UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITY EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1998
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.)
612 Eighth Avenue, Fort Worth, Texas 76104
(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 States
$0.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act
during the past 12 months and (2) has been subject to such filing
requirement for the past 90 days. Yes [ X ] No [ ]
Check whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after distribution of securities under a plan confirmed by a
Court. Yes [ ] No [ X ] because there was no distribution of
securities under the Registrant's confirmed plan.
Common Shares outstanding at March 31, 1998: 25,777,014
Transitional Small Business Disclosure Format: Yes [ ] or No [ X ]
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
MSR Exploration Ltd. and Subsidiaries
Fort Worth, Texas
We have reviewed the accompanying condensed consolidated balance
sheet of MSR Exploration Ltd. and subsidiaries (the Company) as
of March 31, 1998, and the related condensed consolidated
statements of operations and cash flows for the three-month
period ended March 31, 1998. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated financial
statements for them to be in conformity with generally accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of 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 (not presented
herein); and in our report dated March 25, 1998, we expressed an
unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
May 12, 1998
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
MSR Exploration Ltd. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1998 1997
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $245,000 $528,000
Time deposits 59,000 59,000
Accounts receivable 603,000 507,000
Inventories 267,000 248,000
Prepaid expenses 25,000 32,000
Total current assets 1,199,000 1,374,000
PROPERTIES, PLANT AND EQUIPMENT - NET
("full cost") 24,024,000 24,234,000
OTHER ASSETS 387,000 355,000
$25,610,000 $25,963,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $90,000 $88,000
Accounts payable 747,000 652,000
Accrued liabilities 354,000 592,000
Total current liabilities 1,191,000 1,332,000
LONG-TERM DEBT 10,537,000 10,560,000
DEFERRED INCOME TAXES 935,000 1,001,000
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value
Authorized 50,000,000 shares,
issued and outstanding 25,777,014 258,000 258,000
Paid in capital in excess of par value 12,812,000 12,812,000
Foreign currency translation adjustment (24,000) (30,000)
Retained earnings (deficit) (99,000) 30,000
12,947,000 13,070,000
$25,610,000 $25,963,000
See Condensed Notes to Consolidated Financial Statements
MSR Exploration Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1998
(UNAUDITED)
REVENUE
Oil sales $649,000
Gas sales 431,000
Interest and other income 17,000
Total revenues 1,097,000
EXPENSES
Operating expenses 439,000
Production taxes 82,000
Depletion and depreciation 337,000
General and administrative 221,000
Interest 212,000
Total expenses 1,291,000
Loss before income taxes (194,000)
Income tax benefit 65,000
Net loss ($129,000)
Basic and diluted earnings (loss) per share ($0.01)
Basic weighted average number of shares
outstanding for the periods 25,777,014
Diluted weighted average number of shares
outstanding for the periods 25,796,000
See Condensed Notes to Consolidated Financial Statements
MSR Exploration Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended March 31, 1998
(UNAUDITED)
OPERATING ACTIVITIES
Net loss ($129,000)
Charges and credits to net loss not affecting cash
Depletion and depreciation 337,000
Deferred income taxes (65,000)
Changes in assets and liabilities
Receivables (97,000)
Inventory and prepaid expenses (11,000)
Accounts payable and accrued liabilities (132,000)
NET CASH FROM (USED FOR) OPERATING ACTIVITIES (97,000)
INVESTING ACTIVITIES
Acquisition of properties and equipment (165,000)
NET CASH FROM (USED FOR) INVESTING ACTIVITIES (165,000)
FINANCING ACTIVITIES
Principal payments on long-term debt (21,000)
NET CASH FROM (USED FOR) FINANCING ACTIVITIES (21,000)
NET INCREASE (DECREASE) IN CASH (283,000
CASH AT BEGINNING OF PERIOD 528,000
CASH AT END OF PERIOD $245,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense $206,000
See Condensed Notes to Consolidated Financial Statements
MSR Exploration Ltd. and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1998
Note 1. ACCOUNTING POLICIES AND DISCLOSURES
In the opinion of management of MSR Exploration, Ltd. (the
"Company"), the Company's Consolidated Financial Statements
contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of
the Company as of March 31, 1998, and the results of its
operations and its cash flows for the three months ended March
31, 1998.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto
included in the Form 10-KSB for the year ended December 31, 1997.
The results of operations for the three month period ended March
31, 1998 are not necessarily indicative of the operating results
to be expected for the full fiscal year.
