UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITY EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE
SECURITY EXCHANGE ACT OF 1934
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
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months and (2) has been subject to such filing
requirement for the past 90 days. Yes X No __
Check whether the registrant has filed all 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. Yes__ No X because there was no
distribution of securities under the Registrant's confirmed
plan.
Common Shares outstanding at March 31, 1997: 13,777,014
Transitional Small Business Disclosure Format: Yes__ or No X
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
MSR Exploration Ltd. and Subsidiaries
(Incorporated Under the Laws of Alberta)
CONDENSED CONSOLIDATED BALANCE SHEETS
U.S. DOLLARS
March 31, December 31,
1997 1996
ASSETS (unaudited)
(in thousands)
Cash and cash equivalents $348 $313
Accounts receivable 715 937
Inventories 169 195
Prepaid expenses 58 15
Total current assets 1,290 1,460
PROPERTIES, PLANT AND EQUIPMENT - NET
("full cost") 28,738 28,786
OTHER ASSETS 455 470
$30,483 $30,716
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $823 $707
Accounts payable 361 277
Accrued liabilities 551 613
Total current liabilities 1,735 1,597
LONG-TERM DEBT 5,653 5,930
DEFERRED INCOME TAXES 3,807 3,833
STOCKHOLDERS' EQUITY
Common stock, without par value
Authorized 20,000 shares, issued and
outstanding 13,777 in 1997 and
13,712 in 1996 17,861 17,861
Less notes receivable arising from
the issuance of common stock (95) (95)
Foreign currency translation adjustment (130) (109)
Retained earnings 1,652 1,699
19,288 19,356
$30,483 $30,716
See Condensed Notes to Consolidated Financial Statements
2
MSR Exploration Ltd. and Subsidiaries
(Incorporated Under the Laws of Alberta)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
U. S. DOLLARS
(In thousands, except for per share data)
Three Months Ended
Ended March 31,
1997 1996
REVENUE
Oil sales $615 $556
Gas sales 590 415
Interest and other income 15 18
Total revenues 1,220 989
EXPENSES
Operating expenses 397 311
Production taxes 73 56
Depletion and depreciation 367 316
General and administrative 273 221
Interest 182 180
Total expenses 1,292 1,084
Loss before income taxes (72) (95)
Income tax benefit 25 19
Net income (loss) ($47) ($76)
Per share net income (loss) ($0.00) ($0.01)
Weighted average number of shares outstandi 13,777 13,712
See Condensed Notes to Consolidated Financial Statements
3
MSR Exploration, Ltd. and Subsidiaries
(Incorporated Under the Laws of Alberta)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended March 31, 1997 and 1996
(UNAUDITED)
U.S. DOLLARS
1997 1996
CASH PROVIDED BY (USED FOR): (in thousands)
OPERATING ACTIVITIES
Net (loss) ($47) ($76)
Charges and credits to net loss not affecting cash
Depletion and depreciation 366 326
Changes in assets and liabilities 195 (331)
NET CASH FROM (USED FOR) OPERATING ACTIVITIES 514 (81)
INVESTING ACTIVITIES
Property, plant and equipment expenditures (318) (225)
FINANCING
Principal payments on long-term debt (161) (45)
Notes payable, bank proceeds 0 150
NET CASH FROM (USED FOR) FINANCING ACTIVITIES (161) 105
NET INCREASE (DECREASE) IN CASH 35 (201)
CASH AT BEGINNING OF PERIOD 313 280
CASH AT END OF PERIOD $348 $79
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense $149 $159
Cash payments for income taxes $0 $0
See Condensed Notes to Consolidated Financial Statements
4
MSR Exploration Ltd. and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1997 and 1996
Note 1. ACCOUNTING POLICIES AND DISCLOSURES
In the opinion of management of MSR Exploration, Ltd. (the
"Company"), the Company's Consolidated Financial Statements
contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position
of the Company as of March 31, 1997, and the results of its
operations and its cash flows for the three months ended
March 31, 1997 and 1996.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and
notes thereto included in the Form 10-KSB for the year ended
December 31, 1996. The results of operations for the three
month period ended March 31, 1997 and 1996 are not
necessarily indicative of the operating results to be
expected for the full fiscal year.
