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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[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.
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INDEX
Securities and Exchange Commission
Item Number and Description
PART I
Item 1 Description of Business....................................... 3
Item 2 Description of Properties..................................... 16
Item 3 Legal Proceedings............................................. 21
Item 4 Submission of Matters to a Vote of Security Shareholders...... 21
PART II
Item 5 Market for Common Equity and Related Stockholder Matters...... 22
Item 6 Management's Discussion and Analysis or Plan of Operations.... 23
Item 7 Consolidated Financial Statements............................. 29
Item 8 Change in and Disagreement with Accountants
on Accounting and Financial Disclosure..................... 30
PART III
Item 9 Directors Executive Officers, and Control Persons; Compliance with
Section 16(a) of the Exchange Act......................... 31
Item 10 Executive Compensation......................................... 35
Item 11 Security Ownership of Certain Beneficial Owners and Management. 36
Item 12 Certain Relationships and Related Transactions................. 37
Item 13 Exhibits and Reports on Form 8-K............................... 38
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PART I
Item 1. Description of Business
The Company
The Company is an independent energy company engaged in the acquisition,
development, exploration and operation of oil and gas properties within the
United States. In December 1995, Magnum Petroleum, Inc. and Hunter Resources,
Inc. combined their oil, gas and other assets (the "Magnum Hunter Combination"),
with the management of Hunter Resources, Inc. assuming operating control of the
Company. The new management implemented a business strategy emphasizing
acquisitions of long-lived properties in established producing areas with
significant development potential. In June 1996, the Company acquired for $34.7
million property interests in the Texas Panhandle and Western Oklahoma (the
"Panoma Properties"). The Company is in the process of completing a second
acquisition for approximately $143.5 million, which relates to properties in
West Texas and Southeast New Mexico (the "Permian Basin Properties"). As a
result of the completed and pending acquisitions, the Company intends to focus
on exploiting its substantial inventory of development and exploration
opportunities.
On December 31, 1996, the Company had an interest in 727 wells with
estimated proved reserves of 122.6 Bcfe with a pre-tax present value of $164.7
million. Approximately 63% of these reserves are attributable to the Panoma
Properties. On a Bcfe basis, these reserves were 74% natural gas with a reserve
life of 72 years. The Company serves as operator for 71% of its properties.
Additionally, the Company owns approximately 575 miles of gas gathering systems
and a 50% interest in a gas processing plant in proximity to the gas gathering
system purchased with the Panoma Properties. In 1996, the Company had revenues
of $16.4 million and Earnings Before Interest, Tax, Depreciation and
Amortization of $6.2 million.
Since the Magnum Hunter Combination, the Company has made six oil and gas
acquisitions for an aggregate purchase price of $31.9 million and has spent
approximately $1.95 million on development and exploration activities. This
strategy has added approximately 98.2 Bcfe of reserves at their respective
acquisition dates at an average cost of $.345 per Mcfe. As a result of its
completed and pending acquisitions, the Company has achieved substantial growth.
o Reserves increased from 36.7 Bcfe at year end 1995 to 122.6 Bcfe at year
end 1996;
o Production increased from .28 Bcfe in 1995 to 3.82 Bcfe in 1996;
o Earnings Before Interest, Tax, Depreciation and Amortization increased
from $(.5) million in 1995 to $6.2 million in 1996; and
o Net income increased from a $968 thousand loss in 1995 to a $509 thousand
profit in 1996.
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Recent Acquisitions
The Company believes that its recent acquisition activity has provided it
with a significant inventory of development and exploration opportunities. Since
December 1995, the Company has completed six acquisitions (excluding the Permian
Basin Acquisition) for an aggregate consideration of $31.9 million, resulting in
an increase in proved reserves of 2.679 MMbbls of oil and 81.944 Bcf of natural
gas. The two largest completed acquisitions to-date (excluding the Permian Basin
Acquisition) were the Magnum Hunter Combination and the Panoma Acquisition.
Magnum Hunter Combination. The significant growth experienced by the
Company in recent years largely commenced with the Magnum Hunter Combination in
late 1995, a transaction in which the Company ultimately issued 5,085,077 shares
of restricted Common Stock and 111,825 shares of Series C Preferred Stock to
Hunter Resources, Inc. and assumed the associated liabilities of Hunter to
acquire the subsidiaries of Hunter (the "Hunter Subsidiaries") effective as of
December 31, 1995. The acquisition of the Hunter Subsidiaries significantly
increased the size and expanded the nature of the Company's business, since such
companies were engaged in: (i) the acquisition, production and sale of crude
oil; (ii) the gathering, transmission and marketing of natural gas; (iii) the
management and operation of producing oil and natural gas properties for
interest owners; and (iv) the business of consulting and U.S. export services to
facilitate Latin American trade in energy products. The acquisition of Gruy
Petroleum Management Company ("Gruy"), a Hunter Subsidiary that specializes in
the management of producing properties, has enabled the Company to gain a
significant level of expertise in operating oil and gas properties. In
connection with the Magnum Hunter Combination, management of the Company was
replaced by Hunter's management team in December 1995. Estimated proved reserves
for the properties acquired in the Magnum Hunter Combination were 3.122 MMBbls
of oil and 10.973 Bcf of natural gas as of December 31, 1995. Total
consideration paid by the Company for Hunter's assets was 5,085,077 shares of
Common Stock and 111,825 shares of the Company's Series C Preferred Stock which
were subsequently converted into 335,475 shares of Common Stock.
Panoma Acquisition. On June 28, 1996, the Company purchased interests
in 520 gas wells and an adjoining 427-mile gas gathering system from a
subsidiary of Burlington Resources, Inc. ("Burlington"). The net purchase price,
after certain purchase price adjustments, was approximately $34.7 million,
funded by borrowings under the Company's existing credit facility (the "Existing
Credit Facility"). The natural gas wells are located in the Texas Panhandle and
Western Oklahoma and are commonly referred to as the "Panoma Properties." Gruy
has become the operator of the gas gathering system and the wells that were
previously operated by Burlington. Estimated proved natural gas reserves from
the Panoma Properties were approximately 77.2 Bcf at December 31, 1996.
On January 1, 1997, the Company complemented its Panoma Acquisition by
purchasing for $2.5 million a 50% ownerhsip interest (100% net profits interest
until payout) in the adjacent gas processing plant referred to as the McLean Gas
Plant. See "Gathering and Processing of Natural Gas."
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Proposed Acquisition
Overview. On February 27, 1997 the Company entered into a definitive
agreement with Burlington to acquire for $143.5 million, effective as of January
1, 1997, the Permian Basin Properties consisting of 25 field areas in West Texas
and 21 field areas in Southeast New Mexico containing 3,100 oil and gas
completions. The primary producing formations include the Yates, Seven Rivers
and Queen in Lea and Eddy Counties, New Mexico; the Atoka in the Brunson Ranch
Field in Loving County, Texas; the Clearfork in the Westbrook Field in Mitchell
County, Texas; the San Andres in the Levelland/Slaughter Field in Cochran
County, Texas; and the Canyon Sand in Sutton County, Texas. The gross mineral
acres and the net mineral acres of the Permian Basin Properties are, 114,810 and
82,175, respectively. Upon consummation of the acquisition, the Company's Gruy
subsidiary will serve as operator on approximately 66% of the Permian Basin
Properties. Management of the Company believes the Permian Basin Properties will
provide significant opportunities for exploitation of both oil and natural gas
reserves through a combination of enhanced recovery projects and new drilling
prospects.
In accordance with the definitive acquisition agreement, the Company made a
performance deposit of $10 million against the $143.5 million purchase price,
which will be further reduced by approximately $8 million to take into account
production between January 1, 1997 and the closing date. The Company intends to
fund the Permian Basin Acquisition with proceeds received from a combination of
borrowings under a new credit facility (the "New Credit Facility") for which the
Company has received a commitment letter and a private placement of
approximately $50 million in securities under Rule 144(a). The New Credit
Facility has a borrowing base of $145 million and will replace the Company's
Existing Credit Facility. The Company's obligations under the definitive
acquisition agreement are not subject to a financing condition, and it is likely
the Company would default under the acquisition agreement if the New Credit
Facility or other adequate financing is not arranged on a timely basis. The
closing of the Permian Basin Acquisition, which is expected to occur on or
before April 30, 1997, is conditioned, in Burlington's case, upon the approval
of its board of directors and, in the Company's case, upon the satisfactory
results of its due diligence with respect to accounting, title and environmental
matters.
Production and Reserves. During 1996, Burlington's daily net production
from the Permian Basin Properties averaged over 2.5 MBbl of oil and 2.7 Mmbcf of
natural gas. Burlington's cash flow from the Permian Basin Properties exceeded
$27.7 million for the 12-month trailing period ended November 1, 1996 with an
average oil price of $20.90 per Bbl and an average natural gas price of $2.23
per Mcf.
Ryder Scott Co., independent petroleum engineers in Houston, Texas retained
by the Company, have estimated that as of January 1, 1997, the Permian Basin
Properties had proved reserves of 14,238 MBbl of oil, 99.8 Bcf of natural gas
and 185.3 Bcfe. Ryder Scott Co. further estimated the future net revenue and
present value for the Permian Basin Properties to be $452.2 and $237.0 million,
respectively, as of January 1, 1997. Approximately 71% of the proved reserves
are proved producing.
Based on the Company's estimated net purchase price allocation of $135
million, the Company will pay approximately $.78 per Mcfe for its acquisition of
the Permian Basin Properties from Burlington.
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Development and Exploration Activities
Overview
The Company believes that the properties acquired through its acquisition
activities have positioned it to expand the focus of its activities from oil and
natural gas property acquisitions and consulting to exploiting the acquired
properties through drilling. The properties purchased in the Magnum Hunter
Combination and the Panoma Acquisition, together with the properties to be
purchased in the Permian Basin Acquisition, offer significant exploitation
potential through development drilling. The Company has a $15 million capital
budget for 1997, of which approximately $12 million is allocated for development
drilling and approximately $3 million is allocated for several exploration
prospects. The Company minimizes its overhead and capital expenditures by
subcontracting the drilling, redrilling and workover of wells to independent
drilling contractors and by outsourcing other services. The Company typically
compensates its drilling subcontractors on a turnkey (fixed price), footage or
day rate basis depending on the Company's assessment of risk and cost
considerations. The Company does not plan any material capital expenditures for
development or exploratory drilling on the Permian Basin Properties in 1997, as
the Company's management and professional staff will require further time to
efficiently evaluate the properties being acquired and determine the nature and
priority of the capital expenditures required.
