<PAGE>
United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-Q
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the Quarterly Period Ended March 31, 1998
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Transition Period from .......... to ..........
Commission File Number..........1-12508
MAGNUM HUNTER RESOURCES, INC.
Exact name of registrant 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
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (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 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 May 1, 1998: 21,738,320.
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated financial statements of Magnum Hunter Resources, Inc.
("Magnum Hunter"or the "Company") follow "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operation".
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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, 1997. 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 (including third party) 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 fifty percent (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 one hundred percent
(100%) of the net profits of the plant before reverting to a fifty percent (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 $133.8 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 other banks 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 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 with a
different bank group.
On May 29, 1997, the Company placed, through a Rule 144A private placement
offering, $140 million in Senior Notes due 2007. The Notes have a 10% coupon,
with interest payable on June 1 and December 1, commencing on December 1, 1997.
There is no restriction on the ability of any consolidated or unconsolidated
subsidiary to transfer funds to the Company in the form of cash dividends, loans
or advances. Net proceeds from the sale of the Senior Notes were used to
completely repay the Company's outstanding senior subordinated term 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. At that time, the maximum commitment under the revolving credit
facility was reduced from $130 million to $75 million, with a borrowing base of
$60 million. The credit facility was amended as of September 30, 1997, to
increase the maximum commitment from $75 million to $125 million, increase the
borrowing base by $5 million to $65 million, and modify the interest expense
coverage ratio test.
2
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On December 18, 1997, the Company acquired a thirty percent (30%) membership
interest in NGTS, LLC., a newly formed wholly owned subsidiary of Natural Gas
Transmission Services, Inc., a natural gas marketing and trading company based
in Dallas, Texas. NGTS, LLC assumed all of the parent company's operations as of
December 1, 1997. The Company, as of December 1, 1997, dedicated substantially
all of its natural gas production to NGTS, LLC for marketing. The Company's
$4.35 million acquisition was completed for a combination of cash ($2.35
million) and promissory notes ($2.0 million) that have equity "put" features.
The Company may, at its option, retire the promissory note due December 1, 1998,
with common stock or cash.
The Company uses the full cost method of accounting for its investment in oil
and gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
into a "full cost pool" as incurred, and properties in the pool are depleted and
charged to operations using the unit-of-production method based on the ratio of
current production to total proved oil and gas reserves. To the extent that such
capitalized costs (net of accumulated depreciation, depletion and amortization)
less deferred taxes exceed the SEC PV-10 of estimated future net cash flow from
proved reserves of oil and gas, and the lower of cost or fair value of unproved
properties after income tax effects, such excess costs are charged to
operations. Once incurred, a write-down of oil and gas properties is not
reversible at a later date even if oil or gas prices increase. The Company's
capitalized costs exceeded the SEC PV-10 limitation utilizing prices in effect
at March 31, 1998. However, as allowed by SEC rules, no write-down for
impairment of oil and properties was required as a result of the increase in oil
and gas prices subsequent to March 31, 1998. While the Company has never been
required to write-down its asset base, significant downward revisions of
quantity estimates or declines in oil and gas prices, which are not offset by
other factors, could possibly result in write-down for impairment of oil and gas
properties.
Results of Operations for the Three Month Periods in 1998 and 1997
The results of operations for the three month period ended March 31, 1998,
included three months of operations for Permian Basin, while the corresponding
period in 1997 did not include any results of operations from these properties.
Unless otherwise stated, the increases in the 1998 interim period over the 1997
period were substantially the result of this acquisition.
Oil and natural gas sales were $10,555,000 in 1998, a 255% increase over 1997.
The Company sold 262,428 barrels of oil, a 470% increase, and 3,261,217 Mcf of
gas, a 235% increase, in 1998. The price received for oil was $14.44 per barrel
and for natural gas was $2.07 per Mcf in 1998, representing a 30% decrease in
oil price and an insignificant decrease in gas price compared to 1997. Oil and
natural gas production lifting costs increased 494% to $3,689,000 while
production taxes and other costs increased 116% to $1,486,000 in 1998 compared
to 1997. The gross operating margin from oil and natural gas production was
$5,380,000 in 1998, a 223% increase over 1997. On an equivalent unit basis, the
gross margin was $1.11 per Mcfe in 1998 versus $1.33 in 1997, a 17% decrease.
