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FILE PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 333-66709
MSR EXPLORATION, LTD.
Notice of Special Meeting of Stockholders
to Consider the
PROPOSED MERGER of MSR into
QUICKSILVER RESOURCES INC.
YOUR VOTE IS VERY IMPORTANT
The Board of Directors of MSR Exploration, Ltd. has approved, by
unanimous vote (with Messrs. Frank, Thomas and Glenn Darden abstaining), and
recommends to you a merger of MSR with Quicksilver Resources Inc. in a
transaction that we believe will create a more efficient and profitable
energy company and maximize the value of your investment.
As a result of the merger, you will receive .10 of one share of common
stock of Quicksilver for each share of your MSR common stock. As a result of
the merger, MSR stockholders will own 20% of the Quicksilver common stock and
stockholders of Quicksilver will own 80% of the common stock after the
merger. We expect that the merger will be tax-free to you unless you dissent
from the merger or receive cash for fractional shares of Quicksilver common
stock.
The merger cannot be completed unless you and the other MSR Stockholders
approve it by a majority vote and other customary conditions are satisfied.
We are asking you to approve the merger at our special meeting of
stockholders.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND
MAIL THE ENCLOSED PROXY CARD. IF YOU SIGN, DATE AND MAIL YOUR PROXY CARD
WITHOUT INDICATING HOW YOU WANT TO VOTE, YOUR PROXY WILL BE COUNTED AS A VOTE IN
FAVOR OF THE MERGER. IF YOU FAIL TO RETURN YOUR PROXY CARD OR TO VOTE IN PERSON
AT THE MEETING, THE EFFECT WILL BE A VOTE AGAINST THE MERGER.
Additional information regarding the special meeting follows:
Date/Time: Thursday, March 4, 1999
10:00 a.m. Fort Worth, Texas Time
Place: Shady Oaks Country Club
320 Roaring Springs Road
Fort Worth, Texas 76116
Record Date: January 22, 1999
The accompanying Proxy Statement/Prospectus provides additional information
about the proposed merger. Please read this entire document carefully. You may
also obtain information about our company from documents that we have filed with
the SEC.
MSR EXPLORATION LTD.
/s/ Thomas F. Darden
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Thomas F. Darden
Chairman of the Board
For a discussion of material risk factors that you should consider in
evaluating the merger, see "Risk Factors" beginning on page 11.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement/Prospectus is first being mailed to
stockholders on or about February 1, 1999.
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THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE IMPORTANT BUSINESS
AND FINANCIAL INFORMATION ABOUT MSR THAT IS NOT PRESENTED IN OR DELIVERED
WITH THIS PROXY STATEMENT/PROSPECTUS. THESE DOCUMENTS ARE AVAILABLE TO YOU
FREE OF CHARGE UPON REQUEST AT 1619 PENNSYLVANIA AVENUE, FORT WORTH, TEXAS,
76104, ATTENTION: SECRETARY. THE TELEPHONE NUMBER IS (817) 877-3151.
TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE MERGER . . . . . . . . . . . . . . . . . . .iv
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Combined Company. . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Differences in Rights of Stockholders of MSR and Quicksilver. . . . . . 3
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . 3
Recommendation of the Special Committee and Board of Directors of MSR . 3
Opinion of MSR's Financial Advisor. . . . . . . . . . . . . . . . . . . 3
MSR's Reasons for the Merger. . . . . . . . . . . . . . . . . . . . . . 3
The Merger Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Interests of Certain Persons in the Merger. . . . . . . . . . . . . . . 5
Summary Historical and Pro Forma Financial Information. . . . . . . . . 6
Selected Comparative Per Share Data . . . . . . . . . . . . . . . . . . 9
Comparative Market Data . . . . . . . . . . . . . . . . . . . . . . . .10
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
THE MSR MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Time, Place and Date of the Special Meeting . . . . . . . . . . . . . .14
Purpose of the Meeting. . . . . . . . . . . . . . . . . . . . . . . . .14
Voting Rights of MSR Stockholders . . . . . . . . . . . . . . . . . . .14
Proxies, Solicitation and Revocation of Proxies . . . . . . . . . . . .15
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Background of the Merger. . . . . . . . . . . . . . . . . . . . . . . .15
MSR's Reasons for the Merger; Recommendation of the MSR Board . . . . .18
Opinion of MSR's Financial Advisor. . . . . . . . . . . . . . . . . . .19
General Information About The Merger. . . . . . . . . . . . . . . . . .22
Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Conversion of Shares; Conversion. . . . . . . . . . . . . . . . . . . .23
Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Exchange of Stock Certificates. . . . . . . . . . . . . . . . . . . . .24
Dissenting Stockholders' Rights . . . . . . . . . . . . . . . . . . . .24
The Merger Agreement. . . . . . . . . . . . . . . . . . . . . . . . . .26
Treatment of Outstanding Stock Options and Warrants . . . . . . . . . .29
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . .30
Restrictions on the Transfer of Quicksilver Common Stock to be
Received by Affiliates of MSR . . . . . . . . . . . . . . . . . . . .30
INTERESTS OF CERTAIN PERSONS IN THE MERGER . . . . . . . . . . . . . . . . .31
Beneficial Ownership Interests of the Darden Family and
it Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Transactions with Management. . . . . . . . . . . . . . . . . . . . . .32
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . .32
Management after the Merger . . . . . . . . . . . . . . . . . . . . . .32
Formation Documents . . . . . . . . . . . . . . . . . . . . . . . . . .33
MATERIAL FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . .35
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Taxation of U.S. Stockholders . . . . . . . . . . . . . . . . . . . . .36
Taxation of Non-U.S. Stockholders . . . . . . . . . . . . . . . . . . .37
Information Reporting and Backup Withholding. . . . . . . . . . . . . .39
SELECTED FINANCIAL DATA OF MSR . . . . . . . . . . . . . . . . . . . . . . .40
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF MSR'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . .41
Comparison of Historical Results of Operations. . . . . . . . . . . . .41
Comparison of Historical Results of Operations for 1998 to Adjusted
Financial Data for 1997 . . . . . . . . . . . . . . . . . . . . . . .42
Comparison of as Adjusted Financial Data for the Years Ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . .43
MSR Consolidated Financial Data . . . . . . . . . . . . . . . . . . . .43
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . .44
Changes in Prices and Inflation . . . . . . . . . . . . . . . . . . . .45
Year 2000 Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
SELECTED FINANCIAL DATA OF QUICKSILVER . . . . . . . . . . . . . . . . . . .47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF QUICKSILVER. . . . . . . . . . . . . . . .49
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . .49
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . .51
Issues Relating to the Year 2000. . . . . . . . . . . . . . . . . . . .52
SELECTED HISTORICAL FINANCIAL DATA OF QUICKSILVER PREDECESSORS - MERCURY
EXPLORATION COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . .53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF MERCURY EXPLORATION COMPANY . . . . . . . . . . . . . . .54
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . .54
Year Ended September 30, 1997 Compared with the Year Ended
September 30, 1996. . . . . . . . . . . . . . . . . . . . . . . . .54
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . .54
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . .54
Three Months Ended December 31, 1997 Compared with the Three
Months Ended December 31, 1996. . . . . . . . . . . . . . . . . . .55
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . .56
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND
BALANCE SHEET OF THE SURVIVING CORPORATION. . . . . . . . . . . . . . .57
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
AND BALANCE SHEET . . . . . . . . . . . . . . . . . . . . . . . . . . .62
QUICKSILVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
Formation of Quicksilver. . . . . . . . . . . . . . . . . . . . . . . .65
Business of Quicksilver . . . . . . . . . . . . . . . . . . . . . . . .66
Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . .66
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Description of Oil and Gas Properties . . . . . . . . . . . . . . . . .68
Exploration Activities. . . . . . . . . . . . . . . . . . . . . . . . .69
Oil and Gas Reserves. . . . . . . . . . . . . . . . . . . . . . . . . .70
Volumes, Sales Prices and Oil and Gas Production Expense. . . . . . . .71
Development, Exploration and Acquisition Capital Expenditures . . . . .71
Productive Oil and Gas Wells. . . . . . . . . . . . . . . . . . . . . .71
Oil and Gas Acreage . . . . . . . . . . . . . . . . . . . . . . . . . .71
Drilling Activity . . . . . . . . . . . . . . . . . . . . . . . . . . .72
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . .73
Certain Relationships and Related Party Transactions. . . . . . . . . .73
MANAGEMENT OF QUICKSILVER. . . . . . . . . . . . . . . . . . . . . . . . . .73
Directors and Executive Officers. . . . . . . . . . . . . . . . . . . .73
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF QUICKSILVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . .76
DESCRIPTION OF QUICKSILVER'S CAPITAL STOCK . . . . . . . . . . . . . . . . .79
Descripton of Common Stock. . . . . . . . . . . . . . . . . . . . . . .79
Description of Preferred Stock. . . . . . . . . . . . . . . . . . . . .79
COMPARISON OF STOCKHOLDER RIGHTS . . . . . . . . . . . . . . . . . . . . . .80
WHERE YOU CAN GET INFORMATION. . . . . . . . . . . . . . . . . . . . . . . .80
NOTE ON FORWARD-LOOKING INFORMATION. . . . . . . . . . . . . . . . . . . . .80
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INFORMATION INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . . . . .80
STOCKHOLDERS PROPOSAL FOR THE MSR 1999 ANNUAL MEETING. . . . . . . . . . . .81
OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
GLOSSARY OF OIL AND GAS TERMS. . . . . . . . . . . . . . . . . . . . . . . .83
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . F-1
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APPENDIX A AGREEMENT AND PLAN OF MERGER
APPENDIX B OPINION OF EVEREN SECURITIES, INC.
APPENDIX C DISSENTERS' RIGHTS UNDER THE ALBERTA BUSINESS CORPORATION ACT
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS THE MERGER BEING PROPOSED?
A: The boards of directors of MSR and Quicksilver determined that MSR and
Quicksilver will benefit from the combined resources of the energy
entities because the combined entity will be larger and, therefore, is
likely to be better able to obtain financing and to pursue development and
acquisition projects than each company could separately. In addition,
the merger of the two companies would eliminate overlap in management and
accounting and streamline operations.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If you own stock in MSR, you will receive one-tenth (.10) of one
share of Quicksilver common stock for each share of MSR common stock you
own at the time of the merger. For example, if you own 100 shares of
stock in MSR, you will receive 10 shares of stock in Quicksilver.
Q: WILL I RECEIVE ANY FRACTIONAL SHARES?
A: No. Quicksilver will not issue fractional shares of common stock, instead
you will receive a cash payment.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: We expect that the merger will be tax-free to you. If you own shares of
stock of MSR, you will not recognize any gain or loss as a result of the
merger. If, however, you receive cash as a result of exercising your
dissenters' rights or instead of fractional shares of Quicksilver, you
will recognize gain or loss upon that payment, measured by the
difference (if any) between the amount of cash received and the
allocable tax basis. Your gain or loss should be capital gain or loss,
provided that you held the MSR common stock or fractional share as a
capital asset.
Q: WHAT DO I NEED TO DO NOW?
A: Please mail your signed proxy card in the enclosed return envelope
as soon as possible so that your shares of MSR common stock may be
represented at the meeting.
Q: IF MY SHARES ARE HELD BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?
A: Your broker may vote your shares for the merger only if you
instruct your broker on how to vote. You should follow the directions
provided by your broker regarding how to instruct your broker to vote
your shares. If you do not tell your broker how to vote, your shares
will not be voted. Your failure to vote will have the same effect as a
vote AGAINST the merger.
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Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You may change your vote at any time before your proxy is
voted at the meeting. You may do this by sending a written notice
stating that you would like to revoke your proxy or by completing and
submitting a new proxy card. You may also attend the meeting and vote
in person. Simply attending the meeting, however, will not revoke your
proxy. If you have instructed a broker to vote your shares, you must
follow his instructions regarding how to change your vote.
Q: WHAT IF I DON'T WANT TO OWN QUICKSILVER SHARES?
A. You can:
- sell your MSR shares before the meeting or your Quicksilver shares
after the merger; or
- dissent from the merger and receive the fair market value of
your MSR shares by following the procedure on page 24.
Q: SHOULD I SEND IN MY CERTIFICATES NOW?
A: No. After the merger is completed, you will receive written
instructions for exchanging MSR stock for Quicksilver common stock.
Q: WHEN AND WHERE WILL SHARES OF QUICKSILVER BEGIN TRADING?
A: We anticipate that the shares of Quicksilver will begin trading on the
day that the merger is completed. Quicksilver has made an application to
list its shares on the American Stock Exchange under the ticker symbol
"KWK."
Q: WHAT IS THE DIVIDEND POLICY OF QUICKSILVER GOING TO BE?
A: We do not anticipate that dividends will be paid on the Quicksilver
stock for the foreseeable future because the dividend policy of
Quicksilver will be the same as that of MSR--to retain cash flow to
reinvest in Quicksilver's business.
Q: WHAT WILL HAPPEN IF I DO NOT EXCHANGE MY MSR CERTIFICATE FOR A
QUICKSILVER CERTIFICATE?
A: Once the merger is complete, your shares will be converted into the
right to receive shares of Quicksilver and MSR's stock will no longer
trade in any market. If you do not return your old certificate in
exchange for a Quicksilver certificate, your shares of Quicksilver will
eventually be abandoned after a period of 5-7 years in compliance with
the regulations of your state of residence which provide that ownership
of your shares will become property of your state.
Q: WHAT HAPPENS IF YOU DO NOT RECEIVE A MAJORITY VOTE BY MARCH 15, 1999
A: The terms of the merger agreement require that, if we don't
receive a majority vote approving the merger by March 15, 1999, the
merger agreement will be terminated and the merger will not occur, unless
the parties agree to extend the date for approval. However, members of
the Darden family and their affiliated companies own about
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43.7% of the MSR shares, and they have agreed to vote their shares in
favor of the merger. It is likely that the merger will be approved
based on the agreement of the Darden family to vote its MSR shares for
the merger.
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT/PROSPECTUS. BECAUSE THIS IS A SUMMARY, IT DOES NOT CONTAIN ALL OF
THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THIS
ENTIRE PROXY STATEMENT/PROSPECTUS BEFORE DECIDING HOW TO VOTE. FOR EASE OF
REFERENCE, A GLOSSARY OF OIL AND GAS TERMS USED IN THIS PROXY
STATEMENT/PROSPECTUS IS INCLUDED UNDER "GLOSSARY OF OIL AND GAS TERMS."
THE PARTIES (See Page 65)
QUICKSILVER
Quicksilver engages in the acquisition, exploration, production and sale of
crude oil, condensate and natural gas and the gathering, processing and
transmission of natural gas. Quicksilver currently has interests in oil and gas
mineral leases, gas gathering pipeline systems and wells producing hydrocarbons
that are located principally in the states of Michigan, Wyoming and Montana.
You can request information on Quicksilver by calling or writing to 1619
Pennsylvania Avenue in Fort Worth, Texas 76104, Attention: Secretary. The
telephone number is (817) 332-9133.
MSR
MSR engages in the acquisition, exploration, production and sale of
crude oil, condensate and natural gas and the gathering, processing and
transmission of natural gas. MSR currently has interests 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.
MSR's common stock is traded on the American Stock Exchange under the
symbol "MSR." You can request information on MSR by calling or writing to 612
8th Avenue in Fort Worth, Texas 76104, Attention: Secretary. The telephone
number is (817) 877-3151.
THE COMBINED COMPANY
If the merger is completed, the combined company would own
interests in 1,200 wells, with a lease inventory of almost 600,000 gross
acres located in Michigan, Montana, Wyoming, Texas and Canada. The
combined company's net proved reserves would be in excess of 286 billion
cubic feet of gas equivalent having a present value discounted at ten
percent of approximately $148 million, based on reserve reports dated
January 1, 1998.
THE MERGER (See Page 15)
GENERAL. If you approve the merger agreement and the merger, MSR will
merge with and into Quicksilver. Quicksilver will continue as the surviving
corporation in the merger. Your interest in MSR will at that time be
converted into the right to receive shares of stock of Quicksilver. As a
result of the merger, persons who formerly held stock of MSR will own
approximately 20% of the Quicksilver common stock.
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WHAT YOU WILL RECEIVE IN THE MERGER. As a result of the merger, you
will receive one-tenth (.10) of one share of Quicksilver common stock for
each share of MSR common stock that you own unless you dissent to the merger.
Quicksilver will not issue fractional shares of common stock,
instead you will receive a cash payment calculated by multiplying the price
of the MSR common stock on the American Stock Exchange on the day preceding
the closing date of the merger by 10, and then multiplying that number by the
fractional interest to which you are entitled. For example, if the closing
price of MSR's stock was $1.00 and you had an extra 1/2 of a share of
Quicksilver as a result of the merger, you would receive: $1.00 x 10 x .5 or
$5.00 for the 1/2 share.
THE CONVERSION RATIO. During the merger negotiations, our
companies discussed the possibility of exchanging one share of Quicksilver
stock for each share of MSR stock. However, we decided not to do a one for
one exchange because this likely would result in a per share price of less
than $1.00 for the stock of the surviving corporation. After some discussions
among representatives of Quicksilver and the special committee, we agreed
that a .10 to one exchange ratio was appropriate because it would result
in the desired number of outstanding shares and a per share price sufficient to
list the stock on a national exchange.
STOCK OPTIONS; WARRANTS. Each outstanding stock option or warrant to
purchase shares of MSR common stock will be converted into the right to
purchase shares of Quicksilver common stock.
The existing options and warrants will be converted by
(1) Multiplying the number of shares of MSR common stock subject to the
option or warrant by .10; and
(2) Dividing the exercise price of the option or purchase price by .10.
For example, an option to purchase 10,000 shares of MSR common stock at
$2.00 per share, will be converted into an option for 1,000 (10,000 X .10)
shares of Quicksilver common stock at $20.00 per share ($2.00 divided by
.10). As of September 30, 1998, options to purchase 248,570 shares of MSR
common stock were outstanding and warrants to purchase 11,340,000 shares of
MSR common stock were outstanding.
DISSENTERS' RIGHTS (See Page 24)
If you choose not to participate in the merger you will have dissenters'
rights of appraisal under provisions of MSR's certificate of incorporation and
the Alberta Business Corporation Act.
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DIFFERENCES IN RIGHTS OF STOCKHOLDERS OF MSR AND QUICKSILVER (See Page 80)
Other than the availability of dissenter's rights to MSR's stockholders
under MSR's charter documents, which are not similarly available under
Quicksilver's charter documents, there are no significant differences between
the rights of MSR stockholders and those of Quicksilver stockholders.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (See Page 35)
It is intended that the merger will be a tax-free transaction to MSR
stockholders who receive Quicksilver stock in the merger. MSR stockholders
who choose to dissent from the merger and receive cash in exchange for their
MSR common stock will generally be required to recognize taxable income (or a
loss) as a result of the merger. Similarly, stockholders who receive cash in
lieu of shares of fractional shares of Quicksilver common stock will
recognize taxable gain or loss on that amount.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND BOARD OF DIRECTORS OF MSR (See Page
18)
The special committee of the board of directors of MSR and the board of
directors of MSR, with Frank, Thomas and Glenn Darden abstaining, have
unanimously approved the merger. MSR's board of directors has determined that
the terms of the proposed merger are fair to, and in the best interests of,
MSR's stockholders and recommends that you vote "for" the merger.
Due to the interests that the Darden family have in both MSR and
Quicksilver, MSR's board of directors appointed a special committee of
disinterested MSR directors to consider the merger. The special committee
retained EVEREN Securities, Inc. to act as its financial advisor. The special
committee has also determined that the merger is fair to, and in the best
interests of, the MSR stockholders.
OPINION OF MSR'S FINANCIAL ADVISOR (See Page 19)
EVEREN Securities, Inc. has determined that the consideration to be
received by MSR stockholders in the merger is fair to MSR stockholders (other
than members of the Darden family and their affiliates) from a financial
point of view. EVEREN's fairness opinion is attached as Exhibit B to this
proxy statement/prospectus and we encourage you to read it carefully.
MSR'S REASONS FOR THE MERGER (See Page 18)
MSR's special committee considered a variety of factors in making its
determination to recommend that you vote for the merger. These included:
- the fit between the assets of MSR and Quicksilver, including the
balance created by adding MSR's Montana oil reserves to Quicksilver's
gas reserves;
- the large inventory of exploration prospects covering 273,000
gross acres that would result from combining the companies;
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- greater cash flows generated by Quicksilver's properties, which would
provide resources to develop MSR's inventory of undeveloped
properties;
- greater financial strength and growth opportunities and greater
purchasing power with oil field service providers as a result of the
larger size of the combined company;
- the possibility that the larger, more diversified combined company
would benefit from better credit ratings, more flexible financing
terms and lower financing costs;
- the likelihood that the combined company would have a larger market
presence and would likely receive greater attention from financial
analysts and institutional investors; and
- the potential for market valuations comparable to other larger
independent oil and natural gas producers.
THE MERGER AGREEMENT (See Page 26)
GENERAL. The merger agreement sets forth the principal terms by which the
merger will be completed, and the rights of holders of MSR common stock to
receive Quicksilver common stock in the merger. The merger agreement is
attached to this proxy statement/prospectus as Appendix A and we urge you to
read it in its entirety.
CONDITIONS TO THE MERGER; TERMINATION OF THE MERGER AGREEMENT. The
completion of the merger is subject to certain conditions, including:
- approval of the merger agreement by the affirmative vote of the
holders of a majority of MSR's common stock and by the affirmative
vote of the stockholders of Quicksilver;
- approval by the American Stock Exchange of the listing of the
Quicksilver common stock to be issued in the merger; and
- the restructuring of Quicksilver's and MSR's debt.
The parties may waive any condition to the merger that works in that
party's favor. If MSR elects to waive any condition, we will amend or
supplement this proxy statement/prospectus and recirculate it. If a condition
is waived after the merger is approved, we will ask the MSR stockholders that
are adversely affected by the waiver to reapprove the merger.
The merger agreement may be terminated by either party at any time prior to
the effective time of the merger if, among other things:
- we do not receive stockholder approval of the merger;
- we do not complete the merger by February 28, 1999;
- either of us materially breaches the merger agreement;
- an injunction prevents the merger; or
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<PAGE>
- the special committee receives a proposal that is more beneficial to
MSR's stockholders than the merger and chooses to pursue it.
The special committee did not receive any other proposals and is not
considering any other proposals. The special committee did not solicit any
other potential parties to the merger, or consider an alternative transaction
due to the substantial controlling interest in MSR owned by the Darden family,
that precludes an alternative transaction.
VOTING AGREEMENT
In connection with the merger agreement, the members of the Darden
family, Mercury Exploration Company and Quicksilver Energy L.C., each an
affiliate of the Darden family, Joint Energy Development Investment Limited
Partnership and Trust Company of the West entered into a voting agreement
with MSR. None of the parties to the voting agreement received any
compensation in return for entering into the voting agreement. According to
the voting agreement, all of these parties have agreed to vote their shares
of Quicksilver common stock in favor of the merger. These parties
collectively own approximately 96.2% of Quicksilver's common stock. Therefore
approval of the merger agreement by Quicksilver's stockholders is likely. The
Darden family, Mercury Exploration Company and Quicksilver Energy L.C., also
agreed to vote their MSR common stock in favor of the merger. The Darden
family, Mercury Exploration Company and Quicksilver Energy L.C. collectively
own 43.7% of the outstanding MSR common stock entitled to vote.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (See Page 31)
In considering the board's recommendation that you vote for the merger,
you should be aware that some members of MSR's management and MSR's board of
directors have certain interests in the merger that are different from, and
in addition to, yours. Messrs. Frank, Thomas and Glenn Darden are executive
officers and/or directors and substantial stockholders of both MSR and
Quicksilver. Furthermore, they and other members of the Darden family are
directors and stockholders of Mercury Exploration Company, a substantial
stockholder of Quicksilver, and of Quicksilver Energy L.C., which also owns
Quicksilver stock. In addition, these individuals, along with other officers
of MSR, hold options and warrants for MSR stock that will be converted into
options and warrants for Quicksilver stock in the merger.
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<PAGE>
SUMMARY HISTORICAL AND PRO FORMA
FINANCIAL INFORMATION
The following tables set forth summary historical and pro forma
financial data for MSR and Quicksilver. The data presented below has been
derived from, and should be read together with, the consolidated financial
statements of MSR and the financial statements of Quicksilver and Quicksilver
predecessors and the related notes set forth elsewhere or incorporated by
reference in this proxy statement/prospectus. Summary financial data at
June 30, 1998 and September 30, 1998 and for the six months ended June 30,
1998 and for the nine months ended September 30, 1998 for MSR and Quicksilver
were derived from the unaudited financial statements and pro forma data of
MSR and Quicksilver. This includes all adjustments (consisting only of
normally recurring adjustments) that MSR and Quicksilver each considered
necessary for a fair presentation of operating results for these interim
periods. Results for interim periods do not necessarily indicate actual
results for the full year.
The summary historical and pro forma financial information should be
read in conjunction with the historical and pro forma consolidated financial
statements of MSR and historical and pro forma financial statements of
Quicksilver included elsewhere or incorporated by reference in this proxy
statement/prospectus. The pro forma information presented does not
necessarily indicate 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.
6
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA OF MSR
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FROM INCEPTION
MARCH 7, 1997 TO SIX MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998 SEPTEMBER 30, 1998
----------------- ---------------- ------------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues $ 854 $ 2,103 $ 3,003
Net income (loss) 30 (331) (724)
Basic and diluted earnings (loss) per share 0.00 (0.01) (0.03)
Basic weighted average number of shares
outstanding for the period 14,801 25,777 25,777
Diluted weighted average number of shares
outstanding for the period 14,838 25,805 25,777
BALANCE SHEET DATA:
Cash and cash equivalents $ 587 $ 339 $ 340
Accounts receivable 507 439 432
Inventories 248 299 257
Total current assets 1,374 1,089 1,033
Property, plant and equipment - net ("full cost") 24,234 23,840 23,842
Total assets 25,963 25,273 25,214
Current liabilities, including current portion of
long-term debt 1,332 818 1,371
Long-term debt 10,560 10,885 10,874
Deferred income taxes 1,001 831 636
Stockholders' equity 13,070 12,739 12,333
CASH FLOW DATA:
Net cash from (used for) operating activities $ 326 $ (284) $ 57
Net cash from (used for) investing activities (272) (274) (582)
Net cash from (used for) financing activities 474 306 274
</TABLE>
7
<PAGE>
PRO FORMA AND
HISTORICAL INFORMATION OF QUICKSILVER (Pre-Merger)
(in thousands, except per share amount)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998 SEPTEMBER 30, 1998
----------------- ---------------- ------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Total revenues $ 40,001 $ 19,323 $ 29,424
Net income 8,146 2,819 4,685
Basic and diluted
earnings per share $ 0.79 0.27 $ 0.45
Basic and diluted weighted
average number of shares
outstanding for the period 10,311 10,311 10,311
BALANCE SHEET DATA:
Cash and cash equivalents $ 56 $ 238 $ 383
Working capital (deficit) 340 (1,974) (72,321)
Total assets 113,979 120,490 123,802
Long-term debt (includes 74,169 70,531 72,014
current portion)
Total stockholder's equity 27,591 30,409 32,274
CASH FLOW DATA:
Net cash from (used for) $ 10,724 $ 14,172
operating activities
Net cash from (used for) (6,904) (11,690)
investing activities
Net cash from (used for) (3,638) (2,155)
financing activities
</TABLE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
OF THE SURVIVING CORPORATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED NINE MONTHS ENDED
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1997 1998 1998
----------- ---------- -----------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $ 44,415 $ 21,426 $ 32,427
Net income 7,805 2,376 3,838
Basic and diluted earnings per share 0.61 0.18 0.30
Basic and diluted weighted average number of shares 12,888 12,888 12,888
outstanding for the period
<CAPTION>
Nine Months Ended
At June 30, September 30,
1998 1998
---------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 577 $ 723
Accounts receivable 5,644 6,758
Inventories 707 664
Total current assets 6,940 8,149
Property, plant and equipment - net ("full cost") 145,074 146,834
Total assets 152,613 155,863
Current liabilities, including current portion of 9,043 9,358
long-term debt
Long-term debt 81,355 82,837
Deferred income taxes 12,990 13,256
Stockholders' equity 47,268 48,726
</TABLE>
8
<PAGE>
SELECTED COMPARATIVE PER SHARE DATA
The following table sets forth selected historical per share data for
MSR and selected unaudited pro forma per share data for Quicksilver giving
effect to the merger. The pro forma data does not necessarily indicate
Quicksilver's actual financial position or future operating results or what
would have occurred or will occur upon completion of the merger. The
"Surviving Corporation Pro Forma Share Data" is what you would own today if
the merger with Quicksilver had already taken place.
The numbers do reflect the conversion ratio for the merger of .10 share
of MSR for each share of Quicksilver, and a stock dividend, of 10,210,806
shares to be declared prior to completion of the merger.
The information shown below should be read together with the consolidated
financial statements of MSR and Quicksilver and the notes to those financial
statements included or incorporated by reference in this proxy
statement/prospectus and the selected pro forma financial data included
elsewhere in this proxy statement/prospectus.
COMPARATIVE PER SHARE INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998 SEPTEMBER 30, 1998
----------------- ------------- ------------------
Unaudited
<S> <C> <C> <C>
MSR EXPLORATION LTD., Pre-Conversion
Book value per share(1) $ 0.51 $ 0.49 $ 0.48
Net income (loss) per share 0.00 (0.01) (0.03)
Average number of shares outstanding 25,777,014 25,777,014 25,777,014
MSR EXPLORATION LTD., After-Conversion
Book value per share $ 0.05 $ 0.05 $ 0.05
Net income (loss) per share 0.00 0.00 0.00
Average number of shares outstanding 2,577,701 2,577,701 2,577,701
Pro Forma
---------
QUICKSILVER RESOURCES INC., Pre-Merger
Book value per share $ 2.68 $ 2.95 $ 3.13
Net income (loss) per share 0.79 0.27 0.45
Average number of shares outstanding 10,310,800 10,310,800 10,310,800
SURVIVING CORPORATION PRO FORMA SHARE DATA:
Book value per share $ 0.00 $ 3.67 $ 3.78
Net income (loss) per share 0.60 0.18 0.30
Average number of shares outstanding 12,888,500 12,888,500 12,888,500
</TABLE>
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<PAGE>
COMPARATIVE MARKET DATA
MSR's common stock is traded on the American Stock Exchange under the
symbol "MSR". Quicksilver's common stock is not publicly traded.
The following table sets forth the quarterly high and low closing sales
prices of MSR's common stock for the periods indicated below.
<TABLE>
<CAPTION>
MSR COMMON STOCK
----------------
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter $ 1 1/4 $ 13/16
Second Quarter 1 1/16 3/4
Third Quarter 1 3/4
Fourth Quarter 15/16 11/16
1997
First Quarter $ 1 $ 13/16
Second Quarter 1 1/8 15/16
Third Quarter 1 1/8 3/4
Fourth Quarter 1 3/8 15/16
1998
First Quarter $1 3/16 $ 7/8
Second Quarter 1 5/16 15/16
Third Quarter 1 1/8 3/4
Fourth Quarter 15/16 1/2
</TABLE>
On August 30, 1998, the last full trading day prior to public announcement of
the merger, the high sales price of the MSR common stock was $1.12 and the
low price of the MSR common stock was $0.75.
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<PAGE>
RISK FACTORS
THE FOLLOWING ARE MATERIAL RISK FACTORS THAT YOU SHOULD CAREFULLY CONSIDER
IN EVALUATING WHETHER YOU SHOULD VOTE FOR THE MERGER.
QUICKSILVER HAS A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE
ITS PERFORMANCE
Quicksilver, which began operations on April 9, 1998, has a limited
operating history upon which you may base your evaluation of Quicksilver's
performance. As a result of Quicksilver's recent formation and the brief
operating history of Quicksilver, the operating results from the properties
contributed by Mercury Exploration Company and others to Quicksilver when it
was formed may not indicate future results that may be obtained by the
surviving corporation. We cannot assure you that the surviving corporation
will maintain the current level of revenues, oil and natural gas reserves or
production currently attributable to the properties contributed to
Quicksilver when it was formed. Any future growth of the surviving
corporation's oil and natural gas reserves, production and operations could
place significant demands on its financial, operational and administrative
resources.
QUICKSILVER HAS A WORKING CAPITAL DEFICIT THAT WILL REQUIRE ADDITIONAL
FINANCING FOR WORKING CAPITAL
At September 30, 1998, Quicksilver had a working capital deficit of
$72.3 million and will need to obtain additional external financing to meet
its working capital needs. We cannot assure you that this additional
financing will be available. Quicksilver has received a commitment letter
from a bank and expects to enter into a new credit facility upon completion
of the merger.
QUICKSILVER'S FUTURE SUCCESS WILL DEPEND ON ITS ABILITY TO INCREASE ITS
RESERVES
The future success of the surviving corporation will depend in large
part upon its ability to find, develop or acquire additional oil and natural
gas reserves that are economically recoverable. At December 31, 1997,
approximately 37% of Quicksilver's total proved reserves were undeveloped. In
order to increase reserves and production, the surviving corporation must
continue development and exploitation drilling programs or undertake other
replacement activities. There can be no assurance that planned development
and exploitation projects will result in significant additional reserves or
that the surviving corporation will have success drilling productive wells at
acceptable costs.
BECAUSE THERE IS NO PRIOR PUBLIC MARKET FOR QUICKSILVER'S STOCK, WE
CANNOT PREDICT ITS TRADING PRICE OR LIQUIDITY
Before the merger there will have been no public market for the
Quicksilver common stock that you will receive in the merger. Although the
MSR common stock has been listed on the American Stock Exchange since 1983,
there may be no correlation between the trading history and historical prices
of the MSR common stock and future trading characteristics and prices of the
Quicksilver common stock you will receive if the merger is completed. In
addition, a majority of the shares of the surviving corporation will be held
by a small number of interested persons, which may affect the liquidity of
your shares by limiting the market for them.
CERTAIN DIRECTORS HAVE INTERESTS IN THE MERGER THAT ARE DIFFERENT FROM
YOURS AND THIS MAY HAVE AFFECTED THEIR DECISION TO APPROVE THE MERGER
The determinations by the boards of directors of MSR and Quicksilver to
participate in the merger are subject to conflicts of interest due to the
substantial stock ownership of the Darden family and their affiliates in both
Quicksilver and MSR and their positions as directors and officers of both
companies. Although both boards of directors have attempted to resolve all
conflicts of interest in a manner that would not adversely affect either the
stockholders of MSR or Quicksilver, if these conflicts did not exist it is
possible that the merger may not have been considered, been approved or may
have been approved on a basis that would be more favorable to the
stockholders of MSR, Quicksilver or both.
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<PAGE>
QUICKSILVER DEPENDS ON A FEW KEY PERSONNEL, WHICH COULD AFFECT
QUICKSILVER'S SUCCESS IF THEY WERE TO LEAVE QUICKSILVER.
Quicksilver has entered into a management agreement with Mercury
Exploration Company, whereby Mercury will provide property management
and accounting services to the surviving corporation. As a result, the
surviving corporation's success will be highly dependent on management of
Mercury, principally Messrs. Frank, Thomas and Glenn Darden and a limited
number of other senior management and technical personnel. Loss of the
services of any of these individuals could have a material adverse effect on
the surviving corporation's operations. Quicksilver does intend to maintain
key man life insurance policies on any members of senior management.
A SMALL NUMBER OF EXISTING STOCKHOLDERS CONTROL QUICKSILVER, WHICH COULD
LIMIT YOUR ABILITY TO INFLUENCE THE OVERTIME OF STOCKHOLDER VOTES
After the merger, members of the Darden family, together with Mercury
and Quicksilver Energy L.C. (companies primarily owned by the members of the
Darden family), will own approximately 65% of the surviving corporation's
common stock. Joint Energy Development Investment Limited Partnership will
own approximately 10% and TCW Asset Management Company through its affiliate
Trust Company of the West on behalf of a single client will own approximately
10%. In addition, some stockholders, officers and directors of Quicksilver
and MSR are stockholders, officers or directors of Mercury and Quicksilver
Energy L.C., and therefore may affect how Mercury and Quicksilver Energy L.C.
vote their shares on corporate matters. As a result, these entities and
individuals would be able to control the outcome of stockholder votes,
including votes concerning the election of directors, the adoption or
amendment of provisions in the surviving corporation's charter or bylaws and
the approval of mergers and other significant corporate transactions.
THE SURVIVING CORPORATION'S PROPERTIES WILL BE CONCENTRATED IN THE CUT
BANK FIELD COMPLEX, WHICH COULD LIMIT FUTURE REVENUES
MSR's properties in the Cut Bank Field complex in northwest Montana
constitute the majority of MSR's existing inventory of producing properties and
drilling locations. There can be no assurance that the surviving corporation's
operations in Montana will yield positive economic returns. Failure of the Cut
Bank Field properties to yield significant quantities of economically attractive
reserves and production could have a material adverse impact on the surviving
corporation's future financial condition and results of operations.
THE SURVIVING CORPORATION'S RELIANCE ON ITS CONTRACT WITH MONTANA POWER
COMPANY COULD ADVERSELY AFFECT PROFITABILITY IF THE CONTRACT WERE TO BE
TERMINATED
As a result of its merger with Mercury Montana, Inc. in October 1997,
MSR assumed rights and obligations under an agreement with Montana Power
Company. The surviving corporation will assume these rights and obligations
in the merger. Activities conducted pursuant to the agreement by the
surviving corporation and the revenues that result will account for a
significant portion of the activities and revenues of the surviving
corporation. There can be no assurance that the operations under the
contract will be continued for any particular period of time or that, if
operations are continued, they will be conducted on a profitable basis.
RISKS RELATING TO COMPUTER PROBLEMS THAT COULD ARISE IN THE YEAR 2000 COULD
ADVERSELY AFFECT QUICKSILVER'S OPERATIONS AND BE COSTLY TO REMEDY
As the Year 2000 approaches, there are uncertainties concerning whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or fail.
Since 1995, MSR and its predecessors have replaced all of MSR's major
information systems with systems that are Year 2000 compliant as a criterion.
MSR is currently evaluating and assessing the business risks and exposure
related to the Year 2000. This evaluation and assessment should be
substantially completed during 1998. MSR has retained a consultant to advise
MSR in evaluation and assessment. The costs associated with MSR's plans to
address the problems posed by the Year 2000 are not currently expected to be
material. Until the evaluation and assessment is completed, however, MSR cannot
have a reasonable basis to conclude that the risks and exposures related to the
Year 2000 will not
12
<PAGE>
materially affect future financial results or cause reported
financial information not to reflect fairly the future operating results or
future financial condition of MSR.
With respect to the risks and exposures related to MSR's customers,
suppliers, financial institutions, and other constituencies and the resulting
potential impact on MSR's business operations and financial condition, MSR has
initiated formal communications with these entities and individuals to mitigate
or prevent these risks and exposures.
Quicksilver has developed and implemented an action plan and identified
the resources needed to convert the majority of its computer systems and
software applications to achieve a Year 2000 date conversion with minimal
effect on customers or disruption to business operations. Quicksilver
estimates that the cost to complete these efforts, which primarily includes
the purchase of software upgrades under normal maintenance agreements with
third party vendors, will not be material. In addition, Quicksilver has
discussed with its vendors and customers the need to be Year 2000 compliant.
Although Quicksilver has no reason to believe that its vendors and customers
will not be compliant by the Year 2000, Quicksilver is unable to determine the
extent to which Year 2000 issues will effect its vendors and customers, and
Quicksilver continues to discuss with its vendors and customers the need for
implementing procedures to address this issue.
13
<PAGE>
THE MSR MEETING
TIME, PLACE AND DATE OF THE SPECIAL MEETING
The special meeting of stockholders of MSR Exploration Ltd. will be held
on Thursday, March 4, 1998, at the Shady Oaks Country Club, 320 Roaring
Springs Road, Fort Worth, Texas, 76116, at 10:00 a.m. (Fort Worth, Texas
time) and any adjournments thereof.
This proxy statement/prospectus and the accompanying form of proxy are
first being mailed to stockholders of MSR on or about February 1, 1998.
PURPOSE OF THE MEETING
At the meeting, stockholders of MSR will be asked to consider and vote
upon a proposal to approve the Agreement and Plan of Merger and
Reorganization dated September 1, 1998 between MSR and Quicksilver Resources
Inc. providing for the merger of MSR with and into Quicksilver. From and
after the effective time of the merger, Quicksilver will continue as the
surviving corporation. As a result of the merger, each outstanding share of
MSR common stock, other than shares held by dissenting stockholders of MSR,
will be converted into the right to receive shares of Quicksilver common
stock in the manner described below on page 23. Approval of the merger
agreement by MSR stockholders at the meeting is among the conditions to the
completion of the merger under the terms of the merger agreement.
THE BOARD OF DIRECTORS OF MSR, AND THE SPECIAL COMMITTEE OF THE BOARD OF
DIRECTORS OF MSR RECOMMEND A VOTE "FOR" THE APPROVAL OF THE MERGER
AGREEMENT.
VOTING RIGHTS OF MSR STOCKHOLDERS
MSR's board of directors has fixed January 22, 1999, as the record
date for the determination of MSR stockholders entitled to notice of and to
vote at the meeting. Only stockholders at the close of business on the
record date will be entitled to vote at the meeting. The presence at the
meeting, in person or by proxy, of a majority of holders of MSR common stock
will constitute a quorum. A quorum is necessary for the meeting to be valid.
The affirmative vote of a majority of the outstanding MSR common stock
entitled to vote is required to approve the merger agreement.
At the close of business on the record date, there were 25,777,014
shares of MSR common stock outstanding, each of which is entitled to one vote
on each matter properly submitted to a vote at the meeting. Messrs. Frank,
Thomas and Glenn Darden, along with Anne Darden Self collectively directly
own 18.6% of the outstanding MSR common stock. The Darden family also owns
Mercury Exploration Company, which in turn directly owns 25.1% of the
outstanding MSR common stock. Mercury and the Darden family, which
collectively hold 43.7% of the MSR common stock, have agreed to vote their
shares in favor of the merger according to the terms of a Consent and Voting
Agreement entered into on September 1, 1998. In addition, other members of
the MSR board collectively hold approximately 8% of the MSR common stock, and
they have indicated that they intend to vote in favor of the merger. If
these individuals vote as indicated, then together with the 43.7% shares of
MSR common stock held by the Darden family and their affiliated companies,
approximately 51.7% of the MSR common stock will be voted in favor of the
merger agreement and the merger will be approved by MSR.
Members of the Darden family collectively own approximately 9.4% of the
outstanding Quicksilver common stock. Mercury (an affiliate of the Darden
family) owns 31.5% of the Quicksilver common stock and Quicksilver Energy
L.C. ("QELC") (an affiliate of the Darden family) owns 29.4% of the
Quicksilver common stock. Collectively, the Darden family and their
affiliates, Mercury and QELC, own approximately 70.3% of the Quicksilver
common stock. In addition, Joint Energy Development Investment Limited
Partnership ("JEDI"), a limited partnership, the general partner of which is
an affiliate of Enron Capital & Trade Resources Corp., and TCW Asset
Management Company, through its affilate Trust Company of the West on behalf of
a single client ("TCW") each own 13%. QELC, JEDI and TCW are also parties to
the voting agreement and have agreed to vote their Quicksilver common stock in
favor of the merger along with Mercury and the Darden family. Therefore, it is
assured that the merger will also be approved by Quicksilver.
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<PAGE>
PROXIES, SOLICITATION AND REVOCATION OF PROXIES
MSR common stock represented by properly executed and unrevoked proxies
will be voted at the meeting, in accordance with the directions contained in the
proxy. YOU SHOULD NOT SEND ANY CERTIFICATES WITH YOUR PROXY CARDS. If you do
not make any direction in a properly executed and unrevoked proxy, your MSR
common stock represented by that proxy will be voted FOR the adoption of the
merger agreement. If you fail to return your proxy card or to vote in person
at the meeting, the effect will be a vote against the merger.
You may revoke your proxy at any time before its exercise. A proxy may
be revoked by filing with the Secretary of MSR a written revocation or a duly
signed proxy bearing a later date. Any written notice revoking a proxy for
the meeting should be sent to MSR at: 1916 Pennsylvania Avenue, Fort Worth,
Texas, 76104, Attention: Secretary. You may also hand deliver your proxy to the
Secretary at or before the taking of the vote at the meeting. Any MSR
stockholder may attend the meeting and vote in person, whether or not you
have previously given a proxy.
MSR will bear its costs of soliciting proxies from stockholders. In
addition to soliciting proxies by mail, directors, officers and employees of
MSR may solicit proxies by telephone, in person or otherwise, each without
receiving additional compensation for those activities. Arrangements will
also be made with brokerage firms and other custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of
shares of MSR common stock held of record by such persons, and arrangements
may be made to pay reasonable out-of-pocket expenses incurred by them in
connection with the solicitation.
Shares of MSR common stock represented at the meeting but not voted for
or against a proposal, such as abstentions or "broker non-votes," will be
counted in determining a quorum for purposes of determining the votes
required for adoption of the merger agreement. A "broker non-vote" refers to
shares represented at the meeting in person or by proxy by a broker or
nominee where the broker or nominee does not vote the shares because it (1)
has not received voting instructions on a particular matter from the
beneficial owners or person entitled to vote and (2) does not have
discretionary voting power on the matter. Because the merger requires
approval of the holders of a majority of the MSR common stock, an abstention
or "broker non-vote" will have the same effect as a vote against the merger.
THE MERGER
THE FOLLOWING IS A BRIEF SUMMARY OF SOME OF THE ASPECTS OF THE MERGER
THAT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, A
COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS APPENDIX A
AND IS INCORPORATED IN THIS PROXY STATEMENT/PROSPECTUS BY REFERENCE. WE URGE
YOU TO READ THE MERGER AGREEMENT CAREFULLY.
BACKGROUND OF THE MERGER
At a meeting of the MSR board on December 2, 1997, Mr. Thomas F. Darden,
Chairman of the Board, stated that the MSR board had been looking for ways to
maximize MSR's growth. He indicated that members of the Darden family and
their affiliated companies, Mercury and QELC, were contemplating combining
most of Mercury's and QELC's producing properties into an entity to be called
quicksilver Resources Inc. Mr. Darden discussed the possible size and
financial attributes of Quicksilver, explaining that the combined company
would be approximately five times the size of MSR and that Quicksilver's cash
flow situation, combined with MSR's undeveloped reserve inventory would allow
the development of those properties sooner than MSR could accomplish the
development alone. Similarily, because Quicksilver had fewer undeveloped
reserve prospects, while MSR lacked sufficient cash flow to actively pursue
developing its prospects, combining these resources would work to the benefit
of both companies. He indicated that it was his belief that these and other
benefits could be realized through a combination of MSR with Quicksilver and
advised the MSR board that he intended to pursue these possibilities in
depth. The MSR board encouraged Mr. Darden to continue with these efforts.
Mr. Darden stated that, due to the position of Messrs. Frank and Glenn
Darden as well as himself on the MSR board, as well as their significant
beneficial interest in both MSR and Quicksilver, a committee of independent
board members of MSR would be needed to negotiate and approve any merger of the
two companies. It was indicated that director Mr. Steven M. Morris, an
independent outside director of MSR, would probably take a leadership position
on such a committee.
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<PAGE>
During February 1998, Mr. Keith Wright, Mercury's treasurer, provided
the MSR board with preliminary financial information on Quicksilver and pro
forma combined preliminary financial statements of a combined company, which
would be comprised of MSR and Quicksilver. Discussions continued through the
end of February 1998, between members of the Darden family on the MSR board
and the other MSR board members. It was decided that the independent board
members would retain the services of special legal counsel and an independent
financial advisor to assist in the negotiations and evaluation of the two
companies to determine what type of transactions and what range of conversion
ratios would be fair to the MSR stockholders.
A special committee of the MSR board was officially formed to
independently evaluate the proposed merger. The special committee was to be
composed of the independent MSR Directors: Messrs. D. Randall Kent, Patrick
M. Montalban, W. Yandell Rogers III and Steven M. Morris. Mr. Morris was
elected the Chairman of the special committee. No member of the special
committee had any prior business relationship with any of the owners or
stockholders of Quicksilver or had held any position as an officer or
employee of either company, other than Mr. Montalban, who is a vice president
and a director of MSR. The special committee was given the full authority of
the MSR board to act upon a merger proposal. The special committee approved
the engagement of the law firm of Jenkens & Gilchrist, a Professional
Corporation, as special counsel to the special committee. This firm had
provided no prior representation of MSR or any member of the Darden family or
their affiliated companies. The special committee also engaged the services
of the investment banking firm of EVEREN Securities, Inc. ("EVEREN") to act
as its financial advisor. The special committee engaged EVEREN to evaluate
the fairness of the merger, from a financial point of view, to MSR's
stockholders, other than the Darden family and affiliates. The special
committee did not instruct EVEREN to solicit alternative parties to the
merger or to solicit any other type of transaction.
On March 31, 1998 at a regularly scheduled meeting of the MSR board, Mr.
Thomas Darden reintroduced the possibility of a merger between MSR and
Quicksilver after the contribution by Mercury, Michigan Gas Partners Limited
Partnership and QELC of some of their oil and gas properties. Mr. Darden
indicated that various financial and development benefits would come from a
merger between MSR and Quicksilver as proposed, such as the benefits to be
gained by using Quicksilver's cash flow to develop MSR's reserves and the
cost savings to be realized by eliminating overlap in accounting and
management operations by combining and streamlining the two companies. Mr.
Darden reviewed the proposed Quicksilver assets and operations in Michigan
and Wyoming. Mr. Keith Wright, Mercury's treasurer, provided the MSR board
with a preliminary financial review of the proposed Quicksilver and pro forma
financial statements of the combined companies, one including acquisition and
development and one excluding those features. The MSR board discussed
structural issues, reviewed the financial impact of a merger, and considered
the complementary strengths of MSR and Quicksilver and what each of the
companies could contribute to a combined company.
On April 23, 1998 the special committee met in Houston at the offices of
EVEREN. At this meeting, the special committee received a presentation from
EVEREN on a potential merger of MSR and Quicksilver and EVEREN explained the
analyses it performed on the valuation of the companies. Special counsel
attended the meeting in order to advise the special committee on its fiduciary
duties.
Immediately following the special committee meeting, the special
committee and EVEREN met with representatives of Quicksilver. Messrs. Thomas
and Glenn Darden represented Mercury, QELC and the Darden family.
Representatives of JEDI and TCW, significant investors in Quicksilver, were
also present. EVEREN reviewed its valuation analysis of the two companies.
The various valuation methods were discussed, and subsequently it was
tentatively agreed that Quicksilver had an average value, based on the
different valuation methodologies utilized, in the range of approximately
four times that of MSR. In order to preserve this relative four to one
ownership ratio of Quicksilver stockholders after the merger, it was
determined that the exchange ratio in the merger would be .10 of a share of
Quicksilver common stock for each share of MSR common stock exchanged in the
merger.
Initially, during the negotiations, MSR and Quicksilver considered the
possibility of exchanging one share of Quicksilver common stock for each share
of MSR common stock. However, because there are about 25 million shares of
MSR common stock outstanding, a one-for-one exchange would have resulted in
over 125 million shares of Quicksilver's common stock outstanding after the
merger based on the agreement that MSR's stockholders would receive 20% of
Quicksilver's shares in the merger. The parties decided not to do this
because this would likely result in a per share price of less than $1.00 per
share for the stock of the surviving corporation. This was not desirable
because Quicksilver then could not list the shares on any exchange and a
stock price of less than $1.00 per share was considered undesirable because
it would deter interest in the shares. After some discussions among
representatives of Quicksilver and the special committee, the parties agreed
that a .10 to one exchange ratio was appropriate because it
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<PAGE>
would result in about 12 million outstanding shares of Quicksilver after the
merger, which was comparable to the number of outstanding shares of several
public oil and gas companies that EVEREN referred to in its analysis.
Further, while there is no assurance what the price of Quicksilver shares
will be after the merger, it was thought that an exchange ratio of this
nature would result in a stock price sufficient to meet the listing
requirements of the American Stock Exchange.
On May 5, 1998, the special committee and Quicksilver entered into a
letter of intent, which contemplated a proposed merger of MSR with and into
Quicksilver. The two parties agreed to proceed with a more in-depth review
of each other's properties and operations and to discuss various structural,
management and organization issues. Shortly thereafter, MSR issued a press
release describing the execution of the letter of intent and providing
details of the proposed merger.
On June 26, 1998 at a regular meeting of the MSR board, Mr. Glenn Darden
indicated that due diligence and the negotiation of a definitive merger
agreement between the two companies was proceeding. It was anticipated that
the Darden family would have three seats on the board of the surviving
corporation. Also, three MSR directors, Messrs. D. Randall Kent, W. Yandell
Rogers III and Steven M. Morris were designated by the board to continue as
directors of the surviving corporation. Mr. Darden indicated that, pursuant
to the terms of agreements with JEDI and TCW related to the formation of
Quicksilver, JEDI and TCW would each have the right to one board seat.
Although Mr. Darden provided updates to the MSR board on the status of the
merger negotiations, these updates were provided in his role on behalf of
Quicksilver and the fact that he was familiar with the status of the
transaction due to his involvement on behalf of Quicksilver in the
negotiations. All of the disinterested directors of MSR are members of the
special committee and knew of Mr. Darden's role on behalf of Quicksilver.
Therefore, the members of the special committee at this time understood that
Mr. Darden was not purporting to act on behalf of MSR or the special
committee, and received the information from him on the basis that such
information reflected Quicksilver's perspective on the status of the
negotiations.
The special committee received the presentation of management at the
meetings held on March 31, 1998, and June 26, 1998. On September 1, 1998,
the special committee (except for Mr. Kent, who was not in attendance)
received the oral presentation of EVEREN, and special counsel reviewed the
merger agreement with the special committee in detail. EVEREN provided its
analysis of the possible transaction, including reviews of, among other
things: (1) publicly available financial statements and reports filed with
the Securities and Exchange Commission (the "SEC"); (2) independently
prepared oil and gas reserve estimates for MSR and Quicksilver; (3) the
financial terms, to the extent publicly available, of acquisitions of oil and
gas reserves and; (4) other relevant information. The special committee
members that were present determined that the merger would be fair to,
advisable and in the best interests of MSR's stockholders, approved the merger
and the merger agreement and voted to recommend the merger to MSR's
stockholders.
Following the special committee's meeting on September 1, 1998, the full
MSR board, except for Mr. Kent, met to consider approving the merger
agreement and to hear the special committee's recommendation. By vote of the
full MSR board, with Messrs. Thomas, Frank and Glenn Darden abstaining, a
majority of the MSR board determined the merger to be fair to, advisable and
in the best interests of, MSR and its stockholders, approved the merger and
the merger agreement and voted to recommend the merger to MSR's stockholders.
During this time, the Quicksilver board received presentations of
management and its legal advisors, with respect to the proposed merger,
including reviews of, among other things: historical information relating to the
business, financial condition and results of operations of MSR and Quicksilver;
information provided by MSR and Quicksilver management and reviewed and adjusted
by Quicksilver management regarding the reserves and operations of MSR and
Quicksilver; information regarding the management of MSR; historical data
relating to market prices and trading volumes of MSR common stock; the valuation
analysis of Quicksilver; market prices for MSR common stock as compared to those
of other comparable publicly traded companies and the possible enhancement
resulting from the merger of the combined entity's ability to raise capital for
its exploration and development drilling activities.
By unanimous written consent on September 1, 1998, the board of
directors of Quicksilver determined the merger to be in the best interests of
Quicksilver and its stockholders, approved the merger and the merger
agreement and recommended to the stockholders of Quicksilver that they
approve the merger and the merger agreement. The Quicksilver board's
decision to approve the merger and the merger agreement followed an extensive
review of the relative strengths and weaknesses of Quicksilver and MSR,
including Quicksilver's prospects for accessing the capital necessary to
finance exploration and development drilling activities on a cost effective
basis; the increase in inventory
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<PAGE>
of development prospects; greater revenue potential and the resulting
potential for greater institutional interest in the combined company stock
which in turn would allow the surviving corporation greater access to capital
in the financial markets to fund its future activities; the likelihood that
the larger company might benefit from better credit ratings, more flexible
finance terms and lower finance costs; the anticipated benefits of combining
Quicksilver with and into a publicly traded company; the complementary nature
of Quicksilver's and MSR's reserves and properties and the ability of
Quicksilver and MSR to combine their respective management and technical
teams without disrupting ongoing projects and activities.
On September 9, 1998, MSR and Quicksilver jointly announced the execution
of the merger agreement.
In a letter to MSR dated November 5, 1998, Mr. Montalban, a director
and officer of MSR, advised that he was withdrawing his September 1 vote in
favor of the merger. He indicated that he based his September 1, 1998
decision to approve the merger in large part on financial information which
he later discovered contained "material errors."
Mr. Montalban based his comments on Quicksilver's revised statement of
operations for the six months ended June 30, 1998, provided to the
MSR board in mid-September, 1998. The revised statement corrected minor
errors to certain non-cash expenses, such as depletion and tax rates. These
errors were due to the fact that the original calculations used depletion
rates based upon an escalated price case reserve report. These numbers were
recalculated to comply with SEC oil and gas accounting rules, which require
constant price reserve reports based upon year-end prices. The revised
statements showed no changes in revenues, cash flows from operations, cash
flows before taxes and EBITDA. As a result, both Quicksilver and MSR determined
that the revised statements had no effect on the value of Quicksilver in the
merger or the conversion ratio.
In a telephone conference on November 17, 1998, EVEREN informed special
counsel that it had discussed revisions to the historical financial information
for MSR and Quicksilver with Howard Boals, MSR's chief financial officer. Mr.
Boals informed EVEREN that the changes to the historical financial information
for MSR and Quicksilver were non-cash items relating to the recalculation of
depletion of oil reserves and tax consequences thereof for MSR and
Quicksilver as described above. The initial draft of historical financial
information had been previously provided to EVEREN and used in EVEREN's
analysis. After reviewing the revised historical financial information for
MSR and Quicksilver and considering its discussion with Mr. Boals, EVEREN
determined that the revisions to the historical financial information for MSR
and Quicksilver did not materially change EVEREN's analysis, and therefore,
did not have a material affect on EVEREN's opinion dated September 1, 1998.
On December 1, 1998, a telephonic meeting of the special committee was
held. At that meeting, the corrected financial information for both
Quicksilver and MSR was presented, together with an oral report of EVEREN
confirming its fairness opinion. EVEREN's previous analysis was based on four
valuation methodologies, however the new information only required changes to
the "Relative Contribution Analysis." This analysis was affected only
slightly and the changes to EVEREN's overall analysis were insignificant. As
a result, EVEREN's conclusions in the September 1 fairness opinion were
unchanged.
Messrs. Morris, Rogers and Kent emphasized the fact that, given recent
sharp declines in oil prices, the terms of the merger were still favorable,
if not more favorable, to the MSR stockholders. Mr. Montalban agreed with
this analysis, but continued to express reservations about the merger.
The special committee then voted to reaffirm its September 1 approval of
the merger agreement and its recommendation that the stockholders of the
Corporation adopt the merger agreement. Mr. Montalban abstained from voting
pending further discussions with Mr. Morris.
On December , 1998, Mr. Montalban advised MSR that he no longer felt
his abstention necessary and he also voted to reaffirm his September 1 vote.
MSR'S REASONS FOR THE MERGER; RECOMMENDATION OF THE MSR BOARD
The special committee and the MSR board believe the merger is in the
best interests of MSR's stockholders and each has approved the merger
agreement and the transactions contemplated by it. THE SPECIAL COMMITTEE AND
THE MSR BOARD (WITH MEMBERS OF THE DARDEN FAMILY ABSTAINING) RECOMMEND THAT
THE STOCKHOLDERS OF MSR VOTE "FOR" ADOPTION AND APPROVAL OF THE MERGER
AGREEMENT.
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<PAGE>
During the course of its deliberations, the special committee, with the
assistance of management, special counsel and EVEREN, considered a number of
factors including the following:
- The fit between the assets of MSR and Quicksilver, including the
balance created by adding MSR's Montana oil reserves to Quicksilver's
gas reserves;
- A more predictable cash flow and lower-risk growth opportunities
provided by combining activities;
- Greater cash flows generated by Quicksilver's properties, which would
provide resources to develop MSR's inventory of undeveloped
properties;
- The large inventory of exploration prospects covering 273,000 gross
acres resulting from combining the companies;
- Greater financial strength and growth opportunities and greater
purchasing power with oil field service providers as a result of the
larger size of the combined company;
- A larger pool of assets and substantial technical experience allowing
the combined entity more aggressively to exploit existing properties,
accelerate exploration and be more competitive with regard to pursuing
new opportunities;
- The diversification and expansion of Quicksilver's reserve and
exploration opportunities;
- The possibility that the larger, more diversified combined company
would benefit from better credit ratings, more flexible financing
terms and lower financing costs;
- The likelihood that the combined entity would have a larger market
presence and would likely receive greater attention from financial
analysts and institutional investors;
- The potential for market valuations comparable to other larger
independent oil producers;
- The continued involvement of Quicksilver's management in the
management of the combined company thereby providing substantial depth
to the overall management team;
- The preliminary pro forma financial condition, results of operations
and other financial information of the combined company, including an
analysis of the opportunities for costs savings and economies of
scale; and
- The presentation of EVEREN delivered to the special committee at its
meeting on September 1, 1998 and EVEREN's fairness opinion to the
effect that the proposed merger consideration is fair to MSR's
stockholders (other than Mercury and members of the Darden family and
their affiliates) from a financial point of view.
The above discussion of the information and factors considered and given
weight by the special committee is not intended to be exhaustive. In view of
the variety of factors considered in connection with its evaluation of the
merger, the special committee did not find it practical to and did not
quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of
the special committee may have given different weights to different factors.
OPINION OF MSR'S FINANCIAL ADVISOR
On September 1, 1998, EVEREN delivered its written opinion to the special
committee that, as of the date of the opinion and based upon and subject to
matters stated in the opinion, the consideration to be received by the holders
of MSR common stock (other than shares held by Mercury and shares held by
members of the Darden family and their affiliates) was fair from a financial
point of view. EVEREN's presentation to the special committee on September 1,
1998 consisted of the information that is outlined below. THE FULL TEXT OF
THE WRITTEN OPINION OF EVEREN, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND QUALIFICATIONS AND LIMITATIONS
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<PAGE>
ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B TO THIS PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED BY REFERENCE. WE URGE YOU TO, AND
YOU SHOULD, READ THIS OPINION IN ITS ENTIRETY.
