<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ To ___________
Commission file number: 001-14837
QUICKSILVER RESOURCES INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
75-2756163 (I.R.S. Employer Identification No.)
1619 Pennsylvania Avenue, Fort Worth, Texas 76104
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (817) 877-3151
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value American Stock Exchange
$0.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 14, 1999, the registrant had 12,888,500 outstanding shares of
its common stock, $0.01 par value.
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Quicksilver Resources Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Quicksilver Resources Inc. (the Company) as of March 31, 1999, and the related
condensed consolidated statements of operations and cash flows for the three
month periods ended March 31, 1999, and 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 condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1998, and the related consolidated statement of operations, stockholders' equity
and cash flows for the year ended December 31, 1998 (not presented herein); and
in our report dated March 29, 1999, 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, 1998,
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 10, 1999
2
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QUICKSILVER RESOURCES INC.
Condensed Consolidated Balance Sheets
In thousands, except for share and per share amounts
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 404 $ 294
Accounts receivable, net of allowance for doubtful
accounts of $1,350 at March 31, 1999 9,560 7,776
Inventories and other current assets 747 751
---------- ----------
Total current assets 10,711 8,821
PROPERTIES, PLANT AND EQUIPMENT - NET ("full cost") 142,486 134,810
OTHER ASSETS 3,668 969
---------- ----------
$ 156,865 $ 144,600
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 46 $ 67
Accounts payable 9,507 5,772
Accrued liabilities 1,117 1,691
---------- ----------
Total current liablities 10,670 7,530
---------- ----------
LONG-TERM DEBT 87,652 84,972
UNEARNED REVENUE 1,135 1,338
DEFERRED INCOME TAXES 14,838 11,953
MINORITY INTEREST in MSR Exploration Ltd. - 6,219
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01
Authorized 10,000,000 shares
issued and outstanding - none - -
Common stock, $0.01 par value
Authorized 40,000,000 shares,
issued and outstanding 12,888,500 and 11,510,800 129 115
Paid in capital in excess of par value 38,027 27,574
Retained earnings 4,414 4,899
---------- ----------
Total stockholders' equity 42,570 32,588
---------- ----------
$ 156,865 $ 144,600
========== ==========
</TABLE>
The accompanying notes are integral part of these financial statements.
3
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QUICKSILVER RESOURCES INC.
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 1999 and 1998
In thousands, except for the per share data
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
REVENUES
Gas sales $ 7,196 $ 8,130
Oil sales 931 1,988
Interest and other income 904 673
------ ------
Total revenues 9,031 10,791
------ ------
EXPENSES
Operating Expenses 3,227 3,734
Depletion and depreciation 2,815 3,000
Provision for doubtful accounts 1,350 -
General and administrative 820 227
Interest 1,695 1,924
----- -----
Total expenses 9,907 8,885
----- -----
Income (loss) before income taxes
and minority interest (876) 1,906
Minority interest in net loss of
MSR Exploration Ltd. 141 104
----- -----
Income (loss) before income taxes (735) 2,010
Income taxes (benefit) (250) 714
------ -----
NET INCOME (LOSS) $ (485) $ 1,296
======== ======
Basic and diluted earnings (loss) per share $ (0.04) $ 0.11
======== ======
Basic and diluted weighted average number
of shares outstanding for the periods 11,939 11,511
======== ======
</TABLE>
The accompanying notes are an integral part of these statements.
4
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QUICKSILVER RESOURCES INC.
