<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1996 Commission File No. 1-12508
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to .
MAGNUM HUNTER RESOURCES, INC.
(Name of small business issuer in its charter)
Nevada 87-0462881
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
600 East Las Colinas Blvd., Suite 1200, Irving,Texas 75039
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code: (972) 401-0752
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock ($.002 par value) American Stock Exchange
Securities registered under Section 12(g) of the Act: None
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Issuer was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Issuer's revenues for its most recent fiscal year: $16,412,000.
As of March 18, 1997, the aggregate market value of voting stock held by
non-affiliates, computed by reference to the closing price as reported by the
American Stock Exchange, was $65,799,156.
The number of shares outstanding of the Issuer's common stock at February 28,
1997: 13,708,327.
<PAGE>
Item 7. Consolidated Financial Statements and Unaudited Supplemental
Information
Index to Consolidated Financial Statements
Page
Independent Auditors' Report - 1996....................................F-1
Independent Auditor's Report - 1995....................................F-2
Financial Statements:
Consolidated Balance Sheet at December 31, 1996 and 1995.......F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995.............................F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996 and 1995................ F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996 and 1995.......................F-7
Notes to Consolidated Financial Statements.............................F-8
Supplemental Information (Unaudited)...................................F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Magnum Hunter Resources, Inc.
We have audited the accompanying consolidated balance sheet of Magnum
Hunter Resources, Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows 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 Hunter Resources,
Inc. and Subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
March 14, 1997 (April 30, 1997 as to Note 16)
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Magnum Hunter Resources, Inc.
We have audited the accompanying consolidated balance sheet of Magnum
Hunter Resources, Inc. (formerly 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 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 Hunter Resources,
Inc. and Subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the year 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-2
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
-----------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,687 $ 1,544
Securities available for sale 233 101
Accounts receivable:
Trade, net of allowance of $132 and $134 4,372 1,247
Due from affiliates 241 116
Notes receivable from affiliate 264 121
Current portion of long-term note receivable 198 201
Prepaid and other 52 22
-----------------------------------------
TOTAL CURRENT ASSETS 7,047 3,352
-----------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method:
Unproved 459 843
Proved 70,575 36,257
Pipelines 7,102 1,087
Other property 381 146
---------------------------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 78,517 38,333
Accumulated depreciation, depletion and impairment (4,869) (1,928)
---------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 73,648 36,405
---------------------------------------
OTHER ASSETS
Deposits and other assets 645 118
Long-term notes receivable, net of imputed interest 1,732 190
---------------------------------------
TOTAL ASSETS $ 83,072 $ 40,065
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and accrued liabilities $ 3,698 $ 1,283
Gas imbalance payable 242
Dividends payable 22 177
Suspended revenue payable 784 794
Current maturities of long-term debt 22 2,014
----------------------------------------
TOTAL CURRENT LIABILITIES 4,768 4,268
----------------------------------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities 38,744 7,598
Production payment liability 937 288
Other - 290
Deferred income taxes 3,469 3,125
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 shares authorized
216,000 designated as Series A; 80,000 and 80,000 issued and outstanding, respectively,
liquidation amount $0 - -
925,000 designated as Series B; none and 62,050 issued and outstanding, respectively - -
625,000 designated as Series C; none and 625,000 shares issued and outstanding,
respectively - 1
1,000,000 designated as 1996 Series A Convertible ; 1,000,000 and none issued and
outstanding, respectively, liquidation amount $10,000,000 1 -
Common stock - $.002 par value; 50,000,000 shares authorized;
14,252,822 issued and 11,598,183 shares issued and outstanding, respectively 29 23
Additional paid-in capital 40,216 29,660
Accumulated deficit (5,142) (5,245)
Unrealized gain on investments 51 57
----------------------------------------
35,155 24,496
Treasury stock (544,495 shares of common stock) (1) -
-----------------------------------------
TOTAL STOCKHOLDERS' EQUITY 35,154 24,496
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,072 $ 40,065
================= ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
OPERATING REVENUE
Oil and gas sales $ 10,248 $ 617
Gas gathering and marketing 5,768 -
Oil field services and commissions 396 32
---------------------------
TOTAL OPERATING REVENUE 16,412 649
---------------------------
OPERATING COSTS AND EXPENSES
Oil and gas production 4,390 268
Gas gathering and marketing 4,708 -
Costs related to other services 267 26
Depreciation and depletion 2,951 421
General and administrative 1,225 977
---------------------------
TOTAL OPERATING COSTS AND EXPENSES 13,541 1,692
---------------------------
OPERATING PROFIT (LOSS) 2,871 (1,043)
OTHER INCOME 344 77
INTEREST EXPENSE (2,394) (2)
---------------------------
NET INCOME (LOSS) BEFORE INCOME TAXES 821 (968)
Provision for deferred income taxes (312) -
---------------------------
NET INCOME (LOSS) 509 (968)
DIVIDENDS APPLICABLE TO PREFERRED SHARES (406) (617)
---------------------------
INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 103 $ (1,585)
============= ===========
INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.28)
============= ===========
COMMON SHARES USED IN PER SHARE CALCULATION 12,485,893 5,606,669
============= ===========
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-4
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Treasury Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 645,775 $ 1 4,537,045 $9 $12,606
-----------------------------------------------------------------------------
Conversion of preferred stock to common stock (11,300) - 28,900 -
Issuance and costs from exercise of warrants 20,750 - 833,324 2 2,841
Issuance of Series C preferred stock 249
Issuance of common stock to acquire oil and gas
properties 386,615 1 1,378
Issuance of common stock for services 602,222 1 1,370
Issued to directors for collateral 125,000 -
Sale of investment shares
Payments received on receivable from stockholders
