2
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITY EXCHANGE ACT OF 1934 FEE REQUIRED ]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITY EXCHANGE ACT OF 1934 [ NO FEE REQUIRED ]
For the transition period from ....................
to.....................
Commission File No. 1-8523
MSR Exploration Ltd.
(Exact name of Registrant as specified in its charter)
Alberta, Canada None
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Main Street, Suite 210, Fort Worth, Texas 76102
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (817) 877-3151
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Shares, United States
no par value American Stock Exchange
Securities registered pursuant to Section 12(b) of the Act: None
Registrant (1) has filed on time all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12
months and (2) has been subject to such filing requirement for the
past 90 days.
The Registrant's revenues for the year ended December 31, 1996 were
$4,376,000.
The aggregate market value of the Common Shares held by
nonaffiliates (approximately 10,103,037 shares) of the Registrant
as of March 17, 1997 was approximately $8,840,000. As of March 17,
1997 there were 13,777,014 shares of the registrant's Common Stock
outstanding.
The Registrant has not filed documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after
distribution of securities under a plan confirmed by a Court
because there was no distribution of securities under the
Registrant's confirmed plan.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format: Yes or No X
PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
BUSINESS DEVELOPMENT
MSR Exploration Ltd. is an Alberta, Canada, registered public
company created in 1981 under Alberta law by the merger of two
previous Canadian public corporations, Mountain States Resources
Ltd. and Monte Grande Exploration Limited. The Company's
corporate offices are located at 500 Main Street, Suite 210, in
Fort Worth, Texas, 76102. The telephone number is (817) 877-
3151. Unless the context requires otherwise, all references
herein to "MSR" or the "Company" are to MSR Exploration Ltd. and
its subsidiaries.
The Company's principal line of business is the exploration,
development, production and sale of crude oil and natural gas.
The Company's oil and gas operations are conducted primarily in
Montana and Texas. All of the Company's United States oil and
gas property interests are owned and operated directly or through
its wholly-owned United States subsidiaries: Mountain States
Resources, Inc.; Monte Grande Exploration, Inc.; Gypsy Highview
Gathering System, Inc.; and MSR Exploration, Inc. The Company
has operations in Canada and participates in those properties
principally through other oil and gas operators. The Company is
also engaged in the gathering, processing and transmission of
natural gas in Northwest Montana through its wholly-owned Gypsy
Highview Gathering System, Inc. The Company gathers, processes
and transports gas produced from northern Montana wells owned by
the Company and by other producers.
In September 1994, the Company completed a private placement of
its common stock. In exchange for the issuance of 4,444,444
shares of its stock, MSR received $4,000,000. The proceeds from
this placement were used to retire the debt of the Company's then
secured primary lender and certain other unsecured creditors. In
conjunction with this private placement, the Company held a
Special Meeting of the Shareholders on October 25, 1994, to elect
a new Board of Directors which effectively changed control of the
Company. This Board of Directors elected Otto J. Buis as
Chairman of the Board, Chief Executive Officer and President of
the Company.
The Company's primary focus has been the development and
enhancement of oil and gas properties in its present areas of
operations and acquisitions of additional properties. The
Company believes its acquisition efforts should be focused on
properties where operational efficiencies can be achieved. To the
extent purchases can be made primarily within its operating
areas, efficiencies in operations, drilling, gas marketing and
administration should be realized.
On March 26,1997, the Company executed a definitive agreement
with Mercury Exploration Company, of Fort Worth, Texas, to
combine all of their oil and gas assets in Montana with all the
oil and gas assets of MSR Exploration Ltd. (the Business
Combination).
The transaction includes the addition of over 75 producing wells
with proven reserves of more than 5 million barrels of oil. It
also includes the assumption of Mercury's position in a 304,000
acre area designated the "Wells Agreement" which overlies a large
portion of the giant Cut Bank Field complex. In the subject
area, 100% of the oil rights and 30% of the revenue pertaining to
liquids produced by gas wells will accrue to the combined
entities. Over 50 low risk drilling locations have already been
identified in the general area. Monetizing the reserves
attendant to these locations through an extensive drilling
program is planned. This drilling program is expected to be
initiated later this year and will continue over at least the
next three to four years.
With this combination, MSR's proved oil reserves and daily
productive rates are essentially doubled. Further economic gain
will also be experienced by combining administrative efforts into
one Fort Worth office location and by operating in Cut Bank,
Montana from a single site. The assessment pertaining to
personnel and facilities in these areas is presently underway.
In consideration for the business combination, MSR will issue to
Mercury shareholders 12,000,000 shares of common stock valued at
$0.75 per share and assume and/or pay $4,000,000 in Mercury bank
debt. Mercury shareholders will receive warrants to purchase
5,500,000 common shares at $1.25 per share and 5,500,000 common
shares at $2.00 per share.
In negotiating the number of common shares to be issued to
Mercury, consideration was given to the value of the assets, the
proved oil and gas reserves and the market value of the Company's
common shares (prior to the date the Agreement was executed and
announced).
The closing of this transaction is subject to a number of
conditions including MSR shareholder's approval which will be
sought at a shareholder meeting anticipated to be held in July of
1997. The closing is expected immediately subsequent to such
approval. Shareholders owning approximately 40% of MSR common
stock have agreed to vote to approve this transaction. Mercury
shareholders have approved the business combination subject to
MSR shareholder approval and certain other conditions. As a
result of the effective issuance of the common shares to Mercury
by the Company, Mercury shareholders will effectively own
approximately 46.6% of the Company's total issued and outstanding
common stock
In July 1995, the Company acquired interests in three gas and
condensate producing properties located in southeast Texas for
the approximate purchase price of $3,547,000. The effective date
of the purchase was April 1, 1995. The specific interests
acquired are as follows: 42% working interest in the Schmidt
Well #1, Brazoria County; 41% working interest in the Josey Ranch
Well #3, Harris County; and 53% working interest in the Cinco
Ltd. Well #1, Fort Bend County. An independent engineering
consulting company estimated that the Company's proved producing
reserves were increased by 4.6 billion cubic feet of gas and
78,000 barrels of condensate by this acquisition. On May 1, 1996,
the Company purchased an additional 21% working interest in the
Cinco Ltd. #1 well.
During the first quarter of 1997 the Gypsy Highview Gas Plant was
reconditioned and placed into service. After sitting idle for
over five years, the plant began selling natural gas in early
March 1997. During 1993, the Company developed a gas project
known as the Red River Prospect. Additional acreage and wells in
an area north of the town of Cut Bank, Montana were acquired.
During the fall of 1993, a gas plant, gathering lines and a
transmission line connected to a high pressure system were
completed. In December 1993, gas sales began under a long-term
contract with Montana Power Company. The plant was shut down
during the Second Quarter of 1995 due to a lack of product.
Additional drilling in the area in late 1995 and 1996 provided
sufficient product to re-open the plant. After the installation
of gathering lines to the wells, the Red River plant sold natural
gas for six months of calendar 1996.
Prior Bankruptcy. From September 1990 to May 1991, a separate
group of Officers and Directors were in control of the Company
and were responsible for the Company's operations. While under
control of this management group, MSR incurred various
significant legal and other obligations which, coupled with a
steep reduction in product prices, diminished the Company's
operating cash flow. In addition, during this period,
Manufacturers Hanover Trust Company, the Company's then principal
secured creditor, placed MSR's credit facility in default for
infractions of nonmonetary covenants.
In view of these circumstances, a new Board of Directors was
elected at a long-delayed Annual General Meeting held in December
1991. On February 7, 1992, the Company and its five subsidiary
corporations filed petitions for reorganization under Chapter 11
in the United States Bankruptcy Court. Later, on September 12,
1992, the Company filed a Plan of Reorganization with the
Bankruptcy Court, which was then amended on December 11, 1992,
and March 2, 1993, to reflect agreements between the Company and
its creditors. On March 2, 1993, MSR's Restated First Amended
Joint Plan of Reorganization was confirmed by the Bankruptcy
Court.
BUSINESS OF THE COMPANY
General. The business purpose of the Company is to engage in two
principal activities: (1) the acquisition, production and sale of
crude oil, condensate and natural gas and (2) the gathering,
processing and transmission of natural gas. In most instances,
the Company acts as operator of the oil and gas properties in
which it has acquired an interest.
The Company pursues its business through the acquisition of oil
and gas mineral leases, gas gathering systems, and producing oil
and gas properties. Based upon each specific mineral lease
situation as well as geological and engineering interpretations,
the Company either develops its inventory of leases through the
drilling of an oil and/or gas well, redrills or recompletes an
existing well or manages and operates existing wells located on
such leases for the production of oil and/or gas reserves located
thereon. The Company currently has an interest in oil and gas
mineral leases, gas gathering pipeline systems and wells
producing hydrocarbons that are located principally in the states
of Montana and Texas. The Company evaluates other opportunities
for the development of oil and gas reserves and related assets as
they become available and given the right circumstances, may
become involved in these activities in other areas other than
those in which it is currently involved.
The Company currently acts as an "operator" of oil and gas
properties, through its wholly-owned subsidiaries, MSR
Exploration, Inc., Mountain States Resources, Inc., Monte Grande
Exploration, Inc., and Gypsy Highview Gathering System, Inc.,
primarily in Montana and Texas. In this capacity, the Company is
responsible for the daily activities of producing oil and/or gas
from individual wells and leases located within those states.
The Company's functions are focused primarily towards management
of the properties to maximize profitability and supervision of
its field employees. Additionally, for some wells the Company
contracts with individuals doing business within the proximity of
the wells, more commonly referred to as "pumpers", for performing
the various tasks that are required to maintain the production of
oil and/or gas of the wells. The Company is not a user or
refiner of the oil and/or gas produced, except as it may relate
to the operation of wells that may produce gas. Once extracted
from the ground, the Company either connects the production to a
pipeline gathering system, in the case of gas, or stores the
crude oil in storage tanks located in proximity of the producing
field, for collection by an oil purchaser. The properties that
the Company operates are located in areas which are typically
serviced by more than one crude oil purchaser and a gas pipeline
gathering system is generally in proximity of the natural gas
being produced.
