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 June 30, 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 June 30, 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)
CONSOLIDATED BALANCE SHEETS
In Thousand of U.S. Dollars
June 30, December 31,
1997 1996
ASSETS (unaudited)
Cash and cash equivalents $344 $313
Accounts receivable 491 937
Inventories 141 195
Prepaid expenses 39 15
Total current assets 1,015 1,460
PROPERTIES, PLANT AND EQUIPMENT - NET
("full cost") 28,183 28,786
OTHER ASSETS 627 470
$29,825 $30,716
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $839 $707
Accounts payable 157 277
Accrued liabilities 496 613
Total current liabilities 1,492 1,597
LONG-TERM DEBT 5,435 5,930
DEFERRED INCOME TAXES 3,706 3,833
STOCKHOLDERS' EQUITY
Common stock, without par value
Authorized 20,000,000 shares, issued and
outstanding 13,777,014 in 1997 and
13,777,014 in 1996 17,861 17,861
Less notes receivable arising from
the issuance of common stock 0 (95)
Foreign currency translation adjustment (124) (109)
Retained earnings 1,455 1,699
19,192 19,356
$29,825 $30,716
See Condensed Notes to Consolidated Financial Statements
2
MSR Exploration Ltd. and Subsidiaries
(Incorporated Under the Laws of Alberta)
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands of U.S. Dollars, except for per share data
(UNAUDITED)
Three Months Ended Six Months Ended
Ended June 30, Ended June 30,
1997 1996 1997 1996
REVENUE
Oil sales $498 $600 $1,113 $1,156
Gas sales 378 451 968 866
Interest and other income 39 5 54 23
Total revenues 915 1,056 2,135 2,045
EXPENSES
Operating expenses 381 371 778 682
Production taxes 59 60 132 116
Depletion and depreciation 354 334 721 650
General and administrative 236 225 509 446
Interest 183 180 365 360
Total expenses 1,213 1,170 2,505 2,254
Loss before income taxes (298) (114) (370) (209)
Income tax benefit 101 52 126 71
Net (loss) ($197) ($62) ($244) ($138)
Per share net (loss) ($0.01) ($0.00) ($0.02) ($0.01)
Weighted average shares
outstanding for the periods 13,777 13,779 13,777 13,745
See Condensed Notes to Consolidated Financial Statements
3
MSR Exploration Ltd. and Subsidiaries
(Incorporated Under the Laws of Alberta)
CONSOLIDATED STATEMENTS OF CASH FLOW
Six months ended June 30, 1997 and 1996
In Thousand of U.S. Dollars
(UNAUDITED)
1997 1996
OPERATING ACTIVITIES
Net (loss) ($244) ($138)
Charges and credits to net loss not affecting cash
Depletion and depreciation 721 650
(Gain) loss on disposition of property,
plant and equipment (24) 0
Changes in other assets and liabilities 126 (350)
NET CASH FROM (USED FOR) OPERATING ACTIVITIES 579 162
INVESTING ACTIVITIES
Acquisition of properties and equipment (318) (674)
Expenditures on prospective merger (186) 0
Proceeds form sale of property plant and equipment 224 0
Proceeds on notes receivable arising from the
issuance of common stock 95 60
NET CASH FROM (USED FOR) INVESTING ACTIVITIES (185) (614)
FINANCING ACTIVITIES
Principal payments on long-term debt (363) (65)
Notes payable, bank proceeds 400
NET CASH FROM (USED FOR) FINANCING ACTIVITIES (363) 335
NET INCREASE (DECREASE) IN CASH 31 (117)
CASH AT BEGINNING OF PERIOD 313 280
CASH AT END OF PERIOD $344 $163
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense $294 $296
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
Six Months Ended June 30, 1997 and 1996
(Unaudited)
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 June 30, 1997, and the results of its operations and its cash
flows for the six months ended June 30, 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 and six month periods ended June 30, 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 and Mercury Montana,Inc.
(Mercury), both of 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. by way of a merger of the Company with and
into Mercury, with Mercury being the surviving corporation (the
Business Combination).
Mercury has 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 the surviving corporation in the Business
Combinatioin until January 1,1998.
In the Business Combination, the surviving corporation will issue
(i) to MSR shareholders, one share of common stock for each
outstanding share of common stock of MSR and (ii) to Mercury
shareholders, one share of common stock for each outstanding share
of common stock of Mercury. In addition, the surviving corporation
will assume and/or pay $4,000,000 of Mercury Exploration Company
bank debt. Mercury currently has outstanding 12,000,000 shares of
common stock, 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 and stock options to purchase 228,570 shares of common
stock at $0.875.