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998
In thousands
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (485) $ 1,296
Charges and credits to net income
not affecting cash
Depletion and depreciation 2,815 3,000
Provision for doubtful accounts 1,350 -
Deferred income taxes (250) 492
Recognition of unearned revenue (203) (362)
Change in minority interest in
subsidiary (141) (100)
Amortization of deferred loan costs 32 -
Changes in assets and liabilities
Accounts receivable (3,134) (1,718)
Inventory, prepaid expenses and other 4 (45)
Accounts payable 3,735 7,373
Accrued liabilities (574) 506
-------- ---------
NET CASH FROM (USED FOR) OPERATING ACTIVITIES 3,149 10,442
-------- ---------
INVESTING ACTIVITIES
Acquisition of properties and
equipment (2,742) (3,544)
Advance on purchase of properties (2,700) -
-------- ---------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES (5,442) (3,544)
-------- ---------
FINANCING ACTIVITIES
Notes payable, bank proceeds 3,214 3,000
Principal payments on long-term debt (555) (10,142)
Deferred financing costs (31) -
Stock registration fees (225) -
-------- ---------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES 2,403 (7,142)
-------- ---------
NET INCREASE (DECREASE) IN CASH 110 (244)
CASH AT BEGINNING OF PERIOD 294 643
--------- ---------
CASH AT END OF PERIOD $ 404 $ 399
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash payments for interest expense $ 2,240 $ 1,918
========= =========
Cash payments for income taxes $ - $ -
========= =========
Common stock issued for acquisition
of minority interest in MSR
Exploration Ltd. 1,377 -
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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QUICKSILVER RESOURCES INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three Months Ended March 31, 1999 and 1998
Note 1. ACCOUNTING POLICIES AND DISCLOSURES
In the opinion of management of Quicksilver Resources Inc. (the "Company"), the
Company's Condensed 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, 1999, and the results of its
operations and its cash flows for the three months ended March 31, 1999, and
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 consolidated financial statements and notes
thereto included in the Form 10-K for the year ended December 31, 1998. The
results of operations for the three month period ended March 31, 1999, are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
FORMATION OF QUICKSILVER
Quicksilver Resources Inc. (the "Company" or "Quicksilver") was formed as a
Delaware corporation in December 1997 to combine certain oil and gas properties
pursuant to a merger. On January 1, 1998, Mercury Exploration Company
("Mercury"), Quicksilver Energy, L.C. ("QELC"), Michigan Gas Partners Limited
Partnership ("Michigan Gas Partners"), Trust Company of the West ("TCW"), Joint
Energy Development Investments Limited Partnership ("JEDI"), and Quicksilver
Resources Inc. entered into an agreement and plan of reorganization and merger
to combine certain oil and gas properties owned by Mercury, QELC, and Michigan
Gas Partners by causing Michigan Gas Partners to be merged with Quicksilver and
by causing certain assets and liabilities of Mercury and QELC to be transferred
to and assumed by Quicksilver. Quicksilver was the surviving corporation of the
merger.
In exchange for the contribution of properties and debt, Quicksilver issued
shares of common stock. The common stock was issued to contributing parties
based on their ownership interest in the oil and gas properties. The oil and gas
properties were evaluated based on the net present value of their reserves. The
reserves were discounted at 10 percent and reduced for any associated debt. The
conversion of debt to equity was valued at its face value. The net values for
all properties and debt were summarized, and the percentage each contributed to
the total was used to allocate shares of common stock to the shareholders.
In the business combination, the surviving corporation issued 1,340,404 (13
percent of the outstanding) shares of common stock, $.01 par value, for all JEDI
partnership interests in Michigan Gas Partners. Mercury did not receive
consideration for its partnership interests in Michigan Gas Partners.
Quicksilver issued 3,325,955 shares of common stock to Mercury in exchange for
certain Mercury oil and gas properties in Michigan and Wyoming, and Quicksilver
assumed debts related to the oil and gas properties transferred from Mercury.
Quicksilver also issued 3,030,860 shares of Quicksilver common stock to QELC in
exchange for all of QELC's oil and gas properties in Michigan and Wyoming. In
addition, Quicksilver assumed debts related to QELC's oil and gas producing
properties. Quicksilver issued 1,273,176 shares of common stock to individuals
for their interests in the assets of Mercury and QELC to be transferred to
Quicksilver in the business combination. Quicksilver satisfied debt owed to TCW
under a credit agreement dated November 14, 1996, between TCW and QELC, by
paying $17,075,000 in cash to TCW and by issuing 1,340,404 (13 percent of the
outstanding) shares of common stock to TCW in exchange for a $10,000,000 credit
on the debt.
