EXHIBIT 99.4
TRIAD HUNTER, LLC AND HUNTER DISPOSAL, LLC
CONDENSED COMBINED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009
TABLE OF CONTENTS
| | Page |
| | |
| PART I. FINANCIAL INFORMATION | F-1 |
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| Item 1. Financial Statements (Unaudited): | F-1 |
| | |
| Condensed Combined Balance Sheets as of June 30, 2010 and December 31, 2009 | F-1 |
| | |
| Condensed Combined Statements of Operations for the Six Months Ended June 30, 2010 and 2009 | F-2 |
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| Condensed Combined Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 | F-3 |
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| Notes to Condensed Combined Financial Statements | F-4 |
PART I. FINANCIAL INFORMATION
TRIAD HUNTER, LLC AND HUNTER DISPOSAL, LLC
CONDENSED COMBINED BALANCE SHEETS
(Unaudited)
| | | June 30, | | | December 31, | |
| | | 2010 | | | 2009 | |
| ASSETS | | | | | | |
| CURRENT ASSETS: | | | | | | |
| Cash and cash equivalents | | $ | - | | | $ | 2,915,026 | |
| Accounts receivable | | | 2,123,848 | | | | 2,462,917 | |
| Accounts receivable, intercompany | | | 8,820,250 | | | | 7,999,832 | |
| Prepaids and other current assets | | | 750,380 | | | | 1,086,654 | |
| Total current assets | | | 11,694,478 | | | | 14,464,429 | |
| | | | | | | | | |
| PROPERTY AND EQUIPMENT (Net of Accumulated Depletion and Depreciation): | | | | | | | | |
| Oil and natural gas properties, successful efforts accounting | | | | | | | | |
| Unproved | | | 22,398,528 | | | | 2,433,630 | |
| Proved properties | | | 48,250,293 | | | | 69,266,226 | |
| Equipment and other fixed assets | | | 3,969,720 | | | | 4,388,218 | |
| Total property and equipment, net | | | 74,618,541 | | | | 76,088,074 | |
| | | | | | | | | |
| OTHERS ASSETS: | | | | | | | | |
| Other assets | | | 434,505 | | | | 385,711 | |
| Deferred financing costs, net | | | - | | | | 394,081 | |
| Total assets | | $ | 86,747,524 | | | $ | 91,332,295 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Accounts payable | | $ | 2,079,387 | | | $ | 1,513,518 | |
| Accrued liabilities | | | 464,036 | | | | 674,406 | |
| Revenue payable | | | 1,948,844 | | | | 1,782,494 | |
| Current portion of notes payable | | | 168,708 | | | | - | |
| Total current liabilities | | | 4,660,975 | | | | 3,970,418 | |
| | | | | | | | | |
| NONCURRENT LIABILITIES: | | | | | | | | |
| Liabilities subject to compromise | | | - | | | | 77,664,336 | |
| Notes payable, less current portion | | | 531,501 | | | | - | |
| Asset retirement obligation | | | 2,351,623 | | | | 161,270 | |
| Total liabilities | | | 7,544,099 | | | | 82,796,024 | |
| | | | | | | | | |
| SHAREHOLDERS’ EQUITY: | | | | | | | | |
| Common stock | | | - | | | | 9,150 | |
| Treasury stock | | | - | | | | (5,300,000 | ) |
| Additional paid in capital | | | - | | | | 241,700 | |
| Contributed capital | | | 77,545,828 | | | | - | |
| Retained earnings | | | 1,657,597 | | | | 14,420,729 | |
| Total shareholders’ equity | | | 79,203,425 | | | | 9,371,579 | |
| Non-controlling interest | | | - | | | | 164,692 | |
| Total shareholders’ equity | | | 79,203,425 | | | | 9,536,271 | |
| Total liabilities and shareholders' equity | | $ | 86,747,524 | | | $ | 91,332,295 | |
The accompanying notes are an integral part of these unaudited combined financial statements
TRIAD HUNTER, LLC AND HUNTER DISPOSAL, LLC
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
| | | Six Months Ended | |
| | | June 30, | |
| | | 2010 | | | 2009 | |
| REVENUE: | | | | | | |
| Oil and gas sales | | $ | 9,534,176 | | | $ | 8,322,987 | |
| Field operations and other | | | 735,348 | | | | 1,017,659 | |
| Total revenue | | | 10,269,524 | | | | 9,340,646 | |
| | | | | | | | | |
| EXPENSES: | | | | | | | | |
| Lease operating expenses | | | 3,106,408 | | | | 2,341,025 | |
| Severance taxes and marketing | | | 783,504 | | | | 687,952 | |
| Exploration | | | 320,206 | | | | 130,903 | |
| Field operations | | | 649,090 | | | | 1,637,080 | |
| Depreciation, depletion and accretion | | | 2,283,177 | | | | 2,148,827 | |
| General and administrative | | | 1,008,719 | | | | 1,107,459 | |
