<PAGE>
United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-QSB
(Check one)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended June 30, 1997
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from .......... to ..........
Commission File Number..........1-12508
MAGNUM HUNTER RESOURCES, INC.
Exact name of small business issuer as specified in its charter
Nevada 87-0462881
State or other jurisdiction of IRS employer identification No.
incorporation or organization
600 East Las Colinas Blvd., Suite 1200, Irving, Texas 75039
Address of principal executive offices
(972) 401-0752
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of August 8, 1997: 13,708,098
Transitional Small Business Disclosure Format (Check one) Yes No X
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated financial statements of Magnum Hunter Resources, Inc.
("Magnum Hunter"or the "Company") required by Item 310(b) of Regulation S-B
follow "Item 2. Management's Discussion and Analysis or Plan of Operation".
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction with
Magnum Hunter's consolidated financial statements and the notes associated with
them contained in its Form 10-KSB for the year ended December 31, 1996. This
discussion should not be construed to imply that the results discussed herein
will necessarily continue into the future or that any conclusion reached herein
will necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment by management of Magnum
Hunter.
In June 1996, the Company acquired the Panoma Properties, which include
interests in 520 gas wells in the Texas Panhandle and Western Oklahoma and an
adjoining 427-mile gas gathering system, from Burlington Resources Inc. for
$34.7 million. The Company assumed operations of nearly all the wells and of the
gathering system and began planning for increased density development drilling
in the Panoma area.
In January 1997, the Company purchased a 50% interest in a natural gas
liquids processing plant, the McLean Gas Plant, which is connected to the Panoma
gas gathering system, for $2.5 million. The related operating agreement allows
the Company to recoup its investment out of 100% of the net profits of the plant
before reverting to a 50% interest after payout.
In February 1997, the Company entered into an agreement with Burlington
Resources Inc. to purchase certain oil and gas properties located in the Permian
Basin (hereinafter referred to as the "Permian Basin Properties"), consisting of
1,852 producing oil and natural gas wells and associated acreage located in 25
field areas of West Texas and in 22 field areas of Southeast New Mexico. On
April 30, 1997, the Company closed on the purchase for a net price of
approximately $133 million, including, but not limited to, certain adjustments
for a January 1, 1997 effective date.
On April 29, 1997, the Company received and accepted two new loan
commitments from Bankers Trust Company, as Agent, and Banque Paribas and First
Union National Bank of North Carolina for senior credit facilities for the
Company and several of its subsidiaries. The two new senior credit facilities
were structured as a $130 million revolving line of credit with a term of five
years and a $60 million one year senior subordinated bridge facility convertible
into a five year term loan. The new credit facilities were conditioned, among
other things, upon the closing of the Permian Basin Properties from Burlington,
which took place April 30, 1997. The revolving line of credit gives the
2
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Company the flexibility of choosing a range of either "LIBOR" or "Prime" based
interest rate options. This new credit facility replaced the previously existing
$100 million revolving credit facility.
On May 29, 1997, the Company placed, through a Rule 144A private placement
offering, $140 million in Senior Notes due 2007. Net proceeds from the sale of
the Senior Notes were used to completely repay the Company's outstanding bridge
loan facility in the principal amount of $60 million with the remaining proceeds
used to repay a substantial portion of the Company's outstanding revolving
credit facility. The Notes have a 10% coupon, with interest payable on June 1
and December 1, commencing on December 1, 1997.
Results of Operations for the Six Month Periods in 1997 and 1996
As discussed above, the Company acquired the Panoma Properties in June
1996, the McLean Gas Plant in January 1997, and the Permian Basin Properties in
April 1997. As such, the results of operations for the six month period ended
June 30, 1997, included six months of operations for Panoma and McLean and two
months for Permian Basin, while the corresponding period in 1996 contained no
results related to these properties. Unless otherwise stated, the increases in
the 1997 interim period over the 1996 period were a result of these
acquisitions.
