<PAGE>
U. S. Securities and Exchange Commission
Washington, D. C. 20549
Form 10-QSB/A
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the Quarterly Period Ended September 30, 1996 -------------------
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act For the
transition period from .......... to ..........
Commission File Number..........1-12508
MAGNUM PETROLEUM, INC.
Exact name of small business issuer as specified in its charter
Nevada 87-0462881
State or other jurisdiction of IRS employer identification No.
Incorporation or organization
600 East Las Colinas Blvd., Suite 1200, Irving, Texas 75039
Address of principal executive offices
(214) 401-0752
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of September 30, 1996. 13,644,769
Transitional Small Business Disclosure Format Yes No X
Page 1 of 15 pages contained in the sequential numbering system.
1
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements of Magnum Petroleum, Inc. ("Magnum" or the "Company")
required by Item 310(b) of Regulation S-B follow Item 2. Management's Discussion
and Analysis or Plan of Operation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
Magnum's consolidated financial statements and the notes associated with them
contained in its Form 10-KSB for the year ended December 31, 1995. 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 by 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 fifty percent (50%) of the common stock of Hunter and provided for
the issuance to Hunter of an additional 2,335,077 shares of newly issued
restricted common stock and 111,825 shares of Series C preferred stock.
Therefore, the total consideration paid by Magnum for the Hunter subsidiaries
was 5,085,077 shares of restricted common stock and 111,825 shares of Series C
preferred stock.
On October 31, 1996, Hunter held a special meeting of its shareholders and
formally approved the Agreement. This action represented the last formality in
completing the Business Combination and all Magnum shares previously held in
escrow have been released for distribution to the Hunter shareholders.
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 were consolidated in Magnum's
financial statements beginning December 31, 1995.
On June 26, 1996, Magnum received a commitment from Wells Fargo Bank, N.A., as
Agent, and Banque Paribas, as Co-agent, (hereinafter collectively referred to as
"Banks") for a new credit facility for the benefit of Magnum and several
wholly-owned subsidiaries. The purpose of the new line of credit is to i)
refinance the Company's existing indebtedness with First Interstate Bank of
Texas, N.A. (a wholly-owned subsidiary of Wells Fargo Bank, N.A.), ii) finance
the acquisition of oil and gas reserves including the $35.4
2
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million "Panoma Property" acquisition, as discussed below, from Meridian Oil
Inc. ("Meridian"), a wholly-owned subsidiary of Burlington Resources, Inc., iii)
future property development, and iv) working capital support and general
corporate purposes. The $100 million credit facility is subject to a "Borrowing
Base" determination established from time-to-time by the Banks based upon proven
oil and gas reserves and gas gathering assets owned by Magnum and its
subsidiaries. The availability under the Company's existing credit facility was
increased from $16 million to $48 million based upon the value of the assets
associated with the acquisition of the Panoma Properties. The new credit
facility has given the Company the flexibility to choose a range of either
"LIBOR" or "Prime" based interest rates options.
On June 28, 1996, Magnum closed on the purchase of 469 natural gas wells and
approximately 427 miles of a gas gathering pipeline system from Meridian. The
net purchase price after certain purchase price adjustments was approximately
$35,350,000, funded by a loan from Magnum's Banks. As the purchase was not
completed until the end of the second quarter of 1996, the Statements of
Operations for 1996 only include the operating results of the Panoma Properties
for the third quarter. The purchase price was allocated based on estimated fair
market values resulting in the recording of $29,560,000 as oil and gas
properties and $5,790,000 as pipelines. The gas wells and gas gathering system
are located in the Panhandle of Texas and Western Oklahoma and are more commonly
referred to as the "Panoma Properties."
Results of Operations for the Nine Month Periods in 1996 and 1995
As discussed above, Magnum completed a business combination with Hunter, which
for accounting purposes, was recorded under the purchase method of accounting.