| Total expenses | | | 8,151,104 | | | | 8,053,246 | |
| | | | | | | | | |
| INCOME FROM OPERATIONS | | | 2,118,420 | | | | 1,287,400 | |
| | | | | | | | | |
| OTHER INCOME AND (EXPENSE): | | | | | | | | |
| Interest income | | | 4,263 | | | | 12,391 | |
| Interest expense | | | (19,233 | ) | | | (1,542,382 | ) |
| Gain on derivative contracts | | | - | | | | 599,577 | |
| | | | | | | | | |
| Income before reorganization items | | | 2,103,450 | | | | 356,986 | |
| | | | | | | | | |
| Bankruptcy fees | | | (333,881 | ) | | | (1,843,463 | ) |
| | | | | | | | | |
| Net income (loss) | | $ | 1,769,569 | | | $ | (1,486,477 | ) |
The accompanying notes are an integral part of these unaudited combined financial statements
TRIAD HUNTER, LLC AND HUNTER DISPOSAL, LLC
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Six Months Ended June 30, | |
| | | 2010 | | | 2009 | |
| Cash flows from operating activities | | | | | | |
| Net income (loss) | | $ | 1,769,569 | | | $ | (1,486,477 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
| Depletion, depreciation, and accretion | | | 2,283,117 | | | | 2,148,827 | |
| Exploratory cost | | | | | | | - | |
| Amortization of deferred financing costs included in interest expense | | | 42,577 | | | | 253,646 | |
| Accretion expense | | | | | | | - | |
| (Gain) loss on sale of assets | | | (43,704 | ) | | | 19,865 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (7,402,069 | ) | | | (687,854 | ) |
| Notes receivable | | | - | | | | (12,227 | ) |
| Inventory | | | 55,341 | | | | 99,106 | |
| Prepaid expenses | | | 280,933 | | | | 121,247 | |
| Accounts payable | | | 565,869 | | | | 77,050 | |
| Revenue payable | | | 166,350 | | | | (115,066 | ) |
| Accrued liabilities | | | (210,370 | ) | | | (278,633 | ) |
| Net cash provided by operating activities | | | (2,492,387 | ) | | | 139,484 | |
| | | | | | | | | |
| Cash flows from investing activities | | | | | | | | |
| Capital expenditures | | | (696,609 | ) | | | (253,500 | ) |
| Change in deposits | | | 302,710 | | | | (34,307 | ) |
| Proceeds from sale of assets | | | 45,517 | | | | 210,032 | |
| Net cash used in investing activities | | | (348,382 | ) | | | (77,775 | ) |
| | | | | | | | | |
| Cash flows from financing activities | | | | | | | | |
| Proceeds from loan | | | 139,362 | | | | 1,090,000 | |
| Principal payment on loan | | | (213,619 | ) | | | (410,017 | ) |
| Net cash (used in) provided by financing activities | | | (74,257 | ) | | | 679,983 | |
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (2,915,026 | ) | | | 741,692 | |
| Cash and cash equivalents, beginning of period | | | 2,915,026 | | | | 197,795 | |
| | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | - | | | $ | 939,487 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | | | |
| Cash paid for interest | | $ | 19,233 | | | $ | 2,186,221 | |
| MHR capital contribution | | $ | 77,545,828 | | | $ | - | |
The accompanying notes are an integral part of these unaudited combined financial statements
TRIAD HUNTER, LLC AND HUNTER DISPOSAL, LLC
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited condensed combined interim financial statements of Triad Hunter, LLC and Hunter Disposal, LLC (together the “The Companies”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2009. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results t o be expected for the full year.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The combined financial statements include the accounts of Triad Hunter, LLC and Hunter Disposal, LLC. All significant intercompany balances and transactions have been eliminated.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions and conditions.
Critical accounting policies are defined as those significant accounting policies that are most critical to an understanding of a company’s financial condition and results of operation. We consider an accounting estimate or judgment to be critical if (i) it requires assumptions to be made that were uncertain at the time the estimate was made, and (ii) changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.