Oil and natural gas sales were $11,791,000 in 1997, a 318% increase over
1996. The Company sold 239,752 barrels of oil, a 167% increase, and 3,332,349
Mcf of gas, a 583% increase, in 1997. The price received for oil was $18.33 per
barrel and for gas was $2.22 per Mcf in 1997, representing a 5% decrease in oil
price and a 1% decrease in gas price compared to 1996. Oil and natural gas
production costs increased 321% to $4,740,000 in 1997 over 1996. The gross
operating margin from oil and natural gas production was $7,051,000 in 1997, a
316% increase over 1996. On an equivalent unit basis, the gross margin was $1.48
per Mcfe in 1997 versus $1.65 in 1996, a 10% decrease. The sales price declined
10% to $2.47 per Mcfe while production costs also declined 10% to $0.99 per Mcfe
from 1996 to 1997. These production costs are inclusive of gathering and
overhead charges of $0.19 per Mcfe. The sales price decline was caused by lower
oil and gas prices in 1997, while the lower unit production costs were the
result of lower Permian Basin Properties unit costs, principally gas gathering
fees, compared to the unit costs of the Company's other properties. The overall
increase in the gross operating margin from 1996 to 1997 was principally due to
the 364% increase in Mcfe sold, from 1,027,182 Mcfe to 4,770,861 Mcfe.
Gas gathering, marketing, and processing revenues were $5,283,000 in the
1997 period, a 246% increase over 1996, principally as a result of the
acquisition of the Panoma Gas Gathering System and the McLean Gas Plant. Costs
from these activities were $3,938,000 in 1997, a 200% increase over 1996. Gross
operating margin was $1,345,000 in 1997 versus $214,000 in 1996, a 529%
increase. As a result of the acquisition of the Panoma System, gathering system
throughput increased 385% to 21,057 Mcf per day in 1997 compared with 4,344 Mcf
per day in 1996. Due to the McLean Plant acquisition, natural gas plant
processing throughput was 15,303 Mcf per day in 1997 versus none reported in
1996. Gross operating margin from gathering operations was $787,000, or $0.22
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per Mcf of throughput, in 1997 versus $214,000, or $0.27 per Mcf in 1996. The
gross operating margin from natural gas processing was $558,000, or $0.22 per
Mcf of throughput versus none reported in 1996.
Revenues from oil field services and international sales was $3,606,000 in
1997, a $3,405,000 increase over 1996, principally due to an increase in sales
of Hunter Butcher International, L.L.C. in the amount of $3,398,000. Operating
costs increased 947% to $3,424,000 in 1997 from 1996, also principally due to
Hunter Butcher in the amount of $3,338,000. The gross operating margin from
these activities was $182,000 in 1997 versus a loss of $126,000 in the 1996
period. The margin from Hunter Butcher operations was $60,000 in 1997 versus
$32,000 in 1996. Oil field services produced an operating margin of $122,000 in
1997 versus a loss of $158,000 in 1996.
Depreciation and depletion expense increased 311% to $4,460,000 in 1997 due
to the acquisitions. Depletion expense on oil and gas production was $4,080,000,
or $0.86 per Mcfe, in 1997 versus $975,000, or $0.95 per Mcfe in 1996. General
and administrative expense was $651,000 in 1997, a 47% increase over 1996, due
to increased staffing and other costs as a result of the acquisitions.
Operating profit increased to $3,467,000 in 1997 from $256,000 in 1996, a
1,245% increase. Interest expense increased to $4,758,000 in 1997 from $499,000
in 1996, an increase of 854%, due to increased levels of borrowing under the
Company's revolving credit lines with banks, the 10% Senior Notes, and bridge
financing used to fund the acquisitions previously mentioned. The Company
incurred a net loss before income tax and minority interest of $1,136,000 in
1997, versus a $57,000 loss in 1996, principally due to interest expense on the
acquisitions exceeding operating income and due to the higher charge for
depreciation and depletion. The Company provided for a deferred income tax
benefit of $432,000 on this loss in 1997. After recording a $20,000 minority
interest in Hunter Butcher, the Company reported a net loss before extraordinary
item of $724,000, or $0.09 per common share, in 1997 versus a $57,000 loss, or
$0.03 per common share, in 1996.
The Company realized an extraordinary loss of $1,384,000 ($0.10 per common
share) as required under Accounting Principles Board ("APB") Statement No. 26
and Statement of Financial Standards ("SFAS") No. 4, from the early
extinguishment of bank debt. The early extinguishment was a result of the new
10% Senior Notes financing and amended revolving credit agreements with banks
arranged to facilitate the $133 million purchase of the Permian Basin Properties
from Burlington Resources Inc. The net loss, after the extraordinary charge,
applicable to common shareholders was $2,546,000 ($0.19 per share) in 1997
compared to a loss of $397,000 ($0.03 per share) in 1996. The Company accrued
$436,000 in dividends on its preferred stock in 1997 versus $340,000 in 1996.