The sales price declined 8% to $2.18 per Mcfe while production lifting costs
were $0.76 per Mcfe in 1998, a 52% increase over 1997. Production taxes and
other costs, including overhead, were $0.31 per Mcfe in 1998, a 44% decrease
over 1997. The overall increase in the gross operating margin from 1997 to 1998
was principally due to a 287% increase in Mcfe sold, from 1,248,482 Mcfe to
4,835,785 Mcfe.
Gas gathering, marketing, and processing revenues were $2,005,000 in the 1998
period, a 48% decrease from 1997, principally as a result of a 27% decline in
natural gas and natural gas liquids prices. Costs from these activities were
$1,559,000 in 1998, a 47% decrease from 1997. Gross operating margin was
$446,000 in 1998 versus $932,000 in 1997, a 52% decrease. Gathering system
throughput decreased 1% to 20,899 Mcf per day in 1998 compared to 21,052 Mcf per
day in 1997 primarily due to the sale of one of the Company's gathering systems.
Natural gas plant processing throughput was 15,813 Mcf per day in 1998 versus
15,309 Mcf per day in 1997, a 3% increase. Gross operating margin from gathering
operations was $0.12 per Mcf of throughput in 1998 versus $0.44 per Mcf of
throughput in 1997, which included a gain of $0.34 per Mcf from the repayment of
a gas imbalance position. The gross operating margin from natural gas processing
was $0.17 per Mcf of throughput in 1998 versus $0.24 per Mcf of throughput in
1997.
3
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Revenues from oil field services and international sales were $193,000 in 1998,
a $3,278,000 decrease from 1997. Operating costs decreased to $99,000 in 1998
from $3,338,000 in 1997. The decline of both revenue and costs was due to a
decrease in business activity in Hunter Butcher International LLC. The gross
operating margin was $94,000 in 1998 versus $133,000 in 1997. Depreciation and
depletion expense increased 258% to $3,875,000 in 1998. General and
administrative expense was $750,000 in 1998, a 238% increase over 1997, due to
increased staffing and other costs. Operating profit decreased 9% to $1,295,000
in 1998 from 1997. The Company booked equity in loss of affiliate, net of income
tax, of $49,000 in 1998 versus none in 1997. Other income was $201,000 in 1998,
an increase of 179% due to dividends on marketable securities. Interest expense
increased 296% to $4,233,000 in 1998 from $1,068,000 in 1997, due primarily to
borrowing under the Company's 10% Senior Notes used to fund the acquisitions
previously mentioned. The Company provided for a deferred income tax benefit of
$1,040,000 on this loss in 1998 versus deferred income tax expense of $164,000
in 1997. The Company reported a net loss of $1,966,000, or $0.09 per common
share, in 1998 versus income of $31,000, or $0.00 per common share in 1997. The
Company accrued $219,000 in dividends on its preferred stock in 1998 and 1997.
Liquidity and Capital Resources
The Company has three principal operating sources of 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.
On April 30, 1997, the Company closed the acquisition of the Permian Basin
Properties for a net purchase price of approximately $133.8 million. At the same
time, the Company's previously existing $100.0 million credit facility was
replaced by two new credit facilities; (i) a $130.0 million Credit Facility and
(ii) a $60.0 million Term Loan Facility for a combined aggregate amount of
$190.0 million. The initial advances under these new facilities totaled $179.5
million, including funds to complete the Permian Basin Acquisition, to pay
principal and accrued interest remaining on the Company's previous credit
facility, and to provide cash for working capital purposes.
On May 29, 1997, the Company sold, through a Rule 144A private placement
offering, $140.0 million aggregate principal amount of Senior Notes. Net
proceeds from the sale of the Senior Notes were used to completely repay the
Company's Term Loan Facility in the principal amount of $60.0 million and to
repay a substantial portion of the indebtedness outstanding under the Credit
Facility. The Senior Notes are unsecured and bear interest at 10% per annum,
with interest payable on June 1 and December 1 commencing on December 1, 1997.