The Company operates and holds working interests in over two
hundred and fifty producing oil and gas wells. The Company also
holds or has acquired interests in properties which contain
proved undeveloped reserves that require additional drilling,
workovers, water flooding or other forms of enhancement to become
productive. In addition to acquiring such properties, the
Company has also engaged in exploration and development
activities by drilling new wells on such properties during the
past several years.
Acquisition of Additional Properties. The Company will continue
to evaluate and select additional prospects and leases for
acquisition and development, which management considers
appropriate for the purposes of the Company. Such prospects may
be located anywhere in the United States. The principal purpose
of the Company in such acquisitions will be to seek and acquire
properties which presently are producing oil and/or gas and are
generating sufficient revenues from such properties to provide
the Company with the potential to significantly increase cash
flow.
To the extent the Company continues seeking additional
acquisitions of producing oil and gas properties, it competes
with many other entities which seek to acquire similar assets.
The operations and expenditures on behalf of the Company are
minor in relation to total operations conducted and in comparison
to amounts expended by all entities operating within this
industry. The total number and identity of producing oil and
gas properties and proved developed leases acquired by the
Company will depend upon, among other things, on a combination of
the total amount of capital available to the Company, the latest
geological and geophysical data available, and the continuation
of a sufficient supply of properties which may become available
for purchase.
Because management is responsible for selecting additional
acquisitions, it continually engages in a process of reviewing
and analyzing prospects submitted by oil and gas operating
companies, investment bankers, geologists, engineers and others
within the energy industry. In some circumstances, prospects
may, in addition to the usual royalty paid to the landowner, have
the burden of an overriding royalty for the benefit of the entity
or person submitting prospects to the Company.
These royalty interests do not share in any expense of drilling,
development, completion, operating and other costs incident to
the production and sale of oil and gas. The Company seeks to
acquire leasehold interests which will create the maximum revenue
interest attributable to the working interest owners in leases
acquired by the Company.
The following information and factors are considered by the
management in connection with each decision to acquire a Property
for the Company:
1. The amount of uncommitted funds then available;
2. The current production and expected future cash flow
therefrom;
3. The geologic and geographic region in which the property is
located; and
4. The nature and extent of geological and engineering data
available concerning the property.
Oil and gas production, prospects, and leases have been and will
continue to be acquired by the Company from various industry
sources, including, without limitation, landowners, lease
brokers, operating companies, investment bankers and other
persons or companies engaged in the business of acquiring and
dealing in oil and gas properties. In that regard, leases
which are purchased by the Company may be whole or fractional
interests in oil and gas properties, and if fractional, a portion
of the costs of development may be borne by the parties
possessing the remaining fractional interests. The Company may
also from time to time enter into joint ventures or farmout
arrangements to acquire or develop properties.
Drilling Agreements and Operation of Wells. In addition to
acquiring producing oil and gas properties, the Company may use
its working capital and available line of credit for drilling
and other development on the properties in which the Company has
acquired interests, to the extent funds permit. The Company sub-
contracts the drilling, redrilling or workover of wells for which
it is designated the operator. When the Company is acting as the
operator, it will typically enter into a drilling agreement with
an independent drilling contractor. The Company either
compensates the drilling contractor on i) a footage contract,
ii) an hourly arrangement during the drilling, testing and
completion phase of each well, or iii) seeks a fixed price or
turn-key agreement. The drilling contractor is typically allowed
to utilize other selected independent contractors, each of which
is experienced in providing drilling related services in the
area, to conduct certain activities on behalf of the Company.
The Company manages all day-to-day operations of the Company's
wells, leases and prospects for which it is the operator. While
the Company may enter into agreements with other parties for
specific services, such agreements will keep management functions
within the control of the Company. The Company utilizes its in-
house technical personnel to provide geological, geophysical,
engineering and other services and when necessary, retains these
services on a contractual basis from within the industry. The
Company reviews and analyzes all prospects, drilling and logging
data, engineering information and production data, and monitors
all expenditures made on behalf of the Company by any third party
engaged as a subcontractor.
The Company will from time to time determine that it is in its
best interest to drill either exploratory or development wells on
properties in which it has acquired an ownership interest.
Management will have the responsibility to determine whether any
well should, at any point, be abandoned. In the event that a
well is lost at any depth, either vertically or horizontally, by
reason of any accident or casualty, or if igneous rock or other
impenetrable substances are encountered, or loss of circulation
or other conditions rendering further drilling impractical by
methods to be employed, the Company may elect to plug and abandon
a well and cease operations on the prospect or to plug and
abandon a well and commence drilling an additional well on the
prospect.
Timing of Acquisitions/Operations. The Company is continually
evaluating the acquisition of additional proven oil and gas
properties and other oil and gas companies. Additionally, the
Company may commence drilling on existing prospects as it deems
appropriate. The Company believes that it has available suitable
prospects and leases for future development.
Gas Gathering, Processing and Transmission. Gypsy Highview
Gathering System, Inc., a wholly owned subsidiary of the Company,
owns and operates gas gathering pipeline systems and two gas
plants located in northwest Montana. The Gypsy Highview Gas
Plant and the Red River Gas Plant presently compress natural gas
from Company leases and from third party leases. Approximately
12 wells are connected to the Red River Plant. Approximately 538
Mcf per day is delivered through the system to Montana Power
Company. After a complete overhaul, the Gypsy Highview Plant and
system started delivering natural gas in March 1997 from three
wells into the Montana Power Company pipeline.
Insurance. The Company maintains insurance coverage generally as
follows:
1. Employer's liability insurance in certain states covering
injury or death to any employee who may be outside the scope of
the worker's compensation statute;
2. Commercial general liability insurance for bodily injury and
property damage, including property damage by blow-out and
cratering, completed operations, and broad form contractual
liability with respect to any contract into which the operator
may enter into;
3. Automobile liability insurance covering owned, non-owned and
hired automotive equipment;
4. Umbrella liability insurance; and
5. Operator's insurance covering the costs of controlling a
blow-out, and seepage and pollution liability, when deemed
appropriate on certain properties.
The Company attempts to obtain such insurance in amounts
management believes to be reasonable and standard. Such coverage
will likely not fully protect the Company from any specific
casualty or loss. There is no assurance such insurance will
always be available to the Company and on terms the Company can
afford.
The Company is subject to, and to the best of its knowledge and
belief is currently in compliance with all bonding requirements
(such as those relating to plugging and abandonment) that are
imposed by each of the states in which the properties for which
the Company acts as operator are located.
Competition. The oil and gas industry is a highly competitive
industry. Competitors include major oil companies, other
independent oil and gas concerns, and individual producers and
operators, many of which have financing resources, staffs and
facilities substantially greater than those of the Company. The
principal means of competition are the amount and terms of the
consideration offered. When possible, the Company tries to avoid
open competitive bidding for acquisition opportunities. The
principal means of competition with respect to the sale of oil
and natural gas production are product availability and price.
While it is not possible for the Company to state accurately its
position in the oil and gas industry, the Company believes that
it represents a minor competitive factor.
Business Risks and Regulation. The Company's operations are
affected in various degrees by political developments, federal
and state laws, and regulations. In particular, oil and gas
production operations and economics are affected by price
controls, tax and other laws relating to the petroleum industry.
They are all affected by the changes in such laws, by changing
administrative regulations, and by the interpretation and
application of such rules and regulations.
Legislation affecting the oil and gas industry is under constant
review for amendment or expansion. Numerous departments and
agencies, both federal and state, are authorized by statute to
issue and have issued rules and regulations binding on the oil
and gas industry and its individual members, some of which carry
substantial penalties for the failure to comply. The regulatory
burden on the oil and gas industry increases the Company's cost
of doing business and, consequently, affects its profitability.
Sales of crude oil, condensate and natural gas liquids by the
Company can be made at uncontrolled market prices.
Changing Oil and Natural Gas Prices and Markets -- The market
for oil and natural gas produced by the Company depends on
factors beyond its control, including the extent of domestic
production and imports of oil and natural gas, the proximity and
capacity of natural gas pipelines and other transportation
facilities, demand for oil and natural gas, the marketing of
competitive fuels, and the effects of state and federal
regulation of oil and natural gas production and sales. The oil
and gas industry as a whole also competes with other industries
in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
The Company's production revenues and the carrying value of its
oil and natural gas properties are affected by changes in oil and
natural gas prices. Moreover, the Company's current borrowings
under certain credit facilities, its borrowing capacity and its
ability to obtain additional capital in the future are directly
affected by oil and natural gas prices.
Environmental Regulation. Various federal, state and local laws
and regulations covering the discharge of materials into the
environment, or otherwise relating to the protection of the
environment, may affect the Company's operations and costs as a
result of the effect on oil and gas exploration, development and
production operations. At present, substantially all of the
Company's U.S. production of crude oil, condensate and natural
gas is in states having conservation laws and regulations. It
is not anticipated that the Company will be required in the near
future to expend amounts that are material in relation to its
total capital expenditures program by reason of environmental
laws and regulations, but inasmuch as such laws and regulations
are frequently changed, the Company is unable to predict the
ultimate cost of compliance. The Company is able to control
directly the operations of only those wells for which it acts as
operator. Notwithstanding the Company's lack of control over
wells operated by others, the failure of the operator to comply
with applicable environmental regulations may, in certain
circumstances, be attributable to the Company.
Raw Materials. The Company's raw materials are its oil and gas
reserves. Many operators are engaged in the exploration for oil
and gas, and there is strong competition for desirable leases.
(See Item 2. "Description of Property" and Note 1 to the
Consolidated Financial Statements Item 7, appearing elsewhere in
this Form 10-KSB for certain information concerning the Company's
oil and gas properties, producing activities and proved
reserves.)
Working Capital Practices. The Company's working capital
practices are common to the industry, with crude oil and natural
gas sold to purchasers under short-term payment arrangements.