4
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Results of Operations for the Three Month Periods in 1997 and 1996
The results of operations for the three month period ended June 30, 1997,
included three months of operations for Panoma and McLean and two months for
Permian Basin, while the corresponding period in 1996 contained no results
related to these properties. Unless otherwise stated, the increases in the 1997
interim period over the 1996 period were a result of these acquisitions.
Oil and natural gas sales were $8,528,000 in 1997, a 492% increase over
1996. The Company sold 193,735 barrels of oil, a 326% increase, and 2,359,969
Mcf of gas, a 915% increase, in 1997. The price received for oil was $17.76 per
barrel and for gas was $2.16 per Mcf in 1997, representing an 11% decrease in
oil price and a 5% decrease in gas price in 1997 compared to 1996. Oil and
natural gas production costs increased 460% to $3,143,000 in 1997 over 1996. The
gross operating margin from oil and natural gas production was $5,385,000 in
1997, a 512% increase over 1996. On an equivalent unit basis, the gross margin
was $1.53 per Mcfe in 1997 versus $1.74 in 1996, a 12% decrease. The sales price
declined 15% to $2.42 per Mcfe while production costs also declined 20% to $0.89
per Mcfe from 1996 to 1997. These production costs are inclusive of gathering
and overhead charges of $0.09 per Mcfe. The sales price decline was caused by
lower oil and gas prices in 1997, while the lower unit production costs were the
result of lower Permian Basin Properties unit costs, principally gas gathering
fees, compared to the unit costs of the Company's other properties. The overall
increase in the gross operating margin from 1996 to 1997 was principally due to
the 597% increase in Mcfe sold, from 505,136 Mcfe to 3,522,379 Mcfe.
Gas gathering, marketing, and processing revenues were $1,391,000 in the
1997 period, an 80% increase over 1996, principally as a result of the
acquisition of the Panoma Gas Gathering System and the McLean Gas Plant. Costs
from these activities were $978,000 in 1997, a 46% increase over 1996. Gross
operating margin was $413,000 in 1997 versus $101,000 in 1996, a 309% increase.
As a result of the acquisition of the Panoma System, gathering system throughput
increased 338% to 18,796 Mcf per day in 1997 compared with 4,287 Mcf per day in
1996. Due to the McLean Plant acquisition, natural gas plant processing
throughput was 12,614 Mcf per day in 1997 versus none reported in 1996. Gross
operating margin from gathering operations was $179,414, or $0.10 per Mcf of
throughput, in 1997 versus $101,000, or $0.26 per Mcf in 1996. The gross
operating margin from natural gas processing was $234,000, or $0.20 per Mcf of
throughput versus none reported in 1996.
Revenues from oil field services and international sales was $135,000 in
1997, a 36% increase over 1996, principally due to increased operator fees on
oil and gas properties. Operating costs decreased 46% to $86,000 in 1997 from
1996 due to an increased allocation of operating costs to oil and gas production
costs. The gross operating margin from these activities was $49,000 in 1997
versus a loss of $61,000 in the 1996 period.
Depreciation and depletion expense increased 485% to $3,379,000 in 1997 due
to the acquisitions. Depletion expense on oil and gas production was $3,184,000,
or $0.90 per Mcfe, in 1997 versus $505,000, or $1.00 per Mcfe in 1996. General
and administrative expense was $429,000 in 1997, a 94% increase over 1996, due
to increased staffing and other costs as a result of the acquisitions.
Operating profit increased to $2,039,000 in 1997 from $121,000 in 1996, a
1,585% increase. Interest
5
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expense increased to $3,690,000 in 1997 from $245,000 in 1996, an increase
of 1,406%, due to increased levels of borrowing under the Company's revolving
credit lines with banks, the 10% Senior Notes, and bridge financing used to fund
the acquisitions previously mentioned. The Company incurred a net loss before
income tax and minority interest of $1,568,000 in 1997, versus income of $36,000
in 1996, principally due to interest expense on the acquisitions exceeding
operating income , inclusive of depreciation and depletion in the total amount
of $3,379,000. The Company provided for a deferred income tax benefit of
$596,000 on this loss in 1997. The Company reported a net loss before
extraordinary item of $974,000, or $0.09 per common share, in 1997 versus income
of $36,000 in 1996.