In connection with its opinion, EVEREN, among other things,
- reviewed the draft of the merger agreement;
- reviewed historical financial results for MSR and Quicksilver, as well
as publicly available financial statements and reports as filed with
the SEC regarding MSR;
- reviewed independently prepared oil and gas reserve estimates for MSR
and Quicksilver and discussed those estimates with MSR's reserve
engineers;
- reviewed the financial terms, to the extent publicly available, of
acquisitions of oil and gas reserves;
- discussed with senior management of MSR the operations of and business
prospects for MSR; and
- considered such other information, financial data, analyses and
investigations as it deemed relevant under the circumstances.
As set forth in its opinion, and in connection with preparing and
rendering its opinion, EVEREN relied on the accuracy and completeness of the
information and financial data provided to it by MSR and Quicksilver, and its
opinion is based solely upon the information set forth in this proxy
statement/prospectus as reviewed by it and circumstances existing as of the
date of this proxy statement/prospectus. Events occurring after the date of
EVEREN's opinion could materially affect the assumptions used in both
preparing its opinion and in the documents reviewed by it. In connection
with its review, EVEREN did not independently verify any of the information
concerning MSR or Quicksilver. EVEREN assumed that the pro forma financial
and reserve information reviewed by it has been reasonably prepared on bases
reflecting the best currently available estimates and judgments of MSR's
management as to the future performance reflected in that information. In
addition, EVEREN did not make an independent evaluation or appraisal of the
assets of MSR or Quicksilver, nor was it furnished with any independent
evaluations or appraisals (other than reserve reports prepared by independent
petroleum engineers for MSR and Quicksilver).
For purposes of its opinion, EVEREN assumed, in all respects material to
its analysis:
- - that the representations and warranties of MSR and all related documents and
instruments contained in those documents were true and correct;
- - that each party to those documents would perform all of the covenants and
agreements required to be performed by that party under those documents; and
- - that all of the conditions to the completion of the merger would be satisfied
without waiver of any condition.
EVEREN's opinion:
- - was based upon the securities markets and the oil and natural gas market
prevailing as of the date of its opinion and the conditions and prospects,
financial and otherwise, of MSR and Quicksilver as they had been represented
to EVEREN as of the date of the opinion or as they were reflected in the
materials and discussions described above;
- - did not imply any conclusion as to the likely trading range for the
Quicksilver common stock following the completion of the merger, which may
vary depending upon, among other factors, changes in oil and gas prices,
market conditions, general economic conditions and other factors, that
generally influence the price of securities;
- - did not address MSR's underlying business decision to enter into the
merger agreement, and EVEREN expressed no view on the effect on MSR of the
merger;
- - was directed only to the fairness, from a financial point of view, of the
consideration to be received by the holders of MSR common stock (other than
Mercury and members of the Darden family and their affiliates), and did not
constitute a recommendation concerning how MSR stockholders should vote with
respect to the merger.
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The special committee did not impose any limitations on the scope of
EVEREN's analysis nor was EVEREN asked to seek alternative transactions or
parties to the merger.
In performing its analysis, EVEREN made numerous assumptions with respect
to the industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond MSR's control. Any
information contained in this analysis does not necessarily indicate actual
values or predict future results or values, which may be significantly more or
less favorable than as set forth in the analysis. In addition, analyses and
estimates relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may trade, be acquired or sold. Accordingly, the analyses and estimates
inherently are subject to substantial uncertainty. In addition, the
requirements for the delivery of the fairness opinion was among several
factors taken into consideration by the special committee in making its
determination to approve the merger. Consequently, EVEREN's analyses described
below should not be viewed as determinative of the decision of the special
committee with respect to the fairness of the consideration received in the
merger.
In connection with its opinion, EVEREN used four methodologies: discounted
cash flow analysis, relative contribution analysis, market multiple analysis and
comparable reserve acquisitions analysis. The discounted cash flow, relative
contribution, market multiple and comparable reserve acquisitions analysis
yielded implied contribution to the combined company by MSR of between 1.0%
to 31.7% (see chart below).
<TABLE>
<CAPTION>
Implied contribution to the
Methodology combined company by MSR
-------------------------- ---------------------------
<S> <C>
Discounted Cash Flow 28.8% to 31.7%
Relative Contribution 11.3% to 12.4%
Market Multiple 1.0% to 6.0%
Comparable Reserve Acquisitions 31.0% to 31.0%
</TABLE>
DISCOUNTED CASH FLOW ("DCF") ANALYSIS. EVEREN performed a DCF analysis
using the present value of the future pre-tax cash flows of MSR and
Quicksilver's oil and gas reserves as of January 1, 1998, based on reserve
reports prepared by independent petroleum engineers for MSR and Quicksilver.
In addition, EVEREN discussed with management of MSR and Quicksilver the
current and projected operations for both companies. In developing its DCF
analysis, EVEREN discounted the pre-tax cash flows derived from MSR and
Quicksilver's oil and gas reserves (defined as net oil and gas revenues less
severance and ad valorem taxes, direct operating expenses and required
capital expenditures) to a present value using discount rates ranging from
10% to 40%. EVEREN then adjusted the resulting values to account for the net
working capital and long-term debt at June 30, 1998 of MSR and Quicksilver
that were not part of the analysis. This methodology yielded an implied
contribution to the combined company by MSR of between 28.8% to 31.7%.
RELATIVE CONTRIBUTION ANALYSIS. EVEREN projected financial results for
the 1998 through 2000 fiscal years using reserve reports prepared by
independent petroleum engineers for MSR and Quicksilver and assumptions
provided by the management of MSR and Quicksilver. EVEREN then examined the
relative contribution of the projected operating cash flow, net income and
after-tax cash flow. This methodology yielded an implied contribution to the
combined company by MSR of between 11.3% to 12.4% based on average projected
1998 to 2000 operating cash flow, net income and after-tax cash flow.
MARKET MULTIPLE ANALYSIS. EVEREN examined eight companies that MSR's
management believed to be comparable to MSR on various financial and operational
parameters. These companies included Cabot Oil and Gas, Callon Petroleum,
Comstock Resources, Costilla Energy, Lomak Petroleum, National Energy, Patina
Oil and Gas and Snyder Oil. With respect to these companies, EVEREN reviewed,
among other things, current market value multiples relative to operating cash
flow and after-tax cash flow. EVEREN then averaged the market value multiples
of the eight companies and applied the multiples to MSR and Quicksilver's
projected operating cash flows and after-tax cash flows for the 1998 and 1999
fiscal years. The average, excluding the highest and lowest multiple,
operating cash flow and after-tax cash flow multiples of the eight companies
based on their respective public stock market closing prices on August 25,
1998 and financial results for the latest twelve months ended June 30, 1998
were 6.2x and 3.0x, respectively. EVEREN then adjusted the resulting values
to account for the net working capital and long-term debt at June 30, 1998 of
MSR and Quicksilver that were not part of the analysis. This methodology
yielded in an implied contribution to the combined company by MSR of between
1.0% to 6.0%.
COMPARABLE RESERVE ACQUISITIONS ANALYSIS. EVEREN reviewed 227
comparable oil and gas reserve acquisition transactions that occurred during
the 1996 and 1997 calendar years and the first six months of 1998 in the
Mid-Continent and Rocky Mountain regions of the United States, as well as
Canada. EVEREN's review of these transactions was based on public
information compiled by an independent petroleum research company. EVEREN
calculated the average price paid in these transactions and applied the
resulting per barrel of oil equivalent ("BOE") value to the total proved
reserve volumes of MSR and Quicksilver. The average price paid in these
transactions was $4.99 per BOE in the Mid-Continent region, $3.97 per BOE in
the Rocky Mountain region and $4.99 in Canada. EVEREN then adjusted the
resulting values to account for the net working capital and long-
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<PAGE>
term debt at June 30, 1998 of MSR and Quicksilver that were not part of the
analysis. This methodology yielded in an implied contribution to the
combined company by MSR of 31.0%.
The preparation of the opinion involved performing complex analyses and
making numerous determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to the particular
circumstances and, therefore, the opinion is not readily susceptible to partial
analysis or summary description. In arriving at its fairness opinion, EVEREN
did not attribute any particular weight to any analysis or factor considered by
it, but rather made qualitative judgments as to the significance and the
relevance of each analysis and factor. Accordingly, EVEREN believes that its
analyses must be considered as a whole and to select any portions of its
analyses and of the factors considered, without considering all analyses and
factors, would create an incomplete or misleading view of the process underlying
the opinion.
On or about the date of this proxy statement/prospectus, EVEREN has
confirmed its opinion to the special committee.
EVEREN is an investment banking firm, and, as part of its investment
banking activities, is regularly engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, underwritings,
private placements and valuations for corporate and other purposes. EVEREN, in
the normal course of its business, may trade the securities of MSR or
Quicksilver for its own account and for the account of its customers and,
accordingly, may hold a long or short position in those securities at any time.
EVEREN was selected on March 13, 1998 to serve as the special committee's
financial advisor in connection with the merger on the basis of its experience
and expertise in transactions similar to the merger, specifically in oil and gas
transactions, and its reputation in the banking and investment communities.
According to the terms of the engagement letter, MSR agreed to pay EVEREN a
financial advisory fee of $37,500 upon the execution of its engagement letter
and an additional $37,500 at the time EVEREN delivered the fairness opinion.
EVEREN is entitled to receive an additional $10,000 per month beginning on
September 1, 1998 and ending on December 31, 1998 in connection with its
performing financial advisory duties under the engagement letter. MSR has also
agreed to reimburse EVEREN for its reasonable out-of-pocket expenses and to
indemnify EVEREN against liabilities and expenses.
GENERAL INFORMATION ABOUT THE MERGER
When the merger is completed, MSR will be merged with and into
Quicksilver, with Quicksilver as the surviving corporation in the merger.
The boards of directors chose to merge MSR into Quicksilver rather than
merging Quicksilver into MSR, because they determined that it was more
desirable that Quicksilver, as the larger company, continue its corporate
existence. Also, MSR's charter documents contain some unusual provisions as
a result of MSR changing its country of incorporation from Canada to the
United States. By merging MSR with Quicksilver, Quicksilver's charter
documents will be the charter documents of the surviving corporation.
Except with respect to shares as to which dissenters' rights have been
exercised, if the merger agreement is approved and the merger is completed,
each share of MSR common stock outstanding immediately prior to the merger
will be automatically converted into and exchanged for the right to receive
shares of Quicksilver common stock based on the conversion ratio described
below.
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EFFECTIVE TIME
Quicksilver and MSR anticipate completing the merger as promptly as
possible after the approval of the merger agreement by the stockholders of MSR
and when all of the conditions contained in the merger agreement are satisfied
or waived.
CONVERSION OF SHARES; CONVERSION RATIO
As a result of the merger, MSR stockholders, other than MSR stockholders
who dissent to the merger and properly exercise their dissenters' rights to
appraisal, will receive .10 of one fully paid nonassessable share (the
"Conversion Ratio") of Quicksilver common stock for each share of MSR common
stock that they own. The number of shares of Quicksilver common stock to be
received by each MSR stockholder will be determined by multiplying the number of
shares of MSR common stock held by each stockholder of MSR by the Conversion
Ratio. No fractional shares will be issued, but rather MSR stockholders will
receive cash in lieu of fractional shares.
During the merger negotiations, our companies discussed the possibility of
exchanging one share of Quicksilver stock for each share of MSR stock.
However, a one-for-one share exchange would likely have resulted in a per
share price of less than $1.00 for the stock of the surviving corporation.
A per share price of less than $1.00 is not desirable because:
- we could not list the Quicksilver stock on the American Stock
Exchange or any other stock exchange; and
- a stock price of less than $1.00 deters institutional investors
from following and purchasing the stock.
It is our long-term goal to attract more interest in the shares of the
surviving corporation among institutional investors. Because a higher stock
price is more attractive to institutional investors, this possibility will
assist us over time to acquire more capital for our growth and the
development of our oil and gas properties.
We considered that this exchange ratio would reduce the number of shares
available for sale in the public market after the merger, because the number
of shares in the hands of non-affiliates would be reduced by 90% based on the
one-for-ten exchange. This will create a "thin" trading market in the shares
of the surviving corporation, meaning that after the merger, only about 1.2
million shares of the surviving corporation (representing about 10% of the
shares of the surviving corporation to be outstanding after merger) will be
held by non-affiliates. However, we decided that the advantage of obtaining
a listing on a national exchange, which would allow active trading, was more
important than preserving a one-for-one share exchange.
After the merger is completed, holders of MSR common stock prior to the
effective time of the merger, in the aggregate, will own approximately 20% of
the outstanding Quicksilver common stock after giving effect to the merger and
holders of Quicksilver common stock prior to the effective time of the merger,
in the aggregate, will own approximately 80% of the outstanding Quicksilver
common stock after giving effect to the merger.
In order to meet the requirements of the merger and give effect to the
relative percentage of the surviving corporation to be owned by the MSR
stockholders after the merger, Quicksilver will issue an additional 10,210,806
shares in the form of a stock dividend to the current Quicksilver stockholders.
References in this proxy statement/prospectus (other than in the attached
financial statements and related notes) to the number of shares or
percentage interests of MSR and Quicksilver owned by the entities and
individuals that are stockholders of Quicksilver reflect the adjustment for
the stock dividend.
FRACTIONAL SHARES
You will not receive any fractional shares of Quicksilver common stock
as a result of the merger. Instead of fractional shares, you will receive,
upon surrender of your certificate(s) to the Exchange Agent along with the
letter of transmittal, an amount in cash (without interest), rounded to the
nearest cent, calculated by multiplying (A) the closing price of the MSR
common stock on AMEX on the day preceding the closing date of the merger
multiplied by ten and (B) the fractional interest to which you would
otherwise be entitled after giving effect to the merger.
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EXCHANGE OF STOCK CERTIFICATES
At the completion of the merger, all shares of MSR common stock will
cease to be outstanding and will automatically be canceled and retired. Each
certificate formerly representing MSR common stock, other than shares held by
dissenting stockholders of MSR, will represent ownership of the right to
receive the Quicksilver common stock issuable in the merger until those
certificates are surrendered to an exchange agent.
As soon as possible after the completion of the merger, the exchange
agent will mail you a form of letter of transmittal and instructions for use
in surrendering of your certificates. When you surrender your certificates,
together with a signed letter of transmittal, you will receive in exchange
certificate(s) representing whole shares of Quicksilver common stock to which
you are entitled, based on the Conversion Ratio.
DO NOT SEND IN YOUR STOCK CERTIFICATES NOW. YOU SHOULD NOT SEND YOUR STOCK
CERTIFICATES TO THE EXCHANGE AGENT UNTIL YOU RECEIVE A LETTER OF TRANSMITTAL.
DISSENTING STOCKHOLDERS' RIGHTS
Stockholders of MSR will have no dissenters' rights under the Delaware
General Corporation Law (the "DGCL"), however, MSR's certificate of
incorporation provides for dissenters' rights under Section 184 of the
Alberta Business Corporation Act (the "ABCA"), a copy of which is attached to
this proxy statement/prospectus as Exhibit C. We urge you to read it in its
entirety.
Section 184 of the ABCA entitles the holders of shares of MSR common
stock to dissent and be paid the fair value of that stockholder's shares if
the stockholder objects to the merger and the merger becomes effective. A
stockholder is not entitled to dissent with respect to any shares if the
stockholder votes in favor of the merger. In order to dissent, a stockholder
must send, on or before the date of the meeting, a written objection notice
to MSR at 1619 Pennsylvania Avenue, Fort Worth, Texas 76104, Attention:
Secretary. A refusal to deliver a proxy for the meeting does not constitute
an objection notice, but a stockholder need not vote against the merger in
order to dissent to the merger. Within 10 days following the date of the
meeting, the surviving corporation will deliver to each stockholder who has
filed an objection notice a notice stating that the resolutions adopting and
approving the merger and the merger agreement have been adopted pursuant to
the stockholder vote.
IF YOU ARE A BENEFICIAL OWNER OF MSR COMMON STOCK THAT IS REGISTERED IN
THE NAME OF A BROKER, CUSTODIAN, NOMINEE OR OTHER INTERMEDIARY AND YOU WISH
TO DISSENT TO THE MERGER, YOU SHOULD BE AWARE THAT ONLY THE REGISTERED OWNER
OF THOSE SHARES IS ENTITLED TO DISSENT. A REGISTERED HOLDER, SUCH AS A
BROKER WHO HOLDS SHARES AS NOMINEE FOR BENEFICIAL OWNERS, SOME OF WHOM DESIRE
TO DISSENT, MUST EXERCISE DISSENTER'S RIGHTS ON BEHALF OF THOSE BENEFICIAL
OWNERS WITH RESPECT TO THE SHARES HELD FOR THEM. IN THAT CASE, THE OBJECTION
NOTICE SHOULD SET FORTH THE NUMBER OF SHARES OF MSR COMMON STOCK TO WHICH IT
RELATES.
PROCEDURE FOR DISSENTING TO THE MERGER
After the merger has been approved, an application may be made to the
court of Queen's Bench of Alberta by the surviving corporation or by any
dissenting stockholder to fix the fair value of the shares of MSR common
stock held by the dissenting stockholder. It is unlikely that MSR will make
such an application, therefore, any dissenting stockholder who intends to use
the appraisal provisions available in MSR's certificate of incorporation
should make application to the court.
- - If an application is made to the court, the surviving corporation will
send to each dissenting stockholder a written offer to pay an amount
considered by the board of directors of the surviving corporation to
be the fair value of those shares and a statement showing how the fair
value was determined.
- - The offer to purchase must be sent to each dissenting stockholder within
10 days after MSR is served with notice that a dissenting stockholder has
applied to the court to fix the fair value of the shares of MSR common
stock.
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- - Every offer to purchase shares of MSR common stock made to a holder of the
MSR common stock who dissents to the merger will be on the same terms as
every other offer to purchase made to other holders of MSR common stock who
dissent to the merger.
- - A dissenting stockholder may make an agreement with the surviving
corporation for the purchase of his shares in the amount of the surviving
corporation's offer to purchase at any time before the court fixes the
fair value of the shares.
- - If a settlement cannot be reached, the parties will proceed to the court.
- - The court order will (1) fix the fair value of the shares of all dissenting
stockholders who are parties to the application; (2) give judgment in that
amount against the surviving corporation in favor of each of the dissenting
stockholders; and (3) fix the time within which the surviving corporation
must pay the amount to the dissenting stockholders.
- - Stockholders generally will not be liable for costs of application to the
court or for the costs of appraisal of shares.
A dissenting stockholder ceases to have any rights as a stockholder of the
surviving corporation other than the right to be paid the fair value of
his shares on the earlier of:
- The effectiveness of the merger;
- the surviving corporation and the dissenting stockholder entering into
a settlement agreement; or
- the pronouncement of the court order giving judgment against the
surviving corporation for the fair value of the shares of the
dissenting stockholder.
The surviving corporation will not make a payment to a dissenting stockholder
if there are reasonable grounds for believing that the surviving corporation
is, or would after the payment, be unable to pay its liabilities as they
become due or the realizable value of the surviving corporation's assets
would be less than the aggregate amount of its liabilities as a result of the
payment. If either of these tests cannot be met, the surviving corporation
will, within 10 days of the court order or reaching its settlement with a
dissenting stockholder, send a notice to each dissenting stockholder that the
surviving corporation cannot lawfully make the payment for the shares.
Once this notice is received, a dissenting stockholder has 30 days to
withdraw his objection notice, in which case the dissenting stockholder is
returned his full rights as a stockholder. If the dissenting stockholder
does not withdraw his objection notice, he retains his status as a claimant
against the surviving corporation to be paid as soon as the surviving
corporation is lawfully able to do so or, in liquidation, to be ranked
subordinate to the rights of the creditors of the surviving corporation but
in priority to its stockholders.
THE ABOVE DISCUSSION IS ONLY A SUMMARY OF YOUR RIGHT TO DISSENT TO THE
MERGER UNDER MSR'S CERTIFICATE OF INCORPORATION AND IS QUALIFIED IN ITS ENTIRETY
BY THE PROVISIONS OF THE CERTIFICATE OF INCORPORATION. IF YOU WISH TO EXERCISE
YOUR RIGHT TO DISSENT, YOU SHOULD SEEK LEGAL ADVICE AND YOUR FAILURE STRICTLY TO
COMPLY WITH THE PROVISIONS OF THE CERTIFICATE OF INCORPORATION MAY PREJUDICE
THAT RIGHT. YOUR RIGHT TO DISSENT IS NOT EXCLUSIVE OF ANY OTHER RIGHTS
AVAILABLE TO STOCKHOLDERS GENERALLY.
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THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY THAT HIGHLIGHTS SOME OF THE SIGNIFICANT
PROVISIONS OF THE MERGER AGREEMENT. YOU MAY READ THE MERGER AGREEMENT, WHICH
IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS APPENDIX A FOR MORE DETAIL.
WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
REPRESENTATIONS AND WARRANTIES. The merger agreement contains
representations and warranties made by each of Quicksilver and MSR relating to,
among other things,
- the proper organization of the companies, their subsidiaries and
similar corporate matters;
- the capital structures of the companies and their subsidiaries;
- the authorization, performance and enforceability of the merger
agreement;
- the absence of violations of either company's governing instruments
and applicable laws and agreements, governmental filings,
authorizations and consents required to complete the merger;
- compliance by each company and its subsidiaries with applicable laws;
- claims and litigation against the companies or their subsidiaries;
- employee benefit plans and ERISA matters;
- taxes and tax matters;
- the absence of material adverse changes and events relating to the
business and properties of Quicksilver and MSR;
- compliance by each company and its subsidiaries with applicable
environmental laws and regulations;
- the absence of undisclosed liabilities;
- interests in real property;
- insider interests and transactions with management;
- the absence of brokers and broker fees;
- that Quicksilver's and MSR's disclosures in the merger agreement are
not misleading; and
- material contracts.
COVENANTS OF QUICKSILVER AND MSR. MSR and Quicksilver have made
covenants or promises in the merger agreement. These include covenants that
they will:
- operate their businesses in the usual and ordinary course;
- preserve their business organizations intact, maintain rights and
franchises, retain the services of their respective officers and key
employees and maintain relationships with customers and suppliers;
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- maintain and keep their properties and assets in good repair and
condition and use their best efforts to maintain supplies and
inventories in quantities consistent with customary business
practices;
- maintain in full force and effect insurance and bonds comparable in
scope and coverage to that currently maintained;
- promptly notify the other of
- any material adverse change in the condition of its businesses,
properties, assets, liabilities or prospects;
- any material litigation or similar actions;
- the occurrence of any event that renders any of the
representations or warranties of the other party set forth in the
merger agreement materially inaccurate;
- the failure of either party to comply with or satisfy any of the
covenants or agreements of that party set forth in the merger
agreement; and
- any other event that could reasonably result in a material
adverse effect.
In addition MSR and Quicksilver will :
- file all tax returns required to be filed on or before the closing of
the merger;
- give the other party and its attorneys and other representatives
access at all reasonable times to such parties and records;
- operate their properties in conformity with all required documents,
and all applicable rules, regulations and orders of all governmental
authorities having jurisdiction; and
- maintain the machinery, improvements, equipment and other personal
property and fixtures forming a part of their properties.
NEGATIVE COVENANTS OF MSR. MSR has also agreed that it will not, and will
not permit any of its subsidiaries to, among other things:
- increase the compensation payable to any director or increase the
compensation payable or pay bonuses to officers or employees of MSR or
any of its subsidiaries;
- establish, adopt or enter into any employee benefit plan or
arrangement;
- make any loans to any stockholders, officers, directors or employees
or make any change in its borrowing arrangements; or
- declare or pay any dividend on its shares of capital stock or other
equity interests;
- reorganize or recapitalize MSR or any of its subsidiaries;
- split, combine or reclassify any of its or its subsidiaries' capital
stock;
- issue any shares of any class of its or its subsidiaries' capital
stock, any securities convertible into or exercisable or exchangeable
for any such shares, or any rights, warrants or options to acquire any
such shares.
MSR has also made negative covenants regarding the operation of its
business and relating to its oil and gas properties. For a description of
these negative covenants, please see the merger agreement, which is attached
to this proxy statement/prospectus as Exhibit A.
NEGATIVE COVENANTS OF QUICKSILVER. Quicksilver has also agreed that it
will not, among other things:
- amend or modify any one or more of the formation documents (see page
33 for a description of these documents);
- adopt any amendments to its certificate of incorporation or its bylaws
that could reasonably be expected to delay or have an adverse effect
on completing the merger;
- change any of its significant accounting policies;
- declare or pay any dividend on shares of its or its subsidiaries'
capital stock or other equity interests, other than the stock
dividend;
- take or permit any action that would adversely affect or delay the
ability of either MSR or Quicksilver to obtain any necessary approvals
of any governmental entities required for the transactions
contemplated by the merger agreement or to perform its covenants and
agreements under the merger agreement;
- issue any securities convertible into or exercisable or exchangeable
for its common stock, or grant any rights, warrants or options to
acquire any common stock;
- solicit, initiate or participate in any discussions or negotiations
with any person (other than MSR), regarding any merger, consolidation,
sale of assets, tender offer, sale of shares of capital stock or
similar transaction involving Quicksilver; or
- disclose to any person preparing to make or considering any of the
above actions confidential information regarding Quicksilver.
Quicksilver has also made negative covenants regarding its oil and gas
properties similar to those made by MSR. For a description of these negative
covenants, please see the merger agreement, which is attached to this proxy
statement/prospectus as Exhibit A.
NO SOLICITATION BY MSR. During the term of the merger agreement, MSR has
agreed that it will not initiate, solicit or encourage any of the following
"Alternative Transactions":
- any purchase, lease, exchange, transfer or other acquisition of all or
a material portion of MSR's assets and its subsidiaries;
- any merger (other than with Quicksilver), consolidation, share
exchange, business combination or similar transaction involving MSR or
any of its subsidiaries;
- a purchase or other acquisition of securities representing 20% or more
of the outstanding voting stock of MSR; or
- enter into discussions or negotiate with any person or entity
regarding an Alternative Transaction.
At any time prior to the approval of the merger agreement by MSR's
stockholders, however, if the special committee receives an unsolicited
proposal for an Alternative Transaction and determines that the proposal is
more beneficial to the stockholders of MSR than the merger, it may, in the
exercise of its fiduciary duty, cause MSR to furnish information to, and may
participate in discussions or negotiations with, the person who submitted the
proposal and enter into such an Alternative Transaction if it would be in the
best interests of MSR's stockholders. If the special committee completes an
Alternative Transaction, MSR must pay Quicksilver a $500,000 fee to
compensate Quicksilver for MSR's failure to complete the merger.
CONDITIONS TO THE MERGER. Completion of the merger is subject to a
number of conditions, including:
- the approval of the merger agreement by the affirmative vote of the
holders of a majority of the Quicksilver common stock and by the
affirmative vote of the holders of a majority of the MSR common stock;
- approval by AMEX of the listing of the Quicksilver common stock to be
issued in the merger;
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- receipt of customary legal opinions;
- receipt by MSR on the closing date of the merger of EVEREN's fairness
opinion;
- the absence of third party actions that would prohibit or restrict the
completion of the merger or would have a material adverse effect on
either MSR or Quicksilver;
- the restructuring of the debt owed by Quicksilver to NationsBank of
Texas, N.A. ("NationsBank") and MSR's debt to Banque Paribas; and
- other customary closing conditions.
There can be no assurance as to when and if the conditions to completion
of the merger will be satisfied (or, where permissible, waived) or that the
merger will be completed. In addition, according to the terms of various
documents associated with Quicksilver's formation, each of Mercury, JEDI and
TCW must approve the terms of the merger agreement and the merger as well as
any modifications or amendments to the merger agreement or the waiver of any
provision of the merger agreement. According to the terms of the voting
agreement signed and delivered by JEDI and TCW at the time the merger
agreement was signed, JEDI and TCW have agreed and consented to the merger
agreement and the merger. However, Quicksilver has entered into a separate
agreement with JEDI and TCW in which Quicksilver has agreed that it will not
amend the merger agreement or waive any terms or conditions without the prior
written consent of JEDI and TCW.
AMENDMENT OF MERGER AGREEMENT. The parties may modify or amend the merger
agreement by written agreement prior to the completion of the merger, subject to
the applicable provisions of the DGCL.
WAIVER AND TERMINATION. The merger agreement permits the parties to
waive any of the conditions to the merger that are in favor of that party.
However, as described above, Quicksilver has agreed that it will not waive
any conditions in its favor without the prior written consent of JEDI and
TCW. If we elect to waive any material condition to the merger, we will
amend or supplement this proxy statement/prospectus as appropriate and
recirculate it to the affected stockholders if the waiver occurs prior to
approval of the merger by the stockholders of MSR and Quicksilver. If a
material condition to the merger is waived after the stockholders approve it,
the stockholders of the party adversely affected by the waiver will be
resolicited to reapprove the merger.
The merger agreement is subject to termination by one or more of the
parties at any time prior to the effective time if, among other things:
- we do not receive our stockholders' approval of the merger;
- we do not complete the merger by March 15, 1999;
- either of us materially breaches the merger agreement;
- an injunction prevents the merger;
- the special committee receives a proposal that is more beneficial to
MSR's stockholders than the merger that it chooses to pursue; or
- we mutually agree to terminate the merger.
The merger agreement requires MSR to pay Quicksilver a $500,000 break-up
fee in cash should MSR terminate the merger agreement in order to pursue a
merger or acquisition transaction with a party other than Quicksilver or if
MSR or Quicksilver terminates the merger agreement and within one year MSR
completes a merger transaction with another party, subject to some specific
requirements pertaining to the timing and manner of the termination. The
special committee has not solicited, received or considered any proposals for
such a transaction, other than the merger.
The merger agreement also requires MSR to pay Quicksilver $100,000 as
reimbursement of its estimated expenses, if:
- either party terminates the merger agreement because MSR's
stockholders fail to approve the merger;
- Quicksilver terminates the merger agreement because of a material
breach of the merger agreement by MSR; or
- Quicksilver terminates the merger agreement after its expiration on
February 28, 1999 if the expiration resulted from the failure of the
condition that EVEREN confirm the fairness opinion on the closing date
of the merger.
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Any $100,000 required expense reimbursement does not offset any amount
payable by MSR if it also owes Quicksilver the $500,000 break-up fee
described above.
Similarly, the merger agreement requires Quicksilver to pay to MSR $100,000
as reimbursement of its estimated expenses if:
- either party terminates the merger agreement because Quicksilver's
stockholders fail to approve the merger; or
- MSR terminates the merger agreement because of a material breach of
the merger agreement by Quicksilver.
The merger agreement provides that the sole remedy that MSR and Quicksilver
have against the other based on the other's material breach of the merger
agreement is recovery of the $100,000 expense reimbursement described
above and the $500,000 break-up fee that might be due by MSR if the
conditions to payment of that fee are met, unless the breach was willful or
intentional. This means that neither party has any liability beyond these
amounts for any other damages was incurred by reason of a breach of the
merger agreement, unless the breach was willful or intentional.
LISTING. Quicksilver will use all reasonable efforts to cause the
Quicksilver common stock to be issued in the merger to be approved for
listing and quotation on the American Stock Exchange ("AMEX") prior to the
completion of the merger. This listing is also a condition to completion of
the merger. Quicksilver anticipates that it will file a listing application
with AMEX relating to the issuance by Quicksilver of the Quicksilver common
stock prior to the date of the meeting.
ADDITIONAL AGREEMENTS. Both MSR and Quicksilver have made agreements
relating to the filing of the Registration Statement of which this proxy
statement/prospectus forms a part and the accuracy of the information
contained within it. They have also agreed to take all appropriate action,
and do all things necessary, proper or advisable under applicable law to
complete the transactions contemplated by the merger agreement and to use all
reasonable efforts to cooperate with each other in connection with the making
of all required filings.
TREATMENT OF OUTSTANDING STOCK OPTIONS AND WARRANTS
At September 30, 1998, a total of 248,570 shares of MSR common stock were
the subject of options under MSR's 1997 Stock Option Plan, all of which were
held by Messrs. Glenn and Thomas Darden and Mr. Howard N. Boals, Vice-President,
Finance of MSR. All options granted were at an exercise price as determined by
a committee. The price was not less than the fair market value of the shares
(which was the closing price of the shares on the business day preceding the day
the option was granted). All outstanding stock options are fully vested and
immediately exercisable.
In addition to holding options, members of the Darden family, along with
Mercury and two other persons, hold warrants to purchase shares of MSR common
stock. These warrants will be converted into warrants to purchase
Quicksilver common stock, as described below. The Darden family holds
warrants to purchase a total of 4,400,000 shares of MSR common stock.
Mercury, an affiliate of the Darden family, holds warrants for 5,940,000
shares. Mr. Jack Thurber, a consultant to Mercury, owns warrants to purchase
550,000 shares and Mr. Jeff Cook, an officer of Mercury, holds warrants for
110,000 shares.
Pursuant to the merger agreement, at the effective time, each option or
warrant that is outstanding and unexercised will be converted automatically into
an option or warrant to purchase shares of Quicksilver common stock in an amount
and at an exercise price determined as follows: (1) the number of shares of
Quicksilver common stock to be subject to the new option or warrant will be
equal to the product of the number of shares of MSR common stock subject to the
original option or warrant multiplied by the Conversion Ratio, provided that any
resulting fractional share of Quicksilver common stock will be rounded to the
nearest whole share; and (2) the exercise price per share of Quicksilver common
stock under the new option or warrant will be equal to the exercise price per
share of MSR common stock under the original option or warrant, divided by the
Conversion Ratio, provided that the exercise price will be rounded down to the
nearest whole cent. The existing options and warrants will be converted by
(1) multiplying the numbers of shares of MSR common stock subject to the
option or warrant by .10; and (2) dividing the exercise price of the option
or purchase price by .10.
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For example, an option to purchase 10,000 shares of MSR common stock at
$2.00 per share will be converted into an option for 1,000 shares of
Quicksilver common stock (10,000 x .10) at $20.00 per share ($2.00 DIVIDED BY
.10).
ACCOUNTING TREATMENT
Accounting Principles Board Opinion Number 16 ("ABP 16") Accounting for
Business Combinations 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, which
means we will treat our companies as if they had always been combined for
purposes of accounting and financial reporting. 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. QELC, Mercury and the principal stockholders of Mercury,
comprised of the Darden family, (the "Mercury Group") presently control
Quicksilver through their approximate 70.3 percent ownership of Quicksilver.
The Mercury Group is considered to control MSR because the Mercury Group and
two other individuals affiliated with Mercury own approximately 46.5 percent
of the MSR common stock, controls MSR's executive committee of its board of
directors and holds warrants to purchase 11 million shares of MSR common
stock. Accordingly, Quicksilver will be considered the "accounting acquiror"
and will transfer approximately 47 percent of MSR's net assets to Quicksilver
at historical cost. The remainder of MSR's net assets, approximately 53
percent, that relate to minority interests, will be valued and recorded based
on the purchase method of accounting.
RESTRICTIONS ON THE TRANSFER OF QUICKSILVER COMMON STOCK TO BE RECEIVED BY
AFFILIATES OF MSR
The Quicksilver common stock issuable in connection with the merger has
been registered under the Securities Act of 1933, as amended, (the
"Securities Act"). Accordingly, there will be no restrictions upon the
resale or transfer of such shares by Quicksilver stockholders except for
those stockholders who are deemed "affiliates" of Quicksilver, as that term
is defined in Rule 144 and Rule 145 adopted under the Securities Act. These
shares may be traded freely and without restriction by those stockholders not
deemed to be "affiliates" of MSR as that term is defined in the rules under
the Securities Act. Quicksilver common stock received by those stockholders
of MSR who are deemed to be "affiliates" of MSR may be resold without
registration only as provided for by Rule 145 or as otherwise permitted under
the Securities Act. Persons who may be deemed to be affiliates of MSR
generally include individuals or entities that control, are controlled by or
are under common control with, MSR and may include the executive officers and
directors of MSR as well as the principal stockholders of MSR. In the merger
agreement, MSR has agreed to use its best efforts to cause each stockholder
(other than Messrs. Joseph and Patrick Montalban) who, in the opinion of MSR,
is an affiliate of MSR to enter into an agreement with Quicksilver providing
that the affiliate will not sell, transfer or otherwise dispose of the shares
of Quicksilver common stock to be received by that person in the merger
except (1) in compliance with the applicable provisions of the Securities Act
and its rules and regulations; (2) unless counsel representing the
affiliate, satisfactory to Quicksilver, advises Quicksilver in a written
opinion letter satisfactory to Quicksilver and Quicksilver's counsel that no
registration under the Securities Act would be required in connection with
the proposed sale, transfer or other disposition of the affiliate's shares;
(3) except pursuant to a registration statement under the Securities Act
covering the Quicksilver common stock proposed to be sold, transferred or
otherwise disposed of, describing the manner and terms of the proposed sale,
transfer or other disposition, and containing a current prospectus under the
Securities Act that is effective under the Securities Act; or (4) unless an
authorized representative of the SEC has rendered written advice to the
affiliate to the effect that the SEC would take no action with respect to the
proposed sale, transfer or other disposition if consummated. This proxy
statement/prospectus does not cover any resales of Quicksilver common stock
received by affiliates of MSR.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the MSR board with respect to the
merger, you should be aware that some of the directors, officers and
employees of MSR have interests in the completion of the merger that are
different from, or in addition to yours. The special committee and the MSR
board were aware of these interests and considered them, among other matters,
in approving the merger agreement and the merger.
Messrs. Thomas and Glenn Darden are each an officer and director of both
MSR and Quicksilver. Frank Darden is a director of both MSR and Quicksilver,
and an officer of Quicksilver. All three gentlemen will continue as officers
and directors of the surviving corporation. The Darden family collectively
owns, directly or indirectly, substantially all of the outstanding stock of
Mercury and its parent, Mercury Production Company. The Darden family and
Mercury in turn own all of the membership interests of QELC. The Darden family,
Mercury and QELC together own approximately 70.3% of the outstanding stock of
Quicksilver.
The Darden family and its affiliated companies own approximately 43.7% of
the outstanding MSR common stock. In addition, Thomas and Glenn Darden
collectively own options to purchase 248,570 shares of MSR common stock at an
exercise price of $0.875 per share, which will be converted into options to
purchase 24,857 shares of common stock in the surviving corporation at a
purchase price of $8.75 per share. Messrs. Frank, Thomas and Glenn Darden, Ann
Darden Self, Mercury, Mr. Jack Thurber and Mr. Jeff Cook collectively own
immediately exercisable warrants to acquire an aggregate of 5,500,000 shares of
MSR common stock at an exercise price of $1.25 per share, as well as warrants
for an aggregate of 5,500,000 shares of MSR common stock at an exercise price of
$2.00 per share. All of the warrants will be converted into warrants to acquire
a number of shares of the surviving corporation as previously described.
BENEFICIAL OWNERSHIP INTERESTS OF THE DARDEN FAMILY AND ITS AFFILIATES
The following table illustrates the ownership interests of the Darden
family, Mercury and QELC in MSR and Quicksilver before the merger and in the
surviving corporation after the merger. The numbers in the column titled "MSR
Ownership Percentage" are adjusted to reflect the stock dividend. The total
number of shares listed in the column titled "Surviving Corporation Shares"
includes options and warrants for MSR common stock to be converted into
options and warrants for Quicksilver common stock in the merger. Numbers are
adjusted for the Conversion Ratio.
<TABLE>
<CAPTION>
MSR Quicksilver Surviving
MSR Ownership Quicksilver Ownership Corporation Ownership Percentage
Stockholder Shares Percentage Shares Percentage Shares After the merger
- ----------------- ------------- ---------- ------------ ------------ ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Mercury 6,480,000 25.1% 3,251,820 31.5% 4,493,820 33.3%
QELC 0 0 3,030,860 29.4% 3,030,860 23.5%
Darden family
Interests 11,280,000 (1) 43.7% 7,254,368(2) 70.3% 9,439,224(3) 67.7%
</TABLE>
- --------
(1) Includes 6,480,000 shares of MSR common stock owned by Mercury, an
affiliate of the Darden family, and 4,800,000 (18.6%) owned directly by the
Darden family.
(2) Includes 3,251,820 shares held by Mercury, 3,030,688 shares owned by QELC
and 971,688 (9.4%) shares held directly by the Darden family.
(3) Includes 4,493,820 shares of stock of the surviving corporation to be owned
by Mercury, 3,030,860 shares of stock of the surviving corporation that
will be owned by QELC, and 1,914,544 shares (11%) of the common stock of
the surviving corporation that will be held directly by the Darden family.
Quicksilver's bank debt is guaranteed by Mercury, Mercury Production
Company, and QELC. The bank debt is secured by pledges of the MSR stock and the
Quicksilver stock that is owned by the Darden family, Mercury and QELC and is
also secured by Quicksilver's oil and gas properties. It is a condition to the
merger that the bank debt be restructured in such manner as not to require those
guarantees and pledges.
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Because of the interests in the merger that are described above, Messrs.
Frank, Thomas and Glenn Darden abstained from voting on the merger as members of
the MSR board. They, along with Mercury and QELC, have agreed to vote their
shares of MSR stock and their shares of Quicksilver stock in favor of the merger
according to the voting agreement.
TRANSACTIONS WITH MANAGEMENT
Mr. Patrick Montalban was a director and officer of MSR until his
resignation as an officer on December 31, 1998. Pursuant to a severance
agreement, Mr. Montalban will continue to receive compensation for a period
of seven months following his resignation. Mr. Montalban will remain as a
director until the earlier of the completion of the merger or MSR's next
annual meeting.
Quicksilver does not have any direct employees other than its top manager
and officers. Instead, Quicksilver's businesses are managed under a management
agreement entered into with Mercury in April 1998. According to the
management agreement, Mercury is responsible for the supervision and
management of Quicksilver's day-to-day operations. These services include
administrative and management activities. In addition, Mercury acts as the
operator of Quicksilver's oil and gas properties in Michigan, Wyoming and
Montana. Quicksilver pays Mercury a fee based on the number of hours each
Mercury employee spends on activities relating to Quicksilver, less overhead
expenses paid by MSR under any joint operating agreements. In addition,
Quicksilver reimburses Mercury for specified out of pocket expenses. Through
September 30, 1998, Quicksilver had paid Mercury a total of approximately $1
million under the management agreement.
Upon completion of the merger, the existing management agreement will
terminate. Quicksilver and Mercury have entered into a new agreement, which
will replace the management agreement. Under this new agreement, Mercury
will provide accounting services to the surviving corporation and will
operate its oil and natural gas properties, including the daily activities of
producing oil and/or gas from an individual wells and leases, and will
continue to provide services as an operator under existing operating
agreements. Mercury's compensation will consist of payments and overhead
reimbursements to which it or Quicksilver is entitled as operator under
existing and future operating agreements for the properties. Mercury, which
is owned by the Darden family, anticipates receiving fees from the surviving
corporation under the management agreement in the amount of approximately
$2.2 million for 1999.
CONFLICTS OF INTEREST
The determinations by the MSR board and the Quicksilver board to
participate in the merger were subject to potential conflicts of interest.
Messrs. Frank, Glenn and Thomas Darden are directors and officers of both MSR
and Quicksilver and are therefore under a fiduciary duty to act in the best
interest of the stockholders of both MSR and Quicksilver. These duties may
be in conflict with each other. To address the fiduciary duty of the MSR
board to its stockholders, the MSR board authorized the special committee,
consisting solely of the independent directors (1) to engage special counsel
for independent legal advice; (2) to engage EVEREN, an independent investment
banking firm to consider and provide an opinion on the fairness of the merger
to the stockholders of MSR from a financial standpoint, and (3) to consider
whether MSR should participate in the merger. The decision by the full MSR
board to recommend the merger to the stockholders was made by a unanimous
vote of only the independent directors, with the members of the
Darden family abstaining.
Although the MSR board and the Quicksilver board have attempted to resolve
all conflicts of interest in a manner that would not adversely effect either the
stockholders of MSR or the stockholders of Quicksilver, if these conflicts did
not exist, it is possible that the merger may not have been considered, been
approved or may have been approved on a basis that would be more favorable to
the stockholders of MSR.
MANAGEMENT AFTER THE MERGER
The board of directors of the surviving corporation will consist of the
current directors of MSR, with the exception of Mr. Patrick Montalban, who will
not become a director of Quicksilver. The directors of Quicksilver will be
Messrs. Frank, Thomas and Glenn Darden, Mr. D. Randall Kent, Mr. Steven M.
Morris and Mr. Yandell Rogers, III. Mr. Mark Warner will become a director of
Quicksilver as a representative of JEDI. The officers of MSR, other than Mr.
Montalban, will continue as the officers of Quicksilver after the merger. Mr.
Thomas Darden
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will serve as Chief Executive Officer and Chairman of the Board. Mr. Glenn
Darden will be President and Chief Operating Officer. Mr. Howard Boals will
be Vice President-Finance and Administration.
FORMATION DOCUMENTS
In addition to the management agreement, Mercury, Quicksilver, JEDI and
TCW entered into several other agreements in connection with the formation of
Quicksilver. The management agreement and these other agreements, which are
identified and described below, are referred to collectively in this proxy
statement/prospectus as the "formation documents."
STOCK TRANSFER AGREEMENT
To preserve the economic consequences of the provisions of the Michigan
Gas Partners partnership agreement, which would have allowed Mercury's
interest in Michigan Gas Partners to increase from 10% to 85% upon JEDI's
receipt of distributions from the partnership equal to the amount invested by
JEDI plus a specified rate of return, Mercury and JEDI are parties to a stock
transfer agreement, dated April 9, 1998, which provides Mercury with the
right to require JEDI to transfer a portion of the 13,000 shares of
Quicksilver common stock that JEDI received in the formation of Quicksilver
to Mercury as consideration for the merger of Michigan Gas Partners into
Quicksilver. This portion is the number of shares of Quicksilver common
stock having any aggregate market value equal to 85% of the excess of the
market value of JEDI's shares of Quicksilver common stock over the amount of
$20,995,205. An amendment to the stock transfer agreement extended this
right to the full 1,340,404 shares that JEDI will own after giving effect to
the stock dividend. Mercury may request the transfer on only one occasion
prior to the first anniversary of the date on which the Quicksilver common
stock becomes publicly traded.
STOCKHOLDERS AGREEMENT
Quicksilver, Mercury, QELC, the Darden family, Jeff Cook, Jack Thurber,
TCW, JEDI and Mercury Production Company (a Texas corporation and the owner
of substantially all of the outstanding shares of common stock of Mercury)
are parties to a stockholders agreement, dated April 9, 1998, as amended on
September 1, 1998. The stockholders agreement contains the agreement of all
of the Quicksilver stockholders, other than TCW, not to transfer their shares
of Quicksilver common stock that they received in the formation, except for
specified transfers that are permitted until the "termination date," which is
defined as the first anniversary date of the stockholders agreement or, if
the shares of Quicksilver common stock are publicly traded, on the earlier of
the first anniversary of the stockholders agreement, the first anniversary of
the date on which the Quicksilver common stock became publicly traded or the
date on which Mercury requests the stock transfer under the stock transfer
agreement. As to JEDI, the termination date could also be the date on which
TCW makes a transfer of its Quicksilver common stock that is more than 25% of
the shares of Quicksilver common stock owned by TCW on the date of the
stockholders agreement. By reason of the merger, these stock transfer
restrictions will lapse.
The stockholders agreement also contains the agreement of each of the
Quicksilver stockholders to provide Quicksilver and the other stockholders
with a right of first refusal on any transfers of their Quicksilver common
stock from and after the termination date and until such time as the
Quicksilver common stock becomes publicly traded (the "expiration date").
Mercury, QELC and the Darden family (collectively, the "Darden stockholders")
have an obligation continuing past the expiration date to provide a similar
right of first refusal to JEDI and TCW. The Darden stockholders are further
required to provide JEDI and TCW with a proportionate right to join in any
transfers of shares of Quicksilver common stock by Mercury, QELC or a member
of the Darden family. In addition, until the Expiration Date, without the
written consent of JEDI and TCW, the Darden stockholders are prohibited from
transferring their shares of Quicksilver common stock if the transfer would
result in the Darden stockholders owning beneficially or of record in the
aggregate less than a majority of the outstanding shares of Quicksilver
common stock or any one Darden stockholder owning beneficially or of record
less than a majority of the shares of Quicksilver common stock owned by such
Darden stockholder on the date of the stockholders agreement. Finally, the
Darden stockholders and Mercury Production Company are restricted from
permitting or causing there to be any change in the ownership of Mercury,
Mercury Production Company and QELC until the expiration date.
The stockholders agreement provides each of JEDI and TCW with the
preemptive right to acquire its proportionate share of any additional
Quicksilver common stock issued by Quicksilver until the expiration date
However, according to the terms of the voting agreement, each of JEDI and TCW
have waived their preemptive rights with respect to the Quicksilver common stock
to be issued in the merger. In addition, each of JEDI and TCW,
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<PAGE>
so long as it is a holder of Quicksilver common stock, has the right to elect
a number of members of the board of directors of Quicksilver representing a
percentage of the entire board of directors as close as possible to the
percentage of outstanding shares of Quicksilver common stock held by JEDI or
TCW, as applicable, but in no case less than one.
The stockholders agreement, as amended, does not apply to any transfer by
Mercury to its employees, independent consultants or directors of options to
purchase from Mercury either 1) shares of MSR common stock or, if MSR has merged
into Quicksilver, shares of Quicksilver common stock; or 2) to transfers by
Mercury if the number of shares transferred does not exceed 2,000,000 shares of
MSR common stock, or the number of shares of Quicksilver common stock into which
2,000,000 shares of MSR common stock are converted upon completion of the
merger. That number of Quicksilver shares will be 200,000 under the Conversion
Ratio.
Quicksilver and Quicksilver's stockholders, other than JEDI and TCW, are
bound by covenants contained in the stockholders agreement, including a
requirement to deliver specified information concerning Quicksilver to JEDI
and TCW so long as they are the owners of Quicksilver common stock. In
addition, until the expiration date of the merger agreement, they are not to
take major corporate actions without the prior written consent of JEDI and
TCW, including amending Quicksilver's certificate of incorporation, issuing
of capital stock, the merger of Quicksilver into any other corporation or a
sale of all or substantially all of Quicksilver's assets. Quicksilver is
obligated by one such covenant in the stockholders agreement to use its
reasonable best efforts to engage as soon as practicable in a transaction
that results in the Quicksilver common stock becoming publicly traded.
PUT-CALL AGREEMENT
Mercury and TCW are parties to a put-call agreement, dated April 9,
1998, providing TCW with the right to cause Mercury to purchase from TCW all
of the 13,000 (to be adjusted after the stock dividend) shares of Quicksilver
common stock acquired by TCW in the formation. If Quicksilver does not
complete the merger with MSR on or before December 31, 1998, TCW's right to
cause Mercury to purchase TCW's shares of Quicksilver common stock is
exercisable at any time from and after January 1, 1999 through July 10, 1999
and the price Mercury will be required to pay is $10,000,000 plus an amount
equal to interest accruing on $10,000,000 at the rate of 12.25% per annum
compounded quarterly from April 9, 1998 up to and including the date of payment
of the amount to TCW. The second put right of TCW is available to TCW on and
after April 9, 2006 through October 9, 2008. In three annual increments
during this period, TCW has the ability to cause Mercury to purchase TCW's
shares of Quicksilver common stock at the price paid for the shares by TCW.
The put-call agreement also provides Mercury the right, at its
option, during the period commencing September 4, 1998, and ending on the
earlier of the sixth anniversary of the closing date of the merger or
December 31, 2005, to purchase from TCW all of TCW's shares of Quicksilver
common stock that have not been sold by TCW for a cash purchase price equal
to an amount necessary to cause TCW to receive on the date of purchase a
nominal 25% cash-on-cash internal rate of return on $10,000,000 from the date
of the put-call agreement to the date of receipt of the cash payment if the
call right is exercised after October 9, 1999. If Mercury exercises its call
right before October 9, 1999, the cash price per share will be equal to:
$1,057.69 (to be adjusted by the stock dividend) MINUS (a) 50% TIMES (1) the
amounts of royalty proceeds received by TCW PLUS (2) projected royalty
amounts from the date of the call through October 9, 1999 and then (b)
DIVIDED by $13,000 (to be adjusted by the stock dividend). If, for example,
at the time Mercury purchases the stock, 50% of the overriding royalty
already received by TCW and projected to be received by it from the date of
the purchase to October 9, 1999 is $500,000.00, the purchase price of
$1,057.69 per share would be reduced by $500,000.00 divided by 13,000 or
$38.46 per share. Appropriate adjustments would be made for the increase in
the number of shares above 13,000 pursuant to the stock dividend.
As amended September 1, 1998, the put call agreement also gives TCW a
third put right. TCW may cause Mercury to purchase TCW's shares of
Quicksilver common stock if any holder of warrants to purchase MSR common
stock currently held by Mercury and members of the Darden family exercises
that warrant while TCW still holds its Quicksilver common stock.
AGREEMENT REGARDING WARRANTS
Mercury and the Darden family also entered into an agreement regarding
warrants with JEDI and TCW. Mercury and the Darden family have agreed that
they will not exercise their warrants to purchase MSR common
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<PAGE>
stock at $1.25 (which will be converted into warrants to purchase Quicksilver
common stock in the merger at a purchase price of $12.50 per share) until (a)
either (1) the market value of JEDI's Quicksilver common stock exceeds
$20,995,200; (2) JEDI no longer owns any Quicksilver common stock; or (3)
JEDI consents to the exercise in writing; AND (b) either (1) TCW no longer
owns its Quicksilver common stock; or (2) TCW consents to the exercise in
writing. If any holder of the warrants exercises any of those warrants while
TCW holds any Quicksilver common stock, the amendment to the put-call
agreement gives TCW the put right discussed above.
REGISTRATION RIGHTS AGREEMENT
Quicksilver, JEDI and TCW are parties to a registration rights
agreement, dated as of April 9, 1998. The registration rights agreement
provides each of JEDI and TCW with demand registration rights exercisable at
any time after the Quicksilver common stock is publicly traded, and with
"piggyback" registration rights. No more than three demands may be made by
either JEDI or TCW. In connection with registration of JEDI's or TCW's
shares of Quicksilver common stock under the registration rights agreement,
Quicksilver is responsible for all registration expenses such as registration
and filing fees and fees and disbursements to counsel of Quicksilver. JEDI
or TCW, as applicable, is responsible for selling expenses, including
underwriting fees, discounts and selling commissions. On the second and
third occasions of the exercise of demand registration rights by JEDI, JEDI
is also responsible for registration expenses.
ADMINISTRATIVE AGREEMENT
In connection with the merger agreement, Quicksilver, Mercury, JEDI and TCW
entered into an agreement according to which Quicksilver has agreed to provide
each of JEDI and TCW with copies of:
- notices and other communications made, given or received by
Quicksilver under the merger agreement;
- press releases or other public announcements regarding the merger or
the merger agreement; and
- the Registration Statement and any amendments to it.
Quicksilver must give JEDI and TCW a reasonable amount of time to review
and comment on any press releases or public announcement and must give them an
opportunity to review the Registration Statement and any amendments prior to
filing.
In addition, without JEDI's and TCW's prior written consent, Quicksilver
may not, among other things:
- consent to or approve any act that requires consent or approval under
the merger agreement;
- waive any inaccuracy in any representation or warranty made in the
merger agreement;
- waive compliance with or extend the time for the performance of any
covenant or condition in the merger agreement;
- agree to terminate the merger agreement; or
- exercise or fail to exercise any other rights or modify any
obligations specified in the merger agreement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Jenkens & Gilchrist, a Professional Corporation, and
United States special counsel to MSR, the following are the material United
States federal income tax considerations arising from and relating to the merger
that generally apply to U.S. stockholder and non-U.S. stockholders.
- The term U.S. stockholders means stockholders of MSR that are United
States citizens or residents, domestic corporations, domestic
partnerships, or estates subject to United States federal income tax on
their income regardless of the source, of the income.
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- The term U.S. stockholders also includes any trust if a court within
the United States is able to exercise primary supervision over the
administration of that trust and one or more United States fiduciaries
have the authority to control all substantial decisions of the trust.
- The term non-U.S. stockholders means MSR stockholders that are not U.S.
stockholders.
This opinion does not discuss all aspects of United States federal income
taxation that may be relevant to a particular U.S. stockholder (including,
without limitation, the potential application of the alternative minimum tax
to a particular non-U.S. stockholder, to the holder of an option or warrant to
purchase MSR common stock, or to certain types of investors subject to special
treatment under the United States federal income tax laws such as banks, life
insurance companies, tax-exempt organizations, broker-dealers or holders who
received their MSR common stock as compensation), nor does it discuss any aspect
of state, local or foreign tax laws.
This opinion is based on the United States Internal Revenue Code of
1986, as amended, (the "Code") and proposed regulations under the Code, IRS
rulings and pronouncements, reports of congressional committees, judicial
decisions and current administrative rulings and practice, all as currently
in effect. This opinion is based on current law, which is subject to change.
Any such change could be retroactive and, accordingly, could modify the tax
consequences contained in this discussion. No advance income tax ruling has
been sought or obtained from the IRS regarding the tax consequences of any of
the transactions described in this proxy statement/prospectus. Accordingly,
it is possible that the United States federal income tax consequences of the
merger may differ from those described below. This opinion is based on
certain factual assumptions and is subject to some limitations, including the
reliance on the representations of MSR and Quicksilver. If these assumptions
or representations are incorrect, the tax consequences contained in this
discussion could be modified.
THE FOLLOWING OPINION DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO YOU IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES
AND INCOME TAX SITUATION. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO YOU OF THE TRANSACTIONS DESCRIBED IN THIS
PROXY STATEMENT/PROSPECTUS INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN
TAX LAWS AND POSSIBLE FUTURE CHANGES IN FEDERAL TAX LAWS.
TAXATION OF U.S. STOCKHOLDERS
The following opinion is limited to U.S. stockholders:
- who hold MSR common stock as a "capital asset" within the meaning of
Section 1221 of the Code;
- whose ownership, receipt or disposition of MSR common stock is not
attributable to a permanent establishment in a country other than the
United States for purposes of an income tax treaty to which the United
States is a party; and
- who are not residents of a country other than the United States for
purposes of an income tax treaty to which the United States is a party.
If you are a U.S. stockholder who does not meet one or more of these
criteria, you are urged to consult your tax advisors regarding your
particular United States federal income tax consequences.
THE MERGER
Special counsel is of the opinion that the merger should qualify as a
reorganization within the meaning of Section 368(a) of the Code. This
conclusion is based on factual assumptions and reliance on the representations
of MSR and Quicksilver. These assumptions and representations include, but are
not limited to the assumption that:
- Quicksilver has no plan or intention to sell or otherwise dispose of
any of the assets of Quicksilver acquired in the merger, except for
dispositions made in the ordinary course of business;
- Quicksilver will continue to use MSR's historic business assets or use
a significant portion of MSR's historic business assets in a business;
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- neither Quicksilver nor any related person of Quicksilver (as that
term is defined in United States Treasury Regulation Section
1.368-1(e)(3)) has any current plan or intention to repurchase or
redeem any of the Quicksilver common stock to be issued to the MSR
stockholders in connection with the merger or make any extraordinary
distribution (within the meaning of United States Treasury Regulation
Section 1.368-1T(e)) with respect to that stock;
- neither Quicksilver nor any related person of Quicksilver (within the
meaning of United States Treasury Regulation Section 1.368-1(e)(3))
has transferred or will transfer cash or other property to MSR or any
subsidiary of MSR in anticipation of the merger or has made or will
make any loan to MSR or any subsidiary of MSR in anticipation of the
merger; and
- the fair market value of the Quicksilver common stock received by each
MSR stockholder will be approximately equal to the fair market value
of the shares of MSR common stock surrendered in the exchange.
RECEIPT OF QUICKSILVER COMMON STOCK IN EXCHANGE FOR MSR COMMON STOCK
Based upon the conclusion described above that the merger should qualify as
a reorganization under Section 368(a) of the Code, the following will be the
material United States federal income tax consequences to you if you are a U.S.
stockholder:
- You will recognize no gain or loss upon the exchange in the merger of
your MSR common stock solely for Quicksilver common stock;
- The basis of the shares of Quicksilver common stock you receive in the
merger will be the same as your basis in the MSR common stock you
surrendered in exchange for the Quicksilver common stock;
- Your holding period in the shares of Quicksilver common stock you
receive as a result of the merger will include the period for which
you held the shares of MSR common stock that are converted into shares
of Quicksilver common stock;
- Cash payments received by a U.S. stockholder in lieu of fractional
shares of Quicksilver common stock will be treated as if those
fractional shares had been issued in the merger and then redeemed by
Quicksilver. If you are a U.S. stockholder and receive cash in lieu
of fractional shares of Quicksilver common stock, you will recognize
gain or loss upon that payment, measured by the difference (if any)
between the amount of cash received and the tax basis allocated to
that fractional share. Your gain or loss should be capital gain or
loss, provided that you held the fractional share of MSR common stock
as a capital asset at the effective time of the merger; and
- If you exercise your dissenters' rights with respect to shares of MSR
common stock and receive a cash payment for those shares you should
generally recognize capital gain or loss (if you held each share as a
capital asset at the effective time of the merger) measured by the
difference between your tax basis in the shares and the amount of cash
received, provided that the payment is not "essentially equivalent to a
dividend" within the meaning of Section 302 of the Code after giving
effect to the constructive ownership rules of the Code (collectively, a
"Dividend Equivalent Transaction"). A sale of shares pursuant to an
exercise of dissenters' rights generally will not be a Dividend
Equivalent Transaction if, as a result of the exercise, the stockholder
exercising the dissenters' rights owns no shares of capital stock of
Quicksilver (either actually or constructively within the meaning of
Section 318 of the Code) immediately after the merger.
TAXATION OF NON-U.S. STOCKHOLDERS
The following opinion is applicable to non-U.S. stockholders:
- who hold MSR common stock as a "capital asset" within the meaning of
Section 1221 of the Code;
- who do not actually or constructively own (and have not at any time in
the preceding five-year period actually or constructively owned) five
percent or more (by vote or value) of the stock of MSR;
37
- whose ownership, receipt or disposition of MSR common stock is not
attributable either to the conduct of a trade or business in the
United States or to a permanent establishment in the United States; and
- who are not residents of the United States for purposes of United
States federal income tax law or an income tax treaty to which the
United States is a party.