Hunter's operations were consolidated with those of Magnum beginning December
31, 1995. In addition, as discussed above, the results of operations for 1996
include only the third quarter operations from the June 28, 1996 acquisition of
the Panoma Properties. As such, the comparison of the increases in the 1996
interim and nine month periods over the comparable 1995 periods are, unless
otherwise stated, the result of the Hunter operating activities and the
acquisition of the Panoma Properties.
Magnum recorded an operating profit of $1,872,000 for the nine month period
ended September 30, 1996 versus an operating loss of $513,000 during the
previous year. This $2,385,000 improvement in operations can be directly
attributed to i) the operating activities of the Panoma Properties acquired on
June 28, 1996, ii) the operating activities associated with the acquisition of
Hunter on December 22, 1995 and, iii) improved oil and gas sale commodity
prices.
Magnum realized a net loss after payment of dividends on preferred stock of
$50,000 during the nine month period ended September 30, 1996, compared to a net
loss of $869,000 for the same period of the preceding year. The loss per common
share improved to $0.004 from a loss per common share in the 1995 period of
$0.16.
Total revenues increased 1,938% from $485,000 during the nine month period of
1995 to $9,885,000 during 1996. During the nine month period ended September 30,
1996, revenue from oil and gas sales increased 1,285% to $6,357,000 as compared
to $459,000 for the same period of the prior year. For the first nine months of
1996, Magnum sold 139,874 barrels of oil and 1,596,987 mcf of gas. In
comparison, during the same nine month period of 1995, Magnum sold 23,852
barrels of oil and 71,313 mcf of gas. The average oil price of $15.00 per barrel
in 1995 increased to $19.91 per barrel in the 1996 period. The average gas price
of $2.24 per mcf in 1996 increased from $1.42 per mcf in 1995.
Gas gathering and marketing activities in 1996, all of which are a result of the
acquisition of the Panoma Properties and the combination with Hunter, provided
revenues of $3,143,000 and a net profit from these activities of $514,000.
Expenses directly associated with this activity were $469,000 and $2,160,000,
3
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representing pipeline operating expenses and purchase of natural gas from third
parties, respectively.
Revenues from oil field services and commissions were $385,000 in the 1996
period as compared to $26,000 in the 1995 period. Related cost of services
expense of $521,000 and $26,000 for the 1996 and 1995 period, respectively, were
recognized resulting in a net loss in 1996 from these activities of $136,000 as
compared to a break-even in 1995.
Lease operating expenses amounted to 2,305,000 in 1996 as compared to $145,000
in the 1995 period. On an equivalent barrel basis, the expense was $5.68 per
barrel and $4.06 per barrel for the respective 1996 and 1995 periods.
Depreciation and depletion rose to $1,888,000 in 1996 versus $138,000 in 1995
due to the increased oil and gas activities from the Panoma Properties
acquisition and the combination with Hunter.
General and administrative expense declined $19,000 to $670,000 in the 1996
period as compared to $689,000 in 1995 due to a reduction in professional and
promotional expenses incurred in 1996. A gain on sale of $143,000 related to the
Company's securities previously held for resale was recognized in the second
quarter of 1996.
Interest expense rose to $1,550,000 in 1996 from $3,000 in 1995 primarily as a
result of commercial bank indebtedness assumed in the combination with Hunter
and additional property acquisitions completed in 1996, including the Panoma
Properties acquisition funded at the end of June 1996. A provision for deferred
income taxes of $204,000 (38% rate) was made against before tax income of
$536,000. The Company is not currently paying income taxes due to utilization of
net operating loss carryforwards. Preferred dividends decreased to $382,000 in
1996 from $440,000 in 1995 as Magnum completed the redemption and conversion of
all of the outstanding Series C preferred stock in the third quarter of 1996,
thereby eliminating any future dividend obligations.
Results of Operations for the Three Month Periods in 1996 and 1995
Magnum realized an operating profit of $1,616,000 for the three month period
ended September 30, 1996 versus an operating loss of $86,000 during the previous
year. This $1,702,000 improvement in operations can be directly attributed to i)
the operating activities of the Panoma Properties acquired June 28, 1996, ii)
the operating activities associated with the acquisition of Hunter on December
22, 1995, and iii) improved oil and gas sale commodity prices.
