UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITY EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
Delaware 75-2695071
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
New Address:
612 Eighth Avenue, Fort Worth, Texas 76104
Prior Address:
500 Main Street, 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(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
Common Shares, United State
$0.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange 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 period from Inception, March 7,
1997, to December 31, 1997 were $854,000
The aggregate market value of the Common Shares held by
nonaffiliates (approximately 10,103,000 shares) of the Registrant
as of March 16, 1998, was approximately $10,103,000. As of March
16, 1998, there were 25,777,014 shares of the registrant's Common
Stock outstanding.
Check if disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Old MSR did 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 a
confirmed plan.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format: Yes or No X
2
PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
BUSINESS DEVELOPMENT
MSR Exploration Ltd., previously Mercury Montana, Inc. (the
"Company") was organized on March 7, 1997 under the laws of the
State of Delaware for the purpose of acquiring from Mercury
Exploration Company, a Texas corporation, ("Mercury"), and
thereafter exploring, developing, and operating, all of Mercury's
oil and natural gas properties located in Montana (the "Mercury
Properties"). Upon formation of the Company, Mercury and certain
of its directors, officers and agents conveyed the Mercury
Properties to the Company in exchange for shares of the Company's
common stock and common stock warrants.
On October 31, 1997, the Company completed a merger (the
"Merger") with MSR Exploration Ltd., formerly an Alberta, Canada
corporation ("Old MSR"). The Merger combined all the assets of
the Company and Old MSR and was accounted for under the purchase
method of accounting. The Company was the surviving corporation
in the Merger and changed its name to MSR Exploration Ltd.
As a result of the Merger, pursuant to the terms of the Agreement
and Plan of Merger, dated March 26, 1997, as amended, among Old
MSR, the Company and Mercury Exploration Company, each
outstanding share of common stock, no par value per share, of Old
MSR outstanding immediately prior to the effective time of the
merger was converted into the right to receive one share of
common stock, par value $0.01 per share, of the Company. In
accordance with Rule 12g-3(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Company has succeeded
to the obligations of Old MSR under the Exchange Act and will
continue to file reports with the Securities and Exchange
Commission using the Commission File Number (No. 1-8523) utilized
by its predecessor.
On February 7, 1992, Old MSR voluntarily filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. On September 12,
1992, Old MSR filed a plan of reorganization with the Bankruptcy
Court, which was subsequently amended to reflect agreements
between Old MSR and its creditors. On March 2, 1993, Old MSR's
plan of reorganization was approved by the Bankruptcy Court.
The Company's corporate offices are located at 612 Eighth Avenue
in Fort Worth, Texas 76104. The telephone number is (817) 877-
3151. Unless the context requires otherwise, all references
herein to "MSR," "New MSR" or the "Company" are to MSR
Exploration Ltd., post Merger, and its subsidiaries.
BUSINESS COMBINATION
At a combined Annual General and Special Meeting of Shareholders
of Old MSR held on October 30, 1997, the shareholders elected
directors and approved the domestication or continuance of Old
MSR from Alberta, Canada, to Delaware, USA. The domestication of
Old MSR into Delaware was required for the Merger to become
effective. The Merger was subsequently approved on October 31,
1997, by written consent of the stockholders of Old MSR.
As part of the Merger, the Company issued to Old MSR shareholders
one share of common stock of the Company for each of the
13,777,014 outstanding shares of Old MSR common stock. Each of
the 12,000,000 shares of common stock of the Company outstanding
prior to the Merger remained outstanding. The combined total
number of outstanding shares of the Company's common stock became
25,777,014. All such shares are listed for trading on the
American Stock Exchange. In addition, warrants to purchase 5.5
million shares of common stock of the Company at $1.25 per share,
and 5.5 million shares at $2.00 per share also remained
outstanding after the Merger, as did Company stock options to
purchase an aggregate of 228,570 shares of Company common stock
at $0.875 per share granted in lieu of salaries. An outstanding
warrant to purchase 280,000 shares of common stock of Old MSR at
$3.375 per share was converted to an equivalent right to acquire
shares of the Company.
Three members of Old MSR's Board of Directors, Otto J. Buis,
Patrick M. Montalban and Steven M. Morris, together with two
independent directors, D. Randall Kent and W. Yandell Rogers,
III, were elected to the Board of Directors of Old MSR at its
October 30, 1997, meeting. With the completion of the Merger,
Messrs. Buis, Montalban, Morris, Kent and Rogers became directors
of the Company, joined by Frank Darden, Thomas F. Darden and
Glenn M. Darden, directors of the Company prior to the Merger and
also directors of Mercury.
On October 31, 1997, the Company restructured Old MSR's revolving
credit facility and entered into a new credit agreement with a
bank. The closing of the new loan was subject to the successful
completion of the Company's merger with Old MSR. The new
agreement provides for a $25,000,000 senior secured revolving
credit facility with an initial borrowing base of $12,000,000,
which matures in five years. The Company immediately utilized
the new credit facility to repay $4.0 million of debt owed by
Mercury to Nations Bank. Such debt was due and payable by
Mercury on December 31, 2002. The debt was secured by a lien on
the Mercury Properties, which were taken by the Company subject
to such lien.
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 properties are primarily in Montana and
Texas. All of the Company's interests in the United States are
operated and managed by Mercury. The Company and Mercury entered
into a management agreement upon effectiveness of the Merger.
Pursuant to the agreement, Mercury will manage the ongoing
operations of the Company's various oil and gas properties and
gas gathering and compression facilities located in Montana and
Texas. The Company is required to reimburse Mercury for its
costs and expenses incurred in connection with managing such
operations and, in addition, pay to Mercury a management fee
equal to 10 percent of such costs and expenses. The Company also
must indemnify Mercury and its officers, directors, shareholders,
employees and agents against losses incurred in connection with
the performance of the management agreement, except to the extent
that such losses arise as a result of the gross negligence or
intentional misconduct of such indemnified parties. The term of
the management agreement is two years from the effective date of
the Merger and continues thereafter for successive one-year
terms. Unless terminated by either party to the agreement, at
the end of the initial term or any successive one-year term upon
30-day advance notice.
BUSINESS OF THE COMPANY
General. The business purpose of the Company is to engage in the
acquisition, exploration, production and sale of crude oil,
condensate and natural gas and the gathering, processing and
transmission of natural gas.
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 oil and/or gas wells or redrills or recompletes
existing wells located on such leases for the recovery 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 areas other than those in which it is currently involved.
The Company has entered into an agreement with Mercury to act as
"operator" of the Company's oil and gas properties primarily in
Montana and Texas. In this capacity, Mercury is responsible for
the daily activities of producing oil and/or gas from individual
wells and leases located within those states. Mercury's
functions are focused primarily towards management of the
properties to maximize profitability and supervision of its field
employees. Additionally, for some wells, Mercury 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 from 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
owns 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 owns and holds working interests in over 425
producing oil and gas wells. The Company also holds or has
acquired interests in properties that 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 that seek to acquire similar assets.
The operations and expenditures on behalf of the Company in
seeking additional acquisitions 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, 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 that 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.
The following information and factors are considered by
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 that
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 i) on a footage contract,
ii) on an hourly arrangement during the drilling, testing and
completion phase of each well, or iii) by seeking 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, through Mercury, 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 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, through or with assistance
from Mercury, 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 determine from time to time 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 render 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 proved 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. The Company owns and
operates gas-gathering pipeline systems and two gas plants
located in northwest Montana. During the two months ended
December 31, 1997, the Red River Plant sold 12,800 Mcf, which
were approximately 5 percent of the Company's total gas sales.
The Gypsy Highview Gas Plant and the Red River Gas Plant
presently compress natural gas from Company leases. The Red
River Plant has a capacity of 8,000 Mcf per day and was
delivering to the purchasers approximately 200 Mcf per day from
12 company wells. The Gypsy Highview Plant has a capacity of
8,000 Mcf per day and has been shut down since November 1997 due
to lack of available gas production from area wells.
The Company has a five-year natural gas sales contract with
Montana Power Company that expires on January 1, 2004. The
agreement calls for an annual price predetermination in January
of each year, with the 1998 base price set at $1.65 per Mcf. For
the past two years, the purchaser has invoked its right not to
take gas during the months of June, July and August. Therefore,
the Company does not anticipate any sale from its gas plants
during those months.
The Company's gas plants have been qualified and permitted to
operate by Montana's Department of Environmental Quality. In
addition, the Federal Energy Regulatory Commission ("FERC")
regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of gas produced by the
Company, as well as the revenues received by the Company for the
sales of such productions. Since the mid-1980s, FERC has issued
a series of orders, culminating in Order Nos. 636, 636-A and 636-
B ("Order 636"), that have significantly altered the marketing
and transportation of gas. Order 636 mandates a fundamental
restructuring of interstate pipeline sales and transportation
service, including the unbundling of interstate pipeline sales,
transportation, storage and other components of the city-gate
sales services which such pipelines previously performed. One of
FERC's purposes in issuing the orders is to increase competition
within all phases of the gas industry. Order 636 and subsequent
FERC orders on rehearing have been appealed and are pending
judicial review. Because these orders may be modified as a
result of the appeals, it is difficult to predict the ultimate
impact of the orders on the Company and its gas-marketing
efforts. Generally, Order 636 has eliminated or substantially
reduced the interstate pipelines' traditional role as wholesalers
of natural gas, and has substantially increased competition and
volatility in natural gas markets.