Major Customers. During the year ended December 31, 1996, three
customers: Rio Vista Energy, Ltd., Cenex, Inc. and Montana
Refining Company, accounted for approximately 34%, 19% and 15%
respectively of total consolidated oil and gas sales. For year
ended December 31, 1995, three customers: Montana Refining
Company, Cenex, Inc. and Hanson Production Company, accounted for
approximately 26%, 23% and 21% respectively of total consolidated
oil and gas sales.
The Company does not anticipate that the loss of any of its
present purchasers would have a materially adverse effect on the
Company's consolidated business and believes that, in the event
of a loss of a present purchaser, other purchasers of oil and gas
operating in the Company's areas would purchase the production at
competitive prices.
Employees. At December 31, 1996, the Company had 20 full-time
employees, including officers.
Financial Information About Foreign and Domestic Operations and
Export Sales. For each of the Company's last five fiscal years
it has produced and sold oil and gas in the United States. At
December 31, 1996, five wells were on production in Canada. For
information regarding the Company's United States and Canadian
revenues, operating profits and assets, see the Consolidated
Financial Statements.
ITEM 2. DESCRIPTION OF PROPERTY
The Company operates crude oil and natural gas producing
properties in northwestern Montana, namely the North Central Cut
Bank Sand Unit, Cut Bank Field, Graben Coulee Field in Glacier
County, Gypsy Basin Field in Pondera County, Bills Coulee Field,
Highview Field in Teton County, and the Red River/Midnight Coulee
Gas Field. Crude oil and natural gas are also produced in the
Winters Capps Field in Runnels County, Texas, and principally
natural gas from wells in Brazoria, Harris and Fort Bend
Counties, Texas. Active areas of exploration interest for the
Company are Montana, Texas, North Dakota and Western Canada.
Acreage in Western Canada is still considered in its early stages
of development.
During 1993, the Company built the Red River project, which
consists of an eight mile gathering and transmission system, a
compressor and a dehydration unit. MSR purchases sweet gas from
wells in the field, and dries and transports it to the Montana
Power System in the north Cut Bank area. The Company also owns
the Gypsy-Highview Gas Plant and a natural gas gathering and
transmission pipeline system located in northwestern Montana.
During January and February, 1997 this plant was overhauled and
placed in service. After setting idle for over five years, the
plant began selling natural gas in early March, 1997
Productive Wells and Acreage as of December 31, 1996
Gross Net
United States properties Oil Gas Oil Gas
Productive Wells* . 227 14 227 12.58
Developed Acreage**. . . 16,188 Acres 15,612 Acres
Undeveloped Acreage*** . 27,370 Acres 27,370 Acres
Gross Net
Canadian properties Oil Gas Oil Gas
Productive Wells* 7 9 .27 1.60
Developed Acreage** 2,290 Acres 712 Acres
Undeveloped Acreage*** 52,070 Acres 2,100 Acres
A "gross" acre or gross well is an acre or well in which an
interest is owned. The number of gross acres or wells is the
total number of acres or wells in which an interest is owned. A
"net" acre or net well is deemed to exist when the sum of the
fractional interests owned in gross acres or wells equals one.
The number of net acres or wells is the sum of fractional working
interests owned by the Company in gross acres or wells, expressed
as whole numbers and fractions thereof.
* "Productive wells" are wells producing oil or gas.
** "Developed acreage" is acreage assignable to productive
wells.
*** "Undeveloped acreage" refers to lease acres on which wells
have not been drilled or completed to a point that would permit
the production of commercial quantities of oil and gas regardless
of whether or not such acreage contains proved reserves.
Essentially all of the Company's oil and gas interests are
working interests or overriding royalty interests under standard
onshore oil and gas leases, rather than mineral ownership or fee
title. The defensibility of the Company's title to such
interests in most cases is supported by written title opinions.
Title of Properties. Title to the properties acquired by the
Company is subject to royalty, overriding royalty, carried and
other similar interests, contractual arrangements customary in
the oil and gas industry, liens incident to operating agreements,
liens for current taxes not yet due and to other comparatively
minor encumbrances. Substantially all of the Company's oil and
gas properties are pledged to a financial institution under
certain credit agreements.
Production Results. The average sales price and average
production (lifting) cost per equivalent unit of oil for the
three years ended December 31, 1996 were as follows:
Fiscal Year Production Average Price Average
Ended Oil Gas Oil Gas Production
December 31 (Bbl)* (Mcf)** (Bbl)* (Mcf)** Cost perUnit
1996 123,088 890,530 $19.21 $2.19 $5.29
1995 131,143 506,643 $15.54 $1.51 $6.26
1994 149,804 291,631 $14.03 $1.47 $6.33
* Barrels ("Bbl")
** Thousand cubic feet ("Mcf").
Drilling Results. Below is a summary of drilling activity for
the three years ended December 31, 1996.
Wells Drilled (Gross): Exploratory Development
Year Productive Dry Productive Dry
1996** 1 0 0 0
1996 0 0 0 1
1995** 2 0 4 0
1994** 3 0 0 0
* Canadian
** USA
In general, an "exploratory well" is a well drilled either in
search of a new and yet undiscovered pool of oil or gas or with
the expectation of greatly extending the limit of a pool which is
partly developed. All other wells are "development wells."
Wells completed in multiple zones are treated as a single well.
Reserves. The determination of reserves is a complex and
interpretive process which is subject to continued revisions as
additional information becomes available. Reserve estimates
prepared by different engineers from the same data can vary
widely. Therefore, the reserve data in the Supplemental
Financial Information appearing elsewhere in this Form 10-KSB
should not be construed as being exact. Any reserve estimate,
especially when based upon volumetric calculations, depends in
part on the quality of available data, engineering and geologic
interpretation and judgment, and thus represents only an informed
professional assessment. Subsequent reservoir performance may
justify upward or downward revision of the estimate. The
Company's proved reserves and proved developed reserves of oil
and gas and the standardized measure of discounted future net
cash flows relating to proved oil and gas reserves for the years
ended December 31, 1996, and 1995, were estimated by Citadel
Engineering Ltd., independent petroleum consultants located in
Calgary Alberta, Canada. Such estimates were used in the
preparation of the Company's financial statements. The Company
has not included estimates of total proven oil and gas reserves
comparable to those disclosed in the Supplemental Financial
Information in any reports filed with Federal authorities or
agencies other than the Securities and Exchange Commission.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company had no matters requiring a vote of security holders
during the fourth quarter of 1996 nor any as of March 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Market Information. The Company's Common Shares have been listed
in the United States on the American Stock Exchange since
September 13, 1983. "MSR" is the Company's trading symbol. The
following table sets forth, for the calendar periods indicated,
the range of high and low prices for the Company's Common Shares
as reported by the American Stock Exchange.
1996 1995
High Low High Low
First Quarter $ 1 1/4 $ 13/16 $ 2 $ 1 3/8
Second Quarter 1 1/16 3/4 1 5/8 1 3/16
Third Quarter 1 3/4 1 3/8 1 1/8
Fourth Quarter 15/16 11/16 1 7/16 11/16
Security Holders. As of March 17, 1997, the number of registered
holders of Common Shares was 1,432.
Dividends. The Company has never paid any cash dividends and
presently it intends to retain its earnings to finance the growth
of its business.
There are no limitations under Canadian law or the Company's
Memorandum or Articles of Association on the right of non-
Canadians to hold or vote securities of the Company. There are
no restrictions on the export or import of capital which affect
the remittance of dividends, interest or other payments to
nonresident holders of the Company's securities.
Cash dividends paid to Shareholders resident in the United States
are generally subject to Canadian withholding tax at a rate of
15%. Cash dividends paid to other nonresidents of Canada will
also generally be subject to Canadian withholding tax at a
maximum rate of 25%, depending upon applicable tax treaties.
Stock dividends paid to nonresidents are generally not subject to
Canadian withholding tax provided that they are paid in shares of
the same class of stock as that on which the stock dividends are
paid.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General. The following discussion and analysis should be read in
conjunction with the Company's consolidated financial statements
and the notes associated with them contained elsewhere in this
report.
Year ended December 31, 1996 compared with year ended December
31, 1995.
Revenue. The Company's total revenue for 1996 was $4,376,325,
an increase of 40% compared to $3,126,700 for 1995. This
increase was due primarily to increases in product pricing and
increased natural gas sales volumes.
Oil sales for 1996 were $2,364,440, an increase of 16% over the
$2,038,588 for 1995. Sales volume decreased 6% from 131,143
barrels sold in 1995 to 123,088 barrels sold in 1996. The
average price per barrel for crude oil in 1996 was $19.21, a 24%
increase compared to an average of $15.54 in 1995.
Gas sales for 1996 were $1,953,092 an increase of $1,189,394 or
156% over the $763,698 reported in 1995. Natural gas sale
volumes for 1996 were 890,530 Mcf an increase of 383,887 Mcf or
76% compared to the 506,643 Mcf sold in 1995. The average price
the Company received for its gas sales in 1996 was $2.19 per Mcf,
an increase of 45% compared to $1.51 per Mcf for 1995. Most of
the increase in sales volumes was attributable to the three wells
the Company purchased in southeast Texas in July, 1995. Also
contributing to the 1996 increase were sales from the Red River
Gas Plant located in northwest Montana. The plant was on line
for approximately six months of calendar 1996. During January
and February, 1997 the Company overhauled its Gypsy-Highview Gas
Plant in Montana and began selling gas in March 1997. The plant
had been idle for over five years.
Interest and other income for 1996 was $58,793 compared to $324,
414 in 1995. In 1995 the Company reported a gain from sale of
assets of $177,000.
Expenses. The Company's total expenses for 1996 were $4,876,011,
an 18 % increase compared to $4,126,254 in 1995. Operating
expenses increased 6% from $1,349,151 in 1995 to $1,435,362 for
1996. Average production costs per barrel of oil equivalent
decreased from $6.26 in 1995 to $5.29 in 1996. The decrease in
cost per unit of production can be attributed to the increase in
natural gas sales volumes. Natural gas wells generally can be
operated more economically than crude oil wells. Production
taxes increased 46% from $213,793 in 1995 to $311,680 in 1996.