Note 2. PROSPECTIVE BUSINESS COMBINATION.
On March 26, 1997, MSR Exploration Ltd. (MSR) entered into
an agreement with Mercury Exploration Company (Mercury), a
private company located in Fort Worth, Texas, to combine all
of Mercury's 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 to MSR of over 75
producing wells, which have significant crude oil reserves,
and the assumption of Mercury's position in the 304,000 acre
Wells agreement in the Cut Bank Field complex in
northwestern Montana. In the subject area, Mercury holds
100% of the oil rights and 30% of the revenue interest
pertaining to liquids produced by gas wells. Through
December 31, 1997, most of the revenues and operating
expenses from Mercury's producing oil and gas properties are
subject to a forward sale. A significant portion of the
cash flow attendant to the Mercury properties will not begin
to accrue to MSR until January 1,1998.
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. In addition, Mercury
shareholders will receive warrants to purchase 5,500,000
shares of Common Stock at $1.25 per share and 5,500,000
shares of Common Stock at $2.00 per share.
In negotiating the number of shares of common stock to be
issued to Mercury, consideration was given to the value of
the assets, the estimated proved oil and gas reserves and
the market value of the Common Stock (prior to the date the
Agreement was executed and announced).
Closing the transaction is subject to certain precedent
conditions, including MSR shareholder approval of the
Business Combination and the redomestication and continuance
of MSR as a Delaware corporation. MSR is presently
organized under the laws of Alberta, Canada. The closing is
expected to occur immediately subsequent to MSR's
reincorporation in Delaware and such stockholder approval.
MSR shareholders owning approximately 40% of the 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 issuance of the
aforementioned shares of Common Stock to Mercury by MSR,
Mercury shareholders will effectively own approximately
46.6% of the total issued and outstanding Common Stock.
MSR Exploration Ltd. and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(continued)
Three Months Ended March 31, 1997 and 1996
Note 2. NOTE PAYABLE AND LONG-TERM DEBT. March 31, December 31,
1997 1996
(Unaudited)
The notes payable and long-term debt consists of :
Prime rate plus 1.0% note payable to
Banque Paribas (9.5% at March 31, 1997) $ 6,260,000 $ 6,400,000
Various pre-petition claims at interest rates ranging
from 6% to 10%, due in monthly, quarterly and annual
installments. 214,000 237,000
6,476,000 6,637,000
Less current maturities (823,000) (707,000)
$ 5,653,000 $ 5,930,000
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 contains certain restrictive
covenants which, among other things, require the maintenance
of a minimum current ratio, net worth and debt service
ratio. As of March 31, 1997 the Company was in compliance
with all such requirements.
MSR Exploration Ltd. and Subsidiaries
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Three Months Ended March 31, 1997, compared to Three Months
Ended March 31, 1996.
Revenue. Total revenue for the first quarter ended March
31, 1997 was $1,220,000 a 23% increase compared to the
$989,000 reported for the first quarter of 1996. The
increase is primarily attributed to higher product prices.
Oil sales for the first quarter of 1997 were $615,000, an
11% increase compared to $556,000 of oil sales in the same
period last year. The average price received for oil during
the first quarter of 1997 increased 14% to $19.82 per barrel
compared to the $17.34 average price for the same period in
1996. Oil sales volumes for the quarters ended March 31,
1996 and 1995 were 31,011 barrels and 32,100 barrels,
respectively. This decrease is primarily due to normal
production decline.