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 blowout and
cratering, completed operations, and broad-form contractual
liability with respect to any contract 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
blowout, 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 or, if so, 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 for acquisition of properties 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 the Company's 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 or its
agent act 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. From the Company's inception on March 7, 1997
to December 31, 1997, three customers: Rio Vista Energy, Ltd.,
Montana Power Company and J. N. Petroleum Marketing, Inc.,
accounted for approximately 42 percent, 22 percent and 11 percent
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 the 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, 1997, the Company had eight full-time
employees, including officers.
Financial Information About Foreign and Domestic Operations and
Export Sales. Since inception in March 1997, the Company has
produced and sold oil and gas in the United States. At December
31, 1997, five wells were on production in Canada. For
information regarding the Company's United States revenues,
operating profits and assets see the Consolidated Financial
Statements. Revenues and expenses from Canadian interests are
considered immaterial.
ITEM 2. DESCRIPTION OF PROPERTY
Montana Properties. The Company owns crude oil and natural gas
producing properties in northwest Montana, near Cut Bank located
in Glacier, Pondera and Teton Counties. Approximately 75 crude
oil producing wells (the "Mercury Properties") were contributed
to the Company by Mercury upon the Company's formation in March
1997. These wells were subject to a prior production payment,
forward-sale agreement between Mercury and a third party covering
a period from October 1996 through December 1997. The agreement
was the obligation of Mercury, consequently the oil revenue and
associated expenses from these properties belonged to Mercury
through December 31, 1997, and started accruing to the Company on
January 1, 1998.
The Mercury Properties also include the rights and obligations
under an agreement with a utility company in Montana related to
approximately 304,000 acres of largely undeveloped oil and gas
properties centered over the Cut Bank Field complex in
northwestern Montana. The Company holds 100 percent of the oil
rights and the rights to 30 percent of the revenue interest
pertaining to liquids produced from gas wells.
As a result of the Merger the Company became the owner of an
interest in approximately 236 oil wells producing primarily from
the Cut Bank formation to depths to 3,000 feet. The Company has
an average of 99 percent of working interests in the area. The
Company's net production during December 1997 averaged
approximately 250 barrels of oil per day (BOPD). The Company's
average daily production in January 1998, including the Mercury
Properties, was approximately 700 BOPD.
The geologic complexity of Cut Bank Field has resulted in the
inefficient development of the field and consequently a large
amount of oil, which is potentially recoverable, remains in the
rock. MSR is using modern technology in an attempt to accurately
model these depositional complexities and identify bypassed oil
reserves that could be recovered by developing the Cut Bank
Field.
In late 1997, MSR shot a 3-D seismic survey over approximately
nine square miles of the Cut Bank Field. This data is currently
being evaluated using methods and techniques which will
seismically image the sand deposits and integrate all available
geologic and reservoir engineering data to create the most
accurately detailed model possible. In 1998, MSR plans to drill
three or four wells in the Cut Bank Field. These wells will be
drilled once the seismic evaluation is completed and will allow
MSR to test and refine the model. If these techniques, which
have been proven to identify undeveloped and bypassed reserves,
are successful at Cut Bank, MSR could add significant reserves to
the Cut Bank Field. During the fourth quarter of 1997, the
Company incurred approximately $530,000 of capital expenditures
on 3-D seismic imaging.
In northwestern Montana, the Company owns the Red River Gas
Plant, which consists of a compressor and a dehydration unit, and
an associated gathering and transmission system. 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.
Texas Properties. The Company owns 100 percent working interest
in 43 wells near Winters, Texas, in Runnels County, that produce
primarily crude oil. During December 1997, the Company's net
production from these properties averaged approximately 70 BOPD.
In southeast Texas, the Company owns three principally natural
gas wells, the Cinco Ltd. #1, Schmidt #1 and Josey Ranch #3. The
Company holds a 74 percent, 42 percent and 42 percent working
interest in the wells and the wells are located in Fort Bend,
Brazoria and Harris Counties, respectively. During December
1997, the Company's net production from these properties averaged
approximately 1886 Mcf per day of natural gas and 28 BOPD.
Active areas of exploration interest for the Company are Montana,
Texas, North Dakota and Western Canada properties. The Company
also owns minor oil and gas working and royalty interests in
Western Canada.
Productive Wells and Acreage as of December 31, 1997.
Gross Net
United States properties Oil Gas Oil Gas
Productive Wells* 278 143 278 141.58
Developed Acreage** 103,414 Acres 102,606 Acres
Undeveloped Acreage*** 21,983 Acres 17,962 Acres
Gross Net
Canadian properties Oil Gas Oil Gas
Productive Wells* 0 5 0 .27
Developed Acreage** 15,974 Acres 1,019 Acres
Undeveloped Acreage*** 9,648 Acres 197 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 barrels of oil equivalent (BOE) for
the period from inception March 7, 1997, to December 31, 1997,
were as follows:
Production Average Price Average
Oil Gas Oil Gas Production
(Bbl)* (Mcf)** (Bbl)* (Mcf)** Cost per BOE
16,336 274,100 $15.74 $2.08 $4.77
* Barrels ("Bbl")
** Thousand cubic feet ("Mcf")
Drilling Results. Below is a summary of combined drilling
activity for the Company and Old MSR, for the three years
ended December 31, 1997. No wells were drilled during 1997.
Wells Drilled (Gross): Exploratory Development
Year Productive Dry Productive Dry
1996** 1 - - -
1996* - - - 1
1995** 2 - 4 -
* 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 as
of December 31, 1997, 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 proved 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
Old MSR held an Annual General and Special Shareholders Meeting
on October 30, 1997, at 10:00 a.m. local time. At the meeting,
shareholders (1) elected five directors and (2) approved the
continuance or domestication of the Old MSR from Alberta, Canada,
to Delaware, USA. After the continuance, the shareholders
approved the merger of Old MSR with Mercury Montana, Inc., by
written consent. Below are the results of the voting.
Shares For Shares Against Abstentions
Director Otto J.Buis 11,149,748 125,882
Director Patrick M. Montalban 10,588,471 687,159
Director Steven M. Morris 11,149,478 126,152
Director D. Randall Kent 10,876,648 398,982
Director W.Yandell Rogers,III 10,875,348 400,282
Continuance to Delaware 8,368,804 132,130 17,518
Consent to Merge 9,193,286 212,917
The Company was not required to, and did not, submit any matters
to a vote of security holders during the first quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Market Information. The Company's common stock has been listed
on the American Stock Exchange since November 3, 1997; and the
common stock of Old MSR, 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 and Old MSR's as reported by the
American Stock Exchange.
1997 1996
High Low High Low
First Quarter $1 $13/16 $1 1/4 $13/16
Second Quarter 1 1/8 15/16 1 1/16 3/4
Third Quarter 1 1/8 3/4 1 3/4
Fourth Quarter 1 3/8 15/16 15/16 11/16
Security Holders. As of March 17, 1998, the number of registered
holders of the Company's common shares was 1,432.
Dividends. The Company has never paid any cash dividends and
presently intends to retain its earnings to finance the growth of
its business. The Company's credit facility contains certain
restrictions on the Company's ability to declare and pay
dividends. The payment of future cash dividends, if any, will be
reviewed periodically by the Board of Directors and will depend
upon, among other things, the Company's financial condition,
funds from operations, the level of its capital and exploration
expenditures, its future business prospects and any restrictions
imposed by the Company's present or future credit facility.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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. This discussion should not be construed to imply that
the results discussed herein will necessarily continue into the
future or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such
discussion represents only the best present assessment of
management of the Company.
On March 7, 1997, the Company was organized to explore, develop
and operate oil and natural gas properties. In exchange for
Company common stock and common stock warrants, the founders of
the Company contributed approximately 75 crude oil producing
wells in northwest Montana, constituting the Mercury Properties
as discussed in Item 2 above. These properties were subject to a
forward sale of production and consequently the revenue or
expenses from the properties did not begin to accrue to the
Company until January 1, 1998.
On March 26, 1997, Old MSR , entered into an agreement with the
Company, then known as Mercury Montana, Inc., and its majority
shareholder at that time, Mercury, both of Fort Worth, Texas, to
combine all of the Company's oil and gas assets in Montana with
all the oil and gas assets of Old MSR by way of the Merger. The
Company was the surviving corporation in the Merger and changed
its name to MSR Exploration Ltd. on October 31, 1997, the
effective time of the Merger. The Merger was accounted for under
the purchase method of accounting with the Company considered the
accounting acquiror.
Due to the Company's limited existence, discussion and analysis
of results of operations will be centered on the unaudited pro
forma consolidated statements of operation set forth below.
These pro forma statements of operations are presented to provide
more comparative information about the Company for 1998 and beyond.
Comparison of Pro Forma Statements of Operations. Pro Forma
statements of operations, including production payment
adjustments, for the year ended December 31, 1997 and the year
ended December 31, 1996 are presented immediately after the
following comparisons.
Revenue. Total pro forma revenues for the year ended December
31, 1997 were $6,577,000, an 8 percent decrease compared to pro
forma revenues of $7,135,000 for 1996. Oil sales were $4,151,000
in 1997, a 15% decrease compared to $4,908,000 in 1996. This
decrease was attributable to a 10 percent decrease in average
price per barrel sold from $19.25 in 1996 to $17.34 in 1997.