The formation of Quicksilver was accounted for under provisions of Accounting
Principal Board Opinion Number 16 (APB 16), "Business Combinations". Under APB
16, Mercury and QELC were considered companies under common control and were
accounted for at historical cost. The merger of Michigan Gas Partners into
Quicksilver was accounted for using the purchase method with a fair value of $10
million. The fair value of Michigan Gas Partners was based on the conversion of
TCW's $10,000,000 of debt into 13 percent of Quicksilver's common shares. This
was the same percentage issued to the partners of Michigan Gas Partners.
Michigan Gas Partners' net book value was $8,884,000 at January 1, 1998. All of
the valuation adjustment was assigned to oil and gas
6
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properties, and a total of $1,116,000 was allocated to Michigan Gas Partners'
book value of producing oil and gas properties to complete the accounting.
MERGER OF MSR EXPLORATION LTD. WITH AND INTO QUICKSILVER
On March 4, 1999, Quicksilver completed a merger with MSR Exploration Ltd. APB
16 provides that exchanges or transfers of net assets between companies under
common control must be accounted for at historical cost in a manner similar to
that of pooling of interest accounting. Furthermore, APB 16 indicates that the
purchase method of accounting should be used if the effect of a transfer or
exchange is to acquire all of the outstanding shares held by minority interests.
Prior to the merger Quicksilver Energy, L.C., Mercury, and the principal
stockholders of Mercury, comprised of the Darden family (the "Mercury Group"),
controlled Quicksilver through their approximate 74 percent ownership of
Quicksilver. The Mercury Group was considered to control MSR because the Mercury
Group and two other individuals affiliated with Mercury owned approximately 46.5
percent of MSR's common stock, controlled MSR's executive committee of its board
of directors, and held warrants to purchase 11 million shares of MSR common
stock. Accordingly, Quicksilver was considered the "accounting acquiror" and
transferred approximately 46.5 percent of MSR's net assets to Quicksilver at
historical cost. The remainder of MSR's net assets, the approximate 53.5 percent
related to minority interests, was valued and recorded based on the purchase
method of accounting. Although the merger did not occur until 1999, MSR's
financial statements as of December 31, 1998, and March 31, 1998, have been
combined with the Company's since the entities were under common control. Also,
a minority interest has been reflected on the December 31, 1998, balance sheet
and the statements of operations since the merger closed on March 4, 1999.
2. MERGERS AND ACQUISITIONS
On March 4, 1999, the Company completed the MSR merger. The merger qualified as
a tax-free exchange and was accounted for in part as a pooling of interests for
entities under common control, with the minority interest accounted for under
the purchase method. In connection with the merger, the Company issued 2,577,700
shares of its common stock in exchange for all of the outstanding common stock
of MSR Exploration Ltd. based on a conversion ratio of one share of the
Company's common stock for ten shares of MSR common stock (the merger exchange
ratio). MSR's outstanding common stock options and warrants were converted into
Quicksilver common stock options and warrants to purchase approximately 58,857
shares and 1,110,000 shares, respectively. The minority interest reflected on
the Company's December 31, 1998, balance sheet and statements of operations is
approximately 53.5 percent of MSR's net assets and results of operations for the
periods prior to March 4, 1999.