Depletion and depreciation expense increased $345,894 or 34% in
1996 compared to the prior year. The increases in production
taxes and depletion and depreciation expense are the result of
higher product sales. General and administrative expense
decreased $40,627 or 4% in 1996 compared to 1995. Interest
expense in 1996 was $732,910, an increase of 55% over the
$472,519 for 1995.
Net Loss. The 1996 net loss was $329,686 ($0.02 per share),
compared to the 1995 loss of $640,554 ($0.04 per share).
Year ended December 31, 1995 compared with year ended December
31, 1994.
Revenue. The Company's total revenue 1995 was $3,126,700, an
increase of 23% compared to $2,543,990 for 1994. This increase
was due primarily to increased natural gas sales.
Oil sales for 1995 were $2,038,588, up slightly over the
$2,033,916 in 1994. Sales volumes decreased 12%, from 149,804
barrels sold in 1994 to 131,143 barrels sold in 1995. The average
price per barrel sold increased 11% from sold increased 11% from
14.03 in 1994 to $15.54 in 1995 which helped to offset reduced
sales volumes.
Gas sales of $763,698 for 1995 increased 97% compared to $388,183
for 1994. The increase in sales is attributable to three gas
wells purchased in Southeast Texas. Since the acquisition on
July 28, 1995, these three wells contributed $507,600 of gas
sales during the last five months of 1995. Gas sales volumes in
1995 were 506,643 Mcf, a 73% increase compared to the 291,631 Mcf
for 1994. The average price for gas sold in 1995 was $1.51 per
Mcf, an increase of 3% compared to $1.47 per Mcf for 1994.
Interest and other income was $324,414 in 1995, a $200,523
increase compared to 1994. Most of the 1995 increase was
attributable to the $177,000 of gain recognized on the sale of
the GeoResources, Inc. common stock.
Expenses. The Company's total expenses for 1995 were $4,126,254,
a 21% increase compared to $3,418,939 in 1994. Operating expenses
increased 7% to $1,349,151 in 1995. However, the average
production cost per unit decreased from $6.33 in 1994 to $6.26 in
1995. Production taxes decreased 12% in 1995 to $213,793 compared
to $241,780 in 1994, principally due to reduced crude oil sales
volumes and reduced tax rates. Depletion and depreciation are up
13% in 1995 compared to 1994 primarily due to the increased gas
sales volumes from the new gas wells in Southeast Texas. General
administrative expenses increased 55% in 1995 to $1,058,768
compared to $683,552 in 1995. Most of the increase was in
administrative salaries and office expenses related to relocating
the corporate headquarters to Fort Worth, Texas. Interest expense
has increased from $324,981 in 1994 to $472,519 in 1995 due to an
increase in long-term borrowing.
Net Loss. The 1995 net loss was $640,554 ($0.04), compared to
the 1994 loss of $460,455 ($0.04 per share), which included
extraordinary income from the extinguishment of debt of $278,494
($0.03 per share).
Liquidity and Financial Resources. The Company's liquidity
position at December 31, 1996 improved as the balance of cash,
cash equivalents and time deposits increased to $313,185 as
compared to $279,519 at December 31, 1995. The current ratio was
0.91 to 1, with current liabilities exceeding current assets by
$136,700 as of December 31, 1996. This compares to a ratio of
1.2 to 1, and current assets exceeding current liabilities by
$211,060 at December 31, 1995. Cash flow forcasts indicate cash
will be available for working capital requirements, to fund
capital expenditures and to make debt service payments.
Cash flow from operating activities for 1996 was $708,880,
compared to $522,415 of negative cash flow used for operating
activities for 1995. This significant increase of $1,231,000
was primarily the result of increases in product sales. Cash used
for investing was $1,074,068 for 1996 as compared to $4,773,724
for 1995. The 1996 expenditures were for purchasing reserves in
place and for drilling, completing oil and gas wells, and
additions to the Red River Gas Plant, with most of the funding
coming from working capital. The 1995 expenditures consisted of
reserve acquisitions and reworking, drilling and completing oil
and gas wells.
Cash provided from financing activities for 1996 was $394,744
compared to $5,037,944 of funds from financing activities in
1995. During 1996 and 1995 the Company borrowed $400,000 and
$6,000,000 respectively, under its revolving credit agreement.
In January 1995, the Company entered into a $15,000,000 revolving
credit agreement. The proceeds from the facility were used
primarily to fund the Company's oil and gas reserve acquisition
program and for development drilling in the Company's present
producing areas. The loan agreement is for seven years. Only
interest on principal amounts outstanding was required in the
first two years, with the balance of the loan at December 31,
1996 to be amortized in quarterly installments over the remaining
five years. The interest rate on the loan is prime rate plus 1%.
On August 15, 1996 the loan limit was set at $6,500,000 and on
January 1, 1997 the commitment shall be reduced by monthly
payments at a rate of $60,000 for 1997, $65,000 for 1998, $75,000
for 1999, $70,000 for 2000 and $60,000 for 2001. The Company
began making such payments on the principal of the note in
February 1997.
GeoResources, Inc. In November, 1995 the Company completed the
sale of its holdings in 687,600 shares of GeoResources Common
Stock and 44,000 shares of Big Sky Airlines Common Stock to
Joseph V. Montalban, a former director of the Company, in
exchange for 700,000 shares of the Company's Common Stock. The
sale or exchange was approved by Shareholders at the Company's
Annual General Meeting held on September 22, 1995. The Company
recognized a $177,000 gain from the sale of the stock in 1995.
Inflation. The Company's sales and operating expenses have not
been significantly affected by inflation during the two year
period ending December 31, 1996.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements. The audited consolidated financial
statements for the years ended December 31, 1996 and 1995 are
submitted herewith as part of this Form 10-KSB.
Information About Oil and Gas Producing Activities.
Supplementary disclosures regarding the Company's oil and gas
producing activities are set forth in the unaudited Supplemental
Financial Information appearing elsewhere in this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the Company's Directors and
Executive Officers are as follows:
Name Age Position
Otto J. Buis 65 Chairman of the Board,
President, Chief Executive,
Officer and Director
Patrick M. Montalban 39 Executive Vice President,
Chief Operating Officer
and Director
James M. Richardson 67 Vice President - Operations
and Special Projects
Bruce D. Hirsche 48 Secretary - General Counsel
Howard N. Boals 53 Vice President - Finance and
Administration
C. Al Buis 37 Director
Robert McClinton 46 Director
Steven M. Morris 44 Director
The Company's Board of Directors has an Audit Committee
consisting of Otto J. Buis, C. Al Buis and Steven M. Morris and
its Compensation Committee includes C. Al Buis, Steven M. Morris
and Patrick M. Montalban. The Company does not have a nominating
committee.
Otto J. Buis is a petroleum geologist and for some 35 years has
held executive positions with domestic and international
companies such as OKC Limited Partnership, OKC Corp., Shenandoah
Oil Corporation and Texaco, Inc. Mr. Buis has been President and
Chief Executive Officer of Pozo Resources, Inc. since 1992. Mr.
Buis was a director of the Company from September 1989 through
July 1990 and he was a court appointed Director and Chief
Executive Officer from June 1991 through March 1992. At the
Special Stockholders meeting on October 25, 1994, Mr. Buis was
elected Director and subsequently elected Chairman of the Board,
President and Chief Executive Officer.
Patrick M. Montalban is a petroleum geologist who graduated from
the University of Montana in 1981. He joined the Company as a
Staff Geologist in 1983 and became Vice President of Exploration
and Production in October 1986. In December 1990 he was named
Executive Vice President and at the December 1991 Annual General
Meeting for the Company was elected Director and he has continued
in these offices to the present.
James M. Richardson is a petroleum engineer and has over 25 years
of management and executive experience in many areas of the
petroleum industry. Corporate affiliations include The Gruy
Companies, Inc., Howell Petroleum Corporation, OKC Corp., General
Crude Oil Company and Texaco, Inc. Mr. Richardson has also
worked as a petroleum consultant. He is Vice President of Pozo
Resources, Inc. having joined that company in 1992 as Operating
Manager. In October, 1994, Mr. Richardson joined MSR as Vice
President, Operations and Special Projects.
Bruce D. Hirsche is a barrister and solicitor, who was admitted
to the Alberta Bar in 1975 and has practiced corporate and
securities law in Edmonton, Alberta since his admittance. Mr.
Hirsche was appointed Director and Chairman of the Interim Board
effective June 27, 1991 by the Court of Queen's Bench of Alberta,
and subsequently elected Director, Secretary and General Counsel
at the Company's December 1991 Annual General Meeting. At the
Annual General Meeting, held on June 25, 1993, Mr. Hirsche was re-
elected Director of the Company and subsequently elected
Secretary and General Counsel. Mr. Hirsche continued in these
offices until the Special Stockholders Meeting held on October
25, 1994, at which time he was elected Secretary and General
Counsel.
Howard N. Boals is a certified public accountant with over ten
years experience as a controller for publicly and privately held
oil and gas exploration and production companies. From 1992
through 1994, Mr. Boals was the accounting manager for PG & E
Resources Inc. of Dallas and the prior five years was controller
for Sinclair Resources, Inc. Mr. Boals joined the Company as
controller in January 1995. In September 1995 he was named Vice
President of Finance and Administration.
C. Al Buis has been the President of Buis & Co., a private
investment banking firm and its predecessor company from March
1990 to the present. Mr. Buis was an officer in the Corporate
Finance Department of Rauscher Pierce Refsnes, Inc. from 1985 to
1990. From 1982 to 1985 Mr. Buis held a position in the
Investment Banking Division of Schneider, Bernet & Hickman, a
division of Thompson McKinnon Securities. Mr. Buis was elected
Director of the Company at the Special Stockholders Meeting held
on October 25, 1994.