Sale volumes decreased 6 percent from 255,000 barrels sold in
1996 to 239,000 barrels in 1997. The decrease in sales volumes
was due primarily to natural production declines. Pro forma gas
sales in 1997 were $2,331,000, an 8 percent increase compared to
$2,168,000 in 1996. An average gas sales price of $2.21 per Mcf
was approximately the same for both periods. Gas sales volumes
in 1997 were 1,054,000 Mcf, an increase of 8 percent compared to
977,000 Mcf in 1996. This increase in gas sales volumes was in
part due to increased sales from gas plants.
Expenses. Total pro forma expenses for 1997 were $6,928,000, a
decrease of 3 percent compared to $7,108,000 for 1996. Operating
expenses increased 3% from 1996 to 1997 primarily due to an
increase in gas plant operating expenses. Production taxes and
depletion and depreciation expenses were down 3 and 6 percent,
respectively, due to the reduction in sales revenues. General
and administrative expenses for 1997 were $937,000, an 8 percent
decrease compared to $1,018,000 for 1996. This decrease was the
result of cost cutting efforts, which were begun during the
fourth quarter of 1997. Interest expense declined 6 percent in
1997 to $1,042,000 compared to $1,107,000 in 1996. The reduction
in interest expense was due to reduced interest rates in the
fourth quarter of 1997 and reduction of debt throughout 1997.
Net income (loss). For 1997 the pro forma net loss was $232,000
compared to a net income of $18,000 for 1996. The 1997 loss was
primarily due to lower crude oil prices.
The following pro forma consolidated statements of operations for
the years ended December 31, 1997 and 1996 combine the historical
information of the Company and Old MSR adjusted to give effect to
the Merger and Production Payment and the related pro forma
adjustments which are based on estimates and assumptions explained
in further detail in Notes to these statements. The pro forma
statements of operations for the years ended December 31, 1997
and 1996, reflect the consolidated operations of the Company
and Old MSR as if the merger had been consummated as of
January 1, 1996.
The pro forma statements of operations are provided for
comparative purposes only and should be read in conjunction with
the historical consolidated financial statements of the Company
included elsewhere in this Form 10-KSB. The pro forma
information presented is not necessarily indicative of the
combined financial results as they may be in the future or as
they might have been for the periods indicated had the Merger
been consummated as of January 1, 1996. The Merger was accounted
for under the purchase method of accounting with the Company
considered the accounting acquiror.
MSR Exploration Ltd.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1997
In thousands except for per share amounts
Ten Months As Adjusted
Ended Pro Forma
October 31, Production Including
1997 Adjust- Payment Production
Company Old MSR ments Pro Forma Adjustment Payment
Note 1 (a) Note 1 Note 2 Note 2
REVENUES
Oil sales $257 $1,714 $1,971 $2,180 $4,151
Gas sales 570 1,761 2,331 2,331
Interest and other 27 68 95 95
Total revenues 854 3,543 0 4,397 2,180 6,577
EXPENSES
Operating expenses 228 1,255 1,483 1,326 2,809
Production taxes 68 283 351 210 561
Depletion and depreciat 220 1,169 (248)(b 1,141 438 1,579
General and administrat 146 791 0 (c) 937 937
Interest 147 605 752 290 1,042
Total expenses 809 4,103 (248) 4,664 2,264 6,928
Income (loss) before inc 45 (560) 248 (267) (84) (351)
Income tax benefit (expe (15) 190 (84)(d) 91 29 119
Net income (loss) $30 ($370) $164 ($176) ($55) ($232)
Basic and diluted per
share net income (loss) $0.00 ($0.03) ($0.01) ($0.01)
Weighted average number of
shares outstanding 12,000 13,777 25,777 25,777
See Notes to Pro Forma Consolidated Financial Statements
MSR Exploration Ltd.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1996
In thousands except for per share amounts
As Adjusted
Pro Forma
Production Including
Old Adjust- Payment Production
Company MSR ments Pro Forma Adjustment Payment
Note 1 (a) Note 1 Note 2 Note 2
REVENUES
Oil sales $1,855 2,364 $4,219 $689 $4,908
Gas sales 215 1,953 2,168 2,168
Interest and other 59 59 59
Total revenues 2,070 4,376 6,446 689 7,135
EXPENSES
Operating expenses 1,054 1,435 2,489 243 2,732
Production taxes 199 312 511 65 576
Depletion and deprecia 412 1,378($268)(b) 1,522 153 1,675
General and administrative 1,018 0 (c) 1,018 1,018
Interest 273 733 1,006 101 1,107
Total expenses 1,938 4,876 (268) 6,546 562 7,108
Income (loss) before in 132 (500) 268 (100) 127 27
Income tax benefit (exp (45) 170 (91)(d) 34 (43) (9)
Net income (loss) $87 ($330)$177 ($66) $84 $18
Basic and diluted per
share net income (loss) $0.01 ($0.02) ($0.00) $0.00
Weighted average number of
shares outstanding 12,000 13,777 25,777 25,777
See Notes to Pro Forma Consolidated Financial Statements
12
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS
1. Pro Forma Adjustments
The accompanying unaudited pro forma consolidated statements of
operations reflect the following adjustments;
(a) The information reflected as "Company" for 1997 is from
inception, March 7, 1997, to December 31, 1997, which includes
Old MSR beginning October 31, 1997. Amounts for the first two
months of 1997 are considered immaterial. The 1996 informantion
reflects operations from the Mercury Properties for the nine
months ended September 30, 1996. Revenues for the last three
months of 1996 were dedicated to the forward sale, see Note 2.
(b) Depreciation, depletion and amortization expense (DD&A)
expense for Old MSR has been recomputed based on the revaluation
of Old MSR's properties required by the purchase method of
accounting for the Merger. Old MSR's DD&A expense was reduced
$268,000 for 1996 and $248,000 for 1997.
(c) The general and administrative expenses of the combined
entities are not anticipated to increase. By bringing together
both the Company's and Old MSR's Fort Worth, Texas offices and
the Cut Bank, Montana offices, general and administrative
expenses are anticipated to be reduced by approximately 25
percent per year.
(d) Income taxes or tax benefits were computed on a pro forma
basis using the Company's effective rate of 34 percent.
2. Forward Sale of Oil Revenues.
The Company's oil revenues and associated operating expenses from
the Mercury Properties included in the pro forma statements of
operations were subject to a prior production payment forward
sales agreement between Mercury and a third party ("the Forward
Sales Agreement") for the period of October 1996 until a certain
amount of production was delivered to the third party. The
production payment was completed and the agreement fulfilled on
December 31, 1997. The Forward Sales Agreement is the obligation
of Mercury. Mercury recorded the receipt of the sales proceeds
under the Forward Sales Agreement and the related deferred
revenue.
While the Company's oil revenues and associated expenses related
to the Mercury Properties were excluded from the Company's
statements of operations for the year ended December 31, 1997,
the revenues and expenses are included in the pro forma
statements of operations for 1996 and 1997 to provide comparative
information about the Company for 1998 and beyond. The oil
revenues and associated expenses of the Mercury Properties began
accruing to the Company on January 1, 1998.
Oil revenues and operating expenses relating to the Forward Sales
Agreement have been added to the statements of operations for
1996 from the effective date of the Forward Sales Agreement
(October 1, 1996) to the end of 1996 and for the twelve months
ended December 31, 1997 under the Production Payment Adjustment
column and reported as if the Merger had been consummated on
January 1, 1996.
Interest expense accociated with the Forward Sale was not charged
to the Company by Mercury. It is included with the production
payment revenues and expense to present a more accurate as
adjusted pro forma results of operations.
Liquidity and Capital Resources
The Company's current ratio at December 31, 1997 was 1.1 to 1
with positive working capital of $42,000. The Company's source
of liquidity is cash flow from operations and bank debt. As part
of the formation of the Company on March 7, 1997, the Company
agreed to guarantee the repayment of $4.0 million of debt owed by
Mercury Exploration Company to a bank. On October 31, 1997 the
Company restructured the Old MSR revolving credit facility and
entered into a new credit agreement with a bank. Proceeds from
the new facility were used to repay the $4.0 million of debt
guarantee by the Company and repay $6.0 million of debt owed by
Old MSR. The closing of the loan was subject to the successful
completion of the Company's merger with Old MSR. The new
agreement is for a $25,000,000 senior secured revolving credit
facility with an initial borrowing base of $12,000,000, which
matures in five years. The Company can designate the interest
rate on amounts outstanding at either the London Interbank
Offered Rate (LIBOR) + 1.75%, 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.
Discretionary cash flow, a measure of performance for exploration
and production companies, is determined by adjusting net income
to eliminate depletion and depreciation expense, deferred income
tax, gain (loss) on sale of assets and non-cash amortization of
debt financing costs. The effects of working capital changes are
not taken into account. This measure reflects an amount that is
available for capital expenditures and debt repayment. The pro
forma combined entities with the production payment properties
generated discretionary cash flow of approximately $1.3 million
and $1.7 million in 1997 and 1996, respectively.
The Company requires capital primarily for the exploration,
exploitation and acquisition of oil and natural gas properties,
the repayment of indebtedness and general working capital
purposes. During 1997 the Company incurred approximately
$530,000 on 3-D seismic to evaluate a portion of the Cut Bank
field in northwest Montana and approximately $62,000 for other
development expenditures.
The Company's combined NOL carryforward is subject to certain
limitations. Under Section 382 of the Internal Revenue Code, the
taxable income of the Company available for offset by pre-
ownership change NOL carryforwards and certain built-in losses is
subject to an annual limitation (the "382 Limitation") if an
"ownership change" occurs. The Company has determined that an
ownership change occurred for purposes of Section 382 in 1997.