After paydown, the maximum commitment under the Credit Facility was reduced from
$130.0 million to $75.0 million, with a Borrowing Base of $60.0 million. The
Credit Facility was subsequently amended effective September 30, 1997 to
increase the maximum commitment from $75.0 million to $125.0 million, increase
the Borrowing Base by $5.0 million to $65.0 million and modify the Consolidated
EBITDA to Interest Expense ratio. With these adjustments, total long-term debt
under the Credit Facility at March 31, 1998 was $32.5 million, leaving $32.5
million available to draw at such time, prior to the next borrowing base
redetermination based upon financial results of the Company. At March 31, 1998,
the Company had $4.5 million in cash and cash equivalents and a deficit of $3.0
million in net working capital, in addition to the funds available under the
Credit Facility.
The Company called for redemption on November 14, 1997 its publicly traded
Warrants, each of which were exercisable for three shares of Common Stock at an
exercise price of $5.50 per share and redeemable at $0.02 per Warrant. As a
result, Warrants were exercised for an aggregate of 846,256 shares of Common
Stock and the remaining Warrants covering 7,920 shares of Common Stock were
redeemed. The Company received cash proceeds of approximately $4.7 million. In
addition, during June and October, 1997, 100,000 warrants and 50,000 warrants
were exercised at $4.125 per share and an average of $4.25 per share,
respectively, resulting in net proceeds to the Company of $625,000.
4
<PAGE>
On November 21, 1997, the Company sold 6,500,000 newly issued shares of its
common stock in a public offering, receiving net cash proceeds of approximately
$36.2 million, after deducting fees and expenses of the offering.
For the three months ended March 31, 1998, the Company had a net increase in
cash of $1.5 million. The Company's operating activities provided net cash of
$8.5 million, principally from operating income before depreciation, depletion,
and deferred taxes, a decrease in accounts receivable, and an increase in
accounts payable and accrued liabilities. The Company used $17.8 million in
investing activities, principally for additions to property and equipment of
$17.4 million. Financing activities provided $10.8 million of cash, principally
from the aggregate proceeds from the issuance of long-term debt of $13.5
million, less principal payments of $2.5 million on this debt. The Company also
paid $219,000 in dividends on preferred stock.
Capital Requirements
For fiscal 1998 the Company has budgeted approximately $36 million for
development and exploration activities, including $30 million budgeted for
development projects on the Permian Basin and Panoma Properties and $6.0 million
budgeted for exploration projects. In addition, with respect to the Permian
Basin Acquisition closed in April, 1997, the Company anticipates that it will
spend approximately $38.1 million over a four year period which began in 1997 on
a development program to enhance an existing waterflood project in the Westbrook
Field located in Mitchell County, Texas. The Company is not contractually
obligated to proceed with any of its budgeted capital expenditures. The amount
and allocation of future capital expenditures will depend on a number of factors
that are not entirely within the Company's control or ability to forecast,
including drilling results and changes in oil and gas prices. Due to the recent
decline in oil prices, the Company has begun to redirect some of its budgeted
funds from oil projects to natural gas or it may defer certain projects until a
later date. As a result, actual capital expenditures may vary significantly from
current expectations.
In connection with the acquisition of 30% of the outstanding common member's
equity of NGTS, the Company is obligated to pay a note of $2.0 million to
current and former shareholders of NGTS. This loan is due December 1, 1998 and
may be repaid, at the option of the Company, with cash or shares of its common
stock.
Based upon the Company's anticipated level of operations, the Company believes
that cash flow from operations together with the availability under the Credit
Facility (approximately $32.5 million as of March 31, 1998) will be adequate to
meet its anticipated requirements for working capital, capital expenditures and
scheduled interest payments for the foreseeable future.
In the normal course of business, the Company reviews opportunities for the
possible acquisition of oil and gas reserves and activities related thereto.
When potential acquisition opportunities are deemed consistent with the
Company's growth strategy, bids or offers in amounts and with terms acceptable
to the Company may be submitted. It is uncertain whether any such bids or offers
which may be submitted by the Company from time to time will be acceptable to
the sellers. In the event of a future significant acquisition, the Company may
require additional financing in connection therewith.