Business Formation and Merger
MSR Exploration Ltd. ("the Company") formerly Mercury Montana,
Inc. was organized on March 7, 1997 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. 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 on October 31, 1997. The merger was accounted for
under the purchase method of accounting.
Financial Statement Presentation
Statements of operation for the Company from its inception, March
7, 1997, through the date of the merger with Old MSR, October 31,
1997, are considered immaterial and are not presented in this
report. Most of the revenue and associated expenses from the
Mercury Properties did not begin to accrue to the Company until
January 1, 1998.
Pro forma unaudited condensed consolidated statement of
operations for the three months ended March 31, 1997, assuming
the merger of the Company and Old MSR had been consummated on
January 1, 1997 and had included revenues and expenses from the
Mercury Properties subject to the production payment forward
sales agreement, would have shown revenues of approximately
$1,881,000, income before income taxes of approximately $63,000
and net income of approximately $42,000. The pro forma results
are not necessarily indicative of what would have occurred had
the merger actually taken place on January 1, 1997.
MSR Exploration Ltd. and Subsidiaries
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This Quarterly Report on Form 10-QSB contains forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements.
The following discussion and analysis should be read in
conjunction with the Company's consolidated financial statements
and notes thereto and with the Company's audited financial
statements and notes thereto for the fiscal year ended December
31, 1997.
The Company was organized on March 7, 1997. The founders of the
Company contributed approximately 75 crude oil producing wells in
northwest Montana, constituting the Mercury Properties in
exchange for Company common stock and common stock warrants.
These properties were subject to a forward sale of production and
consequently the revenues and 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. The merger was effective
October 31, 1997.
Due to the Company's limited existence the unaudited statement of
operations for the three months ended March 31, 1998 will be
compared to the unaudited pro forma statement of operations for
the three months ended March 31, 1997, which are presented
separately in this report.
Revenue. Total revenues for the three months ended March 31,
1998 were $1,097,000, a 42% decrease compared to $1,881,000 of
pro forma revenues for the same period in 1997. Oil sales for
the 1998 period were $649,000, a decrease of 46% compared to
first quarter 1997 pro forma sales of $1,207,000. This decrease
was due primarily to a 39% decrease in average price per barrel
sold by the Company. Average crude oil prices were $12.06 during
the three months ended March 31, 1998 compared to pro forma 1997
price of $19.81. Sale volumes decreased 12% from pro forma
barrels of 60,900 in 1997 to 53,800 for the first quarter of
1998. The decrease in oil sales volumes was primarily the result
of natural production declines. Gas sales for the first quarter
ended March 31, 1998 were $431,000 a 35% decline compared to
$659,000 of pro forma sales during the same quarter in 1997. The
reduction in gas sales revenues was primarily the result of lower
average gas prices the Company received for its gas. In the 1998
quarter, the Company sold its gas at an average price of $2.13
per mcf as compared to the 1997 pro forma price of $2.77 per mcf,
a 23% decrease. Gas sales volumes for the three months ended
March 31, 1998 were 202,500 mcf, a decrease of 15% compared to
1997 pro forma of 237,700 mcf. Most of the reduction in gas sale
volume can be attributed to the Company's Gypsy Highview Gas
Plant in northwest Montana, which has been shut-in since December
1997 due to lack of gas production from wells in the area.
Expenses. Total expenses for the three months ended March 31,
1998 were $1,291,000, a 29% decrease compared to pro forma
expenses of $1,818,000 for the same period in 1997. Management
believes a significant portion of the decrease in expenses can be
attributed to efficiencies gained as a result of the merger of
the Company and Old MSR. Comparing actual expenses for the first
quarter of 1998 to pro forma expenses for the same period in 1997
indicates that 1998 operating expense of $439,000 decreased 37%;
1998 production taxes of $82,000 decreased 39%, primarily due to
reduced sales; 1998 depletion and depreciation expense of
$337,000 was down 23%, the result of lower sales volumes and a
reduced depletion rate; general and administrative expenses of
$221,000 for 1998 decreased 19%, and interest expense for 1998 of
$212,000 decreased 23% due to a reduced interest rate on the
Company's long-term debt.
Net Income (Loss). For the first quarter ended March 31, 1998
the net loss was $129,000 compared to pro forma net income of
$42,000 for the 1997 period. The 1998 first quarter loss was
primarily the result of the extreme decline in crude oil prices.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following pro forma consolidated statement of operations for
the three months ended March 31, 1997, combine the historical
information of the Company adjusted to give the effect to the
merger as if the merger had been consummated on January 1, 1997.