Robert McClinton is a chartered accountant in Canada and for the
past four years has served as Director, President and Chief
Operating Officer of BMP Energy Systems Ltd. (BMP). BMP is a
Canadian company specializing in the provision of gas measurement
and production accounting services and products. From 1981 to
1991, Mr. McClinton was Vice President of Finance and Chief
Financial Officer of Canadian Turbo, Inc. a Canadian publicly
held company. From 1969 to 1981 he was with Deloitte & Touche
Chartered Accountants. Mr. McClinton was elected as a Director
of the Company's Board in July, 1996.
Steven M. Morris is a certified public accountant and President
of Morris & Co., a private investment firm in Houston, Texas.
From 1988 to 1991 he was Vice-President of Finance for ITEX
Enterprises, Inc. From 1981 to 1988 Mr. Morris was the Financial
Vice-President of Hanson Minerals Company, a Houston based oil
and gas exploration company. From 1978 to 1981 Mr. Morris was a
Partner in the Certified Public Accounting Firm of Haley &
Morris. He served as Senior Accountant with the Houston office
of Arthur Young and Company from 1974 to 1977. Mr. Morris was
elected Director of the Company at the Special Stockholders
Meeting held on October 25, 1994.
All Directors of the Company hold office until the next annual
meeting of Shareholders or until their successors are elected and
shall qualify. Executive officers are elected annually by, and
serve at the discretion of the Board of Directors. There are no
arrangements or understandings between any of the directors or
officers or any other person (other than arrangements or
understandings with directors or officers acting as such)
pursuant to which any person was elected as a director or officer
of the Company. Otto J. Buis and C. Al Buis are father and son.
There are no other family relationships among the executive
officers of the Company.
ITEM 10. EXECUTIVE COMPENSATION
Compensation. The following table lists compensation paid to all
the Company's chief executive officers and other officers paid in
excess of $100,000 for the three years ended December 31, 1996.
Summary of Compensation
Annual Compensation
Name and Principal Position Year Salary All Other
Otto J. Buis 1996 $116,667 -
Chairman of the Board, 1995 $101,000 -
President, Chief Executive
Officer and Director
Patrick M. Montalban 1996 $88,200 -
Executive Vice President 1995 $80,700 $28,000
(1)
Chief Operating Officer
and Director
(1) The additional amounts paid to Patrick M. Montalban were for
four years of scheduled raises that had not been paid.
Directors who are not employees of the Company receive $200 per
day per meeting plus traveling and out-of-pocket expenses for
each Directors meeting attended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table provides information concerning persons known
to the Company to be the beneficial owners of more than 5% of the
Company's outstanding Common Shares as of March 15, 1997. Unless
otherwise indicated, the Shareholders listed in the table have
sole voting and sole investment powers with respect to the shares
indicated. On March 17, 1997 there were 13,777,014 Common Shares
issued and outstanding. On March 17, 1997, the Company had 1,432
Registered Shareholders. Each Common Share is entitled to one
vote on each matter presented to Shareholders for a vote.
Number of Common Shares
Name and Address Beneficially Owned Percentage of
of Beneficial Owner Controlled or Directed Common Shares
Pozo Resources, Inc. 1,931,444 14.0%
500 Main Street, Suite 201
Fort Worth, Texas 76102
Joseph V. Montalban 1,809,855 13.1%
East Lakeshore Drive
Whitefish, Montana 59937
Steven M. Morris 1,111,111 8.1%
Morris & Co.
952 Echo Lane, Suite 335
Houston, Texas 77024
The following table sets forth the number of Common Shares
beneficially owned by each Director and nominee for Director of
the Company and by all Directors and Officers as a group, as of
the same date:
Number of Common Shares
Name and address Position Beneficially Owned, Percentage of
Beneficial Owner With Company Controlled or Directed Common Shares
Pozo Resources, Inc. 1,931,444 (1) 14.0%
Steven M. Morris Director 1,111,111 (2) 8.1%
952 Echo Lane, Suite 335
Houston, Texas 77024
Patrick M. Montalban Executive 279,100 2.0%
317 1st Avenue, S. E. Vice-President,
Cut Bank, Montana 59427 Chief Operating
Officer and Director
Otto J. Buis Chairman of the Board, 194,544 (3) 1.4%
500 Main Street, Ste 210 President, Chief Executive
Fort Worth, Texas 76102 Officer and Director
Bruce D. Hirsche Secretary 100,000 0.7%
1201 Esso Tower
10060 Jasper Avenue
Edmonton, Alberta
James M. Richardson Vice President 30,000 0.2%
5930 Theall
Houston, Texas 77066
C. Al Buis Director 27,778 (4) 0.2%
500 Main Street, Suite 201
Fort Worth, Texas 76102
All Directors and
Officers as a Group 3,673,977 26.6%
(1) Pozo Resources, Inc., ("POZO") is owned by Otto J. Buis, C.
Al Buis and Steven M. Morris, each of whom is also a Director of
MSR. Otto J. Buis, C. Al Buis and Steven M. Morris may be deemed
to share voting and investment power with respect to the
1,931,444 shares of Common Stock beneficially owned by Pozo
Resources, Inc. Otto J. Buis, C. Al Buis and Steven M. Morris
each disclaim beneficial ownership of such shares.
(2) Excludes 1,931,444 shares owned by Pozo Resources, Inc.
(3) Excludes 27,778 shares owned by Otto J. Buis' adult son, C.
Al Buis (who is a Director of MSR) and 1,931,444 shares owned by
Pozo Resources, Inc. Mr. Buis disclaims beneficial ownership of
such shares.
(4) Excludes 194,544 shares owned by C. Al Buis' father, Otto
J. Buis (who is Chairman of the Board, President, Chief Executive
Officer and a Director of MSR) and 1,931,444 shares owned by Pozo
Resources, Inc. Mr. Buis disclaims beneficial ownership of such
shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lucas, Bowker & White, barristers & solicitors, of Edmonton,
Alberta are Corporate Counsel for MSR Exploration Ltd. Mr. Bruce
Hirsche is a Partner of the firm. He served as Chairman and
Director of the Interim Board from June 1991 until December 1991.
Mr. Hirsche served as Director, Secretary and General Counsel to
the Company through October 25, 1994, at which time he was
elected Secretary and General Counsel. Legal fees and out-of-
pocket costs totaling approximately $2,523 and $25,777 were
billed to the Company by the law firm during the years ended
December 31, 1996 and 1995, respectively.
In 1994, the Company retained the services of Buis & Co., a
private investment banking firm, to assist in arranging credit
facilities. The firm is partially owned by C. Al Buis, a
Director of the Company. In January 1995, the Company paid Buis
& Co. $150,000 for the performance of such services in connection
with the Company's $15,000,000 revolving credit/term agreement
with a bank.
The Company subleases office space for its Fort Worth
headquarters from Buis & Co. As previously noted, Buis & Co. is
partially owned by C. Al Buis, a current Director of the Company.
The Company reimbursed $35,160 and $22,300 for annual rental
payments for 1996 and 1995 respectively and $14,644 and $12,428
for property taxes, telephone and utilities for 1996 and 1995.
The rent paid for the Company's space was at the same rate per
square foot as that paid by Buis & Co. and is commensurate with
rental rates in the area.
In November, 1995 the Company completed the sale of its holdings
in 687,600 shares of GeoResources Common Stock and 44,000 shares
of Big Sky Airlines Common Stock to Joseph V. Montalban, a former
director, in exchange for 700,000 shares of the Company's Common
Stock. The sale or exchange was approved by Shareholders at the
Company's Annual General Meeting held on September 22, 1995.
There was a $177,000 gain recognized on the sale of the stock.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Exchange Act requires directors and officers
of the Company, and persons who own more than 10% of the Common
Stock, to file with the SEC initial reports of ownership and
reports of changes in ownership of the Common Stock. Directors,
officers and more than 10% stockholders are required by the SEC
regulations to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and written
representations that no other reports were required, during the
year ended December 31, 1996, all Section 16(a) filing
requirements applicable to its directors, officers and more than
10% beneficial owners were complied with.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K.
(a) Documents filed as a part of this report.
Page in
this
Form 10-KSB
(1) Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets
at December 31, 1996 and 1995 F-2
Consolidated Statements of Operations
Years ended December 31, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996 and 1995 F-4
Consolidated Statements of Cash Flows
Years ended December 31, 1996 and 1995 F-5
Notes to Consolidated Financial Statements
Years ended December 31, 1996 and 1995 F-6 / F-14
(2) Supplemental Financial Information (Unaudited):
Disclosures about Oil and Gas Producing Activities F-15 / F-17
Selected Quarterly Financial Data F-18
(3) List of Exhibits Required by Item 601 of Regulation S-B
Exhibit
Number Description of Exhibit
2.1 Amalgamation Agreement of Monte Grande Exploration
Limited and Mountain States Resources Ltd.
predecessors of the Registrant (filed as Exhibit 2.1 of the
Registrant's Registration Statement on Form 10
dated May 5, 198 and incorporated herein by reference.
2.2 Purchase and Sale Agreement by and between MSR
Exploration, Inc. and Hanson Production Company
dated July 28, 1995 (filed as Exhibit 2-1 to the Registrant's
Form 8-K/A dated October 11, 1995 and incorporated
herein by reference.
3.1 Articles of Continuance of the Registrant, which
constitute the Registrant's corporate charter
(filed as Exhibit 3.1 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1994 and
incorporated herein by reference.
3.2 By-Law No. 1 of the Registrant, relating generally
to the conduct of its affairs (filed as
Exhibit 3.2 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein
by reference.
4.1 Form of stock certificate representing
Registrant's Common Shares (filed as Exhibit 4.2
to the Registrant's Form 10-K for the fiscal year ended December
31, 1989 and incorporated herein by reference.
10.1 Agreements of subsidiaries dated December 17,
1982, October 15, 1977 and May 26, 1977 with
Montana Power Company (filed as Exhibit 10.1 to the Registrant's
Registration statement on Form 10 dated May 5,
1983 and incorporated herein by reference.
10.2 Purchase and Sale Agreement between Registrant and
Omni Petroleum dated March 9, 1991 (filed as
Exhibit 10.6 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1990 and incorporated herein by
reference.
(b) Reports on Form 8-K.
There have been no Form 8-K reports filed during the last quarter
of the year ended December 31, 1996.