Inflation and Changes in Prices
During the past several years, the Company experienced some inflation in oil and
gas prices with moderate increases in property acquisition and development
costs. During 1997, the Company received significantly lower (13%) oil prices
and slightly lower (1%) gas prices for the natural resources produced from its
properties. For the three months ended March 31, 1998 compared to the same
period in 1997, oil prices were significantly lower (30%) while gas prices were
unchanged. 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
gas prices. Should the Company experience a significant increase in oil and gas
prices that is sustained over a prolonged period, it would expect that there
would also be a corresponding increase in oil and gas finding costs, lease
acquisition costs, and operating expenses. Periodically the Company enters into
5
<PAGE>
futures, options, and swap contracts to reduce the effects of significant
fluctuations in crude oil and gas prices. It is policy of the Company not to
enter into any such arrangements which exceed 75% of the Company's oil and gas
production during the next twelve months.
The Company markets oil and gas for its own account, which exposes the Company
to the attendant commodities risk. Substantially all of the Company's gas
production is currently sold to NGTS, LLC or end users either on the spot market
on a month-to-month basis at prevailing spot market prices or under long-term
contracts based on current spot market prices. The Company normally sells its
oil under month-to-month contracts with a number of different purchasers.
Hedging Activity
Periodically, the Company enters into futures, options, and swap contracts to
reduce the effects of fluctuations in crude oil and natural gas prices. As of
March 31, 1998, the Company had 34% of its oil production and 74% of its gas
production hedged through September, 1998. At March 31, 1998, the Company had
open contracts for oil price collars of 30,000 Bbls of oil per month (with cap
and floor prices of $23.25 and $18.50, respectively) through December 1998. At
March 31, 1998, the Company had open contracts for gas price swaps of 250,000
MMBtu of gas per month at $2.09 per MMBtu through September 1998, 250,000 MMBtu
of gas per month at $2.11 per MMBtu through September 1998, gas price collars of
100,000 MMBtu per month (with cap and floor prices of $2.25 and $2.05,
respectively) through September 1998, and gas price collars of 200,000 MMBtu per
month (with cap and floor prices of $2.65 and $2.25, respectively) from, May
1998 through October, 1998. In addition, a call was sold on 200,000 MMBtu per
month at $2.65 from May 1998 through October, 1998. The average Btu content of
gas produced by the Company exceeds 1,100 Btu per Mcf of gas. Therefore, each of
the above gas prices should be increased by 10% to reflect the actual gas price
per Mcf received by the Company. All of these swaps are against the El Paso
Permian Basin Index and these contracts expire monthly. The gains and 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 New York
Mercantile Exchange. The resulting transaction gains and losses are determined
monthly and are included in the period the hedged production or inventory is
sold. Net gains related to derivatives for the three month period ended March
31, 1997 were $724,000.
Year 2000 Modification
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company has identified no significant applications that will require
modifications to ensure Year 2000 Compliance. In addition, the Company plans to
communicate with others with whom it does significant business to determine
their Year 2000 Compliance readiness and the extent to which the Company is
vulnerable to any third party Year 2000 issues. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. However, there can be no guarantee that these
estimates will be achieved and actual results could differ from those plans.
Comprehensive Income
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," became effective as of the first quarter of 1998. This
statement requires companies to report and display comprehensive income and its
components (revenues, expenses, gains and losses). Comprehensive income includes
all changes in equity during a period except those resulting from investments by
owners and distributions to owners. For the Company, comprehensive income is the
same as net income reported in the statement of consolidated operations for the
period
6
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ended March 31, 1998, since there are no other items of comprehensive income for
that period. For the period ended March 31, 1997, the Company incurred a loss
from investments of $6,000, resulting in comprehensive income of $25,000.
Changes in Accounting Standards
SFAS 131, "Disclosures About Segments of an Enterprise and Related Information,"
will become effective in 1998. This statement establishes standards for defining
and reporting business segments. The Company is currently determining its
reportable segments. The adoption of SFAS 131 will not affect the Company's
consolidated financial position, results of operations or cash flows.