As a result of this ownership change, the NOL carryforward will
not be affected, but the annual 382 Limitation will equal the
fair market value of the Company immediately before the ownership
change multiplied by the long-term tax exempt interest rate. To
the extent the 382 Limitation exceeds the federal taxable income
of the post-merger entity for a given year, the 382 Limitation
for the subsequent year will be increased by such excess. NOL
carryforwards of the Company will be disallowed entirely if
certain continuity of business enterprise requirements are not
met. It is expected these requirements will be met. The effect
of the 382 Limitation may be to defer the use of the Company's
existing NOL carryforwards.
Changes in the supply and demand for oil, natural gas liquids,
hydrocarbon price volatility, inflation, timing of production,
reserve revisions and other factors make these estimates
inherently imprecise and subject to substantial revision. As a
result, these measures are not necessarily accurate estimates of
future cash flows nor do these measures serve as precise
determinations of current market value.
Changes in Prices and Inflation. The Company's revenues and the
value of its oil and natural gas properties have been, and will
continue to be, affected by changes in oil and natural gas
prices. The Company's ability to maintain current borrowing
capacity and to obtain additional capital on attractive terms is
also substantially dependent on oil and natural gas prices. Oil
and natural gas prices are subject to significant seasonal and
other fluctuations that are beyond the Company's ability to
control or predict. Although certain of the Company's costs and
expenses are affected by the level of inflation, inflation did
not have a significant effect on the Company's results of
operations during 1997.
Year 2000 Issue
The Company is in the process of conducting a comprehensive
evaluation and assessment of the business risks and exposures
related to the coming change in the century. These business
risks and exposures relate to the problem present in certain
software and embedded logic control devices to recognize the
change in the century. If not corrected, such software and
devices could fail or create erroneous results by or at the Year
2000.
Since 1995, the Company has replaced all major information
systems with Year 2000 compliance as a criterion; therefore, the
Company does not currently expect to incur any material amount of
expense associated with its remediation of its major information
systems. With respect to the risks and exposures related to the
Company's customers, partners, suppliers, financial institutions,
and other constituencies and the resulting potential impact on
the Company's business operations and financial condition, the
Company has initiated formal communications with its customers,
partners, suppliers, financial institutions and other
constituencies to mitigate or prevent such risks and exposures.
The extent of such risks and exposures will be assessed and
evaluated.
The evaluation and assessment of the extent of the risks and
exposures related to the Company's information systems, including
embedded logic devices, and the Company's customers, partners,
suppliers, financial institutions, and other constituencies,
should be substantially completed during 1998. Until the
evaluation and assessment is completed, the Company can not have
a reasonable basis to conclude that the risks and exposures
related to the Year 2000 will not materially affect future
financial results, or cause reported financial information not to
reflect fairly the future operating results future financial
condition or cash flow of the Company.
Forward-Looking Statements. Certain statements in this report,
including statements of the Company's and management's
expectations, intentions, plans and beliefs, particularly those
contained in or implied by "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Notes
to Consolidated Financial Statements, are forward-looking
statements, as defined in Section 21E of the Securities Exchange
Act of 1934, that are dependent on certain events, risks and
uncertainties that may be outside the Company's control. These
forward-looking statements include statements of management's
plans and objectives for the Company's future operations and
statements of future economic performance; information regarding
drilling schedule, expected or planned production or
transportation capacity, future production levels of
international and domestic fields, the Company's capital budget
and future capital requirements, the Company's meeting its future
capital needs, the Company's realization of its deferred tax
assets, the level of future expenditures for environmental costs
and the outcome of regulatory and litigation matters; and the
assumptions described in this report underlying such forward-
looking statements. Actual results and developments could differ
materially from those expressed in or implied by such statements
due to a number of factors, including, without limitation, those
described in the context of such forward-looking statements,
fluctuations in the price of crude oil and natural gas, the
success rate of exploration efforts, timeliness and development
activities, and the risk factors described from time to time in
the Company's other documents and reports filed with the
Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements. The audited Company's consolidated
financial statements as of December 31, 1997, and for the period
from inception, March 7, 1997 to December 31, 1997, 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
Thomas F. Darden 44 Chairman of the Board,
Chief Executive Officer
and Director
Glenn M. Darden 42 President,
Chief Operating Officer
and Director
Patrick M. Montalban 40 Vice President
and Director
Howard N. Boals 54 Vice President - Finance and
Administration,
Secretary and Treasurer
Frank Darden 70 Director
D. Randall Kent 72 Director
Steven M. Morris 46 Director
W. Yandell Rogers, III 35 Director
The Company's Board of Directors has an Audit Committee
consisting of D. Randall Kent, W. Yandell Rogers, III, and Steven
M. Morris, and its Compensation Committee includes Frank Darden,
Steven M. Morris and W. Yandell Rogers, III. The Company does
not have a nominating committee.
Thomas F. Darden has served as President of Mercury for the last
five years. During that time, Mercury has developed and acquired
interests in over 1,200 producing wells in Michigan, Indiana,
Kentucky, Wyoming, Montana, New Mexico and Texas. A graduate of
Tulane University with a BA in Economics in 1975, Mr. Darden has
been employed by Mercury or its parent corporation, Mercury
Production Company, for 22 years. Mr. Darden became a Director
and the President of the Company upon its formation on March 7,
1997. On January 1, 1998, Mr. Darden was named Chairman of the
Board and Chief Executive Officer.
Glenn M. Darden has served with Mercury for 14 years, the last
five years as the Executive Vice President of that company.
Prior to working for Mercury, Mr. Darden worked as a geologist
for Mitchell Energy Corporation. Mr. Darden graduated from
Tulane University in 1979 with a BA in Earth Sciences. Mr.
Darden became a Director and Vice President of the Company upon
its formation on March 7, 1997. Effective January 1, 1998, he
was named President and Chief Operating Officer.
Patrick M. Montalban is a petroleum geologist who graduated from
the University of Montana in 1981. He joined Old MSR 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 Meeting
for Old MSR was elected Director. Upon closing the Merger on
October 31, 1997, Mr. Montalban became a Director of the Company
and was named Vice President.
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 Old MSR as
controller in January 1995. In September 1995, he was named Vice
President - Finance and Administration. On October 30, 1997, Mr.
Boals was elected to serve as the Company's Vice President -
Finance and Administration, Secretary and Treasurer.
Frank Darden is a registered professional engineer and Chairman
of the Board of Mercury; a family owned private oil and gas
company in Fort Worth, Texas. Mr. Darden founded the parent
corporation of Mercury, Mercury Production Company, and has
served as its Chairman since 1965 and as chairman of Mercury
since its founding in 1978. Mr. Darden commenced his career in
the oil and gas business with Humble Oil and Refining Company in
1948. From 1954 through 1955, he was retained by Empresa
Colombiana de Petroleos to organize an engineering department and
guide the company's planning for the secondary recovery program
in the La Cira Field in the Magdelena Valley of Colombia. From
1956 through 1964, Mr. Darden served as Manager of Operations for
Newmont Oil Company, the energy subsidiary of Newmont Mining
Corporation, and as Executive Vice President and Director of
Yucca Water Company. Mr. Darden became a Director of the Company
upon its formation on March 7, 1997.
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 Old MSR at the Special Stockholders
Meeting held on October 25, 1994. Upon closing of the Merger on
October 31, 1997, Mr. Morris became a Director of the Company.
D. Randall Kent is a retired Vice President of the General
Dynamics Corporation. He joined General Dynamics/Ft. Worth
division in 1949 and served in various engineering management
positions, including Vice President and Chief Engineer of the F-
16 Fighter Program. Following his retirement in 1991, Mr. Kent
has served as a consultant to the Lockheed-Martin Corporation.
Mr. Kent graduated from Louisiana State University in 1947 with a
BS in Mechanical Engineering and from Cornell University in 1949
with an MS in Engineering. Mr. Kent was elected as a Director of
Old MSR at its October 30, 1997 Annual and Special Meeting of
Shareholders, and upon closing the Merger on October 31, 1997,
became a Director of the Company.
W. Yandell Rogers, III has served as Vice President and General
Manager of Ridgway's, Inc. since July 1997. For more than five
years prior to that date he served as Regional Manager for
Ridgway's, Inc. Based in Houston, Texas, Ridgway's, Inc. is the
largest privately held reprographics firm in the U.S. with more
than 60 locations nationwide. Mr. Rogers graduated from Southern
Methodist University in 1986 with a B.B.A. in finance. Mr. Rogers
was elected as a Director of Old MSR at its October 30, 1997
Annual and Special Meeting of Shareholders, and upon closing the
Merger on October 31, 1997, became a Director of the Company.
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. Frank Darden is the father of Thomas F. Darden
and Glenn M. Darden. 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, 1997.
Summary of Compensation
Common
Name and Annual Stock
Principal Position Year Compensation Option
Thomas F. Darden (1) 1997 None 114,285
Chairman of the Board
and Chief Executive Officer
Otto J. Buis (2) 1997 $121,666
Chairman of the Board 1996 $116,667
President and 1995 $101,000
Chief Executive Officer 1995 $101,000
(1) Mr. Darden was granted Company stock options in lieu of
salary on March 7, 1997. Mr. Darden's common stock options
have an option price of $0.875, expire March 7, 2002 and amount to
46% of the Company's stock options outstanding.