Magnum realized net income, after payment of dividends on preferred stock, of
$347,000 during the three month period ended September 30, 1996, compared to a
net loss of $216,000 for the same period of the preceding year. The income per
common share improved to $.03 from a net loss per share of $.04.
Total revenues increased 3,173% from $163,000 during the third quarter of 1995
to $5,335,000 during the third quarter of 1996. During the three month period
ended September 30, 1996, revenue from oil and gas sales increased 2,152% to
$3,536,000 as compared to $157,000 for the same period of the prior year. For
the three month period of 1996, Magnum sold 50,036 barrels of oil and 1,108,833
mcf of gas. In comparison, during the same three month period of 1995, Magnum
sold 7,187 barrels of oil and 36,772 mcf of gas. The average oil price of $13.32
per barrel in 1995 increased to $21.00 per barrel in the 1996 period. The
average gas prices increased to $2.24 per mcf in 1996 as compared to $1.67 per
mcf in 1995.
Gas gathering and marketing activities in 1996, all of which are a result of the
acquisition of the Panoma Properties and the combination with Hunter, provided
revenues of $1,615,000 and a net profit from these activities of $300,000.
Expenses directly associated with this activity were $279,000 and $1,036,000
4
<PAGE>
representing pipeline operating expenses and purchases of natural gas from third
parties, respectively.
Revenues from oil field services and commissions were $184,000 in the 1996
period as compared to $6,000 in the 1995 period. Related cost of services
expense of $194,000 and $16,000 for the 1996 and 1995 period, respectively, were
recognized resulting in a net loss from these activities of $10,000 for both
periods.
Lease operating expenses amounted to $1,179,000 in 1996 as compared to $52,000
in the 1995 period. On an equivalent barrel basis, the expense was $5.02 per
barrel and $3.91 per barrel for the respective 1996 and 1995 periods.
Depreciation and depletion rose to $804,000 in 1996 versus $35,000 in 1995 due
to the increased oil and gas activities from the Panoma Properties acquisition
and the combination with Hunter.
General and administrative expense increased $81,000 to $227,000 in the 1996
three month period as compared to $146,000 in the same 1995 period due to an
increase in personnel requirements in the 1996 period.
Interest expense of $1,051,000 was realized in the third quarter of 1996
primarily as a result of commercial bank indebtedness assumed in the combination
with Hunter and new indebtedness incurred as a result of additional property
acquisitions, including the Panoma Properties acquisition funded at the end of
June 1996. A provision for deferred income taxes of $204,000 was made against
before tax income of $593,000. The Company is not currently paying income taxes
due to utilization of net operating loss carryforwards. Preferred dividends
decreased to $42,000 in 1996 from $147,000 in 1995 as Magnum completed the
redemption and conversion of all of the outstanding Series C preferred stock in
the third quarter of 1996, thereby eliminating any future dividend obligations.
Liquidity and Capital Resources
On June 5, 1996, Magnum called for redemption 208,333 shares of its Series C
preferred stock at $10.50 per share, as provided by the terms of the certificate
of designations, plus accrued dividends with an extended redemption date of July
10, 1996. Terms of the preferred stock provide for the option by the holder to
convert the preferred shares into common stock at the rate of three (3) shares
of common stock for each share of Series C preferred stock. 294,392 shares of
the preferred stock were converted for 907,950 shares of common stock including
accrued dividends paid in common stock. Additionally, 8,224 shares of preferred
stock were redeemed including the accrued dividends for cash in the amount of
$88,860.
