1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) of
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
Commission file number 1-1705
HUNTER RESOURCES, INC.
(Exact name of small business issuer as specified in its Charter)
Pennsylvania 87-0205057
(State of Incorporation) (I.R.S. Employer Identification No.)
600 East Las Colinas Blvd., Suite 1200, Irving, Texas 75039
(Address of principal executive offices) (Zip Code)
(214) 401-0752
(Registrant's telephone number, including area code)
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
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As of November 16, 1995, the Registrant had issued and outstanding
18,354,261 shares of Common Stock, Par Value $.10 Per Share.
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2
P A R T I
FINANCIAL INFORMATION
INDEX
Item 1. CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet - September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations - Three and Nine Months Ended
September 30, 1995 and September 30, 1994 . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows - Nine Months Ended
September 30, 1995 and September 30, 1994 . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 6 & 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . 6 & 7
2
3
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30,
1995
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ASSETS
------
CURRENT ASSETS:
Cash $ 87,000
Notes and accounts receivable, net: Trade (less reserve of $84,000) 852,000
Affiliates 79,000
Prepaids 91,000
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TOTAL CURRENT ASSETS 1,109,000
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PROPERTY AND EQUIPMENT:
Oil and gas properties, full cost method 8,780,000
Pipeline 674,000
Other property 218,000
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9,672,000
Accumulated depreciation, depletion, amortization and impairment (4,934,000)
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PROPERTY AND EQUIPMENT, NET 4,738,000
Excess of cost of investments in subsidiaries over net assets acquired, net 963,000
Accounts and notes receivable, net: Trade -
Affiliates 86,000
Deposits and other assets 4,000
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TOTAL ASSETS $ 6,900,000
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities: Trade $ 957,000
Affiliates 19,000
Suspended revenue interests 733,000
Notes payable, current 575,000
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TOTAL CURRENT LIABILITIES 2,284,000
Deferred income tax 7,000
Long-term debt, less current portion 1,166,000
Production Payment Liability (Non-Recourse) 305,000
Other Liabilities 85,000
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TOTAL LIABILITIES 3,847,000
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Commitments and contingencies -
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 1,000,000 shares authorized for each Class A,B,C;
90,000 shares (Class A, Series 1) issued and outstanding 90,000
Common stock, $.10 par value; 100,000,000 shares authorized;
18,354,261 shares issued and outstanding 1,835,000
Capital in excess of par value 1,816,000
Accumulated deficit (668,000)
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3,073,000
Less 22,000 shares of treasury stock at cost and Put stock (20,000)
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TOTAL STOCKHOLDERS' EQUITY 3,053,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,900,000
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The accompanying notes are an integral part of these statements
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4
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
REVENUES:
Gas gathering and marketing $ 42,000 $ 111,000 $ 144,000 $ 362,000
Oil and gas sales 270,000 156,000 708,000 450,000
Oil field services and commissions 151,000 349,000 409,000 950,000
Interest 6,000 7,000 20,000 20,000
Other 161,000 15,000 271,000 132,000
------------ ------------ ------------ ------------
TOTAL REVENUES 630,000 638,000 1,552,000 1,914,000
------------ ------------ ------------ ------------
EXPENSES:
Purchases of natural gas 24,000 63,000 83,000 213,000
Pipeline operations 14,000 (3,000) 41,000 58,000
Lease operating 130,000 99,000 329,000 299,000
Cost of services 112,000 182,000 299,000 526,000
Depreciation, depletion,
amortization and impairment 108,000 77,000 284,000 242,000
General and administrative 154,000 186,000 349,000 510,000
Interest 59,000 12,000 129,000 33,000
------------ ------------ ------------ ------------
TOTAL EXPENSES 601,000 616,000 1,514,000 1,881,000
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 29,000 22,000 38,000 33,000
FEDERAL INCOME TAX - - - -
------------ ------------ ------------ ------------
NET INCOME $ 29,000 $ 22,000 $ 38,000 $ 33,000
============ ============ ============ ============
NET INCOME PER SHARE
(primary and fully diluted):
*Less than $.01 per share * * * *
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
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5
HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
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1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME
Adjustments to reconcile net income to net cash $ 38,000 $ 33,000
provided by operating activities:
Gain on sale of assets
Common stock issued for service (27,000) -
Depreciation, depletion, amortization, and impairment - 63,000
Reversal of allowances and payables 284,000 242,000
Change in assets and liabilities (200,000) (47,000)
(Increase) decrease in notes and accounts
receivables, trade and affiliates
(Increase) decrease in other assets (203,000) (157,000)
Increase (decrease) in accounts payable, (56,000) (85,000)
accrued liabilities and suspended revenue
Total adjustments 522,000 132,000
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NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 320,000 148,000
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358,000 181,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 77,000 22,000
Additions to property and equipment (1,751,000) (186,000)
(Increase) decrease in long-term accounts receivable,
trade and affiliate 6,000 1,000
Other - (102,000)
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NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (1,668,000) (265,000)
================== ================
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,604,000 116,000
Increase (decrease) in other liabilities 420,000 20,000
Payments on long-term debt (1,708,000) (214,000)
Proceeds from sale of common stock 56,000 111,000
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NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,372,000 33,000
================== ================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 62,000 (51,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,000 97,000
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 87,000 $ 46,000
================== ================
The accompanying notes are an integral part of these statements
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HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
(1) MANAGEMENT'S REPRESENTATION
The consolidated balance sheet as of September 30, 1995, the consolidated
statements of operations for the three and nine month periods ended September
30, 1995 and 1994, and the consolidated statements of cash flows for the nine
month periods then ended are unaudited. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary have
been made to present fairly the financial position, results of operations and
changes in cash flows for the interim 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, 1994 annual report on Form 10-KSB for
Hunter Resources, Inc. (the "Company"). The results of operations for the nine
month period ended September 30, 1995 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.
(2) SIGNIFICANT EVENTS
MAGNUM PETROLEUM, INC. MERGER
On July 7, 1995, Hunter Resources, Inc. entered into a Letter of Intent to
proceed with a business reorganization whereby Magnum Petroleum, Inc.
(Commission File No. 1-12508, "Magnum") would acquire all of the assets of
Hunter Resources, Inc. under a stock exchange. The Registrant, on July 21,
1995, announced the closing of a definitive agreement to combine with Magnum.
Pursuant to the definitive agreement, Magnum has issued to Registrant 2,750,000
shares of newly issued restricted common stock of Magnum ("Magnum Shares") in
exchange for all of the assets of the Registrant, subject to its liabilities.
The Registrant's assets consisted of stock in wholly owned subsidiaries and
interests in limited liability companies ("Hunter Subsidiaries").
Magnum intends to continue to use and manage the Hunter Subsidiaries and their
underlying assets in the same manner as previously conducted by the Registrant.
The companies considered the value of the underlying assets, future prospects,
and the market value of Magnum's common stock in determining the consideration
paid by Magnum in the exchange.
As a result of the issuance of the Magnum Shares to the Registrant, the
Registrant is the owner of approximately 30.3% of Magnum's total issued and
outstanding common stock. The Registrant intends to liquidate and distribute
all of the Magnum Shares to its shareholders. A Special Meeting of the
shareholders of the Registrant will be held to approve the transaction between
the Registrant and Magnum and the subsequent liquidation of the Registrant.
Officers, directors and other affiliates of the Registrant, representing over
50% of Registrant's issued and outstanding common shares, intend to vote in
favor of the transaction. The Registrant has filed an Information Statement
with the Securities and Exchange Commission and will provide such Information
Statement to its shareholders before the Special Meeting. The Magnum Shares
and interests in the Subsidiaries are held in escrow pending shareholder
approval of the transaction. Shareholders of Registrant are expected to
receive one Magnum common share for every 7.234 common shares of Registrant
redeemed, after registration of the Magnum Shares by Magnum. The common stock
of Registrant will continue to trade on the Boston Stock Exchange and
Over-The-Counter market until the time of the liquidation.