The Company realized an extraordinary loss of $1,384,000 ($0.10 per common
share) as required under Accounting Principles Board ("APB") Statement No. 26
and Statement of Financial Standards ("SFAS") No. 4, from the early
extinguishment of bank debt. The early extinguishment was a result of the new
10% Senior Notes financing and amended revolving credit agreements with banks
arranged to facilitate the $133 million purchase of the Permian Basin Properties
from Burlington Resources Inc. The net loss, after the extraordinary charge,
applicable to common shareholders was $2,577,000 ($0.19 per share) in 1997
compared to a loss of $132,000 ($0.03 per share) in 1996. The Company accrued
$219,000 in dividends on its preferred stock in 1997 versus $168,000 in 1996.
Liquidity and Capital Resources
On April 30, 1997, the Company closed on the acquisition of the Permian
Basin Properties for a net purchase price of approximately $133 million. At the
same time, the Company's existing $100 million revolving credit facility was
replaced by two new credit facilities, a revolving credit facility of $130
million and a bridge loan facility of $60 million, for a total of $190 million.
The initial advances under these new facilities totaled $179.5 million,
including funds to complete the Permian Basin Property acquisition, to pay
principal and accrued interest remaining on the $100 million revolving credit
facility, and to provide cash for working capital purposes.
On May 29, 1997, the Company sold, through a Rule 144A private placement
offering, $140 million in Senior Notes due 2007. Net proceeds from the sale of
the Senior Notes were used to completely repay the Company's outstanding bridge
loan facility in the principal amount of $60 million with the remaining proceeds
used to repay a substantial portion of the Company's outstanding revolving
credit facility. The Notes have a 10% coupon, with interest payable on June 1
and December 1, commencing on December 1, 1997. After paydown, the revolving
facility was reduced from $130 million to $75 million, with a current borrowing
base of $60 million. Total long-term debt under the revolving credit agreement
at June 30, 1997 was $47 million, leaving $13 million available to draw at this
time, prior to the next borrowing base redetermination occurring during the
third quarter. At June 30, 1997, the Company had $1.6 million in cash and cash
equivalents and $4.2 million in net working capital, in addition to the funds
available under the revolving line of credit.
For fiscal 1997, the Company is currently projecting that it will spend
approximately $20 million on development and exploration activities, of which $3
million is budgeted on exploration projects. In addition, with respect to the
recently closed Permian Basin Properties acquisition, the Company projects to
spend approximately $40 million in a development program to enhance an existing
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waterflood project in the Westbrook Field located in Mitchell County,
Texas. This capital expenditure is budgeted over a four year period beginning in
1997. Based upon the Company's anticipated level of operations, management
believes that cash flow from operations together with the availability under the
New Credit Facility will be adequate to meet its anticipated requirements for
working capital, capital expenditures and scheduled interest payments for the
foreseeable future. The Company may seek to increase it liquidity through the
sale of common equity and/or the exercise of its publicly traded warrants. A
depressed price for oil or natural gas would have a material adverse effect on
the Company's cash flow from operations and could cause the Company to alter its
planned capital expenditures.
Inflation and Changes in Prices
During the past several years, the Company has experienced some inflation
in oil and natural gas prices with moderate increases in property acquisition
and development costs. During 1996, the Company received somewhat higher
commodity prices for 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 increasing 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 effect of fluctuations
in crude oil and natural gas prices. It is policy of the Company not to enter
any such arrangements which exceed 50% of the Company's oil and natural gas
production during the next 12 months.