On July 11, 1996, Magnum called for the redemption the remaining 322,384 shares
of its Series C preferred stock. The redemption price was $10.50 per share, plus
accrued dividends of $.141 per share from July 1, 1996 through the extended
redemption date of August 16, 1996, for a total redemption price of $10.641 per
share. The Series C preferred shares could be converted, at the option of the
holder, at any time prior to August 16, 1996 into common stock. 302,492 shares
of Series C preferred stock were converted into 938,451 shares of common stock
including the accrued dividends paid in common stock. Additionally, 19,892
shares of preferred stock were redeemed including the accrued dividends for cash
in the amount of $210,431.
After both redemption calls, Magnum converted 596,884 shares of its Series C
preferred stock including the accrued dividends paid in common stock into
1,846,401 shares of common stock and redeemed 28,116 shares of its Series C
preferred stock including the accrued dividends for $299,291.
5
<PAGE>
At December 31, 1995, Magnum had unproven oil and gas properties with a carrying
value of $842,889 located in predominately three prospects. In the third quarter
of 1996, Magnum successfully completed a well on one prospect and decided to not
attempt a well on another prospect. Accordingly, the carrying values
attributable to these two prospects were transferred to the proven category. At
September 30, 1996, a balance of $459,000 remained in the unproven oil and gas
properties representing the one remaining prospect. The remaining property will
be evaluated further in the fourth quarter of 1996 and management will then
review the development plans for this property. If Magnum elects to not develop
the property, the property 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 such time.
In 1995 and prior years, Magnum has been successful in raising capital through
the issuance of preferred and common stock. During 1995, Magnum received
proceeds of $249,000 from the purchase of 20,750 shares of Series C preferred
stock from the exercise of representatives' warrants. In addition, the exercise
of 833,324 common stock purchase warrants resulted in net proceeds after
offering costs of $2,840,860.
Prior to the business combination with Hunter, Magnum's anticipated capital
expenditures for 1996 on its existing properties were not considered significant
and would be financed by existing working capital. However, due to the business
combination with Hunter, Magnum now has a budget of approximately $2 million for
exploration and production activities during 1996. Magnum has already spent
approximately $700,000 for the drilling of six gas wells in the south Texas
region and one oil well in West Texas. The remaining exploration budget of $1.3
million has been reallocated to a combination of exploratory and development
projects, specifically proved undeveloped locations associated with the Panoma
Properties. The source of financing for such projects has and will continue to
be a combination of the following: i) existing available cash, ii) Magnum's
senior bank line of credit, iii) third party investors, iv) seller financing
through production payments and v) new equity capital. At November 12, 1996,
there remained approximately $100,000 of available borrowings under Magnum's
senior bank line of credit with an anticipated increase in the Company's
borrowing base of approximately $7 million under consideration by the Banks.
In February 1996, Magnum entered into an exclusive arrangement with an
investment banking firm specialized in raising capital for energy companies for
a private placement of preferred stock for as much as $15 million to be
completed during 1996. On October 30, 1996, Magnum executed a letter agreement
with an institution for the issuance of $10 million of convertible preferred
stock with a dividend rate of 8.75% per annum. The purpose for the $10 million
private placement is to initially reduce Magnum's existing senior bank
indebtedness and to ultimately fund the capital cost necessary to fully develop
six development and waterflood projects.
Inflation and Changing Prices
During 1995 and the past several years, Magnum experienced minimal inflation in
oil and natural gas prices with moderate increases in property acquisition and
development costs. During 1996, Magnum has experienced somewhat greater
increases in the commodity prices of the natural resources produced from its
properties. The results of operations and cash flow of Magnum has been and will
continue to be effected to a certain extent by the volatility in oil and gas
prices. Should Magnum experience a significant increase in oil and natural gas
prices over a prolonged period, it would expect that there would also be a
corresponding increase in oil and natural gas finding costs, lease acquisition
costs and operating expenses.