The Company's financial statements have been restated for the period prior to
the business combination to include the combined financial results of the
Company and MSR. Total revenues, income (loss) before income taxes and minority
interest, and net income (loss) for the individual companies are as follows in
thousands:
For the three months ended March 31, 1999:
<TABLE>
<CAPTION>
Quicksilver MSR
Resources Exploration
Inc. Ltd. Total
----------- ----------- -------
<S> <C> <C> <C>
Total revenues $ 8,570 $ 461 $ 9,031
(Loss) before income taxes and minority interest $ (612) $ (264) $ (876)
Net (loss) $ (362) $ (123) $ (485)
</TABLE>
7
<PAGE>
For the three months ended March 31, 1998:
<TABLE>
<CAPTION>
Quicksilver MSR
Resources Exploration
Inc. Ltd. Total
----------- ------------ -------
<S> <C> <C> <C>
Total revenues $ 9,695 $ 1,096 $10,791
Income (loss) before income taxes and minority interest $ 2,100 $ (194) $ 1,906
Net income (loss) $ 1,386 $ (90) $ 1,296
</TABLE>
There were no significant intercompany transactions between the Company and MSR
Exploration Ltd.
3. NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
<S> <C>
Long-term debt, in thousands, consists of:
Notes payable to banks
(7.38% at March 31, 1999) $ 84,850
Note payable to affiliated company 2,000
Various loans 848
--------
87,698
Less current maturities (46)
--------
$ 87,652
========
</TABLE>
Long-term debt maturities are as follows, in thousands of dollars:
<TABLE>
<CAPTION>
Periods Ending March 31
-------------- --------
<C> <C>
1999 46
2000 2,720
2001 20
2002 4
2003 4
Thereafter 84,904
--------
$ 87,698
========
</TABLE>
As part of the merger of the Company with MSR on March 4, 1999, the Company
entered into a new five year Credit Facility agreement. The existing debt of
$73,993,000 and $10,848,000 from, respectively, Quicksilver and MSR was
transferred into the new Credit Facility. The Credit Facility permits the
Company to obtain revolving credit loans and to issue letters of credit for the
account of the Company from time to time in an aggregate amount not to exceed
$200 million. The Borrowing Base is currently $85 million and is subject to
semi-annual determination and certain other redeterminations based upon a
variety of factors, including the discounted present value of estimated future
net cash flow from natural gas and crude oil production. At the Company's
option, loans may be prepaid, and revolving credit commitments may be reduced in
whole or in part at any time in certain minimum amounts. The Company can
designate the interest rate on amounts outstanding at either the London
Interbank Offered Rate (LIBOR) + 1.65 percent or at bank prime. On March 4,
1999, the Company locked in its interest rate at 7.38 percent for the next six
months. 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 dividend restrictions and restrictive covenants,
which, among other things, require the maintenance of a minimum current ratio.
The Company currently is in compliance with all such restrictions. The Company
also has entered
8
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into an 15 month $2,000,000 note agreement with an affiliated company, which
can be prepaid at the Company's option. Interest, which is payable at
maturity, is tied to the LIBOR and is currently 7.25 percent.
4. STOCKHOLDERS' EQUITY
The Company is authorized to issue 40 million shares of common stock with a par
value of one cent ($0.01) and 10 million shares of preferred stock with a par
value of one cent ($0.01). At December 31, 1998, the Company had 100,000 shares
of common stock outstanding.
As part of the merger with MSR Exploration Ltd., the Company agreed to exchange
one share of its common stock for each ten shares of MSR common stock. To effect
the exchange ratio, the founding shareholders of the Company were issued an
additional 10,210,800 shares, prior to the merger, in the form of a stock
dividend. Upon completion of the merger the founding shareholders owned
10,310,800 (80%) of the shares of the Company and former MSR shareholders owned
approximately 2,577,700 (20%) of the common shares of the Company. A total of
1,200,000 shares of MSR common stock was held under common control, and
1,377,700 shares were held by minority shareholders. All references to numbers
of shares and per share amounts in the financial statements dated prior to the
effective date of the merger, March 4, 1999, have been restated to reflect the
stock dividend plus 1,200,000 shares held under common control or a total of
11,510,800 common shares.