Lloyd T. Rochford, the current President, Chief Executive and Financial Officer
and a director of Magnum, shall resign as an officer and remain as Chairman of
the combined companies. Registrant directors to be appointed to the new board
of the combined companies are Matthew C. Lutz as Vice Chairman, Gary C. Evans
and James E. Upfield. Mr. Evans shall be appointed President and Chief
Executive Officer of the combined companies. Mr. Lutz also will be appointed
Exploration and Business Development Manager.
The Registrant and Magnum, through the Hunter Subsidiaries, have conducted
their oil and gas operations and activities regarding energy related
acquisitions in conjunction with one another.
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OTHER ITEMS
On April 7, 1994, the Company was awarded a Production and Services Management
Contract between its wholly-owned subsidiary, Gruy Petroleum Management Co.,
and Oryx Energy Company ("Oryx"), for the management and operation of certain
oil and gas producing properties. The contract, effective April 1, 1994,
covered Oryx properties consisting of onshore producing properties in ten
states, one gas processing plant, one offshore platform and two inland water
platforms. The total number of wells in the management contract was
approximately 400. These oil and gas properties were ultimately sold by Oryx
and effective November 1, 1994, the contract terminated.
On March 31, 1995, the Company closed an acquisition of domestic producing oil
and gas properties for $1.4 million from a Midland, Texas based independent.
The purchase price was comprised of $1.2 million cash, $200,000 in restricted
common stock of Hunter, and had an effective date of January 1, 1995. The
properties are concentrated in four fields in West Texas and Eastern New Mexico
and include ownership interest in 25 wells, 23 of which the Company or its
subsidiary have assumed operations.
On August 21, 1995, the Company's wholly-owned subsidiary signed a definitive
agreement for the purchase of four unregulated gas gathering systems. The
systems are located in Texas, Louisiana and New Mexico. The total cash
consideration is $1.2 million with closing scheduled for November 27, 1995.
The acquisition has an effective date of August 1, 1995.
On October 18, 1995, the Registrant's wholly-owned subsidiary closed on an
acquisition of the remaining 75 per cent ownership interest in an affiliated
company from a joint venture partner. The purchase price of $1,075,287
consisted of a) $300,000 in cash, b) $300,000 represented by 85,131 shares of
restricted common stock of Magnum valued at $3.52 per share and c) the
assumption of existing bank indebtedness of $475,287. As additional
consideration, 50,000 warrants to purchase common stock of Magnum were issued
at exercise prices ranging from $4.00 to $4.50 per share. The effective date
of the acquisition was July 1, 1995.
On October 25, 1995, the Registrant's wholly-owned subsidiary closed on an
acquisition of domestic producing oil and gas properties. The purchase price
was comprised of $2.107 million cash, funded by an existing bank line of
credit, and $225,000 represented by 64,176 shares of restricted common stock of
Magnum valued at $4.00 per share. The acquisition had an effective date of
August 1, 1995.
On November 6, 1995, the Registrant's wholly-owned subsidiary entered into an
increased $20 million revolving credit agreement with First Interstate Bank of
Texas, N.A. ("FITX"). The previous line of credit was in the maximum amount of
$10 million and was entered into by the Company prior to the business
reorganization with Magnum. The new line of credit facility is secured by oil
and gas properties and gas gathering system assets subject to a borrowing base
determination established from time to time by FITX. The combined current
borrowing base has been increased to $8.7 million with outstanding borrowings
bearing interest at prime plus 1.5 percent.
On November 9, 1995, the Registrant's wholly-owned subsidiary closed on an
acquisition of domestic producing oil and gas properties for approximately $4.5
million as adjusted for operations from the effective date (August 1, 1995) to
closing date. The purchase price was comprised of $3.375 million of cash,
funded by the Registrant's line of credit, and a note payable to the previous
owner in the amount of $1.125 million secured by 610,170 shares of restricted
common stock of Magnum.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. LIQUIDITY, CAPITAL RESOURCES AND LONG-TERM OBLIGATIONS.