6
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MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1996
-----------------------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,679,000
Accounts receivable
Trade, net of allowance of $134,158 3,492,000
Due from affiliates 104,000
Note receivable from affiliate 247,000
Note receivable 248,000
Other current assets 160,000
Current portion of long-term note receivable 75,000
TOTAL CURRENT ASSETS ----------------------
6,005,000
______________________
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method
Unproved 459,000
Proved 69,983,000
Pipelines 7,002,000
Other property 364,000
--------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 77,808,000
Accumulated depreciation, depletion and impairment (3,806,000)
--------------------
NET PROPERTY, PLANT AND EQUIPMENT 74,002,000
OTHER ASSETS
Deposits and other assets 494,000
Long-term notes receivable, net of imputed interest 48,000
--------------------
TOTAL ASSETS $ 80,549,000
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and accrued liabilities $ 3,936,000
Suspended revenue payable 867,000
Current maturities of long-term debt 6,022,000
---------------------
TOTAL CURRENT LIABILITIES 10,825,000
LONG-TERM LIABILITIES
Long-term debt 41,250,000
Production payment liability 231,000
Deferred income taxes 3,329,000
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 authorized,
216,000 designated as Series A; 80,000 shares issued and outstanding -
Common stock - $.002 par value; 50,000,000 shares authorized,
14,240,564 shares issued and outstanding 28,000
Additional paid-in capital 30,182,000
Accumulated deficit (5,295,000)
---------------------
Receivable from stockholders -
24,915,000
Treasury stock (595,795 shares of common stock) (1,000)
---------------------
TOTAL STOCKHOLDERS' EQUITY 24,914,000
---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 80,549,000
=====================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
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MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------------
1996 1995 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Oil and gas sales $ 3,536,000 $ 157,000 $6,357,000 $ 459,000
Gas gathering and marketing 1,615,000 - 3,143,000 -
Oil field services and commissions 184,000 6,000 385,000 26,000
-----------------------------------------------------------------------
TOTAL OPERATING REVENUE 5,335,000 163,000 9,885,000 485,000
-----------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Lease operating 1,179,000 52,000 2,305,000 145,000
Pipeline operating 279,000 - 469,000 -
Purchases of natural gas 1,036,000 - 2,160,000 -
Costs of services 194,000 16,000 521,000 26,000
Depreciation and depletion 804,000 35,000 1,888,000 138,000
General and administrative 227,000 146,000 670,000 689,000
-----------------------------------------------------------------------
TOTAL OPERATING COSTS & EXPENSES 3,719,000 249,000 8,013,000 998,000
-----------------------------------------------------------------------
OPERATING PROFIT (LOSS) 1,616,000 (86,000) 1,872,000 (513,000)
Gain (loss) on sale of assets - (18,000) 143,000 (33,000)
Interest income 20,000 35,000 51,000 120,000
Other income 8,000 - 20,000 -
Interest expense (1,051,000) - (1,550,000) (3,000)
-----------------------------------------------------------------------
Net Income (Loss) befor income taxes 593,000 (69,000) 536,000 429,000
Provision for deferred income taxes (204,000) - (204,000) -
-----------------------------------------------------------------------
NET INCOME (LOSS) 389,000 (69,000) 332,000 (429,000)
Dividends Applicable to Preferred Stock (42,000) (147,000) (382,000) (440,000)
-----------------------------------------------------------------------
INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 347,000 $ (216,000) $ (50,000) $ (869,000)
=============== ============== ================ ==============
INCOME (LOSS) PER COMMON SHARE $ 0.03 $ (0.04) $ - $ (0.16)
-----------------------------------------------------------------------
Common Shares Used In Per Share Calculation 12,924,967 5,734,269 12,084,041 5,383,238
========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
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MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1996 1995
-------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 332,000 $ (429,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and depletion 1,888,000 138,000
Deferred income tax provision 204,000 -
(Gain) loss on sale of assets (143,000) -
Change in assets and liabilities 23,000
(Increase) decrease in securities available for sale - (56,000)
(Increase) decrease in accounts receivable (2,211,000) 62,000
(Increase) decrease in notes receivable (106,000) -
(Increase) decrease in other current assets (160,000) 55,000
(Increase) decrease in costs in excess of billings on uncompleted drilling contracts - 1,000
(Increase) decrease in deposits and other assets (376,000) (476,000)
Increase (decrease) in trade accounts payable and accrued liabilities 2,653,000 -