The Company now has 12,888,500 shares of common stock outstanding. Outstanding
options and warrants for MSR stock were converted into options and warrants to
purchase Company common stock. As a result of the merger, the Company has
outstanding warrants to purchase common stock of 555,000 shares at $12.50 per
share, 555,000 shares at $20.00 per share, 28,000 shares at $33.75 per share,
and 6,000 shares at $0.01 per share and options to purchase 24,857 shares of
common stock at $8.75 per share.
5. ACCOUNTS RECEIVABLE - CONTINGENCY LOSS
The Company's customers are large natural gas and crude oil purchasers. The
Company does not generally require collateral, and receivables are usually due
and collected in 30 to 60 days. On March 10, 1999, one of the Company's natural
gas purchasers filed for protection under Chapter 11 of the Federal Bankruptcy
Code. Management considers a portion of the approximately $2,450,000 account
receivable associated with this purchaser to be uncollectible; accordingly, an
allowance for doubtful accounts of $1,350,000 has been established at March 31,
1999. All contracts with that purchaser have been terminated, and the gas has
been recontracted with a credit-worthy purchaser.
9
<PAGE>
QUICKSILVER RESOURCES INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q 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.
LIQUIDITY AND CAPITAL RESOURCES
General
The following discussion compares the Company's financial condition at March 31,
1999, to its financial condition at December 31, 1998.
Prior to March 4, 1999, the stockholders of the Company approved the merger with
MSR. Pursuant to the merger, stockholders of MSR received approximately
2,577,700 shares of the Company's common stock. As a result of the merger, MSR
ceased to exist, and all of its assets and liabilities were transferred to the
Company. The merger was accounted for, in part, as a pooling of interest;
therefore the financial statements have been combined. The merged net assets
attributable to the minority interest shareholders have been reported as a
minority interest. Such minority interest was acquired in March 1999 and was
accounted for under the purchase method of accounting at December 31, 1998.
The Company believes that its cash flows from operations are adequate to meet
the requirements of its business. However, future cash flows are subject to a
number of variables including the level of production and prices, and there can
be no assurance that operations and other capital resources will provide cash in
sufficient amounts to maintain planned levels of capital expenditures.
Cash Flow
The Company's principal operating sources of cash include sales of natural gas
and crude oil and revenues from transportation and processing. Quicksilver sells
approximately 70 percent of its natural gas production under long term
contracts. As a result, the Company experiences significant predictability to
its natural gas revenues. Commodity market prices affect cash flow for that
portion of natural gas not under contract as well as most of the Company's crude
oil sales. Because of the recent price weakness of oil and natural gas, the
Company has reduced its development and exploration budget. However, 1999
expenditures will be funded by internally generated cash flow and, depending
upon commodity prices, may be increased.
The Company's net cash provided by operations for the three months ended March
31, 1999, was $3,149,000 compared to $10,442,000 for the same period last year.
The Company's net cash used in investing for the three months ended March 31,
1999, was $5,442,000. Investing activities were comprised primarily of additions
to oil and gas properties through acquisitions and development and, to a lesser
extent, exploration and additions of field service assets. The Company's
activities have been financed through a combination of operating cash flow and
bank borrowings. The Company's net cash from financing activities for the three
months ended March 31, 1999, was $2,403,000. Sources of financing used by the
Company primarily have been borrowings under its Credit Facility.
Capital Requirements
On March 31, 1999, the Company announced it had signed a purchase and sale
agreement with Unocal Corporation's Spirit Energy 76 unit to acquire
substantially all of Spirit Energy's natural gas and crude oil assets in
Michigan. Total consideration to Spirit Energy is $27 million in cash, which
will be provided by the Company's Credit Facility, and $3 million in Quicksilver
common stock. The properties include Spirit Energy's ownership in the Garfield
Unit and the Beaver Creek Richfield Unit. Quicksilver's working interest
ownership in Garfield will
10
<PAGE>
increase to 99% from 54%. The purchase includes approximately 20,000 net
leasehold acres producing about 13,000 Mcf equivalent (Mcfe) net per day.