7
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MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1998 1997
--------------------------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents................................................... $ 4,485 $ 3,030
Accounts receivable
Trade, net of allowance of $166........................................ 10,040 12,850
Due from affiliates.................................................... 63 58
Notes receivable from affiliate............................................. 375 355
Current portion of long-term note receivable................................ 370 357
Prepaid and other........................................................... 656 1,299
-------------------------------
Total Current Assets.................................................. 15,989 17,949
-------------------------------
Property, Plant, and Equipment
Oil and gas properties, full cost method
Unproved.............................................................. 944 517
Proved................................................................ 244,189 227,389
Pipelines................................................................... 9,176 9,166
Other property.............................................................. 810 776
-------------------------------
Total Property, Plant and Equipment......................................... 255,119 237,848
Accumulated depreciation, depletion, and impairment.................... (20,455) (16,589)
-------------------------------
Net Property, Plant and Equipment........................................... 234,664 221,259
-------------------------------
Other Assets
Deposits and other assets................................................ 6,130 5,863
Investment in unconsolidated affiliate................................... 4,343 4,372
Long-term notes receivable, net of imputed interest...................... 1,612 1,626
-------------------------------
Total Assets $ 262,738 $ 251,069
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade payables and accrued liabilities................................... $ 12,248 $ 9,235
Dividends payable........................................................ 219 219
Suspended revenue payable................................................ 1,825 1,162
Current maturities of long-term debt..................................... 24 24
Notes payable............................................................ 4,699 4,699
-------------------------------
Total Current Liabilities......................................... 19,015 15,339
-------------------------------
Long-Term Liabilities
Long-term debt, less current maturities.................................. 172,514 161,519
Production payment liability............................................. 711 743
Deferred income taxes.................................................... 218 1,289
Minority interest........................................................ 40 39
Commitments and Contingencies
Stockholders' Equity
Preferred stock - $.001 par value; 10,000,000 shares authorized 216,000
designated as Series A; 80,000 issued and outstanding,
liquidation amount $0.......................................... - -
1,000,000 designated as 1996 Series A Convertible; 1,000,000
issued and outstanding, liquidation amount $10,000,000............... 1 1
Common Stock-$.002 par value; 50,000,000 shares authorized,
21,738,320 shares issued............................................. 43 43
Additional paid-in capital.................................................. 80,578 80,731
Accumulated deficit......................................................... (10,381) (8,634)
--------------------------------
70,241 72,141
Treasury stock (525,820 and 538,633 shares of common stock, respectively)... (1) (1)
--------------------------------
Total Stockholders' Equity.................................................. 70,240 72,140
--------------------------------
Total Liabilities and Stockholders' Equity.................................. $ 262,738 $ 251,069
================================
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>
For the Three Months Ended
March 31,
------------------------------
1998 1997
------------------------------
Operating Revenues:
Oil and gas sales........................................................ $ 10,555 $ 2,976
Gas gathering, marketing and processing.................................. 2,005 3,892
Oil field services and international sales............................... 193 3,471
------------------------------
Total Operating Revenue............................................ 12,753 10,339
------------------------------
Operating Costs and Expenses:
Oil and gas production lifting costs..................................... 3,689 621
Production taxes and other costs......................................... 1,486 689
Gas gathering, marketing and processing.................................. 1,559 2,960
Oil field services and international sales............................... 99 3,338
Depreciation and depletion............................................... 3,875 1,081
General and administrative............................................... 750 222
------------------------------
Total Operating Costs and Expenses................................. 11,458 8,911
------------------------------
Operating Profit ........................................................... 1,295 1,428
Equity (loss) of affiliate, net of income tax............................ (49) -
Other income............................................................. 201 72
Interest expense......................................................... (4,233) (1,068)
-------------------------------
Net Income (Loss) before income tax and minority interest................... (2,786) 432
Benefit (Provision) for deferred income tax.............................. 1,040 (164)
-------------------------------
Net Income (Loss) before minority interest.................................. (1,746) 268
Minority interest in subsidiary earnings................................. (1) (18)
-------------------------------
Net Income (Loss)........................................................... (1,747) 250
Dividends Applicable to Preferred Stock.................................. (219) (219)
-------------------------------
Income (Loss) Applicable to Common Shares................................... $ (1,966) $ 31
===============================
Income (Loss) per Common Share - Basic...................................... $ (0.09) $ 0.00
===============================