Acquisition of Hunter Resources, Inc. for Series C
preferred stock and common stock 111,825 - 5,085,077 10 11,216
Dividends declared on preferred stock
Net loss from operations
Unrealized gain on investments
-----------------------------------------------------------------------------
Balance at December 31, 1995 767,050 $ 1 11,598,183 $23 - - $29,660
-----------------------------------------------------------------------------
Conversion of preferred stock to common stock (658,934) (1) 1,821,638 4 (3)
Redemption of 28,116 shares of Series C preferred stock (28,116) (294)
Issuance of 1996 Series A convertible preferred stock,
net of offering costs 1,000,000 1 9,785
Shares issued as collateral, returned and held
as treasury stock 610,170 1 (610,170) (1) (1)
Exercise of employees' common stock options - - 12,258 - 9
Issuance of common stock to acquire oil and gas properties 188,410 1 51,300 - 938
Sale of investment shares
Dividends declared on preferred stock 34,421 - 2,117 - 122
Net income from operations
Unrealized gain on investments
-----------------------------------------------------------------------------
Balance at December 31, 1996 1,080,000 $ 1 14,252,822 $ 29 (544,495) $(1) $40,216
========= ====== ========== ======= ========= ===== ========
The accompanying notes are an integral part of these consolidated financial
statements
</TABLE>
F-5
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized Gain
Deferred Costs Receivable (Loss) On
of Warrant Accumulated from Investments
Offerings Deficit Stockholder
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $(240) $(3,659) $(63) $ (9)
-------------------------------------------------------------
Conversion preferred stock to common stock
Issuance and costs from exercise of warrants 240
Issuance of Series C preferred stock
Issuance of common stock for services and
to acquire oil and gas properties
Issued to directors for collateral
Sale of investment shares 9
Payments received on receivable from stockholders 63
Acquisition of Hunter Resources, Inc. for Series C
preferred stock and common stock
Dividends declared on preferred stock (618)
Net income from operations (968)
Unrealized gain on investments 57
--------------------------------------------------------------
Balance at December 31, 1995 $ - $(5,245) $ - $ 57
--------------------------------------------------------------
Conversion of preferred stock to common stock
Redemption of 28,116 shares of Series C preferred stock
Issuance of 1996 Series A convertible preferred stock,
net of offering costs
Shares issued as collateral, returned and held
as treasury stock
Exercise of employees' common stock options
Issuance of common stock to acquire oil and gas properties
Sale of investment shares (57)
Dividends declared on preferred stock (406)
Net income from operations 509
Unrealized gain on investments 51
--------------------------------------------------------------
Balance at December 31, 1996 $ - $(5,142) $ - $ 51
========= ======= ========= =====
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-6
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------
1996 1995
------------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 509 $ (968)
Adjustments to reconcile net income (loss) to cash provided by (used for)
operating activities:
Depreciation and depletion 2,951 421
Deferred income taxes 312 -
Common stock issued for services - 102
(Gain) Loss on sale of assets (143) 76
Other 32 15
Changes in certain assets and liabilities:
Accounts receivable (3,250) (37)
Costs in excess of billings on uncompleted drilling contracts - 55
Deposits and other assets (30) -
Accounts payable and accrued liabilities 2,647 (513)
------------------------------
Net Cash Provided By (Used By) Operating Activities $ 3,028 $ (849)
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 318 88
Additions to property and equipment (41,471) (1,244)
Increase in deposits and other assets (527) -
Loan made for promissory note receivable (58) (121)
Payments received on promissory notes receivable - 334
Purchase of securities available for sale - (30)
Obligations and property acquisitions funded in Hunter acquisition - (1,034)
------------------------------
Net Cash Used By Investing Activities (41,738) (2,007)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and production payment 57,262 -
Payments of principal on long-term debt and production payment (27,459) (186)
Payments on other liabilities (290) -
Proceeds from issuance of common and preferred stock,
net offering costs 9,796 3,332
Redemption of preferred stock (295) -
Payments received on notes receivable 277 62
Increase in segregated funds for payments of notes payable - 130
Dividends paid (438) (583)
-------------------------------
Net Cash Provided By Financing Activities 38,853 2,755
-------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 143 (101)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,544 1,645
------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,687 $ 1,544
============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations:
Magnum Hunter Resources,Inc.(the"Company"), formerly Magnum Petroleum,
Inc., 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
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 four gathering systems located in Texas, Louisiana and Oklahoma.
Merger and Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its existing wholly-owned subsidiaries, Gruy Petroleum
Management Company, Hunter Butcher International Limited Liability Company, a
Wyoming limited liability company, Hunter Gas Gathering, Inc. Inesco
Corporation, Magnum Hunter Production, Inc. Midland Hunter Petroleum Limited
Liability Company, a Wyoming limited liability company, and SPL Gas Marketing,
Inc. 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 that fiscal year. 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.
At December 31, 1996, the Company's available for sale securities had an
amortized cost basis of $150,000, gross unrealized gains reported in equity of
$51,150 and a fair market value
F-8
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of $232,500. During 1996, Securities were sold for gross proceeds of
$187,312 and the Company realized a gain of $142,872.
At December 31, 1995, the Company's available for sale securities had an
amortized cost basis of $44,440, gross unrealized gains reported in equity of
$57,200 and a fair market value of $101,640. During 1995, Securities were sold
for gross proceeds of $73,083 and the Company realized a gain of $19,370.
Suspended Revenues
Suspended revenue interests represent oil and gas sales payable to
third parties largely on properties operated by the Company. The Company
distributes such amounts to third parties upon receipt of signed division orders
or resolution of other legal matters.
Oil and Gas Producing Operations
The Company follows the full-cost method of accounting for oil and gas
properties, as prescribed by the Securities and Exchange Commission ("SEC").
Accordingly, all costs associated with acquisition, exploration and development
of oil and gas reserves, including directly related overhead costs, are
capitalized.
All capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the unit-of-production
method using estimates of proved reserves. 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 $459,000 and $843,000 at
December 31, 1996 and 1995, respectively. These costs arose in 1995 and are
expected to be evaluated and transferred into the amortization base over the
next twelve months.
The net capitalized costs are subject to a "ceiling test," which generally
limits such costs to the aggregate of the estimated present value of future net
revenues from proved reserves discounted at ten percent based on current
economic and operating conditions.
Drilling Operations
Fees from fixed-price contracts with other working interest owners to
drill, complete and place oil and gas wells into production less related costs
are accounted for as adjustments to oil and gas properties.
F-9
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pipelines
Pipelines are carried at cost. Depreciation is provided using the
straight-line method over an estimated useful life of 15 years. Gain or loss on
retirement or sale or other disposition of assets is included in results of
operations 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 results of operation 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 has issued Statement No. 121,
("SFAS No. 121") "Accounting for Impairments of Long-Lived Assets and Assets to
be Disposed of", and Statement No. 123, "Accounting For Stock-Based
Compensation" ("SFAS No. 123"). The Company adopted the provisions of SFAS No.
121 in 1996 but it did not have any effect on the Company's consolidated
financial statements, and it adopted the disclosures only portion of SFAS No.
123 as it continued to follow the provisions of APB No. 25 which is the
intrinsic value method of accounting for stock-based compensation. See Note 15
which follows for the effect of stock based compensation on a proforma basis.
Income Taxes
The Company files a consolidated federal income tax return. Income
taxes are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due, if any, plus net deferred taxes
related primarily to differences between the basis of assets and liabilities for
financial and income tax reporting. Deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred tax assets include recognition of operating losses that are
available to offset future taxable income and tax credits that are available to
offset future income taxes. Valuation allowances are recognized to limit
recognition of deferred tax assets where appropriate. Such allowances may be
reversed when circumstances provide evidence that the deferred tax assets will
more likely than not be realized.
F-10
<PAGE>
MAGNUM HUNTER RESOURCES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income or Loss Per Common Share
Income or 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, 1996 and 1995 and were not included in the
calculation of income or 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 9, 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. There were no warrants exercised during 1996.
Use of Estimates and Certain Significant Estimates
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates. Significant assumptions are required in the valuation of proved
oil and gas reserves, which as described above may affect the amount at which
oil and gas properties are recorded. It is at least reasonably possible those
estimates could be revised in the near term and those revisions could be
material.
NOTE 2--CHANGE IN ACCOUNTING METHOD
The Company accounted for its oil and gas producing activities using
the successful efforts method from inception through June 30, 1995. However, the
full cost method has subsequently been adopted. The Company is of the opinion
that the full cost method of accounting is preferable to the successful efforts
method of accounting for its oil and gas activities for the following reasons:
(1) The Company recently acquired the subsidiaries of Hunter (See note 3),
which comprise corporations engaged in oil and gas related activities
and which utilize the full cost method of accounting for these
activities. For both legal and accounting purposes, the
F-11
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company is the acquiring entity; however, the subsidiaries are
increasing their oil and gas activities and have more proved oil and
gas reserves than the Company. Furthermore, management of Hunter
became the management of the Company upon completion of the
acquisition. One of the Hunter subsidiaries specializes in the
management of oil and gas properties and all accounting functions and
financial reporting have been undertaken by the subsidiaries'
personnel. The individuals employed by the subsidiaries have comprised
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 relationships 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.
F-12
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements have been restated to apply the full
cost method retroactively. This change in accounting principle has no
significant effect on income taxes. The effect of the accounting change on net
loss and accumulated deficit as previously reported for the respective periods
is:
<TABLE>
<CAPTION>
1995
-----------------------
<S> <C>
Statement of Accumulated Deficit:
Balance at Beginning of Period as Previously Reported $ (4,166,058)
Add Adjustment for the Cumulative Effect on Prior Years
of Applying Retroactively the Full Cost Method 506,651
-----------------------
Balance at Beginning of Period, as Adjusted (3,659,407)
Net Loss (968,272)
Preferred Dividends (617,220)
----------------------
Balance at End of Year $ (5,244,899)
======================
</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.
NOTE 3--ACQUISITIONS AND DISPOSITIONS
During March 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 1995, the Company also acquired an
additional 40 percent (40%) 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 restricted 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 restricted
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 restricted common stock,
F-13
<PAGE>
MAGNUM HUNTER RESOURCES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
valued at $3.25 per share, in an acquisition of a proven undeveloped
property by a Hunter subsidiary.
The Company executed a definitive agreement on July 21, 1995 to
acquire all of the assets, subject to the existing liabilities of Hunter
Resources, Inc. ("Hunter"). Pursuant to the agreement, the Company issued,
subject to shareholder approval, 2,750,000 shares of its restricted common stock
to Hunter in exchange for the assets acquired. In addition, 575,000 shares of
restricted common stock were issued to a third party as an additional cost of
the acquisition. The third party distributed a total of 250,000 of the shares to
a former director and a former officer of the Company for their assistance in
completing the acquisition.
On December 19, 1995 to be effective December 22, 1995, the Company
and Hunter entered into an amended agreement. Under the terms of the amendment,
which was executed by Hunter shareholders representing over fifty percent (50%)
of the common stock of Hunter, an additional 2,335,077 shares of restricted
common stock and 111,825 shares of Series C preferred stock were issued to
Hunter. The acquisition was recorded under the "purchase method" of accounting,
based upon the estimated value of the shares issued of $12,495,005. The
operations of Hunter have been consolidated with those of the Company beginning
on December 31, 1995.