All schedules have been omitted because they are not applicable,
are not required, or because the required information has been
provided in the Consolidated Financial Statements or notes
thereto.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
MSR Exploration
Ltd.
(the "Registrant")
Dated: March 27, 1997 by: /s/ Otto J. Buis
Otto J. Buis
Chairman of the Board
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Otto J. Buis Chairman of the Board, March 27, 1997
Otto J. Buis President and Chief Executive
Officer and Director
/s/ Patrick M. Montalban Executive Vice-President, March 27, 1997
Patrick M. Montalban Chief Operating Officer
and Director
/s/ C. Al Buis Director March 27, 1997
C. Al Buis
Director March 27, 1997
Robert McClinton
/s/ Steven M.Morris Director March 27, 1997
Steven M. Morris
/s/ Howard N. Boals Vice President - Finance March 27, 1997
Howard N. Boals Chief Accounting Officer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MSR Exploration Ltd. and Subsidiaries
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of MSR
Exploration Ltd. and subsidiaries (the Company) as of December 31,
1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 26, 1997
F - 1
MSR Exploration Ltd. and Subsidiaries
(Incorporated Under the Laws of Alberta)
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
U.S. DOLLARS
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $262,150 $232,594
Time deposits 51,035 46,975
Accounts receivable 936,639 700,069
Inventories 194,873 184,421
Prepaid expenses 15,184 11,478
Total current assets 1,459,881 1,175,537
PROPERTIES, PLANT AND EQUIPMENT - NET
("full cost") (Note 4) 28,786,443 29,040,594
OTHER ASSETS (Note 5) 470,103 538,025
$30,716,427 $30,754,156
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 6) $706,931 $90,707
Accounts payable 277,141 368,630
Accrued liabilities 612,509 503,140
Total current liabilities 1,596,581 962,477
LONG-TERM DEBT (Note 6) 5,930,532 6,252,012
DEFERRED INCOME TAXES (Note 7) 3,832,635 4,003,000
STOCKHOLDERS' EQUITY
Common stock, without par value
Authorized 20,000,000 shares, issued and
outstanding 13,777,014 in 1996 and
13,712,014 in 1995 17,861,264 17,796,264
Less notes receivable arising from
the issuance of common stock (Note 8) (95,000) (190,000)
Foreign currency translation adjustment (108,986) (98,684)
Retained earnings 1,699,401 2,029,087
19,356,679 19,536,667
$30,716,427 $30,754,156
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F - 2
MSR Exploration Ltd. and Subsidiaries
(Incorporated Under the Laws of Alberta)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
U.S. DOLLARS
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
REVENUE
Oil sales $2,364,440 $2,038,588
Gas sales 1,953,092 763,698
Interest and other income 58,793 324,414
Total revenues 4,376,325 3,126,700
EXPENSES
Operating expenses 1,435,362 1,349,151
Production taxes 311,680 213,793
Depletion and depreciation 1,377,917 1,032,023
General and administrative 1,018,141 1,058,768
Interest 732,911 472,519
Total expenses 4,876,011 4,126,254
Loss before income taxes (499,686) (999,554)
Income tax benefit (Note 7) 170,000 359,000
NET LOSS ($329,686) ($640,554)
PER SHARE NET LOSS ($0.02) ($0.04)
Weighted average number
of shares outstanding 13,773,110 14,262,973
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F- 3
MSR Exploration Ltd. and Subsidiaries
(Incorporated Under the Laws of Alberta)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996 and 1995
U.S. DOLLARS
<TABLE>
<CAPTION>
Foreign Total
Stock Currency Stock-
Common Stock Option Translation Retained holders'
Shares Amount Loans Adjustment Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 14,312,014 $18,621,264 ($300,000) $0 $2,669,641 $20,990,905
Net loss 0 0 0 0 (640,554) (640,554)
Purchase of 700,000 shares (Note 8) (700,000) (875,000) 0 0 0 (875,000)
Issuance of 100,000 shares
of common stock as
payment for services (Note 8) 100,000 50,000 0 0 0 50,000
Translation adjustments 0 0 0 (98,684) 0 (98,684)
Proceeds from stock option loans 0 0 110,000 0 0 110,000
Balance at December 31, 1995 13,712,014 17,796,264 (190,000) (98,684) 2,029,087 19,536,667
Net loss 0 0 0 0 (329,686) (329,686)
Issuance of 100,000 shares
of common stock for
property acquisition (Note 8) 100,000 100,000 0 0 0 100,000
Translation adjustments 0 0 0 (10,302) (10,302)
Repurchase of stock option
shares (Note 8) (35,000) (35,000) 0 0 0 (35,000)
Proceeds from stock option loans 0 0 95,000 0 0 95,000
Balance at December 31, 1996 13,777,014 $17,861,264 ($95,000) ($108,986) $1,699,401 $19,356,679
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F - 4
MSR Exploration Ltd. and Subsidiaries
(Incorporated Under the Laws of Alberta)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 and 1995
U.S. DOLLARS
<TABLE>
<S> <C> <C>
1996 1995
OPERATING ACTIVITIES
Net loss ($329,686) ($640,554)
Charges and credits to net loss not affecting cash
Depletion and depreciation 1,377,917 1,032,023
Amortization of deferred financing costs 67,922 0
Common stock issued for payment of general
and administrative expenses 0 50,000
Gain on property and securities available for sale 0 (175,223)
Deferred income taxes (170,365) (359,000)
Changes in assets and liabilities
Proceeds from sale of (invested in) time deposits (4,060) 29,097
Receivables (236,570) (430,655)
Inventories and prepaid expenses (14,158) 11,316
Accounts payable and accrued liabilities 17,880 (39,419)
NET CASH FROM (USED FOR) OPERATING ACTIVITIES 708,880 (522,415)
INVESTING ACTIVITIES
Property, plant and equipment expenditures (773,766) (1,086,635)
Acquisition of producing properties (250,000) (3,621,984)
Proceeds from sale of property and equipment 0 56,570
Proceeds on notes receivable arising
from the issuance of common stock 60,000 110,000
Change in cumulative foreign currency translation (10,302)
Restricted cash 0 (191,675)
NET CASH FROM (USED FOR) INVESTING ACTIVITIES (974,068) (4,733,724)
FINANCING ACTIVITIES
Principal payments on long-term debt (105,256) (615,706)
Proceeds from debt borrowings 400,000 6,000,000
Payment of financing costs 0 (346,350)
NET CASH FROM (USED FOR) FINANCING ACTIVITIES 294,744 5,037,944
NET INCREASE (DECREASE) IN CASH 29,556 (218,195)
CASH AT BEGINNING OF PERIOD 232,594 450,789
CASH AT END OF PERIOD $262,150 $232,594
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F - 5
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of MSR Exploration Ltd. (the Company) (incorporated
under the laws of Alberta, Canada), and its wholly-owned
subsidiaries. All significant inter-company transactions and
balances have been eliminated in consolidation.
Principal Business Activity and Reorganization
The Company and its subsidiaries are involved in oil and gas
exploration, development and production activities in the United
States and Canada. On February 7, 1992, the Company and its
subsidiaries filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. On March 2, 1993, the Company's Restated First
Amended Joint Plan of Reorganization was confirmed by the
Bankruptcy Court. See Note 2.
U.S. Dollar Reporting
The majority of the Company's business is transacted in U.S.
dollars and, accordingly, the consolidated financial statements
are expressed in that currency.
Securities Available for Sale
The Company had investments in marketable equity securities.
These consisted of common stocks that were listed and traded on
national stock exchanges.
The Company adopted Statement of Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," at January 1, 1994. Statement No. 115 requires that
management classify securities at the date of adoption, and
thereafter at the date of acquisition, as trading, held-to-
maturity, or available-for-sale. The investments in marketable
equity securities had been classified as available-for-sale, and
were stated at fair value each balance sheet date, with
unrealized gains and losses reported separately as a component of
stockholders' equity. During the fourth quarter of 1995, all
marketable securities held by the Company were sold.
Accounts Receivable
The Company's customers are large oil and natural gas purchasers.
The Company does not require collateral and receivables are
generally due in 30-60 days. Management considers all accounts
receivable current and collectible; accordingly, no allowance for
doubtful accounts has been established.
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Major Customers
For the years ended December 31, 1996 and 1995 three purchasers
accounted for approximately 66% and 70%, respectively of the
Company's total consolidated oil and gas sales. The Company does
not anticipate that the loss of any of its present purchasers
would adversely effect the Company's consolidated business. The
Company also believes that, in the event of a loss of a present
purchaser, other oil and gas purchasers located in the Company's
areas of production would offer competitive prices for such
production.
Inventories
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
Properties, Plant and Equipment
The Company follows the "full cost" method of accounting for oil
and gas properties whereby all costs associated with acquiring,
exploring for, and developing oil and gas reserves are
capitalized and accumulated in cost centers established on a
country-by-country basis. Such costs include land acquisition
costs, geological and geophysical expenses, carrying charges on
non-producing properties, costs of drilling both productive and
non-productive wells, and overhead charges directly related to
acquisition, exploration and development activities.
The capitalized costs related to each cost center, including the
estimated future costs to develop proved reserves and the costs
of production equipment, are amortized using the unit-of-
production method based on the estimated net proved reserves of
each country as determined by independent petroleum engineers.
Investments in unproved properties are not amortized until proved
reserves associated with them can be determined or until
impairment occurs. Oil and natural gas reserves and production
are converted into equivalent units based upon estimated relative
energy content.
The capitalized costs less accumulated depletion and depreciation
in each cost center are limited to an amount equal to the
estimated future net revenue from proved reserves discounted at a
ten percent interest rate (based on prices and costs at the
balance sheet date) plus the lower of cost (net of impairments)
or fair market value of unproved properties.
Proceeds from the sale of oil and gas properties are applied
against capitalized costs, with no gain or loss recognized,
unless such a sale would significantly alter the relationship
between capitalized costs and proved reserves of oil and gas, in
which case the gain or loss is recognized in income.