Development Drilling
The Company's development strategy focuses on maximizing the value and
productivity of its oil and natural gas asset base through development drilling
and enhanced recovery techniques. In particular, the Company plans to emphasize
in-fill drilling on its Panoma Properties and several of its West Texas
properties, to initiate waterflood projects on selected West Texas properties
and to drill lateral re-entry wells in its Austin Chalk properties. In-fill
drilling is the process of drilling a well between producing wells to better
exploit the reservoir. In a waterflood, water is injected into a producing
formation to increase pressure and enhance the hydrocarbon recovery by forcing
oil into the producing well bores. Lateral re-entry wells are wells drilled
horizontally from existing bore holes into undrained areas on the lease block.
In exploiting its producing properties, the Company relies upon its in-house
technical staff of petroleum engineering and geological professionals and
utilizes the services of outside consultants on a selective basis.
Panoma Properties. The Company believes that developmental drilling can
enhance the value of its recently acquired Panoma Properties, which include the
Brown Dolomite and Granite Wash Formations in the Texas Panhandle and Western
Oklahoma. The Company has identified over 70 in-fill drilling prospects on the
Panoma Properties, and subject to receiving routine density approvals from the
Railroad Commission of Texas (the state oil and gas regulatory agency), the
Company plans to drill approximately 40 in-fill wells on the West Panhandle
Field through the end of 1997, thereby enhancing the value of the field, the
adjoining 427- mile gas gathering system and the McLean Gas Plant in which the
Company acquired an ownership
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interest in January 1997. Wells owned by the Company in the West Panhandle
Field are currently drilled on 640-acre spacing as compared to 160-acre spacing
for wells drilled and owned by the Company on a neighboring field along the same
geologic trend and producing from the same formations. These wells, which are
approximately 2,500 feet deep, are estimated to cost approximately $125,000 each
to drill and complete.
West Texas. The Company believes it can enhance the value of selected West
Texas fields through in-fill drilling and enhanced recovery projects. The
Company plans to utilize its management experience to conduct a number of
waterflood projects primarily in West Texas fields. While waterflood projects
typically take a longer period of time to respond to fluid injection as compared
to production rates of new wells drilled, the West Texas properties have in-fill
drilling potential that could result in a somewhat faster increase in production
and cash flow. The Company presently plans to spend approximately $7 million on
development drilling and waterflood projects in West Texas during 1997.
o Fargo West. The Company, as operator, owns a 95% working interest in this
property located in the Fargo West Field. This property produces from the
6,200-foot deep Strawn Formation in Wilbarger County in West Texas. By recently
conducting fracture simulation ("frac") work on five wells, the Company was
successful at more than doubling the property's production to over 4,400 Bbls of
oil per month. The Company plans to drill from four to ten additional wells at
Fargo West, with one extension well and three in-fill wells to be drilled during
1997 at an approximate cost of $250,000 per well.
o Chinquapin Strawn. The Company, as operator, owns an approximately 70%
working interest in a property in the Chinquapin Strawn Field, which produces
from the 5,300-foot deep Strawn Formation in Nolan County in West Texas. The
Company has drilled three wells on the Chinquapin Strawn property to date in
1997. A total of nine more wells are planned for this property, with three of
such wells to be drilled in 1997 at an approximate cost of $250,000 per well.
o Jameson. The Jameson Field property, in which the Company owns a 100%
working interest and is operator, produces from the 6,000-foot deep Strawn
Formation in Coke County in West Texas. The Company has drilled one in-fill well
on the Jameson property to date in 1997. The Company plans to drill a total of
12 additional wells on this property, with three or four wells to be drilled in
1997 at an approximate cost of $250,000 per well.
o McFarland. The Company owns a 25% working interest in the McFarland Field
property, a waterflood project which produces from the 4800-foot deep Queen
Formation in Andrews County in West Texas. The property is operated by Mariah
Energy Corporation, which drilled one well there in 1996 and plans to drill up
to six wells during 1997 and a total of up to eleven additional wells in
subsequent years to fully develop the property. The approximate total cost of
each well is estimated at $225,000.
o Levelland. The Company, as operator, owns a 95% working interest in the
Levelland Field property, a waterflood project which produces from the 5000-foot
deep San Andres Formation
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in Cochran County in West Texas. Although the Company has not yet drilled
any wells on this property, it plans to drill up to ten wells in 1997 and 29
additional wells thereafter at an approximate cost of $225,000 per well.
o Starnes. The Company, as operator, owns a 100% working interest in the
Starnes property, which is also located in the Levelland Field and produces from
the San Andres Formation in West Texas. The Company plans to drill its initial
two wells in this waterflood project in 1997, with a total of four additional
wells being planned at an approximate cost of $225,000 each.
Austin Chalk. Management believes that horizontal drilling can be
successfully used to augment the value of the Company's properties in the Austin
Chalk Formation of Central Texas, an area where wells typically have high
initial rates of production. The Company owns a 25% working interest in (38)
producing wells on approximately 12,000 lease acres in Fayette and Gonzales
Counties. The Company drilled one lateral well in the Austin Chalk formation in
1996, which was successfully completed as an oil well. Geological studies
indicate the potential for as many as 20 new lateral locations to be drilled
from existing bore holes into undrained areas on the lease block. Drilling
laterally from existing bore holes is advantageous, as the cost is approximately
one-third of the expenditure required for a new "grass roots" well. The Company
plans to drill two lateral wells on its Austin Chalk properties in 1997 at an
approximate cost of $400,000 per well to the 100% working interest.
Exploratory Drilling
The Company has adopted a "controlled risk" approach to its exploratory
drilling activity by concentrating in specific regions in the United States
(primarily Oklahoma and Texas) where the Company's technical staff has
considerable experience, or which are near proved producing properties where the
potential for significant reserves exists. To the extent feasible, the Company
reduces its exploration risk by diversifying through investment in multiple
prospects, by farming out (promoting out) interests to industry partners and by
utilizing 3-D seismic surveys and other advanced technologies.
The Company has successfully completed four out of the eight exploration
wells it has drilled since January 1995. The exploratory wells drilled by the
Company have ranged in cost from $75,000 to $500,000 on a dry hole basis, with
an average dry hole cost of approximately $150,000 each. The Company plans to
spend approximately $3 million out of its $15 million drilling budget on
exploratory drilling during 1997.
The Company and its partners are presently drilling two exploratory wells,
a potential gas well in the Douglas Formation in Western Oklahoma and a
prospective oil well in the Austin Chalk Formation in Central Texas. The latter
well is the Company's first exploratory horizontal well and the Company is
presently drilling at a depth of 9,000 feet. The Company's working interests in
these two wells are 25% and 20%, respectively.
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Four or five additional exploratory wells are planned by the Company for
drilling in 1997. These include a prospective shallow gas well in Frio County in
Southwest Texas, a possible oil and gas well to be determined by 3-D seismic in
Victoria County on the Texas Gulf Coast and two or three other potential oil and
gas wells on the Texas Gulf Coast. The Company is also reviewing other
exploration opportunities.
Gathering and Processing of Natural Gas
Hunter Gas Gathering, Inc., a wholly owned subsidiary of the Company, owns
and operates four gas gathering systems located in Oklahoma, Texas and
Louisiana, none of which are subject to regulation by the Federal Energy
Regulatory Commission ("FERC"), and a 50% ownership interest in a gas processing
plant knows as the McLean Gas Plant in the Texas Panhandle. Two of the gas
gathering systems, Panoma and North Appleby, account for more than 40% of the
throughput utilization from the Company's four systems.
Generally, the gathering systems transport the natural gas to a common
point where it is dehydrated prior to redelivery to downstream pipelines. In
managing its gas gathering systems, the Company has emphasized operating
efficiency and overhead management and introduced a third party compressor
congract program which ties throughput costs to volume transported rather than
to compression capacity. The Company believes that its focus on volume-based
pricing reduces the potential financial impact of a decline in actual
throughput.
The Panoma system, the largest of the Company's four gas gathering systems,
consists of approximately 427 total miles of pipeline. The main trunklines run
east to west for approximately 66 miles with the east end starting in Beckham
County, Oklahoma and the west end starting in Gray County, Texas. The Panoma gas
gathering system currently delivers gas to El Paso Natural Gas Company for
transport to markets in Western Oklahoma and the West Coast, although the
Company is actively seeking additional markets for such gas. Gas throughput for
the Panoma gathering system is approximately 16.5 MMcf per day. The Company,
which owns approximately 469 of the roughly 500 wells connected to the Panoma
system, is also actively looking to add new wells to such system through
acquisition or development.
The Company's North Appleby gas gathering system is located primarily
in Nacogdoches County in East Texas. Approximately 39 wells are connected to the
system, which delivers approximately 3.0 MMcf per day for third parties to
Natural Gas Pipeline Co. for transportation to other markets. The Company's
other two systems deliver an aggregate of 1.5 MMcf per day for third parties
from 66 wells into various markets.
Effective January 1, 1997, Hunter Gas Gathering, Inc. purchased for $2.5
million a 50% ownership interest in the McLean Gas Plant, the gas processing
facility connected to the Company's Panoma gas gathering system. The purchase
also included a 23-mile products pipeline between the McLean Gas Plant and the
Koch Pipeline at Lefors, Texas and all gas and product purchase and sales
agreements related to the plant. The McLean Gas Plant is a modern cryogenic gas
processing plant
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with a capacity of 23.0 MMcf per day. The Company is currently processing
approximately 1000 Bbls of natural gas liquids per day (a plant utilization rate
of 16.5 MMcf per day). The Company acquired its 50% ownership interest in the
plant from Carrera Gas Company, L.L.C. of Tulsa, Oklahoma, which owns the
remaining 50% of the plant and has remained as operator of the facility. Under
terms of the Company's agreement with Carrera, the Company receives 100% of the
net profits from the McLean Gas Plant until it recoups the $2.5 million purchase
price, at which point profits are thereafter divided equally between the Company
and Carrera.
Marketing of Production
Hunter Gas Gathering, Inc., a wholly owned subsidiary of the Company,
markets all of the Company's gas production.