The Company's oil revenues and associated operating expenses from
the Mercury Properties included in the pro forma statements of
operation was subject to a prior production payment forward sales
agreement between Mercury and a third party for the period of
October 1996 through December 31, 1997.
The Mercury Property oil revenues and associated expenses were
excluded from the Company's statements of operations for the year
ended December 31, 1997, however the revenues and expenses are
included in this pro forma statement of operations 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.
The pro forma statement of operations is provided for
comparative purposes only and should be read in conjunction with
the historical consolidated financial statements of the Company
included elsewhere in the report. 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, 1997.
MSR Exploration Ltd. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
For the Three Months Ended March 31, 1997
REVENUE
Oil sales $1,207,000
Gas sales 659,000
Interest and other income 15,000
Total revenues 1,881,000
EXPENSES
Operating expenses 694,000
Production taxes 135,000
Depletion and depreciation 440,000
General and administrative 273,000
Interest 276,000
Total expenses 1,818,000
Income before income taxes 63,000
Income tax expense (21,000)
Net income $42,000
Basic and diluted earnings (loss) per share $0.00
Basic and diluted weighted average number
of shares outstanding for the periods 25,777,014
Liquidity and Capital Resources
The Company finances its operations primarily through a third
party credit facility and cash from operations. Net cash
provided by operations was ($107,000) for the quarter ended March
31, 1998. The Company believes that its cash flow from
operations and funds available under its existing credit facility
will be sufficient to fund foreseeable working capital
requirements of its operations. However, the Company's capital
expenditure programs, principally the drilling of development
wells, will be dependent on crude oil pricing in the coming
months.
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 million senior secured
revolving credit facility with an initial borrowing base of
$12million, 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
0.125%. At March 31, 1998 there was a total of $10,498,000
outstanding under the credit agreement, all of which constituted
long-term debt. 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 certain dividend restrictions. For the period
ended March 31, 1998, the Company is in compliance with all of
the covenants.
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
Company generated discretionary cash flow for the three months
ended March 31, 1998, of approximately $355,000 compared to
approximately $779,000 of pro forma discretionary cash flow for
the three months ended March 31, 1997.
Prospective Business Combination.
On May 6 1998, the Company announced that it had entered into a
letter of intent to merge with Quicksilver Resources Inc., a
company affiliated with Mercury Exploration Company and the
Darden family of Fort Worth, Texas. The letter of intent
contemplates that MSR will be merged into Quicksilver Resources
Inc. with MSR shareholders receiving common stock of Quicksilver
Resources.
Following completion of the merger, Quicksilver Resources would
own interests in 1,200 wells (672 net), with a lease inventory of
almost 600,000 gross acres (330,000 net) located in Michigan,
Montana, Wyoming, Texas, and Canada. The company's net proved
reserves would be in excess of 285 billion cubic feet of gas
equivalent (BCFE), having a present value discounted at ten
percent (PV-10) of approximately $210 million, based on reserve
reports dated January 1, 1998. The combined companies would have
projected 1998 revenues of approximately $50 million, operating
cash flow of approximately $30 million and net income of
approximately $10 million.
Quicksilver Resources is primarily owned by Mercury Exploration
Company, Trust Company of the West and an affiliate of Enron
Corp. Quicksilver Resources expects to make application to the
American Stock Exchange to list the shares of Quicksilver
Resources, including the shares to be issued to the MSR
shareholders in the merger. Upon consummation of the merger, the
MSR shareholders would receive shares of common stock of
Quicksilver Resources in exchange for each of their MSR shares,
representing approximately 20 percent of the shares of
Quicksilver Resources to be outstanding after the merger.
The merger is subject to negotiation and execution of a
definitive merger agreement, approval of the shareholders of MSR
and Quicksilver Resources, certain regulatory filings and other
customary conditions. If approved, the merger is expected to be
completed in the third quarter of 1998.
MSR Exploration Ltd. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings: None
ITEM 2. Changes in Securities: None
ITEM 3. Defaults Upon Senior Securities: None
ITEM 4. Submission of Matters to a Vote of Security Holders: None
ITEM 5. Other Information: None
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K: None
MSR EXPLORATION LTD.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May 14, 1998
MSR Exploration Ltd.
By: /s/ Glenn M. Darden
Glenn M. Darden
President and Chief Operating Officer
By: /s/ Howard N. Boals
Howard N. Boals, Vice President of Finance
Chief Accounting Officer
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