(2) Mr. Buis resigned his position with the Company effective
December 31, 1997. Mr. Buis' annual compensation is the total
amount he received from the Company and Old MSR.
Directors who are not employees of the Company receive annual
compensation of 10,000 shares of the Company Common Stock plus
traveling and out-of-pocket expenses for each Director's meeting
attended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth with respect to the Company,
certain information as of March 16, 1998 regarding the beneficial
ownership of the Company's common stock, as the case may be, of
(i) directors, (ii) executive officers, (iii) executive officers
and directors as a group and (iv) holders of five percent or more
of such securities.
Shares Beneficially
Owned
Name of Beneficial Owner Number Percent
Directors
Frank Darden (1) 2,300,000 8.6
Glenn M. Darden (1) 2,414,285 8.9
Thomas F. Darden (1) 2,414,285 8.9
Patrick M. Montalban 276,600 1.1
Steven M. Morris 1,722,222 6.7
D. Randall Kent 30,000 0.1
W. Yandell Rogers, III 35,000 0.1
Executive Officers Not Named Above
Howard N. Boals (4) 25,000 0.1
Directors and Executive Offices as a Group (2) 9,217,392 35.0
Holders of Five Percent or More Not Named Above
Mercury Exploration Company (3) 12,420,000 39.2
Joseph V. Montalban 1,809,855 7.0
Anne Darden Self (1) 2,300,000 8.6
1) Does not include shares beneficially owned by Mercury
Exploration Company. See footnote 2) below. Does include with
respect to each person 1,100,000 shares subject to immediately
exercisable warrants. Also includes with respect to each of
Thomas F. Darden and Glenn M. Darden 114,285 shares subject to
immediately exercisable options.
2) Includes 3,300,000 shares subject to immediately exercisable
warrants and 248,570 shares subject to immediately exercisable
options. Does not include shares beneficially owned by Mercury
Exploration Company.
3) Number of shares indicated includes 5,940,000 shares subject
to immediately exercisable warrants. Each of Frank Darden,
Thomas F. Darden, Glenn M. Darden and Anne Darden Self are
directors, officers and shareholders of Mercury and share voting
and investment power with respect to the 12,420,000 shares of the
Company's Common Stock beneficially owned by Mercury. Each such
person disclaims beneficial ownership of such shares.
4) Includes 20,000 shares subject to currently exercisable
options.
The address of each of Mercury Exploration Company, Frank Darden,
Glenn M. Darden, and Howard N. Boals is 612 8th Avenue, Fort
Worth, Texas 76104. The address of Thomas F. Darden is 720 South
Otsego, Gaylord, Michigan 49735 and the address of Anne Darden
Self is 2630 Fountainview, Suite 300, Houston, Texas 77057.
The address of Steven M. Morris is 952 Echo Lane, Suite 335,
Houston, Texas 77024. The address of Joseph V. Montalban is East
Lakeshore Drive, Whitefish, Montana 59937. The address of
Patrick M. Montalban is 317 1st Avenue S.E., Cut Bank, Montana
59427. The address of D. Randall Kent is 4421 Tamworth Rd., Fort
Worth, Texas 76116. The address of W. Yandell Rogers, III is
5711 Hillcroft, Houston, Texas 77036.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 31, 1997, the Company and Mercury Exploration Company
(Mercury) have entered into a Management Agreement. Pursuant to
the Agreement, Mercury will be managing all of the operations of
the Company's various oil and gas properties and gas gathering
and compression facilities located in Montana and Texas. Mercury
will also provide accounting, administrative and advisory
services.
The Company agreed to reimburse Mercury for its costs and
expenses incurred in connection with managing such operations and
pay a management fee equal to 10 percent of such costs and
expenses. The term of the Management Agreement is for two years
and thereafter for successive one-year terms.
Mercury owns 6,480,000 shares of the Company's Common Stock and
three of Mercury's directors and officers - Frank Darden, Thomas
Darden, and Glenn Darden - are also directors and officers of the
Company.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K.
Page in
this
Form 10-KSB
Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheet
at December 31, 1997 F-2
Consolidated Statement of Operations
For the Period from Inception, March 7, 1997 to December 31, 1997 F-3
Consolidated Statement of Stockholders' Equity
For the Period from Inception, March 7, 1997 to December 31, 1997 F-4
Consolidated Statement of Cash Flows
For the Period from Inception, March 7, 1997 to December 31, 1997 F-5
Notes to Consolidated Financial Statements
December 31, 1997 F-6 / F-15
Unaudited Statement of Revenues and Direct Operating Expenses
For the Year Ended December 31, 1997 F-16
Supplemental Financial Information (Unaudited):
Disclosures about Oil and Gas Producing Activities F-17 / F-19
Selected Quarterly Financial Data F-20
Exhibits Required by Item 601 of Regulation S-B:
Exhibit Number Description
2.1* Agreement and Plan of Merger dated as of
March 26, 1997, among MSR Exploration Ltd.,
Mercury Montana, Inc. and Mercury Exploration
Company, as amended by Amendment No. 1 to
Agreement and Plan of Merger dated as of June
17, 1997 and Amendment No. 2 to Agreement and
Plan of Merger dated as of September 11, 1997
(included as Appendix "E" to the Proxy
Statement/Prospectus) of the second
Registration Statement referenced below.
2.2* Credit Agreement dated October 31, 1997 among
MSR Exploration Ltd., as Borrower, The Bank
named therein and Banque Paribas, as Agent,
relating to a $25,000,000 Revolving Credit
Facility. Filed as an exhibit to Form 10-QSB
- Quarterly Report, for period ended
September 30, 1997 incorporated herein by
reference.
3.3* The Company's Certificate of Incorporation,
as amended (included as Appendix "F" to the
Proxy Statement/Prospectus) of the second
Registration Statement referenced below.
3.4* The Company's Bylaws (included as Appendix
"G" to the Proxy Statement/Prospectus) of the
second Registration Statement referenced
below.
4.1* Common Stock Warrant dated January 13, 1995
issued to Banque Paribas by MSR Exploration
Ltd.
4.2* Form of Common Stock Warrants issued to
Mercury Exploration Company, Frank Darden,
Thomas F. Darden, Glenn M. Darden, Anne
Darden Self, Jack L. Thurber and Jeff Cook by
Mercury Montana, Inc., each dated March 7,
1997 and each having an exercise price per
share of $1.25.
4.3* Form of Common Stock Warrants issued to
Mercury Exploration Company, Frank Darden,
Thomas F. Darden, Glenn M. Darden, Anne
Darden Self, Jack L. Thurber and Jeff Cook
by Mercury Montana, Inc., each dated March 7,
1997 and each having an exercise price per
share of $2.00.
4.4* Form of Stock Purchase Warrant issued to
Mercury Exploration Company at the Effective
Time of the Merger.
4.5* Form of Certificate representing shares of
Common Stock of Mercury Montana, Inc. (to be
known as MSR Exploration Ltd.).
10.1* Form of Management Agreement entered into
between the Company and Mercury Exploration
Company.
10.3* 1997 Stock Option Plan of the Company,
previously known as Mercury Montana, Inc.
10.4* Employment Agreement between MSR Exploration
Ltd. and Patrick M. Montalban.
10.5* Wells Agreement.
10.6* Purchase and Sale Agreement between Mercury
Exploration Company and Supply Development
Group, Inc.
10.7* Production and Delivery Agreement between
Mercury Exploration Company and MCNIC Oil &
Gas f/k/a Supply Development Group, Inc.
10.8* Conveyance of Production Payment from Mercury
Exploration Company to MCNIC Oil & Gas f/k/a
Supply Development Group, Inc.
21.* Subsidiaries of MSR Exploration Ltd.
27. Financial Data Schedule (filed herewith)
* Filed as an exhibit to the Old MSR Registration Statement on
Form S-4 (333-29769) and as an exhibit to Mercury Montana's
Registration Statement on Form S-4 (333-29783), and incorporated
herein by reference.
Reports on Form 8-K
The Company filed a Form 8-K on October 31, 1997 announcing the
completion of the Merger with and between the Company and Old
MSR.
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/Thomas F. Darden
Thomas F. Darden
Chairman of the Board
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/ Thomas F. Darden Chairman of the Board, March 27, 1998
Thomas F. Darden Chief Executive Officer
and Director
/s/ Glenn M. Darden President, March 27, 1998
Glenn M. Darden Chief Operating Officer
and Director
/s/ Patrick M. Montalban Vice President March 27, 1998
Patrick M. Montalban and Director
/s/ Howard N. Boals Vice President - Finance March 27, 1998
Howard N. Boals Chief Accounting Officer
/s/ Frank Darden Director March 27, 1998
Frank Darden
/s/ Steven M. Morris Director March 27, 1998
Steven M. Morris
/s/ D. Randall Kent Director March 27, 1998
D. Randall Kent
/s/ W. Yandell Rogers, III Director March 27, 1998
W. Yandell Rogers, III
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 sheet of
MSR Exploration Ltd. and subsidiaries (the Company) as of
December 31, 1997, and the related consolidated statement of
operations, stockholders' equity and cash flows for the period
from inception March 7,1997 to December 31, 1997. 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 audit.