If you are a non-U.S. stockholder who does not meet one or more of these
criterion you are urged to consult your tax advisors regarding your particular
United States federal income tax consequences.
THE MERGER
RECEIPT OF QUICKSILVER COMMON STOCK IN EXCHANGE FOR MSR COMMON STOCK.
Based on the conclusion described above that the merger should qualify as a
reorganization under Section 368(a) of the Code, if you are a non-U.S.
stockholder and you exchange your shares of MSR common stock solely for shares
of Quicksilver common stock, you will have the same United States federal
income tax consequences as those described above for a U.S. stockholder
regarding nonrecognition of gain or loss, tax basis and holding period, unless
you are subject to gain recognition under the rules for the taxations of sales
of a United States real property interest. See UNITED STATES REAL PROPERTY
INTEREST section below.
RECEIPT OF CASH IN EXCHANGE FOR MSR COMMON STOCK. If you are a non-U.S.
stockholder and exchange your shares of MSR common stock for cash (either
from the exchange of fractional shares of MSR common stock or from the
exercise of dissenters' rights), you will recognize gain or loss on the
exchange equal to the difference between the amount of cash received and your
adjusted tax basis in your shares of MSR common stock exchanged for
Quicksilver common stock. Generally, you will not be subject to United
States federal income tax on such gain, however, unless (1) the cash you
receive in exchange for your shares of MSR common stock is a Dividend
Equivalent Transaction; or (2) the MSR common stock is United States real
property interest ("USRPI").
As explained under the "Taxation of U.S. Stockholders" section above, a
sale of shares pursuant to an exercise of dissenters' rights generally will not
be a Dividend Equivalent Transaction if, as a result of the exercise, the
stockholder exercising the dissenters' rights owns no shares of capital stock of
Quicksilver (either actually or constructively within the meaning of Section 318
of the Code) immediately after the merger.
As explained in "United States Real Property Interest" section below,
your MSR common stock will not be treated as a USRPI provided: (1) the MSR
common stock is regularly traded on an established securities market; and (2)
you have actually and constructively held less than five percent of the fair
market value of the MSR common stock for all times during the shorter of (a)
the period during which the you held the interest or (b) the five-year period
ending on the effective date of the merger.
UNITED STATES REAL PROPERTY INTEREST. If your shares of MSR common
stock are a USRPI within the meaning of Section 897(c) of the Code, the gain
or loss you realize in the merger may be treated as effectively connected
with a United States trade or business subject to United States federal
income tax. In addition, if your shares of MSR common stock are a USRPI, MSR
may be required to withhold tax on the disposition of your stock. Based on
representations obtained from MSR, special counsel has concluded that the MSR
common stock is a "United States real property holding corporation" as that
term is defined in Section 897(c) of the Code and, absent an exception, would
be a USRPI. In addition, based on representations obtained from Quicksilver,
special counsel has concluded that, absent an exception, the Quicksilver
common stock would be a USRPI immediately after the merger.
There is an exception for certain publicly traded stock. If any class
of stock of a corporation is regularly traded on an established securities
market, the stock of that class shall be treated as a USRPI only in the case
of a "five-percent owner," that is, a person who actually or constructively
(under Section 318 of the Code) held more than five percent of the fair
market value of that class of stock at some time during the shorter of (a)
the period during which the taxpayer held the interest or (b) the five-year
period ending on the date of the disposition of that interest.
For purposes of determining whether a corporation's stock is regularly
traded, a class of interests that is traded on an established securities
market (such as a national securities exchange that is registered under
Section 6 of the Securities Exchange Act of 1934 (15 U.S.C. Section 78f)) and
is located in the United States is considered to be regularly traded for any
calendar quarter during which it is regularly quoted by brokers or dealers
making a market in
38
<PAGE>
these interests. Brokers or dealers are considered market makers with
respect to a class of interests only if they hold themselves out to buy or
sell interests in that class at the quoted price. Based on representations
obtained from MSR, special counsel has concluded that the MSR common stock
will be considered to be "regularly traded on an established securities
market." Therefore, the merger should not be treated as the sale or exchange
of a USRPI with respect to a non-U.S. stockholder who is not a five-percent
owner.
Non-U.S. stockholders should consult applicable income tax treaties, which
may provide different rules.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Quicksilver must report annually to the IRS and to each stockholder the
amount of cash proceeds paid as a result of the merger, if any, and dividends
paid to, and the tax withheld with respect to, such stockholder. These
reporting requirements apply regardless of whether withholding has been reduced
or eliminated by an applicable treaty. Copies of these information returns may
also be made available under the provisions of a specific treaty or agreement
with the tax authorities in the country in which a non-U.S. stockholder is
established.
In general, information reporting requirements may apply to dividend
distributions on Quicksilver common stock or the proceeds of a sale, exchange,
retraction or redemption of MSR common stock or of Quicksilver common stock.
A 31% backup withholding tax may apply to such payments unless the holder (1) is
a corporation, non-U.S. stockholder or comes within certain other exempt
categories and, when required, demonstrates its exemption or (2) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
backup withholding rules. A stockholder of MSR common stock or Quicksilver
common stock who is required to provide a correct taxpayer identification number
and fails to do so may be subject to penalties imposed by the IRS.
Under current United States Treasury regulations, backup withholding and
information reporting generally will apply to amounts paid for shares of MSR
common stock to a non-U.S. stockholder at an address in the United States, if
that holder fails to establish an exemption or to provide certain other
information to the payor. Under the current regulations, the payment of
proceeds from the disposition of MSR common stock to or through a United
States office of a broker will be subject to information reporting and backup
withholding unless the beneficial owner, under penalties of perjury,
certifies, among other things, its status as a non-U.S. stockholder or
otherwise establishes an exemption.
The payment of proceeds from the disposition of MSR common stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject
to backup withholding and information reporting except as noted below. In
the case of proceeds from a disposition of MSR common stock paid to or
through a non-U.S. office of a broker that is (1) a United States person, (2)
a "controlled foreign corporation" for United States federal income tax
purposes, or (3) a foreign person, 50% or more of whose gross income from
certain periods is effectively connected with a United States trade or
business, information reporting (but not backup withholding) will apply
unless the broker has documentary evidence in its files that the owner is a
non-U.S. stockholder (and the broker has no actual knowledge to the contrary).
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a non-U.S. stockholder will be
refunded or credited against the non-U.S. stockholder's United States federal
income tax liability, if any, provided that the required information is
furnished to the IRS in a timely manner.
39
<PAGE>
SELECTED FINANCIAL DATA OF MSR
The following sets forth certain historical consolidated financial data
relating to MSR. The selected financial data for the period from inception
March 7, 1997 to December 31, 1997 is derived from the audited consolidated
financial statements of MSR. The selected financial data for the six month
period ended June 30, 1998 and the nine month period ended September 30, 1998
are derived from the unaudited consolidated financial statements of MSR
incorporated by reference in this proxy statement/prospectus and includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such data. The selected financial data should be read
in conjunction with the information set forth in MSR's annual report on Form
10-K for the year ended December 31, 1997 under the caption "Management's
Discussion and Analysis of MSR's Financial Condition and Results of
Operations," which is incorporated in this proxy statement/prospectus by
reference. Operating results for the six month period ended June 30, 1998
and the nine month period ended September 30, 1998 do not necessarily
indicate actual future results or trends.
<TABLE>
<CAPTION>
From Inception Six Months Nine Months
March 7, 1997 to Ended Ended
CONSOLIDATED STATEMENT OF OPERATIONS DATA: December 31, 1997 June 30, 1998 September 30, 1998
----------------- --------------- --- ---------------
Revenues (In thousands, except per share data)
<S> <C> <C> <C>
Oil sales $ 257 $ 1,230 $ 1,775
Gas sales 570 839 1,178
Interest and other income 27 34 50
------- ------- -------
Total revenues 854 2,103 3,003
------- ------- -------
Expenses
Operating expenses 228 826 1,382
Production taxes 68 185 250
Depletion and depreciation 220 668 974
General and administrative 146 499 827
Interest 147 426 644
------- ------- -------
Total expenses 809 2,604 4,077
------- ------- -------
Income (loss) before income taxes 45 (501) (1,074)
Income tax benefit (expense) (15) 170 350
------- ------- -------
Net income (loss) $ 30 $ (331) $ (724)
------- ------- -------
------- ------- -------
Basic weighted average number of shares
outstanding for the period 14,801 25,777 25,777
Basic and diluted earnings (loss) per share $ 0.00 (0.01) $ (0.03)
CONSOLIDATED STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities $ 326 $ (284) $ 57
Investing activities (272) (274) (582)
Financing activities 474 306 274
OTHER CONSOLIDATED FINANCIAL DATA:
Capital expenditures $ 592 $ 274 $ (582)
EBITDA (1) 412 593 544
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 587 $ 276 $ 340
Working capital (deficit) 42 271 (338)
Total assets 25,963 25,273 25,214
Long-term debt (includes current portion) 10,648 10,954 10,922
Total stockholder's equity 13,070 12,739 12,333
</TABLE>
- -------------------
1) EBITDA (as used in this financial data) is calculated by adding interest,
income taxes, and depreciation, depletion and amortization to net income
(loss). Interest includes interest expense accrued and amortization of
deferred financing costs. EBITDA is presented here not as a measure of
operating results, but rather as a measure of MSR's operating performance
and ability to service debt. EBITDA should not be considered as an
alternative to earnings (loss), or operating earnings (loss), as defined by
generally accepted accounting principles, as an indicator of MSR's
financial performance, as an alternative to cash flow, as a measure of
liquidity or as being comparable to other similarly titled measures of
other companies.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MSR'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
MSR's consolidated financial statements and the notes associated with them
contained elsewhere in this proxy statement/prospectus. This discussion should
not be construed to imply that the results discussed in this proxy
statement/prospectus will necessarily continue into the future or that any
conclusion reached will necessarily indicate actual operating results in the
future. This discussion represents only the best present assessment of
management of MSR.
On March 7, 1997, MSR was organized to explore, develop and operate oil and
natural gas properties. In exchange for MSR common stock and common stock
warrants the founders of MSR (Mercury and the members of the Darden family)
contributed approximately 75 crude oil producing wells in northwest Montana,
constituting the "Mercury properties." These properties were subject to a
forward sale of oil production and consequently the cash flow from the
properties did not begin to accrue to MSR until January 1, 1998.
On March 26, 1997, MSR's predecessor, MSR Exploration Ltd., an Alberta,
Canada corporation, ("Old MSR") entered into an agreement to merge with MSR,
then known as Mercury Montana, Inc., and Mercury, its majority stockholder at
that time. The agreement contemplated combining all of MSR's oil and gas
assets in Montana with all the oil and gas assets of Old MSR by (the "MSR
1997 merger"). MSR was the surviving corporation in that merger and changed
its name to MSR Exploration Ltd. on October 31, 1997. The merger was
accounted for under the purchase method of accounting, with MSR considered the
accounting acquiror.
COMPARISON OF HISTORICAL RESULTS OF OPERATIONS
Due to the limited existence of MSR, comparisons between current periods and
prior years' historical data may not be meaningful. The following discussion
will center on trends and specific results, which have occurred during the
periods presented. MSR's 1997 results of operations include MSR's predecessor
from January 1, 1997 through March 6, 1997 and MSR's from inception March 7,
1997 through December 31, 1997. Most of the revenues and expenses from the
Mercury properties do not begin to accrue to MSR until January 1, 1998. The
1996 MSR results (from its predecessor) include the results of operations from
the Mercury properties. References to MSR include the predecessor company,
unless the context requires otherwise.
The large increases in 1998 compared to 1997 were due to (1) the merger with
Old MSR, which was effective October 31, 1997 and (2) the inclusion of the
results of operations from the Mercury properties since January 1, 1998,
which were subject to a forward sale/production payment for all of 1997.
Unless stated otherwise, all of the increases discussed below relate to these
two items and will not be repeated below.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO SEPTEMBER 30, 1997.
REVENUE. Total revenues for the nine months ended September 30, 1998 were
$3,003,000 compared to $154,000 for the 1997 period. Oil revenues for the
1998 period were $1,775,000 from the sale of 161,200 barrels of oil at an
average sales price of $11.01 per barrel, a price decline of 38 percent
compared to 1997. Average oil prices during the same period last year were
approximately $17.68 per barrel. Gas sales in the first nine months of 1998
were $1,178,000 from the sale of 581,000 Mcf of gas at an average sales price
of $1.03 per Mcf, an approximate 12 percent decline compared to average prices
last year of $2.30.
EXPENSES. Total expenses for the nine months ended September 30, 1998 were
$4,077,000 compared to $70,000 for the 1997 period. Operating expenses
totaled $1,382,000 or approximately $5.36 per barrel of oil equivalent.
Production taxes for 1998 were $250,000 and averaged 8.3 percent of sales.
Depletion and depreciation expense for 1998 was $974,000 at approximately
$3.77 per barrel of oil equivalent. General and administrative expenses for
the first nine months of 1998 totaled $827,000 and included $166,000 of
pre-merger costs. Interest expense was $644,000 for the 1998 period. The
interest rate on MSR's debt average approximately 7.5 percent in 1998. Income
taxes were calculated using the statutory rate of 34 percent.
NET INCOME (LOSS). For the nine months ended September 30, 1998 MSR had a
loss of $724,000 compared to $55,000 of income for the same period last year.
The 1998 loss was due primarily to the decline in both crude oil and natural
gas prices.
41
<PAGE>
COMPARISON OF THE TWELVE MONTHS ENDED DECEMBER 31, 1997 TO DECEMBER 31, 1996.
REVENUE. MSR had revenues of $911,000 for 1997 compared to $2,070,000
for 1996. Oil sales for 1997 were $257,000 on volumes of approximately 14,800
barrels of oil at an average sales price of $17.34 per barrel compared to
1996 oil sales of $1,855,000 of approximately 96,300 barrels of oil at an
average sales price of $19.25 per barrel. The average sales price of oil
declined 10 percent from 1996 to 1997. Gas sales for 1997 were $627,000 on
volumes of approximately 283,700 Mcf of gas at an average sales price of
$2.21 per Mcf compared to 1996 sales of $215,000 on volumes of approximately
97,300 Mcf at an average sales price of $2.21.
EXPENSES. Total expenses for 1997 were $827,000 compared to $1,938,000 for
1996. Operating expenses for 1997 totaled $228,000 and averaged $3.68 per
barrel of oil equivalent. The 1996 operating expenses were $1,054,000 and
average $9.37 per barrel of oil equivalent. The large variance in operating
costs per barrel in 1997 was because general and administrative costs were
allocated to producing properties, there were high maintenance and extensive
workover costs incurred. Product taxes in 1997 were $75,000, which was 8.2
percent of sales. In 1996 production taxes were $199,000 or 9.6 percent of
sales. The variance in percentage was due to higher property taxes on
producing properties in 1996. In 1997 the general and administrative expense
was $146,000. Interest expense for 1997 was $147,000 compared to $273,000 for
1996. Interest rates averaged approximately 8.5 percent in 1997 and 9.1
percent in 1996. Income taxes were calculated based on the statutory rate of
34 percent.
NET INCOME. Earnings for 1997 were $56,000 compared to $87,000 for 1996.
COMPARISON OF HISTORICAL RESULTS OF OPERATIONS FOR 1998 TO ADJUSTED FINANCIAL
DATA FOR 1997
Due to MSR's limited existence the 1998 historical statements of
operations will be compared to the statements of financial data for 1997,
which are presented and explained following these comparisons.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997.
REVENUES. Revenues for the first nine months of 1998 were $3,003,000, a 40
percent decrease compared to as adjusted financial data revenues for the same
period in 1997, due primarily to the lower price from oil and gas production.
Oil sales for the 1998 period were $1,775,000, 44 percent lower than the 1997
financial data oil sales of $3,169,000. During the 1998 period the Company
sold its crude oil for an average price of $11.01 per barrel compared to a
1997 average of $17.68, a decrease of 38 percent. Oil sales volumes were
161,200 barrels for the first nine months of 1998, a decrease of ten percent
compared to the 1997 period and was due to natural production declines and
the result of shutting-in uneconomic wells. Gas sales for the first nine
months of 1998 were $1,178,000 or $550,000 (32 percent) less than 1997
financial data sales of $1,728,000. The average price per MCF sold was $2.03
in 1998 compared to $2.33 in 1997. Gas volumes decreased from 745,400
financial data Mcf of sales in 1997 to 581,000 Mcf in 1998 primarily due to
declines in production and lower gas plant sales.
EXPENSES. Total expenses for the nine months ended September 30, 1998, were
$4,077,000, a decrease of 24 percent over the as adjusted financial data for
1997 of $5,344,000. As stated previously, management believes the overall
reduction in operating expenses is the result of efficiencies gained from the
merger of the Company and Old MSR. Operating expenses of $1,382,000 in 1998
decreased $689,000 or 33 percent. Production taxes were $250,000 in 1998, a
decrease of 31 percent due primarily to reductions in product sales.
Depletion and depreciation expense in the 1998 period was $974,000 or 28
percent less than financial data 1997 of $1,354,000 primarily due to reduced
sales volumes and a lower depletion rate. General and administrative expenses
for the 1998 period were $827,000 an increase of 15 percent compared to
$721,000 in 1997. If merger costs totaling $166,000 had not been included,
general and administrative expenses would have decreased eight percent.
Interest expense decreased 23 percent primarily due to a reduction of
interest rates on long-term debt.
NET LOSS. The first nine months of 1998 results of operations shows a net
loss of $724,000 ($0.03 per share) compared to an as adjusted financial data
net loss for the same period in 1997 of $249,000 ($0.01 per share). During
1998 the Company reduced expenses 24 percent, which was not sufficient to
overcome the sharp decline in crude oil prices and a decrease in production.
42
<PAGE>
COMPARISON OF AS ADJUSTED FINANCIAL DATA THE YEARS ENDED DECEMBER 31, 1997
AND 1996.
The as adjusted financial data, 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 as adjusted financial data revenues for the year ended
December 31, 1997 were $6,634,000, a seven percent decrease compared to pro
forma revenues of $7,135,000 for 1996. Oil sales were $4,151,000 in 1997, a
15 percent 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 six 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. Financial
data gas sales in 1997 were $2,388,000, a ten 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 eight 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 as adjusted financial data expenses for 1997 were
$6,945,000, a decrease of two percent compared to $7,108,000 for 1996.
Operating expenses increased three percent from 1996 to 1997 primarily due to
an increase in gas plant operating expenses. Production taxes and depletion
and depreciation expenses were down three percent and six percent,
respectively, due to the reduction in sales revenues. General and
administrative expenses for 1997 were $937,000, an eight 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 six 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 as adjusted financial data net loss was
$205,000 compared to a net income of $18,000 for 1996. The 1997 loss was
primarily due to lower crude oil prices.
MSR CONSOLIDATED FINANCIAL DATA
The following as adjusted financial data for the years ended December
31, 1997 and 1996 and the nine months ended September 30, 1997, combine MSR
1997 the historical information of MSR and Old MSR adjusted to give effect to
the MSR 1997 merger and the related adjustments. The statements of operations
for the years ended December 31, 1996 and 1997, and nine months ended September
30, 1997 reflect the consolidated operations of MSR and Old MSR as if the MSR
1997 merger had been consummated as of January 1, 1996 and include the
results of operations of the Mercury properties.
The statements are provided for comparative purposes only and should be
read in conjunction with the historical consolidated financial statements of
MSR incorporated by reference in this proxy statement/prospectus. The
information presented does not necessarily indicate the combined financial
results as they may be in the future or as they might have been for the
periods indicated had the MSR 1997 merger been completed as of January 1, 1996.
MSR's oil revenues and associated operating expenses from the Mercury
properties included in the statements were 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 properties oil
revenues and associated expenses were excluded from MSR's statements of
operations for the year ended December 31, 1997, however the revenues and
expenses are included in these statements to provide comparative information
about MSR for 1998 and beyond. The statements for the years ended December
31, 1997 and 1996 and the nine months ended September 30, 1997 include oil
revenues of $2,180,000, $689,000 and $1,742,000 respectively, operating
production tax of $1,536,000, $308,000 and $1,769,000 respectively, and
adjustment to depletion of $438,000, $153,000 and $268,000 respectively,
associated with the Mercury properties. The oil revenues and associated
expenses of the Mercury properties began accruing to MSR on January 1, 1998.
43
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
Unaudited Adjusted Financial Data
In thousands, except for per share amounts
<TABLE>
<CAPTION>
Nine Months
Ended Twelve Months Ended
September 30, December 31,
1997 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Oil sales $ 3,169 $ 4,151 $ 4,908
Gas sales 1,728 2,388 2,168
Interest and other income 69 95 59
-------- -------- --------
Total revenues 4,966 6,634 7,135
-------- -------- --------
EXPENSES
Operating expenses 2,071 2,809 2,732
Production taxes 363 568 576
Depletion and depreciation 1,354 1,589 1,675
General and administrative 721 937 1,018
Interest 835 1,042 1,107
-------- -------- --------
Total expenses 5,344 6,945 7,108
-------- -------- --------
Income (loss) before income taxes (378) (311) 27
Income tax (expense) benefit 129 106 (9)
-------- -------- --------
Net income (loss) $ (249) $ (205) $ 18
-------- -------- --------
-------- -------- --------
Basic and diluted loss per share $ (0.01) $ (0.01) $ 0.00
-------- -------- --------
-------- -------- --------
Basic and diluted weighted average
number of shares outstanding for
the periods 25,777 25,777 25,777
-------- -------- --------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
MSR's current working capital ratio at December 31, 1997 was 1.1 to 1
with positive working capital of $42,000. At September 30, 1998 MSR's
current ratio was 0.8 to 1 and showed positive working capital of $338,000.
MSR finances its operations primarily through a third party credit facility
and cash from operations. Net cash from operations was $57,000 for the nine
months ended September 30, 1998. For the period from inception, March 7, 1997
to December 31, 1997 net cash from operating activities was $326,000. MSR
believes that its cash from operations and funds available under its existing
credit facility will be sufficient to fund foreseeable working capital
requirements of its operations. However, MSR's capital expenditure programs,
principally the drilling of development wells, will be dependent on crude oil
pricing in the coming months.
For the 1997 period MSR used $272,000 for investing activities. During
1997 MSR 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. MSR received $350,000 in cash in the merger
with Old MSR. Cash used in investing activities for the nine months ended
September 30, 1998 totaled $582,000 for the acquisition and purchase of
property and equipment. Capital expenditures included costs incurred for
geological and geophysical activities of $181,000, maintaining leases
$140,000, plugging wells at a cost of $95,000 and the remainder for various
other equipment expenditures.
Cash flow from financing activities for the period ended December 31,
1997 was $474,000; this consisted primarily of $10,575,000 of debt borrowings
and $10,040,000 of repayment of long-term debt. Most of the borrowing and
repayment of debt relate to the restructuring of MSR's and Old MSR's long-term
debt effective upon the closing date of the MSR 1997 merger. Cash from
financing activities for the nine months ended September 30, 1998 was
$274,000. MSR borrowed an additional $350,000 using its credit
facility and repaid other loans in the amount of $76,000.
44
<PAGE>
On October 31, 1997 MSR 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 $4.0 million of Mercury's debt guaranteed
by MSR and to repay $6.0 million of debt owed by Old MSR. The closing of the
loan was subject to the successful completion of MSR's merger with Old MSR.
The new agreement was for a $25 million senior secured revolving credit
facility with an initial borrowing base of $12 million, which matures in five
years. MSR can designate the interest rate on amounts outstanding at either
the London Interbank Offered Rate ("LIBOR") + 1.75%, or bank prime plus one
percent. At June 30, 1998 there was a total of $10,848,000 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 MSR 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 September 30, 1998, MSR
is in compliance with all of the covenants except for the interest coverage
ratio set at two to one. The bank waived the requirement for the remainder
of 1998.
MSR's combined NOL carry forward is subject to some limitations. Under
Section 382 of the Code, the taxable income of MSR available for offset by
pre-ownership change NOL carry forwards and built-in losses is subject to an
annual limitation (the "382 Limitation") if an "ownership change" occurs. MSR
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 MSR 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 MSR will be disallowed entirely if specified 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 MSR's existing NOL carryforwards.
MSR's EBITDA for the period from inception to December 31, 1997 was
$412,000 and for the nine months ended September 30, 1998 the Company had
EBITDA of $544,000. EBITDA is calculated by adding interest, income taxes,
and depreciation, depletion and amortization to net income (loss). Interest
includes interest expense accrued and amortization of deferred financing
costs. EBITDA is presented here not as a measure of operating results, but
rather as a measure of MSR's operating performance and ability to service
debt. EBITDA should not be considered as an alternative to earnings (loss),
or operating earnings (loss), as defined by generally accepted accounting
principles, as an indicator of MSR's financial performance, as an alternative
to cash flow, as a measure of liquidity or as being comparable to other
similarly titled measures of other companies.
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
MSR'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. MSR'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 MSR's ability to control or
predict. Although some of MSR's costs and expenses are affected by the level
of inflation, inflation did not have a significant effect on MSR's results of
operations during 1997.
YEAR 2000 ISSUE
MSR has adopted a Year 2000 readiness program and an implementation
plan. MSR is in the process of conducting a comprehensive evaluation and
assessment of the business risks and potential exposures related to the
coming change in the century. These business risks and exposures relate to
the problem present in some software and embedded logic control devices that
makes it difficult for computers 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.
45
<PAGE>
Since 1995, MSR and its predecessors have replaced all major information
systems with Year 2000 compliance as a criterion, therefore, MSR does not
currently expect to incur any material amount of expense associated with the
remediation of its major information systems.
MSR is currently evaluating and assessing the business risks and
exposures related to MSR's information systems. This evaluation and
assessment of the extent of the risks and exposures includes evaluating risks
associated with embedded logic devices, and risk related to MSR's customers,
suppliers, financial institutions and other constituencies. MSR has retained
a consultant to advise MSR in the evaluation and assessment phase of the
implementation plan. The costs associated with the Year 2000 readiness
program and its implementation are not currently expected to be material.
Until the evaluation and assessment is completed, however, MSR cannot 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 or
future financial condition of MSR.
With respect to the risks and exposures related to MSR's customers, partners,
suppliers, financial institutions, and other constituencies and the resulting
potential impact on MSR's business operations and financial condition, MSR has
initiated formal communications with its customers, suppliers, financial
institutions and other constituencies to mitigate or prevent such risks and
exposures.
46
<PAGE>
SELECTED FINANCIAL DATA OF QUICKSILVER
The following sets forth certain historical and pro forma financial data
relating to Quicksilver. The selected financial data for the year ended
December 31, 1997 is derived from the unaudited pro forma statements of
operations included elsewhere in this proxy statement/prospectus. The balance
sheet data at January 1, 1998 and selected financial data for the six months
ended June 30, 1998 is taken from the audited balance sheet, which is
included elsewhere in this proxy statement/prospectus. The selected
financial data for the six month period ended June 30, 1997 and the nine
month periods ended September 30, 1998 and 1997 is derived from the unaudited
financial statements attributable to Quicksilver included elsewhere in this
proxy statement/prospectus. Operating results for the six month period ended
June 30, 1998 and the nine month periods ended September 30, 1998 and 1997 do
not necessarily indicate actual future results or trends.
<TABLE>
<CAPTION>
Pro Forma
Twelve Months Six Months Pro Forma
Ended Ended Six Months
December 31, June 30, Ended
1997 1998 June 30, 1997
----------- ---------- -------------
(in thousands, except per
share data)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues
Gas sales $ 29,113 $ 15,418 $14,629
Oil sales 10,888 2,564 5,664
Interest and other income 17 1,341 0
-------- -------- -------
Total revenues 40,018 19,323 20,293
-------- -------- -------
Expenses
Operating expenses 10,290 5,433 5,161
Production taxes 2,229 954 1,145
Depletion and depreciation 8,643 5,375 4,330
General and administrative 950 49 425
Interest 5,563 3,234 2,782
-------- -------- -------
Total expenses 27,675 15,045 13,843
-------- -------- -------
Income before income taxes 12,343 4,278 6,451
Income tax benefit (expense) (4,197) (1,459) (2,193)
-------- -------- -------
Net income $ 8,146 $ 2,819 4,257
-------- -------- -------
-------- -------- -------
Basic weighted average number of shares
outstanding for the periods 10,311 10,311 10,311
Basic and diluted earnings per share $ 0.79 $ 0.27 $ 0.41
CONSOLIDATED STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities $ 10,724
Investing activities (6,904)
Financing activities (3,638)
OTHER CONSOLIDATED FINANCIAL DATA:
Capital expenditures $ 6,904
EBITDA(1) $ 26,549 12,887
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 56 $ 238
Working capital 340 (1,947)
Total assets 113,979 120,490
Long-term debt (includes current portion) 74,169 70,531
Total stockholders' equity 27,591 30,409
</TABLE>
47
<PAGE>
SELECTED FINANCIAL DATA OF QUICKSILVER - CONTINUED
<TABLE>
<CAPTION>
Pro Forma
Nine Months Nine Months
Ended Ended
September 30, September 30,
1998 1997
------------- -------------
In thousands, except for per share data
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Gas sales $23,817 $22,942
Oil sales 3,375 7,176
Interest and other income 2,232 14
------------- -------------
Total revenues 29,424 30,132
------------- -------------
EXPENSES
Operating expenses 7,923 6,968
Production taxes 1,448 1,699
Depletion and depreciation 8,401 6,805
General and administrative 248 675
Interest 4,307 4,172
------------- -------------
Total expenses 22,327 20,319
------------- -------------
Income before income taxes 7,097 9,813
Income taxes (2,412) (3,336)
------------- -------------
Net income $4,685 $6,477
------------- -------------
------------- -------------
Weighted average number of shares outstanding 10,311 10,311
Basic and diluted per share net income $0.45 $0.63
CONSOLIDATED STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities $14,172
Investing activities (11,690)
Financing activities (2,155)
OTHER CONSOLIDATED FINANCIAL DATA:
Capital expenditures $11,690
EBITDA (1) 19,805
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $383
Working capital (deficit) (471)
Total assets 123,802
Long-term debt (including current portion) 72,014
Total stockholders' equity 32,274
</TABLE>
(1) EBITDA (as used in this financial data) is calculated by adding interest,
income taxes, and depreciation, depletion and amortization to net income.
Interest includes interest expense accrued and amortization
of deferred financing costs. EBITDA is presented here not as a measure
of operating results, but rather as a measure of Quicksilver's operating
performance and ability to service debt. EBITDA should not be considered
as an alternative to earnings or operating earnings, as defined by
generally accepted accounting principles, as an indicator of the
Quicksilver's financial performance, as an alternative to cash flow,
as a measure of liquidity or as being comparable to other similarly
titled measures of other companies.
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF QUICKSILVER
OPERATING DATA
The following table sets forth certain operating data regarding
Quicksilver for the periods indicated:
<TABLE>
<CAPTION>
Nine Months
Pro Forma Ended
Twelve Months Ended Six Months Ended September 30,
December 31, 1997 June 30, 1998 1998
------------------- ----------------- -------------
<S> <C> <C> <C>
Production:
Natural gas (MMcf - Millions of cubic feet) 12,646 7,350 11,156
Oil (Thousands of Barrels) 629 263 363
Total (MMcfE - Millions of cubic feet, Equivalent) 16,420 8,928 13,334
Average Sales Price Per Unit (1):
Natural gas (per Mcf - Thousands of cubic feet) $ 2.30 $ 2.10 $ 2.13
Oil (per barrel) $ 17.31 $ 9.75 $ 9.30
Cost Per Unit (McfE):
Production costs $ 0.63 $ 0.61 $ .59
Production taxes and ad valorem taxes $ 0.14 $ 0.11 $ .11
</TABLE>
Quicksilver's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, which
are dependent upon numerous factors beyond control, such as economic, political
and regulatory developments and competition from other sources of energy. The
energy markets have historically been highly volatile, and future decreases in
oil or natural gas prices could have a material adverse effect on Quicksilver's
financial position, results of operations, quantities of oil and natural gas
reserves that may be economically produced, and access to capital.
Quicksilver uses the full cost method of accounting for its investments
in oil and natural gas properties. Under this methodology, all costs of
exploration, development and acquisition of oil and natural gas reserves are
capitalized into separate country by country "full cost pool" as incurred.
Properties in each pool are depleted and charged to operations using the
unit-of-production method, based on a ratio of current production to total
proved oil and natural gas reserves. To the extent that such capitalized
costs (net of accumulated depreciation, depletion and amortization) less
deferred taxes, exceed the present value (using a ten percent discount rate)
of estimated future net cash flows from proved oil and natural gas reserves
and the lower of cost or fair value of unproved properties, such excess costs
are charged to operations. If a write-down were required, it would result in
a non-cash charge to earnings but would not have an impact on cash flows.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Quicksilver's statement of operations for the six months ended June 30, 1998,
and the pro forma statement of operations for the nine months ended September
30, 1998 and the six months ended June 30, 1998 and 1997, which are contained
elsewhere in this proxy statement/prospectus.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH PRO FORMA NINE MONTHS ENDED
SEPTEMBER 30, 1997.
REVENUE. Total oil and gas revenues for the nine months ended September 30,
1998 were $27,192,000, a decrease of 10 percent compared to $30,118,000 of pro
forma revenue for 1997. Gas revenues for the 1998 period were $23,817,000,
approximately four percent higher than 1997 pro forma of $22,942,000. Gas sales
volumes for the 1998 period were 11,156,000 Mcf, a 17 percent increase compared
to 9,512,000 Mcf in 1997. Average gas sale prices declined from $2.30 per Mcf
in the 1997 period to $2.13 in 1998. Oil revenues for the first nine months of
49
<PAGE>
1998 were $3,375,000, a 53 percent decrease compared to $7,176,000 of pro forma
revenues for the same period in 1997. Crude oil production in the 1998 period
was 363,000 barrels compared to 491,000 pro forma barrels, a decrease of 26
percent. Average oil sales price for 1998 was $9.30 per barrel, a decrease of
36 percent compared to $14.62 average price in 1997. The reduction in sales
volumes was due to natural production declines; also, some marginal producing
wells were shut-in due to the sharp decrease in the price of crude oil.
Interest and other income for the nine months ended September 30, 1998 was
$2,232,000 and primarily consisted of $1,134,000 from the sale of tax credits
and $1,098,000 from transportation and processing of natural gas.
EXPENSES. Operating expenses for the nine months ended September 30, 1998
were $7,923,000, or $0.59 per Mcf equivalent, a fourteen percent increase
compared to $6,968,000 or $0.61 per Mcf equivalent of pro forma operating
expenses for the same period in 1997. Production tax expenses for 1998 were
$1,448,000, a 15 percent decrease compared to $1,699,000 for 1997. The 1998
production taxes were 5.5 percent of product sales and 1997 were 5.6 percent.
The decrease in production taxes was due primarily to the reduction in crude
oil sales revenues. Depreciation and depletion expense for the 1998 period
was $8,401,000 or approximately $0.63 per Mcf equivalent. Interest expense
was $4,307,000 for the first nine months of 1998. Quicksilver's interest
rate averaged approximately 7.4 percent during the period.
NET INCOME. Net income for the first nine months of 1998 was $4,685,000, which
was approximately 17 percent of total revenues.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH PRO FORMA SIX MONTHS ENDED
JUNE 30, 1997
REVENUE. Total oil and gas revenues for the six months ended June 30,
1998 were $17,982,000, an 11 percent decrease compared to pro forma revenues
of $20,293,000 for the same period in 1997. Gas sales were $15,418,000 for
the first six months of 1998, an increase of five percent compared to a pro
forma of $14,629,000 for the 1997 period. Average natural gas prices
Quicksilver received from gas sales for the 1998 and pro forma for the 1997
periods were $2.10 and $2.30 per Mcf, respectively. Gas sales volumes for
the 1998 period were 7,350,000 Mcf, a 16 percent increase compared to pro
forma 6,360,000 Mcf for 1997. Oil sales were $2,564,000 for the six months
ended June 30, 1998, a 55% decrease compared to $5,664,000 in 1997. The
primary reason for this decrease was due to the sharp decline in average oil
prices. For 1998 the average sales price was $9.75 per barrel, a 46 percent
decrease compared to the pro forma 1997 price of $18.21. Oil sales volumes
were 263,000 barrels for the 1998 six-month period compared to 311,000 pro
forma barrels in 1997. The reduction in sales volumes was due in part of
natural production declines and in part to the shut-in of wells due to the
lower crude oil prices.
EXPENSES. Operating expenses for the first six months of 1998 were
$5,433,000, or $0.61 per Mcf equivalent, a five percent increase compared to
pro forma $5,161,000 or $0.63 per Mcf equivalent for the 1997 period.
Production taxes for the six months ended June 30, 1998 were $954,000 or 5.3
percent of product sales, down 17 percent compared to the pro forma
$1,145,000 or 5.6 percent of product sales in 1997. The decline in
production taxes was primarily attributable to reduced sales revenues.
Depletion and depreciation expense for the period was $5,375,000, which
equates to a per cost unit of approximately $0.60 per Mcfe.
Interest expense for the 1998 period was $3,234,000. The average
interest rate on Quicksilver's debt for 1997 was approximately 7.6 percent.
Interest expense included amortization of bank origination fees. Income tax
expense was calculated using the statutory rate of 34 percent.
NET INCOME. Net Income for the six months ended June 30, 1998 was
$2,819,000, which is approximately 15% of total revenues. This percentage is
lower than expected principally due to the sharp decline in crude oil prices.
PRO FORMA YEAR ENDED DECEMBER 31, 1997 COMPARED WITH PRO FORMA YEAR ENDED
DECEMBER 31, 1996
REVENUES. Total oil and gas revenues for pro forma 1997 were
$40,001,000, a decrease of 22 percent compared to pro forma $51,368,000 for
1996. Most of the decrease was attributed to a product sales volume decline
of 19 percent from wells principally operated by other oil and gas operators.
Pro forma gas sales were $29,113,000 for 1997, down 21 percent compared to
$37,084,000 for 1996. Gas sales prices for both 1997 and 1996 average
approximately $2.30 per Mcf. Pro forma gas sales volumes in 1997 were
12,646,000 Mcf, a decrease of 21% compared to 16,062,000 Mcf in 1996. Most
of the decrease in gas sales volumes was from sales from outside
50
<PAGE>
operated properties. Pro forma oil sales for 1997 were $10,888,000, a 24
percent decline compared to $14,284,000 in 1996. Approximately ten percent
of the decline was due to natural producing declines and 14 percent of the
decline was due to lower crude oil prices. The average pro forma sale price
of crude oil in 1997 and 1996 was $17.31 and $20.15, respectively.
EXPENSES. Pro forma direct operating expenses for 1997 were $10,290,000
or $0.63 per Mcf equivalent, a decrease of two percent compared to
$10,472,000 or $0.53 per Mcf equivalent in 1996. Interest expense for the
1997 period was $5,563,000. Comparing the costs per Mcf equivalent of gas
shows a slight decrease in operating cost per unit sold in the 1998 period
compared to 1997. The average interest rate on Quicksilver's debt for 1997 was
approximately eight percent. Income tax expense was calculated using the
statutory rate of 34 percent. Pro forma production taxes for 1997 were
$2,229,000 or 5.5 percent of product sales, which was 17 percent or $443,000
less than 1996. Most of the increase in operating cost per Mcf equivalent was
on outside operated properties not controlled by Quicksilver. The reduction
was primarily due to reduced sales. Pro forma depreciation and depletion for
1997 was $8,643,000 or approximately $0.53 per Mcfe.
NET INCOME. Pro forma net income for 1997 was $8,146,000 or
approximately 20% of total revenues.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The following discussion compares Quicksilver's financial condition at
September 30, 1998 to its financial condition at December 31, 1997. At
September 30, 1998, Quicksilver had total assets of $123 million and debt of
$72 million.
CASH FLOW. Quicksilver's net cash flow provided by operations for the nine
months ended September 30, 1998 was $14.2 million. Quicksilver's principal
operating sources of cash are from the sale of oil and natural gas.
Quicksilver's cash flow is highly dependent upon oil and gas prices. Decreases
in the market price of oil or gas could result in reductions of both cash flow
and the borrowing base under the bank facility, which would result in decreased
funds available, including funds intended for planned capital expenditures.
Quicksilver's net cash used in investing for the nine months ended September 30,
1998 was $11.7 million. Investing activities for this period 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. Quicksilver's activities have been financed through a combination of
operating cash flow and bank borrowings. Quicksilver's net cash used for
financing activities for the nine months ended September 30, 1998 was $2.2
million. Sources of financing used by Quicksilver have been primarily
borrowings under its bank facility.
CAPITAL REQUIREMENTS. During the first nine months of 1998 $11 million of
capital was expended on acquisitions, development and exploration activities.
Although these expenditures are principally discretionary, the development
and exploration expenditures are currently expected to consume a large
portion of internally generated cash flow. The remaining cash flow will be
available for debt repayment, acquisitions, or other capital expenditures.
During the third quarter of 1998, Quicksilver had capital expenditures in
Michigan of approximately $5 million. These expenditures included the
drilling of 13 gross/11.1 net Antrim Shale wells, installing 22 miles of six
inch and four inch pipelines. The pipelines will serve Quicksilver's
northern Otsego county Antrim projects and the new Livingston 31 central
processing facility. The Livingston 31 central processing facility was
recently completed and is currently loaded to capacity at over 8 MMcfd
(million cubic feet per day).
The new facilities and pipelines increased existing net production by 1.9 MMcfd
and provided additional capacity for over 2 MMcfd of new gas that was brought
on by development wells drilled in the second and third quarter. The pipelines
will also serve Quicksilver's new Fontinalis project, which is expected to have
first sales in the late fourth quarter of this year. Quicksilver has drilled 35
gross/24.6 net wells year to date and projects to have drilled 52 gross/40
net wells by year-end. Total proved producing reserves are estimated to
increase by over 28 billion cubic feet.
BANK FACILITY. In connection with its formation, Quicksilver obtained
its existing credit facility with NationsBank. The credit facility permits
Quicksilver to obtain revolving credit loans and to issue letters of credit for
51
<PAGE>
the account of Quicksilver from time to time in an aggregate amount not to
exceed the lesser of the borrowing base or $100 million. The borrowing base
is currently $75 million and is subject to a semi-annual determination and
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 June 30, 1998, Quicksilver had $4.7 million available under
the Bank Facility. Loans may be prepaid at Quicksilver's option, and
revolving credit commitments may be reduced, in whole or in part at any time
in specified minimum amounts. At Quicksilver's option, the applicable
interest rate per annum is the LIBOR plus a margin ranging from 1.0% to
1.75%. The facility contains other alternative rate options, which have never
been utilized by Quicksilver. Based on levels of debt outstanding as of June
30, 1998, the margin was 1.75%. At June 30, 1998, long term debt to total
book capitalization was 72%. Quicksilver's capital expenditure budget for
1998 was approximately $15 million for exploration and development. Expected
capital expenditures and investments reflect changes due to current oil
prices, which impact acquisition and exploration and development activities.
Actual levels of capital expenditures may vary significantly due to a variety
of factors, including drilling results, oil and gas prices, industry
conditions and future acquisitions. Quicksilver expects to selectively
pursue acquisition opportunities for proved reserves where it believes
significant operating improvement or exploration and exploitation potential
exists. The credit facility expires on the earlier of January 31, 1999 or
upon completion of the merger. As a condition to the completion of the
merger, Quicksilver expects to enter into a new credit facility with
NationsBank. Quicksilver has obtained a commitment letter from the bank to
refinance the debt.
Quicksilver expects to fund its activities through a combination of cash
flow from operations and the use of its existing revolving credit facilities.
Based upon Quicksilver's current level of operations and anticipated growth,
management believes that available cash, together with borrowings under the
existing revolving credit facilities and cash provided by operating
activities, will be adequate to meet Quicksilver's anticipated future
requirements for working capital, capital expenditures and payments of
principal and interest on its debt. However, there can be no assurance that
such anticipated growth will be realized, that Quicksilver's business will
generate sufficient cash flow from operations or that future borrowings will
be available in an amount sufficient to enable Quicksilver to service its
debt or make necessary capital expenditures.
HEDGING ACTIVITIES. Quicksilver intends to use financial instruments
such as futures contracts, options and collars to manage its commodity price
risk. Under these financial instrument contracts, Quicksilver may still be
at risk for basis differential, which is the difference in the quoted
financial price for contract settlement and the actual physical point of
delivery price. Quicksilver will, from time to time, attempt to mitigate
basis differential risk by entering into basis swap contracts. Quicksilver
limits its open positions under these contracts so that they will not exceed
the volume of production controlled by Quicksilver. Quicksilver has
established internal controls to monitor these positions against established
limits. However, to the extent that Quicksilver has an open position,
Quicksilver may be exposed to risk from fluctuating market prices.
ISSUES RELATING TO THE YEAR 2000
Quicksilver has developed an action plan and identified the resources
needed to convert the majority of its computer systems and software applications
to achieve a Year 2000 date conversion with minimal effect on customers or
disruption to business operations. Implementation of the plan has begun and
Quicksilver estimates that the cost to complete the testing of critical
systems, which primarily includes the purchase of software upgrades under
normal maintenance agreements with third party vendors, will not be material.
In addition, Quicksilver has discussed with its vendors and customers the
need to be Year 2000 compliant. Although Quicksilver has no reason to
believe that its vendors and customers will not be compliant by the Year
2000, Quicksilver is unable to determine the extent to which Year 2000 issues
will effect its vendors and customers, and Quicksilver continues to discuss
with its vendors and customers the need for implementing procedures to
address this issue.
52
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF QUICKSILVER PREDECESSORS
MERCURY EXPLORATION COMPANY
(Includes Quicksilver Energy, LC)
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Year ended September 30,
Three Months Ended ------------------------------
December 31, 1997 1997 1996 1995
------------------ -------- ------- -------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues $ 11,049 $ 41,328 $17,388 $ 6,703
Net income (loss) 2,354 5,115 2,248 1,463
Net income (loss) per common share 9.38 20.38 8.96 5.83
Weighted average shares outstanding 251 251 251 251
Cash dividends 0 0 0 0
OTHER INFORMATION:
Capital expenditures $ 27,750 $ 54,231 $19,779 $ 2,227
BALANCE SHEET DATA:
Working capital (deficit) $ (9,324) $(13,133) $ 5,813 $(4,076)
Total assets 126,506 102,880 50,186 31,272
Long-term debt 65,275 47,174 19,560 2,150
Stockholders' equity 17,670 15,316 10,427 8,179
</TABLE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues $ 3,021 $ 3,368 $ 1,930
Net income (loss) 19 (617) (613)
OTHER INFORMATION:
Capital expenditures $ 13 $ 132 $ 4,837
BALANCE SHEET DATA:
Working capital (deficit) $ 343 $ 261 $ 324
Total assets 9,835 10,551 12,348
Long-term debt 0 0 0
Partners' equity 9,453 10,313 12,212
</TABLE>
Financial data for the years ended 1994 and 1993 are not presented because
the operations and net assets contained in the predecessor entities for these
periods are not material to the formation of Quicksilver.
53
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
MERCURY EXPLORATION COMPANY
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Mercury's statements of operation contained elsewhere in this proxy
statement/prospectus.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH THE YEAR ENDED SEPTEMBER 30, 1996.
Mercury acquired the Shell Michigan properties on November 14, 1996. The
results of operations of these properties have been included in Mercury's
results since November 1, 1996. Unless otherwise indicated, the changes in
operating results were primarily the result of the acquisition of these
properties.
REVENUES. Total oil and gas revenues for the 1997 period were $41,328,000,
an increase of 138 percent compared to the $17,388,000 for the 1996 period.
In 1997, $32,714,000 of the revenues related to the sale of oil and natural
gas compared to $11,771,000 for the 1996 period. Sales volumes for 1997 were
2,144,000 barrels of oil equivalent and sold at an average price of $15.26
per barrel, compared to 722,000 barrels of oil equivalent sold in the 1996
period at an average price of $16.31 per barrel. This increase in oil and gas
sales was principally due to the purchase of the Shell Michigan properties.
The remainder of the revenue for 1997 of approximately $8,614,000 and
$5,617,000 in 1996 was from oil and gas operations income providing services
such as operations, supervision, maintenance and gas marketing.
COST AND EXPENSES. Total cost and expenses for the 1997 period were
$24,156,000, a 69 percent increase compared to $14,265,000 for the 1996
period. Production expenses for the 1997 period were $16,454,000 ($7.67 per
barrel of oil equivalent ("BOE") a 38 percent increase compared to
$11,907,000 ($16.49 per BOE). General and administrative expenses for the
1997 period were $1,784,000; a 30 percent increase compared $1,372,000 for
1996. Depreciation and depletion for the 1997 period was $5,918,000 ($2.67
per BOE) compared to $986,000 ($1.37 per BOE) for 1996.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1997 was $5,414,000 compared to $1,620,000 for the 1996 period. Principally
the entire increase in interest expense relates to the approximately $57
million borrowed to purchase the Shell Michigan properties.
OTHER INCOME AND EXPENSES. Excluding interest expense noted above, the
remainder of other income totals $1,738,000 for the 1997 period a decrease of
$254,000 (13 percent) compared to $1,992,000 for 1996. Most of the change is
attributable to the $279,000 decrease in equity in partnership income. The
decrease in net income from the partnerships was primarily due to higher
operating costs.
INCOME. Income before minority interest and income taxes was $13,496,000 for
the 1997 period compared to $3,495,000 for 1996. These amounts include 100
percent of the results of operations of QELC, a 52 percent-owned subsidiary
of Mercury. The minority interest in income of subsidiaries principally
applies to QELC.
EARNINGS. Net income was $5,115,000 ($20.38 per share) for the 1997 period
compared to $2,248,000 ($8.96 per share) for 1996. Most of the increase
relates to the acquisition of the Shell Michigan properties.
LIQUIDITY AND CAPITAL RESOURCES.
CASH FLOW FROM OPERATING ACTIVITIES. Mercury's net cash flow from operations
for the year ended September 30, 1997 was $15,356,000 compared to $3,951,000
for the same period in 1996. The increase was principally attributable to the
Shell Michigan properties.
CASH FLOW FROM INVESTING ACTIVITIES. Mercury used $53,578,000 for investing
activities during the twelve months ended September 30, 1997. Of this amount,
$54,231,000 was for capital expenditures, which were principally used for the
acquisition of the Shell Michigan properties.
54
<PAGE>
CASH FLOW FROM FINANCING ACTIVITIES. For the year ended September 30, 1997,
cash provided by financing activities totaled $39,794,000. Mercury borrowed
$94,323,000 and repaid $54,529,000 of debt.
On October 9, 1997, Mercury completed the acquisition of the Destec
properties in Michigan from ECT Enocene Enterprises II, Inc. The properties
consist of 143 wells with combined proved reserves of approximately 30.8
Bcfe. The purchase price was approximately $23.5 million, which was paid in
cash principally from bank borrowings.
Effective January 1, 1998, Mercury exchanged most of its oil and gas
producing properties and most of its long-term debt for Quicksilver common
shares.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE THREE MONTHS ENDED
DECEMBER 31, 1996.
REVENUES. Total oil and gas revenues for the three months ended December 31,
1997 period were $11,049,000, an increase of 10 percent compared to
$10,016,000 for the 1996 period. In 1997 $9,456,000 of the revenues related
to the sale of oil and natural gas compared to $8,178,000 for the 1996
period. Sales volumes for the 1997 period were 723,800 barrels of oil
equivalent and sold at an average price of $13.06 per barrel, compared to
529,500 barrels of oil equivalent sold in the 1996 period at an average price
of $15.45 per barrel. The increase in oil and gas sales was primarily due to
the purchase of the Shell Michigan and the Destec properties. The remainder
of the revenue to the 1997 period of approximately $1,593,000 and $1,838,000
in 1996 was from oil and gas operations income providing services such as
operations, supervision, maintenance and gas marketing.
COSTS AND EXPENSES. Total costs and expenses for the 1997 period was
$7,734,000, an increase of 28 percent compared to $6,039,000 for the 1996
period. Generally, the increase in expense is the result of the acquisition
of the Destec and Shell Michigan properties. The Destec results have been
included since October 1, 1997 and Shell Michigan since November 1, 1996.
Operating expenses for the three months ended December 31, 1997 were
$4,736,000 or $6.54 per BOE compared to $4,114,000 or $7.77 per barrel of oil
equivalent for the 1996 period. A portion of the improvement in cost per unit
of sales was due to economies of scale as Mercury's growth costs have
declined. The recent acquisitions included mostly producing natural gas
properties which generally cost less to operate on a per unit of sales basis
than do oil properties.
Depletion and depreciation expense for the 1997 period was $2,466,000 ($3.41
per BOE) compared to $1,479,000 ($2.79 per BOE) for 1996. The increase in
1997 was due to Mercury's property acquisitions.
General and Administrative expenses for the 1997 period were $532,000,
a 19 percent increase compared to $446,000 for the 1996 period.
OTHER INCOME (EXPENSE). Interest expense for the three months ended December
31, 1997 was $1,879,000, an increase of 39 percent compared to $1,353,000 for
the 1996 period. The increase in interest expense primarily was due to the
increase in debt related to Mercury's property acquisitions. During the 1997
period Mercury received a settlement on a lawsuit in the amount of $2,781,000
which was included in other income. The other income items for the 1997
period totaled $652,000, down slightly compared to $750,000 for 1996.
INCOME. Income before income taxes and minority interest was $4,869,000 for
the 1997 period compared to $3,374,000 in 1996. These amounts include 100
percent of the results of operations of QELC, a 52 percent owned subsidiary
of Mercury.
The minority interest in income of subsidiary of $1,277,000 for the 1997
period and $1,422,000 for 1996 primarily applies to QELC.
Income taxes were calculated using a statutory rate of 34 percent.
EARNINGS. Net income was $2,354,000 ($9.38 per share) for the 1997 period
compared to $1,279,000 ($5.10) for 1996. Most of the increase in earnings
relates to the recent property acquisitions.
55
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATING ACTIVITIES. Mercury's net cash flow from operations
for the three months ended December 31, 1997 was $5,651,000.
CASH FLOW FROM INVESTING ACTIVITIES. Mercury used $27,327,000 for investing
activities during the three months ended December 31, 1997. Of this amount,
$27,750,000 was for capital expenditures, which was principally used for the
acquisition of the Destec properties.
CASH FLOW FROM FINANCING ACTIVITIES. For the three months ended December 31,
1997, cash provided by financing activities, totaled $23,990,000. Mercury
borrowed $25,435,000 and repaid $3,533,000 of debt. Most of the borrowings
were from banks and was used principally to purchase the Destec properties.
Effective January 1, 1998, Mercury exchanged most of its oil and gas
producing properties and most of its long-term debt for Quicksilver common
shares.
56
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND
BALANCE SHEET OF THE SURVIVING CORPORATION
The following pro forma consolidated statements of operations for the
year ended December 31, 1997, six months ended June 30, 1998 and the nine
months ended September 30, 1998 combine the pro forma information of
Quicksilver and MSR adjusted to give effect to the merger and the related pro
forma adjustments, which are based on estimates and assumptions explained in
further detail in the notes to these statements. The pro forma statements of
operations for the year ended December 31, 1997, for the six months ended
June 30, 1998 and the nine months ended September 30, 1998 reflect the
consolidated operations of MSR and Quicksilver as if the merger had been
consummated as of January 1, 1997. The pro forma balance sheet as of
September 30, 1998 is presented as if the merger had been consummated on that
date.
The pro forma consolidated statements of operations and balance sheet
are provided for comparative purposes only and should be read in conjunction
with the historical consolidated financial statements of MSR and historical
and pro forma financial statements of Quicksilver included elsewhere or
incorporated by reference in this proxy statement/prospectus. The pro forma
information presented does not necessarily indicate 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.
57
<PAGE>
QUICKSILVER RESOURCES INC.
Unaudited Pro Forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 1998
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quicksilver Adjust- Company
(b) MSR (a) ments Pro Forma
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
REVENUES
Gas sales $23,817 $1,178 $24,995
Oil sales 3,375 1,775 5,150
Interest and other income 2,232 50 2,282
----------- --------- --------- -----------
Total revenues 29,424 3,003 0 32,427
----------- --------- --------- -----------
EXPENSES
Operating expenses 7,923 1,382 9,305
Production taxes 1,448 250 1,698
Depletion and depreciation 8,401 974 $186 (d) 9,561
General and administrative 248 827 (c) 1,075
Interest 4,307 644 4,951
----------- --------- --------- -----------
Total expenses 22,327 4,077 186 26,590
----------- --------- --------- -----------
Income (loss) before income taxes 7,097 (1,074) (186) 5,837
Income tax benefit (expense) (2,412) 350 63 (f) (1,999)
----------- --------- --------- -----------
Net income (loss) $4,685 ($724) ($123) $3,838
----------- --------- --------- -----------
----------- --------- --------- -----------
Basic and diluted per share net income (loss) $0.45 ($0.03) $0.30
----------- --------- -----------
----------- --------- -----------
Weighted average number of shares outstanding 10,311 25,777 (j) 12,888
----------- --------- -----------
----------- --------- -----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
58
<PAGE>
QUICKSILVER RESOURCES INC.
Unaudited Pro Forma Consolidated Statement of Operations
For the Six Months Ended June 30, 1998
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Company
Quicksilver (b) MSR (a) Adjustments Pro Forma
--------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES
Gas sales $15,418 $ 839 $16,257
Oil sales 2,564 1,230 3,794
Interest and other income 1,341 34 1,375
------- -------- ----- -------
Total revenues 19,323 2,103 0 21,426
------- -------- ----- -------
EXPENSES
Operating expenses 5,433 826 6,259
Production taxes 954 185 1,139
Depletion and depreciation 5,375 668 $ 169 (d) 6,212
General and administrative 49 499 (c) 548
Interest 3,234 426 3,660
------- -------- ----- -------
Total expenses 15,045 2,604 (169) 17,818
------- -------- ----- -------
Income (loss) before income taxes 4,278 (501) (169) 3,608
Income tax benefit (expense) (1,459) 170 57 (f) (1,232)
------- -------- ----- -------
Net income (loss) $ 2,819 ($331) $ (112) 2,376
------- -------- ----- -------
------- -------- ----- -------
Basic and diluted per share net income (loss) $ 0.27 ($0.01) $ 0.18
------- -------- -------
------- -------- -------
Weighted average number of shares
outstanding 10,311 25,777 (j) 12,888
------- -------- -------
------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
59
<PAGE>
QUICKSILVER RESOURCES INC.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MSR Quicksilver
MSR Old Adjust- Quicksilver Adjust- Company
(a) MSR (a) ments (b) ments Pro Forma
------ ------- ------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Gas sales $ 570 $ 1,761 $29,113 $31,444
Oil sales 257 1,714 10,888 12,859
Interest and other income 27 68 17 112
------ ------ ---- ------ ----- ------
Total revenues 854 3,543 40,018 44,415
------ ------ ---- ------ ----- ------
EXPENSES
Operating expenses 228 1,255 10,290 11,773
Production taxes 68 283 2,229 2,580
Depletion and depreciation 220 1,169 (249) 8,643 $250 (d) 10,034
General and administrative 146 791 950 1,887
Interest 147 605 5,563 6,315
------ ------ ---- ------ ----- ------
Total expenses 809 4,103 (248) 27,675 32,589
------ ------ ---- ------ ----- ------
Income (loss) before income taxes 45 (560) 248 12,343 (250) 11,826
Income tax benefit (expense) (15) 190 (84) (4,197) 85 (f) (4,021)
------ ------ ---- ------ ----- ------
Net income (loss) $30 ($370) $164 $8,146 ($165) $7,805
------ ------ ---- ------ ----- ------
------ ------ ---- ------ ----- ------
Per share net income (loss) $0.00 ($0.03) $0.79 $0.61
------ ------ ------ ------
------ ------ ------ ------
Weighted average number of shares
outstanding 14,801 13,773 10,311 12,888
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
QUICKSILVER RESOURCES INC.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
September 30,1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Company
Pro
ASSETS Quicksilver(g) MSR(f) Adjustments Forma
-------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash, cash equivalents and time deposits $ 383 $ 340 $ 723
Accounts receivable 6,326 432 6,758
Inventories 407 257 664
Prepaid expenses 0 4 4
--------- --------- --------
Total current assets 7,116 1,033 8,149
PROPERTIES, PLANT AND EQUIPMENT-NET 116,145 23,842 $ 6,847 (g) 146,834
("full cost")
OTHER ASSETS 541 339 880
--------- --------- --------- --------
$ 123,802 $ 25,214 $ 6,847 $155,863
--------- --------- --------- --------
--------- --------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 71,901 $ 48 $ (71,850)(k) $ 99
Accounts payable 5,824 1,035 400 (g) 7,259
Accrued liabilities 1,712 288 2,000
--------- --------- --------
Total current liabilities 79,437 1,371 9,358
--------- --------- --------
LONG-TERM DEBT 113 10,874 71,850 (k) 82,837
--------- --------- --------
UNEARNED REVENUES 1,686 0 1,686
--------- --------- --------
DEFERRED INCOME TAXES 10,292 636 2,328 (g) 13,256
--------- --------- --------
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01
Authorized 10,000,000 shares
Issued and outstanding - none 0 0 0
Common stock, without par value
Authorized 40,000,000 shares,
Issued and outstanding 10,310,800
(12,888,500 pro forma) 103 26 (g)(h)(j) 129
Common stock, par value $0.01
Authorized 50,000,000 shares,
Issued and outstanding 25,777,014 258 (258)(g)(h) 0
Additional paid in capital 27,487 12,812 3,614 (g)(h)(i) 43,913
Foreign currency translation adjustment (43) 43 (g)(h) 0
Retained earnings (deficit) 4,684 (694) 694 (g)(h) 4,684
--------- --------- --------- --------
Total stockholders' equity 32,274 12,333 4,119 48,726
--------- --------- --------- --------
$ 123,802 $ 25,214 $ 6,847 $155,863
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
61
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
AND BALANCE SHEET - SURVIVING CORPORATION
1. PRO FORMA ADJUSTMENT
The accompanying unaudited pro forma consolidated statements of operations
reflect the following adjustments:
(a) The information reflected as "MSR" for the six months ended June
30,1998 and the nine months ended September 30, 1998 is historical
information of MSR. The pro forma data for the year ended December
31, 1997 combines the historical information of MSR and Old MSR
adjusted to give effect to the MSR 1997 merger as if that merger
had been consummated as of January 1, 1997. The pro forma data
does not include oil revenues and associated operating expenses
from the Mercury properties that were subject to a prior production
payment/forward sales agreement between Mercury and a third party
for the period of October 1, 1996 through December 31, 1997.