The Company sells its gas production as well as gas it purchases from third
parties to gas marketing firms or end users either on the spot market on a
month-to-month basis at prevailing spot market prices or at negotiated prices
under long-term contracts based on current spot market prices. The Company's
historic ability to produce or purchase gas at a somewhat lower price than that
at which it is resold has enabled the Company to profit from the price
differential, however, the marketing of gas for its own account also exposes the
Company to the attendant commodities risk. Hunter Gas Gathering, Inc. currently
sells the majority of its gas to Crosstex Energy Services, a gas marketing firm
located in Dallas, Texas formed in January 1997 when Comstock Natural Gas, Inc.
sold its gas gathering, processing and marketing operations. Although the
Company sold approximately 91% of its gas to Comstock in 1996 and has sold a
comparable percentage to Crosstex to date in 1997, the Company does not believe
that any discontinuation of such sales arrangement would be disruptive to the
Company's gas marketing operations. The Company typically obtains letters of
credit guaranteeing the payment of the purchase price for its gas. At December
31, 1996, the Company had hedged two-thirds of the gas produced from the Panoma
Properties. The Company's two gas hedges, each of which covers 100,000
MMBtu/month for the period February 1997 though January 1998, are at prices of
$1.77 per MMBtu and $1.905 per MMBtu and $2.00 and $2.15 per Mcf, respectively.
The Company's oil is sold by Magnum Hunter Production, Inc. typically under
month-to-month contracts with a variety of crude oil purchasers. Oil is usually
sold for the Company's own account through Enmark, a marketing agent in Dallas,
Texas. While the Company has historically been able to sell oil at above posted
prices, it is also exposed to the commodities risk inherent in short-term
contracts. Based on fourth quarter 1996 production, approximately 85% of the
Company's oil is hedged under a price collar whereby settlement only occurs if
between March 1997 and August 1997, the average monthly closing price for oil
falls outside its $20.00 minimum and $25.10 maximum amount of the collar.
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The following table provides summary operating data with respect to production,
sales prices, costs, and the resulting gross margins for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S>
Production <C> <C> <C>
Oil (MBbl)....................................... 191 30 42
Gas (MMcf)....................................... 2,675 102 88
Mmcfe............................................ 3,821 282 340
Average sales price
Oil (per Bbl).................................... $ 20.46 $ 15.60 $ 14.20
Gas (per Mcf).................................... 2.37 1.46 1.53
Mcfe............................................. 2.68 2.19 2.15
Average operating cost per Mcfe.................... $ 1.15 $ .95 $ .94
Gross margin per Mcfe.............................. $ 1.53 $ 1.24 $ 1.21
</TABLE>
The market for oil and natural gas produced by the Company depends on
factors beyond its control, including the extent of domestic production and
imports of oil and natural gas, the proximity and capacity of natural gas
pipelines and other transportation facilities, weather, demand for oil and
natural gas, the marketing of competitive fuels and the effects of state and
federal regulation. The oil and natural gas industry also competes with other
industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
Petroleum Management and Consulting Services; Possible Foreign Drilling
Gruy. The Company acquired Gruy Pertroleum Management Co.("Gruy") in the
Magnum Hunter Combination in December 1995. Gruy has a 37-year history of
managing properties for third parties, which include banks, financial
institutions, bankruptcy trustees, estates, individual investors, trusts and
independent oil and gas companies. Gruy provides drilling, completion and other
well-site services; advice regarding certain regulatory compliance regulations;
receipt and disbursement functions and other managerial services; petroleum
engineering services; and consultation as an expert witness. Gruy manages,
operates and provides consulting services on oil and natural gas properties
located in Texas, Oklahoma, Mississippi, Louisiana, New Mexico and Kansas. Gruy
is an important component of the Company's acquisition program. As the operator
of wells for third parties and as a provider of consulting services for the
energy industry, Gruy is often able to identify attractive acquisition
opportunities.
Hunter Butcher. The Company provides consulting services to several Latin
American energy companies through Hunter Butcher International L.L.C. ("Hunter
Butcher"), a 51% owned subsidiary. Hunter Butcher has primarily focused on
assisting energy-related Mexican companies in obtaining financing for their U.S.
purchases of products and services for export to Mexico. This is accomplished
through a commercial bank credit facility established to facilitate short and
medium term credit for Hunter Butcher to purchase these products and resell them
to its clients at a slight premium. The credit risk to Hunter Butcher on such
resales is lessened by partial guaranties of
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approximately 85% to 90% of such borrowings by the Export Import Bank of
the United States (the "ExIm Bank"), by credit insurance and through deposits by
Hunter Butcher's clients to secure the unguaranteed portion of the indebtedness
and certain interest. Hunter Butcher could, however, incur a loss under such
arrangement in repaying indebtedness under the credit facility since the
applicable ExIm Bank guaranty and deposit would not be adequate to pay interest
under the credit facility at the default rate or cover other possible losses. In
addition, the Company itself may choose from time to time to guarantee the
indebtedness incurred under the credit facility by Hunter Butcher for the
ultimate benefit of its clients. In 1996, the Company's share of Hunter
Butcher's net revenues was approximately $18,000.
Possible Participation in Foreign Energy Related Activities. As the Company
continues to increase its asset base, management plans to expand the scope of
its oil and gas activities, including the Company's possible participation in
foreign energy projects. The Company believes that Latin America offers
significantly greater hydrocarbon reserve potential with less competition than
in the United States. Therefore, as part of its long-term growth strategy, the
Company periodically reviews energy related investment opportunities in
Argentina, Bolivia, Guatemala, Mexico, Peru and other countries in Latin
America. Although no investment has been made to date, the Company is exposed to
some of these opportunities through relationships established by Hunter Butcher.
In expanding into Mexico, Central America or South America, the Company
anticipates that any investment would be made in partnership with one or more
partners either locally or through parties with whom it had previously worked in
the United States. In pursuing international opportunities, the Company intends
to adhere to its philosophy of primarily focusing on proved producing properties
that it perceives to be reasonably priced and that afford the opportunity for
significant enhancement of value through appropriate exploitation and
development activities utilizing its management expertise.
Competition
The oil and gas industry is highly competitive. Competitors of the
Company include major oil companies, other independent oil and natural gas
concerns, and individual producers and operators, many of which have
substantially greater financial resources and larger staffs and facilities than
those of the Company. In addition, the Company frequently encounters competition
in the acquisition of oil and natural gas properties and gas gathering systems,
and in its management and consulting business. The principal means of
competition are the amount and terms of the consideration offered. When
possible, the Company tries to avoid open competitive bidding for acquisition
opportunities. The principal means of competition with respect to the sale of
oil and natural gas production are product availability and price. The price at
which the Company's natural gas may be sold will continue to be affected by a
number of factors, including the price of alternate fuels such as oil and coal
and competition among various natural gas producers and marketers.
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Regulation
Federal Regulation of Sales of Natural Gas
Historically, the transportation and sale for resale of natural gas in
interstate commerce have been regulated pursuant to the Natural Gas Act of 1938
(the "NGA"). In addition, since 1978, maximum selling prices of certain
categories of gas, whether sold in interstate or intrastate commerce, have been
regulated pursuant to the Natural Gas Policy Act of 1978 (the "NGPA"). These
statutes are administered by the FERC. The provisions of these acts and
regulations are complex. However, as a result of the enactment of the Natural
Gas Wellhead Decontrol Act of 1989 (the "Decontrol Act"), the remaining
restrictions imposed on the NGA and the NGPA with respect to "first sales"
terminate on the earlier of January 1, 1993 or the expiration of the applicable
contract. Any natural gas not otherwise deregulated prior to January 1, 1993 was
deregulated as of that date. The effect of the Decontrol Act is to remove all
remaining price controls under the NGPA and to remove all remaining FERC
certificate and abandonment jurisdiction otherwise applicable to producers under
the NGA.
Several major regulatory changes have been implemented by the FERC from
1985 to the present that affect the economics of natural gas production,
transportation and sales. In addition, the FERC continues to promulgate
revisions to various aspects of the rules and regulations affecting those
segments of the natural gas industry which remain subject to the FERC's
jurisdiction. The stated purpose of many of these regulatory changes is to
promote competition among the various sectors of the gas industry. The ultimate
impact of the complex and overlapping rules and regulations issued by the FERC
since 1985 cannot be predicted. In addition, many aspects of these regulatory
developments have not become final but are still pending judicial and FERC final
decisions.
FERC has issued Orders 636 and 636-A for the purpose of restructuring
gas pipeline sales and transportation services in the United States to promote
competition in all phases of the gas industry. The impact of these FERC Orders
has significantly altered the traditional way natural gas was purchased,
transported, and sold. The restructuring requirements that have emerged from the
administrative and judicial review process have varied significantly from those
previously in effect.
Environmental Regulation
The Company's exploration, development and production of oil and
natural gas operations are subject to various federal, state and local
environmental laws and regulations. Such laws and regulations can increase the
costs of planning, designing, installing and operating oil and natural gas
wells. For example, the Company's domestic activities are potentially subject to
the regulations promulgated by the Environmental Protection Agency ("EPA") under
the Oil Pollution Act of 1990 ("OPA"), the Clean Water Act ("CWA"), the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
the Resource Conservation and Recovery Act
13
<PAGE>
("RCRA"), and the Clean Air Act ("CAA"), as well as state regulations
promulgated under comparable state statutes.
Under the OPA, in a limited set of circumstances, a release of oil into
the waters of the United States could result in the Company being held
responsible for the costs of remediating such a release, certain OPA specified
damages suffered by private parties, and natural resource damages recoverable by
federal, state, or foreign governments and Indian tribes. The extent of that
liability could range from $500,000 to either $350 million or all costs of
remediation plus $75 million, depending on the nature of the release. Any
limitation on such financial liability would be lost if a release were found to
be caused by gross negligence, willful misconduct or violation of applicable
regulations.
Pursuant to the CWA, a release of oil in harmful quantities into the
waters of the United States could, in certain limited circumstances, result in
the Company being held responsible for the actual costs of remediation.
Depending on the nature of the release, such liability could range from $125,000
to $50 million. A finding of willful misconduct or willful negligence would
cause a loss of the limits on liability under the CWA. Furthermore, in
appropriate circumstances significant civil penalties ranging from $25,000 to
$100,000 per day of violation, or $1,000 to $3,000 per barrel of oil discharged,
and significant criminal fines could be imposed on the Company for a release of
harmful quantities of oil to those waters identified in the CWA.