On June 28, 1996, the Company purchased 469 natural gas wells and
approximately 427 miles of a gas gathering pipeline system for a net purchase
price of $34,652,395. The properties are located in the Panhandle of Texas and
Western Oklahoma and are referred to as the "Panoma Properties". As the purchase
was not completed until the end of the second quarter of 1996, the consolidated
financial statements for 1996 include the operating results of the Panoma
Properties for only the last six months of the year.
On November 4, 1996, the Company entered into an agreement to sell certain
oil and gas properties for $1,850,000, including $150,000 of restricted
securities of an American Stock Exchange listed company and a $1,700,000
promissory note payable out of 100% of the net oil and gas income of the
properties. The agreement calls for the Company's subsidiary to continue to
operate the properties for a monthly management fee.
The following summary, prepared on a pro forma basis, presents the results
of operations for the years ended December 31, 1996 and 1995, as if the
acquisitions occurred as of the beginning of the respective years. The pro forma
information includes the effects of adjustments for increased general and
administrative expense, interest expense, depreciation, depletion and income
taxes:
F-14
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
<S> <C> <C>
Revenue................................................... $ 20,653,000 $ 12,512,000
Net Income (Loss) Applicable to Common Stock.............. (304,000) (4,403,000)
Net Income (Loss) Per Common Share........................ $ (.02) $ (.79)
Average shares outstanding................................ 12,485,893 5,606,669
</TABLE>
NOTE 4--NOTES RECEIVABLE
During July of 1994, the Company received an interest bearing note due
on May 1, 1995, in exchange for $319,206 paid by the Company. Interest in the
amount of $3,000 per month accrued through February 28, 1995 and was paid in
March 1995. For the remaining two months, interest in the amount of $4,500 per
month was accrued which, along with the principal amount, was paid during May
1995. The note was collateralized by securities, the fair market value of which
was less than the amount of the note.
On July 28, 1995, the Company received a non-interest bearing note
receivable in the amount of $223,500 in exchange for its interest in an oil and
gas property. Interest at 10 percent was inputed on the note resulting in a
discount of $28,366. The note provides for payments of $7,000 per month which
were received timely in 1996. As of December 31, 1996, the unpaid balance, net
of discount, is $112,288.
On November 4, 1996, the Company received an interest bearing note due on
November 1, 1999, in exchange for its interest in oil and gas properties.
Interest is at the rate of 12% per annum. The note is collateralized by stock in
an American Stock Exchange listed company and the oil and gas properties sold.
As of December 31, 1996, the unpaid balance is $1,627,534.
NOTE 5--RELATED PARTY TRANSACTIONS
In conjunction with the acquisition of Hunter, the Company assumed a
note receivable with a balance of $178,527 and $120,758 at December 31, 1996 and
1995 respectively, from an owner in an affiliated limited liability company. The
note provides for interest at ten percent and has a due date of January 31,
1997.
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, 1996 and 1995. This note bears interest at
ten percent and is due on demand. Additionally, trade accounts receivable from
this affiliated company were $30,761 and $51,346 at December 31, 1996 and 1995,
respectively.
F-15
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 previously operated
several of the wells in which the Company owned an interest. Operating fees paid
this company were $35,519 in 1995. The operations of these wells were
transferred to a subsidiary of Hunter during 1995. 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.
During 1996, as part of the Company's overall compensation package, the
Company's officers and directors were granted the right to participate in
certain development and exploration projects of the Company on a promoted basis.
As of December 31, 1996, eleven (11) of the Company's officers and directors as
a group spent an aggregate of $137,340 participating in 6 wells. The Company
discontinued this program as of January 1, 1997.
NOTE 6--LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Banks
Revolving promissory note, collateralized by pipeline and oil and gas
properties, due June 30, 2001, interest at LIBOR + 2.25% (total of
7.625% at December 31, 1996)(1) $ 38,700,000 $ -
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(2) - 9,555,000
Note payable, payable in monthly installments of $498 through July 1996
plus interest at 7.25 percent, collateralized by truck, - 3,000
Note payable to bank collateralized by vehicle payable in
monthly installment of $1,031 including interest at 8.5% through
February 1999. 24,000 -
Other
Notes payable, non-interest bearing and uncollateralized, payable in
monthly installments of $1,000 through July 1, 2000, assumed
in Hunter acquisition 42,000 54,000
--------------------------------------------
Total Long-Term Debt 38,766,000 9,612,000
Less Current Portion 22,000 2,014,000
--------------------------------------------
Long-Term Debt $ 38,744,000 $7,598,000
============================================
</TABLE>
F-16
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of long-term debt based on contractual requirements for the years
ending December 31, are as follows:
1997 $ 22,000
1998 24,000
1999 14,000
2000 6,000
2001 38,700,000
--------------
$ 38,766,000
==============
(1) The revolving promissory note to the banks is a borrowing under a
$100,000,000 line of credit on which there existed a borrowing base of
$55,000,000 at December 31, 1996. The level of the borrowing base is dependent
on the valuation of the assets pledged, primarily oil and gas reserve values.
The line of credit includes covenants, the most restrictive of which require
maintenance of a current ratio, interest coverage ratio, and tangible net worth,
as specified in the loan agreement. The bank group must approve all dividends
paid on common stock.
(2) The promissory note to bank was 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 included $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 were due June 1, 2000. The amount that could be borrowed under the line
of credit was based upon a designated percentage of oil and gas reserve values.
The line of credit included covenants, the most restrictive of which require
maintenance of a current ratio and tangible net worth, as specifically defined
in the loan agreement.
NOTE 7--PRODUCTION PAYMENT LIABILITY
As a result of the merger with Hunter in 1995, the Company assumed an
obligation under a production payment conveyance. The conveyance provides for a
royalty payment equal to 50% of the monthly net revenue proceeds received by the
Company in certain oil and gas properties. The balance owed under the conveyance
bears interest at 15% per annum and is non-recourse to the Company. The balance
owed under this conveyance was $210,000 and $288,000 at December 31, 1996 and
1995, respectively.