The Mercury properties oil revenues of $2,180,000, operating
expenses of $1,536,000 and an adjustment to depletion of $438,000
were excluded from MSR's statements of operations for the year ended
December 31, 1997. The oil revenues and associated expenses of the
Mercury properties began accruing to MSR on January 1, 1998.
(b) The information reflected as "Quicksilver" for the six months ended
June 30, 1998 and the nine months ended September 30, 1998 is the
historical information of Quicksilver. The statement of operations
for the year ended December 31, 1997 is pro forma data of
Quicksilver's predecessors adjusted for (1) the exclusion of
operations not included in the formation and (2) pro forma revenues
and direct operating expenses from the acquisition of the Destec
properties. On October 9, 1997 Mercury acquired the Destec
properties from Enocene Enterprises II, Inc.
(c) Quicksilver and Mercury have entered into the management agreement.
Under this agreement, Mercury will provide certain accounting
services to the surviving corporation and will operate its oil and
natural gas properties, including the daily activities of producing
oil and/or gas from individual wells and leases, and will continue
to provide services as an operator under existing operating
agreements. Mercury's compensation will consist of payments and
overhead reimbursements to which it or Quicksilver is entitled as
operator under existing and future operating agreements for the
properties. Overhead rates are specified in the operating
agreements for each individual well, lease or operating area.
Overhead rates will vary based in part on factors such as: location
of property, depth of wells and type of product produced.
Quicksilver anticipates fees under the management agreement in the
amount of approximately $2.2 million for 1999.
(d) Depreciation, depletion and amortization expense ("DD&A") for
MSR has been recomputed based on the revaluation of MSR's properties
(see (g) below). MSR's DD&A expense was increased $250,000 for 1997,
$169,000 for the six months ended June 30, 1998 and $186,000 for the
nine months ended September 30, 1998. The initial depletion rate of
the combined companies will be approximately $3.77 per barrel of oil
equivalent.
(e) The general and administrative expenses ("G&A") of the combined
entities are anticipated to increase as Quicksilver continues to add
personnel to its management team. G&A expenses for the combined
companies is estimated to have been approximately the same or less.
There are anticipated personnel changes that might have occurred if
the merger had been completed at the beginning of the period
presented.
(f) Income taxes were computed on a pro forma basis using an effective tax
rate of 34 percent.
The accompanying unaudited pro forma balance sheet reflects the following
adjustments.
(g) The information reflected as MSR and Quicksilver are the companies'
historical balance sheets at September 30, 1998. Under provisions of
APB 16, the portion of MSR under common control will be accounted for
at historical cost. The remainder will be accounted for using the
purchase
62
<PAGE>
method. Accordingly, Quicksilver, considered the "accounting
acquiror," will transfer approximately 47 percent of MSR's net
assets to Quicksilver at historical cost. The remainder of MSR's
net assets, approximately 53 percent that relate to minority
interests, will be transferred to Quicksilver based on their market
value. The market value used in the valuation was based on the
average closing price for MSR's common stock for the three days
prior to the date the merger agreement was announced, that date and
the three trading days after that date. As a result of the
revaluation of a portion of MSR's net assets, the carrying value of
MSR's property, plant and equipment and associated deferred income
taxes have been adjusted. Pro forma income taxes have been
determined based on the difference between the book and tax bases
of net assets that are revalued. The revaluation of that portion
of MSR's assets has resulted in an increase in the book basis of
its assets and, accordingly, an increase in the deferred tax
liability relating to the basis differences.
(h) To eliminate the common stock and retained earnings of MSR and reflect
the adjusted value of Quicksilver's shares.
(i) To record the estimated additional cost of registering the Quicksilver
common stock.
(j) The Conversion Ratio for the merger is one share of Quicksilver common
stock for each 10 shares of MSR common stock. To effect the
Conversion Ratio, the present stockholders of Quicksilver will be
issued an additional 10,210,806 shares in the form of the stock
dividend. Upon completion of the merger the present stockholders
of Quicksilver will own approximately 10,310,806 (80%) of the shares
of Quicksilver and former MSR stockholders will own approximately
2,577,700 (20%) of the common shares of Quicksilver. After the merger
there will be approximately 12,888,500 shares of Quicksilver common
stock outstanding.
(k) Quicksilver's credit facility expires on the earlier of January 31,
1999 or upon completion of the merger. As a condition to the
completion of the merger, Quicksilver expects to enter into a new
credit facility with NationsBank. Quicksilver has obtained a
commitment letter from the bank to refinance the debt.
2. OIL AND GAS RESERVES INFORMATION (UNAUDITED)
The following pro forma information summarizes the MSR's and Quicksilver's
estimated net quantities of proved and proved-developed oil and gas reserves.
The December 31, 1997 reserves of MSR are based on estimates of Citadel
Engineering Ltd., petroleum consultants, contained in a report dated March 1,
1998. Quicksilver's estimated reserves at December 31, 1997 were prepared by
Mercury's petroleum engineers.
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------
Proved Reserves Quicksilver MSR Pro Forma
----------- ---------- ------------
<S> <C> <C> <C>
Oil Mbbls (in thousand of barrels) 15,066 9,470 24,536
----------- ---------- -----------
----------- ---------- -----------
Natural Gas (Mmcf - millions of cubic feet of gas) 117,615 21,219 138,834
----------- ---------- -----------
----------- ---------- -----------
Mmcf of gas equivalent (Mmcfe) (Mbbls on a 1:6 basis) 208,011 78,039 286,050
----------- ---------- -----------
----------- ---------- -----------
Proved Developed reserves
Oil Mbbls (in thousand of barrels) 4,520 4,412 8,932
----------- ---------- -----------
----------- ---------- -----------
Natural Gas (Mmcf - millions of cubic fee of gas) 103,200 16,484 119,684
----------- ---------- -----------
----------- ---------- -----------
Mmcf of gas equivalent (Mmcfe) (Mbbls on a 1:6 basis) 130,320 42,956 173,276
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
63
<PAGE>
The following pro forma 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 price changes and costs.
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------
Quicksilver MSR Pro Forma
------------ --------- ---------
(amounts in thousands)
<S> <C> <C> <C>
Future cash flows $ 450,827 $178,672 $ 629,499
Future production and development costs (230,031) (70,242) (300,273)
Future income tax expense (21,259) (25,474) (46,733)
--------- -------- ---------
Future net cash flows 199,537 82,956 282,493
-------------------------------------------------
10% annual discount for estimated timing of cash flows (90,267) (44,581) (134,848)
-------- -------- ---------
Standardized measure of discounted future net cash flows $109,270 $ 38,375 $ 147,645
-------- -------- ---------
-------- -------- ---------
</TABLE>
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 MSR's estimate for future cash
flows nor do these measures serve as an estimate of current market value.
3. STOCK OPTIONS AND WARRANTS
MSR issued a warrant to Banque Paribas to acquire 280,000 shares of
MSR common stock at an exercise price of $3.375 per share under a January
1995 agreement in connection with MSR obtaining financing from that lender.
Under an agreement in October 1997 MSR issued to Banque Paribas additional
warrants to acquire 60,000 shares of MSR common stock at an exercise price of
$0.01 per share. MSR has granted to officers and employees options to
purchase an aggregate of 248,570 shares of common stock at an exercise price
of $0.875 per share, which expire on March 31, 2002. MSR has also issued
warrants to certain stockholders, officers, directors and a consultant to
acquire (1) an aggregate of 5,500,000 shares of MSR common stock at an
exercise price of $1.25 per share and (2) an aggregate of 5,500,000 shares of
MSR common stock at an exercise price of $2.00 per share. These warrants
also will expire on March 31, 2002. As of the effective time, each option
and each warrant to purchase MSR common stock, and each of MSR's warrants
that remain unexercised in whole or in part will become options and warrants
to acquire Quicksilver common stock. Accordingly, each option and warrant
for MSR common stock will be deemed to remain outstanding as an option and
warrant to purchase and will be converted into the right to purchase
Quicksilver common stock at the Conversion Ratio of ten shares of MSR common
stock for one share of Quicksilver common stock. The exercise prices per
share will be adjusted using the same Conversion Ratio.
Costs associated with the 60,000 shares due Banque Paribas are included
in MSR's financial statements. The other options and warrants have no value
based on MSR's present market price. Most of the warrants and options are
held by Mercury and the Darden family and no fair market value of such
warrants and options relate to minority interests.
64
<PAGE>
QUICKSILVER
FORMATION OF QUICKSILVER
Quicksilver was organized on December 18, 1997 under the laws of the
State of Delaware for the purpose of combining some of Quicksilver's oil and
natural gas properties located in Michigan, Wyoming and Montana and owned by
Michigan Gas Partners, Mercury and QELC, and thereafter exploring,
developing, and operating these Quicksilver properties. At the time of the
formation of Quicksilver, Mercury was the sole general partner of Michigan
Gas Partners and JEDI was the sole limited partner. The membership interests
in QELC are owned by Mercury and members of the Darden family. The Darden
family also owns, directly or indirectly, substantially all of the stock of
Mercury.
Pursuant to an Agreement and Plan of Reorganization and Merger by and
among Quicksilver, QELC, Michigan Gas Partners, Mercury, TCW and JEDI,
effective January 1, 1998, Michigan Gas Partners was merged with and into
Quicksilver and various assets and liabilities of Mercury and QELC were
transferred to and assumed by Quicksilver. Some of the debt owed by QELC to
TCW and by Mercury and QELC to NationsBank was also assumed by Quicksilver
and restructured as part of the formation.
As a result of the merger of Michigan Gas Partners with and into
Quicksilver, the separate existence of Michigan Gas Partners ceased and
Quicksilver became the owner of Michigan Gas Partners' Michigan oil and
natural gas properties. All of the partnership interests of JEDI in Michigan
Gas Partners were converted into the right to receive 13,000 shares
(1,340,404 shares as adjusted for the stock dividend) of Quicksilver common
stock. The interests of Mercury in Michigan Gas Partners were canceled
without payment of any consideration and all shares of Quicksilver common
stock outstanding prior to the formation, consisting of 1,000 shares held by
QELC, were canceled without payment of any consideration.
In the formation, Mercury transferred to Quicksilver all of its oil and
gas properties in the states of Michigan, Montana and Wyoming, except for
some of its excluded Michigan properties. Mercury acquired the Montana
properties from QELC. As consideration for the transfer, Quicksilver assumed
the liabilities of Mercury relating to the transferred properties, including
debt in the amount of $34.6 million owed by Mercury to NationsBank under a
credit agreement dated January 31, 1997. Quicksilver also issued 3,251,820
shares of Quicksilver common stock to Mercury. In addition, at Mercury's
request, 74,135 shares of Quicksilver common stock to which Mercury was
entitled under the Quicksilver merger agreement were issued to Mercury's
employee, Jeff Cook, as part of his agreed compensation.
QELC also transferred all of its oil and gas properties in the states of
Michigan and Montana to Quicksilver as part of the formation. As
consideration for this transfer, Quicksilver assumed the liabilities of QELC
relating to the transferred properties and debt in the amount of
approximately $39.6 million owed by QELC to TCW and NationsBank under credit
agreements dated November 14, 1996. Quicksilver issued an additional
3,030,860 shares of Quicksilver common stock to QELC.
Messrs. Frank, Thomas and Glenn Darden, Anne Darden Self and Jack L.
Thurber transferred to Quicksilver the contractual after payout or net
profits interests owned by those individuals in some of the assets of Mercury
or QELC that were transferred to Quicksilver in the formation. As
consideration for those transfers of contractual rights, Quicksilver issued
242,922 shares of Quicksilver common stock to each of Frank Darden, Thomas F.
Darden, Glenn M. Darden and Anne Darden Self and 301,488 shares of
Quicksilver common stock to Mr. Thurber.
Quicksilver satisfied debt owed to TCW under a credit agreement dated
November 14, 1996 by paying $17,075,000 in cash to TCW and issuing 13,000
shares (1,340,404 shares as adjusted for the stock dividend) of Quicksilver
common stock to TCW, in exchange for a $10,000,000 credit. NationsBank
financed the prepayment of the debt to TCW pursuant to the terms of a credit
agreement, dated April 9, 1998, between Quicksilver, NationsBank, as Agent,
and other financial institutions named in the Quicksilver credit agreement.
Mercury's and QELC's debt to NationsBank that was assumed by Quicksilver was
restructured under the Quicksilver credit agreement.
The restructured debt of Quicksilver to NationsBank is guaranteed by
Mercury, QELC, and Mercury Production Company. In addition to being secured by
the Quicksilver properties, the debt is also secured by pledges of all of the
MSR common stock owned by Mercury and the Darden family and all of the
Quicksilver common stock
65
<PAGE>
owned by them and by QELC. It is a condition to the merger that the debt be
restructured in such a manner as to eliminate those guarantees and pledges.
The number of shares of Quicksilver referred to in the above discussion
have been adjusted to reflect the stock dividend.
BUSINESS OF QUICKSILVER
Quicksilver engages in the acquisition, exploration, production and sale of
crude oil, condensate and natural gas and the gathering, processing and
transmission of natural gas. Quicksilver pursues its business through the
acquisition of oil and gas mineral leases, gas gathering systems and producing
oil and gas properties. Based upon the specifics of each mineral lease, as well
as geological and engineering interpretations, Quicksilver either develops its
inventory of leases through the drilling of oil and/or gas wells, or re-drills
or re-completes existing wells located on those leases for the recovery of oil
and/or gas reserves located there. Quicksilver 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 Michigan, Wyoming and
Montana. Quicksilver evaluates other opportunities for the development of oil
and gas reserves and related assets as they become available and, depending
upon the circumstances, may explore opportunities in regions other than those in
which Quicksilver is currently involved.
Quicksilver 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, Quicksilver either connects the production to a pipeline
gathering system, in the case of gas, or stores the crude oil in storage tanks
located close to the producing field for collection by oil purchasers.
Quicksilver owns or holds working interests in over 800 producing oil and
gas wells. Quicksilver also holds or has acquired interests in oil and gas
properties that contain proved undeveloped reserves that require additional
drilling, work overs, water flooding or other forms of enhancement in order to
become productive.
Quicksilver presently employs only its officers and top managers. Mercury
presently manages substantially all of Quicksilver's business through Mercury
employees under the management agreement. At June 30, 1998, Mercury operated
over 635 wells on behalf of Quicksilver. After the management agreement
terminates and the new agreement takes effect, these services will be provided
by employees of Quicksilver.
As operator, Mercury is able to exert greater control over the cost and
timing of all field activities. Mercury strives to manage Quicksilver's
producing properties to maximize economic production over the life of the
properties through a combination of development well drilling, existing well
recompletions and workovers and enhanced recovery operations. Mercury uses
advanced drilling technologies to minimize costs and frequently performs
operational reviews to minimize operating expenses.
Quicksilver has an active exploration program targeting a wide variety of
reserve creation opportunities. In its exploration and development projects,
geoscientists integrate 3-D seismic, 2-D seismic and all available subsurface
well control data on geologic and geophysical interpretation workstations.
Substantially all of Quicksilver's undeveloped acreage is the subject of active
exploration efforts. Additional undeveloped acreage is regularly added as
existing exploration plays are expanded and new plays are pursued.
BUSINESS STRATEGY
Quicksilver's objective is to enhance stockholder value through sustained
growth in its reserve base, production levels and resulting cash flow from
operations. To further this strategy, Quicksilver (and the surviving
corporation) expects to (1) acquire properties with exploration and development
potential; (2) balance lower risk, shallow target exploration in the Northern
Michigan Antrim trend and similar geologic areas with higher risk, large target
exploration; and (3) acquire properties that provide it with the ability to
control or significantly influence operations.
DEVELOPMENT ACTIVITIES. Quicksilver currently conducts its exploration and
development activities in three areas. Quicksilver conducts exploration and
development activities in Michigan, where it seeks principally gas deposits
located near existing production facilities at vertical depths of between 500
and 2000 feet. Relatively low exploration and development costs and long life
successful wells exist in this area. Quicksilver conducts operations in
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<PAGE>
the Prairie du Chien ("PdC") sands located in central to southern Michigan.
PdC wells produce natural gas and condensate from an average depth of 11,000
feet with higher exploration and development cost, a relatively high
production rate and quicker return on investment.
During the first six months of 1998, Quicksilver or its predecessors in
the formation completed two PdC wells that were drilled in 1997, drilled 18
gross (10.6 net) successful development wells and nine gross (nine net)
successful exploratory wells in Michigan for a drilling success rate of 100
%. Primarily as a result of these wells, Quicksilver's average daily
production at June 30, 1998 increased to 48.1 Mmcfe/day, a 16% increase over
December 1997 rates for the same properties.
Quicksilver has 194 wells in the Rocky Mountain region producing
principally low gravity crude, making up the highest potential oil reserves of
Quicksilver. The South Casper Creek Steamflood Project has estimated oil in
place of 49 million barrels of oil and, with improved oil prices and a reliable
source of gas to fire steamers, Quicksilver believes 20% of these reserves are
recoverable.
EXPLORATION FOR NEW RESERVES. Quicksilver is placing increasing emphasis on
exploration as a source of future growth and has an active exploration program
targeting a wide variety of reserve creation opportunities in its core areas of
operations and in select new areas. Quicksilver pursues a balanced portfolio of
exploration prospects where it believes multiple additional new reserve
opportunities could result if a significant discovery were made. At June 30,
1998, Quicksilver had approximately 170,000 gross (128,000 net) undeveloped
acres on which it was actively conducting exploration activities.
Mercury's exploration team, working on behalf of Quicksilver, includes
geologists, engineers, geophysicists and petrophysicists who have developed
in-depth knowledge and expertise in each of Quicksilver's core operating areas
and related exploration projects areas. Joint venture and contract technical
personnel and consultants who have demonstrated experience and expertise in
select areas of interest to Quicksilver provide supplemental support as needed.
The technical staff uses in-house 3-D seismic evaluation software as well as
other modern techniques in its exploration effort.
UTILIZATION OF RISK MANAGEMENT TECHNIQUES. Quicksilver uses a variety of
techniques to reduce Quicksilver's exposure to the risks involved in its oil and
gas activities. Quicksilver conducts operations in distinct geographic areas to
gain diversification benefits from geologic settings, local commodity price
differences and local operating characteristics. Quicksilver seeks to reduce
risks normally associated with exploration through the use of advanced
technologies, such as 3-D seismic surveys, by spreading projects over various
geologic settings and geographic areas, by balancing exposure to crude oil and
natural gas projects, by balancing potential rewards against evaluated risks and
by participating in projects with other experienced industry partners at working
interest levels appropriate for Quicksilver. Quicksilver intends to reduce its
exposure to short-term fluctuations in the price of oil and natural gas and
interest rates by entering into various hedging arrangements.
ACQUISITION OF SELECT PROPERTIES. Quicksilver actively seeks to acquire oil
and gas properties that are either complementary to existing production
operations or that it believes will provide significant exploration
opportunities beyond any proved reserves acquired. Mercury provides Quicksilver
an experienced management team, which employs a comprehensive interdisciplinary
approach encompassing technical, financial, legal and strategic considerations
in evaluating potential acquisitions of oil and gas properties.
MARKETING
The oil and gas produced from the Quicksilver properties has typically
been marketed through normal channels for such products. Quicksilver
generally sells its oil at local field prices paid by the principal
purchasers of crude oil. The majority of Quicksilver natural gas production
is sold under long-term contracts of one to 10 years, and is transported in
intrastate pipelines.
Both oil and gas are purchased by refineries, major oil companies,
public utilities, industrial customers and other users and processors of
petroleum products. Quicksilver is not confined to, or dependent upon, any
one purchaser or small group of purchasers. Accordingly, the loss of a
single purchaser, or a few purchasers, would not materially affect
Quicksilver's business because there are numerous purchasers in the areas in
which Quicksilver sells its production. For the six months ended June 30,
1998, however, purchases by the following companies exceeded 10% of the total
oil and gas revenues of Quicksilver: Consumers Power Company, Howard Energy,
Inc. and Unocal.
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<PAGE>
DESCRIPTION OF OIL AND GAS PROPERTIES
Quicksilver owns significant interests in the following properties by
region:
MICHIGAN
Quicksilver's Michigan properties consist of principally natural gas
wells producing primarily from two different reservoirs, the first being the
Antrim Shale located in Antrim, Crawford, Montmorency and Otsego Counties and
the second being the PdC reservoir located in Arenac, Bay, Clare, Crawford,
Kalkaska, Iosco, Mecosta, Newaygo, Ogemaw, and Osceola Counties.
The Antrim shale is a fractured shale reservoir producing from depths
ranging from 500 feet to 2000 feet. As water is produced, the gas is released
from the rock very similarly to coalbed methane production. As of June 30,
1998, Quicksilver had 713 gross (186-net) wells producing in the Antrim shale
with net production of 14.0 Mmcf/day. Quicksilver drilled 16 development and
nine exploratory Antrim wells in the first half of 1998 and plans to drill 52
vertical wells and three horizontal development wells in the second half of 1998
at an estimated cost of $10.4 million.
The Prairie du Chien wells (the "Prairie du Chien Group") produce from
several Ordovician age reservoirs with the majority being in the massive Prairie
du Chien Group that has three major sands: the Lower PdC, Middle PdC and Upper
PdC. Many of these wells also have pay in the Zone of Unconformity ("ZOU"), or
St. Peter sandstone, and the Glenwood formations, which lie directly above the
PdC. Some of the wells are producing from two or more of these zones.
Depending upon the area and the particular zone, the PdC will produce dry gas,
gas and condensate or oil with associated gas. The average depths of these
wells are from 10,000 feet to 12,000 feet.
Two new PdC wells, the State Garfield 2-8 and State Garfield 8-9, were
drilled in the Garfield 8 field operated by Spirit Energy, a division of
Unocal, in late 1997 and early 1998 as acceleration wells to recover PdC
reserves. First production occurred in early 1998. These two wells are
currently flowing at a combined rate of 13.4 Mmcf/day, which has increased
total Garfield 8 production to 25 Mmcf/day. Quicksilver has a 54% working
interest in the field.
At June 30, 1998, Quicksilver had 41 gross (25 net) wells producing in the
PdC with net production of 24.7 Mmcf/day and 400 Bopd. Many of the PdC wells
have behind pipe reserves within the Prairie du Chien Group as well as in the
ZOU and Glenwood. Quicksilver has a capital budget of approximately $400,000
for the remainder of 1998 to be used principally for recompletions and workovers
in this area.
ROCKY MOUNTAIN REGION
Quicksilver's properties in the Rocky Mountain region consist of wells
in five fields and a steamflood project within the state of Wyoming.
Production is primarily oil obtained from depths of ranging from 1,000 feet
to 9,000 feet.
The Dallas Dome Field is located in Fremont County, Wyoming. This field is
the site of the first oil well drilled in the State of Wyoming in 1884.
Production is from the Tensleep sandstone at a depth of 1050 to 1200 feet and
the Phosphoria carbonate from a depth of 750 to 900 feet. Average production
for the month of December 1997 was 210 barrels of oil per day from 63 wells, and
for the month of June 1998, was 210 barrels of oil per day from 52 wells. No
exploratory or development wells were drilled in 1997 or 1998.
The Derby Dome Field is also located in Fremont County, Wyoming.
Production is also from the Tensleep sandstone and Phosphoria carbonate.
Average production in this field was 81 barrels of oil per day from 29 wells
for the month of December 1997 and 90 barrels of oil per day from 22 wells
for the month of June 1998. No development wells were drilled in 1997 or
1998. One exploratory well, the Gypsum Bluff # 1, located approximately one
mile southeast of the Derby Dome field, was drilled in 1998 and was plugged
and abandoned after testing wet in the Phosphoria and Tensleep. Total depth
of the well was 2,200 feet.
The Am-Kirk Field is located in Campbell County, Wyoming. Production is
from the Minnelusa formation, which is unitized and under waterflood, at depth
of 10,000 feet. There is also production from the Muddy/Mowry
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zones in one well at a depth of 8,400 feet to 8,900 feet. Production from
the Am-Kirk Unit Minnelusa waterflood averaged 226 barrels of oil per day for
the month of December 1997 and 261 barrels of oil per day for the month of
June 1998. Production is from three producing wells with one water injection
well. One development well #A4-7 was completed and put on production in
early January 1997. No other development wells were drilled. Production
from the Muddy/Mowry zone averaged 12 barrels of oil per day and 22 Mcf per
day of gas for the month of December 1997 and 15 barrels of oil per day and
50 Mcf per day of gas for the month of June 1998. No exploratory wells were
drilled or are planned.
The South Casper Creek Field is located in Natrona County, Wyoming.
Production is from the Tensleep sandstone from a depth of 2,500 feet to 3,000
feet and averaged 490 barrels of oil per day for the month of December 1997,
from 63 producing wells, and 417 barrels of oil per day for the month of June
1998 from 43 producing wells. No development or exploratory wells were drilled
in 1997 or 1998.
The South Casper Creek Steamflood Project is in Natrona County, Wyoming.
Unocal, the previous owner of the property, had conducted several steamflood
pilots during the 1970s and 1980s in the Tensleep formation. The steamflood
pilots had mixed results due to poor design until the late 1980s when two
five-spot pilots verified the technical viability of steaming operations.
Based on these pilot results, Unocal proceeded to drill new injection wells
and in 1991 initiated a full-scale steamflood employing four 50 mmbtu/hour
generators providing 14,400 barrels of water per day as 80% steam to eleven
injectors.
The full-scale steamflood proved technically successful with a production
peak in early 1992 at 1,500 barrels of oil per day compared to a pre-steam
production high of about 800 barrels of oil per day. At this point the field
performance was exceeding Unocal's simulation forecast. Despite this success,
Unocal decided to cut costs by discontinuing the operation of two generators and
three injectors. This resulted in a flattening of the production. After one
year of this partial operation, Unocal shut down the project to reduce costs,
citing internal economic pressure.
Quicksilver believes the steamflood potential in this area has been proven.
The project has all of the necessary wells, steam generators and operational
infrastructure in place, and constitutes a proved developed reserve.
Quicksilver's delay in re-initiating steaming operations is due to the lack of
sufficient available gas reserves for fueling the steam generators and the
present low prices of crude oil.
The West Poison Spider Field is located in Natrona County, Wyoming.
Production in the field is from five producing horizons from depths of 9,000 to
16,000 feet. Oil production averaged 147 barrels of oil per day for the month
of December 1997 from 23 oil wells, and 140 barrels of oil per day for the month
of June 1998 from 23 oil wells. Total gas production averaged 1,503 Mcf per day
for the month of December 1997 from seven producing gas wells, and 1,012 Mcf per
day for the month of June 1998 from eight producing gas wells. One development
well was drilled in 1997 to a total depth of 10,232 feet with the completion
running into early 1998. The well was completed in the Teapot "A" zone and shut
in. A completion of the Cody zone is being evaluated. No other development or
exploratory wells were drilled in 1997 or 1998.
EXPLORATION ACTIVITIES
Quicksilver has interests in 19 exploratory prospects located in Montana
and Wyoming. Eleven are oil prospects and the remaining eight are gas prospects.
These prospects are located in the Big Horn Basin, the Crazy Mountain Basin and
the Montana Thrust Belt. Quicksilver's interest in these prospects ranges from
25% to 50%, with 50% being the most common Quicksilver interest. The target
depths of these prospects range from 3,000 feet to 19,500 feet, with 7,000 feet
being the median depth. The potential impact of these prospects is considerable
to Quicksilver with several of the gas prospects having reserve potential in the
one Tcf range. The shallow depths of many of these prospects will allow
Quicksilver to test all of them at a relatively low cost.
CRAZY MOUNTAIN BASIN. The Crazy Mountain basin is located in south central
Montana and is an extension of the Big Horn Basin. Quicksilver's prospects are
approximately 30 miles from production and consist of two Fort Union coal bed
methane prospects and a deep Frontier prospect. The two Fort Union prospects
are less than 4000 feet deep and are set up by a well drilled on Quicksilver
acreage in 1996, which encountered numerous thin gassy coal beds between 500
feet and 4500 feet. The deep prospect, which is at a depth of 14,600 feet, is
designed to test the Big Elk member of the Frontier formation on a seismically
defined structural closure.
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BIG HORN BASIN. The Big Horn Basin is located in northern Wyoming and
southern Montana. Several of the prospects in the Big Horn are known to contain
oil. However, the oil is a low gravity, high viscous crude. Due to the heavy
nature of the oil, drawdown pressures are high, resulting in early water
encroachment. Quicksilver believes that the less concentrated pressure drawdown
associated with horizontal wells would reduce early water encroachment. A
producing horizontal well on one of these prospects is currently being
evaluated, and the other prospects will be developed based on the results of
this well. Other projects in the Big Horn consist of seismically defined
structural and stratigraphic traps. Quicksilver believes that some of these
prospects will yield gas and others will yield high gravity oil.
MONTANA THRUST BELT. The Montana Thrust Belt is located in western
Montana. These prospects target fractured rocks of the Mississippian Madison
formation, which has been over-thrust from the west by older Pre-Cambrian rocks.
The structural style is believed to be similar to the Alberta Foothills area
where the Waterton Field has reserves of over 2.3 Tcf gas. Quicksilver has five
prospects in the Thrust Belt area.
OIL AND GAS RESERVES
The following reserve quantity and future net cash flow information for
Quicksilver represents proved reserves that are located in the United States.
The reserves have been estimated by Mercury's petroleum engineers. The
determination of oil and gas reserves is based on estimates that are highly
complex and interpretive. The estimates are subject to continuing change as
additional information becomes available. Under the guidelines set forth by the
SEC, the calculation is performed using year-end prices held constant (unless a
contract provides otherwise) and is based on a 10% discount rate. Future
production costs are based on year-end costs and include severance taxes. This
standardized measure of discounted future net cash flows is not necessarily
representative of the market value of Quicksilver properties.
There are numerous uncertainties inherent in estimating oil and gas
reserves and their estimated values, including many factors beyond Quicksilver's
control. The reserve data set forth in this document represents only estimates.
Although Quicksilver believes the reserve estimates contained in this document
are reasonable, reserve estimates are imprecise and are expected to change as
additional information becomes available.
The following table summarizes Quicksilver proved reserves, the estimated
future net revenues from such proved reserves and the standardized measure of
discounted future net cash flows attributable thereto at January 1, 1998.
<TABLE>
<S> <C>
PROVED RESERVES:
Proved reserves:
Oil (Bbl) 15,066,000
Natural gas (Mcf) 117,615,000
-------------
Total (Mcfe) 208,011,000
Estimated future net cash flows $199,537,000
Standardized measure of discounted
future net cash flows $109,300,000
Proved developed reserves:
Oil (Bbl) 4,520,000
Natural gas (Mcf) 103,200,000
-------------
Total (Mcfe) 130,320,000
</TABLE>
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<PAGE>
VOLUMES, SALES PRICES AND OIL AND GAS PRODUCTION EXPENSE
The following table sets forth information regarding the production
volumes and weighted average sales prices received for and average production
costs associated with Quicksilver's sale of oil and gas for the periods
indicated.
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<S> <C>
Production:
Oil (Bbl) 263,000
Natural gas (Mmcf) 7,350,000
Total (Mcfe) 8,928,000
Weighted average sales price:
Oil (per Bbl) $ 9.75
Natural gas (per Mcf) $ 2.10
Production operating expense
(per Mcfe)(1) $ 0.72
</TABLE>
(1) Includes production taxes.
DEVELOPMENT, EXPLORATION AND ACQUISITION CAPITAL EXPENDITURES
The following table sets forth information regarding the approximate
costs Quicksilver incurred in its development and exploration activities
and purchase of oil in place.
For the six months ended June 30, 1998
<TABLE>
<S> <C>
Development costs $ 4,486,000
Exploration costs 370,000
Acquisition of producing properties 2,048,000
------------
Total $ 6,904,000
</TABLE>
PRODUCTIVE OIL AND GAS WELLS
The following table summarizes the productive oil and gas wells as of
December 31, 1997, attributable to Quicksilver's direct interests.
<TABLE>
<CAPTION>
GROSS NET
----- ---
<S> <C> <C>
Productive Wells
Oil 155 150.3
Natural gas 752 212.9
--- -----
Total 907 363.2
--- -----
--- -----
</TABLE>
OIL AND GAS ACREAGE
The following table sets forth the developed and undeveloped leasehold
acreage held directly by Quicksilver as of June 30, 1998. Developed acres are
acres that are spaced or assignable to productive wells. Undeveloped acres are
acres on which wells have not been drilled or completed to a point that would
permit the production of commercial quantities of oil or gas, regardless of
whether or not such acreage contains proved reserves. Gross acres are the total
number of acres in which Quicksilver has a working interest. Net acres are the
sum of Quicksilver's fractional interests owned in the gross acres. States in
which Quicksilver holds undeveloped acreage include Michigan, Montana and
Wyoming.
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<PAGE>
<TABLE>
<CAPTION>
GROSS NET
----- ---
<S> <C> <C>
Developed acreage 127,700 44,700
Undeveloped acreage 319,400 170,300
------- -------
Total 447,100 215,000
------- -------
------- -------
</TABLE>
DRILLING ACTIVITY
The following table sets forth the number of wells attributable to
Quicksilver's direct interests drilled during and for the six months ended
June 30, 1998.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
-------------
GROSS NET
----- ---
<S> <C> <C>
DEVELOPMENT WELLS:
Productive 16 8.4
Dry 0 0
----- -----
Total 16 8.4
----- -----
----- -----
EXPLORATORY WELLS:
Productive 9 9
Dry 0 0
----- -----
Total 9 9
----- -----
----- -----
</TABLE>
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EXECUTIVE COMPENSATION
Quicksilver began operations on January 1, 1998 and to date has not paid
any compensation to its executive officers. As of the date of this proxy
statement/prospectus there are no arrangements or understandings related to
executive compensation and there have been no contracts entered into with
respect to executive compensation.
Quicksilver has no employees other than its executive officers.
Quicksilver compensates Mercury for its services under the existing management
agreement. Quicksilver will continue to compensate Mercury for those services
under the new management agreement to be entered into upon completion of the
merger. Mercury's compensation will consist of payments and overhead
reimbursements to which Mercury or Quicksilver are entitled as operator under
existing and future operating agreements. We estimate that payments to Mercury
under the new agreement will be approximately $2.2 million for fiscal 1999.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In considering the recommendations of the MSR board and the special
committee with respect to the merger, stockholders are advised that members
of the Darden family and Mercury have interests in the merger that are in
addition to, or different from yours.
In addition, Quicksilver, TCW and Enron and NationsBank are parties to
an agreement regarding future financings, dated April 9, 1998. According to
the agreement, if Quicksilver seeks to obtain financing of any type in
excess of $5,000,000, it must notify the other parties and provide them with
information regarding the financing. Enron, TCW or NationsBank or their
affiliates may then make a proposal to Quicksilver regarding the structure
and terms of the proposed financing. Quicksilver may then, at its sole
discretion, negotiate with any or all of the other parties in order to
finalize the financing.
If Quicksilver receives an unsolicited proposal for financing from a
third party, it must notify the other parties that it has received the
proposal. Quicksilver may then negotiate with any or all of the other parties
in order to finalize the financing.
MANAGEMENT OF QUICKSILVER
DIRECTORS AND EXECUTIVE OFFICERS
The Quicksilver board currently consists of three members, Messrs.
Thomas, Glenn and Frank Darden, each of whom is also a director of MSR.
Directors of Quicksilver serve one-year terms. The directors are elected
annually at each annual meeting of stockholders.
The following table sets forth information regarding the directors of
MSR and Quicksilver. With the exception of Mr. Montalban, these individuals
will be directors of the surviving corporation.
<TABLE>
<CAPTION>
Positions(s) Term
Name Held With MSR Age Director Since Expires
- ------------------------- ----------------- --- -------------- --------
<S> <C> <C> <C> <C>
Thomas F. Darden (1) Chairman of the Board and Chief 45 1997 1999
Executive Officer
Glenn M. Darden (1) President, Chief Operating Officer 43 1997 1999
and Director
Frank Darden (1) Director 71 1997 1999
Patrick M. Montalban (2) Director 41 1997 1999
Steven M. Morris Director 46 1997 1999
D. Randall Kent Director 72 1997 1999
W. Yandell Rogers Director 35 1997 1999
Mark Warner (3) Director 35
</TABLE>
- ---------------
(1) Members of both the MSR board and the Quicksilver board.
(2) Mr. Montalban will resign as a director of MSR effective on completion of
the merger.
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<PAGE>
(3) Mr. Warner will be elected to the Quicksilver board upon completion of the
merger.
The business experience of each director is set forth below.
THOMAS F. DARDEN has served on the board of Quicksilver since December
1997. He has served as President of Mercury since 1993. During that time,
Mercury 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 MSR
upon its formation on March 7, 1997. On January 1, 1998, Mr. Darden was
named Chairman of the Board and Chief Executive Officer of MSR.
GLENN M. DARDEN has served on the board of Quicksilver since December
1997. He also served with Mercury for 14 years, and for 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 MSR upon its
formation on March 7, 1997. Effective January 1, 1998, he was named
President and Chief Operating Officer of MSR.
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 MSR upon
its formation on March 7, 1997.
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 was elected director
in 1991. Upon closing the merger between Old MSR and Mercury Montana on
October 31, 1997, Mr. Montalban became a director of MSR and was named Vice
President. Mr. Montalban will resign as a director upon completion of the
merger.
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 in October, 1994. Upon
closing of the merger between Old MSR and Mercury Montana on October 31, 1997,
Mr. Morris became a director of MSR.
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 in 1997, and upon closing the merger
between Old MSR and Mercury Montana on October 31, 1997, became a director of
MSR.
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 and upon closing the merger between Old MSR and Mercury
Montana on October 31, 1997, became a director of MSR.
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<PAGE>
MARK WARNER is currently a Manager of Domestic Energy Finance for Enron
Capital & Trade Resources in Houston, Texas where he has worked since 1995.
He received a Bachelor's degree in Geological Engineering from the University
of Missouri-Rolla in 1985 and a Master's Degree in Petroleum Engineering from
the University of Oklahoma in 1987. From 1987 to 1989 he was a reservoir
engineer with Marathon Oil Company in Lafayette, Louisiana working in the
offshore Gulf of Mexico. From 1989 to 1993 he served as Manager of Petroleum
Engineering for Remington Oil Company (formerly Box Energy) in Dallas, Texas.
In 1995 he received an MBA from the Edwin L. Cox School of Business at
Southern Methodist University in Dallas. Mr. Warner currently serves as a
member of the board of directors of HV Marine Services, Inc., an integrated
marine transportation company in New Orleans, Louisiana and as an observer to
the board of directors of Lyco Energy Corporation of Dallas.
DIRECTOR COMPENSATION
Quicksilver has not yet determined the fees to be paid to its directors
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF QUICKSILVER
chart to show Stock Ownership of Quicksilver and MSR before the Merger.
chart to show Stock Ownership of Quicksilver after the Merger. Hard copy
to be furnished upon request.
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<PAGE>
As of September 30, 1998, there were 10 holders of record of Quicksilver
common stock.
The following table presents information to the best knowledge of
management as to each beneficial owner of the outstanding Quicksilver common
stock before and after the merger and as to the shares of Quicksilver common
stock beneficially owned by each director of Quicksilver before and after the
merger. Except as otherwise described, all shares are held with sole voting and
investment power.
Before the merger, Quicksilver will have a total of 10,310,806 shares
outstanding. After the merger, there will be approximately 12,888,500 shares
of Quicksilver common stock outstanding. Ownership of the outstanding shares
of Quicksilver common stock before and after the merger is
as follows:
<TABLE>
<CAPTION>
Common Stock Beneficially Common Stock Beneficially
Owned Before the Merger(1) Owned After the Merger(2)
------------------------------------ -----------------------------------------
Name of Beneficial Owner Number of Percent of Number of Percent of
------------------------ Shares Class Shares Class
-------------------- ------------- --------------------- ----------
<S> <C> <C> <C> <C>
Mercury Exploration Company (3) 3,251,820 31.5% 4,493,820(9) 33.3%
Quicksilver Energy L.C. (4) 3,030,860 29.4% 3,030,860 23.5%
JEDI 1,340,404 13% 1,304,404 10.4%
The TCW Group, Inc. (5) 1,340,404 13% 1,304,404 10.4%
The Darden family interests 7,254,368(6) 70.3% 9,439,226(10) 67.7%
Jack Thurber (7) 301,488 * 416,488(11) *
Jeff Cook (8) 74,135 * 97,135 (12) *
All officers and directors as a group (8 728,766(13) 7.1% 1,622,844(14) 12.5%
persons)
</TABLE>
- ---------------
* Less than 5%
(1) As adjusted to reflect the stock dividend required to facilitate the
merger.
(2) After giving effect to conversion of options and warrants for MSR common
stock to warrants or options for Quicksilver common stock.
(3) Members of the Darden family are directors, officers and shareholders of
Mercury and share voting and investment power with respect to the 3,251,820
shares of the Quicksilver common stock owned by Mercury.
(4) Members of the Darden family hold substantially all the membership
interests of QELC and share voting and investment power with respect to the
3,030,860 shares of the Quicksilver common stock owned by QELC.
(5) The shares are held by a subsidiary on behalf of a third party client.
Robert A. Day may be deemed to beneficially control The TCW Group, Inc.
(6) Includes 3,251,820 shares of Quicksilver common stock owned by Mercury,
3,030,000 shares owned by QELC and 971,688 shares (9.4%) owned directly by
Frank, Thomas and Glenn Darden and Anne Darden Self.
(7) Mr. Thurber is a consultant to Mercury, an affiliate of the Darden family.
(8) Mr. Cook is an officer of Mercury, an affiliate of the Darden family.
77
<PAGE>
(9) Includes warrants to purchase 297,000 shares of Quicksilver common stock at
a purchase price of $12.50 per share and warrants to purchase 297,000
shares of Quicksilver common stock at a purchase price of $20.00 per share.
(10) Includes 1,914,544 shares of MSR common stock owned directly by the Darden
family, 4,493,820 shares (including warrants) beneficially owned by Mercury
and 3,030,860 shares owned by QELC. Includes warrants to purchase 55,000
shares of Quicksilver common stock at a purchase price of $12.50 per share
and warrants to purchase 55,000 shares of Quicksilver common stock at a
purchase price of $20.00 per share owned by each of Frank, Thomas and Glenn
Darden and Anne Darden Self. According to the terms of the Warrant
Agreement, these individuals have agreed not to exercise their warrants
unless certain conditions are met.
(11) Includes warrants to purchase 27,500 shares of Quicksilver common stock at
a purchase price of $12.50 per share and warrants to purchase 27,500 shares
of Quicksilver common stock at a purchase price of $20.00 per share.
(12) Includes warrants to purchase 5,500 shares of Quicksilver common stock at a
purchase price of $12.50 per share and warrants to purchase 5,500 shares of
Quicksilver common stock at a purchase price of $20.00 per share.
(13) Includes 242,922 shares owned by each of Frank, Thomas and Glenn Darden.
Does not include 4,493,820 shares (including warrants) beneficially owned
by Mercury and 3,030,860 shares owned by QELC.
(14) Includes 472,922 shares beneficially owned by Frank Darden, 484,350 shares
beneficially owned by each of Thomas and Glenn Darden, 172,222 shares owned
by Steven M. Morris, 3,000 shares owned by D. Randall Kent, 3,500 shares
owned by W. Yandell Rogers, III, and currently exercisable options for
2,500 shares of Quicksilver common stock held by Howard N. Boals. Does not
include 4,493,820 shares beneficially owned by Mercury and 3,030,860 shares
owned by QELC.
78
<PAGE>
DESCRIPTION OF QUICKSILVER'S CAPITAL STOCK
The description of Quicksilver's capital stock set forth below is only a
summary and is not intended to be complete. For a complete description of
Quicksilver's capital stock, we urge you to read Quicksilver's restated
certificate of incorporation and bylaws which were filed as exhibits to the
Registration Statement of which this proxy statement/prospectus forms a part.
DESCRIPTION OF COMMON STOCK
Under its charter, Quicksilver has the authority to issue up to one
million shares of Quicksilver common stock. Prior to completion of the
merger, Quicksilver intends to amend its certificate of incorporation to
authorize 40 million shares of Quicksilver common stock and 10 million shares
of preferred stock. Quicksilver will issue 10,210,806 shares in the form of
a stock dividend. There will be 10,310,806 shares of Quicksilver common
stock outstanding after the stock dividend.
TERMS
Subject to the preferential rights of any outstanding series of
preferred stock, the holders of Quicksilver common stock are entitled to one
vote per share on all matters voted on by stockholders, including in the
election of directors. Quicksilver's certificate of incorporation does not
provide for cumulative voting in the election of directors or grant
preemptive rights with respect to future issuances of Quicksilver common
stock. Quicksilver may in the future, however, enter into contracts with
stockholders to grant holders preemptive rights.
Subject to any preferential rights of any series of preferred stock
outstanding, the holders of Quicksilver common stock are entitled to
dividends, if any, as may be declared from time to time by the Quicksilver
board from funds legally available to pay dividends and, upon liquidation,
are entitled to receive a pro rata share of all the assets of Quicksilver
that are available for distribution to stockholders. All Quicksilver common
stock will, when issued, be fully paid and nonassessable.
EXCHANGE LISTING
Quicksilver has made an application for listing of its common stock on
AMEX. If AMEX accepts the Quicksilver common stock for listing, it is
anticipated that the Quicksilver common stock will trade under the symbol "KWK."
TRANSFER AGENT
The transfer agent and registrar for the Quicksilver common stock is
ChaseMellon Shareholder Services.
DESCRIPTION OF PREFERRED STOCK
The Quicksilver preferred stock may be issued from time to time in one
or more series without stockholder approval. The Quicksilver board may
determine the preferences, conversion or other rights, voting powers,
restrictions, limitations on dividends, qualifications and terms and
conditions of redemption of the preferred stock. As a result, without
stockholder approval, the Quicksilver board could authorize the issuance of
preferred stock with voting, conversion and other rights that could dilute
the voting power and other rights of the holders of common stock. The
Quicksilver board has not authorized any shares of preferred stock.
79
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
Other than the provisions in the MSR certificate of incorporation
related to dissenters' rights under the ABCA, there are no material
differences between the Quicksilver certificate of incorporation and the MSR
certificate of incorporation. If the merger is completed, stockholders of
the surviving corporation will not have dissenters' rights under the DGCL as
long as the Quicksilver common stock is listed on AMEX. There are also no
material differences between the Quicksilver Bylaws and the MSR Bylaws.
Consequently, the rights of former MSR stockholders who receive shares of
Quicksilver common stock in the merger will not be materially different than
their rights before the merger.
WHERE YOU CAN GET INFORMATION
MSR files reports, proxy statements and other information with the SEC.
You may read and copy these reports, proxy statements and other information
that we file with the SEC's public reference facilities maintained in
Washington, D.C., at Chicago, Illinois 60661 and New York, New York. Please
call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. In addition, these materials and other information
concerning MSR can be inspected at the offices of the American Stock
Exchange, 86 Trinity Place, New York, New York, 10006-1881. In addition, the
SEC maintains a World Wide Web site that contains reports, proxy and
information statements and other information filed electronically with the
SEC. The address of the site is http://www.sec.gov. Upon completion of the
merger, the surviving corporation will become subject to the SEC's
informational requirements.
Quicksilver has filed with the SEC under the Securities Act, a Registration
Statement on Form S-4 with respect to the shares of Quicksilver common stock
issuable in connection with the merger. This proxy statement/prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
SEC.
NOTE ON FORWARD-LOOKING INFORMATION
THROUGHOUT THIS PROXY STATEMENT/PROSPECTUS WE USE "FORWARD-LOOKING
STATEMENTS", WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS SUCH
AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR THEIR
NEGATIVES OR COMPARABLE TERMS. OUR STATEMENTS IN "RISK FACTORS" CONTAINED IN
THIS PROXY STATEMENT/PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING
IMPORTANT FACTORS, INCLUDING RISKS AND UNCERTAINTIES, WITH RESPECT TO OUR
FORWARD-LOOKING STATEMENTS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN OUR FORWARD-LOOKING STATEMENTS.
INFORMATION INCORPORATED BY REFERENCE
THE SEC ALLOWS US TO "INCORPORATE BY REFERENCE" CERTAIN INFORMATION. YOU
CAN RECEIVE COPIES OF ANY OF THIS INFORMATION WITHOUT CHARGE BY CALLING OR
WRITING TO MSR EXPLORATION LTD., 1619 PENNSYLVANIA AVENUE, FORT WORTH, TEXAS,
76104, (817-877-3151), ATTN: SECRETARY.
The following documents filed by MSR are incorporated by reference in this
proxy statement/prospectus:
80
<PAGE>
MSR EXPLORATION LTD.
(1) Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997
(2) Quarterly Reports on Form 10-QSB for the quarters ended March 31,
June 30, 1998 and September 30, 1998
(3) Description of the MSR common stock set forth in MSR's
certificate of incorporation, as amended, included as Appendix
"F" to the proxy statement/prospectus filed as an exhibit to the
Registration Statement on Form S-4 (File No. 333-29769) filed by
MSR and as an exhibit to the Registration Statement on Form S-4
(File No. 333-29783) filed by Mercury Montana, Inc., including
any amendment or report filed for the purpose of updating such
description
(4) Current Report on Form 8-K, filed November 12, 1997
All documents filed with the SEC by MSR pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of effectiveness of the
Registration Statement of which this proxy statement/prospectus forms a part and
prior to the date of the meeting are incorporated herein by reference and such
documents will be deemed to be a part hereof from the date of filing of such
documents. Any statement contained in this proxy statement/prospectus or in a
document incorporated or deemed to be incorporated by reference will be deemed
to be modified or superseded for purposes of this proxy statement/prospectus to
the extent that a statement contained in this proxy statement/prospectus or in
any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this proxy statement/prospectus.
STOCKHOLDER PROPOSALS FOR MSR 1999 ANNUAL MEETING
In the event the merger is not consummated, stockholders of MSR may
submit proposals on matters apropriate for stockholder action at annual
meetings in accordance with regulations adopted by the SEC. To be considered
for inclusion in the proxy statement and form of proxy relating to the 1999
MSR annual meeting, if held, such proposals must have been received by MSR
within 60 days after the date on which MSR first publicly discloses the date
of its 1999 annual meeting. Proposals should be directed to the attention of
the Secretary of MSR.
OTHER MATTERS
The MSR board and the Quicksilver board are not aware of any matter not
set forth in this proxy statement/prospectus that may come before the
meeting. If, however, further business properly comes before the meeting,
the persons named in the proxies will vote the shares represented thereby in
accordance with their judgment.
LEGAL MATTERS
The validity of the Quicksilver common stock to be issued in connection
with the merger has been passed upon for Quicksilver by Cantey & Hanger, L.L.P.,
Fort Worth, Texas. An opinion regarding federal income tax consequences
of the merger has been rendered by Jenkens & Gilchrist, a Professional
Corporation, Dallas, Texas. Jenkens & Gilchrist has also acted as special
counsel to the MSR special committee in connection with the merger.
EXPERTS
The information included and incorporated by reference in this proxy
statement/prospectus regarding the total proved reserves of MSR was prepared by
Citadel Engineering. Citadel Engineering's reserve review letter is filed as an
exhibit to the Registration Statement of which this proxy statement/prospectus
is a part in reliance upon the authority of that firm as experts with respect
to the matters covered by its report and the giving of its report.
81
<PAGE>
Some of the information with respect to the oil and gas reserves of
Quicksilver derived from the reports of Mercury's petroleum engineers has
been included in this proxy statement/prospectus in reliance upon those
engineers as experts with respect to the matters contained in those reports.
The consolidated financial statements of MSR incorporated by reference
from MSR's Annual Report on Form 10-KSB for the year ended December 31, 1997
have been incorporated by reference in this proxy statement/prospectus in
reliance on the reports of Deloitte and Touche LLP, independent auditors
given on the authority of that firm as experts in accounting and auditing. A
representative of Deloitte & Touche LLP is expected to be present at the
meeting to respond to appropriate questions and give a statement, if desired.
The consolidated financial statements of Mercury for the years ended
September 30, 1997, 1996 and 1995, the three months ended December 31, 1997
and the financial statements of Michigan Gas Partners were audited by Weaver
and Tidwell LLP. The audited statement of revenues and direct operating
expenses of Mercury and the report relating to them presented in this proxy
statement/prospectus were audited by Weaver and Tidwell LLP.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/STATEMENT PROSPECTUS OR OTHER INFORMATION TO WHICH WE HAVE REFERRED
YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT.
82
<PAGE>
GLOSSARY OF OIL AND GAS TERMS
The definitions set forth below apply to the indicated terms as used in
this proxy statement/prospectus. All volumes of natural gas referred to are
stated at the legal pressure base of the state or area where the reserves exist
and at 60 degrees Fahrenheit and in most instances are rounded to the nearest
major multiple.
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BCFE. Billion cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
BOPD. Barrel of oil per day.
COMPLETION. The installation of permanent equipment for the production of
oil or gas or, in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable
to producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
EXPLORATORY WELL. A well drilled to find and produce oil or gas reserves
not classified as proved, to find a new reservoir in a field previously found to
be productive of oil or gas in another reservoir or to extend a known reservoir.
FIELD. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be,
in which a working interest is owned.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons.
MCF. One thousand cubic feet.
MCF/DAY. One thousand cubic feet per day.
MCFE. One thousand cubic feet equivalent, determined using the ratio of
six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids, which approximates the relative energy content of crude oil, condensate
and natural gas liquids as compared to natural gas. Prices have historically
been higher or substantially higher for crude oil than natural gas on an energy
equivalent basis.
MMBTU. One million British Thermal Units, which is the English system unit
of heat used to measure the heat content of natural gas.
MMCF. One million cubic feet.
MMCF/DAY. One million cubic feet per day.
MMCFE. One million cubic feet equivalent, determined using the ratio of
six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned
in gross acres or gross wells.
83
<PAGE>
PRESENT VALUE. When used with respect to oil and gas reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and costs in effect as of the date indicated, without giving effect to
nonproperty-related expenses such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
PRODUCTIVE WELL. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
PROVED DEVELOPED PRODUCING RESERVES. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
PROVED DEVELOPED RESERVES. Proved reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
PROVED UNDEVELOPED RESERVES. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
RECOMPLETION. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
RESERVOIR. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
SUCCESSFUL WELL. A well for which production casing has been run for a
completion attempt.
3-D SEISMIC. Advanced technology method of detecting accumulations of
hydrocarbons identified through a three-dimensional picture of the subsurface
created by the collection and measurement of the intensity and timing of sound
waves transmitted into the earth as they reflect back to the surface.
TCF. One trillion cubic feet.
UNDEVELOPED ACREAGE. Lease acreage 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 such acreage contains proved reserves.
WORKING INTEREST. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
WORKOVER. Major remedial operations required to maintain, restore or
increase production rates.
84
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
QUICKSILVER RESOURCES INC.
Independent Auditors' Report June 30, 1998 Financial Statements................... F-3
Independent Auditors' Report January 1, 1998 Balance Sheet........................ F-4
Balance Sheet June 30, 1998 and January 1, 1998................................... F-5
Statement of Operations for the Six Months ended
June 30, 1998............................................................ F-6
Statement of Cash Flow for the Six Months ended
June 30, 1998............................................................ F-7
Notes to Financial Statements..................................................... F-8
Balance Sheet September 30, 1998 (unaudited)...................................... F-16
Statement of Operations for the Nine Months ended
September 30, 1998 (unaudited)........................................... F-17
Statement of Cash Flow for the Nine Months ended
September 30, 1998 (unaudited)........................................... F-18
PREDECESSOR FINANCIAL STATEMENTS
QUICKSILVER RESOURCES INC.--Pre MSR merger
Unaudited Pro Forma Consolidated Statement of Operations
for the Twelve Months Ended December 31, 1997............................ F-19
Notes to Pro Forma Consolidated Statements of Operations and Balance Sheet........ F-20
MERCURY EXPLORATION COMPANY
Independent Auditors' Report...................................................... F-22
Consolidated Balance Sheet at September 30, 1997 and 1996......................... F-23
Consolidated Statement of Income for the years
ended September 30, 1997, 1996 and 1995.................................. F-25
Consolidated Statement of Stockholders' Equity for the years
ended September 30, 1997, 1996 and 1995.................................. F-26
Consolidated Statement of Cash Flows for the years
ended September 30, 1997, 1996 and 1995.................................. F-27
Notes to Consolidated Financial Statements........................................ F-29
MERCURY EXPLORATION COMPANY-TRANSITION REPORTS
Independent Auditors' Report...................................................... F-41
Consolidated Balance Sheet at December 31, 1997 .................................. F-42
Consolidated Statement of Income for the Three Months
ended December 31, 1997 ................................................. F-43
Consolidated Statement of Stockholders' Equity
for the three months ended December 31, 1997............................. F-44
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Consolidated Statement of Cash Flows for the Three Months
ended December 31, 1997 ................................................. F-45
Notes to Financial Statements .................................................... F-46
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
Independent Auditors' Report...................................................... F-57
Balance Sheet at December 31, 1997 and 1996 ...................................... F-58
Statement of Operations for the years ended
December 31, 1997, 1996 and 1995......................................... F-59
Statement of Partner's Capital for the years ended
December 31, 1997, 1996 and 1995......................................... F-60
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995......................................... F-61
Notes to Financial Statements..................................................... F-62
ACQUISITIONS BY PREDECESSOR
Independent Auditors Report--Shell Michigan Properties acquired years
ended September 30, 1996 and 1995........................................ F-67
Statement of Revenues and Direct Operating Expenses--acquired years
ended September 30, 1996 and 1995 Shell Michigan Properties.............. F-68
Notes to Financial Statements..................................................... F-69
Independent Auditors' Report--Destec Michigan Properties acquired years
ended September 30, 1996 and 1995........................................ F-71
Statement of Revenues and Direct Operating Expenses--Destec Michigan Properties
acquired years ended September 30, 1997 and 1996......................... F-72
Notes to Financial Statements..................................................... F-73
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Quicksilver Resources, Inc.
Fort Worth, Texas
We have audited the accompanying balance sheet of Quicksilver Resources, Inc.
as of June 30, 1998, and the related statements of operations, and cash flows
for the six months then ended. 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 financial statements present fairly, in all material
respects, the financial position of the Company at June 30, 1998, and the
results of its operations and its cash flows for the six months then ended in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Fort Worth, Texas
November 23, 1998
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Quicksilver Resources, Inc.
Fort Worth, Texas
We have audited the accompanying balance sheet of Quicksilver Resources, Inc.
as of January 1, 1998. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement 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 balance sheet is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used significant
estimates made by management, as well as evaluating the overall balance
sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of the Company at January 1, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
October 2, 1998
F-4
<PAGE>
QUICKSILVER RESOURCES INC.
Balance Sheet
In thousands
<TABLE>
<CAPTION>
June 30, January 1
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 238 $ 56
Accounts receivable 5,205 660
Inventories 408 407
------------ ------------
Total current assets 5,851 1,123
------------ ------------
PROPERTIES, PLANT AND EQUIPMENT - NET ("full cost") 114,384 112,856
OTHER ASSETS 255 0
------------ ------------
$ 120,490 $ 113,979
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 70,411 $ 73
Accounts payable 5,852 711
Accrued liabilities 1,912 0
------------ ------------
Total current liabilities 78,175 784
------------ ------------
LONG-TERM DEBT 120 74,096
------------ ------------
UNEARNED REVENUES 1,957 2,680
------------ ------------
DEFERRED INCOME TAXES 9,829 8,829
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01
Authorized 10,000,000 shares
Issued and outstanding - none 0 0
Common stock, par value $0.01
Authorized 1,000,000 shares,
Issued and outstanding 10,310,800 103 103
Additional paid in capital 27,487 27,487
Retained earnings 2,819 0
------------ ------------
Total stockholders' equity 30,409 27,590
------------ ------------
$ 120,490 $ 113,979
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
QUICKSILVER RESOURCES INC.
Statement of Operations
For the Six Months Ended June 30, 1998
In thousands, except for per share amounts
<TABLE>
<S> <C>
REVENUES
Gas sales $15,418
Oil sales 2,564
Interest and other income 1,341
-------
Total revenues 19,323
-------
EXPENSES
Operating expenses 5,433
Production taxes 954
Depletion and depreciation 5,375
General and administrative 49
Interest 3,234
-------
Total expenses 15,045
-------
Income before income taxes 4,278
Income taxes (1,459)
-------
Net income $ 2,819
-------
-------
Basic and diluted per share net income $ 0.27
-------
-------
Weighted average number of shares outstanding 10,311
-------
-------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE>
QUICKSILVER RESOURCES INC.
Statement of Cash Flow
For the Six Months Ended June 30, 1998
In thousands
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income $ 2,819
Charges and credits to net income not affecting cash
Depletion and depreciation 5,375
Deferred income taxes 1,000
Recognition of unearned revenues (723)
Changes in assets and liabilities
Accounts receivable (4,545)
Accounts payable and accrued liabilities 7,053
Other assets (255)
--------
NET CASH FROM (USED FOR) OPERATING ACTIVITIES 10,724
--------
INVESTING ACTIVITIES
Acquisition of properties and equipment (6,904)
--------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES (6,904)
--------
FINANCING ACTIVITIES
Notes payable, bank proceeds 6,500
Principal payments on long-term debt (10,138)
--------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES (3,638)
--------
NET INCREASE (DECREASE) IN CASH 182
CASH AT BEGINNING OF PERIOD 56
--------
CASH AT END OF PERIOD $ 238
--------
--------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense $ 2,028
--------
--------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-7
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998
1. BUSINESS COMBINATION
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 of each
contributed piece to the total was used to allocate shares of common stock back
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) Accounting for Business combination.
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
the $10,000,000 of debt of TCW for 13 percent of Quicksilver's common shares
which was the same percentage issued to the partners of Michigan Gas Partners.
Michigan Gas Partners net book value was $9,453,000 at January 1, 1998. All of
the valuation adjustment was assigned to oil and gas properties. An amount of
$547,000 was allocated to Michigan Gas Partners book value of producing oil and
gas properties to complete the accounting. As the acquisition occurred at the
beginning of the periods being presented, no pro forma information regarding the
acquisition is considered necessary.
2. FINANCIAL STATEMENT PRESENTATION.
The Company's balance sheet dated January 1, 1998 is provided for information
purposes to provide a starting point for the new company.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policy relative to the carrying value of property and equipment
is indicated in the caption on the balance sheets. The nature of operations and
other significant accounting policies are as follows:
NATURE OF OPERATIONS
F-8
<PAGE>
Quicksilver Resources Inc. was formed to own various oil and gas properties in
the states of Michigan and Wyoming. Substantially all of the Company's revenue
is derived from the production and sale of natural gas, condensate, and plant
products.