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MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
June 30,
1997
----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,571
Securities available for sale 360
Accounts receivable
Trade, net of allowance of $134,158 10,541
Due from affiliates 101
Notes receivable from affiliate 382
Current portion of long-term note receivable 129
Prepaid and other 384
----------------------
TOTAL CURRENT ASSETS 13,468
----------------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method
Unproved 460
Proved 208,871
Pipelines 9,824
Other property 571
---------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 219,726
Accumulated depreciation, depletion and impairment (9,329)
---------------------
NET PROPERTY, PLANT AND EQUIPMENT 210,397
---------------------
OTHER ASSETS
Deposits and other assets 6,140
Long-term notes receivable, net of imputed interest 1,665
---------------------
TOTAL ASSETS $ 231,670
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables and accrued liabilities $ 5,524
Dividends payable 219
Suspended revenue payable 834
Current maturities of long-term debt 22
Notes payable 2,699
---------------------
TOTAL CURRENT LIABILITIES 9,298
---------------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities 187,033
Production payment liability 831
Deferred income taxes 2,215
Minority interest 40
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 shares authorized,
216,000 designated as Series A; 80,000 shares issued and outstanding,
liquidation amount $0 -
1,000,000 shares designated as 1996 Series A Convertible;
1,000,000 issued and outstanding, liquidation amount $10,000,000 1
Common stock - $.002 par value; 50,000,000 shares authorized,
14,263,037 shares issued and outstanding 29
Additional paid-in capital 39,782
Accumulated deficit (7,688)
Unrealized gain (loss) on investments 130
--------------------
32,254
Treasury stock (654,939 shares of common stock) (1)
--------------------
TOTAL STOCKHOLDERS' EQUITY 32,253
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 231,670
====================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
8
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MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
1997 1996 1997 1996
--------------------------------------------------------------
Operating Revenues:
Oil and gas sales $ 8,528 $ 1,441 $ 11,791 $ 2,821
Gas gathering, marketing and processing 1,391 771 5,283 1,528
Oil field services and international sales 135 99 3,606 201
--------------------------------------------------------------
Total Operating Revenues 10,054 2,311 20,680 4,550
--------------------------------------------------------------
Operating Costs and Expenses
Oil and gas production 3,143 561 4,740 1,126
Gas gathering, marketing and processing 978 670 3,938 1,314
Oil field services and international sales 86 160 3,424 327
Depreciation and depletion 3,379 578 4,460 1,084
General and administrative 429 221 651 443
--------------------------------------------------------------
Total Operating Costs and Expenses 8,015 2,190 17,213 4,294
--------------------------------------------------------------
Operating Profit (Loss) 2,039 121 3,467 256
Other income 83 160 155 186
Interest expense (3,690) (245) (4,758) (499)
--------------------------------------------------------------
Net Income (Loss) before income tax and minority interest (1,568) 36 (1,136) (57)
Benefit (Provision) for deferred income tax 596 - 432 -
--------------------------------------------------------------
Net Income (Loss) before minority interest (972) 36 (704) (57)
Minority interest in subsidiary earnings (2) - (20) -
--------------------------------------------------------------
Net Income (Loss) Before Extraordinary Loss (974) 36 (724) (57)
Extraordinary Loss From Early Extinguishment of Debt (1,384) - (1,384) -
--------------------------------------------------------------
Net Income (Loss) (2,358) 36 (2,108) (57)
Dividends Applicable to Preferred Stock (219) (168) (438) (340)
--------------------------------------------------------------
Loss Applicable to Common Shares $ (2,577) $ (132) $ (2,546) $ (397)
==============================================================
Loss Before Extraordinary Loss per Common Share $ (0.09) $ (0.01) $ (0.09) $ (0.03)
Extraordinary Loss per Common Share $ (0.10) $ - $ (0.10) $ -
--------------------------------------------------------------
Loss per Common Share $ (0.19) $ (0.01) $ (0.19) $ (0.03)
==============================================================
Common Shares Used In Per Share Calculation 13,602,940 11,710,065 13,644,884 11,658,958
==============================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
9
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MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended
June 30,
----------------------------------
1997 1996
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,108) $ (57)
Adjustments to reconcile net income (loss) to cash provided by
(used for) operating activities:
Extraordinary loss 1,384 -
Depreciation and depletion 4,460 1,084
Amortization of financing fees 153 -
Deferred income taxes (432) -
Minority interest 20 -
(Gain) Loss on sale of assets - (143)
Other 51 -
Change in certain assets and liabilities
Accounts and notes receivables (6,029) (479)
Other current assets (332) (82)
Deposits and other assets - (401)
Accounts payable and accrued liabilities 1,634 351
----------------------------------
NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES $ (1,198) $ 273
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets 463 188
Additions to property and equipment (141,667) (37,301)
Loan made for promissory note receivable (145) -
Payments received on promissory note receivable 164 -
----------------------------------
NET CASH USED BY INVESTING ACTIVITIES (141,185) (37,113)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and production payment 335,000 54,313
Fees paid related to financing activities (7,881) -
Proceeds from short-term notes payable 2,699 -
Payments of principal on long-term debt and production payment (186,817) (15,890)
Payment of fees on issuance of preferred stock (505) -
Proceeds from issuance of common and preferred stock,
net of offering costs 12 -
Dividends paid (241) (349)
----------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 142,267 38,074
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (116) 1,234
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,687 1,544
---------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,571 $ 2,778
=================================
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
10
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MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
The consolidated balance sheet as of June 30, 1997, the consolidated
statements of operations for the six months ended June 30, 1997 and 1996, and
the consolidated statements of cash flows for the six month periods then ended
are unaudited. In the opinion of management, all necessary adjustments (which
include only normal recurring adjustments) have been made to present fairly the
financial position, results of operations and changes in cash flows for the
three month periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the December 31, 1996 annual report on Form 10-KSB for the
Company. The results of operations for the six month period ended June 30, 1997,
are not necessarily indicative of the operating results for the full year.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain items
have been reclassified to conform with the current presentation.