We conducted our audit 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 audit provides 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, 1997, and the results of its
operations and its cash flows for the period from inception March
7,1997 to December 31, 1997, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 25, 1998
F - 1
MSR Exploration Ltd. and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 1997
In thousands
ASSETS
Cash and cash equivalents $ 528
Time deposits 59
Accounts receivable 507
Inventories 248
Prepaid expenses 32
Total current assets 1,374
PROPERTIES, PLANT AND EQUIPMENT - NET
("full cost") 24,234
OTHER ASSETS 355
$ 25,963
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $88
Accounts payable 652
Accrued liabilities 592
Total current liabilities 1,332
LONG-TERM DEBT 10,560
DEFERRED INCOME TAXES 1,001
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value
Authorized 50,000,000 shares, issued
and outstanding 25,777,014 258
Preferred stock, $0.01 par value
Authorized 10,000,000 shares, issued and
and outstanding - none 0
Paid in capital in excess of par value 12,812
Foreign currency translation adjustment (30)
Retained earnings 30
13,070
$ 25,963
The accompanying notes are an integral part of these
consolidated financial statements.
F - 2
MSR Exploration Ltd. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period from Inception,
March 7, 1997 to December 31, 1997
In thousands except for per share data
REVENUE
Oil sales $257
Gas sales 570
Interest and other income 27
Total revenues 854
EXPENSES
Operating expenses 228
Production taxes 68
Depletion and depreciation 220
General and administrative 146
Interest 147
Total expenses 809
Income before income taxes 45
Income tax (expense) benefit (15)
Net income $30
Basic and diluted earnings per share $0.00
Basic weighted average number of shares
outstanding for the period 14,801
Diluted weighted average number of shares
outstanding for the period 14,838
The accompanying notes are an integral part of these
consolidated financial statements.
F - 3
MSR Exploration Ltd. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Period from Inception, March 7, 1997, to December 31, 1997
In Thousands
<TABLE>
<CAPTION>
Cumulative
Paid in Foreign Total
Capital Currency Stock-
Common Stock in Excess Translatio Retained holders'
Shares Amount of Par Adjustment Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
Inception March 7, 1997
Issuance of shares in exchange for
oil and gas properties 12,000 $120 $337 $0 $0 $457
Merger - Issuance of shares in
exchange for Old MSR shares
(Note 1) 1,377 138 12,400 12,538
Warrants - 60,000 warrants
issued in payment of bank
commitment fee 75 75
Translation adjustments (30) (30)
Net Income 30 30
Balance at December 31, 1997 13,377 $ 258 $ 12,812 $ (30) $ 30 $13,070
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F - 4
MSR Exploration Ltd. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from Inception,
March 7, 1997 to December 31, 1997
In thousands
OPERATING ACTIVITIES
Net Income $30
Charges and credits to net loss not affecting cash
Depletion and depreciation 220
Deferred income taxes 15
Changes in assets and liabilities
Receivables 236
Inventories and prepaid expenses (22)
Accounts payable and accrued liabilities (153)
NET CASH FROM (USED FOR) OPERATING ACTIVITIES 326
INVESTING ACTIVITIES
Property, plant and equipment expenditures (592)
Cash received in merger 350
Change in cumulative foreign currency translation (30)
NET CASH FROM (USED FOR) INVESTING ACTIVITIES (272)
FINANCING ACTIVITIES
Proceeds from debt borrowings 10,575
Repayment of long-term debt (10,040)
Payment of financing costs (61)
NET CASH FROM (USED FOR) FINANCING ACTIVITIES 474
CASH AT END OF PERIOD $528
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, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of MSR Exploration Ltd. (the Company), and its wholly
owned subsidiaries. The Company's consolidated financial
statements includes the operations of the Company from its
inception on March 7, 1997 and Old MSR's operations since
October 31, 1997, the effective date of the Merger. All
significant inter-company transactions and balances have been
eliminated in consolidation.
Principal Business Activity and Merger
MSR Exploration Ltd. ( "the Company") formerly Mercury Montana,
Inc. was organized on March 7, 1997 under the laws of the State
of Delaware for the purpose of acquiring from Mercury Exploration
Company (Mercury) and thereafter exploring, developing and
operating all of the Company's oil and natural gas properties
located in Montana (the "Mercury Properties"). Upon formation of
the Company, Mercury conveyed to the Company the Mercury
Properties and associated debt in exchange for a majority of the
then outstanding Company Common Stock and warrants to purchase
additional shares of Company Common Stock. Certain directors,
officers and agents of Mercury also conveyed to the Company
certain contractual rights in the Mercury Properties in exchange
for shares of Company Common Stock and warrants. The Mercury
Properties included approximately 75 crude oil producing wells
which were subject to a prior production payment, forward-sale
agreement between Mercury and a third party covering a period
from October 1996 through December 1997. The agreement was the
obligation of Mercury; consequently the oil revenue and associated
expenses from these properties belonged to Mercury through
December 31, 1997, and started accruing to the Company on January
1, 1998.
On March 26, 1997, MSR Exploration Ltd., ("Old MSR") , an
Alberta, Canada corporation entered into an agreement with the
Company, then known as Mercury Montana, Inc. and its majority
shareholder at that time, Mercury, both of Fort Worth, Texas, to
combine all of the Company's oil and gas assets in Montana with
all the oil and gas assets of Old MSR by way of a merger of the
Company and Old MSR. The Company was the surviving corporation
in the merger and changed its name to MSR Exploration Ltd. after
the merger was effective. The merger was accounted for under the
purchase method of accounting.
At a combined Annual General and Special Meeting of Shareholders
of the Old MSR held on October 30, 1997, the shareholders elected
directors and approved the domestication or continuance of Old
MSR from Alberta, Canada to Delaware, U.S.A. The domestication
of Old MSR into Delaware was required for the merger to become
effective. The merger was subsequently approved on October 31,
1997, by written consent of the stockholders of Old MSR.
As part of the merger, the Company issued to Old MSR shareholders
one share of common stock of the Company for each of the
13,777,014 outstanding shares of Old MSR common stock. Each of
the 12,000,000 shares of common stock of the Company outstanding
prior to the merger remained outstanding. The combined total
number of outstanding shares is 25,777,014. All such shares are
listed for trading on the American Stock Exchange. In addition,
the Company paid $4 million of Mercury Exploration Company bank
debt. Outstanding warrants to purchase 5.5 million shares of
common stock of the Company at $1.25 per share, and 5.5 million
shares at $2.00 per share also remained outstanding after the
merger, as did Company stock options to purchase an aggregate of
228,570 shares of Company common stock at $0.875 per share
granted in lieu of salaries. An outstanding warrant to purchase
280,000 shares of common sock of the Old MSR at $3.375 per share
was converted to an equivalent right to acquire shares of the
Company.
Three members of Old MSR's Board of Directors, Otto J. Buis,
Patrick M. Montalban and Steven M. Morris, together with two
independent directors, D. Randall Kent and W. Yandell Rogers,
III, were elected to the Board of Directors of Old MSR at its
October 30, 1997 meeting. With the completion of the merger,
Messrs. Buis, Montalban, Morris, Kent and Rogers became directors
of the Company joined by Frank Darden, Thomas F. Darden and
Glenn M. Darden, the directors of the Company prior to the merger
and also directors of Mercury.
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Principal Business Activity and Merger (continued)
On October 31, 1997, the Company restructured the Old MSR's
revolving credit facility and entered into a new credit agreement
with a bank. The closing of the loan was subject to the
successful completion of the Company's merger with Old MSR. The
new agreement is for a $25,000,000 senior secured revolving
credit facility with an initial borrowing base of $12,000,000,
which matures in five years.
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.
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.
Major Customers
For the period from Inception March 7, 1997, to December 31, 1997,
three purchasers: Rio Vista Energy, Ltd. Montana Power Company
and J.N. Petroleum Marketing, Inc., accounted for approximately
42%, 22% and 11%, 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 and consist of crude oil in tanks and well
equipment spares and supplies.
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 as
determined by independent petroleum engineers. Investments in
unproved properties are not amortized until proven 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)
Properties, Plant and Equipment (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 seven years
Potential impairment of producing properties and significant
unproved properties and other plant and equipment are 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.
Revenue Recognition
The Company recognizes revenue as quantities of oil and gas sold
or volumes of gas transported, and utilizes the entitlement
method of accounting for oil and gas imbalances. Under this
method, the Company recognizes revenue for its proportionate
share of volumes sold. Any over-produced amount is recorded as
deferred revenue and any under-produced amount is recorded as
current revenue and revenue receivable. The Company had no
significant over or under-produced positions as of December 31,
1997.
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.
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.
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.
Earnings Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" ("EPS") which established new standards for
computing and presenting EPS. SAFES No. 128 replaced the
presentation of primary EPS with a presentation of basic EPS.
Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Earnings Per Share (continued)
number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted
into common stock. The diluted weighted average number of shares
outstanding includes 16,000 shares for the period attributable to
the assumed exercise of dilutive common stock options. Earnings
per share amounts for 1997 have been presented to conform to the
SFAES No. 128 requirements.
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 include cash, time deposits,
accounts receivable, notes payable, accounts payable and long-
term debt. The Company estimates 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.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting
comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of gerbil-purpose 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 surplus 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.
2. PRODUCTION PAYMENT
The Mercury Properties contributed to the Company's by Mercury,
upon its inception, were subject to a production payment.