Income (Loss) per Common Share - Diluted.................................... $ (0.09) $ 0.00
===============================
Common Shares Used in Per Share Calculation
Basic.................................................................... 21,204,385 13,687,294
===============================
Diluted.................................................................. 21,204,385 14,215,868
===============================
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 STOCKHOLDERS' EQUITY
FOR THE PERIOD ENDED MARCH 31, 1998
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Additional
Preferred Stock Common Stock Treasury Stock Paid - In Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
------------------------------------------------------------------------------------------
Balance at December 31, 1997 1,080,000 $ 1 21,738,320 $ 43 (538,633) $ (1) $ 80,731 $ (8,634)
------------------------------------------------------------------------------------------
Issue shares to 401(k) plan 12,813 - 66
Dividends declared on preferred stock (219)
Net Income (Loss) (1,747)
------------------------------------------------------------------------------------------
Balance at March 31, 1998 1,080,000 $ 1 21,738,320 $ 43 (525,820) $ (1) $ 80,578 $ (10,381)
------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
10
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Three Months Ended
March 31,
---------------------------
1998 1997
---------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss)........................................................... $ (1,747) $ 250
Adjustments to reconcile net income (loss) to cash provided by
(used for) operating activities:
Depreciation and depletion.............................................. 3,875 1,081
Amortization of financing fees.......................................... 178 -
Deferred income taxes................................................... (1,040) 164
Equity in unconsolidated affiliate...................................... 49 -
Minority interest....................................................... 1 18
Other................................................................... 3 (119)
Changes in certain assets and liabilities
Accounts and notes receivable......................................... 2,805 (1,040)
Other current assets.................................................. 643 (16)
Accounts payable and accrued liabilities.............................. 3,742 405
----------------------------
Net Cash Provided By Operating Activities...................................... 8,509 743
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets................................................ 93 145
Additions to property and equipment......................................... (17,375) (5,460)
Increase in deposits and other assets....................................... (445) (10,249)
Loan made for promissory note receivable.................................... (35) (29)
Payments received on promissory note receivable............................. 14 133
Investment in unconsolidated affiliate...................................... (50) -
----------------------------
Net Cash Used In Investing Activities....................................... (17,798) (15,460)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt and production payment......... 13,500 14,000
Proceeds from short-term notes payable...................................... - 2,699
Payments of principal on long-term and production payment................... (2,537) (33)
Payment of fees on issuance of preferred stock.............................. - (505)
Dividends paid.............................................................. (219) (22)
----------------------------
Net Cash Provided By Financing Activities................................... 10,744 16,139
----------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................................... 1,455 1,422
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................... 3,030 1,687
----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................... $ 4,485 $ 3,109
============================
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
11
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March, 1998
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
The consolidated balance sheet as of March 31, 1998, the consolidated statements
of operations for the three months ended March 31, 1998 and 1997, the
consolidated statement of stockholder's equity for the period ended March 31,
1998 and the consolidated statements of cash flows for the three months ended
March 31, 1998 and 1997 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
changes in stockholder's equity 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, 1997 annual report on Form 10-KSB for the
Company. The results of operations for the three month period ended March 31,
1998, 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 subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Certain items have been
reclassified to conform with the current presentation.
The Company is a holding company with no significant assets or operations other
than its investments in its subsidiaries. The wholly-owned subsidiaries of the
Company are direct Guarantors of the Company's Section 144 A Notes and have
fully and unconditionally guaranteed the Notes on a joint and several basis. The
Guarantors comprise all of the direct and indirect subsidiaries of the Company
(other than inconsequential subsidiaries), and the Company has not presented
separate financial statements and other disclosures concerning each Guarantor
because management has determined that such information is not material to
investors. There is no restriction on the ability of consolidated or
unconsolidated subsidiaries to transfer funds to the Company in the form of cash
dividends, loans, or advances.
NOTE 2 - RECENT EVENTS
On January 9, 1998, the Company adopted a Shareholder Rights Plan, pursuant to
which Rights would be distributed as a dividend to its common stockholders at a
rate of one Right for each share of common stock held of record on January 20,
1998. Under the Rights Plan, the Rights will initially represent the right to
purchase one one-hundreth of a share of 1998 Series A Junior Participating
Preferred Stock for $35.00 per one one-hundreth of a share. The Rights will
become exercisable only if a person or a group acquires or commences a tender
offer for 15% or more of the Company's common stock. Until they become
exercisable, the Rights attached to and trade with the Company's common stock.