CERCLA and comparable state statutes, also known as "Superfund" laws,
impose joint and several liability, without regard to fault or the legality of
the original conduct, on certain classes of persons for the release of a
"hazardous substances" into the environment. These persons include the owner or
operator of a site, and companies that transport, dispose of or arrange for the
disposal of, the hazardous substances found at the site. CERCLA also authorizes
the EPA, and in some cases, third parties to take actions in response to threats
to the public health or the environment and to seek to recover from the classes
of responsible persons the costs they incur. Although CERCLA, as amended,
currently exempts crude oil, natural gas and natural gas liquids from the
definition of hazardous substance, the Company's operations may involve the use
or handling of other materials that may be classified as non-exempt hazardous
substances or hazardous wastes under CERCLA. Furthermore, there can be no
assurance that the exemption will be preserved in future amendments of the act,
if any, or that more stringent laws and regulations protecting the environment
will not be adopted.
RCRA and its comparable state and local requirements impose standards
for the transportation, treatment and disposal of both hazardous and
nonhazardous solid wastes. The EPA is currently considering the adoption of
stricter disposal standards for nonhazardous waste. Further, legislation has
been proposed in Congress from time to time that would reclassify certain oil
and gas wastes, including wastes generated during pipeline, drilling and
production operations, as "hazardous wastes" under RCRA which would make such
solid wastes subject to much more stringent handling, transportation, storage,
disposal and clean-up requirements. This development could have a
14
<PAGE>
significant impact on the Company's operating costs. State initiatives to
further regulate oil and natural gas wastes could have a similar impact.
The Company's operations may also be subject to the Clean Air Act
("CAA") and comparable state and local requirements. Amendments to the CAA were
adopted in 1990 and contain provisions that may require certain oil and natural
gas related installations to obtain federally enforceable operating permits and
may require the monitoring of emissions.
It is not anticipated that the Company will be required in the near
future to expend amounts that are material in relation to its total capital
expenditures program by reason of environmental laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance. The Company is able to
control directly the operations of only those wells for which it acts as
operator. Notwithstanding the Company's lack of control over wells operated by
others, the failure of the operator to comply with applicable environmental
regulations may, in certain circumstances, be attributable to the Company.
State Regulation
State statutes and regulations require permits for drilling operations,
drilling bonds and reports concerning operations. The Railroad Commission of the
State of Texas regulates the production of oil and natural gas produced by the
Company in Texas. Similar regulations are in effect in all states in which the
Company produces oil and natural gas. Most states in which the Company owns and
operates properties have statutes, rules or regulations governing conservation
matters, including the unitization or pooling of oil and natural gas properties,
establishing of maximum rates or production from oil and natural gas wells and
the spacing of such wells. Many states also restrict production to the market
demand for oil and natural gas. Such statutes and regulations may limit the rate
at which oil and natural gas could otherwise be produced from the Company's
properties. Some states have enacted statutes prescribing ceiling prices for
natural gas sold within their state.
The Company owns and operates saltwater disposal and injection wells which
are subject to state regulations. Through its subsidiaries, the Company owns ten
saltwater disposal wells located in Oklahoma and Texas. One of these wells is
currently inactive. Only one of the ten disposal wells is a commercial well, the
other nine wells are used for disposal of waters from Company operations. The
commercial disposal well is located in Cushing, Oklahoma and is for sale. This
well is permitted to accept only non-hazardous produced waters.
The Company also owns, through its subsidiaries, approximately
seventeen saltwater injection wells. These wells are located in Oklahoma and
Texas. Only four of the approximately seventeen wells are currently being used
by the Company.
The operations of the Company's disposal and injection wells are subject to
regulatory oversight by the Corporation Commission in Oklahoma and the Railroad
Commission of Texas. In
15
<PAGE>
addition, the Company has one injection well located on Indian lands in Oklahoma
which also is subject to oversight by the Environmental Protection Agency. The
regulatory scheme includes regulations adopted pursuant to the Safe Drinking
Water Act and similar state laws and regulations. These laws and regulations
establish construction, permitting, operating, monitoring and reporting
requirements for disposal and injection wells. To the Company's knowledge, its
wells are in compliance with all applicable regulations.
Several states have also adopted regulations on the handling,
transportation, storage, and disposal of naturally occurring radioactive
materials that are found in oil and natural gas operations.
Employees
At December 31, 1996, the Company had thirty-seven (37) full-time employees
of which six (6) were management, thirteen (13) were administrative and eighteen
(18) were field employees. None of the Company's employees are represented by a
union. Management considers its relations with employees to be good. The Company
anticipates hiring approximately nine (9) additional employees assuming the
Permian Basin Acquisition closes as expected.
Facilities
The Company occupies approximately 9,590 square feet of office space at
600 East Las Colinas Boulevard, Suite 1200, Irving, Texas, under a lease that
expires in November 2001. The Company owns a field office and production yard in
Shamrock, Texas, consisting of approximately four (4)acres of land.
Item 2. Description of Properties
Oil and Natural Gas Reserves
All information set forth herein regarding estimated proved reserves,
related estimated future net revenues and present value of the Company's oil and
gas interests is taken from reports prepared by Gaffney, Cline & Associates Inc.
and Glenn Harrison Petroleum Consultants, Inc., both independent petroleum
engineers in Dallas, Texas. These estimates have been prepared with respect to
the Company's interests as of December 31, 1996 and December 31, 1995 and by the
respective engineers named in the footnotes below the tables. The estimates of
these independent petroleum engineers were based upon their review of production
histories and other geological, economic, ownership and engineering data
provided by the Company an independent sources.
In accordance with SEC guidelines, the estimates of future net revenues
from proved reserves and the present value of proved reserves are made using oil
and natural gas sales prices in effect as of the dates of such estimates and are
held constant throughout the life of the properties. The Company's proved
reserves at December 31, 1996 were estimated based upon weighted average prices
(before deduction of production taxes) of $4.00 per Mcf of natural gas and
$24.31 per Bbl
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<PAGE>
of oil, compared to $1.46 per Mcf of natural gas and $15.60 per Bbl of oil
as of December 31, 1995. Operating costs and development costs and certain
production-related taxes were deducted in arriving at the estimated future net
revenues. No provision was made for income taxes. The estimates of future net
revenues and their present value differ in this respect from the standardized
measure of discounted future net cash flows set forth in the Notes to the
Consolidated Financial Statements of the Company, which is calculated after
provision for future income taxes. There can be no assurance that these
estimates are accurate predictions of future net revenues from oil and gas
reserves or their present value. Also, prices for natural gas and oil have
decreased since December 31, 1996 to $2.30 per Mcf of natural gas (assuming 1200
BTU gas) and $20.41 per Bbl of oil as of March 31, 1997, which would have a
significant effect on the proved discounted value of reserves.
Proved reserves are estimates of hydrocarbons to be recovered in the
future. Reservoir engineering is a subjective process of estimating the sizes of
underground accumulations of oil and natural gas that cannot be measured in an
exact way. The accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Reserve reports of other engineers might differ from the reports contained
herein. Results of drilling, testing, and production subsequent to the date of
the estimate may justify revision of such estimate. Future prices received for
the sale of oil and natural gas may be different from those used in preparing
these reports. The amounts and timing of future operating and development costs
may also differ from those used. Accordingly, reserve estimates are often
different from the quantities of oil and natural gas that are ultimately
recovered.
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<PAGE>
The following tables set forth the estimated proved reserves of oil and
natural gas of the Company and the present value thereof for the two years in
the periods ended December 31, 1996 and December 31, 1995:
Estimated Proved Oil and Natural Gas Reserves(1)
<TABLE>
<CAPTION>
1996 (2) 1995 (3)
<S> <C> <C>
Net natural gas reserves (MMcf):
Proved developed producing............... 71,166,555 8,796,748
Proved developed nonproducing............ 108,586 -
Proved undeveloped....................... 9,290,856 5,275,168
-----------------------------
Total proved natural gas reserves..... 90,565,997 14,071,916
=============================
Net oil reserves (Bbl):
Proved developed......................... 1,849,846 1,681,841
Proved developed nonproducing............ 112,338 -
Proved undeveloped....................... 3,376,071 2,085,898
------------------------------
Total proved oil reserves............. 5,338,255 3,767,739
Total proved reserves (Mcfe)(4)............ 122,595,527 36,678,350
===============================
Estimated Present Value of Proved Reserves(1)
1996 1995
Estimated Present Value:
Proved developed producing............... $ 115,858,134 $ 19,036,205
Proved developed nonproducing............ 664,308 -
Proved undeveloped....................... 48,244,017 18,173,125
-----------------------------------
Total proved reserves................. $ 164,766,459 $ 37,209,330
===================================
(1) Based upon reserve reports at December 31, 1996 and 1995, prepared by
independent petroleum consultants, James J. Weisman, Jr., Gaffney
Cline & Associates and Glenn Harrison Petroleum Consultants, Inc., all
of Dallas Texas.
(2) Includes reserves acquired in the Panoma Acquisition.
(3) Includes reserves acquired in the Magnum Hunter Combination.
(4) Mcfe is the Mcf equivalent of oil and gas and is computed as follows:
Bbls of oil times six (6) plus Mcf of natural gas.
</TABLE>
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<PAGE>
Drilling Activity
The following table sets forth the results of the Company's drilling
activities during the two fiscal years ended December 31, 1996.
<TABLE>
<CAPTION>
Gross Wells(1) Net Wells(2)
Year Type of Well Total Producing(3) Dry(4) Total Producing(3) Dry(4)
<S> <C> <C> <C> <C> <C> <C>
1996 Exploratory
Texas 8 4 4 5.23 2.63 2.60
Oklahoma 0 0 0 0 0 0
Other 0 0 0 0 0 0
Development
Texas 2 2 0 .35 .35 0
Oklahoma 1 1 0 .31 .31 0
Other 0 0 0 0 0 0
1995 Exploratory
Texas 1 1 0 .30 .30 0
Oklahoma 1 1 0 .25 .25 0
Other 0 0 0 0 0 0
Development
Texas 0 0 0 0 0 0
Oklahoma 0 0 0 0 0 0
Other 0 0 0 0 0 0
</TABLE>
(1) A gross well is a well in which a working interest is owned. The number
of gross wells is the total number of wells in which a working interest
is owned. Fluid injection wells for waterflood and other enhanced
recovery projects are not included as gross wells.
(2) A net well is deemed to exist when the sum of fractional ownership
working interests in gross wells equals one. The number of net wells is
the sum of fractional working interests owned in gross wells expressed
as whole numbers and fractions thereof.
(3) A producing well is an exploratory or development well found to be
capable of producing either oil or natural gas in sufficient quantities
to justify completion as an oil or natural gas well.
(4) A dry well is an exploratory or development well that is not a
producing well.