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
At June 30, 1998, three purchasers: Consumers Power, Howard Energy, and CoEnergy
Supply and Trading, accounted for approximately 49%, 26% and 14% 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 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.
Other plant and equipment are depreciated on the straight-line basis as follows:
Gas processing plants and gathering systems - over ten to fifteen years
Other equipment - over three to seven years
Building - over forty 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
F-9
<PAGE>
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 are transported to the buyer, and utilizes the sales method of accounting
for oil and gas imbalances. The Company's net imbalance was immaterial at June
30, 1998.
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.
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.
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.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, time deposits, accounts
receivable, and 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of long-term debt is estimated at the present value of future
cash flows discounted at rates consistent with comparable maturities for credit
risk. The carrying amounts reflected in the Balance Sheet for financial assets
classified as current assets, and the carrying amounts for financial liabilities
classified as current liabilities, approximate fair value due to the short
maturity of such instruments.
F-10
<PAGE>
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
general-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 adopted SFAS No. 130 on January 1,
1998.
The FASB has also issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which is effective for fiscal years beginning after June
15, 1999. This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. Management is currently
evaluating the effect of adopting SFAS No. 133 on the Company's financial
statements.
4. PROPERTIES PLANT AND EQUIPMENT
Capitalized costs are shown below in thousands.
<TABLE>
<CAPTION>
June 30, 1998 January 1, 1998
------------- ---------------
<S> <C> <C>
Proved oil and gas properties $133,601 $126,698
Unproved oil and gas interests 3,790 3,790
Accumulated depletion and depreciation (23,826) (18,475)
-------- --------
$113,565 $112,013
Other equipment 939 939
Accumulated depreciation (120) (96)
-------- --------
$114,384 $112,856
-------- --------
-------- --------
</TABLE>
5. OTHER ASSETS
Other assets include deferred charges related to the acquisition of
long-term debt amortized on a straight-line basis over the life of
the debt.
Other assets, in thousands, consist of:
<TABLE>
<CAPTION>
June 30, 1998
-------------
<S> <C>
Deferred loan cost $ 319
Less accumulated amortization (64)
--------
Net deferred loan cost $ 255
--------
--------
</TABLE>
F-11
<PAGE>
6. NOTE PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
June 30, 1998 January 1, 1998
------------- ---------------
<S> <C> <C>
Long-term debt, in thousands, consists of:
Note payable to a bank
(7.6% at June 30, 1998) $ 70,350 $ 73,955
Various equipment loans 181 214
-------- --------
Less current maturities (70,411) (73)
-------- --------
$ 120 $ 74,096
-------- --------
-------- --------
</TABLE>
Long-term debt maturities are as follows, in thousands of dollars:
<TABLE>
<CAPTION>
Periods Ending June 30, 1998 January 1, 1998
-------------- ------------- ---------------
<S> <C> <C>
1998 $70,411 $ 73
1999 61 74,028
2000 59 68
2001 None None
2002 None None
Thereafter None None
------- -------
$70,531 $74,169
------- -------
------- -------
</TABLE>
As part of the reorganization and merger by and among the Company,
Quicksilver Energy L.C., Michigan Gas Partners, Limited Partnership, Mercury
Exploration Company, Trust Company of the West and Joint Energy Development
Investments Limited Partnership; a new credit agreement was established by
the Company. Existing debt of $27,000,000 and $40,268,000 from Quicksilver
Energy L.C. and Mercury Exploration Company was transferred into the new
credit agreement. The new agreement is for a $100,000,000 senior secured
revolving credit facility with an initial borrowing base of $75,000,000,
which terminates at January 31, 1999 or upon closing of the merger. The
Company can designate the interest rate on amounts outstanding at either
LIBOR + 1.75%, or 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 restrictive
covenants, which, among other things, require the maintenance of a minimum
current ratio, net worth, debt service ratio and contains certain dividend
restrictions.
To replace credit facility noted above, on July 7, 1998 the Company accepted a
commitment letter from a bank for a $200,000,000 senior secured revolving credit
facility with a commitment to lend up to a $85,000,000 initial borrowing base.
The terms and condition would be similar to those of the credit facility
discussed above and will be effective upon the closing of the merger with MSR.
7. 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 June 30, 1998 and
January 1, 1998 are as follows in thousands:
<TABLE>
<CAPTION>
June 30, 1998 January 1, 1998
------------- ---------------
<S> <C> <C>
Deferred tax liabilities
Properties, plant and equipment $8,199 $7,301
Unearned revenues 1,630 1,528
------ ------
$9,829 $8,829
------ ------
------ ------
</TABLE>
F-12
<PAGE>
The provisions for income taxes are as follows in thousands:
<TABLE>
<CAPTION>
June 30, 1998
-------------
<S> <C>
United States Federal
Current $ 460
Deferred 999
------
$1,459
------
------
</TABLE>
The provision for income taxes were computed using an effective tax rate
of 34 percent.
8. UNEARNED REVENUES
The Quicksilver Properties include certain properties, which carry IRS Code
Section 29 income tax benefits. Code Section 29 allows a credit against regular
federal income tax liability for certain eligible gas production. During 1997
these credits were conveyed through the sale of the working interests to a bank.
The agreement with the bank provided that the Company would receive cash,
payment for future production on the properties and payment for a portion of tax
credits taken by the bank. The agreement included a fixed payment note which
provides for the Company to receive a minimum of approximately $7 million plus
interest for the future production on the properties. A portion of the initial
cash payment represented an advance payment for the first eighteen months of tax
benefits. As of June 30, 1998, and January 1, 1998, a balance of $1,957,000 and
$2,680,000 respectively, in unearned revenues existed as a result of the cash
consideration received in excess of the tax benefit earned. At June 30, 1998 and
January 1, 1998, $1,282,000 and $2,005,000 respectively, of the unearned
revenues represented advance payments on tax benefits, which will be recognized
as earned during 1998 and 1999. The balance of $675,000 will remain unearned
until the tax benefits of the IRS Code Section 29 expire at December 31, 2002.
9. 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). The Company currently has 100,000 shares of common
stock outstanding.
As part of the proposed merger with MSR Exploration Ltd., the Company has agreed
to exchange one share of its common stock for each 10 shares of MSR common
stock. To effect the exchange ratio, the present shareholders of the Company
will be issued an additional 10,210,800 shares in the form of a stock dividend.
Upon completion of the merger the present shareholders will own 10,310,800 (80%)
of the shares of the Company and former MSR shareholders will own approximately
2,577,700 (20%) of the common shares of the Company.
All references in the financial statements to numbers of shares, and per share
amounts have been restated to reflect the stock dividend.
10. RELATED PARTY TRANSACTIONS
When the Company was formed on January 1, 1998 it entered into a Management
Agreement (the Management Agreement) for Mercury Exploration Company (Mercury)
to act as operator of the Company's oil and gas properties in Michigan, Wyoming
and Montana under a joint operating agreement. The Company presently has no
operating employees, Mercury performs all operations on behalf of the Company.
In its capacity as operator, Mercury pays all costs and expenses of operations
and distributes all net revenues associated with the Company's properties. The
Company reimburses Mercury for its actual cost for direct and indirect expenses
incurred by Mercury for the benefit of the Company and its properties. The
indirect expenses for which Mercury is reimbursed include employee compensation,
office rent, office supplies and employee benefits. Mercury does not receive any
fees for its services.
Mercury generally allocates its expenses among the Company and other entities
for which Mercury's services are provided by multiplying the aggregate amount of
the indirect expenses incurred by Mercury by the time that the employees
F-13
<PAGE>
of Mercury spend on managing Quicksilver properties and dividing by the
aggregate time that the employees of Mercury spend on all the entities for
which Mercury provides similar services. Management believes the allocated
method and amounts are reasonable.
Mercury owns 3,251,820 (31.5%) 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. OIL AND GAS RESERVES INFORMATION (UNAUDITED)
The Company's proved oil and gas reserves at January 1, 1998 have been
estimated by the Mercury's petroleum engineers in accordance with guidelines
established by the Securities and Exchange Commission ("SEC"). Accordingly, the
following reserve estimates are based upon existing economic and operating
conditions.
There are numerous uncertainties inherent in establishing quantities of proved
reserves. The following reserve data represent estimates only and should not be
construed as being exact. In addition, the present values should not be
construed as the current market value of the Company's oil and gas properties or
the cost that would be incurred to obtain equivalent reserves.
Estimated Reserves
Changes in the estimated net quantities of crude oil and natural gas reserves,
all of which are located in the continental United States, are as follows:
Reserve Quantities
<TABLE>
<CAPTION>
Oil Gas
(MBbl) (MMcf)
<S> <C> <C>
Proved Reserves
As of January 1, 1997 21,696 100,918
Purchase of reserves 30,831
Sale of reserves (5,840) (1,339)
Production for 1997 (790) (12,795)
------- --------
As of January 1, 1998 15,066 117,615
Revision of estimates (12,067) -
Extensions and discoveries - 36,908
Production for 1997 (263) (7,121)
------- --------
As of June 30, 1998 2,736 147,402
------- --------
------- --------
Proved Developed Reserves
As of January 1, 1997 3,730 90,390
As of January 1, 1998 4,520 103,185
As of June 30, 1998 2,357 112,297
</TABLE>
Standardized Measure
The following tables present the Company's standardized measure of discounted
future net cash flows and changes therein relating to proved oil and gas
reserves and were computed using reserve valuations based on regulations
prescribed by the SEC. These regulations provide that the oil, condensate and
gas price structure utilized to project future net cash flows reflects current
prices at each date presented and have been escalated only when known and
determinable price changes are provided by contract. Future production,
development and net abandonment costs are based on current costs without
escalation. The resulting net future cash flows have been discounted to their
present values based on a 10% annual discount factor.
F-14
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Future cash flows $ 359,327 $450,827
Future production and development costs (156,375) (230,031)
Future income tax expense (19,783) (21,259)
--------- --------
Future net cash flows 183,169 199,537
10% annual discount for estimated timing of cash flows (75,166) (90,267)
--------- --------
Standardized measure of discounted future net cash flows $ 108,003 $109,270
--------- --------
--------- --------
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- ------------
<S> <C> <C>
Net changes in price and production costs ($45,949) $ 266
Development costs incurred (6,904) (3,241)
Revision of estimates 21,693
Changes in estimated future development costs 26,943 (1,654)
Purchases of reserves 32,247
Sales of reserves (20,443)
Net change in income taxes (30) 12,285
Sales of oil and gas net of production costs (12,936) (27,482)
Accretion of discount 5,464 9,853
Other 10,452 (4,924)
------- -------
Net decrease ($1,267) ($3,093)
------- -------
------- -------
</TABLE>
The revision of estimates for the period ended June 30, 1998 was due to the
decline in crude oil prices.
Estimated future cash inflows are computed by applying year end prices of oil
and gas to year end quantities of proved developed reserves. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves in
future years, based on year end costs and assuming continuation of existing
economic conditions.
These estimates are furnished and calculated in accordance with requirements of
the Financial Accounting Standards Board and the SEC. Because of unpredictable
variances in expenses and capital forecasts, crude oil and natural gas price
changes, and the fact that the bases for such estimates vary significantly,
management believes the usefulness of these projections is limited. Estimates
of future net cash flows do not necessarily represent management's assessment of
future profitability or future cash flow to the Company.
Costs incurred in development and exploration activities and purchase of oil in
place:
For the six months ended June 30, 1998
<TABLE>
<CAPTION>
<S> <C>
Development costs $ 4,486,000
Exploration costs 370,000
Acquisition of producing properties 2,048,000
------------
Total $ 6,904,000
------------
------------
</TABLE>
F-15
<PAGE>
QUICKSILVER RESOURCES INC.
Balance Sheet
September 30, 1998
In thousands
(Unaudited)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 383
Accounts receivable 6,326
Inventories 407
------------
Total current assets 7,116
------------
PROPERTIES, PLANT AND EQUIPMENT - NET ("full cost") 116,145
OTHER ASSETS 541
------------
$ 123,802
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 71,901
Accounts payable 5,824
Accrued liabilities 1,712
------------
Total current liabilities 79,437
------------
LONG-TERM DEBT 113
------------
UNEARNED REVENUES 1,686
------------
DEFERRED INCOME TAXES 10,292
------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01
Authorized 10,000,000 shares
Issued and outstanding - none 0
Common stock, par value $0.01
Authorized 40,000,000 shares,
Issued and outstanding 100,000 103
Additional paid in capital 27,487
Retained earnings 4,684
------------
Total stockholders' equity 32,274
------------
$ 123,802
------------
------------
</TABLE>
F-16
<PAGE>
QUICKSILVER RESOURCES INC.
Statement of Operations
For the Nine Months Ended September 30, 1998
In thousands of Dollars except for per share amounts
(Unaudited)
<TABLE>
<S> <C>
REVENUES
Gas sales $ 23,817
Oil sales 3,375
Interest and other income 2,232
------------
Total revenues 29,424
------------
EXPENSES
Operating expenses 7,923
Production taxes 1,448
Depletion and depreciation 8,401
General and administrative 248
Interest 4,307
------------
Total expenses 22,327
------------
Income before income taxes 7,097
Income tax (2,413)
------------
Net income $ 4,684
------------
------------
Basic and diluted per share net income $ 0.45
------------
------------
Weighted average number of shares outstanding 10,311
------------
------------
</TABLE>
F-17
<PAGE>
QUICKSILVER RESOURCES INC.
Statement of Cash Flow
Nine Months Ended September 30, 1998
(In thousands,
Unaudited)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income $ 4,684
Charges and credits to net loss not affecting cash
Depletion and depreciation 8,401
Deferred income taxes 1,462
Recognition of unearned revenues (994)
Changes in assets and liabilities
Accounts receivable (5,666)
Accounts payable, accrued liabilities and other assets 6,826
Other assets (541)
----------
NET CASH FROM (USED FOR) OPERATING ACTIVITIES 14,172
----------
INVESTING ACTIVITIES
Acquisition of properties and equipment (11,690)
----------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES (11,690)
----------
FINANCING ACTIVITIES
Notes payable, bank proceeds 8,000
Principal payments on long-term debt (10,155)
----------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES (2,155)
----------
NET INCREASE (DECREASE) IN CASH 327
CASH AT BEGINNING OF PERIOD 56
----------
CASH AT END OF PERIOD $ 383
----------
----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense $ 3,279
----------
----------
Cash payments for income taxes $ 300
----------
----------
</TABLE>
F-18
<PAGE>
QUICKSILVER RESOURCES INC.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1997
In thousands, except for per share data
<TABLE>
<CAPTION>
Mercury and QELC (a)
------------------------------------------- Michigan
Excluded in Sub- Gas Quicksilver
Historical Formation (c) Total Partners (b) Adjust. Pro Forma
----------- --------------- --------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OIL AND GAS REVENUES $ 42,315 $ (12,575) $ 29,740 $ 3,004 $ 7,257 (d) $ 40,001
COSTS AND EXPENSES
Operating expenses 17,077 (8,186) 8,891 2,036 1,592 (d) 12,519
Depletion and depreciation 6,904 (529) 6,375 955 1,313 (d) 8,643
General and administrative 1,870 (931) 939 11 (f) 950
----------- --------------- --------------- ------------- -------------- -------------
Income from operations 16,464 (2,929) 13,535 2 4,352 17,889
OTHER INCOME (EXPENSE)
Gain on sale of assets 0 0 0 0 0
Interest expense (5,939) 376 (5,563) 0 (5,563)
Interest income 75 (75) 0 0 0
Equity in partnerships 626 (626) 0 0 0
Manage fee income 207 (207) 0 0 0
Rental income 198 (198) 0 0 0
Income from litigation
settlement 2,781 (2,781) 0 0 0
Miscellaneous income 480 (480) 0 17 17
----------- --------------- --------------- ------------- ----------- --------------
Income before income taxes
and minority interest 14,892 (6,920) 7,972 19 4,352 12,343
MINORITY INTEREST IN INCOME OF
SUBSIDIARY 5,543 (5,543) 0 0 0 0
----------- --------------- --------------- ------------- ----------- --------------
Income before income taxes 9,349 (1,377) 7,972 19 4,352 12,343
INCOME TAXES 3,259 (549) 2,710 0 1,487 (g) 4,197
----------- --------------- --------------- ------------- ----------- --------------
NET INCOME $ 6,090 $ (828) $ 5,262 $ 19 $ 2,865 $ 8,146
----------- --------------- --------------- ------------- ----------- --------------
----------- --------------- --------------- ------------- ----------- --------------
Earnings per share $ 24.26 $ (3.30) $ 20.96 $ 0.79
----------- --------------- --------------- --------------
----------- --------------- --------------- --------------
Weighted average number
of shares outstanding 251 251 251 10,311
----------- --------------- --------------- --------------
----------- --------------- --------------- --------------
</TABLE>
F-19
<PAGE>
NOTES TO PROFORMA CONSOLIDATED STATEMENT OF
OPERATIONS AND BALANCE SHEET
1. Pro Forma Adjustments
The accompanying unaudited pro forma consolidated statements of operations
reflect the following adjustments.
(a) The information reflected as "Mercury and QELC" is historical
information from Mercury Exploration Company's consolidated financial
statements, which includes QELC. The information has been adjusted for
a change in fiscal year to a December 31, year-end. For the statement
of operations, data for three months ended December 31, 1997, was added
to 12 months ended September 30, 1997, and data for three months ended
December 31, 1996 was then subtracted.
(b) The information reflected as "Michigan Gas Partners" is historical
information for Michigan Gas Partners Limited Partnership.
(c) All of the amounts included in the adjustment column "Excluded in
Formation" are for the assets and liabilities and associated revenues
and expenses, which were excluded in the formation of Quicksilver.
(d) Pro forma revenues, operating expenses and depreciation and depletion
expenses relating to producing properties acquired from Destec are
included in the adjustment column. The pro forma amounts are for the
period from January 1, 1997 to date of purchase October 1, 1997.
Subsequent to October 1, 1997, the results of operations from the
Destec properties were included in historical financial statements.
(e) Depreciation, depletion and amortization expense ("DD&A") has been
computed using the units of production method at a rate of $3.16 per
barrel of oil equivalent to approximately $1,137,000 of the
depletion adjustment of $1,313,000 relates to the Destec properties.
(f) General and administrative expenses were allocated to the remaining
operating units of Mercury based on cost centers served. Mercury
budgets and allocates general and administrative costs based on
profit centers served.
(g) Income taxes were computed on a pro forma basis using an effective rate
of 34 percent.
(h) As part of the proposed merger with MSR Exploration Ltd.,
Quicksilver has agreed to exchange one share of its common stock for
each 10 shares of MSR common stock. To effect the exchange ratio,
the present shareholders of Quicksilver will be issued an additional
10,210,806 common shares in the form of a stock dividend for a
pre-merger total outstanding of 10,310,806.
All references in the financial statements to numbers of shares, and per
share amounts have been restated to reflect the stock dividend.
2. Oil and Gas Reserves Information (Unaudited)
The following pro forma information summarizes Mercury's and Michigan
Gas Partners estimated net quantities of proved and proved-developed
oil and gas reserves. The estimated reserves at December 31, 1997 were
prepared by Mercury's petroleum engineers.
F-20
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------
Michigan
Mercury Gas Partners Pro Forma
----------- -------------- ----------
<S> <C> <C> <C>
Proved Reserves
Oil Mbbls (in thousand of barrels) 15,066 - 15,066
----------- -------------- ----------
----------- -------------- ----------
Natural Gas (MMcf - millions of cubic feet
of gas) 104,088 13,527 117,615
----------- -------------- ----------
----------- -------------- ----------
MMcf of gas equivalent (MMCfE) (Mbbls on
a 1:6 basis) 194,484 13,527 208,011
----------- -------------- ----------
----------- -------------- ----------
Proved Developed Reserves
Oil Mbbls (in thousand of barrels) 4,520 - 4,520
----------- -------------- ----------
----------- -------------- ----------
Natural Gas (MMcf - millions of cubic feet
of gas) 90,600 12,600 103,200
----------- -------------- ----------
----------- -------------- ----------
MMcf of gas equivalent (MMCfE) (Mbbls on
a 1:6 basis) 117,720 12,600 130,320
----------- -------------- ----------
----------- -------------- ----------
</TABLE>
F-21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Mercury Exploration Company
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Mercury
Exploration Company as of September 30, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mercury
Exploration Company as of September 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting
principles.
As described in Note 13, the Company has changed its accounting policy for
accounting for oil and gas properties from the successful efforts method to
the full cost method.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
October 26, 1998
3134
F-22
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 4,530 $ 2,958
Securities available for sale 30 40
Trade accounts receivable 9,226 6,494
Other accounts receivable 110 -
Inventory, at lower of average cost or market 754 887
Notes receivable - current portion 27 40
-------- --------
Total current assets 14,677 10,419
INVESTMENT IN PARTNERSHIPS 6,937 6,200
PROPERTY AND EQUIPMENT
Oil and gas properties ("full cost")
Proven 85,665 25,979
Unproven 1,305 1,710
Land, buildings and leasehold improvements 1,579 1,174
Furniture and equipment 594 478
Transportation equipment 582 502
-------- --------
89,725 29,843
Less accumulated depreciation and depletion 8,621 2,720
-------- --------
81,104 27,123
OTHER ASSETS
Drilling bonds 162 274
Deposit on property acquisition - 6,170
-------- --------
162 6,444
-------- --------
TOTAL ASSETS $102,880 $50,186
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 13,534 $ 3,415
Accounts payable 6,055 4,655
Accrued liabilities 1,698 3,635
Advances payable 2,360 2,839
Royalties payable 1,984 1,483
Accounts payable - related partnerships 107 168
Income taxes payable - 37
Unearned income 2,072 -
-------- --------
Total current liabilities 27,810 16,232
DEFERRED INCOME TAXES 6,650 3,939
LONG-TERM LIABILITIES
Long-term debt 47,174 19,560
MINORITY INTEREST IN SUBSIDIARIES 5,930 28
STOCKHOLDERS' EQUITY
Common shares, no par value,
1,000,000 shares authorized;
250,950 shares issued and outstanding 1,087 1,087
Retained earnings 14,229 9,340
-------- --------
15,316 10,427
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $102,880 $50,186
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OIL AND GAS REVENUE $ 41,328 $ 17,388 $ 6,703
COSTS AND EXPENSES
Production 16,454 11,907 3,849
General and administrative expenses 1,784 1,372 1,234
Depreciation, depletion and amortization 5,918 986 349
---------- ---------- ----------
Income from operations 17,172 3,123 1,271
OTHER INCOME (EXPENSE)
Gain on sale of assets - - 5
Interest expense (5,414) (1,620) ( 324)
Interest income 196 200 239
Equity in partnership income 731 1,010 884
Management fee income 204 176 162
Rental income 221 189 99
Miscellaneous income (expense) 386 417 (189)
---------- ---------- ----------
Income before minority interest
and income taxes 13,496 3,495 2,147
MINORITY INTEREST IN INCOME OF SUBSIDIARIES 5,687 28 -
---------- ---------- ----------
Income before income taxes 7,809 3,467 2,147
INCOME TAXES 2,694 1,219 684
---------- ---------- ----------
NET INCOME $ 5,115 $ 2,248 $ 1,463
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING 250,950 250,950 250,950
---------- ---------- ----------
---------- ---------- ----------
EARNINGS PER SHARE $ 20.38 $ 8.96 $ 5.83
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Retained
Shares Earnings Total
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE,
September 30, 1994 $ 1,087 $ 5,629 $ 6,716
Net income - 1,463 1,463
------------ ------------ ------------
BALANCE,
September 30, 1995 1,087 7,092 8,179
Net income - 2,248 2,248
------------ ------------ ------------
BALANCE,
September 30, 1996 1,087 9,340 10,427
Distribution to shareholders - ( 226) ( 226)
Net income - 5,115 5,115
------------ ------------ ------------
BALANCE,
September 30, 1997 $ 1,087 $ 14,229 $ 15,316
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $39,687 $15,568 $ 7,111
Rent received 221 188 99
Interest received 196 200 239
Cash paid to suppliers and employees ( 19,204) ( 10,290) ( 5,002)
Interest paid ( 5,414) ( 1,620) ( 295)
Income tax paid ( 130) ( 95) ( 49)
---------- ---------- ----------
Net cash provided by operating activities 15,356 3,951 2,103
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable equity securities 14 3 9
Proceeds from sale of assets 586 560 -
Redemption of bonds 112 - 58
Repayment of advance from affiliates - 313 854
Distribution received from partnerships 1,194 1,192 225
Purchases of bonds - ( 71) 90
Payments received on notes receivable 12 60 ( 156)
Advance from affiliates ( 61) - ( 16)
Purchases of marketable equity securities ( 4) ( 14) ( 27)
Deposits paid on property acquisitions - ( 4,370) ( 1,800)
Investments in partnerships ( 1,200) - ( 2,838)
Capital expenditures ( 54,231) ( 19,779) ( 2,227)
---------- ---------- ----------
Net cash used in investing activities ( 53,578) ( 22,106) ( 5,828)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 89,052 17,888 5,950
Payment on advance from stockholders - - ( 47)
Proceeds from production loans 5,271 - -
Payments on production loans ( 3,199) - -
Distributions to minority interest ( 11) - -
Principal paid on long-term debt ( 51,319) ( 1,093) ( 52)
---------- ---------- ----------
Net cash provided by financing activities 39,794 16,795 5,851
---------- ---------- ----------
Net increase (decrease) in cash 1,572 ( 1,360) ( 2,126)
CASH, beginning of period 2,958 4,318 2,192
---------- ---------- ----------
CASH, end of period $ 4,530 $ 2,958 $ 4,318
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 5,115 $ 2,248 $ 1,463
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and depletion 5,918 986 349
Minority interest in income 5,687 28 -
Gain on sale of assets - - ( 5)
Partnership income ( 731) ( 1,010) ( 884)
Deferred income taxes 2,710 1,114 622
Changes in operating assets and liabilities
Accounts receivable ( 2,732) 2,322 ( 731)
Inventory 134 ( 499) ( 388)
Prepaid expenses - - 2,094
Accounts payable 1,400 261 931
Accrued liabilities ( 1,937) 2,434 ( 87)
Advances payable ( 479) 891 ( 3,440)
Royalties payable 501 ( 4,735) ( 1,866)
Income taxes payable ( 147) 10 12
Other ( 83) ( 99) 301
---------- ---------- ----------
Net cash provided by operating activities $ 15,356 $ 3,951 $ 2,103
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
During 1997, notes payables were issued in exchange for assets of
approximately $152,000.
In 1997, stockholders' equity was reduced by approximately $226,000 as
a result of transfer of property to shareholders.
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
MERCURY EXPLORATION
COMPANY NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The nature of operations and significant accounting policies are as
follows:
NATURE OF OPERATIONS
Mercury Exploration Company's (the Company) operations consist
primarily of oil and gas development and production in Texas, New
Mexico, Montana, Wyoming, Michigan, Indiana, Kansas, Oklahoma, Kentucky
and North Dakota.
CONSOLIDATION POLICY
The accompanying consolidated financial statements include the accounts
of the Company, its wholly-owned subsidiary, Mercury Michigan, Inc.,
Quicksilver Pipeline, L.L.C. (organized in 1996) of which the Company
owns 52%, Quicksilver Energy, L.C. (organized in 1996) of which the
Company owns 52%, and Mercury Montana, Inc. (organized in 1997) of
which the Company owns 54%. As a result of the consolidation,
intercompany transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS
Financial instruments of the Company consist of cash, marketable equity
securities, accounts receivable, notes receivable, investments in
partnerships, accounts payable and debt. Recorded values of cash,
accounts receivable, notes receivable and accounts payable approximate
fair values due to the short maturities of the instruments. Investments
in partnerships consist of ownership interests in privately held
entities with no quoted market prices. An estimate of fair value cannot
be made without incurring excessive costs. Investments in marketable
equity securities were determined by quoted prices. Recorded values of
notes payable approximate fair values based upon current interest
rates.
INVENTORY
Inventory consists of oil and gas equipment available for use in
production.
OIL AND GAS PROPERTY 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.
F-29
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
OIL AND GAS PROPERTY AND EQUIPMENT
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.
OTHER PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided for
using the straight-line and accelerated methods. Depreciation methods
are designed to amortize the cost of assets over their estimated useful
lives. Estimated useful lives of major categories of property and
equipment are as follows:
<TABLE>
<S> <C>
Land, buildings and leasehold improvements 40 years
Furniture and equipment 5 - 10 years
Transportation equipment 5 years
</TABLE>
Maintenance, repairs, renewals and betterments, which do not enhance
the value or increase the basic productive capacity of assets are
charged to expense as incurred.
INVESTMENTS IN SECURITIES
The Company has adopted Statement No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, issued by the Financial
Accounting Standards Board. In accordance with Statement No. 115, the
Company's investments in securities are classified as follows:
TRADING SECURITIES - Investments in debt and equity securities
held principally for resale in the near term are classified as
trading securities and recorded at their fair values. Unrealized
gains and losses on trading securities are included in other
income. The Company does not, nor does it intend to, trade
investments that it owns.
F-30
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
SECURITIES TO BE HELD TO MATURITY - Debt securities for which the
Company has the positive intent and ability to hold to maturity
are reported at cost, adjusted for amortization of premiums and
accretion of discounts which are recognized in interest income
using the interest method over the period to maturity.
SECURITIES AVAILABLE FOR SALE - Securities available for sale
consist of its debt and equity securities not classified as
trading securities nor as securities to be held to maturity.
Unrealized holding gains and losses on securities available for sale if
material, are reported as a net amount in a separate component of
stockholders' equity until realized.
Gains and losses on the sale of securities available for sale are
determined using the specific identification method.
ACCOUNTS RECEIVABLE
The Company has not provided an allowance for doubtful accounts. All
receivables considered doubtful have been charged to current operations
and it is management's opinion that no additional material amounts are
doubtful of collection.
CASH FLOW PRESENTATION
For purposes of the statement of cash flows, time deposits that mature
in three months or less, certificates of deposit and cash are
considered cash and cash equivalents.
EARNINGS PER COMMON SHARE
The Company has adopted Statement No. 128, EARNINGS PER SHARE, issued
by the Financial Standards Accounting Board. Adoption of Statement No.
128 had no effect upon 1997, 1996 or 1995 earnings per share
computations.
Basic earnings per common share was computed based on the weighted
average number of common shares outstanding for the period. Diluted
earnings per share have not been presented since the Company has no
outstanding options or warrants to purchase its common stock.
CONCENTRATION OF CREDIT RISK
The Company regularly maintains cash in bank deposit accounts, which
exceed FDIC insured limits. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
F-31
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Accounting Changes
The Financial Accounting Standards Board has issued the following
Statements of Financial Accounting Standards effective for fiscal years
beginning after December 15, 1997:
No. 130 - Reporting Comprehensive Income
Requires that all items are required to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the
same prominence as other financial statements.
NO. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION
Requires disclosure of operating segments based upon
information used internally for evaluating segment performance
and allocating resources.
No. 132 - Employers' Disclosures About Pensions
and other Post-retirement Benefits
Revises employers' disclosures about pensions and other
post-retirement plans.
The Company will adopt the above standards effective January 1, 1998.
Adoption is not expected to have a significant effect upon current
financial statements.
NOTE 2. SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of equity securities and are
carried at cost, which approximates market at September 30, 1997 and
1996. Market value was determined by quoted prices.
Included in net income for the years ended September 30, 1997 and 1996
is a $241 gain and $161 loss, respectively, from sales of marketable
equity securities. The cost of the securities sold was determined by
the specific identity method.
NOTE 3. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable at September 30 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Oil and gas revenue receivable $8,235 $6,188
Joint interest billings receivable 991 306
------ ------
$9,226 $6,494
------ ------
------ ------
</TABLE>
F-32
<PAGE>
NOTE 4. INVESTMENT IN PARTNERSHIPS
Investment in partnerships is stated at cost plus the proportionate share of
invested accumulated income. The Company's investment in partnerships
consists of a 10% interest in Michigan Gas Partners, Ltd., a 6% interest in
Frederic HOF Limited Partnership, and a 50% interest in Wilderness Energy,
L.C. None of these entities individually are considered a significant
subsidiary of the Company. The following is a summary of the combined
financial position and combined results of operations of the Company's
investments in partnerships as of and for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current assets $ 5,127 $ 7,311 $ 8,085
Property, plant and equipment 40,102 44,392 45,916
Other assets 25 274 299
------- ------- -------
Total assets $45,254 $51,977 $54,300
------- ------- -------
------- ------- -------
Current liabilities $ 200 $ 3,502 $ 4,358
Partnership equity 45,054 48,475 49,942
------- ------- -------
Total liabilities and partnership equity $45,254 $51,977 $54,300
------- ------- -------
------- ------- -------
Oil and gas revenue $ 9,830 $ 9,973 $ 8,116
------- ------- -------
------- ------- -------
Net income $ 2,857 $ 3,840 $ 3,889
------- ------- -------
------- ------- -------
Company's investment $ 6,937 $ 6,200 $ 6,285
------- ------- -------
------- ------- -------
</TABLE>
NOTE 5. LONG-TERM DEBT
Long-term debt at September 30 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Note payable to bank with interest at prime,
due in monthly payments of $82,750, with final payment
due on December 31, 2002, retired in 1997, secured by
investment in Wilderness Energy, L.C. and Frederic
HOF Limited Partnership. $ -- $3,000
Notes payable to various entities, due in monthly payments
ranging from $186 to $3,895, including interest ranging
from 7% to 10.63%, secured by land, buildings and equipment. 673 615
Note payable to bank, interest at 8.75%, unsecured,
due on October 17, 1998, retired in 1997. -- 8,800
</TABLE>
F-33
<PAGE>
NOTE 5. LONG-TERM DEBT - CONTINUED
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
(in thousands)
Note payable to bank, due in monthly installments
of $210,000 in 1997, including interest at 8.18%,
secured by the assets of Mercury Exploration, Inc.
in Wyoming and Montana, retired in 1997. -- 10,560
Note payable to bank, due in monthly payments ranging
from $165,000 to $88,333, including interest
at 7.655%, secured by producing oil and gas properties. 8,680 --
Line of credit to bank, due on January 1, 2002,
including interest at Libor + 1.125%, secured by
producing oil and gas properties. 4,900 --
Note payable to bank, due in monthly payments of
$82,750, with interest at prime + .25%, with final
payment due January 1, 2003, secured by oil and gas
producing properties 4,255 --
Note payable to bank, due in monthly payments of
$866,667, including interest at 7.59% (based on rate swap),
with final payment due on December 27, 2000, secured by
oil and gas producing properties and investment in
Quicksilver Energy, L.C. 15,200 --
Note payable to bank, due in quarterly payments ranging
from $1,400,000 to $600,000, beginning in August 1999,
including interest at 9%, with final payment due on
March 31, 2007, secured by oil and gas producing
properties and investment in Quicksilver Energy, L.C. 27,000 --
------- -------
60,708 22,975
Less current maturities 13,534 3,415
------- -------
$47,174 $19,560
------- -------
------- -------
</TABLE>
Aggregate maturities of long-term debt as follows: (in thousands)
<TABLE>
<CAPTION>
<S> <C>
1998 $13,534
1999 10,335
2000 7,170
2001 6,220
2002 10,353
Thereafter 13,096
-------
$60,708
-------
-------
</TABLE>
F-34
<PAGE>
NOTE 6. INCOME TAXES
The Company provides for deferred income taxes resulting from temporary
differences between the tax basis of assets and liabilities, and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. Temporary differences result primarily from intangible
development costs being capitalized and amortized for financial reporting
purposes but expensed for tax reporting purposes and different income
recognition criteria for debt extinguishment. Also included in income taxes is
the portion of state taxes based on income.
The Company's income tax provision is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current $ (16) $ 105 $ 62
Deferred 2,710 1,114 622
------ ------ ----
$2,694 $1,219 $684
------ ------ ----
------ ------ ----
</TABLE>
The tax effects of net operating loss carryforwards and temporary
differences at September 30, 1997 and 1996 that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets
Net operating loss carry-forwards $ 539 $ 128
Tax credits carry-forwards 253 322
------ ------
792 450
------ ------
Deferred tax liabilities
Property and equipment $5,458 $2,114
Long term debt 1,198 1,559
Investments 786 716
------ ------
7,442 4,389
------ ------
Total deferred taxes, net $6,650 $3,939
------ ------
------ ------
</TABLE>
There is no material difference between the statutory tax rate and the
provision for taxes used in the accompanying financial statements.
The Company has U.S. net operating loss carry-forwards of approximately
$1,600,000 available to reduce future U.S. taxable income subject to
certain limitations. These U.S. net operating loss carry-forwards will
expire in 2012.
NOTE 7. PROFIT SHARING AND SAVINGS PLAN
The Company sponsors a defined contribution pension plan. All full-time
employees are eligible for participation upon completion of one year's service.
Employee contributions to the plan for the year ended September 30, 1997, 1996
and 1995 were $199,000, $162,000 and $106,000, respectively. The Company made
contributions of $200,000, $117,000 and $78,000 in 1997, 1996 and 1995,
respectively.
F-35
<PAGE>
NOTE 8. OPERATING LEASES
The Company's leasing operations consist principally of the leasing of
automobiles under operating leases that expire over the next three years.
The future minimum annual rentals on noncancellable leases in effect at
September 30, 1997, which have initial or remaining terms of more than one year,
are as follows:
<TABLE>
<S> <C>
1998 $87,000
1999 70,000
2000 17,000
</TABLE>
Total rental expense under operating leases was $129,000, $115,000 and
$162,000 in 1997, 1996 and 1995, respectively.
NOTE 9. FUTURES CONTRACT
There were no significant realized or unrealized gains or losses on this
agreement at September 30, 1997. The Company has entered into this
agreement as a hedge against any downward movement in the commodity
price of oil through December 31, 1997. The agreement terminates at
December 31, 1997. The Company has received a cash payment in advance of
the deliver of the oil at a fixed price of approximately $17.48 per
barrel. The market price for oil at September 30, 1997 was less than
this price.
NOTE 10. CONTINGENCIES
The Company is a defendant in a lawsuit filed by a former employee with
potential exposure of $500,000. The Company believes the lawsuit is without
merit and is vigorously defending its position, and does not expect the
ultimate outcome to materially affect the Company's financial position.
NOTE 11. SUBSEQUENT EVENTS
The Company settled a lawsuit in December of 1997, which resulted in a
gain of approximately $2,781,000.
In October 1997, Mercury Montana, Inc. merged with MSR Exploration, Inc.
As a result of the merger, Mercury Exploration Company obtained an
approximate 25% ownership interest in MSR Exploration, Inc.
Effective January 1, 1998, Mercury transferred substantially all
producing oil and gas properties to a newly formed related company,
Quicksilver Resources Inc. in exchange for common stock of Quicksilver.
Subsequently on September 1, 1998, Quicksilver Resources Inc. entered
into a merger agreement with MSR Exploration Ltd.
NOTE 12. ACQUISITIONS
On November 14, 1996 Quicksilver Energy L.C., a 52 percent owned subsidiary
of Mercury, consummated the acquisition of certain property interests from
Shell Western Exploration & Production, Inc. (the Shell properties). Such
interests are primarily located in Michigan and, as of January 1, 1998, had
combined proved reserves of approximately 42.5 Bcfe. The aggregate purchase
price for the interests was approximately $57.7 million, which was paid in
cash principally with bank debt.
F-36
<PAGE>
The following unaudited pro forma summary presents the consolidated results
of operations of Mercury for the years ended September 30, 1997, 1996 and
1995 as if the acquisition had occurred at the beginning of each fiscal
year.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, 1997 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------
(In thousands, except for per share data)
<S> <C> <C> <C>
Revenues $44,599 $47,802 $26,783
Net income 5,457 10,227 5,872
Earnings per share 21.74 40.75 23.39
</TABLE>
On October 9, 1997, Mercury consummated the acquisition of certain
property interests from ECT Enocene Enterprises II, (the Destec
properties). Such interests are primarily located in Michigan and, as of
January 1, 1998, had combined proved reserves of approximately 25.4
Bcfe. The aggregate purchase price for the interests was approximately
$23.5 million, which was paid in cash principally with debt from
Mercury's credit facility.
The following unaudited pro forma summary presents the consolidated
results of operations of Mercury for the years ended September 30, 1997
and 1996 as if the acquisition had occurred at the beginning of each
fiscal year. The 1996 pro forma amounts also give effect to the Shell
properties acquisition discussed above.
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1997 September 30, 1996
------------------ ------------------
(In thousands, except for per share data)
<S> <C> <C>
Revenues $51,856 $54,026
Net income 8,330 12,721
Earnings per share 33.19 50.68
</TABLE>
NOTE 13. CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES
Pursuant to the merger agreement with MSR Exploration Ltd. dated
September 1, 1998, the Company has changed its accounting policy for oil
and gas properties from the successful efforts method to the full cost
method. Accordingly, the Company's financial statements have been
restated to apply the change retroactively. The effect of the
accounting change on income as previously reported for 1997, 1996 and
1995 is:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Effect on:
Income before extraordinary
item and net income $4,219 $1,169 $ 200
Earnings per common share $16.81 $ 4.66 $0.80
</TABLE>
Adoption of the full cost method of accounting for oil and gas
properties was mandated in the September 1998 merger agreement with MSR
and is consistent with the accounting policy of MSR previously disclosed
to its shareholders and the general public. In addition, the Company
believes the full cost method of accounting for oil and gas properties
more accurately reflects management's exploration objectives and results
by including all costs incurred in oil and gas producing activities as
integral to the acquisition, discovery and development of whatever
reserves ultimately result from its efforts as a whole.
NOTE 14. SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED)
The Company's proved oil and gas reserves at September 30, 1997 have
been estimated by the Company's petroleum engineers in accordance with
guidelines established by the Securities and Exchange Commission ("SEC").
Accordingly, the following reserve estimates are based upon existing
economic and operating conditions.
F-37
<PAGE>
NOTE 14. SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED
There are numerous uncertainties inherent in establishing quantities of proved
reserves. The following reserve data represent estimates only and should not be
construed as being exact. In addition, the present values should not be
construed as the current market value of the Company's oil and gas properties or
the cost that would be incurred to obtain equivalent reserves.
Estimated Reserves
Changes in the estimated net quantities of crude oil and natural gas
reserves, all of which are located in the continental United States, are as
follows:
Reserve Quantities
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Proved reserves:
Crude Oil (MBbls)
Beginning of period 20,473 980 997
Revisions of previous estimates 450 --
Purchase of reserves in place 1,436 19,608 --
Production (835) (565) (17)
------ ------ ------
End of period 21,074 20,473 980
------ ------ ------
------ ------ ------
Minority interest end of period 374 0 0
Natural Gas (MMcf):
Beginning of period 20,571 22,523 23,127
Revisions of previous estimates (881) (3,041)
Purchase of reserves in place 66,114 2,029
Production (7,852) (940) (604)
------ ------ ------
End of period 77,952 20,571 22,523
------ ------ ------
------ ------ ------
Minority interest end of period 21,401 0 0
Proved developed reserves
Crude Oil (MBbls)
Beginning of period 5,955 113 130
End of period 6,873 5,955 113
Minority interest end of period 374 0 0
Natural Gas (MMcf)
Beginning of period 18,542 19,295 19,899
End of period 69,883 18,542 19,295
Minority interest end of period 21,401 0 0
Company's proportional interest in proved
reserves of investee's accounted for
by the equity method - end of year 1,352 1,701 2,641
</TABLE>
F-38
<PAGE>
Standardized Measure
The following tables present the Company's standardized measure of discounted
future net cash flows and changes therein relating to proved oil and gas
reserves and were computed using reserve valuations based on regulations
prescribed by the SEC. These regulations provide that the oil, condensate and
gas price structure utilized to project future net cash flows reflects current
prices at each date presented and have been escalated only when known and
determinable price changes are provided by contract. Future production,
development and net abandonment costs are based on current costs without
escalation. The resulting net future cash flows have been discounted to their
present values based on a 10% annual discount factor.
<TABLE>
<CAPTION>
Standardized Measure (in thousands): Year Ended September 30,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Future cash flows $457,196 $375,012 $56,067
Future production and development costs (255,999) (231,817) (30,418)
Future income tax expense (48,301) (41,985) (6,675)
-------- -------- -------
152,896 101,210 18,974
10% annual discount for timing of cash flows (70,805) (51,810) (10,556)
-------- -------- -------
Standardized measure of discounted
Cash flows $ 82,091 $ 49,400 $ 8,418
-------- -------- -------
-------- -------- -------
Company's share of equity method investee's
standardized measure of discounted future
net cash flows $ 1,101 $ 1,048 $ 1,189
</TABLE>
Primary changes in standardized measure of discounted future net cash flows
(thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net changes in prices and production costs $ (2,176) $ (2,201) $ 2,845
Development costs incurred (1,755) (2,832) (405)
Changes in estimated future development costs (1,654) (4,395) -
Purchases in reserves-in-place 62,355 71,115 -
Net change in income taxes (5,932) (17,531) (994)
Sales of oil and gas, net of production costs (21,923) (5,482) (2,854)
Accretion of discount 4,940 842 614
Other (1,164) 1,466 458
-------- -------- -------
$ 32,691 $ 40,982 $ (336)
-------- -------- -------
-------- -------- -------
</TABLE>
Estimated future cash inflows are computed by applying year end prices of oil
and gas to year end quantities of proved developed reserves. Estimated future
development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and
gas reserves in future years, based on year end costs and assuming
continuation of existing economic conditions.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the SEC. Because of
unpredictable variances in expenses and capital forecasts, crude oil and
natural gas price changes, and the fact that the bases for such estimates
vary significantly, management believes the usefulness of these projections
is limited. Estimates of future net cash flows do not necessarily represent
management's assessment of future profitability or future cash flow to
Mercury.
F-39
<PAGE>
Costs incurred in oil and gas property acquisition, exploration and
development activities (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Property acquisition costs $53,162 $14,631 $ 0
Exploration costs $ 3,027 $ 778 $ 550
Development costs $ 0 $ 0 $2,095
Company's share of equity method investee's
costs of property acquisition, exploration
and development $ -- $ 120 $ 511
</TABLE>
Results of operations from producing activities (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Oil and gas sales $34,440 $12,169 $2,106
Operating expenses (17,312) (11,945) (4,321)
Production taxes (2,169) (739) (78)
Depletion and depreciation (5,361) (796) (271)
-------- -------- -------
9,598 (1,311) (2,564)
Income taxes (3,263) 0 0
-------- -------- -------
Results of operations from
producing activities (excluding corporate
overhead and interest costs) $ 6,335 ($1,311) ($2,564)
-------- -------- -------
-------- -------- -------
Minority interest in results of
operations $ 5,667 $ 0 $ 0
-------- -------- -------
-------- -------- -------
Company's share of equity method investee's
results of operations from producing
activities $ (81) $ 85 $ 7
</TABLE>
NOTE 15. CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
For the Years Ended September 30, 1997, 1996, and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Unproved oil and gas properties $ 1,305 $ 1,710 $ 1,003
Proved oil and gas properties 85,665 25,979 7,986
-------- -------- --------
86,970 27,689 8,989
Less accumulated depreciation and depletion 6,729 1,067 271
-------- -------- --------
Net capitalized costs $ 80,241 $ 26,622 $ 8,718
-------- -------- --------
-------- -------- --------
Company's share of equity method
investee's net capitalized costs $ 911 $ 1,005 $ 1,189
-------- -------- --------
-------- -------- --------
</TABLE>
F-40
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Mercury Exploration Company
Fort Worth, Texas
We have audited the accompanying consolidated balance sheet of Mercury
Exploration Company as of December 31, 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for the three
months then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mercury
Exploration Company as of December 31, 1997, and the results of its
operations and its cash flows for the three months then ended in conformity
with generally accepted accounting principles.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
November 30, 1998
F-41
<PAGE>
MERCURY EXPLORATION COMPANY
Consolidated Balance Sheet
December 31, 1997
In thousands
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 6,844
Securities available for sale 27
Trade accounts receivable 9,635
Inventory, at lower of average cost or market 899
Notes receivable - current portion 81
------------
Total current assets 17,486
INVESTMENT IN MSR EXPLORATION, LTD. 119
INVESTMENT IN PARTNERSHIPS 6,556
PROPERTY AND EQUIPMENT
Oil and gas properties 109,591
Land, buildings and leasehold improvements 1,407
Furniture and equipment 683
Transportation equipment 745
------------
112,426
Less accumulated depreciation and depletion 10,383
------------
102,043
OTHER ASSETS 302
------------
TOTAL ASSETS $ 126,506
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 13,335
Accounts payable 6,744
Accrued liabilities 826
Advances payable 3,420
Royalties payable 1,631
Income taxes payable 854
------------
Total current liabilities 26,810
------------
UNEARNED REVENUES 2,567
DEFERRED INCOME TAXES 7,070
LONG-TERM DEBT 65,275
MINORITY INTEREST IN SUBSIDIARIES 7,114
STOCKHOLDERS'S EQUITY
Capital stock, no par value
1,000,000 shares authorized;
250,950 shares issued and outstanding 1,087
Retained earnings 16,583
------------
17,670
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$ 126,506
------------
------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-42
<PAGE>
MERCURY EXPLORATION COMPANY
Consolidated Statement of Income
For the Three Months Ended December 31, 1997
In thousands
<TABLE>
<S> <C>
OIL AND GAS REVENUES $ 11,049
COSTS AND EXPENSES
Operating expenses 4,736
Depletion and depreciation 2,466
General and administrative 532
-------------
Income from operations 3,315
-------------
OTHER INCOME (EXPENSE)
Interest expense (1,879)
Interest income 27
Equity in partnerships 78
Manage fee income 54
Rental income 32
Miscellaneous income 461
Income from litigation settlement 2,781
-------------
Income before income taxes
and minority interest 4,869
MINORITY INTEREST IN INCOME
OF SUBSIDIARY 1,277
-------------
Income before income taxes 3,592
INCOME TAXES 1,238
-------------
NET INCOME $ 2,354
-------------
-------------
Weighted average shares outstanding 250,950
-------------
-------------
Earnings per share $ 9.38
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-43
<PAGE>
MERCURY EXPLORATION COMPANY
Consolidated Statement of Stockholders' Equity
For the Three Months Ended December 31, 1997
In thousands
<TABLE>
<CAPTION>
Common Retained
Shares Earnings Total
------- -------- --------
<S> <C> <C> <C>
BALANCE
September 30, 1997 $ 1,087 $ 14,229 $ 15,316
Net Income 2,354 2,354
------- -------- --------
BALANCE
December 31, 1997 $ 1,087 $ 16,583 $ 17,670
------- -------- --------
------- -------- --------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-44
<PAGE>
MERCURY EXPLORATION COMPANY
Consolidated Statement of Cash Flows
For the Three Months Ended December 31, 1997
In thousands
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,354
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and depletion 2,466
Minority interest in undistributed subsidiary earnings 1,277
Partnership income (78)
Reduction of unearned revenues (1,593)
Deferred income taxes 273
Changes in operating assets and liabilities
Accounts receivable (7)
Inventory (223)
Accounts payable 575
Accrued liabilities (859)
Advances payable 1,060
Royalties payable (353)
Income taxes payable 964
Other (205)
---------------
Net cash provided by operating activities 5,651
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (27,750)
Proceeds from sale of marketable equity securities 4
Proceeds from bond maturities 65
Distribution received from partnerships 458
Advances on notes receivable (15)
Investments in common stock not held for resale (119)
---------------
Net cash used in investing activities (27,327)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 25,435
Receipt of unearned revenues 2,088
Principal paid on long-term debt (3,533)
---------------
Net cash provided by financing activities 23,990
---------------
Net increase (decrease) in cash 2,314
CASH, beginning of period 4,530
---------------
CASH, end of period $ 6,844
---------------
---------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-45
<PAGE>
MERCURY EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The nature of operations and significant accounting policies are as
follows:
NATURE OF OPERATIONS
Mercury Exploration Company's (the Company) operations consist
primarily of oil and gas development and production in Texas, New
Mexico, Wyoming, Michigan, Indiana, Kansas, Oklahoma, Kentucky and
North Dakota.
CONSOLIDATION POLICY
The accompanying consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiary, Mercury
Michigan, Inc., Quicksilver Pipeline, L.L.C. (organized in 1996) of
which the Company owns 52%, and Quicksilver Energy, L.C. (organized in
1996) of which the Company owns 52%. As a result of the consolidation,
intercompany transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS
Financial instruments of the Company consist of cash, marketable
equity securities, accounts receivable, notes receivable, investments
in partnerships, accounts payable and debt. Recorded values of cash,
accounts receivable, notes receivable and accounts payable
approximate fair values due to the short maturities of the
instruments. Investments in partnerships consist of ownership
interests in privately held entities with no quoted market prices. An
estimate of fair value cannot be made without incurring excessive
costs. Investments in marketable equity securities were determined by
quoted prices. Recorded values of notes payable approximate fair
values based upon current interest rates.
INVENTORY
Inventory consists of oil and gas equipment available for use in
production.
OIL AND GAS PROPERTY 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.
F-46
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
OIL AND GAS PROPERTY AND EQUIPMENT - CONTINUED
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.
OTHER PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided
for using the straight-line and accelerated methods. Depreciation
methods are designed to amortize the cost of assets over their
estimated useful lives. Estimated useful lives of major categories of
property and equipment are as follows:
<TABLE>
<S> <C>
Land, buildings and leasehold improvements 40 years
Furniture and equipment 5 - 10 years
Transportation equipment 5 years
</TABLE>
Maintenance, repairs, renewals and betterments, which do not enhance
the value or increase the basic productive capacity of assets are
charged to expense as incurred.
INVESTMENTS IN SECURITIES
The Company has adopted Statement No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, issued by the Financial
Accounting Standards Board. In accordance with Statement No. 115, the
Company's investments in securities are classified as follows:
TRADING SECURITIES - Investments in debt and equity securities
held principally for resale in the near term are classified as
trading securities and recorded at their fair values. Unrealized
gains and losses on trading securities are included in other
income. The Company does not, nor does it intend to, trade
investments that it owns.
F-47
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVESTMENTS IN SECURITIES - CONTINUED
SECURITIES TO BE HELD TO MATURITY - Debt securities for which the
Company has the positive intent and ability to hold to maturity
are reported at cost, adjusted for amortization of premiums and
accretion of discounts which are recognized in interest income
using the interest method over the period to maturity.
SECURITIES AVAILABLE FOR SALE - Securities available for sale
consist of its debt and equity securities not classified as
trading securities nor as securities to be held to maturity.
Unrealized holding gains and losses on securities available for sale
if material, are reported as a net amount in a separate component of
stockholders' equity until realized.
Gains and losses on the sale of securities available for sale are
determined using the specific identification method.
ACCOUNTS RECEIVABLE
The Company has not provided an allowance for doubtful accounts. All
receivables considered doubtful have been charged to current
operations and it is management's opinion that no additional material
amounts are doubtful of collection.
CASH FLOW PRESENTATION
For purposes of the statement of cash flows, time deposits that mature
in three months or less and certificates of deposit are considered
cash and cash equivalents.
EARNINGS PER COMMON SHARE
The Company has adopted Statement No. 128, EARNINGS PER SHARE, issued
by the Financial Standards Accounting Board. Adoption of Statement
No. 128 had no effect upon 1997 earnings per share computations.
Basic earnings per common share was computed based on the weighted
average number of common shares outstanding for the period. Diluted
earnings per share have not been presented since the Company has no
outstanding options or warrants to purchase its common stock.
CONCENTRATION OF CREDIT RISK
The Company regularly maintains cash in bank deposit accounts, which
exceed FDIC insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
F-48
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
ACCOUNTING CHANGES
The Financial Accounting Standards Board has issued the following
Statements of Financial Accounting Standards effective for fiscal years
beginning after December 15, 1997:
NO. 130 - REPORTING COMPREHENSIVE INCOME
Requires that all items are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as
other financial statements.
NO. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION
Requires disclosure of operating segments based upon information used
internally for evaluating segment performance and allocating
resources.
NO. 132 - EMPLOYERS' DISCLOSURES ABOUT PENSIONS
AND OTHER POST-RETIREMENT BENEFITS
Revises employers' disclosures about pensions and other
post-retirement plans.
The Company will adopt the above standards effective January 1, 1998.
Adoption is not expected to have a significant effect upon current
financial statements.
NOTE 2. SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of equity securities and are carried
at cost, which approximates market at December 31, 1997. Market value was
determined by quoted prices.
Included in net income for the three months ended December 31, 1997 is a
$594 gain from sales of marketable equity securities. The cost of the
securities sold was determined by the specific identity method.
NOTE 3. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable at December 31 consist of the following:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Oil and gas revenue receivable $ 8,023
Joint interest billings receivable 1,612
--------
$ 9,635
--------
--------
</TABLE>
F-49
<PAGE>
NOTE 4. INVESTMENT IN PARTNERSHIPS
Investment in partnerships is stated at cost plus the proportionate share
of invested accumulated income. The Company's investment in partnerships
consists of a 10% interest in Michigan Gas Partners, Ltd., a 6% interest
in Frederic HOF Limited Partnership, and a 50% interest in Wilderness
Energy, L.C. The following is a summary of the combined financial
position and combined results of operations of the Company's investments
in partnerships as of and for the three months ended December 31, 1997:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Current assets $ 4,141
Property, plant and equipment 37,831
--------
Total assets $ 41,972
--------
--------
Current liabilities $ 674
Partnership equity 41,298
--------
Total liabilities and partnership equity $ 41,972
--------
--------
Oil and gas revenue $ 3,209
--------
--------
Net income $ 767
--------
--------
Company's investment $ 6,556
--------
--------
</TABLE>
NOTE 5. CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
<S> <C>
At December 31, 1997 (In thousands)
Unproved oil and gas properties $ 3,079
Proved oil and gas properties 106,512
---------
109,591
Less accumulated depreciation and depletion 9,127
---------
Net capitalized costs $ 100,464
---------
---------
Company's share of equity method investee's
net capitalized costs $ 911
---------
---------
</TABLE>
F-50
<PAGE>
NOTE 6. LONG-TERM DEBT
Long-term debt at December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Notes payable to various entities, due in
monthly payments ranging from 7% to 10.63%,
secured by land, buildings and equipment. 645
Note payable to bank, due in monthly payments
ranging from $165,000 to $88,333, including interest at
7.655%, secured by producing oil and gas properties. 8,020
Line of credit to bank, due on January 1, 2002, including
interest at Libor + 1.125%, secured by producing oil and gas
properties. 26,335
Note payable to bank, due in monthly payments of
$82,750, with interest at prime + .25%, with final payment
due January 1, 2003, secured by oil and gas producing
properties 4,010
Note payable to bank, due in monthly payments of $866,667,
including interest at 7.59% (based on rate swap), with final
payment due on December 27, 2000, secured by oil and gas
producing properties and investment in Quicksilver Energy, L.C. 12,600
Note payable to bank, due in quarterly payments ranging from
$1,400,000 to $600,000, beginning in August 1999, including
interest at 9%, with final payment due on March 31, 2007,
secured by oil and gas producing properties and investment
in Quicksilver Energy, L.C. 27,000
-------
78,610
Less current maturities 13,335
-------
$65,275
-------
-------
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
-------
1999 $13,335
2000 8,896
2001 6,876
2002 6,034
2003 31,874
Thereafter 11,595
-------
$78,610
-------
-------
</TABLE>
NOTE 7. INCOME TAXES
The Company provides for deferred income taxes resulting from temporary
differences between the tax basis of assets and liabilities, and their
reported amounts in the financial statements that will result in taxable
or deductible amounts in future years. Temporary differences result
primarily from intangible development costs being capitalized and
amortized for financial reporting purposes but expensed for tax
reporting purposes and different income recognition criteria for debt
extinguishment. Also included in income taxes is the portion of state
taxes based on income.
F-51
<PAGE>
NOTE 7. INCOME TAXES - CONTINUED
The Company's income tax provision at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Current $ 965
Deferred 273
-------
$ 1,238
-------
-------
</TABLE>
The tax effects temporary differences at December 31, 1997 that give rise
to significant portions of deferred tax assets and deferred tax liabilities
are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Deferred tax assets
Tax credits carry-forwards $ 738
------
738
------
Deferred tax liabilities
Property and equipment 5,992
Long term debt 1,187
Investments 629
------
$7,808
------
Total deferred taxes, net $7,070
------
------
</TABLE>
There is no material difference between the statutory tax rate and the
provision for taxes used in the accompanying financial statements.
The Company has tax credits carry forwards available to offset regular
federal income taxes of approximately $738,000 due to expire in 2002.
NOTE 8. PROFIT SHARING AND SAVINGS PLAN
The Company sponsors a defined contribution pension plan. All full-time
employees are eligible for participation upon completion of one year's
service. Employee contributions to the plan for the three months ended
December 31, 1997 were $61,500. The Company made no contributions for
the three months ended December 31, 1997.
NOTE 9. OPERATING LEASES
The Company's leasing operations consist principally of the leasing of
automobiles under operating leases that expire over the next three years.
The future minimum annual rentals on noncancellable leases in effect at
December 31, 1997, which have initial or remaining terms of more than
one year, are as follows:
<TABLE>
<S> <C>
1998 $ 108,000
1999 81,000
2000 33,000
</TABLE>
Total rental expense under operating leases was $26,000, for the three
months ended December 31, 1997.
F-52
<PAGE>
NOTE 10. FUTURES CONTRACT
The Company has entered into an agreement for the future delivery of
approximately 41,800 barrels of oil. The contract qualifies as a hedge for
financial reporting purposes. Accordingly, changes in the value of the
contract are recognized in income when the effects of changes in oil prices
are recognized. There were no significant realized or unrealized gains or
losses on this agreement at September 30, 1997. The Company has entered
into this agreement as a hedge against any downward movement in the
commodity price of oil through December 31, 1997. The agreement
terminates at December 31, 1997. The Company has received a cash
payment in advance of the delivery of the oil at a fixed price of
approximately $17.48 per barrel. The market price for oil at September
30, 1997 was less than this price.