Increase (decrease) in suspended revenue payable 73,000 -
Increase (decrease) in other liabilities (290,000) 3,000
Increase (decrease) in dividends payable -
-------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 1,864,000 (679,000)
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets 188,000 -
Additions to property and equipment, net (38,787,000) (1,216,000)
Deposits for acquisition of properties and equipment - (200,000)
Costs related to corporations acquired - (87,000)
-------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (38,599,000) (1,503,000)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock, net of offering costs - 3,332,000
Payments received on notes receivable from shareholders - 63,000
Proceeds from long-term debt borrowings 55,313,000 -
Payments of principal on notes payable (17,653,000) (37,000)
Payments on production payment liability (57,000) -
Payments for redemption of preferred stock (295,000) -
Dividends paid (438,000) (437,000)
-------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 36,870,000 2,921,000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 135,000 739,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,544,000 1,645,000
-------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,679,000 $ 2,384,000
-------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
MAGNUM PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
(1) MANAGEMENT'S REPRESENTATION
The consolidated balance sheet as of September 30, 1996, the consolidated
statements of operations for the three and nine months ended September 30, 1996
and 1995, and the consolidated statements of cash flows for the three and nine
month periods then ended are unaudited. In the opinion of management, all
necessary adjustments (which include only normal recurring adjustments) have
been made to present fairly the financial position, results of operations and
changes in cash flows for the three and nine month periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the December 31, 1995 annual report on Form 10-KSB for
Magnum Petroleum, Inc. ("Magnum"). The results of operations for the three and
nine month periods ended September 30, 1996 are not necessarily indicative of
the operating results for the full year.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain items
have been reclassified to conform with the current presentation. The Company has
changed the presentation format for the consolidated statements of cash flows
from the direct method to the indirect method.
During 1995, Magnum changed its accounting method for oil and gas activities
from the successful efforts method to the full cost method. The comparable 1995
amounts in the financial statements included herein have been restated to comply
with the full cost method.
(2) RECENT EVENTS
During the three and nine months ended September 30, 1996, 41,500 shares and
62,050 shares of Series B preferred stock were converted to 20,711 shares and
30,986 shares of common stock, respectively.
On June 26, 1996, Magnum received a commitment from Wells Fargo Bank, N.A., as
Agent, and Banque Paribas, as Co-agent, (hereinafter collectively referred to as
"Banks") for a new credit facility for the benefit of Magnum and several
wholly-owned subsidiaries. The purpose of the new line of credit was to i)
refinance the Company's existing indebtedness with First Interstate Bank of
Texas, N.A. (a wholly-owned subsidiary of Wells Fargo Bank, N.A.), ii) finance
the acquisition of oil and gas reserves including the $35.4 million Panoma
Property acquisition as discussed below from Meridian Oil Inc. ("Meridian"), a
wholly-owned subsidiary of Burlington Resources, Inc., iii) future property
development, and iv) working capital support and general corporate purposes. The
$100 million credit facility is subject to a "Borrowing Base" determination
established from time-to-time by the Banks based upon proven oil and gas
reserves and gas gathering assets owned by Magnum and its subsidiaries. The
availability under the Company's existing credit facility was increased from $16
million to $48 million based upon the value of the assets associated with the
acquisition of the Panoma Properties. The new credit facility has given the
Company the flexibility to choose a range of either "LIBOR" or "Prime" based
interest rates options.
On June 28, 1996, Magnum closed on the purchase of 469 natural gas wells and
approximately 427 miles of a gas gathering pipeline system from Meridian. The
net purchase price after certain purchase price adjustments was approximately
$35,350,000, funded by a loan from Magnum's Banks. As the purchase was not
completed until the end of the second quarter of 1996, the Statements of
Operations for 1996 only include the operating results of the Panoma Properties
for the third quarter. The initial purchase price was allocated based on
estimated fair market values resulting in the recording of $29,560,000 as oil
and gas properties and $5,790,000 as pipelines. The gas wells and gas gathering
system are located in the Panhandle of Texas and Western Oklahoma and are more
commonly referred to as the "Panoma Properties."