19
<PAGE>
Oil and Gas Wells
The following table sets forth the number of oil and natural gas wells
in which the Company had a working interest at December 31, 1996. All of these
wells are located in the United States.
<TABLE>
<CAPTION>
Productive Wells
As of December 31, 1996
Gross(1) Net(2)
Location Oil Gas Total Oil Gas Total
<S> <C> <C> <C> <C> <C> <C>
Texas...................... 113 447 560 53.35 381.72 435.07
Oklahoma................... 26 117 143 21.85 103.09 124.94
Mississippi................ 4 0 4 2.98 0 2.98
New Mexico................. 3 3 6 2.48 .64 3.12
California................. 14 0 14 1.05 0 1.05
Kansas..................... 2 0 2 1.90 0 1.90
162 567 729 83.61 485.45 569.06
</TABLE>
(1) A gross well is a well in which a working interest is owned. The number
of gross wells is the total number of wells in which a working interest
is owned.
(2) A net well is deemed to exist when the sum of fractional ownership
working interests in gross wells equals one. The number of net wells is
the sum of fractional working interests owned in gross wells expressed
as whole numbers and fractions thereof.
Oil and Natural Gas Acreage
The following table summarizes the Company's developed and undeveloped
leasehold acreage at December 31, 1996.
<TABLE>
<CAPTION>
Developed Undeveloped
Gross(1) Net(2) Gross(1) Net(2)
<S> <C> <C> <C> <C>
Texas.............................. 167,216 151,293 10,432 4,711
Oklahoma........................... 45,610 42,982 -- --
Mississippi........................ 528 452 -- --
New Mexico......................... 840 702 -- --
California......................... 509 38 -- --
Kansas............................. 80 69 -- --
</TABLE>
(1) A gross acre is an acre in which a working interest is owned. The
number of gross acres is the total number of acres in which a working
interest is owned.
(2) A net acre is deemed to exist when the sum of fractional ownership
working interests in gross acres equals one. The number of net acres is
the sum of fractional working interests owned in gross acres expressed
as whole numbers and fractions thereof.
20
<PAGE>
As is customary in the industry, the Company generally acquires oil and
natural gas acreage without any warranty of title except as to claims made by,
through or under the transferor. Although the Company has title examined prior
to acquisition of developed acreage in those cases in which the economic
significance of the acreage justifies the cost, there can be no assurance that
losses will not result from title defects or from defects in the assignment of
leasehold rights. In many instances, title opinions may not be obtained if in
the Company's judgment, it would be uneconomical or impractical to do so.
Item 3. Legal Proceedings.
No legal proceedings are pending other than ordinary routine litigation
incidental to the Company's business.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company had no matters requiring a vote of security holders during
the fourth quarter of 1996.
21
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Common Stock has been listed on the American Stock Exchange since March
8, 1996. The Common Stock has been listed under the ticker symbol "MHR" since
March 18, 1997, prior to which time it was listed under the ticker symbol "MPM."
Prior to March 8, 1996, the Common Stock was listed on the American Stock
Exchange Emerging Company Marketplace. At March 15, 1997, there were 3,797
stockholders of record.
<TABLE>
<CAPTION>
Average Daily
Trading Volume
High Low (Shares)
<S> <C> <C> <C>
1996
First Quarter............................................. $ 3 11/16 $ 2 5/8 16,154
Second Quarter............................................ 4 3/4 3 39,096
Third Quarter............................................. 4 7/8 3 1/2 18,371
Fourth Quarter............................................ 5 1/4 4 1/8 34,982
1995
First Quarter............................................. $ 5 $ 2 7/8 24,716
Second Quarter............................................ 4 11/16 3 3/8 8,624
Third Quarter............................................. 4 3/4 3 5/16 15,731
Fourth Quarter............................................ 4 1/4 2 3/4 13,000
1994
First Quarter............................................. $ 3 3/8 $ 2 1/2 277
Second Quarter............................................ 5 1/4 2 3/16 1,829
Third Quarter............................................. 3 5/8 2 7/8 3,660
Fourth Quarter............................................ 4 5/16 3 1/4 13,911
</TABLE>
On March 25, 1997, the last reported sale price of the Company's Common
Stock on the American Stock Exchange was $5 15/16 per share.
The Company has not previously paid any cash dividends on its Common Stock
and does not anticipate paying dividends on its Common Stock in the foreseeable
future. It is the present intention of management to utilize all available funds
for the development of the Company's business activities. The Company may not
pay any dividends on Common Stock unless and until all dividend rights on
outstanding Preferred Stock have been satisfied. The Existing Credit Facility
restricts, and it is expected that the New Credit Facility will also restrict
the payment of cash dividends on the Company's securities.
22
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes associated with
them contained elsewhere in this report. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the
future or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment of management of the Company.
On July 21, 1995, the Company closed a definitive agreement to combine (the
"Business Combination") with Hunter Resources, Inc. ("Hunter"), subject to
Hunter shareholder approval. Pursuant to the definitive agreement, the Company
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, the Company and
Hunter entered into an Agreement and Plan of Reorganization and Plan of
Liquidation, as amended. The Amended Agreement 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 the Company 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 Amended 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 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 $34.7 million "Panoma
Property" acquisition, as discussed below, from Meridian Oil Inc. ("Meridian"),
a wholly-owned subsidiary of Burlington Resources, Inc., iii) fund future
property development, and iv) provide working capital support and cash
availability for general corporate purposes. The $100 million credit facility is
subject to a "Borrowing Base" determination established from time-to-time
23
<PAGE>
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 at that time from $16 million
to $48 million based upon the value of the assets associated with the
acquisition of the Panoma Properties. The borrowing base under the credit
facility was increased again in December 1996 to $55 million upon the entry of
First Union National Bank of North Carolina into the Bank group. The credit
facility gives 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 $34.7 million funded by several loans under Magnum's credit
facilities with the 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 beginning July 1, 1996. 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 November 4, 1996, Magnum 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 provides for Magnum's Gruy subsididary to continue to operate the
properties for a management fee.
On December 6, 1996, Magnum entered into an agreement to issue 1,000,000
shares of 1996 Series A Convertible Preferred Stock in a private placement. The
shares have a stated and liquidating preference value of $10 per share and pay a
fixed annual cumulative dividend of eight and threee quarters percent (8.75%),
payable 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, Magnum has an option to exchange the 1996
Series A Preferred Stock into convertible subordinated debentures of equivalent
value. The purpose of the private placement was to fund the capital cost
necessary to develop certain developmental drilling and secondary recovery
projects. The proceeds were initially used to reduce Magnum's indebtedness under
its Bank credit facility. On December 23, 1996, the 1996 Series A Preferred
Stock was issued, resulting in net proceeds after offering costs of $9,787,000.
Results of Operations for the Years Ended 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 fiscal 1996 include the six months operations from the June 28, 1996
acquisition of the Panoma Properties. As such, the comparison of the increases
in the 1996 period over the 1995 period are, unless otherwise stated, the result
of the Hunter operating activities and the acquisition of the Panoma Properties.
Magnum recorded an operating profit of $2,871,000 for the 1996 year versus
an operating loss of $1,043,000 during the previous year. This $3,914,000
improvement in operations can be directly attributable to i) the operating
activities of the Panoma Properties acquired on June 28, 1996, ii) the
24
<PAGE>
operating activities associated with the acquisition of Hunter on December 22,
1995 and, iii) improved oil and gas commodity sale prices.
Magnum realized net income applicable to common shares of $103,000 (after
dividend payments on preferred stock of $406,000) for the year ended December
31, 1996, compared to a net loss applicable to common shares of $1,585,000
(after dividend payments on preferred stock of $617,000) for the preceding year,
a $1,688,000 improvement. The income per common share improved to $.01 from a
loss per common share of $.28 in the 1995 period, a $.29 per common share
improvement.
Total revenue for the year ended December 31, 1996 increased to $16,412,000
from $649,000 in 1995, a $15,763,000 improvement. Revenue from oil and gas sales
increased 1,561 percent during 1996 to $10,248,000 compared to $617,000 in 1995.
Quantities of oil and gas produced during 1996 totaled 191,203 barrels of oil at
a weighted average price of $20.46 per barrel and 2,674,993 mcf of gas at a
weighted average price of $2.37 per mcf. Quantities of oil and gas produced
during 1995 totaled 29,972 barrels of oil at a weighted average price of $15.60
per barrel and 102,056 mcf of gas at a weighted average price of $1.46 per mcf.
The quantity increases are primarily the result of the Hunter and Panoma
acquisitions. Oil and gas production expenses were $4,390,000 in 1996 and
$268,000 in 1995, an increase of $4,122,000. On an equivalent barrel basis, the
production expense increased to $6.89 per barrel in 1996 from $5.69 in 1995 a
21% increase due to start up costs from the Panoma acquisition. The gross margin
from oil and gas production was $5,858,000 in 1996 versus $349,000 in 1995, a
$5,509,000 increase.
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 $5,768,000. The gross operating margin was $1,060,000,
after expenses of $4,708,000 for gas purchases and pipeline operating expenses.
Revenues from oil field services and commissions were $396,000 in the 1996
period as compared to $32,000 in the preceding year, a $364,000 increase.
Related costs of services of $267,000 and $26,000 for the 1996 and 1995 periods,
respectively, were recognized resulting in a gross margin of $129,000 in 1996
and $6,000 in 1995. The $123,000 increase was due principally to the Hunter
acquisition and the divestiture of certain properties in the fourth quarter
where operations were maintained.
Depreciation and depletion rose to $2,951,000 in 1996 from $421,000 in 1995
as a result of the Panoma properties acquisition, and the property base acquired
in the Business Combination with Hunter. General and administrative expenses
were $1,225,000 in 1996, $248,000 higher than 1995, due to additional overhead
required in a significantly expanded operating base.
Other income is higher in the 1996 period over the 1995 period, partly as a
result of a gain on the sale of marketable securities held for resale. Interest
expense rose to $2,394,000 in 1996 from $2,000 in 1995, primarily as a result of
commercial bank indebtedness assumed in the combination with Hunter and
additional borrowings under the Bank Credit Facility as a result of property
acquisitions, principally the Panoma Properties. A provision for deferred income
taxes of $312,000 was made in 1996 whereas none was charged in 1995. The Company
is not currently paying taxes due to utilization of net operating loss
carryforwards. Preferred dividends decreased to
25
<PAGE>
$406,000 in 1996 from $617,000 in 1995 as Magnum was successful in
completing the redemption and conversion of all of the Company's outstanding
Series C preferred stock in the third quarter of 1996.
