfing 5337486 6.8
James E. Upfield 1244794 0.6
Matthew C. Lutz 110000 1.6
300000
Officers and Employees
- ----------------------
Frances P. Evans 128808 0.7
Russell D. Talley 430750 2.3
Frazier Energy Corporation 62700 0.3
James R. Renfro 150000 0.8
Affiliates and Other
- --------------------
Halter Capital Corporation 252907 1.4
David H. Arrington 516129 2.8
Jesse Edwards 1709761 9.3
TOTAL 10243335 55.8
Shares entitled to vote at December 18, 1995: 18354261
46
<PAGE>
Exhibit 24.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in the 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. 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
May 6, 1996
Dallas, Texas
47
<PAGE>