Estimated reserves were not disclosed.
The transaction is scheduled to close during the second quarter with an
effective date of January 1, 1999. The stock component of the purchase will be
distributed to Spirit Energy over a three year period and will be subject to
downward adjustment in correlation to certain costs, expenses, and liabilities
incurred during this period. As a part of the purchase and sale agreement the
Company advanced to Unocal as an earnest money deposit $2,700,000, which was
funded by long term debt. This earnest money deposit is included in other assets
in the accompanying condensed consolidated balance sheet at March 31, 1999.
Bank Facilities
As part of the merger of the Company with MSR on March 4, 1999, the Company
entered into a new five year Credit Facility agreement. The then existing debt
of $73,993,000 from Quicksilver and $10,848,000 from MSR was transferred into
the new Credit Facility. The Credit Facility permits the Company to obtain
revolving credit loans and to issue letters of credit for the account of the
Company from time to time in an aggregate amount not to exceed the lesser of
$200 million or the borrowing base. The Borrowing Base is currently $85 million
and is subject to semi-annual determination and certain other redeterminations
based upon a variety of factors, including the discounted present value of
estimated future net cash flow from oil and gas production. At the Company's
option, loans may be prepaid, and revolving credit commitments may be reduced,
in whole or in part at any time in certain minimum amounts. The Company can
designate the interest rate on amounts outstanding at either the London
Interbank Offered Rate (LIBOR) + 1.65 percent or at bank prime. 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 dividend restrictions and restrictive covenants, which, among other
things, require the maintenance of a minimum current ratio.
RESULTS OF OPERATIONS
Quicksilver's revenue, profitability, and future rate of growth are
substantially dependent upon prevailing prices for natural gas and crude oil,
which are dependent upon numerous factors such as economic, political, and
regulatory developments as well as competition from other sources of energy. The
energy markets historically have been highly volatile, and future decreases in
prices could have a materially adverse effect on Quicksilver's financial
position, results of operations, quantities of reserves that may be economically
produced, and access to capital.
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 combined consolidated financial statements and notes thereto
for the fiscal year ended December 31, 1998.
THREE MONTHS ENDED MARCH 31, 1999, COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
REVENUES. Total revenues for the three months ended March 31, 1999, were
$9,031,000, a 16 percent decrease from the $10,791,000 of total revenues for the
same period in 1998.
Gas sales for the 1999 period were $7,196,000, a decrease of 11 percent when
compared with first quarter 1998 sales of $8,130,000. This decrease was
primarily due to first quarter 1998 gas balancing allocations and first quarter
1999 Garfield Unit workover projects. An over-allocation of volumes under gas
balancing agreements during the first quarter of 1998 resulted from prior period
under-allocations. During the first quarter of 1999 the Company took its normal
allocations. Gas sales volumes for the three months ended March 31, 1999, were
3,353,500 Mcf, a decrease of 14 percent from the 1998 volumes of 3,893,000 Mcf.
During the 1999 quarter, the Company sold its gas at an average price of $2.15
per Mcf compared to the 1998 price of $2.09 per Mcf, a 3 percent increase.
Oil sales for the three months ended March 31, 1999, were $931,000, a 53 percent
decrease from the $1,988,000 for the same period in 1998. Average crude oil
prices were $9.14 per barrel during the three months ended March 31, 1999,
compared to a 1998 price of $10.78 per barrel. Sales volumes decreased 45
percent from 184,000 barrels in 1998 to 102,000 barrels for the first quarter of
1999. The decrease in oil sales volumes was primarily the result of
11
<PAGE>
the shutting in of wells due to low crude oil prices. Interest and other
income for the three months ended March 31, 1999, was $904,000, a 34 percent
increase compared to $673,000 for the 1998 period.