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other plant and equipment are depreciated on the straight-line
basis as follows:
Gas processing plants and gathering systems - over
eight years
Other equipment - over three to five years
Potential impairment of producing properties and significant
unproved properties is assessed annually (unless economic events
warrant more frequent reviews). In addition, a quarterly
impairment analysis of aggregated properties is performed by the
Company using discounted future net cash flows determined based
upon current prices and costs.
Environmental Compliance and Remediation
Environmental compliance costs, including on-going maintenance
and monitoring, are expensed as incurred. Environmental
remediation costs, which improve the condition of a property, are
capitalized.
The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants has adopted Statement
of Position 96-1, "Environmental Remediation Liabilities," which
provides guidance on the recognition, measurement, display and
disclosure of environmental liabilities. The statement is
effective for the Company's 1997 fiscal year. Management has
evaluated such statement and believes that it will not have a
material effect on the financial condition, results of
operation or cash flows of the Company.
Deferred Charges
Financing charges related to the acquisition of debt are deferred
and amortized over the term of that debt using the effective
interest method.
Foreign Currency Translation
The functional currency for the Company's foreign operations is
the applicable local currency; therefore, translation is
performed for balance sheet accounts using current exchange rates
in effect at the balance sheet date, and for revenue and expense
accounts using a weighted average exchange rate for the year.
Joint Venture Operations
Certain of the Company's exploration and development activities
relating to oil and gas are conducted jointly with others. The
accompanying financial statements reflect only the Company's
proportionate interest in such activities.
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
Income taxes provide for the tax effects of transactions reported
in the financial statements and consist of taxes currently due
plus deferred taxes related primarily to differences between the
basis of properties, plant and equipment for financial and income
tax reporting. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and
liabilities are recovered or settled.
Net Income (Loss) Per Share
Net income (loss) per share has been calculated based on the
weighted average number of common shares outstanding during the
year.
Cash Equivalents and Time Deposits
The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Investments with an original maturity in excess of three months
are considered to be time deposits.
Stock-Based Compensation
Compensation expense is recorded with respect to stock option
grants to employees using the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25. The Company has
not elected the fair value method of accounting for stock-based
compensation encouraged, but not required, by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation."
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments under Statement of Financial
Accounting Standards No. 107, "Disclosure about Fair Value of
Financial Instruments," include cash, accounts receivable, notes
payable, accounts payable and long-term debt. The Company
believes that the carrying amount of these items is a reasonable
estimate of their fair value.
Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements, as well
as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
2. BANKRUPTCY
Due to a series of events, which included a substantial net loss
and the inability to negotiate a mutually agreeable restructuring
of indebtedness with the Company's then primary lender, the
Company and its subsidiaries elected on February 7, 1992 to file
voluntary petitions for protection under Chapter 11 of the U.S.
Bankruptcy Code.
On September 12, 1992, the Company filed a plan of reorganization
with the Bankruptcy Court which was subsequently amended on
December 11, 1992 and March 2, 1993, to reflect agreements
between the Company and its creditors.
On March 2, 1993, the Company's Restated First Amended Joint Plan
of Reorganization was confirmed by the Bankruptcy Court. The
significant changes resulting from the Plan include the
following:
A net reduction of $2,429,829 in recorded liabilities to
secured and unsecured creditors through settlement, disallowance
or rejection of claims.
An increase of $5,143,170 in non-current, long-term debt
through establishment of installment payment terms for certain
claims.
As of December 31, 1996, the remaining amount due to pre-petition
creditors totaled $237,463 (see Note 6).
3. SECURITIES AVAILABLE FOR SALE
As discussed in Note 1, the Company elected to adopt FASB
Statement No. 115 as of January 1, 1994. The December 31, 1994
balance of stockholder's equity increased by $171,900 to
recognize appreciation in the fair value of securities available
for sale. There was no deferred tax effect of that appreciation.
All marketable securities held by the Company were sold in
November, 1995, at a gain of $177,000.
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
4. PROPERTY, PLANT AND EQUIPMENT
1996 1995
U.S. proved oil and gas properties:
Rocky Mountain Region $28,245,283 $27,896,712
Texas Region 13,275,806 12,887,117
Accumulated depletion and depreciation (15,989,893) (14,740,907)
Net U.S. oil and gas properties 25,531,196 26,042,922
Canadian oil and gas properties 2,221,085 2,158,803
Accumulated depletion and depreciation (195,915) (150,572)
Net Canadian oil and gas properties 2,025,170 2,008,231
Gas processing plants and gathering 3,623,687 3,388,459
systems
Other equipment 1,146,343 1,061,984
Accumulated depletion and depreciation (3,539,953) (3,461,022)
1,230,077 989,421
Properties, plant and equipment-Net $28,786,443 $29,040,574
5. OTHER ASSETS
Other assets included deferred charges related to the acquisition
of long-term debt (amortized over the life of that debt using the
effective interest method) and restricted cash (held in a letter
of credit in lieu of a plugging and abandonment bond required by
the US Environmental Protection Agency).
1996 1995
Deferred loan cost $385,215 $397,440
Less accumulated amortizatioin (106,737) (51,040)
Net deferred loan cost 278,478 346,400
Restricted cash 191,625 191,625
Total other assets $470,103 $538,025
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
6. NOTE PAYABLE AND LONG-TERM DEBT
1996 1995
Long-term debt consists of:
Prime rate plus 1.0% note
payable to Banque Paribas
(9.25% at December 31, 1996) $6,400,000 $6,000,000
Various pre-petition claims at
interest rates ranging from
6% to 10% due in monthly,
quarterly and annual
installments
including interest 237,463 342,719
6,637,463 6,342,719
Less current maturities (706,931) (90,707)
$5,930,532 $6,252,012
Long-term debt maturities are as follows:
Years Ending Amount
December 31,
1997 $706,931
1998 868,294
1999 928,892
2000 848,649
2001 744,697
Thereafter 2,540,000
$6,637,463
During the first quarter of 1995, the Company entered into a
revolving credit/term loan agreement with a bank. The agreement
allowed the Company to borrow up to $15,000,000 under a revolving
credit arrangement for a two year period. On August 15, 1996 the
loan limit was set at $6,500,000 and on January 1, 1997 the
commitment shall be reduced by monthly payments at a rate of
$60,000 for 1997, $65,000 for 1998, $75,000 for 1999, $70,000 for
2000 and $60,000 for 2001. The Company can designate the
interest rate on amounts outstanding as either the London
Interbank Offered Rate (LIBOR) + 2.5% or bank prime plus 1%. The
collateral for this loan agreement consists of substantially all
of the existing assets of the Company and any future reserves
acquired. The loan agreement contain certain restrictive
covenants which, among other things, require the maintenance of a
minimum current ratio, net worth and debt service ratio. As of
December 31, 1996 the Company was in compliance with all such
requirements.
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities as of December 31, 1996 and
1995 are as follows:
1996 1995
Deferred tax assets:
Operating loss carryforwards $3,565,000 $3,473,503
Investment tax credits 428,000 428,765
Total deferred tax assets 3,993,000 3,902,268
Less valuation allowance (2,002,635) (2,165,768)
1,990,365 1,736,500
Deferred tax liabilities:
Properties, plant and
equipment 5,823,000 5,739,500
Total deferred tax
liabilities 5,823,000 5,739,500
Net deferred tax $3,832,635 $4,003,000
liabilities
The income tax benefit for each of the years ended December 31,
1996 and 1995 consists of the following:
1996 1995
Deferred tax benefit ($170,365) ($359,000)
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pre-
tax income for the years ended December 31, 1996 and 1995 due to
the following:
1996 1995
Computed expected tax
expense (benefit) ($170,365) ($340,500)
Increase (decrease) in
income resulting from:
State income taxes, net
of federal tax benefit (20,000) (40,000)
Other 20,365 21,500
($170,000) ($359,000)
The Company has U.S. net operating loss carry-forwards of
approximately $10,500,000 available to reduce future U.S. taxable
income. These U.S. net operating loss carry-forwards begin to
expire in 2001. The Company also has Canadian expense carry-
forwards totaling approximately $2,200,000 available to reduce
future Canadian taxable income. These Canadian expense carry-
forwards have no expiration date. Use of these U.S. and Canadian
carry-forwards is dependent on future taxable income.
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
8. COMMON STOCK TRANSACTIONS
In May, 1996 the Company issued 100,000 shares of common stock,
valued at $1.00 per share, with $250,000 to purchase an
additional 21% working interest in the Cinco Ltd No. 1 well in
Southeast, Texas.
During 1994, the Company granted stock options for 600,000 shares
of common stock to the Board of Directors and employees. These
options were exercisable at a price of $0.50 per share. The
options were later exercised and initially funded by the Company.
The Company accepted notes receivable totaling $300,000 from
certain members of the Board of Directors and employees, and are
collateralized by the common stock issued. During 1996, the
Company offered each individual the opportunity to cancel the
notes in exchange for Company stock valued at $1.00 per share.
35,000 shares of common stock were presented to reduce such
notes. At December 31,1996 notes receivable arising from the
issuance of common stock was $95,000.
On November 8, 1995 the Company completed the sale of its
holdings in 687,600 shares of GeoResources Common Stock and
44,000 shares of Big Sky Airlines Common Stock to Joseph V.
Montalban, then a director of the Company, in exchange for 700,000
shares of the Company's Common Stock. The sale or exchange was
approved by Shareholders at the Company's Annual General Meeting
held on September 22, 1995.
During 1995, the Company issued 100,000 shares of common stock to
Joseph V. Montalban for services performed in 1994. These shares
were issued at a value of $0.50 per share.
9. RELATED PARTY TRANSACTIONS
The law firm in which the corporate secretary of the Company is a
senior partner acted as Corporate Counsel during 1996 and 1995.
Legal fees and out-of-pocket costs totaling approximately $2,523
and $25,777 were billed to the Company by the law firm during the
years ended December 31, 1996 and 1995, respectively.
The Company sub-leases office space for its Fort Worth
headquarters from Buis & Co. Buis & Co. is partially owned by C.