The Companies recognized a gain on the realization of derivative contracts of $599,577 for the six months ended June 30, 2009. All derivative contracts were terminated in the six month period ending June 30, 2009 and no further derivative contracts were entered into in subsequent periods.
NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS
In February 2010, the FASB issued ASC 2010-09, Amendments to Certain Recognition and Disclosure Requirements, related to subsequent events under ASC 855, Subsequent Events. This guidance states that if an entity is an SEC filer, it is required to evaluate subsequent events for disclosure through the date that the financial statements are issued. We adopted this guidance as of February 2010 and have included the required disclosures in our condensed combined financial statements. See Note 8 – Subsequent Events for additional information.
TRIAD HUNTER, LLC AND HUNTER DISPOSAL, LLC
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 — ACQUISITION
On February 12, 2010 all of the assets of Triad Energy, Triad Resources, and Triad Oil and Gas were acquired by Magnum Hunter Resources Corporation through bankruptcy proceedings and are now held by Magnum Hunter Resources Corporation’s wholly owned subsidiaries, Triad Hunter, LLC, Hunter Disposal, LLC, and Eureka Hunter Pipeline, LLC (Eureka Hunter, LLC is excluded from this report). Also see Note 7.
| Total consideration paid for Triad Hunter LLC and Hunter Disposal LLC was $78,320,294. | |
| | |
| Consideration was composed of the following. | |
| Contribution by Parent company | | $ | 77,545,828 | |
| Assumed debt | | | 774,466 | |
| Total consideration | | $ | 78,320,294 | |
| | | | | |
| The consideration was allocated as follows: | |
| | | | | |
| Cash | | $ | 3,581,586 | |
| Accounts Receivable | | | 3,872,395 | |
| Inventory | | | 684,656 | |
| Other Current Assets | | | 183,542 | |
| Oil and Gas Properties | | | 70,997,053 | |
| Water Disposal System | | | 988,000 | |
| Machinery and Equipment | | | 3,022,844 | |
| Other Long-Term Assets | | | 549,826 | |
| Liabilities Assumed | | | (3,298,816 | ) |
| Asset Retirement Liability | | | (2,260,792 | ) |
| Total | | $ | 78,320,294 | |
NOTE 5 — ASSET RETIREMENT OBLIGATIONS
The Company accounts for asset retirement obligations based on the guidance of ASC 410 which addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. ASC 410 requires that the fair value of a liability for an asset’s retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. We have included estimated future costs of abandonment and dismantlement in our successful efforts amortization base and amortize these costs as a component of our depreci ation, depletion, and accretion expense in the accompanying combined financial statements.
TRIAD HUNTER, LLC AND HUNTER DISPOSAL, LLC
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the Companys’ asset retirement obligation transactions during the six month period ended June 30, 2010:
| | | June 30, 2010 | |
| Asset retirement obligation at beginning of period | | $ | 161,270 | |
| | | | | |
| Liabilities incurred | | | - | |
| Liabilities settled | | | - | |
| Accretion expense | | | 92,353 | |
| Revisions in estimated liabilities | | | 2,098,000 | |
| Asset retirement obligation at end of period | | $ | 2,351,623 | |
NOTE 6 — NOTES PAYABLE
Notes payable at June 30, 2010 consisted of the following:
| | | June 30, 2010 | |
| Various equipment notes payable with maturity dates August 2010 to February 2015, interest rates of 0.00% - 9.24% | | $ | 700,209 | |
| Less: current portion | | | (168,708 | ) |
| Total Long-Term Debt | | $ | 531,501 | |
The following table presents the approximate annual maturities of note payable:
| 2010 | | $ | 134,903 | |
| 2011 | | | 159,116 | |
| 2012 | | | 126,354 | |
| 2013 | | | 89,937 | |
| Thereafter | | | 189,899 | |
| Total | | $ | 700,209 | |
NOTE 7 — SHAREHOLDERS’ EQUITY
On February 12, 2010, Magnum Hunter Resources Corporation purchased the assets of the Companies (See Note 4). As a result of the purchase, the Companies eliminated previously recorded common stock, treasury stock, additional paid in capital, non-controlling interest and retained earnings on its balance sheet. The Companies’ assets and liabilities were adjusted to the fair value of assets acquired and liabilities assumed by Magnum Hunter. These adjustments resulted in the recording of contributed capital from Magnum Hunter of $77,545,828.
NOTE 8 — SUBSEQUENT EVENTS
There were no subsequent events from June 30, 2010 through October 28, 2010.