During the nine months ended September 30, 1995, cash provided by operations
was $358,000 compared to cash provided by operations of $181,000 for the nine
months ended September 30, 1994. Investing activities during the first nine
months of 1995 required net cash of $1,668,000 compared to $265,000 used during
the comparable period in 1994. Required payments on indebtedness were
$1,708,000, which included refinancing several existing loans. All loan
payments to financial institutions were made on a timely basis. At the end of
the second quarter, the Company was successful at closing a new financing
(non-recourse) with an insurance company in the amount of $300,000. Repayment
of the funds will be from the dedication of a fixed percentage of oil sales
from four of the Company's producing properties that are not encumbered to any
other financial institutions.
The Company's working capital position (before current portion of long-term
debt) was a negative $600,000, as of the end of the quarter. The current
liabilities of the Company include suspended revenue interest liabilities
totaling $733,000, the ultimate timing of payment of which is unknown.
Historically, the Company has operated with a working capital deficit and
anticipates that in the immediate future it will continue to do so with such
deficit financed by cash flow from operations and its existing credit line
facilities when necessary.
As discussed in Note 2 to the financial statements, the Company is in the
process of obtaining shareholder approval of the definitive agreement with
Magnum. The Company and Magnum, through the Company's Subsidiaries, have
conducted their oil and gas operations and activities regarding energy related
acquisitions in conjunction with one another. Funding for these acquisitions
have come from the Registrant's existing line of credit and the issuance in
some instances of Magnum restricted common stock. The acquisitions should
continue to increase monthly cash flows of the combined companies.
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Management anticipates that the combined cash flow from oil and gas
production, the property management and consulting business, gas gathering
systems and the export management business, will be sufficient to make all
required principal and interest payments on the Company's debt for the
remainder of 1995.
RESULTS OF OPERATIONS.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
The Company reported a profit of $431,000 from operations (before depletion,
depreciation, amortization, interest expense, income tax expense, interest
income, and gain or loss on sale of assets) for the nine months ended September
30, 1995, as compared to a profit from operations of $288,000 for the nine
months ended September 30, 1994. The Company reported net income of $38,000
and $33,000 for the nine months ended September 30, 1995 and 1994,
respectively.
Total revenues for the nine months ended September 30, 1995 decreased by
$362,000 (approximately 19%) from the year earlier period. The decrease in
revenues was due to a 60% decrease in gas gathering and marketing revenues and
a 57% decrease in the Company's management and consulting business. Oil and
gas revenues increased 57% due to acquisitions of producing oil and gas
properties completed at fiscal year end 1994 and during the first six months of
fiscal 1995. Management anticipates a continued greater shift in the revenue
base of the Company in the future to oil and gas due to its increased property
acquisition efforts. Other income rose substantially in the nine month period
of 1995 as a result of the realization of certain nonrecurring items.
The Company's total expenses for the nine months ended September 30, 1995
decreased $367,000 or 20% compared to the similar period in 1994. The decrease
in expenses includes a 61% and 29% decrease in purchases of natural gas and
pipeline operations, respectively. Lease operating expense only increased 10%
in 1995 over 1994 due to the additional oil and gas producing activities
created from acquisitions completed in the first six months of 1995. The cost
of services related to the Company's property management and consulting
business declined $227,000 or 43%.
General and administrative expenses decreased by $161,000 or 32% during the
first nine months of 1995, primarily due to the capitalization of certain
acquisition related expenses and the elimination of costs associated with an
investor marketing program that was expensed during the previous fiscal year.
Interest expense rose $96,000 in the 1995 nine month period over the comparable
1994 period due to higher debt balances from the 1995 acquisitions and an
increase in interest rates. Depreciation, depletion, amortization and
impairment increased $42,000 to $284,000 for the nine months ended September
30, 1995 as a result of the increased production from the Company's acquisition
program.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
The Company reported a profit of $190,000 from operations (before depletion,
depreciation, amortization, interest expense, income tax expense and interest
income) for the three months ended September 30, 1995, as compared to a profit
from operations of $104,000 for the three months ended September 30, 1994.
The Company reported net income of $29,000 and $22,000 for the three months
ended September 30, 1995 and 1994, respectively.