NOTE 11. TAX CREDIT SALE
In December 1997, the Company transferred certain properties, which
carry IRS Code Section 29 income tax benefits, to an unrelated party and
received consideration as follows:
a. Initial payment of $2,553,000
b. Fixed payment note of $5,093,000
c. Credit payment note
d. Production payment
Code Section 29 allows a credit against regular federal income tax
liability for certain eligible gas production. A portion of the initial
cash payment represented an advance payment for the first eighteen
months of tax benefits. As of December 31, 1997, a balance of $2,448,000
in unearned revenues existed as a result of cash consideration received
in excess of the tax benefit earned. For accounting purposes, the
transfer does not qualify for sale or gain recognition. Accordingly,
the accompanying financial statements continue to include the Company's
costs, revenues and expenses associated with the assets transferred.
NOTE 12. SUPPLEMENTAL CASHFLOW INFORMATION
In October 1998, the Company exchanged its 54% interest in a subsidiary,
Mercury Montana, Inc., for a 25% interest in MSR Exploration Ltd. The
investment in MSR Exploration Ltd. is being accounted for under the equity
method of accounting. Assets and liabilities of Mercury Montana, Inc. at
the date of exchange were as follows:
Non-Cash Investing and Financing Activities
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Assets
Inventory $ 78
Oil and gas properties, net 4,345
Other assets 50
------
Total Assets $4,473
------
------
Liabilities
Accounts payable 395
Accrued liabilities 13
Deferred income taxes (147)
Long-term debt 4,000
Minority interest in subsidiaries 93
------
Total Liabilities $4,354
------
------
Investment in MSR Exploration Ltd. $ 119
------
------
</TABLE>
F-53
<PAGE>
NOTE 13. CONTINGENCIES
The Company is a defendant in a lawsuit filed by a former employee with
potential exposure of $500,000. The Company believes the lawsuit is
without merit and is vigorously defending its position, and does not
expect the ultimate outcome to materially affect the Company's financial
position.
NOTE 14. SUBSEQUENT EVENTS
Effective January 1, 1998, Mercury transferred substantially all
producing oil and gas properties to a newly formed related company,
Quicksilver Resources, Inc. in exchange for common stock in Quicksilver.
Subsequently on September 1, 1998, Quicksilver Resources Inc. entered
into a merger agreement with MSR Exploration Ltd.
NOTE 15. SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED)
The Company's proved oil and gas reserves at December 31, 1997 have been
estimated by the Company's petroleum engineers in accordance with
guidelines established by the Securities and Exchange Commission
("SEC"). Accordingly, the following reserve estimates are based upon
existing economic and operating conditions.
There are numerous uncertainties inherent in establishing quantities of
proved reserves. The following reserve data represent estimates only
and should not be construed as being exact. In addition, the present
values should not be construed as the current market value of the
Company's oil and gas properties or the cost that would be incurred to
obtain equivalent reserves.
Estimated Reserves
Changes in the estimated net quantities of crude oil and natural gas
reserves, all of which are located in the continental United States, are
as follows:
Reserve Quantities December 31, 1997
<TABLE>
<CAPTION>
Petroleum Natural
Liquids Gas
(bbls) (MMCF)
--------- -------
(in thousands)
<S> <C> <C>
Reserves at September 30, 1997 21,074 77,952
Purchases of reserves-in-place - 30,831
Sale of reserves-in-place (5,840) (1,339)
Production (168) (3,339)
------- -------
Reserves at December 31, 1997 15,066 104,105
------- -------
------- -------
Total proved developed reserves
At December 31, 1997 4,520 90,585
------- -------
------- -------
Company's proportional interest
in reserves of investee's accounted
for by the equity method-end of year 0 1,352
------- -------
------- -------
</TABLE>
F-54
<PAGE>
NOTE 15. SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED
Standardized Measure
The following tables present the Company's standardized measure of
discounted future net cash flows and changes relating to proved oil and gas
reserves and were computed using reserve valuations based on regulations
prescribed by the SEC. These regulations provide that the oil, condensate
and gas price structure utilized to project future net cash flows reflects
current prices at each date presented and have been escalated only when
known and determinable price changes are provided by contract. Future
production, development and net abandonment costs are based on current
costs without escalation. The resulting net future cash flows have been
discounted to their present values based on a 10% annual discount factor.
Standardized Measure (in thousands): December 31, 1997
<TABLE>
<S> <C>
Future cash inflows $ 417,051
Future development and production costs (213,408)
Future income tax expense (40,965)
---------
Future net cash flows 162,678
10% annual discount (71,774)
---------
Standardized measure of
discounted future cash flows $ 90,904
---------
---------
Company's shares of equity method investee's
standardized measure of discounted future net
cash flows $ 1,101
---------
---------
</TABLE>
Primary changes in standardized measure of discounted future net cash
flows (thousands of dollars) for the three months ended December 31, 1997:
<TABLE>
<S> <C>
Net changes in prices and production costs $ 1,708
Sale of reserves-in-place (20,443)
Development costs incurred (1,486)
Changes in estimated future development costs -
Purchases of reserves-in-place 32,247
Net change in income taxes 2,052
Sales of oil and gas, net of production costs (6,313)
Accretion of discount 2,052
Other (1,004)
--------
$ 8,813
--------
--------
</TABLE>
Estimated future cash inflows are computed by applying year end prices of
oil and gas to year end quantities of proved developed reserves. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and
gas reserves in future years, based on year end costs and assuming
continuation of existing economic conditions.
These estimates are furnished and calculated in accordance with
requirements of the Financial Accounting Standards Board and the SEC.
Because of unpredictable variances in expenses and capital forecasts,
crude oil and natural gas price changes, and the fact that the bases for
such estimates vary significantly, management believes the usefulness of
these projections is limited. Estimates of future net cash flows do not
necessarily represent management's assessment of future profitability or
future cash flow to the Company.
F-55
<PAGE>
Costs incurred in oil and gas property acquisition, exploration and
development activities (in thousands):
NOTE 15. SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED
For the three months ended December 31, 1997, in thousands:
<TABLE>
<S> <C>
Property acquisition costs $25,152
Exploration costs 32
Development costs 2,566
Company's share of equity method investee's
costs of property acquisition exploratory
and development $ 0
</TABLE>
Results of operations from producing activities (in thousands):
For the three months ended December 31, 1997
<TABLE>
<S> <C>
Oil and gas sales $ 9,456
Operating expenses (2,661)
Production taxes (563)
Depletion and depreciation (2,442)
-------
3,790
Income taxes (1,289)
-------
Results of operations from
producing activities
(excluding corporate
overhead and interest costs) $ 2,501
-------
-------
Minority interest in results of
operations $ 1,269
-------
-------
Company's share of equity method
investee's results of operations
for producing activities $ (12)
-------
-------
</TABLE>
F-56
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Michigan Gas Partners Limited Partnership
We have audited the accompanying balance sheets of Michigan Gas Partners
Limited Partnership as of December 31, 1997 and 1996 and the related
statements of operations, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Michigan Gas Partners
Limited Partnership as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the three years ended December 31,
1997, in conformity with generally accepted accounting principles.
As described in Note 8, the Company has changed its accounting policy for
accounting for oil and gas properties from the successful efforts method to
the full cost method.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
October 26, 1998
F-57
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 56 $ 55
Oil and gas revenue receivable 669 444
--------- --------
Total current assets 725 499
PROPERTY AND EQUIPMENT
Producing oil and gas leases 13,668 13,655
Less accumulated depletion,
depreciation and amortization 4,558 3,603
--------- ---------
9,110 10,052
--------- --------
TOTAL ASSETS $ 9,835 $10,551
--------- --------
--------- --------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable $ 150 $ 238
Deferred revenues 232 -
--------- --------
Total current liabilities 382 238
PARTNERS' CAPITAL 9,453 10,313
---------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 9,835 $10,551
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Oil and gas sales $ 2,894 $ 3,212 $ 1,732
Gas compressor reimbursement 110 156 198
Other income 17 - -
---------- ---------- ----------
Total revenues 3,021 3,368 1,930
COSTS AND EXPENSES
Lease operating expenses 1,922 1,853 1,183
Production taxes 114 133 70
Depletion, depreciation and amortization 955 1,067 839
Impairment of oil and gas properties - 902 423
General and administrative 11 30 28
---------- ---------- ----------
Total cost and expenses 3,002 3,985 2,543
---------- ---------- ----------
NET INCOME (LOSS) $ 19 $ (617) $ (613)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, DECEMBER 31, 1994 $ 8,482
Distributions (494)
Capital contributed 4,838
Net loss (613)
--------
BALANCE, DECEMBER 31, 1995 12,213
Distributions (1,283)
Net loss (617)
--------
BALANCE, DECEMBER 31, 1996 10,313
Distributions (879)
Net income 19
--------
BALANCE, DECEMBER 31, 1997 $ 9,453
--------
--------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from oil and gas sales $ 2,938 $ 3,211 $ 1,561
Cash received from gas compressor reimbursement 90 74 173
Cash paid to suppliers and employees ( 2,135) ( 1,913) ( 1,148)
--------- --------- ---------
Net cash provided by operating activities 893 1,372 586
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 13) ( 132) ( 4,837)
--------- --------- ---------
Net cash used in investing activities ( 13) ( 132) ( 4,837)
CASH FLOWS FROM FINANCING ACTIVITIES:
Partnership distributions ( 879) ( 1,283) ( 494)
Capital contributions - - 4,838
--------- --------- ---------
Net cash provided by
(used in) financing activities ( 879) ( 1,283) 4,344
--------- --------- ---------
Net increase (decrease) in cash 1 ( 43) 93
CASH, beginning of period 55 98 5
--------- --------- ---------
CASH, end of period $ 56 $ 55 $ 98
--------- --------- ---------
--------- --------- ---------
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 19 $ (617) $ (613)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization 955 1,067 839
Impairment of oil and gas properties - 902 423
Changes in operating assets and liabilities
Oil and gas revenue receivable ( 225) ( 83) ( 196)
Accounts payable ( 88) 103 133
Deferred liabilities 232 - -
--------- --------- ---------
Net cash provided by operating activities $ 893 $ 1,372 $ 586
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-61
<PAGE>
MICHIGAN GAS
PARTNERS NOTES TO
FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The accounting policy relative to the carrying value of property and
equipment is indicated in the caption on the balance sheets. The
nature of operations and other significant accounting policies are as
follows:
NATURE OF OPERATIONS
Michigan Gas Partners Limited Partnership was formed to own and operate
various oil and gas properties in the state of Michigan. Substantially
all of the Company's revenue is derived from the production and sale of
natural gas.
USE OF 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 disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
OIL AND GAS PROPERTY AND EQUIPMENT
The Partnership 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.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Partnership
considers all highly liquid investments with an original
maturity of ninety days or less to be cash equivalents.
FEDERAL INCOME TAXES
Federal income taxes are not recorded, as the results of
operations are not taxable to the Partnership, but are
includable in the respective income tax returns of the
partners.
F-62
<PAGE>
NOTE 2. RELATED PARTY TRANSACTIONS
In accordance with the partnership agreement, the Partnership contracts
with a partner for all property exploration costs and continuing costs
of operations. In addition, approximately $220,000 and $209,000,
respectively, of oil and gas receivables at December 31, 1997 and 1996
are due from the partner and substantially all accounts payable for
1997 and 1996 are due to the partner.
NOTE 3. SALE OF PROPERTIES
In December 1997, the Partnership transferred certain properties with a
cost of $6,195,000 to an unrelated party and received consideration as
follows:
a. Initial payment of $232,000
b. Fixed payment note of $2,017,000
c. Credit payment note with a maximum amount of
$4,000,000
d. Production payment
For accounting purposes, the transfer does not qualify for sale or gain
recognition. Accordingly, the accompanying financial statements
continue to include the partnership's costs, revenues and expenses
associated with the assets transferred. Any gain on the properties
transferred will be recognized based upon
future production of the properties.
NOTE 4. ALLOCATION OF NET INCOME OR LOSSES
AND DISTRIBUTION OF CASH FLOWS
Net income equal to adjusted federal taxable income, as defined, is
allocated to the partners' capital accounts to the extent of cash
flows, so distributable, as defined. Remaining net income and net loss,
as defined, are allocated to the partners' capital accounts in
proportion to their prospective capital accounts and partnership
interests in a manner specified in the partnership agreement.
NOTE 5. IMPAIRMENT OF PROPERTY AND EQUIPMENT
In 1996, and 1995 the Partnership recognized an impairment loss for
certain oil and gas properties based upon revision of the properties'
reserves by independent petroleum engineers. The impairment loss
recognized in the accompanying 1996 and 1995 financial statements was
measured as the amount by which the carrying amount of the oil and gas
properties exceeded their fair value. Fair value was determined based
upon estimated future cash flows for the properties, discounted at a ten
percent annual rate.
NOTE 6. SUBSEQUENT EVENTS
Effective January 1, 1998, Michigan Gas Partners transferred
substantially all producing oil and gas properties to a newly-formed
related company, Quicksilver Resources Inc. in exchange for common stock
in Quicksilver.
F-63
<PAGE>
NOTE 7. SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS ACTIVITIES-
UNAUDITED
Quantities of Oil and Gas Reserves
The following table presents estimates of the Partnership's proved
reserves, all of which have been prepared by the engineers of the
Partnership's General Partner. Substantially all of the Partnership's crude
oil and natural gas
activities are conducted in the United States.
Reserve Quantities for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Proved reserves:
Natural Gas (MMcf):
Beginning of period 17,014 26,405 30,487
Production (1,199) (1,306) (915)
Revisions of previous estimates (2,288) (8,085) (3,167)
------ ------ ------
End of period 13,527 17,014 26,405
------ ------ ------
------ ------ ------
Proved developed reserves
Natural Gas (MMcf):
Beginning of year 15,956 25,667 24,190
End of year 12,600 15,956 25,667
</TABLE>
The reduction in the reserves of Michigan Gas Partners from 1996 to 1997
is due primarily to the decision not to spend $3.2 million for drilling
and development of existing leases. Michigan Gas Partners put its
properties up for sale in 1997 and elected to not spend the capital to
develop its reserves. Because no additional development was planned the
1997-reserve report removed those potential reserves from its report and
increased the decline in production. No reasonable sales price was
received for the properties and the assets were eventually merged into
Quicksilver in 1998.
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Reserves.
The following standardized measure of discounted future net cash flows was
computed in accordance with the rules and regulations of the Securities and
Exchange Commission and Financial Accounting Standards Board Statement No.
69 using year-end prices and costs. No values are given to unproved
properties or to probable reserves that may be recovered from proved
properties.
The inexactness associated with estimating reserve quantities, future
production and revenue streams and future development and production
expenditures, together with the assumptions applied in valuing future
production, substantially diminishes the reliability of this data. The
values so derived are not considered to be an estimate of fair market
value. The Partnership therefore cautions against its simplistic use.
F-64
<PAGE>
NOTE 7. SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS ACTIVITIES-
UNAUDITED - CONTINUED
The following tabulation reflects the Partnership's estimated discounted future
cash flows from natural gas production:
<TABLE>
<CAPTION>
For the year ended December 31, 1997,
1996 and 1995, in thousands of dollars. 1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Future cash flows $39,203 $42,342 $55,715
Future production and development costs (23,680) (27,266) (34,926)
Future income tax expense - - -
---------------- ---------------- ----------------
15,523 15,076 20,789
10% annual discount for timing of cash flows (4,509) (4,600) (8,900)
---------------- ---------------- ----------------
Standardized measure of discounted
cash flows $11,014 $10,476 $11,889
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
Primary changes in the standardized measure of discounted future net cash flows,
in thousands:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Sales of oil and gas produced, net of
production costs $ (858) $ (326) $ (479)
Net changes in price and production costs 3,164 1,848 (6,354)
Change in estimated future development costs 468 445 5,539
Revisions of previous quantity estimates (2,254) (5,535) (1,648)
Development costs incurred during the year (13) (132) (4,837)
Accretion of discount 1,047 1,189 1,768
Other (1,016) 1,098 217
---------------- ---------------- ----------------
Net increase (decrease) 538 (1,413) (5,794)
Balance at beginning of year 10,476 11,889 17,683
---------------- ---------------- ----------------
Balance at end of year $11,014 $10,476 $11,889
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
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 Partnership's
estimates for future cash flows nor do these measures serve as an estimate of
current market value.
F-65
<PAGE>
NOTE 8. CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES
Pursuant to the merger agreement with MSR Exploration LTD. dated
September 1, 1998, the Partnership has changed its accounting policy for
oil and gas properties from the successful efforts method to the full
cost method. Accordingly, the Partnership's financial statements have
been restated to apply the change retroactively. The effect of the
accounting change on income as previously reported for 1997, 1996 and
1995 is:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Effect on:
Income before extraordinary
item and net income $1,738 ($659) ($812)
</TABLE>
Adoption of the full cost method of accounting for oil and gas
properties was mandated in the September 1998 merger agreement with MSR
and is consistent with the accounting policy of MSR previously
disclosed to its shareholders and the general public. In addition, the
Company believes the full cost mehtod of accounting for oil and gas
properties more accurately reflects management's exploration objectives
and results by including all costs incurred in oil and gas producing
activities as integral to the acquisition, discovery and development of
whatever reserves ultimately result from its efforts as a whole.
F-66
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Mercury Exploration Company
Fort Worth, Texas
We have audited the accompanying statements of revenues and direct operating
expenses/Shell Michigan properties acquired of Mercury Exploration Company
for the years ended September 30, 1996 and 1995. 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 audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses/Shell
Michigan properties acquired reflect the revenues and direct operating
expenses attributable to Mercury Exploration Company described in Note 2 to
the financial statements and is not intended to be a complete presentation of
the revenues and expenses of Mercury Exploration Company.
In our opinion, the accompany financial statements referred to above present
fairly, in all material respects, the revenues and direct operating
expenses/Shell Michigan properties acquired of Mercury Exploration Company
for the years ended September 30, 1996 and 1995 in conformity with generally
accepted accounting principles.
/s/ Weaver and Tidwell, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
October 23, 1998
F-67
<PAGE>
MERCURY EXPLORATION COMPANY
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
SHELL MICHIGAN PROPERTIES ACQUIRED
YEARS ENDED SEPTEMBER 30,1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
REVENUES
Gas revenues $25,543 $16,539
Oil revenues 1,152 892
Condensate revenues 3,719 2,649
------- -------
Total revenues 30,414 20,080
DIRECT OPERATING EXPENSES
Operating expenses 3,147 2,902
Production taxes 1,648 1,390
------- -------
Total direct operating expenses 4,795 4,292
------- -------
EXCESS OF REVENUES OVER DIRECT OPERATING
Expenses/Shell Michigan Properties Acquired $25,619 $15,788
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
MERCURY EXPLORATION COMPANY
SHELL MICHIGAN PROPERTIES ACQUIRED
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BUSINESS COMBINATION
On November 14, 1996 Mercury Exploration Company consummated the Shell
acquisition from Shell Western E & P, Inc. The acquisition consisted of
64 wells located in Michigan with combined proved reserves of approximately
75 Bcfe at the effective date of July 1, 1996. The aggregate purchase price
for the interests was approximately $57.7 million, which was paid in cash
with bank debt.
NOTE 2. BASIS OF PRESENTATION
Historical financial statements reflecting financial position, results of
operations and cash flows required by generally accepted accounting
principles are not presented, as such information is neither readily
available on an individual property basis nor meaningful for the properties
included in the business combination. Accordingly, these statements of
revenues and direct operating expenses/properties acquired are presented in
lieu of the financial statements required under Rule 3-05 of Securities and
Exchange Commission Regulation S-X. The accompanying financial statements
include the direct revenues and expenses of properties acquired by Mercury
Exploration Company in the business combination referred to in Note 1. All of
the statements and disclosures are stated in U.S. dollars.
The accompanying statements of revenues and direct operating expenses/
properties acquired represent Mercury's net ownership interest in the
properties included in the business combination 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
business combination are from a newly formed business and the expenses
incurred are not necessarily indicative of the expenses to be incurred by
Mercury.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. DISCLOSURES ABOUT OIL AND GAS ACTIVITIES (UNAUDITED)
The changes in proved reserves for 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Petroleum Natural
Liquids Gas
(bbls) (MMCF)
-------------- ------------
(in thousands)
<S> <C> <C>
Reserves at September 30, 1994 1,944 83,542
Production (241) (6,760)
------------- ------------
Reserves at September 30, 1995 1,703 76,782
Production (267) (10,668)
------------- ------------
Reserves at September 30, 1996 1,436 $ 66,114
------------- ------------
------------- ------------
Total proved developed reserves
September 30, 1997 644 18,291
------------- ------------
------------- ------------
September 30, 1996 911 28,959
------------- ------------
------------- ------------
</TABLE>
F-69
<PAGE>
NOTE 3. DISCLOSURES ABOUT OIL AND GAS ACTIVITIES (UNAUDITED) - Continued
The standardized measure of discounted estimated future net cash flows, and
changes therein, related to proved oil and gas reserves (thousands of
dollars) for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Future cash inflows $ 138,460 $ 174,704
Future development and production costs (35,525) (43,198)
Future income tax expense - -
------------- ------------
Future net cash flows 102,935 131,506
10% annual discount (40,580) (43,485)
------------- ------------
Standardized measure of
discounted future cash flows $ 62,355 $ 88,021
------------- ------------
------------- ------------
</TABLE>
Primary changes in standardized measure of discounted future net cash flows
(thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Net changes in prices and production costs $ (5,130) $ (1,807)
Sales of oil and gas, net of production costs (25,619) (15,788)
Accretion of discount 8,036 8,296
Other (2,953) 1,858
------------- ------------
$ (25,666) $ (7,441)
------------- ------------
------------- ------------
</TABLE>
Estimated future cash inflows are computed by applying year end prices of oil
and gas to year end quantities of proved developed reserves. Estimated future
development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and
gas reserves in future years, based on year end costs and assuming
continuation of existing economic conditions.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the SEC. Because of
unpredictable variances in expenses and capital forecasts, crude oil and
natural gas price changes, and the fact that the bases for such estimates
vary significantly, management believes the usefulness of these projections
is limited. Estimates of future net cash flows do not necessarily represent
management's assessment of future profitability or future cash flow to the
Company.
F-70
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Mercury Exploration Company
Fort Worth, Texas
We have audited the accompanying statements of revenues and direct operating
expenses/Destec Michigan Properties acquired of Mercury Exploration Company
for the years ended September 30, 1997 and 1996. 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 audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses/Destec
Michigan properties acquired reflect the revenues and direct operating
expenses attributable to Mercury Exploration Company described in Note 2 to
the financial statements and is not intended to be a complete presentation of
the revenues and expenses of Mercury Exploration Company.
In our opinion, the accompanying financial statements referred to above
present fairly, in all material respects, the revenues and direct operating
expenses/Destec Michigan properties acquired of Mercury Exploration Company
for the years ended September 30, 1997 and 1996 in conformity with generally
accepted accounting principles.
/s/ Weaver and Tidwell, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
October 23, 1998
F-71
<PAGE>
MERCURY EXPLORATION COMPANY
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
DESTEC MICHIGAN PROPERTIES ACQUIRED
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
REVENUES
Gas revenues $7,257 $6,224
------ ------
Total revenues 7,257 6,224
------ ------
DIRECT OPERATING EXPENSES
Operating expenses 1,289 1,689
Production taxes 303 262
------ ------
Total direct operating expenses 1,592 1,951
------ ------
EXCESS OF REVENUES OVER DIRECT OPERATING
EXPENSES/DESTEC MICHIGAN PROPERTIES ACQUIRED $5,665 $4,273
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these statements.
F-72
<PAGE>
MERCURY EXPLORATION COMPANY
DESTEC PROPERTIES ACQUIRED
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BUSINESS COMBINATION
On October 9, 1997 Mercury Exploration Company consummated the Destec
acquisition from ECT Enocene Enterprises II, Inc. Such properties consist of
143 wells located in Michigan with combined proved reserves of approximately
30.8 Bcfe as of the effective date of August 1, 1997. The aggregate purchase
price for the interests was approximately $23.5 million, which was paid in
cash with bank debt.
NOTE 2. BASIS OF PRESENTATION
Historical financial statements reflecting financial position, results of
operations and cash flows required by generally accepted accounting
principles are not presented, as such information is neither readily
available on an individual property basis nor meaningful for the properties
included in the business combination. Accordingly, these statements of
revenues and direct operating expenses/properties acquired are presented in
lieu of the financial statements required under Rule 3-05 of Securities and
Exchange Commission Regulation S-X. The accompanying financial statements
include the direct revenues and expenses of properties acquired by Mercury
Exploration Company in the business combination referred to in Note 1. All of
the statements and disclosures are stated in U.S. dollars.
The accompanying statements of revenues and direct operating expenses/
properties acquired represent Mercury's net ownership interest in the
properties included in the business combination 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
business combination are from a newly formed business and the expenses
incurred are not necessarily indicative of the expenses to be incurred by
Mercury.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3. DISCLOSURES ABOUT OIL AND GAS ACTIVITIES
The changes in proved reserves for 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Petroleum Natural
Liquids Gas
(bbls) (MMCF)
------------- ------------
(in thousands)
<S> <C> <C>
Reserves at September 30, 1995 - 36,781
Production - (3,042)
------------- ------------
Reserves at September 30, 1996 - 33,739
Production - (2,908)
------------- ------------
Reserves at September 30, 1997 - $ 30,831
------------- ------------
------------- ------------
Total proved developed reserves
September 30, 1997 - 26,755
------------- ------------
------------- ------------
September 30, 1996 - 29,663
------------- ------------
------------- ------------
</TABLE>
F-73
<PAGE>
NOTE 3. DISCLOSURES ABOUT OIL AND GAS ACTIVITIES (UNAUDITED) - Continued
The standardized measure of discounted estimated future net cash flows, and
changes therein, related to proved oil and gas reserves (thousands of
dollars) for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Future cash inflows $ 75,746 $ 58,031
Future development and production costs (15,776) (12,440)
Future income tax expense - -
------------- ------------
Future net cash flows 59,970 45,591
10% annual discount (27,723) (23,305)
------------- ------------
Standardized measure of
discounted future cash flows $ 32,247 $ 22,286
------------- ------------
------------- ------------
</TABLE>
Primary changes in standardized measure of discounted future net cash flows
(thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Net changes in prices and production costs $ 10,861 $ (1,369)
Sales of oil and gas, net of production costs (5,665) (4,273)
Accretion of discount 2,229 2,082
Other 2,536 (643)
------------- ------------
$ (9,961) $ (1,465)
------------- ------------
------------- ------------
</TABLE>
Estimated future cash inflows are computed by applying year end prices of oil
and gas to year end quantities of proved developed reserves. Estimated future
development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and
gas reserves in future years, based on year end costs and assuming
continuation of existing economic conditions.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the SEC. Because of
unpredictable variances in expenses and capital forecasts, crude oil and
natural gas price changes, and the fact that the bases for such estimates
vary significantly, management believes the usefulness of these projections
is limited. Estimates of future net cash flows do not necessarily represent
management's assessment of future profitability or future cash flow to the
Company.
F-74
<PAGE>
AGREEMENT AND PLAN OF MERGER
AND REORGANIZATION
BY AND AMONG
QUICKSILVER RESOURCES INC.
AND
MSR EXPLORATION LTD.
DATED AS OF SEPTEMBER 1, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE I - THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.01. The Merger. . . . . . . . . . . . . . . . . . . . . . 2
Section 1.02. The Closing.. . . . . . . . . . . . . . . . . . . . . 2
Section 1.03. Effective Time. . . . . . . . . . . . . . . . . . . . 2
Section 1.04. Effect of the Merger. . . . . . . . . . . . . . . . . 2
Section 1.05. Certificate of Incorporation. . . . . . . . . . . . . 2
Section 1.06. Bylaws. . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.07. Directors and Officers. . . . . . . . . . . . . . . . 3
Section 1.08. Tax Consequences. . . . . . . . . . . . . . . . . . . 3
ARTICLE II - CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES. . . . . . . . 3
Section 2.01. Merger Consideration: Conversion and Cancellation
of Securities. . . . . . . . . . . . . . . . . . . 3
Section 2.02. Exchange Agency; Surrender of Certificates. . . . . . 4
Section 2.03. Stock Transfer Books. . . . . . . . . . . . . . . . . 6
Section 2.04. Dissenters' Rights. . . . . . . . . . . . . . . . . . 7
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE COMPANY. . . . . . . . . . 8
Section 3.01. Organization and Qualification: Subsidiaries. . . . . 8
Section 3.02. Certificate of Incorporation and Bylaws.. . . . . . . 8
Section 3.03. Capitalization. . . . . . . . . . . . . . . . . . . . 8
Section 3.04. Authority.. . . . . . . . . . . . . . . . . . . . . .10
Section 3.05. No Conflict: Required Filings and Consents. . . . . .10
Section 3.06. Permits; Compliance.. . . . . . . . . . . . . . . . .11
Section 3.07. Reports; Financial Statements; Undisclosed
Liabilities . . . . . . . . . . . . . . . . . . . .12
Section 3.08. Absence of Certain Changes or Events. . . . . . . . .13
Section 3.09. Absence of Litigation.. . . . . . . . . . . . . . . .13
Section 3.10. Employee Benefit Plans; Labor Matters.. . . . . . . .14
Section 3.11. Taxes.. . . . . . . . . . . . . . . . . . . . . . . .16
Section 3.12. Affiliates. . . . . . . . . . . . . . . . . . . . .17
Section 3.13. Environmental Matters . . . . . . . . . . . . . . . .17
Section 3.14. Properties. . . . . . . . . . . . . . . . . . . . . .18
Section 3.15. Real Property. . . . . . . . . . . . . . . . . . . .23
Section 3.16. Insider Interests; Transactions with Management.. . .23
Section 3.17. Contracts and Agreements. . . . . . . . . . . . . . .24
Section 3.18. Vote Required.. . . . . . . . . . . . . . . . . . . .24
Section 3.19. Brokers.. . . . . . . . . . . . . . . . . . . . . . .24
Section 3.20. Opinion of Financial Advisor. . . . . . . . . . . . .24
Section 3.21. Special Committee Recommendations. . . . . . . . . .24
Section 3.22. Disclosure. . . . . . . . . . . . . . . . . . . . . .25
i
<PAGE>
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF QRI . . . . . . . . . . . . . .25
Section 4.01. Organization and Qualification. . . . . . . . . . .25
Section 4.02. Certificate of Incorporation and Bylaws;
Formation Documents . . . . . . . . . . . . . . . .25
Section 4.03. Capitalization. . . . . . . . . . . . . . . . . . . .25
Section 4.04. Authority.. . . . . . . . . . . . . . . . . . . . . .26
Section 4.05. No Conflict; Required Filings and Consents. . . . . .27
Section 4.06. Permits; Compliance.. . . . . . . . . . . . . . . . .27
Section 4.07. Reports; Financial Statements.. . . . . . . . . . . .28
Section 4.08. Absence of Certain Changes or Events. . . . . . . . .28
Section 4.09. Absence of Litigation.. . . . . . . . . . . . . . . .28
Section 4.10. Employee Benefit Plans; Labor Matters . . . . . . . .29
Section 4.11. Taxes.. . . . . . . . . . . . . . . . . . . . . . . .31
Section 4.12. Environmental Matters . . . . . . . . . . . . . . . .32
Section 4.13. Properties. . . . . . . . . . . . . . . . . . . . .33
Section 4.14. Insider Interests; Transactions with Management . . .37
Section 4.15. Vote Required . . . . . . . . . . . . . . . . . . . .38
Section 4.16. Brokers . . . . . . . . . . . . . . . . . . . . . . .38
Section 4.17. Board Recommendations . . . . . . . . . . . . . . . .38
Section 4.18. Disclosure. . . . . . . . . . . . . . . . . . . . . .38
ARTICLE V - COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Section 5.01. Affirmative Covenants of the Company. . . . . . . . .38
Section 5.02. Affirmative Covenants of QRI. . . . . . . . . . . . .40
Section 5.03. Negative Covenants of the Company. . . . . . . . . .42
Section 5.04. Negative Covenants of QRI.. . . . . . . . . . . . . .45
Section 5.05. Access and Information. . . . . . . . . . . . . . . .46
ARTICLE VI - ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . .47
Section 6.01. Presentation to Stockholders. . . . . . . . . . . . .47
Section 6.02. Registration Statement; Proxy
Statement/Prospectus. . . . . . . . . . . . . . . .47
Section 6.03. Appropriate Action: Consents; Filings.. . . . . . . .49
Section 6.04. Affiliates; Tax Treatment.. . . . . . . . . . . . . .50
Section 6.05. Public Announcements. . . . . . . . . . . . . . . . .51
Section 6.06. AMEX Listing. . . . . . . . . . . . . . . . . . . . .51
Section 6.07. State Takeover Statutes.. . . . . . . . . . . . . . .51
Section 6.08. Board Seat. . . . . . . . . . . . . . . . . . . . . .51
Section 6.09. Options . . . . . . . . . . . . . . . . . . . . . . .51
Section 6.10. Common Stock Warrants.. . . . . . . . . . . . . . . .52
Section 6.11. Indemnification.. . . . . . . . . . . . . . . . . . .52
Section 6.12. Employment Contracts. . . . . . . . . . . . . . . .55
Section 6.13. Comfort Letters.. . . . . . . . . . . . . . . . . . .55
Section 6.14. Sales Under Rule 145 if Applicable. . . . . . . . . .55
ii
<PAGE>
ARTICLE VII - CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . . . .56
Section 7.02. Additional Conditions to Obligations of QRI.. . . . .57
Section 7.03. Additional Conditions to Obligations of the
Company . . . . . . . . . . . . . . . . . . . . . .58
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . .60
Section 8.01. Termination.. . . . . . . . . . . . . . . . . . . . .60
Section 8.02. Effect of Termination; Remedies. . . . . . . . . . .61
Section 8.03. Amendment.. . . . . . . . . . . . . . . . . . . . . .61
Section 8.04. Waiver. . . . . . . . . . . . . . . . . . . . . . .61
Section 8.05. Fees, Expenses and Other Payments.. . . . . . . . . .62
ARTICLE IX - GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . .63
Section 9.01. Effectiveness of Representations, Warranties and
Agreements. . . . . . . . . . . . . . . . . . . . .63
Section 9.02. Notices.. . . . . . . . . . . . . . . . . . . . . . .63
Section 9.03. Certain Definitions.. . . . . . . . . . . . . . . . .64
Section 9.04. Headings. . . . . . . . . . . . . . . . . . . . . . .66
Section 9.05. Severability. . . . . . . . . . . . . . . . . . . . .66
Section 9.06. Entire Agreement. . . . . . . . . . . . . . . . . . .66
Section 9.07. Assignment. . . . . . . . . . . . . . . . . . . . . .66
Section 9.08. Parties in Interest.. . . . . . . . . . . . . . . . .66
Section 9.09. Failure or Indulgence Not Waiver; Remedies
Cumulative. . . . . . . . . . . . . . . . . . . . .66
Section 9.10. Governing Law.. . . . . . . . . . . . . . . . . . . .67
Section 9.11. Counterparts. . . . . . . . . . . . . . . . . . . . .67
Section 9.12. Specific Performance. . . . . . . . . . . . . . . . .67
Section 9.14. Limitation on Liability . . . . . . . . . . . . . . .68
Section 9.15. Dispute Resolution. . . . . . . . . . . . . . . . . .68
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, dated as of
September 1, 1998 (this "AGREEMENT"), is by and between QUICKSILVER RESOURCES
INC., a Delaware corporation ("QRI"), and MSR EXPLORATION LTD., a Delaware
corporation (the "COMPANY").
WHEREAS, the Company, upon the terms and subject to the conditions of
this Agreement and in accordance with the General Corporation Law of the
State of Delaware ("DGCL"), will merge with and into QRI (the "MERGER");
WHEREAS, the Special Committee (as herein defined) of the board of
directors of the Company, and the board of directors of the Company (with the
members of the Darden family abstaining), have determined that the merger is
advisable and is fair to, and in the best interests of, the Company and its
stockholders, have approved and adopted this Agreement and the transactions
contemplated hereby, and have recommended approval and adoption of this
Agreement by the stockholders of the Company;
WHEREAS, the board of directors of QRI has determined that the merger is
advisable and is fair to, and in the best interests of, QRI and its
stockholders, has approved and adopted this Agreement and the transactions
contemplated hereby, and has recommended approval and adoption of this
Agreement by the stockholders of QRI;
WHEREAS, for federal income tax purposes, it is intended that the merger
will qualify as a tax-free reorganization under the provisions of Section
368(a)(1)(a) of the United States Internal Revenue Code of 1986, as amended
(the "CODE") and it is also intended that the merger will be accounted for as
a purchase;
WHEREAS, QRI consummated a series of transactions (the "FORMATION
TRANSACTION") whereby (i) Quicksilver Energy, L.C., a Michigan limited
liability company ("QELC"), Mercury Exploration Company, a Texas corporation
("MERCURY"), and certain affiliates and employees of Mercury (the "MERCURY
AFFILIATES") contributed certain assets or interests therein to QRI in
exchange for shares of common stock, par value $.01 per share of QRI ("QRI
COMMON STOCK"), (ii) Michigan Gas Partners, Limited Partnership, a Texas
limited partnership ("MGP"), merged with and into QRI, with the sole limited
partner of MGP, Joint Energy Development Investments Limited Partnership, a
Delaware limited partnership ("JEDI"), receiving shares of QRI Common Stock
in the merger, and (iii) certain indebtedness of QELC to Trust Company of the
West, a California trust company ("TCW"), was repaid by the issuance of
shares of QRI Common Stock to TCW (QELC, Mercury, the Mercury Affiliates,
JEDI and TCW are referred to herein as the "CONTRIBUTING ENTITIES") (any
agreement, document or instrument entered into in connection with the
Formation Transactions are collectively referred to herein as the "FORMATION
DOCUMENTS" and individually as a "FORMATION DOCUMENT").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
1
<PAGE>
ARTICLE I
THE MERGER
Section 1.01. THE MERGER. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with the DGCL, at
the Effective Time (as defined in SECTION 1.03 of this Agreement), the
Company shall be merged with and into QRI. As a result of the merger, the
separate corporate existence of the Company shall cease and QRI shall
continue as the surviving corporation of the merger (the "SURVIVING
CORPORATION").
Section 1.02. THE CLOSING. Subject to the terms and conditions of this
Agreement, the closing of the merger (the "CLOSING") shall take place (a) at
the offices of Jenkens & Gilchrist, a Professional Corporation, 1445 Ross
Avenue, Suite 3200, Dallas, Texas, at 9:00 am., local time, on the second
business day immediately following the day on which the last to be fulfilled
or waived of the conditions set forth in ARTICLE VII shall be fulfilled or
waived in accordance herewith (other than conditions with respect to actions
the respective parties hereto will take at the Closing), or (b) at such other
time, date or place as QRI and the Company may agree. The date on which the
Closing occurs is hereinafter referred to as the "CLOSING DATE."
Section 1.03. EFFECTIVE TIME. On the Closing Date, the parties hereto
shall cause the merger to be consummated by filing a Certificate of merger
with the Secretary of State of the State of Delaware, in such form as is
required by, and executed in accordance with the relevant provisions of, the
DGCL (the date and time of the completion of such filing or such later date
and time as may be specified in the Certificate of Merger as the effective
time of the merger being the "EFFECTIVE TIME").
Section 1.04. EFFECT OF THE MERGER. At the Effective Time, the effect
of the merger shall be as provided in Section 259 of the DGCL. Without
limiting the generality of the foregoing, and subject thereto, at the
Effective Time all the property, rights, privileges, powers and franchises of
QRI and the Company shall vest in the Surviving Corporation, and all debts,
obligations, liabilities and duties of each of QRI and the Company shall
become the debts, obligations, liabilities and duties of the Surviving
Corporation.
Section 1.05. CERTIFICATE OF INCORPORATION. At the Effective Time, the
certificate of incorporation of the Surviving Corporation, which shall be in
the form of EXHIBIT "A" hereto, shall be the certificate of incorporation of
QRI as in effect immediately prior to the Effective Time and shall continue
to be its certificate of incorporation until amended as provided therein and
under the DGCL. Prior to the Effective Time, QRI shall take all necessary
corporate action to amend its certificate of incorporation so as to conform
with the form of certificate of incorporation attached hereto as EXHIBIT "A".
Section 1.06. BYLAWS. At the Effective Time and without further action
on the part of the Company or QRI, the bylaws of the Surviving Corporation,
which shall be in the form of EXHIBIT "B" hereto, shall be the bylaws of QRI
in effect as of the Effective Time and thereafter shall continue to be its
bylaws until amended as provided therein and under the DGCL. Prior to the
Effective Time,
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QRI shall take all necessary corporate action to amend and restate its bylaws
to conform with the form of bylaws attached hereto as EXHIBIT "B".
Section 1.07. DIRECTORS AND OFFICERS. Frank Darden, Thomas F. Darden,
Glenn M. Darden, Mark Warner, Steven M. Morris, D. Randall Kent and W.
Yandell Rogers III shall be the directors of the Surviving Corporation, each
to hold office in accordance with the certificate of incorporation and bylaws
of the Surviving Corporation, and the officers of the Company immediately
prior to the Effective Time shall be the officers of the Surviving
Corporation, in each case until their respective successors are duly elected
or appointed and qualified.
Section 1.08. TAX CONSEQUENCES. It is intended that the merger shall
constitute a tax-free reorganization within the meaning of Section
368(a)(1)(a) of the Code, and that this Agreement shall constitute a "plan of
reorganization" for the purposes of Section 368 of the Code.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
Section 2.01. MERGER CONSIDERATION: CONVERSION AND CANCELLATION OF
SECURITIES. At the Effective Time, by virtue of the merger and without any
action on the part of QRI, the Company or the holders of any of the Company's
securities:
(a) Subject to the other provisions of this ARTICLE II, each share
of common stock, par value $.01 per share, of the Company ("COMPANY
COMMON STOCK") issued and outstanding immediately prior to the Effective
Time (excluding any Dissenting Shares and any Company Common Stock
described in SECTION 2.01(d) of this Agreement) shall be converted into
the right to receive one-tenth (0.10) of one fully paid and
nonassessable share of common stock, par value $.0l per share, of QRI
("QRI COMMON STOCK") (the "CONVERSION RATIO").
(b) Notwithstanding the foregoing, if between the date of this
Agreement and the Effective Time the outstanding shares of QRI Common
Stock or Company Common Stock shall have been changed into a different
number of shares or a different class, by reason of any stock dividend,
subdivision, reclassification, recapitalization, split, combination or
exchange of shares, the Conversion Ratio shall be correspondingly
adjusted to reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares; PROVIDED,
THAT HOWEVER, no adjustment shall be made with regard to the 100,000
shares of QRI Common Stock currently outstanding pursuant to a stock
split in connection with the merger that results in an increase in the
number of outstanding shares of QRI Common Stock to 10,310,806 shares.
(c) As a result of their conversion pursuant to SECTION 2.01(a),
all shares of Company Common Stock shall cease to be outstanding and
shall automatically be canceled and retired. Each certificate
previously evidencing Company Common Stock outstanding immediately prior
to the Effective Time (other than Company Common Stock described in
SECTION 2.01(d) of this Agreement and any Dissenting Shares) ("CONVERTED
COMMON STOCK") shall thereafter represent, subject to SECTION 2.02(d) of
this Agreement, the right to receive
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that number of shares of QRI Common Stock determined pursuant to the
Conversion Ratio and, if applicable, the right to receive cash pursuant
to SECTION 2.02(d) of this Agreement ("MERGER CONSIDERATION"). The
holders of certificates previously evidencing Converted Common Stock
shall cease to have any rights with respect to such Converted Common
Stock except the right to receive the Merger Consideration applicable
thereto and as otherwise provided herein or by law. Such certificates
previously evidencing Converted Common Stock shall be exchanged for
certificates evidencing whole shares of QRI Common Stock issued in
consideration therefor upon the surrender of such certificates in
accordance with the provisions of SECTION 2.02 of this Agreement. No
fractional shares of QRI Common Stock shall be issued and, in lieu
thereof, a cash payment shall be made pursuant to SECTION 2.02(d) of
this Agreement.
(d) Notwithstanding any provision of this Agreement to the
contrary, each share of Company Common Stock held in the treasury of the
Company immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof and no payment shall be made
with respect thereto.
(e) Each share of common stock, par value $.0l per share, of QRI
issued and outstanding immediately prior to the Effective Time shall
remain issued and outstanding and shall thereafter represent one validly
issued, fully paid and nonassessable share of common stock of the
Surviving Corporation, and shall not be converted or affected by virtue
of the merger.
Section 2.2. EXCHANGE AGENCY; SURRENDER OF CERTIFICATES.
(a) EXCHANGE FUND. At or prior to the Effective Time, QRI shall
deposit, or cause to be deposited, with a bank or trust company
designated by QRI (the "EXCHANGE AGENT"), for the benefit of the holders
of Converted Common Stock, for exchange in accordance with this ARTICLE
II, through the Exchange Agent (i) certificates evidencing a number of
shares of QRI Common Stock equal to the product of the Conversion Ratio
multiplied by the number of Converted Common Stock issued and
outstanding, and (ii) cash in an amount sufficient to provide for the
payments to be made in lieu of issuing any fractional shares of QRI
Common Stock as provided in SECTION 2.02(d) of this Agreement.
Additionally, subject to the provisions of subsection (e) of this
SECTION 2.02, QRI shall, if and when a payment date has occurred with
respect to a dividend or distribution that has been declared subsequent
to the Effective Time, deposit with the Exchange Agent an amount in cash
(or property of like kind to that which is the subject of such dividend
or distribution) equal to the dividend or distribution per share of QRI
Common Stock times the number of shares of QRI Common Stock evidenced by
certificates theretofore representing Converted Common Stock that have
not theretofore been surrendered for exchange in accordance with this
SECTION 2.02. The certificates and cash (and property, if any)
deposited with the Exchange Agent in accordance with this SECTION
2.02(a) are hereinafter referred to as the "EXCHANGE FUND." The
Exchange Agent shall, pursuant to irrevocable instructions, deliver QRI
Common Stock (and any dividends or distribution related thereto) and/or
cash, as described above, in exchange for surrendered certificates
pursuant to the terms of this Agreement out of the Exchange Fund.
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(b) EXCHANGE PROCEDURES. As soon as practicable after the
Effective Time, QRI shall cause the Exchange Agent to send to each
record holder of Company Common Stock at the Effective Time (i) a letter
of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the certificates theretofore representing
Company Common Stock (the "CERTIFICATES") shall pass, only upon delivery
of the Certificates to the Exchange Agent and shall be in such form and
contain such other provisions as QRI and the Company shall reasonably
determine), and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of QRI
Common Stock, and any cash in lieu of fractional shares, into which the
shares of Company Common Stock represented by such Certificate or
Certificates shall have been converted pursuant to this Agreement. Upon
surrender of a Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, the holder of
such Certificate shall be entitled to receive in exchange therefor, as
applicable, a certificate representing that number of whole shares of
QRI Common Stock that such holder has the right to receive pursuant to
the provisions of this ARTICLE II and cash in the amount such holder has
the right to receive pursuant to such provisions, and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Company Common Stock that is not registered in the transfer
records of the Company, a certificate evidencing the proper number of
shares of QRI Common Stock may be issued to the transferee if the
Certificate evidencing the Company Common Stock shall be surrendered to
the Exchange Agent, accompanied by all documents required to evidence
and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered for exchange in
accordance with the provisions of SECTION 2.02 of this Agreement, each
Certificate theretofore representing Converted Common Stock shall from
and after the Effective Time represent for all purposes only the right
to receive the applicable Merger Consideration as set forth in this
Agreement. If any holder of Converted Common Stock shall be unable to
surrender such holder's Certificates because such Certificates have been
lost or destroyed, such holder may deliver in lieu thereof an affidavit
and indemnity bond in form and substance and with surety reasonably
satisfactory to QRI. No interest shall be paid on any Merger
Consideration payable to former holders of Converted Common Stock.
(c) DISTRIBUTIONS WITH RESPECT TO QRI COMMON STOCK. No dividends
or other distributions declared or made after the Effective Time with
respect to QRI Common Stock with a record date after the Effective Time
shall be paid to the holder of any unsurrendered Certificate previously
representing shares of Company Common Stock with respect to any shares
of QRI Common Stock evidenced thereby, and no Merger Consideration shall
be paid to any such holders until the holder of such Certificate shall
surrender such Certificate theretofore representing shares of Company
Common Stock. Subject to applicable laws, following surrender of any
such Certificate, there shall be paid to the holder of the certificates
evidencing whole shares of QRI Common Stock issued in exchange therefor,
without interest, (i) promptly following the surrender of such
Certificate and in addition to the amount of any cash payable with
respect to a fractional share of QRI Common Stock to which such holder
is entitled pursuant to SECTION 2.02(d) of this Agreement, the amount of
dividends or other distributions with a record date after the Effective
Time theretofore paid with respect to such whole shares of QRI Common
Stock and (ii) at the appropriate payment date, the amount of dividends
or other distributions with a record date after the Effective Time but
prior to
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surrender and a payment date occurring after surrender payable with
respect to such whole shares of QRI Common Stock.
(d) NO FRACTIONAL SHARES. No certificates or scrip evidencing
fractional shares of QRI Common Stock shall be issued upon the surrender
for exchange of Certificates, and such fractional share interests shall not
entitle the owner thereof to any rights of a stockholder of QRI. In lieu
of any such fractional shares, (i) each holder of a Certificate previously
evidencing Company Common Stock, upon surrender of such Certificate for
exchange pursuant to this ARTICLE II, shall be paid an amount in cash
(without interest), rounded to the nearest cent, determined by multiplying
(A) the Closing Price multiplied by the Conversion Ratio by (B) the
fractional interest to which such holder would otherwise be entitled (after
taking into account all shares of Company Common Stock held of record by
such holder at the Effective Time). "CLOSING PRICE" means the closing
sales price of the MSR Common Stock on the American Stock Exchange ("AMEX")
(or such other quotation system or securities exchange on which the MSR
Common Stock is then quoted or listed) as reported by the WALL STREET
JOURNAL on the day preceding the Closing Date as provided in SECTION 1.02
hereof.
(e) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
that remains unclaimed by the former holders of Converted Common Stock on
the second anniversary of the Closing Date shall be delivered to QRI, upon
demand, and any former holders of Converted Common Stock who have not
theretofore complied with this ARTICLE II shall thereafter look only to QRI
for the Merger Consideration and dividends or distributions to which they
are entitled, without any interest thereon. Neither QRI nor the Company
shall be liable to any former holder of Converted Common Stock for any
Merger Consideration (or dividends or distributions with respect thereto)
or cash delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(f) WITHHOLDING. QRI (or any affiliate thereof) shall be entitled to
deduct and withhold from the consideration otherwise payable pursuant to
this Agreement to any former holder of Converted Common Stock such amounts
as QRI (or any affiliate thereof) is required to deduct and withhold with
respect to the making of such payment under the Code or any other provision
of federal, state, local or foreign tax law and QRI agrees to remit to the
proper taxing authority such amounts so withheld. To the extent that
amounts are so withheld by QRI, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the former holder of
the Converted Common Stock in respect of which such deduction and
withholding was made by QRI.
Section 2.03. STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of the Company shall be closed and there shall be no further
registration of transfers of shares of Company Common Stock thereafter on the
records of the Company. If, after the Effective Time, Certificates are
presented to the Surviving Corporation, they shall be canceled and exchanged for
the Merger Consideration, deliverable in respect thereof pursuant to this
Agreement in accordance with the procedures set forth in this ARTICLE II.
Certificates surrendered for exchange by any person constituting an "affiliate"
of the Company for purposes of Rule 145(c) under the Securities Act of
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1933, as amended (the "Securities Act"), shall not be exchanged until QRI has
received a written agreement from such person as provided in SECTION 6.04.
Section 2.04. DISSENTERS' RIGHTS.
(a) Notwithstanding the provision of SECTION 2.01 or any other
provision in this Agreement to the contrary, each share of Company Common
Stock issued and outstanding immediately prior to the Effective Time and
held by stockholders who have not voted such shares in favor of the merger
or consented thereto in writing and qualify under and have complied with
all of the provisions of Article 11, Section 3, entitled RIGHT TO DISSENT,
of the certificate of incorporation of the Company and Section 184 of the
BUSINESS CORPORATIONS ACT (Alberta) as in effect on July 31, 1997 (the
"Appraisal Provisions") ("DISSENTING SHARES") shall not, by virtue of the
merger, be converted into the right to receive the Merger Consideration but
such stockholder shall be entitled to receive payment of the appraised
value of such shares of Company Common Stock or held by them in accordance
with the provisions of the Company's certificate of incorporation and the
Appraisal Provisions; PROVIDED, HOWEVER, that if any holder of Dissenting
Shares (i) subsequently delivers a written withdrawal of his demand for
appraisal rights (with the written consent of QRI if such written
withdrawal is not made after the Effective Time within the time periods
required by the provisions of the Company's certificate of incorporation or
the Appraisal Provisions), or (ii) fails to perfect dissenter's rights as
provided in the Company's certificate of incorporation and the Appraisal
Provisions, or (iii) if neither any holder of Dissenting Shares nor the
Surviving Corporation has filed a petition demanding a determination of the
value of Dissenting Shares within the time provided in the Company's
certificate of incorporation and the Appraisal Provisions, the Dissenting
Shares held by such holder or holders (as the case may be) shall thereupon
be deemed to have been converted into and to have become exchangeable for,
as of the Effective Time, the right to receive the Merger Consideration as
provided in this Agreement without any interest thereon and shall be
treated for all purposes as Converted Common Stock.
(b) The Company shall give QRI (i) prompt notice of any written
demands for appraisal, withdrawal of demands for appraisal and any other
instruments served pursuant to the Company's certificate of incorporation
and the Appraisal Provisions and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for appraisal under
the Company's certificate of incorporation and the Appraisal Provisions.
The Company agrees that prior to the Effective Time, it will not, without
the prior written consent of QRI, voluntarily make or agree to make any
payment with respect to, or settle or offer to settle, any such demands.
(c) Each holder of Dissenting Shares who becomes entitled, pursuant
to the provisions of the Company's certificate of incorporation and the
Appraisal Provisions, to payment for his or its Dissenting Shares shall
receive payment therefor after the Effective Time from the Surviving
Corporation (but only after the amount thereof shall have been agreed upon
or finally determined pursuant to such provisions) and such shares shall
be canceled.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to QRI that:
Section 3.01. ORGANIZATION AND QUALIFICATION: SUBSIDIARIES. The Company
is a corporation, and each of the Company's subsidiaries (as such term in
defined in SECTION 9.03 herein) is a corporation or partnership, duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization, and each of the Company and its subsidiaries has
all requisite power and authority to own, lease and operate its properties and
to conduct its business as it is now being conducted and is qualified to do
business and is in good standing in each jurisdiction in which the nature of the
business conducted by it or the ownership or leasing of its properties makes
such qualification necessary, other than where the failure to be so qualified
and in good standing could not reasonably be expected to have a Company Material
Adverse Effect. The term "COMPANY MATERIAL ADVERSE EFFECT" as used in this
Agreement shall mean any change or effect that would be materially adverse to
the financial condition, results of operations, business, or prospects of the
Company and its subsidiaries, taken as a whole, at the time of such change or
effect; provided, however, no Company Material Adverse Effect shall be deemed to
have occurred hereunder as a result of changes in oil or gas prices. SECTION
3.01 of the Disclosure Schedule delivered by the Company to QRI concurrently
with the execution of this Agreement (the "COMPANY DISCLOSURE SCHEDULE") sets
forth, as of the date of this Agreement, a true and complete list of all the
Company's directly or indirectly owned subsidiaries, together with (a) the
jurisdiction of incorporation or organization of each such subsidiary and the
percentage of each such subsidiary's outstanding capital stock or other equity
interests owned by the Company or another subsidiary of the Company and (b) an
indication of whether each such subsidiary is a "SIGNIFICANT SUBSIDIARY" as
defined in SECTION 9.03 of this Agreement.
Section 3.02. CERTIFICATE OF INCORPORATION AND BYLAWS. The Company has
heretofore furnished or made available to QRI complete and correct copies of the
certificate of incorporation and the bylaws or the equivalent organizational
documents, in each case as amended or restated to the date hereof, of the
Company and each of its Significant Subsidiaries. Neither the Company nor any
of its subsidiaries is in violation of any of the provisions of its certificate
of incorporation or bylaws (or equivalent organizational documents).
Section 3.03. CAPITALIZATION.
(a) The authorized capital stock of the Company consists of
50,000,000 shares of Company Common Stock, par value $.01 per share, and
10,000,000 shares of Preferred Stock, par value $0.01 per share. At the
date hereof, 25,777,014 shares of Company Common Stock were issued and
outstanding, no shares of Company Common Stock were held by the Company in
its treasury or by the Company's subsidiaries and 12,840,000 shares of
Company Common Stock were reserved for issuance as follows: (i) 250,000
shares were reserved for issuance upon exercise of stock options heretofore
granted or available for grant pursuant to the Company's 1997 Stock Option
Plan (the "Company Option Plan"), of which options to purchase 248,570
shares were granted as of December 31, 1997; and (ii)
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12,590,000 shares were reserved for issuance upon the exercise of the
warrants (the "COMMON STOCK WARRANTS") listed and described in
SECTION 3.03(a) of the Company Disclosure Schedule. Except as
described in this SECTION 3.03 or in SECTION 3.03(a) of the Company
Disclosure Schedule, no shares of capital stock of the Company are
issued and outstanding or reserved for issuance for any other purpose.
Each of the issued shares of capital stock of each of the Company and
its subsidiaries is duly authorized, validly issued and fully paid
and nonassessable, and has not been issued in violation of (nor are
any of the authorized shares of capital stock of, or other equity
interests in, the Company or any of its subsidiaries subject to) any
preemptive or similar rights created by statute, the certificate of
incorporation or bylaws (or the equivalent organizational documents) of the
Company or any of its subsidiaries, any agreement to which the Company or
any of its subsidiaries is a party or is bound or applicable federal or
state securities laws. Except as set forth in SECTION 3.03(a) of the
Company Disclosure Schedule, all issued shares or other equity interests in
the subsidiaries of the Company owned by the Company or a subsidiary of the
Company are owned free and clear of all security interests, liens, claims,
pledges, agreements, limitations on the Company's or such subsidiaries'
voting rights, charges or other encumbrances of any nature whatsoever.
(b) No bonds, debentures, notes or other indebtedness of the Company
or its subsidiaries having the right to vote (or convertible into or
exchangeable or exercisable for securities having the right to vote) on any
matters on which stockholders may vote ("COMPANY VOTING DEBT") are issued
or outstanding. All shares of Company Common Stock that may be issued upon
exercise of stock options granted pursuant to the Company Option Plan or
Common Stock Warrants will, when issued in accordance with the terms of
such stock options, warrants, and the related Company Option Plan, be
validly issued, fully paid and nonassessable and not subject to preemptive
rights and issued in compliance with applicable federal and state
securities laws.
(c) Except as set forth in SECTION 3.03(a) above or in SECTION
3.03(c) of the Company Disclosure Schedule, there are no options, warrants
or other rights (including registration rights), agreements, arrangements
or commitments of any character to which the Company or any of its
subsidiaries is a party relating to the issued or unissued capital stock of
the Company or any of its subsidiaries or obligating the Company or any of
its subsidiaries to grant, issue, sell or register under federal or state
securities laws any shares of capital stock, Company Voting Debt or other
equity interests of the Company or any of its subsidiaries. Except as set
forth in SECTION 3.03(c) of the Company Disclosure Schedule, there are no
obligations, contingent or otherwise, of the Company or any of its
subsidiaries (i) to repurchase, redeem or otherwise acquire any shares of
Company Common Stock or other capital stock of the Company or the capital
stock of any subsidiary of the Company or (ii) other than advances to
wholly owned subsidiaries in the ordinary course of business, to provide
funds to, or to make any investment in (in the form of a loan, capital
contribution or otherwise), or to provide any guarantee with respect to the
obligations of, any subsidiary of the Company or any other person. Except
(i) as set forth in SECTION 3.03(c) of the Company Disclosure Schedule or
(ii) for the subsidiaries of the Company set forth in SECTION 3.01 of the
Company Disclosure Schedule, neither the Company nor any of its
subsidiaries (x) directly or indirectly owns, (y) has agreed to purchase or
otherwise acquire or (z) holds any interest
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convertible into or exchangeable or exercisable for the capital stock
or any other equity interests of any corporation, partnership, joint
venture or other business association or entity. Except as set forth
in SECTION 3.03(c) of the Company Disclosure Schedule or for any
agreements, arrangements or commitments between the Company and its
wholly owned subsidiaries or between such wholly owned subsidiaries,
there are no agreements, arrangements or commitments of any character
(contingent or otherwise) pursuant to which any person is or may be
entitled to receive any payment based on, or calculated in accordance
with, the revenues or earnings of the Company or any of its
subsidiaries. Except as set forth in SECTION 3.03(c) of the Company
Disclosure Schedule, there are no voting trusts, proxies or other
agreements or understandings to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
is bound with respect to the voting of any shares of capital stock or other
equity interests of the Company or any of its subsidiaries.
(d) SECTION 3.03(d) of the Company Disclosure Schedule sets forth a
complete and correct list as of the date hereof of (i) the number of
options to purchase Company Common Stock outstanding and the number of
shares of Company Common Stock issuable thereunder, (ii) the number of
Common Stock Warrants outstanding and the number of shares of Company
Common Stock issuable thereunder, (iii) the exercise price of each such
outstanding stock option and warrant, and (iv) the number of stock options
and warrants then exercisable. Complete and correct copies of the Company
Option Plan, all forms of stock options issued pursuant to the Company
Option Plan or otherwise, and all forms of Common Stock Warrants, including
all amendments thereto, have been made available to QRI.
Section 3.4. AUTHORITY. The Company has all requisite corporate power
and authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby (subject to,
with respect to the merger, the approval and adoption of this Agreement by the
stockholders of the Company as described in SECTION 6.01 of this Agreement).
The execution and delivery of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby have been duly authorized
by all necessary corporate action and no other corporate proceedings on the part
of the Company are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby (subject to, with respect to the merger, the
approval and adoption of this Agreement by the stockholders of the Company as
described in SECTION 6.01 of this Agreement). This Agreement has been duly
executed and delivered by the Company and, assuming the due authorization,
execution and delivery hereof by QRI, constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms.
Section 3.5. NO CONFLICT: REQUIRED FILINGS AND CONSENTS.