NOTE 2 - RECENT EVENTS
In February, 1997, the Company entered into a definitive agreement with
Burlington Resources, Inc. to acquire for $143.5 million, subject to certain
purchase price adjustments, effective January 1, 1997, the Permian Basin
Properties consisting of 25 field areas in West Texas and 22 field areas in
Southeast New Mexico containing 1,852 producing oil and natural gas wells. In
accordance with the definitive acquisition agreement, the Company made a
performance deposit of $10 million against the purchase price.
On April 30, 1997, the Company closed on the purchase of the Permian Basin
Properties for a net purchase price of approximately $133 million, including,
but not limited to, certain adjustments for a January 1, 1997 effective date.
The Company financed the acquisition of the Permian Basin Properties with a
new $130.0 million credit facility (the "New Credit Facility") and a senior
subordinated credit facility of $60.0 million (the "Bridge Loan Facility").
Borrowings of $119.5 million under the New Credit Facility and $60.0 million
under the Bridge Loan Facility were used to pay the $123.0 million balance of
the $133.0 million net purchase price for the Permian Basin Properties, to repay
the $53.7 million in outstanding indebtedness as of April 30, 1997 under the
Company's previous $100.0 million credit facility and to pay the costs
associated with the Permian Basin acquisition and the
11
<PAGE>
related financings.
On May 28, 1997, the Company completed an offering of $140,000,000
aggregate principal amount of its 10% Senior Notes due 2007 (the "Notes").
Interest on the Notes will accrue from their date of original issuance and will
be payable semi-annually in arrears on June 1 and December 1 of each year,
commencing on December 1, 1997, at the rate of 10% per annum. The Notes will be
redeemable, in whole or in part, at the option of the Company on or after June
1, 2002, at the redemption prices set forth herein, plus accrued interest to the
date of redemption. The Notes will be general unsecured obligations of the
Company and will rank pari passu with any unsubordinated indebtedness of the
Company and will rank senior in right of payment to all subordinated obligations
of the Company. The net proceeds from the offering were approximately $135.5
million after deducting estimated fees and expenses of $4.5 million payable by
the Company. The Company utilized the net proceeds to repay the $60.0 million of
outstanding indebtedness under the Bridge Loan Facility and to reduce
indebtedness under the New Credit Facility by approximately $75.5 million. As of
June 30, 1997, the Company had approximately $47 million of secured indebtedness
outstanding (excluding unused commitments of $13 million under the New Credit
Facility).