Liquidity and Capital Resources.
The Company has three principal operating sources of operating cash: (i)
sales of oil and gas, (ii) revenues from gas gathering, processing, and
marketing, and (iii) revenues from petroleum management and consulting services.
The Company's cash flow is highly dependent upon oil and gas prices. Decreases
in the market price of oil and gas could result in reductions of both cash flow
and the Borrowing Base under the Company's Credit Facility, which would result
in decreased funds available, including funds for capital expenditures.
For 1996, the Company had a net increase in cash of $143,000. The Company's
operating activities provided net cash of $3,028,000, principally from operating
income before depreciation, depletion and deferred taxes, reduced by a net
increase in accounts receivable over accounts payable. The Company used
$41,738,000 in investing activities, principally for additions to property and
equipment of $41,471,000, as well as increases in deposits and other assets.
Financing activities provided $38,853,000 of cash, principally from the
aggregate proceeds from the issuance of long-term debt ($56,512,000) and
production payments ($750,000), less payments on these liabilities of
$27,459,000, as well as proceeds from the issuance of preferred stock of
$9,796,000. The Company also paid $295,000 to redeem a portion of the
outstanding Series C Preferred Stock and $438,000 to pay dividends on preferred
stock.
For 1995, the Company had a net decrease in cash of $101,000 as the
proceeds received from the sale of stock were principally used for oil and gas
acquisition and development activity and for the payment of dividends and
payables. The Company's operating activities used net cash of $849,000,
principally as a result of the net loss from operations and the payoff of a
substantial amount of accounts payable. Investing activities used net cash of
$2,007,000, largely from acquisition and development of oil and gas properties.
Financing activities accounted for net cash provided of $2,755,000, principally
from the proceeds received due to the issuance of preferred stock mentioned
above. Partially offsetting the proceeds from the stock issuances were advances
made to Magnum Hunter for acquisition costs and working capital of $1,034,000,
prior to their acquisition by the Company and the ultimate consolidation, and
the payment of preferred dividends of $583,000.
Capital Requirements.
For 1997, the Company is projecting exploration and development capital
expenditures of approximately $15 million, of which $3 million is for
exploration projects and $12 million is for development projects. A portion of
these expenditures are required over the next several years under the terms of
the agreement whereby the Company issued 1,000,000 shares of 1996 Series A
Convertible Preferred Stock. The balance of the funds required for these
projects will come from internally generated funds and from the Company's
revolving credit facility with the Banks.
In January 1997, the Company purchased for $2.5 million a fifty percent
(50%)ownership interest in the McLean Gas Plant, the natural gas liquids
processing facility connected to the Company's Panoma gas gathering
26
<PAGE>
system. Under the terms of the purchase agreement, the Company will receive
100% of the profits of the plant until it receives the $2.5 million purchase
price, at which point its interest will revert to fifty percent (50%). The
acquisition was funded through the Company's revolving credit facility with the
Banks.
In February 1997, the Company entered into a definitive agreement with
Burlington Resources, Inc. to acquire for $143.5 million, effective as of
January 1,1997, the Permian Basin Properties, consisting of 25 field areas in
West Texas and 21 field areas in Southeast New Mexico, and containing 3,100 oil
and gas completions. In addition to providing the Company with significant new
sources of earnings and operating cash flow, management of the Company believes
the Permian Basin Properties will provide significant opportunities for
exploitation of both oil and natural gas reserves through a combination of
enhanced recovery projects and new drilling projects.
In accordance with the definitive acquisition agreement, the Company made a
performance deposit of $10 million against the $143.5 million purchase price,
which will be further reduced to take into account production between January 1,
1997 and the closing date. The company plans to fund the Permian Basin
Acquisition with (i) monies borrowed under a new $150 million revolving credit
facility with its Banks (replacing the previous $100 million facility), for
which the Company has received a commitment letter, and (ii) approximately $50
million of convertible subordinated discount notes which the company plans to
offer in a private placement under Rule 144A. The Company's obligations under
the definitive acquisition agreement are not subject to a financing condition,
and it is likely the Company would default under the acquisition agreement if
the new credit facility, the sale of notes, or other adequate financing is not
arranged on a timely basis. The closing of the Permian Basin Acquisition, which
is expected to occur on or before April 30, 1997, is conditioned, in
Burlington's case, upon the approval of its board of directors and, in the
Company's case, upon the satisfactory results of its due diligence with respect
to accounting, title, and environmental matters.
Additional sources of capital the Company is currently considering include
(i) the issuance of high yield long-term debt, (ii) the sale of common stock in
a secondary public offering, and (iii) the call of the Company's publicly traded
warrants. It is likely that one or more of these sources will be utilized to
provide additional funds to the Company during the next year.
The Company has adopted a "controlled risk" approach to its exploratory
drilling activity by concentrating in specific regions in the United States
(primarily Oklahoma and Texas) where the Company's technical staff has
considerable experience and near proved producing properties where the potential
for significant reserve additions exist. To the extent feasible, the Company
reduces its exploration risk by diversifying through investment in multiple
prospects, by farming out (promoting out) interests to industry partners and by
utilizing 3-D seismic surveys and other advanced technologies.
27
<PAGE>
As the Company continues to increase its asset base, management plans to
expand the scope of its oil and gas activities, including the Company's possible
participation in foreign energy projects. The Company believes that Latin
America offers significantly greater hydrocarbon reserve potential with less
competition than in the United States. Therefore, as part of its long-term
growth strategy, the Company periodically reviews energy related investment
opportunities in Argentina, Bolivia, Guatemala, Mexico, Peru and other countries
in Latin America. Although no investment has been made to date, the Company is
exposed to some of these opportunities through relationships established by
Hunter Butcher.
In expanding into Mexico, Central America or South America, the Company
anticipates that any investment would be made in partnership with one or more
partners either locally or through parties with whom it had previously worked
within the United States. In pursuing international opportunities, the Company
intends to adhere to its philosophy of primarily focusing on proved producing
properties that it perceives to be reasonably priced and that afford the
opportunity for significant enhancement of value through appropriate
exploitation and development activities utilizing its management expertise.
Inflation and Changes in Prices.
During the past several years, the Company has experienced some inflation
in oil and gas prices with moderate increases in property acquisition and
development costs. During 1996, the Company received somewhat greater increases
in the commodity prices of the natural resources produced from its properties.
The results of operations and cash flow of the Company have been, and will
continue to be affected to a certain extent, by the volatility in oil and
natural gas prices. Should the Company experience a significant increase in oil
and natural gas prices that is sustained 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. Periodically,
the Company enters into futures, options, and swap contracts to reduce the
effects of fluctuations in crude oil and natural gas prices. Under the Credit
Facility with its Banks, the Company was required to hedge a certain percentage
of its expected natural gas production.
The Company's historic ability to produce or purchase gas at a somewhat
lower price than that at which it is resold has enabled the Company to profit
from the price differential, however, the marketing of gas for its own account
also exposes the Company to the attendant commodities risk. Hunter Gas
Gathering, Inc. currently sells the majority of its gas to Crosstex Energy
Services, a gas marketing firm located in Dallas, Texas formed in January 1997
when Comstock Natural Gas, Inc. sold its gas gathering, processing and marketing
operations. Although the Company sold approximately 91% of its gas to Comstock
in 1996 and has sold a comparable percentage to Crosstex to date in 1997, the
Company does not believe that any discontinuation of such sales arrangement
would be disruptive to the Company's gas marketing operations. The Company
typically obtains letters of credit guaranteeing the payment of the purchase
price for its gas.
28
<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
29
<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
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, net of income taxes 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 (658,394) (1) 1,821,638 4 (3)
Redemption of 28,116 shares of Series C preferred stock (28,116) (28) (294)
Issuance of 1996 Series A convertible preferred stock,
net of offering costs 1,000,000 1 9,786
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, net of income taxes
-----------------------------------------------------------------------------
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 (617)
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, net of income taxes 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
$82,500 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.
In February, 1997, the Company entered into a definitive agreement with
Burlington Resources, Inc. to acquire for $143.5 million, effective January 1,
1997, the Permian Basin Properties consisting of 25 field areas in West Texas
and 21 field areas in Southeast New Mexico containing 3,100 oil and gas
completions. Management of the Company believes the Permian Basin Properties
will provide significant opportunities for exploitation of both oil and natural
gas reserves through a combination of enhanced recovery projects and new
drilling prospects.
In accordance with the definitive acquisition agreement, the Company made a
performance deposit of $10 million against the $143.5 million purchase price,
which will be further reduced by approximately $8 million to take into account
production between January 1, 1997 and the closing date. The Company intends to
fund the Permian Basin Acquisition with (i) monies borrowed under a new $150
million credit facility with certain banks, for which the Company has received a
commitment letter, and (ii)approximately $50,000,000 in convertible subordinated
discount notes which the Company plans to offer to institutional investors under
Rule 144A. The new credit facility has a borrowing base of $145 million and
will replace the Company's $100 million existing credit facility. The Company's
obligation under the definitive acquisition agreement is not subject to a
financing condition, and it is likely the Company would default under the
acquisition agreement if the New Credit Facility or other adequate financing is
not arranged on a timely basis. The closing of the Permian Basin Acquisition,
which is expected to occur on or before April 30, 1997, is conditioned, in
Burlington's case, upon the approval of its board of directors and, in the
Company's case, upon the satisfactory results of its due diligence with respect
to accounting, title and environmental matters.
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>
EXHIBIT 1
SUBSIDIARIES OF REGISTRANT
Cushing Disposal, Inc.
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
SPL Gas Marketing, Inc.
F-29
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
(In thousands, except share and per share amounts)
<S> <C> <C>
-------------------------------------------
Net income (loss) $ 103 $ (1,585)
===========================================
Calculation of primary earnings (loss) per share:
Weighted average shares outstanding 12,485,893 5,606,669
Common stock equivalents (options & warrants) * *
-------------------------------------------
Total weighted average shares outstanding 12,485,893 5,606,669
===========================================
Net income (loss) per share $ .01 $ (.28)
===========================================
Calculation of fully diluted earnings (loss) per share:
Weighted average shares outstanding 12,485,893 5,606,609
Common stock equivalents (options & warrants) * *
------------------------------------------
Total weighted average shares outstanding 12,485,893 5,606,609
===========================================
Net income (loss) per share $ .01 $ (.28)
===========================================
</TABLE>
* Excluded as such amounts are anti-dilutive.