In November, 1996, the Company entered into a second production payment
conveyance with the same party. The Company received a production payment amount
of $750,000 and agreed to make royalty payments of up to 50% of the monthly net
revenue proceeds received from certain oil and gas properties. The balance owed
under the conveyance was $726,000 at December 31, 1996. The production payment
bears interest at the rate of 13.5% per annum and is non-recourse to the
Company.
NOTE 8--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 following is a reconciliation of
income tax expense reported in the statement of operations:
1996
Tax expense at statutory rates $ 279,000
State taxes 24,000
Other 9,000
-----------------------
Total $ 312,000
=======================
F-17
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of significant temporary differences and carryforwards are as
follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Property and equipment, including intangible drilling costs $ (6,381,000) $(5,890,000)
Annualized gain on investment (32,000) -
-------------------------------------
Total deferred tax liability
(6,413,000) (5,890,000)
-------------------------------------
Allowance for doubtful accounts 49,000 50,000
Depletion carryforwards 361,000 365,000
Operating loss carryforwards 2,534,000 2,350,000
------------------------------------
Total deferred tax assets 2,944,000 2,765,000
Valuation allowance - -
------------------------------------
Net Deferred Tax Liability $ (3,469,000) $(3,125,000)
============== ===========
</TABLE>
The Company and its subsidiaries have net operating loss carryforwards
(NOL) of approximately $6,900,000 that expire, if unused, in years through 2011,
none in 1997. 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 9--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, 625,000 shares have been designated
as Series C Preferred Stock and 1,000,000 shares have been designated as 1996
Series A Convertible Preferred Stock. Thus, 7,234,000 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 fifty percent (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 the property. 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 two 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
F-18
<PAGE>
MAGNUM HUNTER RESOURCES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 for the year ended December 31, 1995.
Beginning June 15, 1994, the Company offered to exchange (the "Exchange Offer")
1,250 shares of common stock for each Series B production certificate. During
1994, 141.1 production certificates were exchanged for 176,375 shares of common
stock and the Series B preferred shareholders agreed to convert their Series B
preferred shares into common stock at December 31, 1995 if all dividends were
paid through that date. All of the shares were converted to common stock during
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 was 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. 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 value of the exchange shares were determined in 1996,
and the Company issued 5,000 shares of its common stock to the Individual.
Subsequently to year-end, the 125,000 shares being held were returned to the
Company and are being held as treasury stock.
The Series C preferred stock was convertible at the option of the holder at
any time into three shares of common stock and, after November 12, 1994, would
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 was 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 and $339,827 for the year ended December 31, 1995,and 1996,
respectively. The aggregate annual dividend requirements for the 625,000 shares
of Series C preferred stock outstanding at December 31, 1995 and 1996 amounts to
$687,500 and none, respectively. As of December 31, 1996, all Series C preferred
stock had been redeemed or converted to common stock.
On December 6, 1996, the Company entered into an agreement to issue
1,000,000 shares of new Series A preferred stock, known as the 1996 Series A
Convertible Preferred Stock, in a private placement. The shares have a stated
and liquidation value of $10 per share and pay a fixed annual cumulative
dividend of eight and three quarters percent (8.75%) payble quarterly in arrears
beginning December 31, 1996. The shares are convertible into shares of common
stock at a conversion price of $5.875 per share. Beginning in December 1998, the
Company has an option to exchange the stock into convertible subordinated
debentures of equivalent value. The purpose of the private placement was to fund
the capital cost necessary to drill certain development projects and to fund the
capital costs of several West Texas waterflood projects. Proceeds from the
offering were initially used to reduce the Company's existing bank indebtedness.
Certain capital expenditure requirements for developmental drilling and
waterflood projects are required under the agreement whereby this stock was
issued. In addition, under the terms of the preferred stock, the Company is
required to raise an aggregate of $15 million of additional equity by March 31,
1998 or the Company is required to redeem on June 30 of each of the years 2006,
2007, and 2008, 333,333 shares of preferred stock. On December 23, 1996, the
1996 Series A Convertible Preferred Stock was issued, resulting in net proceeds
to the Company after offering costs of $9,787,000. Dividends of $22,000 were
declared in 1996 and paid subsequent to year end.
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 1996 Series A Convertible Preferred Stock would receive an amount of $10 per
share. 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.
F-19
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Series C preferred stock was originally issued as a unit comprised of
one share of Series C preferred stock and warrants to purchase three (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
June 1997.
In October 1995, in connection with an acquisition of oil and gas
properties, the Company issued 25,000 warrants with an exercise price of $4.00
per share, and 25,000 warrants with an exercise price of $4.50 per share with
each such warrant expiring in October 1997. In December 1995 the Company issued
37,500 warrants at an exercise price of $3.00 per share to an unaffiliated third
party for services rendered. The warrant expires December 1997.
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 three (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 rendered in 1995.
In January, 1996, 60,000 warrants were issued at an exercise price of
$3.375 per share and expiring in January 1999. At December 31, 1996, 45,000 of
these warrants had been earned. In connection with the receipt of a production
payment, in October 1996 the Company issued 25,000 warrants with an exercise
price of $5.18 expiring October 1999, 25,000 warrants with an exercise price of
$5.65 expiring October 2000 and 25,000 warrants with an exercise price of $6.13
expiring October 2001. No warrants were exercised in 1996.
At December 31, 1996, the Company had 1,176,676 total warrants issued,
including the publicly traded warrants. Additionally, in 1996, 610,170 shares of
the Company's common stock that had been held as collateral were returned and
held in the treasury, 12,258 shares of common stock were issued upon exercise of
employees stock options, 239,710 shares of common stock, valued at $939,000,
were issued to acquire oil and gas properties, and 36,538 shares of common stock
were issued as dividends on the Company's Series C Preferred Stock.