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. After the Business
Combination Mercury shareholders will effectively own approximately
46.6% of the total issued and outstanding Common Stock and MSR's
present shareholders will own approximately 53.4%.
MSR Exploration Ltd. and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Six Months Ended June 30, 1997 and 1996
Note 3. NOTE PAYABLE AND LONG-TERM DEBT.
June 30, 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 June 30, 1997) $ 6,080,000 $ 6,400,000
Various pre-petition claims at interest rates ranging
from 6% to 10%, due in monthly, quarterly and annual
installments. 194,000 237,000
6,274,000 6,637,000
Less current maturities (839,000) (707,000)
$ 5,435,000 $ 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 June 30, 1997 the Company was
in compliance with all such requirements.
Note 4. New Accounting Standards.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share ("EPS") which establishes new standards for
computing and presenting EPS. It replaces the presentation of
primary EPS with a presentation of basic EPS. Basic EPS excludes
dilution and is computed by dividing income available to common
stockholder by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential
that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. The
provisions of the statement are effective for fiscal years ending
after December 15, 1997. If the provisions of SFAS No. 128 had
been effective the first six months of 1997 and in 1996, basic and
diluted earnings per share would not have been materially different
from primary and fully diluted earnings per share, respectively, as
calculated in accordance with Accounting Principles Board Opinion
No. 15.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements.
It requires (a) classification of items of other comprehensive
income by their nature in a financial statement and (b) display of
the accumulated balance of other comprehensive income separate from
retained earnings and additional paid-in capital in the equity
section of the statement of financial position. The Company plans
to adopt SFAS No. 130 for the quarter ended March 31, 1998.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about
segments of an Enterprise and Related Information, which
establishes standards for reporting information about operating
segments in annual financial statements, and requires selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company plans to adopt SFAS No. 131 for the year
ended December 31, 1998.
MSR Exploration Ltd. and Subsidiaries
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Three and Six Months Ended June 30, 1997, compared to Three and Six
Months Ended June 30, 1996.
Forward Looking Information. Certain information included in this
report contains, and other materials filed or to be filed by the
Company with the Securities and Exchange Commission (as well as
information included statements made or to be made by the Company)
may contain or include, forward looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended.
Such forward looking statements may be or may concern, among other
things, capital expenditures, drilling activity, development
activities, production efforts and volumes, hydrocarbon prices and
the results thereof, and regulatory matters. Such forward looking
statements generally are accompanied by works such as "estimate",
"expect", "predict", "anticipate", "goal", "should", "assume",
"believe", or other words that convey the uncertainty of future
events or outcomes.
Revenue. Total revenue for the Company's second quarter ended June
30, 1997 was $915,000, a 13% decrease compared to the $1,056,000
reported for the same quarter in 1996. The decrease was due to
reduced sales volumes and product prices. Total revenue for the
six months ended June 30, 1997 was $2,135,000, a 4% increase
compared to $2,045,000 for the first six months of 1996. The
increase was the result of favorable increases in the average
prices for gas sales.
Oil sales for the three and six month periods ended June 30, 1997
were $498,000 and $1,113,000, respectively. This was a 17% and 4%
decrease in oil sales compared to the same periods in 1996. Total
oil barrels sold for the second quarter of 1997 was 29,800, a 7%
decrease compared to 31,800 barrels of oil sales in the same period
last year. For the six months ended June 30, 1997 sales volumes
were 60,800 barrels, a 5% decrease over the 63,900 barrels reported
for the same period of 1996. These modest sales volume declines
were primarily the result of natural production declines. The
average price received for oil during the second quarter of 1997
decreased 11% to $16.73 per barrel compared to the $18.85 average
price for the same period in 1996. The average price for oil for
the first six months of 1997 was $18.32 per barrel, an increase of
1% compared to the $18.09 average in 1996.
Gas sales for the quarter ended June 30, 1997 were $378,000, a
decrease of 16% compared to the $451,000 reported for the second
quarter of 1996. Gas sales for the six months ended June 30, 1997
were $968,000, an increase of 12% compared to the $866,000 reported
for the same period in 1996. The average sale price the Company
received for gas sold during its second quarter and first six
months of 1997 was $1.87 and $2.30 per Mcf, respectively. This was
a 9% decrease and a 13% increase in gas prices compared to 1996
average gas prices of $2.05 and $2.04, respectively. The Company
sold 202,500 Mcf and 420,300 Mcf of gas during the three and six
months ended June 30, 1997, an 8% and 1% increase compared to
219,600 and 424,100 Mcf for the respective periods in 1996.