Gas sales for the quarter ended March 31, 1997 were
$590,000, an increase of 42% compared to the $415,000
reported for the first quarter of 1996. The average sale
price the Company received for gas sold during the first
quarter of 1997 was $2.71 per Mcf an increase of 34%
compared to the $2.03 in 1996. Gas sales volumes for the
first quarter of 1997 were 217,800 Mcf, compared to 204,500
Mcf sold in the 1996 quarter. The increase in sales is
primarily due to gas sales from the Red River Gas Plant in
Montana. During the same period in 1996 the plant was not
in operation.
Interest and other income for the quarters ended March 31,
1997 and 1996 were $15,000 and $18,000, respectively.
Expenses. Total expenses for the first quarter of 1997
were $1,292,000, an increase of 24% compared to $1,084,000
for the first quarter of 1996. Operating expenses for the
1997 quarter were $397,000, an increase of $86,000 or 28%
compared to the 1996 quarter. Most of the increase can be
attributed to an increase in workover expenditures,
operating expenses of the Red River Gas Plant and the start
up expenses of the Gypsy Highview Gas Plant. The Gypsy
plant was placed in service in late March 1997 after being
out of service for over five years. Production taxes for
the quarters ended March 31, 1997 and 1996 were $73,000 and
$56,000 respectively, a 30 % increase, which was primarily
due to increased sales. Depletion and depreciation expenses
increased 16% to $367,000 for the first quarter of 1997
compared to $316,000 for 1996, primarily due to a higher
depletion rate. General and administrative expenses
increased 24% from $221,000 reported for the 1996 period to
$273,000 reported in first quarter 1997. The 1997 general
and administrative expenses were up principally due to
increases in accounting, legal, and engineering fees.
Interest expense for the quarters ended March 31, 1997 and
1996 was $182,000 and $180,000, respectively.
Net Income (Loss). The Company's results of operations for
the quarter ended March 31, 1997 was a net loss of $47,000
as compared to a net loss of $76,000 for the same period in
1996. This improvement was primarily attributable to the
increase in product sales prices.
Liquidity and Capital Resources - March 31, 1997 vs.
December 31, 1996. The Company's liquidity position at
March 31, 1997 shows a current ratio of 0.74 to 1 with a
negative working capital of approximately $343,000. This
compares to a current ratio of 1.5 to 1 and working capital
of approximately $343,000 at December 31, 1996. The change
was primarily a result of the Company beginning to pay down
its long-term debt.
Cash provided by operating activities for the first quarter
1997 was $514,000 compared to $81,000 used for operating
activity in the first quarter 1996, an increase of $595,000.
Investing activities for the first quarter 1997 used cash of
$318,000 compared to $225,000 for the first quarter 1996.
Most of the 1997 capital expenditures were for
reconditioning and overhaul of the Gypsy Highview Gas Plant
and in 1996 the Company purchased additional interest in a
producing property.
Net cash used for financing activities was $161,000 for the
first quarter 1997 compared to $105,000 from financing
activities for the same quarter in 1996.
MSR Exploration Ltd. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings: None
ITEM 2. Changes in Securities: None
ITEM 3. Defaults Upon Senior Securities: None
ITEM 4. Submission of Matters to a Vote of Security
Holders: None
ITEM 5. Other Information: None
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K: The Company filed a Form 8-K
dated April 11, 1997 reporting a prospective merger
which was announced on March 26, 1997, that MSR
Exploration Ltd. (MSR) had entered into an agreement
with Mercury Exploration Company (Mercury), a private
company located in Fort Worth, Texas, to combine all of
Mercury's oil and gas assets in Montana with all the
oil and gas assets of MSR Exploration Ltd.
MSR EXPLORATION LTD.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto dully
authorized.
Dated May 6, 1997
MSR Exploration Ltd.
By: /s/ Otto J. Buis
Otto J. Buis, Chairman of the Board
President and Chief Executive Officer
By: /s/ Howard N. Boals
Howard N. Boals, Vice President of Finance
Chief Accounting Officer
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