NOTE 10--SUPPLEMENTAL CASH FLOW INFORMATION
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 the assets
from Hunter Resources, Inc. 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, creating 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 rendered in 1995.
During 1996, the Company purchased oil and gas properties by issuing
239,710 shares of its common stock, valued at $938,444. The Company converted
658,934 shares of Series B and Series C preferred stock into 1,821,638 shares of
common stock. 36,538 shares of common stock valued at $121,700 were issued in
lieu of cash dividends on preferred stock. The Company received equity
securities with a fair value of $150,000 as partial payment for the sale of
property interests. Interest paid in 1996 was $2,344,308.
F-20
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--ENVIRONMENTAL ISSUES
Being engaged in the oil and gas exploration and development business, the
Company may become subject to certain liabilities as they relate to
environmental clean up of well sites or other environmental restoration
procedures as they relate to the drilling of oil and gas wells and the operation
thereof. In the Company's acquisition of existing or previously drilled well
bores, the Company may not be aware of what environmental safeguards were taken
at the time such wells were drilled or during the time that such wells were
operated. Should it be determined that a liability exists with respect to any
environmental clean up or restoration, the liability to cure such a violation
would most likely fall upon the Company. In certain acquisitions, the Company
has received contractual warranties that no such violations exist, while in
other acquisitions the Company has waived its rights to pursue a claim for such
violations from the selling party. No claim has been made nor has a claim been
asserted, nor is the Company aware of the existence of any liability which the
Company may have, as it relates to any environmental clean up, restoration or
the violation of any rules or regulations relating thereto.
NOTE 12-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
various office equipment leases extend until 1999. 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:
1997..................................................$183,046
1998.................................................. 173,168
1999.................................................. 169,815
2000................................................. 173,711
2001................................................. 159,235
Thereafter........................................... 0
--------
Total Minimum Payments Required......................$858,975
========
Rental expense was $129,169 and $61,191 for 1996 and 1995,
respectively.
At December 31, 1996, the Company is involved in litigation proceedings
arising in the normal course of business. The Company has accrued $87,750 as of
December 31, 1996 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, cash flows or results of operations.
F-21
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13-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, 1996 and 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, 1996 and 1995. The market values of equity
investments are based upon quoted prices (see Note 1).
NOTE 14--COMMODITY DERIVATIVES AND HEDGING ACTIVITIES
Periodically, the Company enters into futures, options, and swap contracts
to reduce the effects of fluctuations in crude oil and natural gas prices. At
December 31, 1996, the Company had open contracts for oil price collars on
12,000 barrels of oil per month (with cap and floor prices of $22.20 and $18.00,
respectively) through February 1997 and 15,000 barrels of oil per month (with
cap and floor prices of $25.10 and $20.00, respectively) from March 1997 through
August, 1997. At December 31, 1996, the Company had open contracts for gas
prices swaps of 302,000 Mmbtu of gas per month at $2.16 per Mmbtu during January
1997, 100,000 Mmbtu of gas per month at $1.905 per Mmbtu from February 1997
through January 1998 and another 100,000 Mmbtu of gas per month at $1.77 per
Mmbtu from February 1997 through January 1998. These contracts expire monthly
as indicated above. The gains or losses on the Company's hedging transactions
are determined as the difference between the contract price and a reference
price, generally closing prices on the NYMEX. The resulting transaction gains
and losses are determined monthly and are included in the period the hedged
production or inventory is sold. Net losses relating to these derivatives for
the years ended December 31, 1996 and 1995 were $272,000 and none, respectively.
NOTE 15--STOCK COMPENSATION PLAN
The Company adopted in 1996 two stock compensation plans for its employees
and directors, (i) the Magnum Hunter Resources Employee Stock Ownership Plan,
(the "ESOP"), and (ii) the Magnum Hunter Resources, Inc. 1996 Incentive Stock
Option Plan. In addition, the Company authorized the issuance of its Common
Stock to participants in the Magnum Hunter Resources, Inc. 401(k) plan in an
amount that matched employee contributions up to one hundred percent (100%). The
cost of this matching contribution was $59,000 in 1996.
F-22
<PAGE>
ESOP
-----
The Company established an ESOP and a related trust as a long-term benefit
for its employees. Under terms of the plan, eligible participants may elect to
make elective deferred contributions of not less than 1% of more than 15% of
their annual compensation, limited in combination with the 401(k) plan to the
maximum allowable per year by the Internal Revenue Code. The plan also allows
for the Company to make Discretionary Contributions to the ESOP, but it is not
the intent of the Company to do so. It is also the Company's intent to invest
all contributions in Employer Stock. In this regard, on October 11, 1996, the
Plan purchased 22,556 shares of the Company's common stock for $3.75 per share
from a third party. To fund this purchase, the Plan borrowed $84,585 from a
bank. Participant contributions will be used to acquire shares at the price
stated above by retiring the principal and interest of this debt. As of December
31, 1996, no Participant contributions had been made to the ESOP.
1996 Incentive Stock Option Plan
--------------------------------
The Company established this plan effective April 1, 1996, and is governed
by Section 422 of the Internal Revenue Code, and Section 16(b) of the Securities
Exchange Act of 1934. The Plan covers 1,200,000 shares of the Company's Common
Stock. Eligibility is limited to employees and directors of the Company and its
subsidiaries. The actual selection of grantees is made by the Board of
Directors. The term of the plan is 10 years, and the term of the options is at
the discretion of the Board, with a term of 5 years. All options are fully
vested and exercisable when granted. The exercise price is fair market value at
the date of grant, except for individuals who own 10% or more of the Company's
stock.