Interest and other income for the three and six months ended June
30, 1997 was $39,000 and $54,000, respectively, and $5,000 and
$23,000 during the same respective periods in 1996. In May 1997
the Company sold its drilling rig for $224,000 which resulted in a
gain for the sale of property, plant and equipment of $24, 000.
Expenses. Total expenses for the second quarter and first six
months of 1997 were $1,213,000 and $2,505,000, an increase of 4%
and 11% compared to $1,170,000 and $2,254,000 reported for the same
periods last year. Operating expenses were $381,000 for the second
quarter of 1997 and $778,000 for the six months ended June 30,
1997, a 3% and 14% increase compared to the 1996 periods. Start-up
costs incurred in reopening the Company's Gypsy Highview Gas Plant
in part resulted in an increase of operating expense during the
first six months of 1997. Production taxes for the three and six
months ended June 30, 1997 were $59,000 and $132,000, respectively
a decrease of 2% and an increase of 14% compared to the 1996
periods. The reduction for the quarter was due to a reduction in
sales for the quarter. The increase in production tax expenses for
the six months ended June 30, 1997 were mostly the result of
increases in oil and gas sales. Also, during the 1997 six month
period ad valorem and property taxes were higher than anticipated.
Depletion and depreciation expenses increased 6% to $354,000 for
the second quarter of 1997 and 11% to $721,000 for the first six
months of 1997 compared to the same periods in 1996, which is
primarily due to the increase in product sales volumes and
marginally due to an increase in depletion rates.
MSR Exploration Ltd. and Subsidiaries
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Three and Six Months Ended June 30, 1997, compared to Three and Six
Months Ended June 30, 1996.
General and administrative expenses for the three and six months
ended June 30, 1997 increased 5% to $236,000 and 14% to $509,000,
respectively, compared to amounts reported for the like periods in
1996. The 1997 general and administrative expenses increases were
principally due to increases in accounting, legal and engineering
fees, some of which relate to the prospective merger. Interest
expense for the second quarter of 1997 was $183,000 a 2% increase
over $180,000 for the same quarter in 1996. Interest expense for
the first six months of 1997 was $365,000, a 1% increase compared
to the $360,000 in 1996.
Net Income (Loss). The Company's results of operations for the
quarter ended June 30, 1997 was a net loss of $197,000 as compared
to a net loss of $62,000 for the same period in 1996. The results
for the six month period ended June 30, 1997 was a net loss of
$244,000 as compared to a net loss of $138,000 reported in the 1996
period. The 1997 results declined partly due to the start-up of
the Company's Gypsy Highview gas plant and costs relating to the
prospective merger.
Liquidity and Capital Resources - June 30, 1997 vs. December 31,
1996. The Company's liquidity position at June 30, 1997 shows a
current ratio of 0.7 to 1 with a working capital deficit of
approximately $478,000. This compares to a current ratio of 0.91
to 1, with current liabilities exceeding current assets by $137,000
at December 31, 1996. To bolster the Company's liquidity position
it is in the process of restructuring its long-term debt. This is
in conjunction with the Company's prospective merger with Mercury
Montana, Inc. which should in the long-term provide a positive
impact on working capital. Until the merger has been completed and
the debt restructured, for the short-term, the Company's working
capital position will remain approximately the same.
Cash from operating activities for the first six months of 1997 was
$576,000 compared to $162,000 from operating activity in the same
period in 1996. The increase in cash flow was primarily the result
of better product prices.
For investing activities, the Company used $185,000 for the six
months ended June 30, 1997 compared to $714,000 used in 1996. For
the 1997 period the Company incurred capital expenditures of
$318,000, which $222,000 was for reconditioning and overhauling the
Gypsy Highview Gas Plant and approximately $182,000 on merger
costs. In May 1997 the Company sold its only drilling rig for
$224,000. During the 1996 period the Company purchased an
additional 21% working interest in the Cinco Ltd.#1 well in
Southeast Texas, bringing its total interest to 74%. The Company
ran an additional 6 miles of gathering line to six gas wells and
drilled and completed three gas wells in Montana.
Net cash used for financing activities was $363,000 for the first
six months of 1997 compared to $435,000 from financing activities
for the same period in 1996. All funds used in the 1997 period was
to reduce long term debt. The 1996 bank loan proceeds and the
issuance of 100,000 shares of the Company's common stock, valued at
$1.00 per share, were used primarily to acquire property and
equipment.
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: None
MSR Exploration Ltd. and Subsidiaries
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 duly authorized.
Dated: August 13, 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
and Chief Accounting Officer
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