(a) Except as disclosed in SECTION 3.05(a) of the Company Disclosure
Schedule, the execution and delivery of this Agreement by the Company does
not, and the performance by the Company of its obligations hereunder,
including consummation of the transactions contemplated hereby, will not
(i) conflict with or violate the certificate of incorporation or bylaws, or
the equivalent organizational documents, in each case as amended or
restated, of the Company or any of its Significant Subsidiaries, (ii)
conflict with or violate any federal,
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state, foreign or local law, statute, ordinance, rule or regulation
(collectively, "LAWS") in effect as of the date of this Agreement or any
judgment, order or decree to which the Company or any of its
subsidiaries is a party or by or to which any of their respective
properties are bound or subject or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or
both would become a default) under, or impair any of the Company's or
any of its subsidiaries' rights or alter the rights or obligations of
any third party under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or require payment under, or
result in the creation of a lien or encumbrance on any of the properties
or assets of the Company or any of its subsidiaries pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company
or any of its subsidiaries is a party or by or to which the Company or
any of its subsidiaries or any of their respective properties are bound
or subject, excluding from the foregoing clause (iii) any such
conflicts, violations, breaches, defaults, events, rights of
termination, amendment, acceleration or cancellation, payment
obligations or liens or encumbrances that individually or in the
aggregate could not reasonably be expected to have a Company Material
Adverse Effect. The board of directors of the Company has approved the
merger, this Agreement and the transactions contemplated hereby. The
provisions of Section 203 of the DGCL are inapplicable to the merger,
this Agreement, and the transactions contemplated hereby. To the best
of the Company's knowledge, no other state takeover statute or similar
statute or regulation applies or purports to apply to the merger, this
Agreement or any of the transactions contemplated hereby.
(b) The execution and delivery of this Agreement by the Company does
not, and the performance by the Company of its obligations hereunder,
including consummation of the transactions contemplated hereby, will not,
require the Company to obtain any consent, license, permit, waiver,
approval, authorization or order of, or to make any filing with or
notification to, any governmental or regulatory authority, federal, state,
local or foreign (collectively, "GOVERNMENTAL ENTITIES"), except (i) for
(A) applicable requirements, if any, of the Securities Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and state securities
or blue sky laws ("BLUE SKY LAWS") and (B) the pre-merger notification
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR ACT") and (ii) the filing and recordation of
appropriate merger documents as required by the DGCL.
Section 3.06. PERMITS; COMPLIANCE. Except as disclosed in SECTION
3.06 of the Company Disclosure Schedule, each of the Company and its
subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
identification and registration numbers, approvals and orders (collectively,
the "PERMITS") necessary to own, lease and operate their properties and to
carry on their businesses as they are now being conducted, except where the
failure to possess such Permits could not reasonably be expected to have a
Company Material Adverse Effect. SECTION 3.06 of the Company Disclosure
Schedule sets forth, as of the date of this Agreement, all actions,
proceedings, or investigations, pending or, to the knowledge of the Company,
threatened against the Company or any of its subsidiaries that could
reasonably be expected to result in the loss, revocation, suspension or
cancellation of a Permit held by the Company or a subsidiary of the Company.
Except as set forth in SECTION 3.06 of the Company Disclosure Schedule, (i)
neither the Company nor any of its subsidiaries is in conflict with, in
default
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under or in violation of (a) any Law applicable to the Company or any of its
subsidiaries or by which any of their respective properties are bound or
subject or (b) any of the Permits held by the Company or a subsidiary of the
Company, except for any such conflicts, defaults or violations that
individually or in the aggregate could not reasonably be expected to have a
Company Material Adverse Effect; (ii) neither the Company nor any of its
subsidiaries is in conflict with, in default under or in violation of any
judgment, order or decree applicable to the Company of any of its
subsidiaries or any material Permits held by the Company or a subsidiary of
the Company; and (iii) neither the Company nor any of its subsidiaries has
received from any Governmental Entity any notice with respect to possible
conflicts with, defaults under or violations of (a) any Law applicable to the
Company or any of its subsidiaries or by which any of their respective
properties are bound or subject, (b) any judgment, order or decree applicable
to the Company or any of its subsidiaries, or (c) any of the Permits held by
the Company or a subsidiary of the Company.
Section 3.07. REPORTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES.
(a) Since March 7, 1997, except as disclosed in SECTION 3.07 of the
Company Disclosure Schedule, the Company has filed all forms, reports,
statements and other documents required to be filed with the Securities and
Exchange Commission ("SEC"), including, without limitation, (i) all Annual
Reports on Form 10-KSB, (ii) all Quarterly Reports on Form 10-QSB, (iii)
all proxy statements relating to meetings of stockholders (whether annual
or special), (iv) all Current Reports on Form 8-K and (v) all other
reports, schedules, registration statements or other documents
(collectively referred to as the "COMPANY SEC REPORTS"). As of their
respective dates, the Company SEC Reports complied in all material respects
with the requirements of applicable Laws (including the Securities Act or
the Exchange Act, as the case may be, and the rules and regulations of the
SEC thereunder applicable to such Company SEC Reports) and the Company SEC
Reports, including, without limitation, any financial statements or
schedules included therein, did not at the time they were filed contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) The Company has heretofore delivered to QRI (i) a consolidated
balance sheet of the Company and its subsidiaries as of December 31, 1997
and (ii) a consolidated statement of income, stockholders' equity and cash
flows for the period from inception, March 7, 1997 to December 31, 1997,
certified by Deloitte and Touche LLP, whose report thereon is included
therewith. The Company has also delivered to QRI (i) an unaudited
consolidated balance sheet of the Company and its subsidiaries as of June
30, 1998 and (ii) unaudited consolidated statements of income,
stockholders' equity and cash flows for the six month period ended June 30,
1998. Such audited and unaudited consolidated financial statements,
including any such financial statements and schedules contained in the
Company SEC reports (or incorporated by reference therein) (i) are in
accordance with the books and records of the Company and its subsidiaries
in all material respects and were prepared in accordance with the published
rules and regulations of the SEC and generally accepted accounting
principles applied on a consistent basis throughout the periods involved
(except (A) to the extent disclosed therein or required by changes in
generally accepted accounting principles), and (B) with respect to Company
SEC Reports, as may be indicated in the notes
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thereto, and (ii) fairly present in all material respects the consolidated
financial position of the Company and its subsidiaries as of the respective
dates thereof and the consolidated results of operations and cash flows for
the periods indicated (except, in the case of unaudited consolidated
financial statements for interim periods, for the absence of footnotes and
subject to adjustments, consisting only of normal, recurring accruals,
necessary to present fairly such results of operations and cash flows).
(c) Except as and to the extent set forth on the consolidated balance
sheet of the Company and its subsidiaries as of December 31, 1997,
including the notes thereto, neither the Company or any of its subsidiaries
has any liabilities or obligations material to the Company and its
subsidiaries that are not referenced on such balance sheet. Except as set
forth in SECTION 3.07 of the Company Disclosure Schedule, since December
31, 1997, neither the Company nor any of its subsidiaries has incurred any
liabilities except for (i) liabilities or obligations incurred in the
ordinary course of business and consistent with past practice which do not
have a Company Material Adverse Effect, and (ii) for professional fees and
expenses incurred in connection with or as a result of the merger.
Section 3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth
in SECTION 3.08 of the Company Disclosure Schedule, since December 31, 1997, the
Company and its subsidiaries have conducted their respective businesses only in
the ordinary course and in a manner consistent with past practice and there has
not been (a) any damage, destruction or loss with respect to any assets of the
Company or any of its subsidiaries that, whether or not covered by insurance,
would constitute a Company Material Adverse Effect, (b) any change by the
Company or its subsidiaries in their significant accounting policies, (c) except
for dividends by a subsidiary of the Company to the Company or another wholly
owned subsidiary of the Company, any declaration, setting aside or payment of
any dividends or distributions in respect of shares of Company Common Stock or
the shares of stock of, or other equity interests in, any subsidiary of the
Company or any redemption, purchase or other acquisition of any of the Company's
securities or any of the securities of any subsidiary of the Company, (d) any
increase in the benefits under, or the establishment or amendment of, any bonus,
insurance, severance, deferred compensation, pension, retirement, profit
sharing, performance awards (including, without limitation, the granting of
stock appreciation rights or restricted stock awards), stock purchase or other
employee benefit plan, or any increase in the compensation payable or to become
payable to any of the directors or officers of the Company or the employees of
the Company or its subsidiaries as a group, except for (i) increases in salaries
or wages payable or to become payable in the ordinary course of business and
consistent with past practice or (ii) the granting of stock options in the
ordinary course of business to employees of the Company or its subsidiaries who
are not directors or executive officers of the Company, (e) a material reduction
in the rate of production of oil, gas or other hydrocarbons from the Company
Properties, viewed as a whole, other than changes in the ordinary course of
operation, changes that result from depletion in the ordinary course of
operation, and changes that result from variances in markets for the oil, gas
and other hydrocarbons, or (f) any other Company Material Adverse Effect.
Section 3.09. ABSENCE OF LITIGATION. Except as set forth in SECTION 3.09
of the Company Disclosure Schedule, there is no claim, action, suit, litigation,
proceeding, arbitration or, to the knowledge of the Company, investigation of
any kind, at law or in equity (including actions or proceedings seeking
injunctive relief), pending or, to the knowledge of the Company, threatened
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against the Company or any of its subsidiaries or any properties or rights of
the Company or any of its subsidiaries, and neither the Company nor any of its
subsidiaries is subject to any continuing order of, consent decree, settlement
agreement or other similar written agreement with, or, to the knowledge of the
Company, continuing investigation by, any Governmental Entity, or any judgment,
order, writ, injunction, decree or award of any Governmental Entity or
arbitrator, including, without limitation, cease-and-desist or other orders.
Section 3.10. EMPLOYEE BENEFIT PLANS; LABOR MATTERS.
(a) With respect to each employee benefit plan, program, arrangement,
contract, employment agreement, stock option, bonus, incentive or similar
plan (including, without limitation, any "employee benefit plan" as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")), maintained or contributed to presently or at any time
within the six (6) year period prior to the date of this Agreement by the
Company or any other entity that, together with the Company, would be
treated as a single employer under Code Section 414 ("ERISA AFFILIATE"), or
with respect to which the Company or any ERISA Affiliate could reasonably
be expected to incur liability under ERISA (the "COMPANY BENEFIT PLANS"),
the Company has delivered or made available to QRI a true and correct copy
of (i) such Company Benefit Plan, (ii) each trust agreement, if any,
relating to such Company Benefit Plan, (iii) the most recent summary plan
description of each Company Benefit Plan for which a summary plan
description is required, (iv) the most recent determination letter issued
by the IRS with respect to any Company Benefit Plan that is intended to be
qualified under Section 401 of the Code ("QUALIFIED PLANS"), (v) Internal
Revenue Service Forms 5500 for each Company Benefit Plan for each of the
three (3) most recent plan years, and (vi) the most recent actuarial
report, if any, for each Company Benefit Plan. SECTION 3.10 of the Company
Disclosure Schedule contains a complete list of all Company Benefit Plans.
(b) Each of the Company Benefit Plans is in compliance with its terms
and with all applicable laws, including, but not limited to, ERISA and the
Code, and except as set forth in SECTION 3.10 of the Company Disclosure
Schedule, no Company Benefit Plan has an accumulated or waived funding
deficiency within the meaning of Section 412 of the Code. Except as set
forth in SECTION 3.10 of the Company Disclosure Schedule, neither the
Company nor any ERISA Affiliate is or has contributed to a "multiemployer
plan," as defined in Section 3(37) of ERISA, and neither the Company nor
any ERISA Affiliate has any past, present or future obligation or liability
to contribute to any multiemployer plan. Neither the Company nor any ERISA
Affiliate has completely or partially withdrawn from any multiemployer plan
with respect to which there is any outstanding liability as of the date of
this Agreement. Neither the Company nor any ERISA Affiliate has incurred,
directly or indirectly, any material liability (including any material
contingent liability) to or on account of a Company Benefit Plan under
Sections 409 or 502 of ERISA or Section 4975 of the Code or pursuant to
Title IV of ERISA to which the Company or an ERISA Affiliate made, or was
required to make, contributions during the five (5) years ending on the
date of this Agreement. As of the date of this Agreement, no condition
exists that presents a material risk to the Company or an ERISA Affiliate
of incurring such a material liability. No proceedings have been
instituted to terminate any Company Benefit Plan that is subject to Title
IV of ERISA and the Pension
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Benefit Guaranty Corporation is not expected to institute any such
proceedings, and no "reportable event," as such term in defined in
Section 4043 of ERISA has occurred with respect to any Company
Benefit Plan.
(c) Except as set forth in SECTION 3.10 of the Company Disclosure
Schedule, the current value of the assets of each of the Company Benefit
Plans that are subject to Title IV of ERISA, based upon reasonable
actuarial assumptions, equals or exceeds the present value of the accrued
benefits under each such Company Benefit Plan and all contributions or
other amounts payable by the Company and each ERISA Affiliate as of the
date of this Agreement with respect to each Plan in respect of current or
prior plan years has been either paid or accrued on the latest balance
sheet included in the Company's most recent SEC Report on Form 10-KSB or
accrued since December 31, 1997. There are no pending, or, to the best
knowledge of the Company and each ERISA Affiliate, threatened or
anticipated claims (other than routine claims for benefits) by, on behalf
of or against any of the Company Benefit Plans or any trusts related
thereto.
(d) There are no collective bargaining or other labor union contracts
to which the Company or its subsidiaries is a party and no collective
bargaining agreement is being negotiated by the Company or any of its
subsidiaries. There is no pending or, to the best knowledge of the
Company, threatened labor dispute, strike or work stoppage against the
Company or any of its subsidiaries.
(e) No Company Benefit Plan provides retiree medical or other retiree
welfare benefits and neither the Company nor any of its subsidiaries is
contractually or otherwise obligated to provide medical or other welfare
benefits upon retirement or termination of employment of employees.
(f) Neither the Company nor any of its ERISA Affiliates contributes
to or has an obligation to contribute to, or has within six years prior to
the date of this Agreement contributed to or had an obligation to
contribute to, an employee benefit plan that is or was subject to Title IV
of ERISA or Section 412 of the Code.
(g) No transaction prohibited by ERISA Section 406 and no "prohibited
transaction" under Code Section 4975(c) has occurred with respect to any
Company Benefit Plan. All "fiduciaries," as defined in ERISA Section
3(21), with respect to the Company Benefit Plans have complied in all
respects with the requirements of ERISA Section 404. Neither the Company
nor any ERISA Affiliate has any liability to the Internal Revenue Service
or the PBGC with respect to any Company Benefit Plan.
(h) Each Company Benefit Plan provides that it may be amended or
terminated at any time except for benefits protected under Code Section
411(d).
(i) Each Qualified Plan is qualified in form and operation under Code
Section 401 (a) and each trust for each Qualified Plan is exempt from
federal income tax under Code Section 501(a). No event has occurred or
circumstances exist that will or could give rise to disqualification or
loss of tax-exempt status of any Qualified Plan or related trust.
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All determination letters with respect to Qualified Plans remain in
effect and have not been revoked.
(j) The Company and each ERISA Affiliate has complied with the
provisions of ERISA Section 601 et seq. and Code Section 4980B.
(k) No payment that is owed or may become due to any director,
officer, employee or agent of the Company or any of its subsidiaries will
be non-deductible to the Company or such subsidiary or subject to tax under
Code Sections 280G or 4999; nor will the Company or any of its subsidiaries
be required to "gross-up" or otherwise compensate any such person because
of the imposition of any excise tax on a payment to such person. The
consummation of the transaction contemplated under this Agreement will not
accelerate or increase any liability under any Company Benefit Plan because
of an acceleration or increase of any of the rights or benefits to which
employees may be entitled thereunder.
(l) The Company has no obligation or liability for benefits under any
"employee benefit plan" as defined in Section 3(3) of ERISA owing to
Mercury.
Section 3.11. TAXES. Except as set forth in SECTION 3.11 of the Company
Disclosure Schedule:
(a) (i) all returns and reports ("TAX RETURNS") of or with respect to
any Tax (as defined in SECTION 9.03 of this Agreement) that are required
to be filed on or before the date hereof by or with respect to the Company
or any of its subsidiaries have been duly and timely filed, (ii) Taxes that
have become due with respect to the period covered by each such Tax Return
have been paid, (iii) all withholding Tax requirements imposed on or with
respect to the Company or any of its subsidiaries have been satisfied in
all material respects, and (iv) no penalty, interest or other charge is due
with respect to the late filing of any such Tax Return or late payment of
any such Tax.
(b) There is no claim against the Company or any of its subsidiaries
for any amount of Taxes, no assessment, deficiency or adjustment has been
asserted or proposed with respect to any Tax Return of or with respect to
the Company or any of its subsidiaries, and no Tax Return of or with
respect to the Company or any of its subsidiaries has been, or is being,
audited by the Internal Revenue Service or any state, local or other taxing
authority other than those disclosed (and to which are attached copies of
all audit or similar reports) in SECTION 3.11 of the Company Disclosure
Schedule.
(c) The total amounts set up as liabilities for current and deferred
Taxes in the financial statements referred to in SECTION 3.07 of this
Agreement are sufficient to cover the payment of all Taxes, whether or not
assessed or disputed, with respect to the Company and any of its
subsidiaries up to and through the periods covered thereby.
(d) Except for statutory liens for current Taxes not yet due and for
Taxes being contested in good faith that have been disclosed in SECTION
3.11 of the Company Disclosure
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Schedule and for which adequate provisions have been made in the financial
statements referred to in SECTION 3.07, no liens for Taxes exist upon the
assets of any of the Company or any of its subsidiaries.
(e) Neither the Company nor any of its subsidiaries has waived any
statute of limitations in respect of Taxes or agreed to any extension of
time with respect to a Tax assessment or deficiency.
(f) Neither the Company nor any of its subsidiaries has made an
election under Section 341(f) of the Code. Except as disclosed in SECTION
3.11 of the Company Disclosure Schedule, neither the Company nor any of its
subsidiaries has made any payments, is obligated to make any payments, or
is a party to any agreement that under the circumstances could obligate it
to make any payments that will not be deductible under Sections 162(m) or
280G of the Code.
(g) The Company and its subsidiaries have not taken or agreed to take
any action that would create a material risk that the merger would not
qualify as a tax free reorganization under the provisions of Section
368(a)(1)(A) of the Code.
(h) Neither the Company nor any of its subsidiaries (i) has ever been
a member of an Affiliated Group (as defined in Section 1504 of the Code)
other than a group the common parent of which was the Company or (ii) has
any liability for the Taxes of any person (other than the Company or any of
its subsidiaries) under Treas. Reg. Section 1.1502-6 (or any similar
provision under state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
Section 3.12. AFFILIATES. SECTION 3.12 of the Company Disclosure
Schedule identifies all persons who, to the knowledge of the Company, may be
deemed to be affiliates ("Affiliates") of the Company within the meaning of that
term as used in Rule 145 promulgated pursuant to the Securities Act, including,
without limitation, all directors and executive officers of the Company.
Section 3.13. ENVIRONMENTAL MATTERS. Except for matters disclosed in
SECTION 3.13 of the Company Disclosure Schedule:
(a) To the best knowledge of Company all of the properties,
operations and activities of the Company and its subsidiaries comply with
all applicable Environmental Laws (as defined in SECTION 9.03).
(b) None of the Company, its subsidiaries or their properties and
operations are subject to any existing, pending or, to the knowledge of the
Company, threatened action, suit, investigation, inquiry or proceeding by
or before any Governmental Authority or third party under any Environmental
Law.
(c) To the best knowledge of the Company all notices, permits,
licenses or similar authorizations, if any, required to be obtained or
filed by the Company or any its subsidiaries under any Environmental Law in
connection with any aspect of the business of the Company
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or its subsidiaries, including without limitation those relating to the
treatment, storage, disposal or release of a hazardous substance or
solid waste, have been duly obtained or filed and will remain valid and
in effect after the merger, and the Company and its subsidiaries are in
compliance with the terms and conditions of all such notices, permits,
licenses and similar authorizations.
(d) To the best knowledge of the Company, the Company and its
subsidiaries have satisfied and are currently in compliance with all
financial responsibility requirements applicable to its operations and
imposed by any Governmental Authority under any Environmental Law, and
neither the Company nor any of its subsidiaries has received any notice of
noncompliance with any such financial responsibility requirements.
(e) To the best knowledge of the Company, there are no physical or
environmental conditions existing on any property of the Company or any of
its subsidiaries or resulting from the Company's or any of its
subsidiaries' operations or activities with respect to any of the Company
Properties, past or present, at any location, that would give rise to any
on-site or off-site investigative, remedial, response, contribution or
similar obligations under any Environmental Laws.
(f) To the best knowledge of the Company, since the effective date of
the relevant requirements of applicable Environmental Laws, all hazardous
substances or solid wastes generated by the Company or any of its
subsidiaries or used in connection with any of their properties or
operations have to the extent required by Environmental Laws been
transported only by carriers authorized under Environmental Laws to
transport such substances and wastes, and disposed of only at treatment,
storage and disposal facilities authorized under Environmental Laws to
treat, store or dispose of such substances and wastes, and, to the best
knowledge of the Company and with respect to such substances and wastes,
such carriers and facilities have been and are operating in compliance with
such authorizations, are not subject to any material unperformed
investigative, remedial, response, contribution or similar obligations
under, and are not the subject of any existing, pending or overtly
threatened action, investigation or inquiry by any Governmental Authority
or third party in connection with, any Environmental Laws.
(g) There has been no exposure of any person or property to hazardous
substances, solid waste or any pollutant or contaminant, nor has there been
any release of hazardous substances, solid waste or any pollutant or
contaminant into the environment by the Company or any of its subsidiaries
in connection with their properties or operations that could reasonably be
expected to have a Company Material Adverse Effect.
(h) The Company shall make available to QRI all internal and external
environmental audits and studies and all correspondence on substantial
environmental matters in the possession of the Company relating to any of
the current or former properties or operations of the Company or any of its
subsidiaries.
Section 3.14. PROPERTIES.
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(a) The oil, gas and/or mineral leases, and interests which comprise
part of the properties, rights and interests listed on SECTION 3.14 of the
Company Disclosure Schedule (the "Company Properties"), and all other
material contracts, agreements, licenses, permits and easements,
rights-of-way and other rights-of-surface use comprising any part of or
otherwise relating to the Company Properties (such leases and such material
contracts, agreements, licenses, permits, easements, rights-of-way and
other rights-of-surface use being herein called the "Company Basic
Documents"), are in full force and effect and constitute valid and binding
obligations of the parties thereto; all contracts and agreements that are
Company Basic Documents are disclosed in SECTION 3.14(a) of the Company
Disclosure Schedule. Neither the Company nor any subsidiary is in breach
or default (and no situation exists which with the passing of time or
giving of notice would create such a breach or default) of its obligations
under the Company Basic Documents, and no breach or default by any third
party (or situation which with the passage of time or giving of notice
would create such a breach or default) exists, to the extent such breach or
default (whether by the Company, any subsidiary or such a third party)
could materially adversely affect (after the date hereof) the ownership,
operation, value or use of any Company Properties. All payments (including,
without limitation, all delay rentals, royalties, excess royalties,
overriding royalty interests, shut-in royalties and valid calls for payment
or prepayment under operating agreements) owing under Company Basic
Documents have been and are being made (timely and properly, and before the
same became delinquent) by the Company or its subsidiaries in all material
respects and, where the non-payment of same by a third party could
materially adversely affect the ownership, operation, value or use of a
Company Property after the date hereof, have been and are being made, by
such third party in all material respects.
(b) Except as set forth in SECTION 3.14(b) of the Company Disclosure
Schedule, neither the Company nor any subsidiary has incurred any expenses,
or made commitments to make expenditures, in connection with (and no other
obligations or liabilities have been incurred) that would materially
adversely affect the ownership or operation of the Company Properties after
the date of this Agreement, other than routine expenses incurred in the
normal operation of existing wells on the Company Properties. All expenses
payable under the terms of the Company Basic Documents have been properly
and timely paid except for such expenses as are being currently paid prior
to delinquency in the ordinary course of business. Except as set forth in
Section 3.14(b) of the Company Disclosure Schedule, no proposals are
currently outstanding (whether made by the Company, any subsidiary or by
any other party) to drill additional wells, or to deepen, plug back,
abandon, or rework existing wells, or to conduct other operations for which
consent is required under the applicable operating agreement, or to conduct
any other material operations, other than normal operation of existing
wells on the Company Properties.
(c) There exist no agreements or arrangements for the sale,
gathering, transportation, compression, treating, processing or other
marketing of a material volume of production from the Company Properties
(including without limitation, calls on, or other rights to purchase,
production, whether or not the same are currently being exercised) other
than (A) the agreements set forth in SECTION 3.14(c) of the Company
Disclosure Schedule, and (B) agreements or arrangements that are cancelable
on 30 days notice or less without penalty or detriment. Any contracts or
other arrangements under which the Company or any
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subsidiary is processing, gathering, transporting or otherwise marketing
any material volume of oil, gas or other minerals (whether or not
attributable to the Company Properties) for the account of a third party
include terms that represent an arm's length, commercially reasonable
trade for the Company or any subsidiary. All of the proceeds from the
sale of production from the Company Properties are being properly and
timely paid to the Company by the purchasers of production without
suspension or indemnity other than standard division order indemnities.
(d) Except as set forth in SECTION 3.14(d) of the Company
Disclosure Schedule, neither the Company nor any subsidiary has received
prepayments (including, but not limited to, payments for oil and gas not
taken pursuant to "take-or-pay" arrangements) for any oil or gas
produced from the Company Properties as a result of which the obligation
does (or may) exist to deliver oil or gas produced from the Company
Properties after the date of this Agreement without then receiving
payment (or without then receiving full payment) therefor or to make
repayments in cash. For each Company Property listed in SECTION 3.14(d)
of the Company Disclosure Schedule, such section reflects (A) the total
amount of prepayment received as of the date hereof, (and the amount of
any recoupment thereof heretofore made), and (B) whether or not a cash
payment can be required in the event recoupment out of production proves
to be inadequate. Except as set forth in SECTION 3.14(d) of the Company
Disclosure Schedule, there is no Company Property with respect to which
the Company, any subsidiary, and/or their respective predecessors in
title, have collectively taken more (referred to herein as
"OVER-PRODUCED") or materially less (referred to herein as
"UNDER-PRODUCED") production from such Company Property (or on the units
in which such Company Property participates), or any product thereof,
than the ownership of the Company or any Company subsidiary and such
predecessors in such Company Property would entitle the Company or any
Company subsidiary and such predecessors (absent any balancing agreement
or arrangement) to receive, to the extent such Over-produced or
Under-produced position has not, as of the date hereof, been fully made
up or otherwise extinguished. For each Company Property listed in
SECTION 3.14 of the Company Disclosure Schedule, such section reflects,
on a well-by-well or any other basis as may be dictated by any
applicable balancing agreement, (A) whether the Company or any
subsidiary is in an Over-produced or Under-produced position, (B) the
amount of such over-production or under-production, (C) a description of
the written balancing agreement (if any) pertaining to such Company
Property (or a statement that no such agreement exists) and (D) a
statement as to whether royalties, overriding royalties or other burdens
against the Company's or any subsidiaries's net revenue interest in the
affected Company Properties were, during the period the subject
imbalance accrued, paid based upon receipts or entitlements. Except as
set forth in SECTION 3.14(d) of the Company Disclosure Schedule, there
are no pipeline imbalances that have arisen due to the failure of
nominations made by the Company or any subsidiary to match actual
deliveries of production from any one or more Company Properties.
Except as set forth on SECTION 13.14(d) of the Company Disclosure
Schedule, (i) none of the purchasers under any production sales
contracts has exercised any economic out provision; (ii) none of the
purchasers under any production sales contracts has curtailed its takes
of natural gas in violation of such contracts; and (iii) none of the
purchasers under any production sales contracts has given notice that it
desires to amend the production sales contracts with respect to price or
quantity of deliveries under take-or-pay provisions or otherwise. The
Company
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is not entitled to receive any portion of the interest of QRI in any
production or to receive cash or other payments to "balance" any
disproportionate allocation of production under any operating
agreement, gas balancing and storage agreement, gas processing or
dehydration agreement, gas transportation or other similar
agreements; and QRI is not obligated to pay any penalties or other
payments under any gas transportation or other agreement as a result
of the delivery of quantities of gas from the Company Properties.
(e) The Company and each subsidiary has all governmental
licenses and permits necessary to own and operate the Company
Properties as presently being owned and operated, and such licenses,
permits and filings are in full force and effect, and neither the
Company nor any subsidiary has received written notice of any
violations in respect of any such licenses or permits.
(f) Except as set forth in SECTION 3.14(f) of the Company
Disclosure Schedule, neither the Company, any subsidiary nor any
Company Property is subject to (A) any area of mutual interest
agreements or non-compete agreements, (B) any farm-out or farm-in
agreement under which any party thereto is entitled to receive
assignments not yet made, or could earn additional assignments after
the date hereof, (C) any tax partnership, or (D) any agreement,
contract or commitment relating to the disposition or acquisition of
the assets of, or any interest in, any business entity.
(g) All severance, production, ad valorem, windfall profit and
other similar taxes based on or measured by ownership or operation of
the Company Properties have been, and are being, paid (properly and
timely, and before the same become delinquent) by the Company and
each subsidiary in all respects.
(h) The ownership and operation of the Company Properties has,
to the extent that non-conformance could materially adversely affect
the ownership, operation, value or use thereof after the date hereof,
been in conformity with all applicable laws, and all applicable
rules, regulations and orders of all governmental agencies having
jurisdiction.
(i) Except as set forth in SECTION 3.14(i) of the Company
Disclosure Schedule, there are no Preferential Rights or Consents,
other than Routine Governmental Approvals (as defined below), that
affect any Company Property or Properties and that will be triggered
by the merger. For purposes of this Agreement, "Preferential Right"
means any preferential right or option to purchase or otherwise to
acquire a thing; "Consent" means any consent to assign or transfer,
including a transfer occasioned by a merger, or any other restriction
or limitation on transferability; "Routine Governmental Approvals"
means approvals required to be obtained from any governmental or
tribal authority that are customarily obtained after consummation of
a transaction.
(j) Except as set forth in SECTION 3.14(j) of the Company
Disclosure Schedule, there exist no agreements or other arrangements
whereunder the Company or any subsidiary undertakes to perform
gathering, transportation, processing or other marketing services for
any third party, including without limitation the owner of a royalty
or overriding royalty interest burdening a lease included in the
Company Properties, for a fee or other consideration
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that is now, or may hereafter be, unrepresentative of commercial
rates being received by third parties in comparable, arm's length
transactions.
(k) Except as set forth in SECTION 3.14(k) of the Company
Disclosure Schedule, the Company and/or its subsidiaries have good
and defensible title to the Company Properties, free and clear of all
liens, security interests, and encumbrances except for (a) the
contracts, agreements, burdens, encumbrances and other matters set
forth in the descriptions of certain of the Company Properties in
SECTION 3.14 of the Company Disclosure Schedule, (b) statutory liens
for taxes which are not yet delinquent, (c) liens under operating
agreements, pooling orders and unitization agreements, and mechanics'
materialmen's liens, with respect to obligations which are not yet
due, and (d) minor defects and irregularities in title to any Company
Property, so long as such defects and irregularities do not
materially impair the value of such Company Property or the use
thereof for the purposes for which such Company Property is held.
With respect to each Company Property described in SECTION 3.14 of
the Company Disclosure Schedule, the ownership of the Company and/or
the subsidiaries in such Company Property does and will, (A) with
respect to each tract of land described in SECTION 3.14 of the
Company Disclosure Schedule (whether described directly in such
section or described by reference to another instrument) in
connection with such Company Property, (1) entitle the Company and/or
a subsidiary to receive a decimal or percentage share of the oil, gas
and other hydrocarbons produced from, or allocated to, such tract
equal to or not less than the decimal or percentage share set forth
in SECTION 3.14 of the Company Disclosure Schedule in connection with
such tract opposite the words "Net Revenue Interest" (or words of
similar import), (2) cause the Company or any subsidiary to be
obligated to bear a decimal or percentage share of the cost of
exploration, development and operation of such tract of land
(collectively, the "Costs") not greater than the decimal or
percentage share set forth in SECTION 3.14 of the Company Disclosure
Schedule in connection with such tract opposite the words "Working
Interest" (or words of similar import) and (B) if such Company
Property is shown in SECTION 3.14 of the Company Disclosure Schedule
to be subject to a unit or units, with respect to each such unit, (1)
entitle the Company and/or the subsidiaries to receive a decimal or
percentage share of all substances covered by such unit that are
produced from, or allocated to, such unit equal to or not less than
the decimal or percentage share set forth in SECTION 3.14 of the
Company Disclosure Schedule in connection with such Company Property
opposite the words "Unit Net Revenue Interest" or words of similar
import (and if such Company Property is subject to more than one
unit, words identifying such interest with such unit), and (2)
obligate the Company and/or the subsidiaries to bear a decimal or
percentage share of the Costs not greater than as set forth in
SECTION 3.14 of the Company Disclosure Schedule in connection with
such Company Property opposite the words "Unit Working Interest" or
words of similar import (and if such Company Property is subject to
more than one unit, words identifying such interest with such unit).
With respect to each Company Property described in SECTION 3.14 of
the Company Disclosure Schedule that is subject to a voluntary or
involuntary pooling, unitization or communitization agreement and/or
order, the term "tract of land" as used in this subsection (k) shall
mean the pooled, unitized or communitized area as an entirety and
shall not be deemed to refer to any individual tract committed to
said pooled, unitized or communitized area. Without limitation of
the foregoing, the ownership by the Company and/or the subsidiaries
of the Company Properties does and will, with respect to each well or
unit identified in SECTION 3.14 of the Company
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Disclosure Schedule, entitle the Company and/or the subsidiaries to
receive a decimal or percentage share of the oil, gas and other
hydrocarbons produced from, or allocated to, such well or unit equal
to not less than the decimal or percentage share set forth, for such
well or unit, in the column headed "Net Revenue Interest" in SECTION
3.14 of the Company Disclosure Schedule, and cause the Company and/or
the subsidiaries to be obligated to bear a decimal or percentage
share of the Costs of such well or unit equal to not more than the
decimal or percentage share set forth, for such well or unit, in the
column headed "Working Interest" in such section. The
above-described shares of production that the Company and/or its
subsidiaries are entitled to receive and share of expenses that the
Company and/or its subsidiaries are obligated to bear are not, and
will not, be subject to change other than such change that arise
pursuant to non-consent provisions of operating agreements described
in SECTION 13.4 of the Company Disclosure Schedule in connection with
operations hereafter proposed, or such changes are reflected in
SECTION 13.4 of the Company Disclosure Schedule.
(l) The Company has delivered to QRI a copy of the Reserve
Report prepared by Citadel Engineering, Ltd. and dated as of March 5,
1998, (the "Citadel Report") relating to the Company's oil and gas
reserves (the "Oil and Gas Reserves"). There are no statements or
conclusions in the Citadel Report that are based upon or include
misleading information or fail to take into account material
information regarding the matters reported therein. To the knowledge
of the Company, the estimates of reserves in the Citadel Report was
prepared in accordance with standard geological and engineering
methods generally accepted in the oil and gas industry. The
estimates of the lease operating expenses, production and ad valorem
taxes and capital expenditures in the Citadel Report reasonably
reflect the historical experience of the Company, and the Company has
no reason to believe that the estimates will not reflect future lease
operating expenses, production and ad valorem taxes and capital
expenses. The historical factual information supplied by the Company
to the independent engineering firm in connection with the
preparation of the Citadel Report was, at the time of delivery to
such firms, true and complete in all material respects.
Section 3.15. REAL PROPERTY. SECTION 3.15 of the Company Disclosure
Schedule lists all real property that is owned or leased by the Company
(other than the Company Properties).
Section 3.16. INSIDER INTERESTS; TRANSACTIONS WITH MANAGEMENT. Except
as set forth in SECTION 3.16 of the Company Disclosure Schedule, no officer,
director, or employee of the Company or holder of more than five percent of
the Company Common Stock currently outstanding has any interest in any
property, real or personal, tangible or intangible, agreement, arrangement,
or understanding, written or oral, providing for the employment of,
furnishing of services by, rental or real or personal property from, or
otherwise requiring payments to any such shareholder, officer, director or
employee used in or pertaining to the business of the Company or any
subsidiary, except for the ordinary rights of a stockholder or employee stock
option holder. Except as disclosed in the Company SEC Reports, no executive
officer, director or stockholder of the Company or any of its subsidiaries
has, since March 7, 1997, engaged in any business dealings with the Company
or any of its subsidiaries, other than such business dealings as would not be
required to be disclosed in such documents or reports pursuant to the
Securities Act and the rules and regulations promulgated thereunder. Except
as set forth on SCHEDULE 3.16, no executive officer or director of the
Company or any of its subsidiaries (except in his capacity as such) has any
direct or indirect material interest
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in (a) any competitor, customer, supplier or agent of the Company or any of
its subsidiaries, or (b) any person that is a party to any contract or
agreement with the Company or any of its subsidiaries.
Section 3.17. CONTRACTS AND AGREEMENTS. The contracts and agreements
listed in SECTION 3.17 of the Company Disclosure Schedule or filed as
exhibits to any of the Company SEC Reports constitute all of the written and
oral contracts, commitments, leases, and other agreements (including, without
limitation, promissory notes, loan agreements, and other evidences of
indebtedness) to which the Company or any of its subsidiaries is a party or
by which any of their properties are bound with respect to which the
obligations of or the benefits to be received by the Company or any of its
subsidiaries, individually or in the aggregate, could reasonably be expected
to have a value in excess of $100,000 in any consecutive 12-month period
(each a "MATERIAL CONTRACT"). Except as set forth in SECTION 3.17 of the
Company Disclosure Schedule, neither the Company nor any of its subsidiaries
are and, to the best knowledge of the Company, no other party thereto is in
default (and no event has occurred which, with the passage of time or the
giving of notice, or both, would constitute a default) under any Material
Contract, and neither the Company nor any of its subsidiaries have waived any
right under any Material Contract. Neither the Company nor any of its
subsidiaries have received any notice of default or termination under any
Material Contract and neither the Company nor any of its subsidiaries has
assigned or otherwise transferred any rights under any Material Contract or
any other contract, to the extent default or termination could have a Company
Material Adverse Effect.
Section 3.18. VOTE REQUIRED. The only votes of the holders of any
class or series of Company capital stock necessary to approve the merger and
this Agreement are the affirmative votes of the holders of at least a
majority of the outstanding shares of the Company Common Stock. Members of
the Darden Family and Mercury control approximately 46% of the outstanding
Company Common Stock, and they have agreed (a copy of which agreement has
been furnished to QRI concurrently with the execution of this Agreement) to
vote their shares of Company Common Stock in favor of the merger at the
Company stockholders meeting referred to in SECTION 6.01.
Section 3.19. BROKERS. Except for payments due to EVEREN Securities,
Inc. disclosed on SCHEDULE 3.19 hereto, no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company.
Section 3.20. OPINION OF FINANCIAL ADVISOR. The board of directors of
the Company has received the written opinion of EVEREN Securities, Inc. to
the effect that, as of the date of this Agreement, the Merger Consideration
to be paid to the holders of the Company Common Stock (other than holders of
shares held by Mercury Exploration Company and shares held by members of the
Darden family and their Affiliates) is fair, from a financial point of view,
to such holders. The Company will promptly deliver a copy of such opinion to
QRI.
Section 3.21. SPECIAL COMMITTEE RECOMMENDATIONS. By a unanimous vote
of the disinterested directors constituting a Special Committee of the board
of directors formed to consider the merger (the "Special Committee") present
at a meeting of the Special Committee (which meeting was duly called and
held and at which a quorum was present at all times), and by unanimous vote
of the board of directors of the Company (with members of the Darden family
abstaining) (which meeting was duly called and held at which a quorum was
present at all times), the Special Committee
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and the board of directors (with members of the Darden family abstaining) (a)
approved and adopted this Agreement, including the merger and the other
transactions contemplated hereby, and determined that the merger is fair to
the stockholders of the Company (other than holders of shares held by Mercury
Exploration Company and shares held by members of the Darden family and their
Affiliates), and (b) subject to SECTION 6.01 hereof, resolved to recommend
approval and adoption of this Agreement, including the merger and the other
transactions contemplated herein, by the stockholders of the Company.
Section 3.22. DISCLOSURE. No representation or warranty hereunder
contains any untrue statement of material fact or omits to state a material
fact necessary in order to make the statements contained therein or herein
not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF QRI
QRI hereby represents and warrants to the Company that:
Section 4.01. ORGANIZATION AND QUALIFICATION. QRI is a corporation,
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and QRI has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
business as it is now being conducted and is duly qualified and in good
standing to do business in each jurisdiction in which the nature of the
business conducted by it or the ownership or leasing of its properties makes
such qualification necessary, other than where the failure to be so duly
qualified and in good standing could not reasonably be expected to have a QRI
Material Adverse Effect. The term "QRI MATERIAL ADVERSE EFFECT" as used in
this Agreement shall mean any change or effect that would be materially
adverse to the financial condition, results of operations, business, or
prospects of QRI taken as a whole, at the time of such change or effect;
provided, however, no QRI Material Adverse Effect shall be deemed to have
occurred hereunder as a result of changes in oil or gas prices.
QRI has no subsidiaries (as that term is defined in SECTION 9.03 herein).
Section 4.02. CERTIFICATE OF INCORPORATION AND BYLAWS; FORMATION
DOCUMENTS. QRI has heretofore furnished or made available to the Company
complete and correct copies of the certificate of incorporation and bylaws,
in each case as amended or restated to the date hereof, of QRI and complete
and correct copies of each of the formation documents. QRI is not in
violation of any of the provisions of its certificate of incorporation or
bylaws (or equivalent organizational documents) or the formation documents,
and to the best knowledge of QRI, no other party to the formation documents
is in violation thereof.
Section 4.03. CAPITALIZATION.
(a) The authorized capital stock of QRI as of the Effective
Time will consist of 40,000,000 shares of QRI Common Stock, par
value $.01 per share ("QRI COMMON STOCK") and 10,000,000 shares of
preferred stock par value $.01 per share (the "PREFERRED STOCK").
Immediately prior to the Effective Time, 10,310,806 shares of QRI
Common Stock will be issued and outstanding and no shares of
Preferred Stock will be issued and outstanding.
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Except as described in this SECTION 4.03 or in SECTION 4.03(a) of the
QRI Disclosure Schedule, no shares of capital stock of QRI are reserved
for issuance for any other purpose. Each of the issued shares of
capital stock of, or other equity interests in, QRI is duly authorized,
validly issued and, in the case of shares of capital stock, fully paid
and nonassessable, and has not been issued in violation of (nor are any
of the authorized shares of capital stock of, or other equity interests
in, QRI subject to) any preemptive or similar rights created by statute,
the certificate of incorporation or bylaws (or the equivalent
organizational documents) of QRI, any agreement to which QRI is a party
or is bound or applicable federal or state securities laws.
(b) No bonds, debentures, notes or other indebtedness of QRI having
the right to vote (or convertible into or exchangeable or exercisable for
securities having the right to vote) on any matters on which stockholders
may vote ("QRI VOTING DEBT") are issued or outstanding.
(c) Except as set forth in SECTION 4.03(a) above or in SECTION
4.03(c) of the QRI Disclosure Schedule, there are no options, warrants or
other rights (including registration rights), agreements, arrangements or
commitments of any character to which QRI is a party relating to the issued
or unissued capital stock of QRI or obligating QRI to grant, issue or sell
any shares of capital stock, QRI Voting Debt or other equity interests of
QRI. Except as set forth in SECTION 4.03(c) of the QRI Disclosure
Schedule, there are no obligations, contingent or otherwise, of QRI (i) to
repurchase, redeem or otherwise acquire any shares of QRI Common Stock or
other capital stock of QRI or (ii) to provide funds to, or to make any
investment in (in the form of a loan, capital contribution or otherwise),
or to provide any guarantee with respect to the obligations of any other
person. Except as set forth in SECTION 4.03(c) of the QRI Disclosure
Schedule, QRI (x) does not directly or indirectly own, (y) has not agreed
to purchase or otherwise acquire or (z) does not hold any interest
convertible into or exchangeable or exercisable for the capital stock or
any other equity interests of any corporation, partnership, joint venture
or other business association or entity. Except as set forth in SECTION
4.03(c) of the QRI Disclosure Schedule, there are no agreements,
arrangements or commitments of any character (contingent or otherwise)
pursuant to which any person is or may be entitled to receive any payment
based on, or calculated in accordance with, the revenues or earnings of
QRI. Except as set forth in SECTION 4.03(c) of the QRI Disclosure
Schedule, there are no voting trusts, proxies or other agreements or
understandings to which QRI is a party or by which QRI is bound with
respect to the voting of any shares of capital stock or other equity
interests of QRI.
Section 4.04. AUTHORITY. QRI has all requisite corporate power and
authority to execute and deliver this Agreement and to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this
Agreement by QRI and the performance by QRI of its obligations hereunder,
including the consummation of the transactions contemplated hereby, have been
or were duly authorized by all necessary corporate action and no other
corporate proceedings on the part of QRI are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby (subject to,
with respect to the merger, the approval and adoption of this Agreement by
the stockholders of QRI as set forth in SECTION 6.01 of this Agreement).
This Agreement has been duly executed and delivered by QRI and,
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assuming the due authorization, execution and delivery hereof by the Company,
constitutes the legal, valid and binding obligations of QRI, enforceable
against QRI in accordance with its terms. The Formation Transactions have
been consummated in all material respects in accordance with all applicable
Laws.
Section 4.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by QRI, does not and
the performance by QRI of its obligations hereunder, including consummation
of the transactions contemplated hereby does not (i) conflict with or
violate the certificate of incorporation or bylaws, or the equivalent
organizational documents, in each case as amended or restated, of QRI,
(ii) conflict with or violate any Laws in effect as of the date of this
Agreement or any judgment, order or decree to which QRI is a party or by or
to which any of its properties are bound or subject or (iii) result in any
breach of or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or impair any of QRI's rights
or alter the rights or obligations of any third party under, or give to
others any rights of termination, amendment, acceleration or cancellation
of, or require payment under, or result in the creation of a lien or
encumbrance on any of the properties or assets of QRI pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which QRI is a party
or by or to which QRI or any of its properties are bound or subject,
excluding from the foregoing clauses (ii) and (iii) any such conflicts,
violations, breaches, defaults, events, rights of termination, amendment,
acceleration or cancellation, payment obligations or liens or encumbrances
that individually or in the aggregate could not reasonably be expected to
have a QRI Material Adverse Effect.
(b) The execution and delivery of this Agreement by QRI does not and
the performance by QRI of its obligations hereunder, including consummation
of the transactions contemplated hereby, will not, require QRI to obtain
any consent, license, permit, waiver, approval, authorization or order of,
or to make any filing with or notification to, any governmental or
regulatory authority, federal, state, local or foreign (collectively,
"GOVERNMENTAL ENTITIES"), except (i) for (A) applicable requirements, if
any, of the Securities Act, the Exchange Act, and the Blue Sky Laws and
(B) the pre-merger notification requirements of the HSR Act and (ii) the
filing and recordation of appropriate merger documents as required by the
DGCL.
Section 4.06. PERMITS; COMPLIANCE. Except as disclosed in SECTION 4.06
of the QRI Disclosure Schedule, QRI is in possession of all Permits necessary to
own, lease and operate its properties and to carry on its business as it is now
being conducted except where the failure to possess such Permits could not
reasonably be expected to have a QRI Material Adverse Effect. Except as
disclosed in SECTION 4.06 of the QRI Disclosure Schedule, as of the date of this
Agreement, there are no actions, proceedings, or investigations pending or, to
the knowledge of QRI, threatened against QRI that could reasonably be expected
to result in the loss, revocation, suspension or cancellation of a Permit held
by QRI. Except as set forth in SECTION 4.06 of the QRI Disclosure Schedule, (i)
QRI is not in conflict with, in default under or in violation of (a) any Law
applicable to QRI or by which any of its properties are bound or subject or (b)
any of the Permits held by QRI, except for any such conflicts, defaults or
violations that individually or in the aggregate could not
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reasonably be expected to have QRI Material Adverse Effect; (ii) is not in
conflict with, in default under or in violation of any judgment, order or
decree applicable to QRI or any material Permits held by QRI; and (iii) QRI
has not received from any Governmental Entity any notice with respect to
possible conflicts with, defaults under or violations of (a) any Law
applicable to QRI or by which any of its properties are bound or subject,
(b) any judgment, order or decree applicable to QRI, or (c) any of the Permits
held by QRI.
Section 4.07. REPORTS; FINANCIAL STATEMENTS.
(a) QRI has heretofore delivered to the Company (i) an unaudited
balance sheet of QRI as of June 30, 1998, and (ii) statements of income,
stockholders' equity and cash flows for the period beginning with inception
and ending June 30, 1998. QRI has also delivered to the Company (i) an
unaudited balance sheet of QRI as of June 30, 1998, and (ii) pro forma
unaudited balance sheets and statements of income, stockholders' equity and
cash flows as of June 30, 1998, giving effect to the Formation
Transactions. Such unaudited historical financial statements, including
any such financial statements and schedules to be contained in the
Registration Statement on Form S-4 (as defined in SECTION 6.02 hereof)
(i) are and will be in accordance with the books and records of QRI in all
material respects and have been prepared in accordance with the published
rules and regulations of the SEC and generally accepted accounting
principles applied on a consistent basis throughout the periods involved
(except (A) to the extent disclosed therein or required by changes in
generally accepted accounting principles, and (B) in the case of the
unaudited financial statements, as permitted by the rules and regulations
of the SEC) and (ii) fairly present in all material respects the
consolidated financial position of QRI as of the respective dates thereof
and the results of operations and cash flows for the periods indicated
(except, in the case of unaudited financial statements for interim periods,
for the absence of footnotes and subject to adjustments, consisting only of
normal, recurring accruals, necessary to present fairly such results of
operations and cash flows). Such unaudited pro forma financial statements
delivered by QRI to the Company fairly present QRI's pro forma financial
position and statements of operation as of and for the periods scheduled
therein, and the pro forma adjustments giving effect to the Formation
Transactions have been properly applied to the historical amounts in the
compilation of those statements.
Section 4.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth
in SECTION 4.08 of the QRI Disclosure Schedule, since January 1, 1998, QRI has
conducted its business only in the ordinary course and in a manner consistent
with past practice and there has not been (a) any damage, destruction or loss
with respect to any assets of QRI, including any assets acquired from any of the
Contributing Entities that, whether or not covered by insurance, would
constitute a QRI Material Adverse Effect, (b) any change by QRI in its
significant accounting policies, (c) a material reduction in the rate of
production of oil, gas or other hydrocarbons from the QRI Properties, viewed as
a whole, other than changes in the ordinary course of operation, changes that
result from depletion in the ordinary course of operation, and changes that
result from variances in markets for the oil, gas and other hydrocarbons, or
(d) any other QRI Material Adverse Effect.
Section 4.09. ABSENCE OF LITIGATION. Except as set forth in SECTION 4.09
of the QRI Disclosure Schedule, there is no claim, action, suit, litigation,
proceeding, arbitration or, to the
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knowledge of QRI, investigation of any kind, at law or in equity (including
actions or proceedings seeking injunctive relief), pending or, to the
knowledge of QRI, threatened against QRI or any properties or rights of QRI,
and QRI is not subject to any continuing order of, consent decree, settlement
agreement or other similar written agreement with, or, to the knowledge of
QRI, continuing investigation by, any Governmental Entity, or any judgment,
order, writ, injunction, decree or award of any Governmental Entity or
arbitrator, including, without limitation, cease-and-desist or other orders.
Section 4.10. EMPLOYEE BENEFIT PLANS; LABOR MATTERS.
(a) With respect to each employee benefit plan, program, arrangement,
contract, employment agreement, stock option, bonus, incentive or similar
plan (including, without limitation, any "employee benefit plan" as defined
in Section 3(3) of ERISA), maintained or contributed presently or at any
time within the six (6) year period prior to the date of this Agreement to
by QRI or any ERISA Affiliate, or with respect to which QRI or any ERISA
Affiliate could reasonably be expected to incur liability under ERISA (the
"QRI BENEFIT PLANS"), QRI has delivered or made available to the Company a
true and correct copy of (i) such QRI Benefit Plan, (ii) each trust
agreement, if any, relating to such QRI Benefit Plan, (iii) the most recent
summary plan description of each QRI Benefit Plan for which a summary plan
description is required, (iv) the most recent determination letter issued
by the IRS with respect to any QRI Benefit Plan that is intended to be a
Qualified Plan (v) Internal Revenue Service Forms 5500 for each Company
Benefit Plan for each of the three (3) most recent plan years, and (vi) the
most recent actuarial report, if any, for each QRI Benefit Plan. SECTION
4.10 of QRI Disclosure Schedule contains a complete list of all QRI Benefit
Plans.
(b) Each of the QRI Benefit Plans is in compliance with its terms and
all applicable laws, including, but not limited to, ERISA and the Code and
except as set forth in SECTION 4.10 of the QRI Disclosure Schedule, no QRI
Benefit Plan has an accumulated or waived funding deficiency within the
meaning of Section 412 of the Code. Except as set forth in SECTION 4.10 of
the QRI Disclosure Schedule, neither QRI nor any ERISA Affiliate is or has
contributed to "multiemployer plan," as defined in Section 3(37), and
neither the Company nor any ERISA Affiliate has any past, present or future
obligation or liability to contribute to any multiemployer plan of ERISA.
Neither QRI nor any ERISA Affiliate has completely or partially withdrawn
from any multiemployer plan with respect to which there is any outstanding
liability as of the date of this Agreement. Neither QRI nor any ERISA
Affiliate has incurred, directly or indirectly, any material liability
(including any material contingent liability) to or on account of a QRI
Benefit Plan under Sections 409 or 502 of ERISA or Section 4975 of Code or
pursuant to Title IV of ERISA to which QRI or an ERISA Affiliate made, or
was required to make, contributions during the five (5) years ending on the
date of this Agreement. As of the date of this Agreement, no condition
exists that presents a material risk to QRI or an ERISA Affiliate of
incurring such a material liability. No proceedings have been instituted
to terminate any QRI Benefit Plan that is subject to Title IV of ERISA and
the PBGC is not expected to institute proceedings and no "reportable
event," as such term in defined in Section 4043 of ERISA, has occurred with
respect to any QRI Benefit Plan.
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(c) Except as set forth in SECTION 4.10 of the QRI Disclosure
Schedule, the current value of the assets of each of the QRI Benefit Plans
that are subject to Title IV of ERISA, based upon reasonable actuarial
assumptions, equals or exceeds the present value of the accrued benefits
under each such QRI Benefit Plan and all contributions or other amounts
payable by QRI and each ERISA Affiliate as of the date of this Agreement
with respect to each Plan in respect of current or prior plan years has
been either paid or accrued on the latest balance sheet. There are no
pending, or, to the best knowledge of QRI and each ERISA Affiliate any
threatened or anticipated claims (other than routine claims for benefits)
by, on behalf of or against any of the QRI Benefit Plans or any trusts
related thereto.
(d) There are no collective bargaining or other labor union contracts
to which QRI is a party and no collective bargaining agreement is being
negotiated by QRI. There is no pending or, to the best knowledge of QRI,
threatened labor dispute, strike or work stoppage against the QRI.
(e) No QRI Benefit Plan provides retiree medical or other retiree
welfare benefits and neither QRI is contractually or otherwise obligated to
medical or other welfare benefits upon retirement or termination of
employment of employees.
(f) Neither QRI nor any of its ERISA Affiliates contributes to or
have an obligation to contribute to, or has within six years prior to the
date of this Agreement contributed to or had an obligation to contribute
to, an employee benefit plan that is or was subject to Title IV of ERISA or
Section 412 of the Code.
(g) No transaction prohibited by ERISA Section 406 and no "prohibited
transaction" under Code Section 4975(c) has occurred with respect to any
QRI Benefit Plan. All "fiduciaries," as defined in ERISA Section 3(21),
with respect to the QRI Benefit Plans have complied in all respects with
the requirements of ERISA Section 404. Neither QRI nor any ERISA Affiliate
has any liability to the Internal Revenue Service or the PBGC with respect
to any QRI Benefit Plan.
(h) Each QRI Benefit Plan provides that it may be amended or
terminated at any time except for benefits protected under Code Section
411(d).
(i) Each Qualified Plan is qualified in form and operation under Code
Section 401 (a) and each trust for each Qualified Plan is exempt from
federal income tax under Code Section 501(a). No event has occurred or
circumstances exist that will or could give rise to disqualification or
loss of tax-exempt status of any Qualified Plan or related trust. All
determination letters with respect to Qualified Plans remain in effect and
have not been revoked.
(j) QRI and each ERISA Affiliate has complied with the provisions of
ERISA Section 601 et seq. and Code Section 4980B.
(k) No payment that is owed or may become due to any director,
officer, employee or agent of QRI will be non-deductible to QRI or subject
to tax under Code
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Sections 280G or 4999; nor will QRI be required to "gross-up" or
otherwise compensate any such person because of the imposition of any
excise tax on a payment to such person. The consummation of the
transaction contemplated under this Agreement will not accelerate or
increase any liability under any QRI Benefit Plan because of an
acceleration or increase of any of the rights or benefits to which
employees may be entitled thereunder.
Section 4.11. TAXES. Except as set forth in SECTION 4.11 of the QRI
Disclosure Schedule:
(a) (i) all TAX RETURNS that are required to be filed on or before
the date hereof by or with respect to QRI have been duly and timely filed,
(ii) Taxes that have become due with respect to the period covered by each
such Tax Return have been paid, (iii) all withholding Tax requirements
imposed on or with respect to QRI have been satisfied in all material
respects, and (iv) no penalty, interest or other charge is due with respect
to the late filing of any such Tax Return or late payment of any such Tax.
(b) There is no claim against QRI for any amount of Taxes, no
assessment, deficiency or adjustment has been asserted or proposed with
respect to any Tax Return of or with respect to QRI, and no Tax Return of
or with respect to QRI has been, or is being, audited by the Internal
Revenue Service or any state, local or other taxing authority other than
those disclosed (and to which are attached copies of all audit or similar
reports) in SECTION 4.11 of the QRI Disclosure Schedule.
(c) The total amounts set up as liabilities for current and deferred
Taxes in the financial statements referred to in SECTION 4.07 of this
Agreement are sufficient to cover the payment of all Taxes, whether or not
assessed or disputed, with respect to QRI up to and through the periods
covered thereby.
(d) Except for statutory liens for current Taxes not yet due and for
Taxes being contested in good faith that have been disclosed in SECTION
4.11 of the QRI Disclosure Schedule and for which adequate provisions have
been made in the financial statements referred to in SECTION 4.07, no liens
for Taxes exist upon the assets of QRI.
(e) QRI has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(f) QRI has not made an election under Section 341(f) of the Code.
Except as disclosed in SECTION 4.11 of the QRI Disclosure Schedule, QRI has
not made any payments, is obligated to make any payments, or is a party to
any agreement that under the circumstances could obligate it to make any
payments that will not be deductible under Sections 162(m) or 280G of the
Code.
(g) QRI has not taken or agreed to take any action that would create
a material risk that the merger would not qualify as a tax free
reorganization under the provisions of Section 368(a)(1)(A) of the Code.
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(h) QRI (i) has never been a member of an Affiliated Group (as
defined in Section 1504 of the Code) other than a group the common parent
of which was QRI or (ii) has any liability for the Taxes of any person
(other than QRI) under Treas. Reg. Section 1.1502-6 (or any similar
provision under state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
Section 4.12. ENVIRONMENTAL MATTERS. Except for matters disclosed in
SECTION 4.12 of the QRI Disclosure Schedule:
(a) To the best knowledge of QRI all of the properties, including the
QRI Properties (as defined in SECTION 4.13 hereof), operations and
activities of QRI comply with all applicable Environmental Laws (as defined
in SECTION 9.03).
(b) QRI and the properties, including the QRI Properties, and
operations of QRI are not subject to any existing, pending or, to the
knowledge of QRI, threatened action, suit, investigation, inquiry or
proceeding by or before any Governmental Authority or third party under any
Environmental Law.
(c) To the best knowledge of QRI, all notices, permits, licenses or
similar authorizations, if any, required to be obtained or filed by QRI
under any Environmental Law in connection with any aspect of the business
of QRI or the QRI Properties, including without limitation those relating
to the treatment, storage, disposal or release of a hazardous substance or
solid waste, have been duly obtained or filed and will remain valid and in
effect after the merger, and QRI is in compliance with the terms and
conditions of all such notices, permits, licenses and similar
authorizations.
(d) To the best knowledge of QRI, QRI has satisfied and is currently
in compliance with all financial responsibility requirements applicable to
its operations and imposed by any Governmental Authority under any
Environmental Law, and QRI has not received any notice of noncompliance
with any such financial responsibility requirements.
(e) To the best knowledge of QRI, there are no physical or
environmental conditions existing on any property of QRI or resulting from
QRI's operations or activities with respect to any of the QRI Properties,
past or present, at any location, that would give rise to any on-site or
off-site investigative, remedial, response, contribution or similar
obligations under any Environmental Laws.
(f) To the best knowledge of QRI, since the effective date of the
relevant requirements of applicable Environmental Laws, all hazardous
substances or solid wastes generated by QRI or used in connection with
QRI's properties, including the QRI Properties, or operations have to the
extent required by Environmental Laws been transported only by carriers
authorized under Environmental Laws to transport such substances and
wastes, and disposed of only at treatment, storage and disposal facilities
authorized under Environmental Laws to treat, store or dispose of such
substances and wastes, and, to the best knowledge of QRI and with respect
to such substances and wastes, such carriers and facilities have been and
are operating in compliance with such authorizations, are not subject to
any material
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unperformed investigative, remedial, response, contribution or similar
obligations under, and are not the subject of any existing, pending or
overtly threatened action, investigation or inquiry by any Governmental
Authority or third party in connection with, any Environmental Laws.
(g) There has been no exposure of any person or property to hazardous
substances, solid waste or any pollutant or contaminant, nor has there been
any release of hazardous substances, solid waste or any pollutant or
contaminant into the environment by QRI in connection with the properties
or operations of QRI, including the QRI Properties, that could reasonably
be expected to have a QRI Material Adverse Effect.
(h) QRI shall make available to MSR all internal and external
environmental audits and studies and all correspondence on substantial
environmental matters in the possession of QRI relating to any of the
current or former properties or operations of QRI, including the QRI
Properties.
Section 4.13. PROPERTIES.