Prior to 1995, Hunter had granted certain of its employees and directors
options to purchase its common shares. In connection with the merger, the
Company has substituted the Hunter options with 264,558 options under the Plan,
239,022 of which have an exercise price of $.73425 per share and 25,536 of which
have an exercise price of $1.65 per share. During 1996, 12,258 of these options
were exercised. In addition, during 1996, the Board granted the remaining
935,442 options to employees and directors at an exercise price of $4.50 per
share.
F-23
<PAGE>
The following is a summary of stock option activity under the Plan:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ------------------------------
<S> <C> <C> <C> <C>
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
---------- ---------------- --------- -----------------
Outstanding - Beginning of Year 264,558 $ 0.82 264,558 $ 0.82
Granted 935,442 4.50 - -
Exercised (12,258) .73 - -
Cancelled - - - -
---------- -------- ------- -------
Outstanding - End of Year 1,187,742 $ 3.72 264,558 $ 0.82
========== ========= ======== =========
</TABLE>
The following is a summary of plan stock options outstanding at December
31, 1996:
<TABLE>
<CAPTION>
Exercise Number of Weighted Average Number of
Price Options Remaining Contractual Exercisable
Outstanding Life (Years) Options
--------- ----------- --------------------- -------------
<S> <C> <C> <C> <C>
$ .73 226,764 1.0 35,242
1.65 25,536 3.0 -
4.50 935,442 4.3 935,442
--------- ---------
1,187,742 970,684
=========== =========
</TABLE>
The Company adopted the disclosures only portion of SFAS No. 123 as it
continued to follow the provisions of APB No. 25, which is the intrinsic value
method of accounting for stock-based compensation.
On a pro forma basis, the effect of stock based compensation had the
Company adopted Statement No. 123 is as follows:
1996
----
Net Income (Loss): As reported $ 103,000
Pro Forma (1,540,000)
Primary Earnings per Share: As Reported .01
Pro Forma (.12)
Fully Diluted Earnings per Share: As Reported .01
Pro Forma (.12)
The weighted average grant date fair value of options granted was $2.56 and
of warrants granted was $1.09 during 1996. Fair value of options and warrants
was calculated by using the Black-Scholes options pricing model using the
following weighted average assumptions for 1996 activity: risk free interest
rate of 5.74%, expected life of 4.28 years, expected volatility of 60.8% and no
divided yield.
NOTE 16--SUBSEQUENT EVENTS
In January, 1997, the Company purchased a fifty percent (50%) interest in
the McLean Gas Plant, the gas processing facility connected to the Company's
Panoma gas gathering system for $2.5 million.
F-24
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the purchase agreement, the Company will receive 100% of
the net profits of the plant until it receives the $2.5 million purchase price,
at which point its net profits interest will revert to fifty percent (50%), the
Company's ownership position. The acquisition was funded through the Company's
revolving credit agreement with certain banks.
On April 30, 1997, the Company acquired from a subsidiary of Burlington
Resources, Inc., effective as of January 1, 1997, the Permian Basin Properties,
consisting of 25 field areas in west Texas and 22 field areas in southeast New
Mexico, for a net purchase price of $133.0 million after adjustments of $10.5
million for production cash flow from January 1, 1997 to the closing date and
other minor adjustments.
The Company financed the acquisition of the Permian Basin Properties with a
new $130.0 million credit facility (the "New Credit Facility") and a senior
subordinated credit facility of $60.0 million (the "Term Loan Facility").
Borrowings of $119.5 million under the New Credit Facility and $60.0 million
under the Term Loan Facility were used to pay the $123.0 million balance of the
$133.0 million net purchase price for the Permian Basin Properties, to repay the
$53.7 million in outstanding indebtedness as of April 30, 1997 under the
Company's previous $100.0 million credit facility (the "Previous Credit
Facility") and to pay the costs associated with the Permian Basin Acquisition
and the related financings. The New Credit Facility currently bears interest at
9.0% per annum. After repayment of the Term Loan Facility using the proceeds of
a $125 million offering of Senior Subordinated Notes due 2007, the New Credit
Facility will initially bear interest at LIBOR plus 1.75% per annum, which would
be 7.6% based on the LIBOR rate at April 30, 1997. The unpaid principal amount
under the New Credit Facility matures on April 30, 2002. At April 30, 1997, the
interest rate on the Term Loan Facility was 11.5% per annum. The Term Loan
Facility initially matures on April 30, 1998, at which time the Company has the
option to extend such facility for an additional five years.
In the event that the borrowings under the New Credit Facility are not less
than $75.0 million on July 15, 1997, the Company is obligated to pay the lenders
an additional fee. In addition, if borrowings under the Term Loan Facility have
not been repaid beginning August 28, 1997, the Company, at various dates
thereafter within the initial one-year term, will incur an increase in interest
rates and be obligated to pay the lenders additional fees and/or warrants to
purchase common stock of the Company. More specifically, the interest rate under
the Term Loan Facility increases by 1.0% on each of three specified dates with a
maximum interest rate of 15.5%. The Company may also be obligated to issue
equity securities up to a maximum of 5.0% of the fully diluted common equity of
the Company.
In April 1997, the terms of the Company's 1996 Series A Convertible
Preferred Stock were amended to require the Company to raise $15 million of
additional equity by December 31, 1997 rather than March 31, 1998 as described
in Note 9.
NOTE 17--EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL ARRANGEMENTS
Mr. Gary C. Evans and Mr. Matthew C. Lutz have employment agreements with
Magnum Hunter Resources, Inc. Mr. Evans' agreement terminates December 31, 1997
and continues thereafter on a year to year basis and provides for a base salary
of $200,000 per annum. Mr. Lutz's agreement terminates September 30, 1997 and
continues thereafter on a year to year basis and provides for a base salary of
$100,000 per annum. Both agreements provide that the same benefits supplied to
other Company employees shall be available to the employee. The employment
agreements also contain, among other things, covenants by the employee that in
the event of termination, he will not associate with a business that competes
with the Company for a period of one year after cessation of employment. The
Company also has key man life insurance on Mr. Evans in the amount of
$1,000,000.