F-30
<PAGE>
Item 8.Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
The accounting firm of Hein + Associates, L.L.P. ("Hein") represented the
Company as its independent accountants during fiscal year 1995 and was dismissed
by the Company's Board of Directors on January 20, 1997. During the Company's
fiscal year ended December 31, 1995 and subsequent interim period, there were no
disagreements between the Company and Hein on any matter of accounting
principals or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Hein, who
would have caused it to make reference to the subject matter of the disagreement
in connection with its reports. Hein's reports on the financial statements of
the Company for the fiscal year ended December 31,1995 did not contain an
adverse opinion or disclaimer of opinion, and were not qualified or modified as
to uncertainty, audit scope or accounting principles. The Company's Board of
Directors appointed Deloitte & Touche LLP as the Company's independent
accountants for fiscal year 1996 on January 20,1997.
30
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth the directors, executive officers and other
significant employees of the Company, their ages, and all offices and positions
with the Company. Each director is elected for a period of one year and
thereafter serves until his successor is duly elected by the stockholders of the
Company and qualifies.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Title
Gary C. Evans..................................................... 39 Director, President, Chief
Executive Officer and Chief
Financial Officer
Matthew C. Lutz................................................... 63 Chairman of the Board and
Executive Vice
President of Exploration
and Business Development
David S. Krueger.................................................. 47 Vice President and Chief
Accounting Officer
Gerald W. Bolfing................................................. 66 Director
Oscar C. Lindemann................................................ 74 Director
Lloyd T. Rochford................................................. 50 Director
James E. Upfield.................................................. 75 Director
</TABLE>
Gary C. Evans has served as President, Chief Executive Officer and a director
of the Company since December 31, 1995 and Chairman and Chief Executive Officer
of all of the Hunter Subsidiaries since their formation or acquisition. He has
served as Chief Financial Officer since January 1997. He acted as Chairman,
President and Chief Executive Officer of Hunter from September 1992 until
October 1996. Previously, he was President and Chief Operating Officer of Hunter
from December 1990 to September 1992. From 1985 to 1990, Mr. Evans served as
President and CEO of Sunbelt Energy, Inc. and its subsidiaries prior to their
merger with Hunter Resources, Inc. From 1981 to 1985, Mr. Evans was associated
with the Mercantile Bank of Canada where he held various positions including
Vice President and Manager of the Energy Division of the Southwestern United
States. As an oil and gas lending officer of a $4.5 billion Canadian bank, he
initiated and managed an energy loan portfolio in excess of $125 million. From
1978 to 1981, he served in various capacities with National Bank of Commerce
(now BankTexas, N.A.) including Credit Manager and Credit Officer. Mr. Evans
serves on the Board of Directors of Karts International Incorporated an OTC
traded company, and Digital Communications Technology Corporation, an American
Stock Exchange listed company.
31
<PAGE>
Matthew C. Lutz was appointed Chairman of the Board on March 31, 1997 and
has served as Vice Chairman and Business Development Manager of the Company
since December 31, 1995. Mr. Lutz held similar positions with Hunter from
September 1993 until October 1996. From 1984 through 1992, Mr. Lutz was Senior
Vice President of Exploration and on the Board of Directors of Enserch
Exploration, Inc. with responsibility for such company's worldwide oil and gas
exploration and development program. Prior to joining Enserch, Mr. Lutz spent 28
years with Getty Oil Company. He advanced through several technical, supervisory
and managerial positions which gave him various responsibilities including
exploration, production, lease acquisition, administration and financial
planning.
David S. Krueger has served as Chief Accounting Officer of the Company since
January 1997. Mr. Krueger acted as Vice President--Finance of Cimarron Gas
Holding Co., a natural gas processing and natural gas liquids marketing company
in Tulsa, Oklahoma, from April 1992 until January 1997. He served as Vice
President/Controller of American Central Gas Companies, Inc., a natural gas
gathering, processing and marketing company from May 1988 until April 1992.
Prior to that time, Mr. Krueger served in various managerial capacities for
Southland Energy Corporation. Mr. Krueger, a certified public accountant,
graduated from the University of Arkansas with a B.S./B.A. degree in Business
Administration and earned his M.B.A. from the University of Tulsa. After
obtaining his undergraduate degree, Mr. Krueger was employed by Arthur Anderson
& Company for three years.
Gerald W. Bolfing has been a director of the Company since December 31,
1995. Mr. Bolfing was appointed a director of Hunter in August 1993. He is an
investor in the oil and gas business and a past officer of one of Hunter's
former subsidiaries. From 1962 to 1980, Mr. Bolfing was a partner in Bolfing
Food Stores of Waco, Texas. During this time, he also joined American Service
Company in Atlanta, Georgia from 1964 to 1965, and was active with Cable
Advertising Systems, Inc. of Kerrville, Texas from 1978 to 1981. He joined a
Hunter subsidiary's well servicing business in 1981 where he remained active
until its divestiture in 1992. Mr. Bolfing is on the board of directors of
Capital Marketing Corporation of Hurst, Texas.
Oscar C. Lindemann has served as a director of the Company since December
31, 1995. Mr. Lindemann was previously a director of Hunter, having been
appointed in November 1995. Mr. Lindemann has over 40 years experience in the
financial industry. Mr. Lindemann began his banking career with the Texas Bank
and Trust in Dallas, Texas in 1951. He served the bank until 1977 in many
capacities, including Chief Executive Officer and Chairman of the Board. Since
leaving Texas Bank and Trust, he has served as Vice Chairman of both the United
National Bank and the National Bank of Commerce, also in Dallas. Mr. Lindemann
has also served as a consultant to the banking industry. He retired from
commercial banking in 1987. Mr. Lindemann is a former President of the Texas
Bankers Association, and a former state representative to the American Bankers
Association. He was a Founding Director and Board Member of VISA, and a member
of the Reserve City Bankers Association. He has served as an instructor at both
the Southwestern Graduate
32
<PAGE>
School of Banking at S.M.U. and the School of Banking of the South at L.S.U. He
has also served as a faculty member for four years in the College of Business at
the University of Texas in Austin teaching various banking subjects.
Lloyd T. Rochford has served as a director since February 10,1989. He served
as Chairman of the Board from December 31, 1995 to March 31, 1997. He previously
served as President and a director of the Company from February 10, 1989 through
December 31, 1995. During a portion of this time and prior thereto, Mr. Rochford
managed his own private investments and operated a private company engaged in
the finding, producing and developing of oil and gas properties
James E. Upfield has served as a director of the Company since December 31,
1995. Mr. Upfield was appointed a director of Hunter in August 1992. Mr. Upfield
is Chairman of Temtex Industries, Inc. based in Dallas, Texas, a public company
traded on NASDAQ that produces consumer hard goods and building materials. In
1969, Mr. Upfield served on a select Presidential Committee serving postal
operations of the United States of America. He later accepted the responsibility
for the Dallas region, which encompassed Texas and Louisiana. From 1959 to 1967,
Mr. Upfield was President of Baifield Industries and its predecessor, a company
he founded in 1949 which merged with Baifield in 1963. Baifield was engaged in
prime government contracts for military systems and sub-systems in the
production of high strength- light weight metal products. In 1967, Baifield
Industries, Inc. was acquired by Automatic Sprinkler Corporation of America,
where Mr. Upfield remained until resigning in 1968 to pursue other business
opportunities.
Significant Officers of Subsidiaries.
Richard R. Frazier, age 50, has been President of Magnum Hunter Production,
Inc. and Chief Operating Officer of Magnum Hunter Production, Inc. and Gruy
Petroleum Management Company since January 1994. From 1977 to 1993, Mr. Frazier
was with Edisto Resources Corporation in Dallas, serving as Executive Vice
President Exploration and Production from 1983 to 1993, where he had overall
responsibility for its property acquisition, exploration, drilling, production,
gas marketing and engineering functions. He has been responsible for hiring
staff and coordinating efforts to evaluate, purchase and operate over $400
million in oil and gas properties, consisting of 2,200 wells in 19 states. From
1972 to 1976, Mr. Frazier served as District Production Superintendent and
Petroleum Engineer with HNG Oil Company (Now Enron Oil & Gas) in Midland, Texas.
Mr. Frazier's initial employment, from 1968 to 1971, was with Amerada Hess
Corporation as a petroleum engineer involved in numerous projects in Oklahoma
and Texas. Mr. Frazier graduated in 1970 from University of Tulsa with a
Bachelor of Science Degree in Petroleum Engineering. He is a registered
Professional Engineer in Texas and a member of Society of Petroleum Engineers
and many other professional organizations.
33
<PAGE>
R. Renn Rothrock, Jr., age 54, has been Executive Vice President of Hunter
and President of Gruy since January 1994 after serving as Executive Vice
President and Chief Operating Officer from May 1988. Mr. Rothrock was Executive
Vice President and General Manager of Gruy Engineering Corporation from 1986
until May 1988. Over his 28-year career, Mr. Rothrock has also served as a
reservoir engineer and operations research engineer at Skelly Oil Company and as
an area engineer at Amerada Petroleum Corporation; the Engineering Editor of
Petroleum Engineer International Magazine; Vice President and Energy Manager of
the First National Bank of Mobile, Alabama; Executive Vice President of Energy
Assets International Corporation, a public company that financed oil and gas
ventures; and the producer and operator of his own gas gathering and
transportation system. Mr. Rothrock earned a B.S. degree in Petroleum
Engineering and an M.S. degree in Engineering from the University of Oklahoma.
He is a member of the Society of Professional Engineers, the National Society of
Professional Engineers, the National Academy of Forensic Engineers and the Texas
Society of Professional Engineers. Mr. Rothrock is a registered Professional
Engineer in Texas and Oklahoma.
R. Douglas Cronk, age 50, has been Vice President of Operations for Magnum
Hunter Production, Inc. since May 1996, at which time the Company acquired from
Mr. Cronk 100% of the capital stock of Rampart Petroleum, Inc., based in
Abilene, Texas. Rampart has been an active operating and exploration company in
the North Central and West Texas region since 1983. Upon acquisition of Rampart,
the Company assumed Rampart's operations of over 50 producing oil and gas wells
in West Texas. Prior to the formation of Rampart, Mr. Cronk was an independent
oil and gas consultant in Houston, Texas for approximately two years. From 1974
to 1981, Mr. Cronk held various positions with subsidiaries of Deutsch
Corporation of Tulsa, Oklahoma, including Southland Drilling and Production
where he became Vice President of Drilling and Production. Mr. Cronk is a
Chemical Engineer graduate from the University of Tulsa.