Mercury and Supply Development Group, Inc. ( SDG )
entered into a Production Payment Agreement in
October 1996. Pursuant to the agreement SDG was entitled to an
aggregate of 320,000 barrels of oil produced from certain
properties of Mercury, including the Mercury Properties. Mercury
could satisfy this obligation by delivering to SDG proceeds from
the sale of oil produced rather than delivering the oil "in
kind", unless SDG elected to take oil "in kind". Pursuant to the
Merger Agreement among the Company, Old MSR, and Mercury dated as
of March 26, 1997, as amended, Mercury was entitled to all of the
oil revenue and income attributable to the Mercury Properties
until the Production Payment Amount had been delivered to SDG;
provided that Mercury must reimburse the Company for all costs
and expenses of oil production. Mercury's obligation to SDG was
satisfied on December 31, 1997. No amounts associated with the
Production Payment Agreement are reflected in the Company's
financial statements, as the Production Payment Agreement was an
obligation of Mercury.
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. PRO FORMA CONDENSED CONSOLIDATED DATA - UNAUDITED
The following pro forma condensed consolidated data for the years
ended December 31, 1997 and 1996 are presented as if the merger
of the Company with Old MSR had been consummated on January 1,
1996. Most of the Company's pro forma revenue and expenses for
1997 and 1996 were subject to a prior forward sale and were
excluded from the Company's statements of operations. Oil
revenues and direct operating expenses subject to the forward
sale for 1997 were approximately $2,180,000 and $2,235,000
respectively, and for 1996 were approximately $689,000 of
revenues and $605,000 of associated expenses. For 1996 the oil
revenues and associated expenses subject to the forward sale
relate to the final three months of 1996. Revenues and expenses
associated with the forward sale began to accrue to the Company
on January 1, 1998. Pro forma data for the
period from January 1, 1997, to March 7, 1997, has been excluded
because Company revenue and expenses from sources other than
those associated with the forward sale are considered immaterial.
In thousands except for per share amounts. Adjusted
Pro Forma
Including
Production
Payment
1997 Historical Pro Forma Note 2
Revenue $854 $4,397 $6,577
Expenses 824 4,573 6,809
Net income (loss) $30 ($176) ($232)
Basic and diluted earnings (loss) pe $0.00 ($0.01) ($0.01)
Weighted average number of
of shares outstanding 25,777 25,777 25,777
Adjusted
Pro Forma
Including
Production
Payment
1996 Historical Pro Forma Note 2
Revenue $2,070 $6,446 $7,135
Expenses 1,188 6,512 7,117
Net income (loss) $882 ($66) $18
Basic and diluted earnings (loss) per share ($0.00) $0.00
Weighted average number of
of shares outstanding 25,777 25,777
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. BANKRUPTCY
On February 2, 1992, Old MSR filed for bankruptcy protection
under Chapter 11 of the U.S. Bankruptcy Code. Old MSR elected to
voluntarily file for bankruptcy primarily due to its substantial
net losses and its inability to negotiate an agreeable
restructuring of indebtedness with its then primary lender.
On September 12, 1992, Old MSR 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 Old MSR and its creditors. As of December 31, 1997, the
remaining amounts due to these creditors totaled $150,500.
5. PROPERTIES, PLANT AND EQUIPMENT
Capitalized costs at December 31, 1997, in thousands:
Proved oil and gas properties $39,930
Unproved oil and gas interests 847
Accumulated depletion and depreciation (17,917)
22,860
Gas processing plants and gathering systems 3,851
Other equipment 830
Accumulated depletion and depreciation (3,307)
1,374
$24,234
6. 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 U.S. Environmental Protection Agency). Amounts presented in
thousands.
1977
Deferred loan cost $118
Less accumulated amortization (4)
Net deferred loan cost 114
Restricted cash 241
Total other assets $355
7. NOTE PAYABLE AND LONG-TERM DEBT
1997
Long-term debt, in thousands, consists of:
Note payable to a bank
(7.6% at December 31, 1997) $10,498
Various pre-petition claims at interest rates ranging
from 6% to 10%, due in monthly, quarterly and
annual installments, including interest 150
10,648
Less current maturities (88)
$10,560
Long-term debt maturities are as follows, in thousands:
Years Ending December 31, Amount
1998 $88
1999 62
2000 None
2001 None
2002 10,498
Thereafter None
$10,648
As part of the formation of the Company on March 7, 1997, the
Company agreed to guarantee the repayment of $4.0 million of debt
owed by Mercury Exploration Company to a bank. On October 31,
1997 the Company restructured the Old MSR revolving credit
facility and entered into a new credit agreement with a bank.
Proceeds from the new facility were used to repay the $4.0
million of debt guarantee by the Company and repay $6.0 million
of debt owed by Old MSR. The closing of the loan was subject to
the successful completion of the Company's merger with Old MSR.
The new agreement is for a $25,000,000 senior secured revolving
credit facility with an initial borrowing base of $12,000,000,
which matures in five years. The Company can designate the
interest rate on amounts outstanding at either the London
Interbank Offered Rate (LIBOR) + 1.75%, 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 debt service ratio and
and contains certain dividend restrictions.
MSR Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. 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, 1997 are
as follows, in thousands:
1997
Deferred tax assets:
Operating loss carryforwards $2,301
Investment tax credits 171
Total deferred tax assets 2,472
Less valuation allowance
Deferred tax liabilities:
Properties, plant and equipment 3,473
Total deferred tax liabilities 3,473
Net deferred tax liabilities $1,001
The income tax expense for the period from inception March 7,
1997 to December 31, 1997 was $15,000. This amount represents a
deferred provision as no current tax provision or benefit was
realized.
The Company has U.S. net operating loss carry-forwards of
approximately $6,500,000 available to reduce future U.S. taxable
income subject to certain limitations. These U.S. net operating
loss carry-forwards begin to expire in 2001. The Company also has
Canadian expense carry-forwards totaling approximately $2,000,000
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.
9. STOCKHOLDERS' EQUITY
The Company is authorized to issue 50,000,000 of common stock
with a par value of one cent ($0.01) and 10,000,000 shares of
preferred stock with a par value of one cent ($0.01). The
Company currently has outstanding 25,777,014 shares of common
stock, warrants to purchase additional shares of common stock,
5,550,000 shares at $1.25 per share, 5,550,000 shares at $2.00
per share, and options to purchase 248,570 shares of common stock
at $0.875 per share, and common stock warrants for 280,000 shares
at $3.375 per share, and 60,000 shares at $0.01 per share.
As a result of the merger of Old MSR with and into the Company on
October 31, 1997 pursuant to the terms of the Agreement and Plan
of Merger, dated as of March 26, 1997, as amended, among Old
MSR, the Company and Mercury Exploration Company, each
outstanding share of common stock, no par value per share, of Old
MSR outstanding immediately prior to the effective time of the
Merger, was converted into the right to receive one share of
common stock, par value $0.01 per share, of the Company. In
accordance with Rule 12g-3(a) of the Securities Exchange Act of
1934, as amended, the Company has succeeded to the obligations of
Old MSR under the Exchange Act and will continue to file reports
with the Securities and Exchange Commission using the Commission
File Number (No. 1-8523) utilized by its predecessor. In
connection with the Merger, the Company changed its name from
Mercury Montana, Inc. to MSR Exploration Ltd.
Exploration Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. STOCKHOLDERS' EQUITY (continued)
Stock Option Plan
The 1997 Stock Option Plan of the Company (the "Plan") was
adopted by the Board of Directors of the Company and approved by
its shareholders and became effective as of March 7, 1997. The
Plan permits the granting of options to purchase shares of the
Company's Common Stock. All employees and directors of the
Company are eligible to participate in the Plan. An aggregate of
250,000 shares of the Company's Common Stock have been authorized
and reserved for issuance under the Plan. The Company's Board of
Directors has increased the authorized share to a total of
500,000 shares, subject to shareholder approval. As of December
31, 1997, options to purchase an aggregate of 248,570 shares of
the Company's Common Stock have been granted under the Plan at an
exercise price of $0.875 per share. Options are totally vested
when granted and must be exercised within five years of the date
of grant. The Company's Compensation Committee of the Board of
Directors determines who shall be granted options under the Plan
and the terms thereof, and administers the Plan. No options may
be granted under the Plan after March 7, 2007.
No compensation cost has been recognized at date of grant of the
stock options because the exercise price at date of grant was
equal to the fair value of the common stock at date of grant.
Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards
under the plan the Company's net income would have been reduced
by $62,000 for the period ended December 31, 1997. The fair
value of the options were calculated in accordance with the Black-
Scholes option pricing model using an expected volatility of 26%,
expected option term of five years and a risk-free rate of return
of 6%. Pro forma basic and diluted earnings per share were
$0.00.
10. RELATED PARTY TRANSACTIONS
On October 31, 1997, the Company and Mercury Exploration Company
(Mercury) have entered into a Management Agreement. Pursuant to
the Agreement, Mercury will be managing all of the operations of
the Company's various oil and gas properties and gas gathering
and compression facilities located in Montana and Texas. Mercury
will also provide accounting, administrative and advisory
services.
The Company agreed to reimburse Mercury for its costs and
expenses incurred in connection with managing such operations and
pay a management fee equal to 10 percent of such costs and
expenses. The term of the Management Agreement is for two years
and thereafter for successive one-year terms. At December 31,
1997 the Company owed Mercury approximately $52,000 for payment
of costs incurred on behalf of the Company . No management fee
have been paid or accrued for the period ended December 31, 1997.
Mercury owns 6,480,000 shares of the Company's Common Stock and
three of Mercury's directors and officers - Frank Darden, Thomas
Darden, and Glenn Darden - are also directors and officers of the
Company.