12
<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
3.1 & 4.1 Articles of Incorporation (Incorporated by reference to
Registration Statement on Form S-18, File No. 33-30298-D)
3.2 & 4.2 Articles of Amendment to Articles of Incorporation (Incorporated
by reference to Form 10-K for the year ended December 31, 1990)
3.3 & 4.3 Articles of Amendment to Articles of Incorporation (Incorporated
by reference to Registration Statement on Form SB-2, File No.33-
66190)
3.4 & 4.4 Articles of Amendment to Articles of Incorporation (Incorporated
by reference to Registration Statement on Form S-3, File No.333-
30453)
3.5 & 4.5 By-Laws, as Amended (Incorporated by reference to
Registration Statement on Form SB-2, File No. 33-66190)
3.6 & 4.6 Certificate of Designation of 1996 Series A Preferred Stock
(Incorporated by reference to Form 8-K dated December 26, 1996,
filed January 3, 1997)
3.7 & 4.7 Amendment to Certificate of Designations for 1996 Series A
Convertible Preferred Stock (Incorporated by reference to
Registration Statement on Form S-3, File No. 333-30453)
4.8 Indenture dated May 29, 1997 between Magnum Hunter Resources,
the subsidiary guarantors named therein and First Union National
Bank of North Carolina, as Trustee (Incorporated by reference to
Registration Statement on Form S-4, File No. 333-31149)
4.9 Form of 10% Senior Note due 2007 (Incorporated by reference to
Registration Statement on Form S-4, File No.333-31149)
10.1 Amended and Restated Credit Agreement, dated April 30, 1997,
between Magnum Hunter Resources, Inc. and Bankers Trust Company,
et al. (Incorporated by reference to Registration Statement on
Form S-4, File No. 333-31149)
10.2 First Amendment to Amended and Restated Credit Agreement, dated
April 30, 1997, between Magnum HunterResources, Inc. and Bankers
Trust Company, et al. (Incorporated by reference to Registration
Statement on Form S-4, File No. 333-31149)
10.3 Employment Agreement for Gary C. Evans(Incorporated by reference
to Registration Statement on Form S-4, File No. 333-2290)
10.4 Employment Agreement for Matthew C. Lutz (Incorporated by
reference to Registration Statement on Form S-4, File No. 333-
2290)
10.5 Stock Purchase Agreement among Magnum Hunter Resources, 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
(Incorporated by reference to Form 8-K dated December 26, 1996,
filed January 3, 1997)
10.6 Registration Rights Agreement,dated May 29, 1997, between Magnum
Hunter Resources, Inc. and Bankers
Trust Company, et al. (Incorporated by reference to Registration
Statement on Form S-4, File No. 333-31149)
10.7 Purchase and Sale Agreement, dated May 17, 1996 between Meridian
Oil, Inc. and ConMag Energy
Corporation (Incorporated by reference to Form 8-K, dated June
28, 1996, filed July 12, 1996)
10.8 Purchase and Sale Agreement, dated February 27, 1997 among
Burlington Resources Oil and Gas Company, Glacier Park Company
and Magnum Hunter Production, Inc. (Incorporated by reference to
Form 8-K, dated April 30, 1997, filed May 12, 1997)
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(b) Reports on Form 8-K
-------------------
Items Reported F/S Included Date of Event Date Filed
-------------- ------------ ------------- -----------
(1) Items 2 and 7 Historical Financial Statements April 30, 1997 May 14, 1997
of Permian Basin Properties
and Pro Forma financial information
(2) Item 5 N/A May 20, 1997 May 20, 1997
(2) Item 5 N/A May 30, 1997 May 30, 1997
</TABLE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAGNUM HUNTER RESOURCES, INC.
By /s/ Gary C. Evans August 14 , 1997
----------------------------
Gary C. Evans
President, Chief Executive Officer and
Chief Financial Officer
By /s/ David S. Krueger August 14 , 1997
---------------------------
David S. Krueger
Vice President and
Chief Accounting Officer
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Jun-30-1997
<CASH> 1,571
<SECURITIES> 360
<RECEIVABLES> 10,675
<ALLOWANCES> 134
<INVENTORY> 0
<CURRENT-ASSETS> 13,468
<PP&E> 219,726
<DEPRECIATION> (9,329)
<TOTAL-ASSETS> 231,670
<CURRENT-LIABILITIES> 9,298
<BONDS> 187,864
0
1
<COMMON> 29
<OTHER-SE> 32,223
<TOTAL-LIABILITY-AND-EQUITY>231,670
<SALES> 20,680
<TOTAL-REVENUES> 20,680
<CGS> 12,102
<TOTAL-COSTS> 17,213
<OTHER-EXPENSES> (155)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,758
<INCOME-PRETAX> (1,136)
<INCOME-TAX> (432)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (1,384)
<CHANGES> 0
<NET-INCOME> (2,108)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