Russell A. Tally, age 64, has been Executive Vice President and Drilling
Manager of Gruy Petroleum Management Company since January 1991. From 1959 to
1970, Mr. Talley worked for Diamond Shamrock Oil & Gas Company in Amarillo,
Texas, where he had substantial responsibilities in drilling, production and
workover programs. He supervised operations for more than 300 properties, and
drilled and completed wells in the predominant oil and gas basins of the
Mid-Continent region and portions of Canada. From 1970 to 1985, Mr. Talley
worked for Samedan Oil Corporation in Houston, Texas, where he became the
Manager of Offshore Drilling and Production. He managed all domestic and
Canadian drilling operations and supervised international operations in Ecuador,
the North Sea and Canada. From 1985 to 1987, Mr. Talley was Vice President of
Operations for Seagull Energy E & P, Inc. in Houston, where he was responsible
for all onshore and offshore drilling operations. In 1988 he established Texstar
Energy Operators, Inc., which was acquired by Gruy in 1991.
34
<PAGE>
Item 10. Executive Compensation.
The following table contains information with respect to all cash
compensation paid or accrued by the Company during the past three fiscal years
to the Chief Executive Officer of the Company. No other officer individually
received annual cash compensation exceeding $100,000 during the past three
years.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Name, Year Salary Bonus Other Number
Principal Annual Restricted Options LTP All Other
Position Compensation Stock SARs Payouts Compensation
Gary C. Evans 1996 $150,000 $100,000 - - - - -
President and CEO
Richard R. Frazier 1996 $ 98,350 $ 9,000 - - - - -
President of Magnum
Hunter Production, Inc.
L.T. Rochford 1995 $ 96,000 -0- $15,693 - - - -
CEO
</TABLE>
From April 1992 through the first half of 1995, the Company provided Mr.
Rochford with a vehicle and has paid the insurance thereon. Such payments
amounted to approximately $17,389, $18,421 and $8,870 for the fiscal years ended
December 31, 1993, 1994 and 1995, respectively. Pursuant to a Letter Agreement
dated July 21, 1995, Mr. Rochford continued to receive a salary of $8,000 per
month until December 31, 1996. Additionally Mr. Rochford was provided with the
same benefits as other employees including health insurance coverage, the
premiums of which totaled $6,823 for the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
(Individual Grants)
Number of Percent of total
Securities options/SARs Exercise of Expiration
Name Underlying granted to base price date
Options/SARs employees in ($/Sh)
granted (#) fiscal year
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C> <C>
Gary C. Evans 100,000 10% $4.50 12/5/2001
Richard R. Frazier 75,000 8% $4.50 12/5/2001
</TABLE>
35
<PAGE>
Compensation of Directors
The Company has six individuals who serve as directors, four of which
are independent. Two of these directors receive compensation with respect to
their services and in their capacities as executive officers of the Company and
no additional compensation has historically been paid for their services to the
Company as directors. The other four directors of the Company are not employees
of the Company and receive no compensation for their services as directors other
than as stated below. Two former directors received 5,000 shares of common
stock, valued at $3.50 per share, as compensation for their services in 1995.
For 1996, directors received $500 per meeting as compensation for their
services. Other than the compensation stated herein, the Company has not entered
into any arrangement, including consulting contracts, in consideration of the
director's service on the board.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Mr. Gary C. Evans and Mr. Matthew C. Lutz have employment agreements with
Magnum. Mr. Evans' agreement terminates December 31, 1997 and continues
thereafter on a year to year basis and provides for a 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 salary of $100,000 per
annum. Both agreements provide that the same benefits supplied to other Magnum
employees shall be available to the employee. The employment agreements also
contain, among other things, covenants by the employee that in the event of
termination, he will not associate with a business that competes with Magnum for
a period of one year after cessation of employment. Magnum also has key man life
insurance on Mr. Evans in the amount of $1,000,000.
The Company has not entered into any contracts or arrangements with any
named executive officer which would provide such individual with a form of
compensation resulting from such individual's resignation, retirement or any
other termination of such executive officer's employment with the Company or its
subsidiary, or from a change-in-control of the Company or a change in the named
executive officer's responsibilities following a change-in-control.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership
The following table sets forth certain information as of March 24,
1997, regarding the share ownership of the Company by (i) each person known to
the Company to be the beneficial owner of more than 5% of the outstanding shares
of Common Stock of the Company, (ii) each director, (iii) the Company's Chief
Executive Officer and the two other most highly compensated executive officers
of the Company, and (iv) all directors and executive officers of the Company, as
a group. None of the directors or executive officers named below owned, as of
March 24, 1997, any shares of the Company's Series A Preferred Stock or its 1996
Series A Convertible Preferred Stock. The business
36
<PAGE>
address of each officer and director listed below is: c/o Magnum Hunter
Resources, Inc., 600 East Las Colinas Blvd., Suite 1200, Irving, Texas 75039.
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned
Number of Percent
Name Shares of Class (4)
<S> <C> <C>
Directors and Executive Officers
Gary C. Evans............................................... 1,653,060 (1) 12.06
Matthew C. Lutz.............................................. 145,460 1.06
Gerald W. Bolfing........................................... 323,144 2.36
Oscar C. Lindemann.......................................... 1,185 *
James E. Upfield............................................ 29,268 *
Lloyd T. Rochford........................................... 541,939 (2) 4.0
Richard R. Frazier.......................................... 47, 745 *
All directors and executive officers as a group (8 persons) 2,741,801 19.78
Beneficial owners of 5 percent or more (excluding persons named
above)
TCW Group, Inc.
865 South Figueroa Street
Los Angeles, CA 90017......................................
1,702,127 (3) 11.05
- ------------------
*Less than 1%
</TABLE>
(1) Includes 17,024 shares held in the name of Jacquelyn Evelyn
Enterprises, Inc., a corporation whose sole shareholder is Mr. Evans' wife. Mr.
Evans disclaims any ownership in such securities other than those in which he
has an economic interest.
(2) Includes 150,000 shares subject to currently exercisable options
pursuant to a stock option agreement between Mr. Rochford and the Company.
(3) Consists of shares attributable to shares of Common Stock issuable upon
conversion of 1,000,000 shares of the Company's 1996 Series A Convertible
Preferred Stock.
(4) Percentage is calculated on the number of shares outstanding plus those
shares deemed outstanding under Rule 13d-3(d)(1) under the Exchange Act.
Item 12. Certain Relationships and Related Transactions.
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.
37
<PAGE>
<TABLE>
<CAPTION>
Item 13. Exhibits and Reports on Form 8-K.
Page
(a) Exhibits Numbering
Sequential
<S> <C> <C> <C>
3.1 & 4.1 Articles of Incorporation *
3.2 & 4.2 Articles of Amendment **
3.3 & 4.3 Articles of Amendment ***
3.4 & 4.4 By-Laws, as Amended ***
3.5 & 4.5 Certificate of Designation, of
1996 Series A Preferred Stock *******
10.1 Agreement and Plan of Reorganization and *****
Plan of Liquidation
10.2 Amendment to Agreement and Plan of ****
Reorganization and Plan of Liquidation
10.3 Employment Agreement for Gary C. Evans ****
10.4 Employment Agreement for Matthew C. Lutz ****
10.5 Credit Agreement dated June 28, 1996
among Wells Fargo Bank (Texas), N.A. et al
and the Company ****
10.6 Purchase and Sale Agreement, dated May 17, 1996
between Meridian Oil, Inc. and
ConMag Energy Corporation ******
10.7 Stock Purchase Agreement among Magnum
Petroleum, Inc. and Trust Company of the
West and TCW Asset Management Company,
in the capacities described herein, TCW Debt
and Royalty Fund IVB and TCW Debt and
Royalty Fund IVC, dated as of December 6, 1996 *******
16. Letter on change in certifying accountant ********
21. Subsidiaries of the Registrant ****
27. Financial Data Schedule
* Incorporated by reference to Registration Statement on Form S-18, File No. 33-30298-D.
Incorporated by reference to Form 10-K for the year ended December 31, 1990.
*** Incorporated by reference to Registration Statement on Form SB-2, File No. 33-66190.
**** Incorporated by reference to Registration Statement on Form S-4, File No. 333-2290.
***** Incorporated by reference to Form 8-K/A dated July 21, 1995, filed on October 3, 1995.
****** Incorporated by reference to Form 8-K dated June 28, 1996, filed July 12, 1996
******* Incorporated by reference to Form 8-K dated December 26, 1996, filed January 3, 1997
******** Incorporated by reference to Form 8-K/A dated January 20, 1997, filed February 5, 1997
(B) Reports on Form 8-K
None
38
</TABLE>
<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 PETROLEUM, INC.
By: /s/ Gary C. Evans April 1, 1997
Gary C. Evans, President & CEO
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Gary C. Evans Director, President April 1, 1997
Gary C. Evans Chief Executive Officer and
Chief Financial Officer
/s/ Matthew C. Lutz Chairman of the Board and April 1, 1997
Matthew C. Lutz Executive Vice President of
Exploration and Business
Development
/s/ David S. Krueger Vice President and April 1, 1997
David S. Krueger Chief Accounting Officer
/s/ Gerald W. Bolfing Director April 1, 1997
Gerald W. Bolfing
/s/ Oscar C. Lindemann Director April 1, 1997
Oscar C. Lindemann
/s/ Lloyd T. Rochford Director April 1, 1997
Lloyd T. Rochford
/s/ James E. Upfield Director April 1, 1997
James E. Upfield
39
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,687,000
<SECURITIES> 233,000
<RECEIVABLES> 5,207,000
<ALLOWANCES> (132,000)
<INVENTORY> 0
<CURRENT-ASSETS> 7,047,000
<PP&E> 78,517,000
<DEPRECIATION> (4,869,000)
<TOTAL-ASSETS> 83,072,000
<CURRENT-LIABILITIES> 4,768,000
<BONDS> 39,681,000
0
1,000
<COMMON> 29,000
<OTHER-SE> 35,156,000
<TOTAL-LIABILITY-AND-EQUITY> 83,072,000
<SALES> 16,016,000
<TOTAL-REVENUES> 16,412,000
<CGS> 9,098,000
<TOTAL-COSTS> 9,365,000
<OTHER-EXPENSES> 3,832,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,394,000
<INCOME-PRETAX> 821,000
<INCOME-TAX> 312,000
<INCOME-CONTINUING> 509,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 509,000
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