On June 5, 1996, Magnum called for redemption 208,333 shares of its Series C
preferred stock at $10.50 per share, as provided by the terms of the certificate
of designations, plus accrued dividends with an extended redemption date of July
10, 1996. Terms of the preferred stock provide for the option by the holder to
convert the preferred shares into common stock at the rate of three (3) shares
of common stock for each share of Series C preferred stock. 294,392 shares of
the preferred stock were converted for 907,950 shares of common stock including
accrued dividends paid in common stock. Additionally, 8,224 shares of preferred
stock were
10
<PAGE>
redeemed including the accrued dividends for cash in the amount of $88,860.
On July 11, 1996, Magnum called for the redemption the remaining 322,384 shares
of its Series C preferred stock. The redemption price was $10.50 per share, plus
accrued dividends of $.141 per share from July 1, 1996 through the extended
redemption date of August 16, 1996, for a total redemption price of $10.641 per
share. The Series C preferred shares could be converted, at the option of the
holder, at any time prior to August 16, 1996 into common stock. 302,492 shares
of Series C preferred stock were converted into 938,451 shares of common stock
including the accrued dividends paid in common stock. Additionally, 19,892
shares of preferred stock were redeemed including the accrued dividends for cash
in the amount of $210,431.
After both redemption calls, Magnum converted 596,884 shares of its Series C
preferred stock including the accrued dividends into 1,846,401 shares of common
stock and redeemed 28,116 shares of its Series C preferred stock for $299,291.
11
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
Item Items F/S Included Date of Event Date Filed
No. Reported
- ----- -------------- ------------ ------------- ----------
2 Acquisition of Assets June 28, 1996 July 12, 1996
7 Financial Statements Schedule of Fin. June 28, 1996 August 14, 1996
Statements Attached
7 Amended Financial Schedule of Fin. June 28, 1996 August 16, 1996
Statements Statements Attached
7 Amended Financial Schedule of Fin. July 21, 1995 September 12, 1996
Statements Statements Attached
12
<PAGE>
SCHEDULE OF FINANCIAL STATEMENTS
I. Form 8-K/A filed August 13, 1996 and amended August 16, 1996
(a) Financial Statements of the Properties Acquired:
Independent Auditor's Report
Historical Summary of Revenue and Direct Operating Expenses for the
Year Ending December 31, 1995 and 1994 and the
Three Months Ending March 31, 1996 and 1995 Notes to Historical Summary of
Revenues and Direct Operating Expenses for theYear Ending December 31, 1995
and 1994 and the Three Months Ending March 31, 1996 and 1995
(b) Pro forma financial information:
Pro Forma Consolidated Financial Information (unaudited)
as of March 31, 1996
Pro Forma Consolidated Statement of Operations (unaudited)
For the Twelve Months Ended December 31, 1995
Pro Forma Consolidated Statement of Operations (unaudited)
For the Three Months Ended March 31, 1996
Notes to Unaudited Pro Forma Consolidated Financial Statements
II. Form 8-K/A-2 filed September 12, 1996
a] Financial Statements of Businesses Acquired:
Accountants' Report of Hein+Associates LLP, dated April 14, 1995
Audited Consolidated Balance Sheet of Hunter Resources,
Inc. and Subsidiaries as of December 31, 1994
Audited Consolidated Statements of Operations for Hunter
Resources, Inc. and Subsidiaries for the Years Ended
December 31,1994 and 1993
Audited Consolidated Statements of Stockholders' Equity for
Hunter Resources, Inc. and Subsidiaries for the Years
Ended December 31, 1994 and 1993
Audited Consolidated Statements of Cash Flows for Hunter
Resources, Inc. and Subsidiaries for the Years Ended
December 31, 1994 and 1993
Unaudited Consolidated Balance Sheet of Hunter Resources, Inc.