Al Buis, a current Director of the Company. The Company
reimbursed Buis & Co. $35,160 and $22,300 for annual rental
payments for 1996 and 1995, respectively, and $14,644 and $12,428
for property taxes, telephone and utilities for 1996 and 1995.
The rent paid for the Company's space was at the same rate per
square foot paid by Buis & Co. and is commensurate with rental
rates in the area.
On November 8, 1995 the Company completed the sale of its
holdings in 687,600 shares of GeoResources Common Stock and
44,000 shares of Big Sky Airlines Common Stock to Joseph V.
Montalban, then a director of the Company, in
Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
exchange for 700,000 shares of the Company's Common Stock. The
sale or MSR
exchange was approved by Shareholders at the Company's Annual
General Meeting held on September 22, 1995.
In 1994, the Company retained the services of Buis & Co., a
private investment banking firm, to assist it in arranging credit
facilities. The firm is partially owned by C. Al Buis, a
Director of the Company. In January 1995, the Company paid Buis
& Co. $150,000 for the performance of such services in connection
with the Company's $15,000,000 revolving credit/term agreement.
10. CASH FLOW INFORMATION
1996 1995
Cash paid during the year:
Interest $677,863 $430,156
Income taxes $0 $0
Non-cash investing activity:
Common stock received in payment
of note receivable from
insuance of common stock ($35,000) $0
Non-cash financing activity:
Acquisition of producing property from
from issuance of common stock $100,000 $0
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
11. SEGMENT INFORMATION
All of the Company's activities are in one business segment: oil
and gas exploration, development and production. The Company
operates in the United States and Canada as follows:
Year Ended December 31, United Canada Total
1996 States
Revenues $4,192,960 $183,365 $4,376,325
Operating income (loss) ($514,896) $15,210 ($499,686)
Total assets $28,512,065 $2,204,362 $30,716,427
Depletion per equivalent
unit of production $4.89 $2.59 $4.74
Year Ended December 31, United Canada Total
1995 States
Revenues $2,962,031 $162,669 $3,124,700
Operating income (loss) ($994,718) ($4,836) ($999,554)
Total assets $28,486,026 $2,268,130 $30,754,156
Depletion per equivalent
unit of production $5.01 $2.36 $4.79
12. SUBSEQUENT EVENT.
On March 26,1997, the Company signed a definitive agreement with
Mercury Exploration Company, a Fort Worth, Texas company, to
combine all of their oil and gas assets in Montana with all the
oil and gas assets of MSR Exploration Ltd. ( the Business Combination).
The transaction includes the addition of over 75 producing wells
with proven reserves of more than 5 million barrels of oil. It
also includes the assumption of Mercury's joint venture position
in 304,000 acres of undeveloped oil and gas properties, located
in the Cut Bank Field complex in Montana. Mercury holds, in the
subject area, 100% of the oil rights and 30% of the revenue
pertaining to liquids produced by gas wells.
As consideration for the business combination, MSR will issue to
Mercury shareholders 12,000,000 shares of common stock valued at
$0.75 per share and assume and/or pay $4,000,000 in Mercury bank
debt. Mercury shareholders will receive warrants to purchase
5,500,000 common shares at $1.25 per share and 5,500,000 common
shares at $2.00 per share.
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
As a result of the issuance of the common shares to Mercury by
the Company, Mercury shareholders will effectively own
approximately 46.6% of the Company's total issued and outstanding
common stock. After approval of the Business Combination at the
Company's shareholder meeting anticipated in July 1997, the
common shares will be distributed to the respective shareholders.
Shareholders owning approximately 40% of MSR common stock have
agreed to vote to approve this transaction. Closing the
transaction is expected immediately subsequent to shareholder
approval.
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
(Unaudited)
The following information about the Company's oil and gas
producing activities has been prepared in accordance with
Statement of Financial Standards No. 69, Disclosures about Oil
and Gas Producing Activities.
The Company believes that the valuation method prescribed by
Statement of Financial Standards No. 69 does not provide the best
estimate of current economic value of its oil and gas reserves as
unproved reserves are not attributed any economic value and the
use of year-end price assumptions and a 10% discount rate are
arbitrary.
Proved Oil and Gas Quantities
The following information summarizes the Company's estimated net
quantities of proved and proved-developed oil and gas reserves.
The December 31, 1996 reserves are based on estimates of Citadel
Engineering Ltd., petroleum consultants, contained in a report
dated March 1, 1997.
Year Ended December 31, 1996
Oil (000,s bbls) Gas (mmcf)
United United
Proved reserves States Canada Total States Canada Total
Beginning of year 4,448 22 4,470 17,220 5,840 23,060
Revisions of previous (466) 15 (451) (861) 857 (4)
estimates
Purchase of reserves in 1 0 1 181 0 181
place
Extensions, discoveries,
reworks
and other additions 42 0 42 1,955 0 1,955
Production (123) 0 (123) (784) (106) (890)
End of year 3,902 37 3,939 17,711 6,591 24,302
Proved developed reserves
Beginning of year 2,621 19 2,640 11,593 5,767 17,360
End of year 2,496 34 2,530 12,120 1,831 13,951
Year Ended December 31, 1995
Oil (000's bbls) Gas (mmcf)
United United
Proved reserves States Canada Total States Canada Total
Beginning of year 4,382 21 4,403 14,076 5,736 19,812
Revisions of previous 54 1 55 (1,081) 213 (868)
estimates
Purchase of reserves in 78 0 78 4,623 0 4,623
place
Extensions, discoveries,
reworks
and other additions 65 0 65 0 0 0
Production (131) 0 (131) (398) (109) (507)
End of year 4,448 22 4,470 17,220 5,840 23,060
Proved developed reserves
Beginning of year 2,563 18 2,581 8,502 5,664 14,166
End of year 2,621 19 2,640 11,593 5,767 17,360
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES - (continued)
(Unaudited)
The following standardized measure of discounted future net cash
flows relating to proved oil and gas reserves has been computed
using year-end prices, except where contractual arrangements in
place at year-end provide for future price changes and costs.
Year Ended December 31, 1996 United Canada Total
States
Future cash flows $116,139,00 $10,701,000 $126,840,000
Future production and development costs(31,135,000) (5,309,000) (36,444,000)
Future income tax expense (19,510,000) (900,000) (20,410,000)
65,494,000 4,492,000 69,986,000
10% annual discount for timing of cash (31,989,000) (2,648,000) (34,637,000)
flows
Standardized measure of discounted
cash flows $33,505,000 $1,844,000 $35,349,000
Year Ended December 31, 1995 United Canada Total
States
Future cash flows $100,768,000 $9,301,000 $110,069,000
Future production and development costs (26,641,000) (5,481,000) (32,122,000)
Future income tax expense (16,651,000) (149,000) (16,800,000)
57,476,000 3,671,000 61,147,000
10% annual discount for timing of cash (27,806,000) (1,974,000) (29,780,000)
flows
Standardized measure of discounted
$29,670,000 $1,697,000 $31,367,000
The standardized measure of discounted cash flows does not
include any value relating to the Company's gathering, processing
and transmission of gas reserves owned by other companies.
The following table sets out in aggregate the principle source of
change in the standardized measure of discounted future net cash
flows for each of the two years ended December 31, 1995 and 1994,
respectively.
1996 1995
Sales of oil and gas produced, net of
production costs ($2,570,000) ($1,239,000)
Net changes in price and production 7,740,000 6,176,000
Purchase of reserves in place 350,000 4,453,000
Extensions, discoveries and improved
recovery, less related costs 36,000 148,000
Revisions of previous quantity (637,000) (71,000)
estimates
Development costs incurred during the 367,000 877,000
year
Accretion of discount 3,137,000 2,294,000
Net change in income taxes (3,610,000) (2,960,000)
Other (831,000) (1,248,000)
Net increase 3,982,000 8,430,000
Balance at beginning of year 31,367,000 22,937,000
Balance at end of year $35,349,000 $31,367,000
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES - (continued)
(Unaudited)
Costs incurred in oil and gas property acquisition, exploration
and development activities:
Year Ended December 31,
1996 1995
Property acquisition
costs
United States $406,824 $3,621,984
Canada 0 0
$406,824 $3,621,984
Exploration costs
United States $0 $116,973
Canada 36,352 13,926
$36,352 $130,899
Development costs
United States $331,235 $259,360
Canada 35,336 617,726
$366,571 $877,086
Results of operations from producing activities:
Year Ended December 31, 1996 United Canada Total
States
Oil and gas sales $4,134,515 $183,017 $4,317,532
Operating expenses (1,369,326) (66,036) (1,435,362)
Production taxes (310,679) (1,001) (311,680)
Depletion and depreciation (1,331,917) (46,000) (1,377,917)
1,122,593 69,980 1,192,573
Income taxes (381,682) (23,793) (405,475)
Results of operations from
producing activities(excluding
corporate overhead and
interest costs) $740,911 $46,187 $787,098
Year Ended December 31, 1995 United Canada Total
States
Oil and gas sales $2,651,281 $151,005 $2,802,286
Operating expenses (1,294,364) (54,787) (1,349,151)
Production taxes (213,677) (116) (213,793)
Depletion and depreciation (989,223) (42,800) (1,032,023)
154,017 53,302 207,319
Income taxes (52,366) (18,123) (70,488)
Results of operations from
producing activities (excluding
corporate overhead and
interest costs) $101,651 $35,179 $136,831
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
The following table summarizes selected quarterly financial data
for each of the two years ended December 31, 1996 and 1995,
respectively.
March 31 June 30 September 30 December 31
1996
Revenue $989,000 $1,056,000 $1,082,000 $1,249,000
Net income (loss) ($76,000) ($62,000) ($99,000) ($93,000)
Net income (loss)
per share ($0.01) Nil ($0.01) Nil
1995
Revenue $575,000 $576,000 $827,000 $1,147,000 *
Net income (loss) ($272,000) ($286,000) ($188,000) $105,000
Net income (loss)
per share ($0.02) ($0.02) ($0.01) Nil
* Included gain of $177,000 recognized on the sale of stock.
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