EXPENSES. Total expenses for the three months ended March 31, 1999, were
$9,907,000, a 12 percent increase over the expenses of the comparable period in
1998. Operating expenses for the first quarter of 1999 were $3,227,000, a 14
percent decrease from operating expenses of $3,734,000 for the 1998 period. The
decrease in operating expenses was primarily attributable to the reduction in
sales volumes.
Depletion and depreciation expense for the three months ended March 31, 1999,
was $2,815,000, a six percent decrease compared to $3,000,000 for the same
period in 1998. The decrease was due to reduced sales volumes; however, the
depletion and depreciation rate per Mcfe of sales increased to $0.71 in the 1999
period from $0.60 in 1998 based on year end evaluations of Company reserves.
The provision for doubtful accounts of $1,350,000 was established due to the
bankruptcy of one of the Company's natural gas purchasers. The total amount of
production for which Quicksilver has made an allowance is equal to approximately
six percent of the Company's estimated production for all of 1999 on an Mcfe
basis.
General and administrative expenses (G&A) for the first quarter of 1999 were
$820,000 as compared to $227,000 for 1998. The increase in G&A was due to the
fees incurred completing the merger, additional compliance costs associated with
being a larger public company, and the resultant increase in personnel.
Interest expense for the first quarter of 1999 was $1,695,000, a decrease of 12
percent compared to $1,924,000. The decrease was the result of lower average
interest rates.
NET INCOME (LOSS). For the first quarter ended March 31, 1999, the net loss was
$485,000 compared to net income of $1,296,000 for the 1998 period. The 1999
first quarter loss was the result of establishing the $1,350,000 allowance for
doubtful accounts related to the bankruptcy of one of the Company's natural gas
purchasers.
YEAR 2000
Quicksilver Resources Inc. has developed a plan (the "Year 2000 Plan") to
address the Year 2000 issue created by computer programs and applications that
utilize two digit rather than four digit date fields to designate a year. As a
result, computer equipment, software, and devices with embedded technology that
are date-sensitive may be unable to recognize or may misinterpret the actual
date. This could result in a system failure or miscalculations causing
disruptions of operations.
The Company has assessed its information technology ("IT") and its non-IT
systems. The Company believes that all of its computer equipment and software as
well as its operational and control systems are currently Year 2000 compliant.
Quicksilver is also monitoring the compliance efforts of the significant
suppliers, customers, and service providers with whom it does business and whose
IT and non-IT systems interface with those of the Company to ensure that they
will be Year 2000 compliant. Management believes that ongoing communications
with and assessment of the compliance efforts of these third parties will
minimize any noncompliance risks.
The discussion of the Company's efforts and management's expectations relating
to Year 2000 compliance contains forward-looking statements. Quicksilver is
continuing its analysis of the operational problems and costs that would be
reasonably likely to result from failure by the Company and significant third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. The Company plans to establish a contingency plan for dealing with
the most likely worst case scenario, which to date has not been clearly
identified. The Company plans to continue such analysis and complete a plan by
the third quarter of 1999.
Although the Company does not expect to experience significant operational
problems due to the Year 2000 issue, there can be no assurance that this issue
will not materially impact the Company's results of operations or adversely
12
<PAGE>
affect its relationship with customers or vendors. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
impact on Quicksilver's systems or results of operations.
QUICKSILVER RESOURCES INC.
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:
On March 4, 1999, the Company held its annual stockholders' meeting at
which the stockholders elected as directors Frank Darden, Thomas F.
Darden, Glenn M. Darden, W. Yandell Rogers III, Steven M. Morris, Mark
Warner, and D. Randall Kent and appointed Deloitte & Touche LLP as
accountants for Quicksilver. The merger with MSR was approved by
Quicksilver stockholders by unanimous consent on February 3, 1999.
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:
On March 4, 1999 the Company filed a Current Report on SEC Form 8-K
announcing the merger of MSR Exploration Ltd. with and into the
Company.
13
<PAGE>
QUICKSILVER RESOURCES INC.
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, 1999
Quicksilver Resources Inc.
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
14
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<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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