and Subsidiaries as of September 30, 1995
Unaudited Consolidated Statements of Operations for Hunter
Resources, Inc. and Subsidiaries for the Quarters and
Nine Months Ended September 30, 1995 and 1994
Unaudited Consolidated Statements of Cash Flows for Hunter
Resources, Inc. and Subsidiaries for the Quarters and
Nine Months Ended September 30, 1995 and 1994
b] Pro Forma Financial Information:
Consolidated Pro Forma Financial Information (unaudited)
Consolidated Pro Forma Balance Sheet at September 30, 1995(unaudited)
Consolidated Pro Forma Statement of Operations
For the Twelve Months Ended December 31, 1994 (unaudited)
Consolidated Pro Forma Statement of Operations
For the Nine Months Ended September 30, 1995 (unaudited)
Notes to Pro Forma Consolidated Statements of Operations (unaudited)
c] Restated Consolidated Financial Statements:
13
<PAGE>
Accountants' Report of HANSEN, BARNETT & MAXWELL, a Professional
Corporation, dated March 26, 1995, except for Note 2, as
to which the date is September 29, 1995
Audited Restated Consolidated Balance Sheet of Magnum Petroleum, Inc.
and Subsidiary as of December 31, 1994 and Unaudited
Consolidated Balance Sheet of Magnum Petroleum, Inc. and
Subsidiary as of September 30, 1995
Audited Consolidated Statements of Operations for Magnum Petroleum,
Inc. and Subsidiary for the Years Ended December 31, 1994
and 1993 and Unaudited Consolidated Statements of
Operationsfor Magnum Petroleum, Inc. and Subsidiary for
the Nine Months Ended September 30, 1995 and 1994
Audited Consolidated Statements of Stockholders' Equity for Magnum
Petroleum, Inc.and Subsidiary for the Years Ended
December 31, 1994 and 1993 and Unaudited Consolidated
Statements of Stockholders' Equity for Magnum Petroleum,
Inc.and Subsidiary for the Nine Months Ended September 30,
1995
Audited Consolidated Statements of Cash Flows for Magnum Petroleum,
Inc. and Subsidiary for the Years Ended December 31, 1994
and 1993 and Unaudited Consolidated Statements of Cash
Flows for Magnum Petroleum, Inc. and Subsidiary for the
Nine Months Ended September 30, 1995
14
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant has
caused this Form 10-QSB Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MAGNUM PETROLEUM, INC.
By /s/ Gary C. Evans
- --------------------------------------
Gary C. Evans
President and Chief Executive Officer
March 17, 1997
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Name and Signature Title
/s/ Gary C. Evans President and Chief Executive Officer
- --------------------------------------
Gary C. Evans
/s/ David S. Krueger Vice President and
- ---------------------------------------- Chief Accounting Officer
David S. Krueger
Date: March 17, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,679,000
<SECURITIES> 0
<RECEIVABLES> 3,626,158
<ALLOWANCES> (134,158)
<INVENTORY> 0
<CURRENT-ASSETS> 6,005,000
<PP&E> 77,808,000
<DEPRECIATION> (3,806,000)
<TOTAL-ASSETS> 80,549,000
<CURRENT-LIABILITIES> 10,825,000
<BONDS> 44,810,000
0
0
<COMMON> 28,000
<OTHER-SE> 24,886,000
<TOTAL-LIABILITY-AND-EQUITY> 80,549,000
<SALES> 9,500,000
<TOTAL-REVENUES> 9,885,000
<CGS> 4,934,000
<TOTAL-COSTS> 5,455,000
<OTHER-EXPENSES> 2,344,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,550,000
<INCOME-PRETAX> 536,000
<INCOME-TAX> 204,000
<INCOME-CONTINUING> 332,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332,000
<EPS-PRIMARY> (.004)
<EPS-DILUTED> (.004)
</TABLE>