The Rights will expire January 20, 2008. The Rights may be redeemed by the
continuing members of the Company's Board of Directors at $.01 per Right prior
to the tenth day after a person or group has accumulated 15% or more of the
Company's common stock. The Rights will not be taxable to the Company's
shareholders. In the event that a person or group acquires 15% or more of the
Company's common stock, the Rights would then be modified to represent the right
to receive for the exercise price, Magnum Hunter common stock having a value
worth twice the exercise price. In the event that the Company is involved in a
merger or other business combination at any time after a person or group has
acquired 15% or more of Magnum Hunter's common stock, the Rights will be
modified so as to entitle a holder to buy a number of shares of common stock of
the acquiring entity having a market value of twice the exercise price of each
Right.
12
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March, 1998
(Unaudited)
On January 28, 1998, the Company announced, and later amended, a cash purchase
offer for Units of TEL Offshore Trust. Previous to the offer, the Company owned
161,500 Units representing 3.4% of the Units outstanding. As amended, the offer
was to purchase between forty percent (40%) and sixty percent (60%) of the
Trust's outstanding Units at $5.50 per Unit. On March 27, 1998, the Company
announced that 1,745,353 Units, or 40.1% of the total number of Units
outstanding, had been tendered.
NOTE 3 - COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," became effective as of the first quarter of 1998. This
statement requires companies to report and display comprehensive income and its
components (revenues, expenses, gains and losses). Comprehensive income includes
all changes in equity during a period except those resulting from investments by
owners and distributions to owners. For the Company, comprehensive income is the
same as net income reported in the statement of consolidated operations for the
period ended March 31, 1998, since there are no other items of comprehensive
income for that period. For the period ended March 31, 1997, the Company
incurred a loss from investments of $6,000, resulting in comprehensive income of
$25,000.
13
<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Number Description of Exhibit
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.
333-2290)
4.9 Form of 10% Senior Note due 2007 (Incorporated by reference to
Registration Statement on Form S-4, File No. 333-2290)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. 333-2290)
10.2 First Amendment to 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. 333-2290)
10.3 Second Amendment to Amended and Restated Credit Agreement, dated
April 30, 1997, between Magnum Hunter Resources, Inc. and Bankers
Trust Company, et al. (Incorporated by reference to Form 10-KSB for
the period ended December 31, 1997)
10.4 Third Amendment to Amended and Restated Credit Agreement, dated
April 30, 1997, between Magnum Hunter Resources, Inc. and Bankers
Trust Company, et al. (Incorporated by reference to Form 10-KSB for
the period ended December 31, 1997)
10.5 Employment Agreement for Gary C. Evans (Incorporated by reference
to Registration Statement on Form S-4, File No. 333-2290)
10.6 Employment Agreement for Matthew C. Lutz (Incorporated by reference
to Registration Statement on Form S-4, File No. 333-2290)
10.7 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)
10.8 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. 333-2290)
10.9 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)
10.10 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)
10.11 Purchase and Sale Agreement between Magnum Hunter Resources, Inc. ,
NGTS, et al., dated December 17, 1997 (Incorporated by reference to
Form 8-K, dated December 17, 1997, filed December 29, 1997)
27 Financial Data Schedule
(B) Reports on Form 8-K. None
14
<PAGE>
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 May 15, 1998
--------------------------------------
Gary C. Evans
President and Chief Executive Officer
By /s/ Chris Tong May 15, 1998
--------------------------------------
Sr. Vice President and
Chief Financial Officer
By /s/ David S. Krueger May 15, 1998
---------------------------------------
David S. Krueger
Vice President and
Chief Accounting Officer
By /s/ Morgan F. Johnston May 15, 1998
---------------------------------------
Morgan F. Johnston
Vice President, General Counsel and
Secretary
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 4,485
<SECURITIES> 0
<RECEIVABLES> 11,014
<ALLOWANCES> (166)
<INVENTORY> 0
<CURRENT-ASSETS> 15,989
<PP&E> 255,119
<DEPRECIATION> (20,455)
<TOTAL-ASSETS> 262,738
<CURRENT-LIABILITIES> 19,015
<BONDS> 173,225
0
1
<COMMON> 43
<OTHER-SE> 70,196
<TOTAL-LIABILITY-AND-EQUITY>262,738
<SALES> 12,560
<TOTAL-REVENUES> 12,753
<CGS> 6,734
<TOTAL-COSTS> 6,833
<OTHER-EXPENSES> 4,473
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,233
<INCOME-PRETAX> (2,786)
<INCOME-TAX> 1,040
<INCOME-CONTINUING> (1,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,966)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