11. SUPPLEMENTAL CASH FLOW INFORMATION
For the period from inception, March 7, 1997, to December 31, 1997,
in thousands:
1997
Cash paid during the year:
Interest $134
Income taxes $0
Non-cash provided from financing activities:
Purchase of the net assets of Old MSR
by the issuance of 13,777,014 shares
of common stock. Amount includes assets
totaling $20,034,000, including cash of
$350,000, and liabilities totaling
$8,496,000, including long-term debt of
$6,114,000 $12,538
Consideration for financing costs by
issuance of common stock warrants $75
MSR Exploration Ltd.
Unaudited Statements of Revenues and Direct Operating Expenses
In Thousands
Twelve Months
Ended
December 31,
1996
REVENUES
Oil sales $1,855
Gas sales 215
Total revenues 2,070
DIRECT OPERATION EXPENSES
Operating expenses 989
Production taxes 199
Total expenses 1,188
EXCESS OF REVENUES OVER DIRECT OPERATING EXPENS $882
The accompanying notes are an integral part of this statement.
1. Basis of Presentation
Historical financial statements reflecting financial
position, results of operations and cash flows required by
generally accepted accounting principles are not presented for
the year ended December 31, 1996, as such information is neither
readily available on an individual property basis nor meaningful
for the properties included in the Merger. Accordingly, this
statement of revenues and direct operating expenses is presented
in lieu of the financial statements required under Rule 3-05 of
Securities and Exchange Commission Regulation S-X.
The accompanying statement of revenues and direct operating
expenses represent the Company's pre-Merger net ownership
interest in the properties included in the Merger and are
presented on the full cost accrual basis of accounting.
Depreciation, depletion, and amortization, allocated general and
administrative expenses, interest expense, and income taxes have
been excluded because the property interests included in the
Merger were from a newly formed business and the expenses
incurred would not necessarily be indicative of the expenses to
be incurred by the Company after the Merger.
2. Forward Sale of Oil Revenues
The Mercury Properties were subject to a Production Payment
Agreement entered into in October 1996 between Mercury and a
third party. The Agreement was the obligation of Mercury and was
for the period from October 1, 1996 to December 31, 1997. The
Company's oil revenues and associated operating expenses included
in the statements of revenues and direct operating expenses do
not include any amounts which were subject to the Agreement. The
oil revenues and associated expenses relating to the production
payment forward sale started accruing to the Company on January
1, 1998.
The oil revenues and associated expenses dedicated to the
production payment forward sale from October 1, 1996 through
December 31, 1996 were excluded from the Statement of Revenues
and Direct Operating Expenses. Such amounts were also excluded
form the Company's statement of operations for the period from
Inception, March 7, 1997, to December 31, 1997. To provide
information about the Company for 1998 and beyond, revenues
subject to the forward sales agreement amounted to $689,000 for
1996. Direct operating expenses subject to the sale were
$308,000 for 1996.
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. The pro forma amounts for 1996 are presented as if
the Company had been in existence, owned the Mercury Properties
and had been combined with Old MSR since January 1, 1996.
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, 1997 and 1996 end of year reserves are based on
estimates of Citadel Engineering Ltd., petroleum consultants.
Year Ended December 31, 1997 Oil Gas
(MBbl) (MMcf)
Proved reserves
Beginning of year - pro forma 5,281 1,339
Revisions of previous estimates 686 332
Purchase of reserves in place - Old MSR 3,646 19,870
Production (143) (322)
End of year 9,470 21,219
Proved developed reserves
Beginning of year - pro forma 1,628 1,339
End of year 4,412 16,484
Year Ended December 31, 1996 - Pro Forma Oil Gas
(MBbl) (MMcf)
Proved reserves
Beginning of year 5,291 1,401
Revisions of previous estimates 120 25
Production (130) (87)
End of year 5,281 1,339
Proved developed reserves
Beginning of year 1,638 1,401
End of year 1,628 1,339
F - 17
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 prices changes and costs.
As of December 31,
1997 1996
Pro Forma
Future cash flows $178,672 $119,585
Future production and development costs (70,242) (71,893)
Future income tax expense (25,474) (10,200)
82,956 37,492
10% annual discount for timing of cash flow (44,581) (20,445)
Standardized measure of discounted
cash flows $38,375 $17,047
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 the year ended December 31, 1997, in thousands.
1997
Sales of oil and gas produced, net of
production costs $ (531)
Net changes in price and production costs (5,628)
Purchase of reserves in place 20,817
Revisions of previous quantity estimates 2,908
Development costs incurred during the year 62
Accretion of discount 1,705
Net change in income taxes 1,234
Other 761
Net increase (decrease) 21,328
Balance at beginning of year - pro forma 17,047
Balance at end of year $ 38,375
F - 18
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (continued)
(Unaudited)
Costs incurred in oil and gas property acquisition, exploration
and development activities, in thousands:
Inception-
March 7,1997
to Year Ended
December 31, December 31,
1997 1996
Property acquisition costs $19,583 $0
Exploration costs $530 $0
Development costs $62 $84
Results of operations from producing activities, in thousands:
Inception-
March 7,1997
to Year Ended
December 31,December 31,
1997 1996
Oil and gas sales $827 $2,070
Operating expenses (228) (1,054)
Production taxes (68) (199)
Depletion and depreciation (220) (273)
311 544
Income taxes (106) (185)
Results of operations from producing activities
(excluding corporate overhead and
interest costs) $205 $359
F - 19
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
The following table summarizes selected quarterly financial data for the
quarter ended December 31, 1997, in thousands.
December 31,
1997
Revenue $729
Net income (loss) $(19)
Basic and diluted earnings
(loss) per share Nil
F - 20
MSR Exploration Ltd. and Subsidiaries
EXHIBIT INDEX
Exhibit Number Description
2.1* Agreement and Plan of Merger dated as of
March 26, 1997, among MSR Exploration Ltd.,
Mercury Montana, Inc. and Mercury Exploration
Company, as amended by Amendment No. 1 to
Agreement and Plan of Merger dated as of June
17, 1997 and Amendment No. 2 to Agreement and
Plan of Merger dated as of September 11, 1997
(included as Appendix "E" to the Proxy
Statement/Prospectus) of the second
Registration Statement referenced below.
2.2* Credit Agreement dated October 31, 1997 among
MSR Exploration Ltd., as Borrower, The Bank
named therein and Banque Paribas, as Agent,
relating to a $25,000,000 Revolving Credit
Facility. Filed as an exhibit to Form 10-QSB
- Quarterly Report, for period ended
September 30, 1997 incorporated herein by
reference.
3.3* The Company's Certificate of Incorporation,
as amended (included as Appendix "F" to the
Proxy Statement/Prospectus) of the second
Registration Statement referenced below.
3.4* The Company's Bylaws (included as Appendix
"G" to the Proxy Statement/Prospectus) of the
second Registration Statement referenced
below.
4.1* Common Stock Warrant dated January 13, 1995
issued to Banque Paribas by MSR Exploration
Ltd.
4.2* Form of Common Stock Warrants issued to
Mercury Exploration Company, Frank Darden,
Thomas F. Darden, Glenn M. Darden, Anne
Darden Self, Jack L. Thurber and Jeff Cook by
Mercury Montana, Inc., each dated March 7,
1997 and each having an exercise price per
share of $1.25.
4.3* Form of Common Stock Warrants issued to
Mercury Exploration Company, Frank Darden,
Thomas F. Darden, Glenn M. Darden, Anne
Darden Self, Jack L. Thurber and Jeff Cook
by Mercury Montana, Inc., each dated March 7,
1997 and each having an exercise price per
share of $2.00.
4.4* Form of Stock Purchase Warrant issued to
Mercury Exploration Company at the Effective
Time of the Merger.
4.5* Form of Certificate representing shares of
Common Stock of Mercury Montana, Inc. (to be
known as MSR Exploration Ltd.).
10.1* Form of Management Agreement entered into
between the Company and Mercury Exploration
Company.
10.3* 1997 Stock Option Plan of the Company,
previously known as Mercury Montana, Inc.
10.4* Employment Agreement between MSR Exploration
Ltd. and Patrick M. Montalban.
10.5* Wells Agreement.
10.6* Purchase and Sale Agreement between Mercury
Exploration Company and Supply Development
Group, Inc.
10.7* Production and Delivery Agreement between
Mercury Exploration Company and MCNIC Oil &
Gas f/k/a Supply Development Group, Inc.
10.8* Conveyance of Production Payment from Mercury
Exploration Company to MCNIC Oil & Gas f/k/a
Supply Development Group, Inc.
21.* Subsidiaries of MSR Exploration Ltd.
27. Financial Data Schedule (filed herewith)
* Filed as an exhibit to the Old MSR Registration Statement on
Form S-4 (333-29769) and as an exhibit to Mercury Montana's
Registration Statement on Form S-4 (333-29783), and incorporated
herein by reference.
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 528000
<SECURITIES> 59000
<RECEIVABLES> 507000
<ALLOWANCES> 0
<INVENTORY> 248000
<CURRENT-ASSETS> 1374000
<PP&E> 45458000
<DEPRECIATION> 21224000
<TOTAL-ASSETS> 25963000
<CURRENT-LIABILITIES> 1332000
<BONDS> 0
0
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<COMMON> 258000
<OTHER-SE> 12812000
<TOTAL-LIABILITY-AND-EQUITY> 25963000
<SALES> 827000
<TOTAL-REVENUES> 854000
<CGS> 516000
<TOTAL-COSTS> 516000
<OTHER-EXPENSES> 146000
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