Total revenues for the three months ended September 30, 1995 decreased slightly
from the year earlier period. Revenues in the current quarter included a 62%
decrease in gas gathering and marketing revenues and a 57% decrease in the
Company's management and consulting business. Oil and gas revenues increased
$114,000 or approximately 73%. Management anticipates a continued greater
shift in the revenue base of the Company in the future to oil and gas due to
its increased property acquisition efforts. Other income rose substantially in
the three month period of 1995 as a result of the realization of certain
nonrecurring items.
The Company's total expenses for the three months ended September 30, 1995
decreased slightly compared to the similar period in 1994. Expenses in the
current quarter included a 62% decrease in purchases of natural gas. The cost
of services related to the Company's property management and consulting
business declined $70,000 or 38%.
General and administrative expenses decreased by $32,000 or 17% during the
third quarter, primarily due to capitalization of certain acquisition related
expenses and the elimination of costs associated with an investor marketing
program that was expensed during the previous fiscal year. Interest expense
rose $47,000 in the 1995 three month period over the comparable 1994 period due
to higher debt balances from the 1995 acquisitions and an increase in interest
rates. Depreciation, depletion, amortization and impairment increased $31,000
(40%) to $108,000 for the three months ended September 30, 1995 as a result of
the increased production from the Company's acquisition program.
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DEFINITIONS
As used herein, the abbreviations listed below are defined as follows:
Bbl. 42 U.S. gallons, the basic unit for measuring crude oil and
natural gas condensate.
Mbbls. Volume of one thousand barrels.
Mcf. Volume of one thousand cubic feet.
Mmcf. Volume of one million cubic feet.
Bcf. Volume of one billion cubic feet.
BOE. Barrel of oil equivalent, determined as one barrel of crude oil
or condensate or six thousand cubic feet of natural gas..
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P A R T II
OTHER INFORMATION
ITEM 1. Legal Proceedings
NONE
ITEM 2. Changes in Securities.
NONE
ITEM 3. Defaults Upon Senior Securities.
NONE
ITEM 4. Submission of Matters to a Vote of Security Holders.
NONE
ITEM 5. Other Information.
NONE
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11: Computation of Net Income (Loss) Per Common Share.
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
Item No. Items Reported F/S Included Date Filed
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2 Letter of Intent to proceed None July 7, 1995
with business reorganization
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2 Closing of agreement to combine None July 21, 1995
and liquidate
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2 Acquisition of Assets September 26, 1995
7 Financial Statements Schedule of Financial
Statements Attached
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2 Description of assets acquired None November 3, 1995
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SCHEDULE OF FINANCIAL STATEMENTS
(a) Financial Statements of the Business Acquired:
Accountants' Report
Historical Summary of Revenue and Direct Operating Expenses for the
Years Ending March 31, 1994 and 1995
Notes to Historical Summary of Revenues and Direct Operating Expenses
for the Years Ended March 31, 1994 and 1995
(b) Pro forma financial information:
Pro forma Consolidated Financial Information (unaudited)
Pro forma Consolidated Statement of Operations (unaudited)
For the Twelve Months Ended December 31, 1994
Pro forma Consolidated Statement of Operations (unaudited)
For the Three Months Ended March 31, 1995
Notes to Unaudited Pro Forma Consolidated Statements of Operations
(c) Exhibits:
Agreement to Acquire Assets
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HUNTER RESOURCES, INC.
(REGISTRANT)
BY: /S/ GARY C. EVANS
--------------------------------
GARY C. EVANS, PRESIDENT
DATE: NOVEMBER 16, 1995
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Name and Signature Title Date
/S/ GARY C. EVANS CHAIRMAN, PRESIDENT
- --------------------------------- CHIEF EXECUTIVE OFFICER,
GARY C. EVANS AND DIRECTOR NOVEMBER 16, 1995
/S/ STEVEN P. SMART SENIOR VICE PRESIDENT AND
- --------------------------------- CHIEF FINANCIAL OFFICER NOVEMBER 16, 1995
STEVEN P. SMART
/S/ DAVID M. KEGLOVITS VICE PRESIDENT AND
- -------------------------------- PRINCIPAL ACCOUNTING OFFICER NOVEMBER 16, 1995
DAVID M. KEGLOVITS
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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11 Computation of Net Income (Loss) Per Common Share
27 Financial Data Schedule