F-25
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARY
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Proved oil and gas reserves consist of those estimated quantities of
crude oil, natural gas, and natural gas liquids that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Estimates of petroleum reserves have been made by independent engineers
and Company employees. These estimates include reserves in which the Company
holds an economic interest under production-sharing and other types of operating
agreements. These estimates do not include probable or possible reserves. The
estimated net interests in proved reserves are based upon subjective engineering
judgments and may be affected by the limitations inherent in such estimation.
The process of estimating reserves is subject to continual revision as
additional information becomes available as a result of drilling, testing,
reservoir studies and production history. There can be no assurance that such
estimates will not be materially revised in subsequent periods.
Estimated quantities of proved oil and gas reserves of the Company were
as follows:
<TABLE>
<CAPTION>
Natural Gas
Oil (Thousand
(Barrels) Cubic Feet)
----------------------------------------------------
<S> <C> <C>
December 31, 1996
Proved reserves......................................................... 5,338,255 90,565,997
Proved developed reserves............................................... 1,962,184 71,275,141
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, 1996 and
1995 were as follows:
Natural Gas
Oil (Thousand
(Barrels) Cubic Feet)
----------------------------------------------------
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
----------------------------------------------------
Purchase of minerals-in-place................................................ 2,678,579 81,943,557
Sale of minerals-in-place.................................................... (214,381) (1,318,164)
Extensions and discoveries................................................... 151,606
Production................................................................... (191,203) (2,674,793)
Revisions of estimates....................................................... (702,479) (1,608,125)
----------------------------------------------------
Reserves at December 31, 1996................................................ 5,338,255 90,565,997
====================================================
</TABLE>
F-26
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARY
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The aggregate amounts of capitalized costs relating to oil and gas
producing activities and the related accumulated depreciation, depletion and
impairment as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------
<S> <C> <C>
Unproved oil and gas properties....................................... $ 459,254 $ 842,889
Proved properties..................................................... 70,574,890 36,256,428
---------------------------------------
Gross Capitalized Costs............................................... 71,034,144 37,099,317
Accumulated depreciation, depletion and impairment.................... (4,513,541) (1,914,602)
----------------------------------------
Net Capitalized Costs.................................................
$ 66,520,603 $ 35,184,715
=======================================
Costs incurred in oil and gas producing activities, both capitalized and
expensed, during the years ended December 31, 1996 and 1995 were as follows:
1996 1995
----------------------------------------
Property acquisition costs
Proved properties................................................ $ 31,982,821 $ 27,983,521
Unproved properties.............................................. - 142,545
Exploration costs................................................ 1,114,733 340,411
Development costs..................................................... 837,273 -
----------------------------------------
Total Costs Incurred.................................................. $ 33,934,827 $ 28,466,477
========================================
Results of operations from oil and gas producing activities for the years
ended December 31, 1996 and 1995 were as follows:
1996 1995
---------------------------------------
Oil and gas production revenue........................................ $ 10,247,688 $ 616,596
Disposal services revenue............................................. 20,487 31,978
Production costs...................................................... (4,389,465) (267,647)
Depreciation and depletion ........................................... (2,598,939) (421,101)
----------------------------------------
Results of Operations for Producing Activities........................ $ 3,279,771 $ (40,174)
========================================
</TABLE>
F-27
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARY
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The standardized measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------
<S> <C> <C>
Future cash inflows .................................................. $ 492,157,062 $ 95,068,694
Future development and production costs................................ (138,614,804) (37,746,877)
-------------------------------------------
Future net cash flows, before income tax............................... 353,542,258 57,321,817
Future income taxes.................................................... (102,341,098) (11,381,779)
-------------------------------------------
Future Net Cash Flows.................................................. 251,201,160 45,940,038
10% annual discount.................................................... (134,116,299) (16,120,359)
-------------------------------------------
Standardized Measure of Discounted Future Net Cash Flows............... $ 117,084,861 $ 29,819,679
==========================================
The primary changes in the standardized measure of discounted estimated
future net cash flows for the years ended December 31, 1996 and 1995 were as
follows:
1996 1995
--------------------------------------------
Purchases of minerals-in-place......................................... $ 129,544,769 $ 30,507,745
Sales of minerals in place............................................. (2,195,780) -
Extensions, discoveries and improved recovery, less related costs...... 302,785 582,001
Sales of oil and gas produced, net of production costs................. (5,858,223) (350,083)
Revision of prior estimates:
Net change in price and costs....................................... 14,993,539 4,864,688
Change in quantity estimates...................................... (10,107,737) (7,637,000)
Accretion of discount.................................................. 2,981,968 623,512
Net change in income taxes............................................. (42,396,139) (5,006,300)
--------------------------------------------
Net Change............................................................. $ 87,265,182 $ 23,584,563
============================================
</TABLE>
Estimated future cash inflows are computed by applying year-end prices of oil
and gas to year-end quantities of proved reserves. Estimated future development
and production costs are determined by estimating the expenditures to be
incurred in developing and producing the proved oil and gas reserves at the end
of the year, based on year-end costs and assuming continuation of existing
economic conditions. Estimated future income tax expense is calculated by
applying year-end statutory tax rates to estimated future pre-tax net cash flows
related to proved oil and gas reserves, less the tax basis of the properties
involved.
The assumption used to compute the standardized measure are those prescribed
by the Financial Accounting Standards Board and as such, do not necessarily
reflect the Company's expectations of actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process are equally applicable to the standardized measure
computations since these estimates are the basis for the valuation process.
F-28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAGNUM HUNTER RESOURCES, INC.
By: /s/ Gary C. Evans June 27, 1997
-------------------------------
Gary C. Evans, President & CEO
<PAGE>