(a) The oil, gas and/or mineral leases, and interests in which
comprise part of the properties, rights and interest of QRI listed in
SCHEDULE 4.13 (collectively, the "QRI PROPERTIES"), and all other material
contracts, agreements, licenses permits and easements, rights-of-way and
other rights-of-surface use comprising any part of or otherwise relating to
the QRI Properties (such leases and such material contracts, agreements,
licenses, permits, easements, rights-of-way and other rights-of-surface use
being herein called the "QRI BASIC DOCUMENTS"), are in full force and
effect and constitute valid and binding obligations of the parties thereto;
all contracts and agreements which are QRI Basic Documents are disclosed in
SECTION 4.13(a) of the QRI Disclosure Schedule. QRI is not in breach or
default (and no situation exists which with the passing of time or giving
or notice would create such a breach or default) of its obligations under
the QRI Basic Documents, and no breach or default by any third party (or
situation which with the passage of time or giving of notice would create
such a breach of default) exists, to the extent such breach or default
(whether by QRI or such a third party) could materially adversely affect
(after the date hereof) the ownership, operation, value or use of any QRI
Properties. All payments (including, without limitation, all delay
rentals, royalties, excess royalties, overriding royalty interests, shut-in
royalties and valid calls for payment or prepayment under operating
agreements) owing under QRI Basic Documents have been and are being made
(timely and properly, and before the same became delinquent) by QRI in all
material respects and, where the non-payment of same by a third party could
materially adversely affect the ownership, operation, value or use of a QRI
Property after the date hereof, have been and are being made by such third
party in all material respects.
(b) Except as set forth in SECTION 4.13(b) of the QRI Disclosure
Schedule, QRI has not incurred any expenses, or made commitments to make
expenditures, in connection with (and no other obligations or liabilities
have been incurred) that would materially adversely affect the ownership or
operation of the QRI Properties after the date hereof, other than routine
expenses incurred in the normal operation of existing wells on the QRI
Properties. All expenses payable under the terms of the QRI Basic
Contracts have been
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properly and timely paid except for such expenses as are being currently
paid prior to delinquency in the ordinary course of business. Except as
set forth in SECTION 4.13(b) of the QRI Disclosure Schedule, no
proposals are currently outstanding (whether made by QRI or by any other
party) to drill additional wells, or to deepen, plug back, abandon, or
rework existing wells, or to conduct other operations for which consent
is required under the applicable operating agreement, or to conduct any
other material operations, other than normal operation of existing wells
on the QRI Properties.
(c) There exist no agreements or arrangements for the sale,
gathering, transportation, compression, treating, processing or other
marketing of a material volume of production from the QRI Properties
(including without limitation, calls on, or other rights to purchase,
production, whether or not the same are currently being exercised) other
than (a) the agreements set forth in SECTION 4.13(c) of the QRI Disclosure
Schedule, and (b) agreements or arrangements that are cancelable on 30 days
notice or less without penalty or detriment. Any contracts or other
arrangements under which QRI is processing, gathering, transporting or
otherwise marketing any material volume of oil, gas or other minerals
(whether or not attributable to the QRI Properties) for the account of a
third party include terms that represent an arm's length, commercially
reasonable trade for QRI. All of the proceeds from the sale of production
from the QRI Properties are being properly and timely paid to QRI by the
purchaser of production without suspension or indemnity other than standard
division order indemnities.
(d) Except as set forth in SECTION 4.13(d) of the QRI Disclosure
Schedule, QRI has not received prepayments (including, but not limited to,
payments for oil and gas not taken pursuant to "take-or-pay" arrangements)
for any oil or gas produced from the QRI Properties as a result of which
the obligation does (or may) exist to deliver oil or gas produced from the
QRI Properties after the date hereof without then receiving payment (or
without then receiving full payment) therefor or to make repayments in
cash. For each QRI Property listed in SECTION 4.13(d) of the QRI
Disclosure Schedule, such section reflects (A) the total amount of
prepayment received as of the date hereof (and the amount of any recoupment
thereof heretofore made), and (B) whether or not a cash payment can be
required in the event recoupment out of production proves to be inadequate.
Except as set forth in SECTION 4.13 of the QRI Disclosure Schedule, there
is no QRI Property with respect to which QRI and/or its predecessors in
title, have collectively Over-Produced or Under-Produced from such QRI
Property (or on the units in which such QRI Property participates), or any
product thereof, than the ownership of QRI and such predecessors in such
QRI Property would entitle QRI and such predecessors (absent any balancing
agreement or arrangement) to receive, to the extent such Over-produced or
Under-produced position has not, as of the date hereof, been fully made up
or otherwise extinguished. For each QRI Property listed in SECTION 4.13(d)
of the QRI Disclosure Schedule, such section reflects, on a well-by-well or
any other basis as may be dictated by any applicable balancing agreement,
(A) whether QRI is in an Over-produced or Under-produced position, (B) the
amount of such over-production or under-production, (C) a description of
the written balancing agreement (if any) pertaining to such QRI Property
(or a statement that no such agreement exists) and (D) a statement as to
whether royalties, overriding royalties, or other burdens against QRI's net
revenue interest in the affected QRI Properties were, during the period the
subject imbalance accrued, paid
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based upon receipts or entitlements. Except as set forth in
SECTION 4.13(d) of the QRI Disclosure Schedule, there are no pipeline
imbalances that have arisen due to the failure or nominations made by QRI
to match actual deliveries of production from any one or more QRI
Properties. Except as set forth on SECTION 4.13(d) of the QRI Disclosure
Schedule, (i) none of the purchasers under any production sales contracts
has exercised any economic out provision; (ii) none of the purchasers under
any production sales contracts has curtailed its takes of natural gas in
violation of such contracts; and (iii) none of the purchasers under any
production sales contracts has given notice that it desires to amend the
production sales contracts with respect to price or quantity of
deliveries under take-of-pay provisions or otherwise. QRI is not
entitled to receive any portion of the interest of the Company in any
production or to receive cash or other payments to "balance" any
disproportionate allocation of production under any operating agreement,
gas balancing and storage agreement, gas processing or dehydration
agreement, gas transportation or other similar agreements.
(e) QRI has all governmental licenses and permits necessary to own
and operate the QRI Properties as presently being owned and operated, and
such licenses, permits and filings are in full force and effect, and QRI
has not received written notice of any violations in respect of any such
licenses or permits.
(f) Except as set forth in SECTION 4.13(f) of the QRI Disclosure
Schedule, neither QRI nor any QRI Property is subject to (A) any area of
mutual interest agreements or non-compete agreements, (B) any farm-out or
farm-in agreement under which any party thereto is entitled to receive
assignments not yet made, or could earn additional assignments after the
date hereof, (C) any tax partnership, or (D) any agreement, contract or
commitment relating to the disposition or acquisition of the assets of, or
any interest in, any business entity.
(g) All severance, production, ad valorem, windfall profit and other
similar taxes based on or measured by the ownership or operation of the QRI
Properties have been, and are being, paid (properly and timely, and before
the same become delinquent) by QRI in all respects.
(h) The ownership and operation of the QRI Properties has, to the
extent that non-conformance could materially adversely affect the
ownership, operation, value or use thereof after the date hereof, been in
conformity with all applicable laws, and all applicable rules, regulations
and orders of all governmental agencies having jurisdiction.
(i) Except as set forth in SECTION 4.13(i) of the QRI Disclosure
Schedule, there are no Preferential Rights or Consents, other than Routine
Governmental Approvals, that affect any QRI Property or Properties and that
will be triggered by the merger.
(j) Except as set forth in SECTION 4.13(j) of the QRI Disclosure
Schedule, there exist no agreements or other arrangements whereunder QRI
undertakes to perform gathering, transportation, processing or other
marketing services for any third party, including without limitation the
owner of a royalty or overriding royalty interest burdening a lease
included in the QRI Properties, for a fee or other consideration that is
now, or may hereafter be,
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unrepresentative of commercial rates being received by third parties in
comparable, arm's length transactions.
(k) Except as set forth in SECTION 4.13(k) of the QRI Disclosure
Schedule, QRI has good and defensible title to the QRI Property, free and
clear of all liens, security interests, and encumbrances except for (a) the
contracts, agreements, burdens, encumbrances and other matters set forth in
the descriptions of certain of the QRI Properties in SECTION 4.13 of the
QRI Disclosure Schedule, (b) statutory liens for taxes which are not yet
delinquent, (c) liens under operating agreements, pooling orders and
unitization agreements, and mechanics' materialmen's liens, with respect to
obligations which are not yet due, and (d) minor defects and irregularities
in title to any QRI Property, so long as such defects and irregularities do
not materially impair the value of such QRI Property or the use thereof for
the purposes for such QRI Property is held. With respect to each QRI
Property described in SECTION 4.13 of the QRI Disclosure Schedule, the
ownership of QRI in such QRI Property does and will, (A) with respect to
each tract of land described in SECTION 4.13 of the QRI Disclosure Schedule
(whether described directly in such section or described by reference to
another instrument) in connection with such QRI Property, (1) entitle QRI
to receive a decimal or percentage share of the oil, gas, and other
hydrocarbons produced from, or allocated to, such tract equal to or not
less than the decimal or percentage share set forth in SECTION 4.13 of the
QRI Disclosure Schedule in connection with such tract opposite the words
"Net Revenue Interest" (or words of similar import), (2) cause QRI to be
obligated to bear a decimal or percentage share of the Costs of
exploration, development and operation of such tract of land not greater
than the decimal or percentage share set forth in SECTION 4.13 of the QRI
Disclosure Schedule in connection with such tract opposite the words
"Working Interest" (or words of similar import) and (B) if such QRI
Property is shown in SECTION 4.13 of the QRI Disclosure Schedule to be
subject to a unit or units, with respect to each such unit, (1) entitle QRI
to receive a decimal or percentage share of all substances covered by such
unit that are produced from, or allocated to, such unit equal to or not
less than the decimal or percentage share set forth in SECTION 4.13 of the
QRI Disclosure Schedule in connection with such QRI Property opposite the
words "Unit Net Revenue Interest" or words of similar import (and if such
QRI Property is subject to more than one unit, words identifying such
interest with such unit), and (2) obligate QRI to bear a decimal or
percentage share of the Costs not greater than as set forth in SECTION 4.13
of the QRI Disclosure Schedule in connection with such QRI Property
opposite the words "Unit Working Interests" or words of similar import (and
if such QRI Property is subject to more than one unit, words identifying
such interests with such unit). With respect to each QRI Property
described in SECTION 4.13 of the QRI Disclosure Schedule that is subject to
a voluntary or involuntary pooling, unitization or communitization
agreement and/or order, the term "tract of land" as used in this subsection
(k) shall mean the pooled, unitized or communitized area as an entirety and
shall not be deemed to refer to any individual tract committed to said
pooled, unitized or communitized area. Without limitation of the
foregoing, the ownership by QRI of the QRI Properties does and will, with
respect to each well or unit identified in SECTION 4.13 of the QRI
Disclosure Schedule entitle QRI to receive a decimal or percentage share of
the oil, gas and other hydrocarbons produced from, or allocated to, such
well or unit equal to not less than the decimal or percentage share set
forth, for such well or unit, in the column headed "Net Revenue Interest"
in SECTION 4.13 of the QRI Disclosure Schedule, and cause QRI to be
obligated to bear a decimal or percentage
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share of the cost of operation of such well or unit equal to not more than
the decimal or percentage share set forth, for such well or unit, in the
column headed "Working Interest" in SECTION 4.13 of the QRI Disclosure
Schedule. The above-described shares of production on which QRI is
entitled to receive and shares of expenses that QRI is obligated to bear
are not and will not be subject to change other than such changes that
arise pursuant to non-consent provisions of operating agreements described
in SECTION 4.13 of the QRI Disclosure Schedule in connection with
operations hereafter proposed, or such changes are reflected in SECTION
4.13 of the QRI Disclosure Schedule.
(l) QRI has delivered to the Company copies of (i) the reserve report
dated as of January 1, 1998 prepared by LaRoche Petroleum Consultants,
Ltd., independent petroleum engineers (the "LaRoche Report"), relating to
the oil and gas reserves attributable to certain Mercury Exploration
Company properties, (ii) the reserve report dated August 1, 1997 prepared
by Albrecht & Associates, Inc., independent petroleum engineers (the
"Albrecht Report"), (iii) the reserve report dated as of January 1, 1998
prepared by S.A. Holditch and Associates, Inc., independent petroleum
engineers (the "QELC Holditch Report"), relating to the oil and gas
reserves attributable to the properties of Quicksilver Energy L.C. and (iv)
the reserve report dated as of January 1, 1998 prepared by S.A. Holditch
and Associates, Inc., independent petroleum engineers (together with the
LaRoche Report, the Albrecht Report and the QELC Holditch Report, the
"Reports"), relating to the oil and gas reserves attributable to properties
of Michigan Gas Partners. There are no statements or conclusions in any of
the Reports that are based upon or include misleading information or fail
to take into account material information regarding the matters reported
therein. To the knowledge of QRI, the estimates of reserves in the Reports
were prepared in accordance with standard geological and engineering
methods generally accepted in the oil and gas industry. The estimates of
the lease operating expenses, production and ad valorem taxes and capital
expenditures in the Reports reasonably reflect the historical experience of
QRI and the Contributing Entities, and QRI has no reason to believe that
the estimates will not reflect future lease operating expenses, production
and ad valorem taxes and capital expenses. The historical factual
information supplied by Mercury to the independent engineering firms in
connection with the preparation of the Reports was, at the time of delivery
to such firms, true and complete in all material respects. SECTION 4.13 of
the QRI Disclosure Schedule sets forth a list of all other current reserve
reports covering the QRI Properties, true and complete copies of which have
been delivered to the Company by QRI.
Section 4.14. INSIDER INTERESTS; TRANSACTIONS WITH MANAGEMENT. Except as
set forth in SECTION 4.14 of the QRI Disclosure Schedule, no officer, director,
or employee of QRI or holder of more than five percent of QRI Common Stock
currently outstanding has any interest in any property, real or personal,
tangible or intangible, agreement, arrangement, or understanding, written or
oral, providing for the employment of, furnishing of services by, rental or real
or personal property from, or otherwise requiring payments to any such
shareholder, officer, director or employee used in or pertaining to the business
of QRI, except for the ordinary rights of a stockholder or employee stock option
holder. No executive officer, director or stockholder of the QRI has, since
January 1, 1997, engaged in any business dealings with QRI, other than such
business dealings as would not be required to be disclosed in such documents or
reports pursuant to the Securities Act and the rules and regulations promulgated
thereunder. Except as set forth on SCHEDULE 4.14, no executive officer or
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director of QRI (except in his capacity as such) has any direct or indirect
material interest in (a) any competitor, customer, supplier or agent of QRI, or
(b) any person that is a party to any contract or agreement with QRI.
Section 4.15. VOTE REQUIRED. Except as required under the terms of the
formation documents, approval of the merger and this Agreement requires
solely the affirmative votes of the outstanding shares of QRI Common Stock
held by the Contributing Entities, and no other vote or consent by any
shareholder of QRI is required to approve the merger and this Agreement.
Members of the Darden family and the Contributing Entities control in excess
of a majority of the outstanding shares of QRI Common Stock, and they have
agreed (a copy of which agreement has been furnished to the Company
concurrently with the execution of this Agreement) to vote their shares of
QRI Common Stock and their shares of Company Common Stock in favor of
approval of the merger and this Agreement at the QRI and Company stockholders
meetings referred to in SECTION 6.01 (or to consent thereto by written
consent of the stockholders of QRI in lieu thereof in accordance with the
DGCL and QRI's certificate of incorporation). All approvals required of the
Contributing Entities to the merger, this Agreement and the transactions
contemplated hereby under the provisions of the QRI stockholder agreement
have been irrevocably given, and copies thereof have been forwarded to the
Company concurrently with the execution of this Agreement (provided, the
terms thereof are subject to the rights of QRI, JEDI and TCW under an
Agreement, dated , 1998 (the "voting agreement"), among QRI, JEDI
and TCW, a copy of which has been delivered to the Company).
Section 4.16. BROKERS. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of QRI.
Section 4.17. BOARD RECOMMENDATIONS. By a unanimous vote of the
directors present at a meeting of QRI's board of directors (which meeting was
duly called and held and at which a quorum was present at all times), or by
unanimous written consent, the board of directors of QRI (a) approved and
adopted this Agreement and the other transactions contemplated herein, and
determined that the merger is fair to the stockholders of QRI, and (b)
resolved to recommend approval and adoption of this Agreement, including the
merger and the other transactions contemplated herein, by the stockholders of
QRI.
Section 4.18. DISCLOSURE. No representation or warranty hereunder
contains any untrue statement of material fact or omits to state a material fact
necessary in order to make the statements contained therein or herein not
misleading.
ARTICLE V
COVENANTS
Section 5.1. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company hereby
covenants and agrees that, prior to the Effective Time, unless otherwise
expressly contemplated by this Agreement or consented to in writing by QRI, the
Company will and will cause each of its subsidiaries to:
(a) operate its business in the usual and ordinary course consistent
with past practices;
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(b) use its best efforts to preserve intact its business
organization, maintain its rights and franchises, retain the services of
its respective officers and key employees and maintain its relationships
with its respective customers and suppliers;
(c) maintain and keep its properties and assets in as good a repair
and condition as at present, ordinary wear and tear excepted, and use its
best efforts to maintain supplies and inventories in quantities consistent
with its customary business practices;
(d) use its best efforts to keep in full force and effect insurance
and bonds comparable in amount and scope of coverage to that currently
maintained;
(e) promptly notify QRI, JEDI and TCW of (i) any material adverse
change in the condition (financial or otherwise), of the business,
properties, assets, liabilities or prospects of the Company and its
subsidiaries or in the operation of the business or the properties of the
Company and its subsidiaries, (ii) any litigation or governmental
complaints, investigations or hearings (or communications indicating that
the same may be contemplated) involving the Company or any of its
subsidiaries, (iii) the occurrence, or failure to occur, of any event,
which occurrence or failure to occur would likely cause any representation
or warranty contained in this Agreement to be untrue or inaccurate in any
respect when made or at any time from the date of this Agreement to the
Effective Time; (iv) any failure of the Company to comply in any respect
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement; or (v) any other event that could
reasonably be expected to result in a Company Material Adverse Effect;
PROVIDED, HOWEVER, that no such notification shall affect the
representations and warranties of the Company or the conditions to the
obligations of the parties hereunder;
(f) (i) file all Tax Returns required to be filed on or before the
Closing Date by or with respect to the Company or any of its subsidiaries,
(ii) include in each such Tax Return all items of income, gain, loss,
deduction and credit or other items required to be included in each such
Tax Return, (iii) timely pay in full all Taxes that become due pursuant to
such Tax Returns, and (iv) satisfy all withholding requirements imposed on
or with respect to the Company;
(g) to the extent legally and contractually authorized to do so, give
QRI and its attorneys and other representatives access at all reasonable
times to the Company Properties and to the Company and any the
subsidiaries' records (including, without limitation, title files, division
order files, well files, production records, equipment inventories,
windfall profit tax records and production, severance and ad valorem tax
records) pertaining to the ownership and/or operation of the Company
Properties;
(h) to the extent third parties operate the Company Properties, take
such steps as would a prudent non-operator to cause the operator to (i)
continue the routine operation of the Company Properties in the ordinary
course of business and as would a prudent operator, (ii) operate the
Company Properties in conformity (in all material respects) with all the
Company Basic Documents and all applicable rules, regulations and orders of
all
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Governmental Authorities having jurisdiction, and (iii) maintain the
machinery, improvements, equipment and other personal property and fixtures
forming a part of the Company Properties in at least as good of a condition
as they are on the date of this Agreement; where the Company or any the
subsidiary is the operator of a Company Property, they will (unless removed
without its consent) remain the operator of such Company Property;
(i) cause all expenses (including, without limitation, all bills for
labor, materials and supplies used or furnished for use in connection with
the Company Properties and all ad valorem, severance, production, windfall
profit and similar taxes) and liabilities relating to the ownership or
operation of the Company Properties to be paid and discharged in the
ordinary course of business; and
(j) request, from the appropriate parties (and in accordance with the
documents creating such rights and/or requirements), all Consents relating
to any Company Property and waivers of Preferential Rights relating to any
material Company Property.
Section 5.2. AFFIRMATIVE COVENANTS OF QRI. QRI hereby covenants and
agrees that, prior to the Effective Time, unless otherwise expressly
contemplated by this Agreement or consented to in writing by the Company, QRI
will:
(a) operate its business in the usual and ordinary course consistent
with past practices;
(b) use its best efforts to preserve intact its business
organization, maintain its rights and franchises, retain the services of
its respective officers and key employees and maintain its relationships
with its respective customers and suppliers;
(c) maintain and keep its properties and assets in as good a repair
and condition as at present, ordinary wear and tear excepted, and use its
best efforts to maintain supplies and inventories in quantities consistent
with its customary business practices;
(d) use its best efforts to keep in full force and effect insurance
and bonds comparable in amount and scope of coverage to that currently
maintained;
(e) promptly notify the Company of (i) any material adverse change in
the condition (financial or otherwise), of the business, properties,
assets, liabilities or prospects of QRI or in the operation of its
businesses or properties; (ii) any litigation or governmental complaints,
investigations or hearings (or communications indicating that the same may
be contemplated) involving QRI or the Contributing Entities, (iii) the
occurrence, or failure to occur, of any event, which occurrence or failure
to occur would likely cause any representation or warranty contained in
this Agreement to be untrue or inaccurate in any respect when made or at
any time from the date of this Agreement to the Effective Time; (iv) any
failure of QRI to comply in any respect with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement; or (v) any other event that could reasonably be expected to
result in a QRI Material Adverse Effect; PROVIDED,
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HOWEVER, that no such notification shall affect the representations and
warranties of QRI or the conditions to the obligations of the parties
hereunder;
(f) (i) file all Tax Returns required to be filed on or before the
Closing Date by or with respect to QRI, (ii) include in each such Tax
Return all items of income, gain, loss, deduction and credit or other
items required to be included in each such Tax Return, (iii) timely pay
in full all Taxes that become due pursuant to such Tax Returns, and (iv)
satisfy all withholding requirements imposed on or with respect to QRI;
(g) promptly as practicable prepare and file an application with
AMEX to list on AMEX the QRI Common Stock, including the QRI Common
Stock to be issued in the merger, effective as of the Effective Time and
shall use all reasonable efforts to cause such application to be
approved prior to the Effective Time, and shall comply in all material
respects with the requirements of AMEX in connection with such listing;
(h) to the extent legally and contractually authorized to do so,
give the Company and its attorneys and other representatives access at
all reasonable times to the QRI Properties and to QRI's records
(including, without limitation, title files, division order files, well
files, production records, equipment inventories, windfall profit tax
records and production, severance and ad valorem tax records) pertaining
to the ownership and/or operation of the QRI Properties;
(i) to the extent third parties operate the QRI Properties, will
take such steps as would a prudent non-operator to cause the operator to
(i) continue the routine operation of the QRI Properties in the ordinary
course of business and as would a prudent operator, (ii) operate the QRI
Properties in conformity (in all material respects) with all QRI Basic
Documents, and all applicable rules, regulations and orders of all
Governmental Authorities having jurisdiction, and (iii) maintain the
machinery, improvements, equipment and other personal property and
fixtures forming a part of the QRI Properties in at least as good of a
condition as they are on the date of this Agreement; where QRI is the
operator of a QRI Property, QRI will (unless removed without its
consent) remain the operator of such QRI Property;
(j) cause all expenses (including, without limitation, all bills
for labor, materials and supplies used or furnished for use in
connection with the QRI Properties and all ad valorem, severance,
production, windfall profit and similar taxes) and liabilities relating
to the ownership or operation of the QRI Properties to be promptly paid
and discharged in the ordinary course of business;
(k) request, from the appropriate parties (and in accordance with
the documents creating such rights and/or requirements), all Consents
relating to any QRI Property and waivers of any Preferential Rights
relating to any material QRI Property; and
(l) prior to the Effective Time, take all necessary corporate
action to amend its certificate of incorporation and bylaws so as to
conform with Exhibits A and B hereto, respectively, as contemplated by
SECTIONS 1.05 and 1.06 hereof.
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Section 5.3. NEGATIVE COVENANTS OF THE COMPANY. Except as expressly
contemplated by this Agreement or otherwise consented to in writing by QRI from
the date of this Agreement until the Effective Time, the Company shall not do,
and shall not permit any of its subsidiaries to do, any of the following:
(a) (i) increase the compensation payable to or to become payable
to any director; (ii) increase the compensation payable or pay bonuses
to officers or employees of the Company or any of its subsidiaries other
than in the ordinary course of business and consistent with past
practices; (iii) grant any severance or termination pay (other than
pursuant to agreements or arrangements in effect on the date hereof) or
enter into any employment or severance agreement with, any director,
officer or employee; (iv) establish, adopt or enter into any employee
benefit plan or arrangement; (v) make any loans to any stockholders,
officers, directors or employees or make any change in its borrowing
arrangements; or (vi) amend, or take any other actions (including,
without limitation, the waiving of performance criteria or the
adjustment of awards or any other actions permitted upon a "change in
control" (as defined in the respective plans) of the Company or a filing
under Section 13(d) or 14(d) of the Exchange Act with respect to the
Company) with respect to any of the Company Benefit Plans or any of the
plans, programs, agreements, policies or other arrangements described in
SECTION 3.10(a) of this Agreement;
(b) declare or pay any dividend on, or make any other distribution
in respect of, outstanding shares of capital stock or other equity
interests, except dividends by a wholly owned subsidiary of the Company
to the Company or another wholly owned subsidiary of the Company;
(c) (i) redeem, purchase or otherwise acquire any shares of its or
any of its subsidiaries' capital stock or any securities or obligations
convertible into or exchangeable for any shares of its or its
subsidiaries' capital stock (other than any such acquisition directly
from any wholly owned subsidiary of the Company in exchange for capital
contributions or loans to such subsidiary), or any options, warrants or
conversion or other rights to acquire any shares of its or its
subsidiaries' capital stock or any such securities or obligations, (ii)
effect any reorganization or recapitalization of the Company or any of
its subsidiaries, or (iii) split, combine or reclassify any of its or
its subsidiaries' capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in
substitution for, shares of its or its subsidiaries' capital stock;
PROVIDED, HOWEVER, that nothing in this SECTION 5.03 shall prohibit the
merger of a wholly-owned, direct or indirect subsidiary of the Company
with and into the Company;
(d) issue (whether upon original issue or out of treasury), sell,
grant, award, deliver or limit the voting rights of any shares of any
class of its or its subsidiaries' capital stock, any securities
convertible into or exercisable or exchangeable for any such shares, or
any rights, warrants or options to acquire any such shares (except for
the issuance of shares upon the exercise of outstanding stock options or
warrants in accordance with their terms);
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(e) except for the merger of a wholly-owned, direct or indirect
subsidiary of the Company with and into the Company, acquire or agree to
acquire (whether pursuant to a definitive agreement, a non-binding
letter of intent or otherwise), by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by
any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets of any other Person
(other than the purchase of assets from suppliers or vendors in the
ordinary course of business and consistent with past practice);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of ("TRANSFER"), or agree to sell, lease, exchange, mortgage,
pledge, transfer or otherwise dispose of, any of its assets or any
assets of any of its subsidiaries, except for Transfers of assets in the
ordinary course of business and consistent with past practice;
(g) initiate, solicit or encourage (including by way of furnishing
information or assistance) any Alternative Transaction (as defined
below), or enter into discussions or negotiate with any Person or entity
in furtherance of an Alternative Transaction, or disclose any nonpublic
information relating to the Company or any of its subsidiaries to, or
afford access to the properties, books or records of the Company or any
of its subsidiaries, or agree to, or endorse, any Alternative
Transaction, or authorize or permit any of the officers, directors,
employees or agents of the Company or any of its subsidiaries or any
investment banker, financial advisor, attorney, accountant or other
representative retained by the Company or any of the Company's
subsidiaries (the "REPRESENTATIVES") to take any such action, PROVIDED,
HOWEVER, that at any time prior to the time that the Company's
stockholders shall have voted to approve this Agreement, the Special
Committee of the board of directors of the Company may cause the Company
to furnish information to, and may participate in discussions or
negotiations with, any Person who (without any solicitation, initiation,
encouragement, discussion or negotiation, directly or indirectly, with
the Company or any of its subsidiaries or their respective
Representatives) has submitted a written proposal to the Special
Committee of the board of directors relating to an Alternative Transaction
that the Special Committee of the Company's board of directors, in the
exercise of its fiduciary duty after consideration of written advice from
its legal and financial advisors, determines is more beneficial to the
stockholders of the Company than the merger. For purposes of this
Agreement, "ALTERNATIVE TRANSACTION" shall mean any of the following
(other than the transactions contemplated by this Agreement) involving
the Company or any of its subsidiaries: (i) any purchase, lease,
exchange, transfer or other acquisition or assumption of all or a
material portion of the assets of the Company and its subsidiaries,
taken as a whole; (ii) any merger, consolidation, share exchange,
business combination or similar transaction involving the Company or
any of its subsidiaries; or (iii) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise)
of securities representing 20% or more of the outstanding voting of the
Company.
(h) adopt or propose to adopt any amendments to its certificate of
incorporation or its bylaws;
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(i) (i) change any of its significant accounting policies or (ii)
make or rescind any express or deemed election relating to Taxes, settle
or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes, or
change any of its methods of reporting income or deductions for federal
income tax purposes from those employed in the preparation of the
federal income tax returns for the taxable year ended December 31, 1997
except, in the case of clause (i) or clause (ii), as may be required by
Law or generally accepted accounting principles;
(j) take or permit any action that could prevent the merger from
qualifying as a tax-free reorganization under Section 368 of the Code,
and the Company will use its best efforts to prevent any of its officers
or directors from taking or permitting any such action;
(k) take or permit any action that could adversely affect or delay
the ability of either the Company or QRI to obtain any necessary
approvals of any Governmental Entities required for the transactions
contemplated hereby or to perform its covenants and agreements under
this Agreement;
(l) except as set forth in Section 5.03(l) of the Company
Disclosure Schedule, neither the Company nor any subsidiaries will sell,
transfer or abandon any portion of the Company Properties other than (i)
items of materials, supplies, machinery, equipment, improvements or
other personal property or fixtures forming a part of the Company
Properties (and then only if the same is replaced with an item of equal
suitability and value free of liens and security interests, which
replacement item will then, for the purposes of this Agreement, become
part of the Company Properties) or (ii) production of oil, gas and/or
other minerals, or the products therefrom, in the ordinary course of
business under arrangements that do not cause the representations and
warranties set forth elsewhere herein to be untrue; neither the Company
nor any subsidiary will, without QRI's consent, release, permit to
terminate, modify or reduce its rights under any oil, gas and/or mineral
lease forming a material part of the Company Properties, or any other
material the Company Basic Document, or enter into any new agreements
which would be the Company Basic Documents;
(m) take materially more of the oil or gas produced from the wells
located on any Company Property (or on units in which such properties
participate) than their ownership of such Company Property would entitle
them (absent any oil or gas balancing agreement or arrangement) to take;
(n) take any action that would, or that reasonably could be
expected to, result in any of the representations and warranties set
forth in this Agreement becoming untrue or any of the conditions to the
merger set forth in Article VI not being satisfied. The Company
promptly shall advise QRI orally and in writing of any change or event
having, or which, insofar as reasonably can be foreseen, would have, a
material adverse effect on the Company and its subsidiaries, taken as a
whole; and
(o) agree in writing or otherwise to do any of the foregoing.
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Section 5.4. NEGATIVE COVENANTS OF QRI. Except as expressly contemplated
by this Agreement or otherwise consented to in writing by the Company, from the
date of this Agreement until the Effective Time, QRI shall not do any of the
following:
(a) amend or modify any one or more of the formation documents
delivered to the Company under SECTION 4.02 in any material respect.
(b) propose to adopt any amendments to its certificate of
incorporation or its bylaws that could reasonably be expected to delay
or have an adverse effect on the consummation of the transactions
contemplated by this Agreement or would otherwise be inconsistent in any
material respect with the terms and conditions of this Agreement or the
other agreements or transactions contemplated hereby (it being
understood that this clause (b) shall not in any respect limit the right
and power of QRI to amend its certificate of incorporation to increase
the authorized number of shares of any class of capital stock of QRI) or
to adopt the certificate of incorporation contemplated by SECTION 1.05
of this Agreement;
(c) change any of its significant accounting policies except as
may be required by Law or generally accepted accounting principles;
(d) declare or pay any dividend (other than a stock split in the
form of a stock dividend as provided for in the last proviso in SECTION
2.01(b))on, or make any other distribution in respect of, outstanding
shares of its or its subsidiaries capital stock or other equity
interests;
(e) take or permit any action that would adversely affect or delay
the ability of either the Company or QRI to obtain any necessary
approvals of any Governmental Entities required for the transactions
contemplated hereby or to perform its covenants and agreements under
this Agreement;
(f) take or permit any action which could prevent the merger from
qualifying as a tax-free organization under Section 368 of the Code, and
QRI will use its best efforts to prevent any of its officers or
directors from taking or permitting any such action;
(g) except as contemplated by this Agreement, issue (whether upon
original issue or out of treasury), sell, grant, award, deliver or limit
the voting rights of any shares of any class of its capital stock, any
securities convertible into or exercisable or exchangeable for any such
shares, or any rights, warrants or options to acquire any such shares
(except for the issuance of shares upon the exercise of outstanding
awards, stock options or warrants in accordance with their terms), or
amend or otherwise modify in any material respect the terms of such
rights, warrants and options;
(h) QRI will not sell, transfer or abandon any portion of the QRI
Properties other than (i) items of materials, supplies, machinery,
equipment, improvements or other personal property or fixtures forming a
part of the QRI Properties (and then only if the same is replaced with
an item of equal suitability and value free of liens and security
interests, which
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replacement item will then, for the purposes of this Agreement, become
part of the QRI Properties) or (ii) production of oil, gas and/or other
minerals, or the products therefrom, in the ordinary course of business
under arrangements that do not cause the representations and warranties
set forth elsewhere herein to be untrue; QRI will not, without the
Company's consent, release, permit to terminate, modify or reduce its
rights under any oil, gas and/or mineral lease forming a material part
of the QRI Properties, or any other material QRI Basic Document, or
enter into any new agreements which would be QRI Basic Documents;
(i) QRI will not take materially more of the oil or gas produced from
the wells located on any QRI Property (or on units in which such properties
participate) than QRI's ownership of such QRI Property would entitle QRI
(absent any oil or gas balancing agreement or arrangement) to take;
(j) QRI shall not take any action that would, or that reasonably
could be expected to, result in any of the representations and warranties
set forth in this Agreement becoming untrue or any of the conditions to the
merger set forth in Article VII not being satisfied. QRI promptly shall
advise the Company orally and in writing of any change or event having, or
which, insofar as reasonably can be foreseen, would have, a material
adverse effect on QRI or the QRI Properties; and.
(k) agree in writing or otherwise to do any of the foregoing.
Section 5.05. ACCESS AND INFORMATION.
(a) The Company shall, and shall cause its subsidiaries to, (i)
afford to QRI and QRI's officers, directors, stockholders, employees,
accountants, consultants, legal counsel, agents and other representatives
(collectively, the "QRI REPRESENTATIVES") access during ordinary business
hours and at other reasonable times, upon reasonable prior notice, to the
officers, employees, accountants, agents, properties, offices and other
facilities of the Company and its subsidiaries and to the books and records
thereof and (ii) furnish promptly to QRI and the QRI Representatives such
information concerning the business, properties, contracts, records and
personnel of the Company and its subsidiaries (including, without
limitation, financial, operating and other data and information) as may be
reasonably requested, from time to time, by QRI.
(b) QRI shall, and shall cause its subsidiaries to, (i) afford to the
Company and the Company's officers, directors, employees, accountants,
consultants, legal counsel, agents and other representatives (collectively,
the "COMPANY REPRESENTATIVES") access during ordinary business hours and at
other reasonable times, upon reasonable prior notice, to the officers,
employees, accountants, agents, properties, offices and other facilities of
QRI and its subsidiaries and to the books and records thereof and (ii)
furnish promptly to the Company and the Company Representatives such
information concerning the business, properties, intellectual property
assets, contracts, records and personnel of QRI and its subsidiaries
(including, without limitation, financial, operating and other data and
information) as may be reasonably requested, from time to time, by the
Company.
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(c) No investigation by the parties hereto made heretofore or
hereafter shall affect the representations and warranties of the parties
that are contained herein and each such representation and warranty shall
survive such investigation.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01. PRESENTATION TO STOCKHOLDERS. The Company shall,
promptly after the date of this Agreement, take all actions necessary in
accordance with the DGCL and its certificate of incorporation and bylaws and
the rules of AMEX to present the merger and this Agreement to the holders of
the Company Common Stock for their consideration and approval by the vote
thereof at a meeting of the Company's stockholders duly called and convened
to act on the merger and this Agreement (the "COMPANY STOCKHOLDERS'
MEETING"). In like manner, QRI shall, promptly after the date of this
Agreement, take all actions necessary in accordance with the DGCL, QRI's
certificate of incorporation and bylaws to present the merger and this
Agreement to the holders of QRI Common Stock for their consideration and
approval by the vote thereof at a meeting of QRI's stockholders duly called
and convened to act on the merger and this Agreement (the "QRI STOCKHOLDERS'
MEETING") (or, in lieu thereof, such action may be taken by written consent
in accordance with the DGCL and QRI's certificate of incorporation). The
Company and QRI shall consult with each other in connection with such
meetings and each shall use its best efforts to cause such meetings to occur
on the same date. The Company and QRI shall use their reasonable best
efforts to solicit from their respective stockholders proxies in favor of the
approval and adoption of this Agreement and to secure the vote of
stockholders required by the DGCL and their respective certificates of
incorporation and bylaws and by the rules of AMEX to approve and adopt the
merger and this Agreement. The board of directors of QRI and the Special
Committee and the board of directors of the Company shall recommend that
their respective stockholders approve and adopt this Agreement and the merger
on the terms and conditions set forth in this Agreement. Provided, however,
that nothing contained in this SECTION 6.01 or elsewhere in this Agreement
shall require the board of directors of the Company, or the Special Committee
thereof, to take any action or refrain from taking any action that the board
of directors of the Company determines in good faith after consultation with
and based on the advice of outside counsel could be reasonably expected to
result in a breach of its fiduciary duties under applicable law; provided
further that, in the event the board of directors, or the Special Committee
thereof, receives a proposal to enter into an Alternative Transaction that
the Special Committee, after consideration of advice from its legal and
financial advisors, determines is more beneficial to the stockholders of the
Company than the merger, the Company's board of directors, or the Special
Committee, may, in the exercise of its fiduciary obligations, withdraw or
modify its approval or recommendation of this Agreement or the merger.
Notwithstanding any other provision hereof, no party shall be restricted from
complying with Rule 14e-2 promulgated under the Exchange Act with regard to a
tender offer or exchange offer.
Section 6.02. REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS.
(a) As promptly as practicable after the execution of this
Agreement, QRI shall prepare and file with the SEC a registration
statement on Form S-4 (the "Registration Statement") containing a Proxy
Statement/Prospectus (the "PROXY STATEMENT/ PROSPECTUS") for
stockholders of the Company in connection with (i) the registration
under the Securities
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Act of the offer, sale and delivery of QRI Common Stock to be issued in
the merger and (ii) the vote of the stockholders of the Company with
respect to the merger and this Agreement. QRI and the Company shall
each use all reasonable efforts to cause the Registration Statement to
become effective as promptly as practicable, and shall take any action
required to be taken in order to comply with any applicable federal or
state securities laws in connection with the issuance of shares of QRI
Common Stock in the merger. QRI and the Company shall each furnish all
information concerning itself and the holders of its capital stock as
the other may reasonably request in connection with such actions. As
promptly as practicable after the Registration Statement shall have
become effective, the Company and QRI shall mail (the "MAILING DATE")
the Proxy Statement/Prospectus to the holders of Company Common Stock of
record at least 20 calendar days prior to the Company Stockholders'
Meeting. It shall be a condition to the mailing of the Proxy
Statement/Prospectus that QRI and the Company shall have received the
comfort letters described in SECTION 6.13 of this Agreement, if QRI
shall have requested such letters as described in SECTION 6.13 hereof.
(b) None of the information supplied or to be supplied by the
Company for inclusion or incorporation by reference in (i) the
Registration Statement will, at the time the Registration Statement is
filed with the SEC and at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements made therein not misleading and (ii) the Proxy
Statement/Prospectus will, at the Mailing Date and at the time of the
Company Stockholders' Meeting and the QRI Stockholders' Meeting, contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances in which they were made, not
misleading. If at any time prior to the Company Stockholders' Meeting
or the QRI Stockholders' Meeting any event or circumstance relating to
the Company or any of its Affiliates, or its or their respective
officers or directors, should be discovered by the Company that should
be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement/Prospectus, the Company shall promptly
inform QRI. All documents that the Company is responsible for filing
with any Governmental Entity in connection with the transactions
contemplated hereby, including, without limitation, the Proxy
Statement/Prospectus to the extent that the information contained
therein relates to the Company and its subsidiaries or the transactions
contemplated hereby, will comply as to form in all material respects
with the provisions of applicable law, including applicable provisions
of the Securities Act, the Exchange Act and the rules and regulations
thereunder, and each such document required to be filed with any
Governmental Entity other than the SEC will comply with the provisions
of applicable Law as to the information required to be contained therein.
(c) None of the information supplied or to be supplied by QRI for
inclusion in (i) the Registration Statement will, at the time the
Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and
(ii) the Proxy Statement/Prospectus will, at the Mailing Date and at the
time of the Company Stockholders' Meeting and the QRI
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Stockholders' Meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances in which they were made, not misleading. If at any time
prior to the Company Stockholders' Meeting or the QRI Stockholders'
Meeting any event or circumstance relating to QRI or any of its
Affiliates, or its or their respective officers or directors, should be
discovered by QRI that should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy
Statement/Prospectus, QRI shall promptly inform the Company. All
documents that QRI is responsible for filing with any Governmental
Entity in connection with the transactions contemplated hereby,
including, without limitation, the Registration Statement to the extent
that the information contained therein relates to QRI and its
subsidiaries or the transactions contemplated hereby, will comply as to
form in all material respects with the provisions of applicable law,
including applicable provisions of the Securities Act, the Exchange Act
and the rules and regulations thereunder, and each such document
required to be filed with any Governmental Entity other than the SEC
will comply with the provisions of applicable Law as to the information
required to be contained therein.
Section 6.03. APPROPRIATE ACTION: CONSENTS; FILINGS.
(a) QRI and the Company and its subsidiaries shall each use all
reasonable efforts promptly (i) to take, or cause to be taken, all
appropriate action, and do, or cause to be done, all things necessary,
proper or advisable under applicable Law or otherwise to consummate and
make effective the transactions contemplated by this Agreement, (ii) to
obtain from any Governmental Entities any consents, licenses, permits,
waivers, approvals, authorizations or orders required to be obtained by
the Company or any of its subsidiaries or QRI, respectively, in
connection with the authorization, execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated
hereby, including, without limitation, the merger, and (iii) to make all
necessary filings, and thereafter make any other required submissions,
with respect to this Agreement and the merger required under (a) the
Securities Act and the Exchange Act and the rules and regulations
thereunder, and any other applicable federal or state securities laws,
(b) the HSR Act, and (c) any other applicable Law; and QRI and the
Company shall cooperate with each other in connection with the making of
all such filings, including providing copies of all such documents to
the nonfiling party and its advisors prior to filing and, if requested,
shall accept all reasonable additions, deletions or changes suggested in
connection therewith. The Company and QRI shall furnish all information
required for any application or other filing to be made pursuant to the
rules and regulations of any applicable Law in connection with the
transactions contemplated by this Agreement.
(b) QRI and the Company and its subsidiaries agree to cooperate
and to use all reasonable efforts to contest and resist any action,
including legislative, administrative or judicial action, and to have
vacated, lifted, reversed or overturned any decree, judgment, injunction
or other order (whether temporary, preliminary or permanent) (an
"ORDER") that is in effect and that restricts, prevents or prohibits the
consummation of the merger or any other transactions contemplated by
this Agreement, including, without limitation, by vigorously pursuing
all available avenues of administrative and judicial appeal and all
available legislative action.
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(c) The Company and QRI shall each promptly give any notices
regarding the merger, this Agreement or the transactions contemplated
hereby to third parties required by Law or by any material contract,
license, lease or other material agreement to which it is a party or by
which it is bound, and use, and cause its subsidiaries, if any, to use,
all reasonable efforts to obtain any third party Consents or waivers of
Preferential Rights (i) necessary, proper or advisable to consummate the
transactions contemplated by this Agreement, (ii) otherwise required
under any contracts, licenses, leases or other agreements in connection
with the consummation of the transactions contemplated by this
Agreement, or (iii) required to prevent a Company Material Adverse
Effect or a QRI Material Adverse Effect, respectively, from occurring;
PROVIDED, HOWEVER, that this SECTION 6.03 shall not impose any
obligations on or confer any rights upon any person or entity other than
the parties to this Agreement.
(d) If any party shall fail to obtain any third party Consent or
waivers of Preferential Rights described in subsection (c) above, such
party shall use all reasonable efforts, and shall take any such actions
reasonably requested by the other parties, to limit the adverse effect
upon the Company, its subsidiaries, and QRI, and their respective
businesses resulting, or that could reasonably be expected to result
from the failure to obtain such consent.
Section 6.04. AFFILIATES; TAX TREATMENT.
(a) The Company shall obtain and deliver to QRI (i) on the date
that this Agreement is executed by QRI, an executed agreement,
substantially in the form of EXHIBIT C hereto from each person
identified as an Affiliate of the Company in SECTION 3.12 of the Company
Disclosure Schedule, and (ii) by the Closing Date, from any other person
who is an Affiliate of the Company on the Closing Date.
(b) QRI shall be entitled to place legends as specified in such
letter agreements on the certificates evidencing any QRI Common Stock to
be received by such Affiliates of the Company pursuant to the terms of
this Agreement, and to issue appropriate stop transfer instructions to
the transfer agent of the QRI Common Stock, consistent with the terms of
such letter agreements.
(c) Neither the Company nor its subsidiaries nor QRI or other
Affiliates shall (i) take any action, or fail to take any action, that
would jeopardize qualification of the merger as a tax-free
reorganization within the meaning of Section 368(a)(1)(a) of the Code or
(ii) enter into any contract, agreement, commitment or arrangement with
respect to the foregoing.
(d) At or before the Closing, QRI and the Company shall provide an
officer's certificate, in form and substance reasonably satisfactory to
the Company, to Jenkens & Gilchrist, a Professional Corporation, to
assist such counsel in rendering the written opinion provided for in
SECTION 7.01(d) of this Agreement. The Company shall use all reasonable
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efforts to obtain from its Affiliates such certificate as may be
requested by such counsel in connection with such opinion.
Section 6.05. PUBLIC ANNOUNCEMENTS. Except as otherwise required by
applicable Law or the rules of AMEX, neither QRI nor the Company nor any of
its subsidiaries shall issue or cause the publication of any press release or
other public announcement with respect to, or otherwise make any public
statement concerning, the transactions contemplated by this Agreement without
the consent of the other party, which consent shall not be unreasonably
withheld.
Section 6.06. AMEX LISTING. QRI shall use all reasonable efforts to
cause the shares of QRI Common Stock to be issued in the merger to be
approved for listing, subject to official notice of issuance, on AMEX prior
to the Effective Time.
Section 6.07. STATE TAKEOVER STATUTES. The Company will take all steps
necessary to exempt the transactions contemplated by this Agreement from, and
if necessary challenge the validity of, any applicable state takeover law,
including, without limitation, Section 203 of the DGCL. The Company shall
take all actions necessary under the DGCL, including approving the
transactions contemplated by this Agreement, to ensure that the prohibitions
on business combinations set forth in Section 203 of the DGCL do not, or will
not, apply to the transactions contemplated by this Agreement.
Section 6.08. BOARD SEAT. Promptly following the Effective Time,
consistent with applicable law and its bylaws, the board of directors of QRI
shall increase the number of members of its board of directors from 3 to 8,
and shall elect Frank Darden, Thomas F. Darden, Glenn M. Darden, Mark Warner,
Steven M. Morris, D. Randall Kent and W. Yandell Rogers III to fill seven of
such vacancies, to serve as such until the next annual meeting of QRI
stockholders or such time as their respective successors shall have been duly
elected or appointed and qualified.
Section 6.09. OPTIONS.
(a) At the Effective Time, each option granted by the Company to
purchase shares of Company Common Stock that is outstanding and unexercised
immediately prior thereto shall cease to represent a right to acquire
shares of Company Common Stock and shall be converted automatically into an
option to purchase shares of QRI Common Stock in an amount and at an
exercise price determined as provided below (and otherwise subject to the
terms of the Company benefit plans under which they were issued and the
agreements evidencing grants thereunder).
(i) The number of shares of QRI Common Stock to be subject to
the new option shall be equal to the product of the number of shares
of Company Common Stock subject to the original option and the
Conversion Ratio, provided that any fractional shares of QRI Common
Stock resulting from such multiplication shall be rounded to the
nearest whole share; and
(ii) The exercise price per share of QRI Common Stock under the
new option shall be equal to the exercise price per share of Company
Common Stock
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under the original option divided by the Conversion Ratio, provided
that such exercise price shall be rounded down to the nearest whole
cent.
(b) The adjustment provided herein with respect to any options that
are "incentive options" (as defined in Section 422 of the Code) shall be
and is intended to be effectuated in a manner which is consistent with
Section 424(a) of the Code. Except as set forth in clauses (i) and (ii) of
SECTION 6.09(a), above, the duration and other terms of the new option
shall be the same as the original option except that all references to the
Company or any of its subsidiaries shall be deemed to be references to QRI.
(c) If and to the extent required by the terms of the plans governing
the original options or pursuant to the terms of any agreements evidencing
grants thereunder, the Company shall use its reasonable efforts to obtain
the consent of each holder of outstanding options to the treatment provided
in subparagraph (a) of this SECTION 6.09.
Section 6.10. COMMON STOCK WARRANTS.
(a) At the Effective Time, each Common Stock Warrant granted by the
Company to purchase shares of Company Common Stock that is outstanding and
unexercised immediately prior thereto shall cease to represent a right to
acquire shares of Company Common Stock and shall be converted automatically
into a warrant to purchase shares of QRI Common Stock in an amount and at
an exercise price determined as provided below (and otherwise subject to
the terms of the agreements evidencing such Common Stock Warrants).
(i) The number of shares of QRI Common Stock to be subject to
the new Warrant shall be equal to the product of the number of shares
of Company Common Stock subject to the original Common Stock Warrant
and the Conversion Ratio, provided that any fractional shares of QRI
Common Stock resulting from such multiplication shall be rounded to
the nearest whole share; and
(ii) The exercise price per share of QRI Common Stock under the
new Warrant shall be equal to the exercise price per share of Company
Common Stock under the original Common Stock Warrant divided by the
Conversion Ratio, provided that such exercise price shall be rounded
down to the nearest whole cent.
(iii) Except as set forth in clauses (i) and (ii) of this
SECTION 6.10(a), the expiration date and other terms of the new
warrant shall be the same as the original warrant except that all
references to the Company or any of its subsidiaries shall be deemed
to be references to QRI.
If and to the extent required by the terms of the Common Stock Purchase
Warrants, the Company shall use its reasonable efforts to obtain the consent of
each holder of such Warrants to the treatment thereof provided in subparagraph
(a) of this SECTION 6.10.
Section 6.11. INDEMNIFICATION.
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(a) The Company shall indemnify and hold harmless, to the fullest
extent permitted under applicable law, and after the Effective Time, QRI
and the Surviving Corporation shall indemnify and hold harmless, to the
fullest extent permitted under applicable law, each present and former
director and officer of the Company or any of its subsidiaries, and each
person who is or was then serving as a director of the Company or any of
its subsidiaries (individually, an "INDEMNIFIED PARTY" and collectively,
the "INDEMNIFIED PARTIES") against any expenses, including reasonable
attorneys' fees, fines, losses, claims, damages, liabilities, costs,
judgments and amounts paid in settlement in connection with any
threatened, pending or completed claim, action, suit, proceeding or
investigation (whether civil, criminal or administrative) arising out of
or pertaining to any action or omission occurring prior to the Effective
Time (including, without limitation, any that arise out of or relate to
the merger and the transactions contemplated by this Agreement) that are
asserted or commenced prior to or within six years following the
Effective Time, and the Company, QRI or the Surviving Corporation, as
the case may be, will advance expenses to each such Indemnified Party
(provided the person to whom expenses are advanced provides an
undertaking to repay such advances if it is ultimately determined that
such person is not entitled to indemnification), provided the
Indemnified Party asserting the right to indemnification hereunder shall
have acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Company and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
that such person reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, that such person and reasonable cause to believe that his
conduct was unlawful. In the event of any such claim, action, suit,
proceeding or investigation (whether asserted or commenced before or
after the Effective Time), the Company, QRI or the Surviving
Corporation, as the case may be, will be entitled to participate in and,
to the extent that it may wish, to assume the defense thereof; PROVIDED,
HOWEVER, that if any Indemnified Party (or group of Indemnified Parties)
reasonably believes that it is advisable for such Indemnified Parties to
be represented by separate counsel as a result of a conflict, on any
significant issue between the positions of the Indemnified Party (or
group of Indemnified Parties) and the Company, QRI or the Surviving
Corporation, as the case may be, as determined under applicable
standards of professional conduct or if the Company, QRI or the
Surviving Corporation shall promptly fail to assume responsibility for
such defense, such Indemnified Party (or group of Indemnified Parties)
may retain counsel satisfactory to such Indemnified Party (or group of
Indemnified Parties), who will represent such Indemnified Party (or
group of Indemnified Parities), and the Company, QRI or the Surviving
Corporation, as the case may be, shall pay all reasonable fees and
expenses of such counsel promptly as statements therefor are received;
PROVIDED, that the Indemnified Parties and the Company, QRI or the
Surviving Corporation, as the case may be, will use their respective
best efforts to assist in the vigorous defense of any such matter;
PROVIDED, FURTHER, that neither the Company, QRI nor the Surviving
Corporation shall be liable for any settlement effected without their
written consent, which consent, if
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the Company, QRI or the Surviving Corporation fails to assume the
defense of any such matter, shall not be unreasonably withheld and in no
event shall be withheld in bad faith; and PROVIDED, FURTHER, that
neither the Company, QRI nor the Surviving Corporation shall have any
obligation hereunder to any Indemnified Party (i) when and if a court of
competent jurisdiction shall ultimately determine, after exhaustion of
all avenues of appeal, that such Indemnified Party is not entitled to
indemnification hereunder (at which point such Indemnified Party shall
promptly refund, without interest, to the indemnifying party all amounts
previously paid by the indemnifying party hereunder) and (ii) unless
such Indemnified Party has delivered to QRI an undertaking to refund
amounts paid as provided in clause (i) above. Any Indemnified Party
wishing to claim indemnification under this SECTION 6.11, upon learning
of any such claim, action, suit, proceeding or investigation, shall
promptly notify the indemnifying party thereof. In the event the
Indemnified Parties are entitled to separate counsel pursuant to this
paragraph (a), the Indemnified Parties may as a group retain only one
such law firm to represent them with respect to any such matter unless
there is, under applicable standards of professional conduct, a conflict
on any significant issue between the positions of any two or more
Indemnified Parties in which case the Indemnified Parties may retain, at
the expense of the Company, QRI or the Surviving Corporation, as the
case may be, two additional law firms.
(b) The Company, its subsidiaries and the Surviving Corporation
will perform and discharge all indemnification agreements to which the
Company or any of its subsidiaries is a party and that have been
disclosed in SECTION 6.11(b) of the Company Disclosure Schedule.
(c) This Section shall survive the closing of the transactions
contemplated hereby, is intended to benefit the Company, QRI, the
Surviving Corporation and each of the Indemnified Parties (each of whom
shall be entitled to enforce this Section against the Company or the
Surviving Corporation, as the case may be) and shall be binding on all
successors and assigns of the Surviving Corporation. The exercise by
any person of such person's rights under any of paragraphs (a) or (b) of
this Section shall not preclude the exercise of such person's rights
under any such other paragraph of this section, provided that such party
shall not be entitled to multiple recoveries thereunder.
(d) For six years from the Effective Time, QRI shall cause the
Surviving Corporation to provide to the Company's current directors and
officers liability insurance protection of the same kind and scope as
that provided by the Company's directors' and officers' liability
insurance policies (copies of which have been made available to QRI) in
effect on the date hereof; PROVIDED, HOWEVER, that in no event shall the
Surviving Corporation be required to expend in any one year an amount in
excess of 150% of the annual premiums currently paid by the Company for
such insurance; and, PROVIDED, FURTHER, that if the annual premiums of
such insurance coverage exceeds such amount, the Surviving Corporation
shall be obligated to obtain a policy with the greatest coverage
available for a cost not exceeding such amount.
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(e) In the event the Surviving Corporation, QRI or any of their
respective successors or assigns (i) consolidates with or merges into
any other person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger, or (ii) transfers
all or substantially all of its properties and assets to any person,
then, and in each such case, proper provision shall be made so that the
successors and assigns of the Surviving Corporation or QRI, as the case
may be, assume the obligations set forth in this SECTION 6.11.
(f) Nothing in this Section 6.11 shall alter or replace the
obligations of an insurer that provides coverage to the Company or QRI.
Section 6.12. EMPLOYMENT CONTRACTS. The Company represents that it has
previously delivered or made available to QRI all employment, retirement,
termination, severance or similar agreements with officers or other employees
of the Company and its subsidiaries which are currently in effect, all of
which are listed in the Company Disclosure Schedule. SECTION 6.12 of the
Company Disclosure Schedule lists all such agreements and plans that provide
for payment of amounts or awards upon consummation of a "change of control"
of the Company, including all those providing for payments or awards upon
consummation of the merger. The Company has made available to QRI true,
correct and complete copies of all such agreements and plans. The Company
will not enter into any such agreements after the date hereof without QRI's
prior written consent.
Section 6.13. COMFORT LETTERS.
(a) If requested by QRI, the Company shall cause Deloitte and
Touche LLP to deliver a letter, dated as of the date of the Proxy
Statement/Prospectus and as of the Closing Date, and addressed to QRI
and its board of directors, in form and substance reasonably satisfactory
to QRI and customary in scope and substance for agreed upon procedures
letters delivered by independent public accountants in connection with
registration statements and proxy statements similar to the Proxy
Statement/Prospectus.
(b) If QRI should make the request for the Company to cause
Deloitte and Touche LLP to deliver the letter referred to in
subparagraph (a) of this SECTION 6.13, QRI shall then cause Weaver &
Tidwell to deliver a letter dated as of the date of the Proxy Statement/
Prospectus and as of the Closing Date, and addressed to QRI and the
Company and their respective board of directors, in form and substance
reasonably satisfactory to the Company and customary in scope and
substance for agreed upon procedures letters delivered by independent
public accountants in connection with registration statements and proxy
statements similar to the Proxy Statement/Prospectus.
Section 6.14. SALES UNDER RULE 145 IF APPLICABLE.
(a) QRI will use its best efforts to comply with the reporting
requirements of the Exchange Act after the Effective Time.
(b) Upon being informed in writing by any person who, at the
Effective Time, was an officer, director or a shareholder of the Company
that may be deemed to be an affiliate of
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the Company (within the meaning of the Exchange Act), that such person
intends to sell any shares of QRI Common Stock acquired in the merger
under Rule 145 under the Exchange Act, QRI will certify in writing to
such person that it has been subject to the reporting requirements of
the Exchange Act for at least 90 days and it has filed all of the
reports required to be filed by it under the Exchange Act to enable such
person to sell such person's QRI Common Stock acquired in the merger
under Rule 145 (or will inform such person in writing that it has not
filed such reports). QRI will further supply such person with any
information in its possession which he may reasonably request in
connection with any such proposed sale.
(c) If any of the certificates representing any QRI Common Stock
acquired in the merger is presented to QRI's transfer agent for
registration of transfer in connection with any sale theretofore made
under paragraph (d) of Rule 145, provided such certificate is duly
endorsed for transfer or accompanied by a duly executed stock power and
is accompanied by an opinion of counsel satisfactory to QRI that such
transfer has complied with the requirements of Rule 145, QRI will
promptly instruct its transfer agent to register such transfer and to
issue one or more new certificates free of any stop transfer order or
restrictive legend.
Section 6.15. STOCKHOLDER LITIGATION. The Company shall give QRI the
opportunity to participate in the defense or settlement of any stockholder
litigation against the Company and its directors relating to any of the
transactions contemplated by this Agreement; PROVIDED, no such settlement
shall be agreed to without QRI's consent, which consent shall not be
unreasonably withheld; and FURTHER PROVIDED, that no settlement requiring a
payment by a director of the Company shall be agreed to without such
director's consent.
ARTICLE VII
CLOSING CONDITIONS
Section 7.1. CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER THIS
AGREEMENT. The respective obligations of each party to effect the merger and
the other transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions
(any or all of which may be waived by the parties hereto in writing, in whole
or in part, to the extent permitted by applicable Law):
(a) EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Registration
Statement shall have been declared effective by the SEC under the
Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no
proceedings for that purpose shall have been initiated by the SEC.
(b) LISTING OF QRI COMMON STOCK. The AMEX shall have approved the
listing, subject to official notice of issuance of the QRI Common Stock,
including the QRI Common Stock to be issued in the merger.
(c) STOCKHOLDER APPROVAL. The merger and this Agreement shall have
been approved and adopted by the requisite vote of the stockholders of
the Company and of QRI
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in accordance with the DGCL and the respective certificates of
incorporation of the Company and QRI.
(d) HSR ACT. The Company and QRI shall have made all filings, if
any, required under the HSR Act and the applicable waiting period under
the HSR Act with respect to the transactions contemplated by this Agreement
shall have expired or been terminated.
(e) COMPANY TAX OPINION. The Company shall have received from
Jenkens & Gilchrist, a Professional Corporation a written opinion, dated
as of the Mailing Date and as of the Closing Date, to the effect that
the merger, when effected in accordance with this Agreement, will
qualify as a tax free reorganization under Section 368(a)(1)(A) of the
Code and, QRI and the Company will constitute parties to such
reorganization, and a copy of such opinion shall have been delivered to
QRI.
(f) NationsBank, N.A. and any other lenders to QRI, and Banque
Paribas and any other lenders to the Company, shall have consented to
the merger under the terms of this Agreement, and the indebtedness to
those lenders shall have been consolidated and restructured in such
manner as to require no guaranty by anyone other than subsidiaries of
QRI and the Company and to require no collateral be provided by anyone
other than QRI, the Company and their respective subsidiaries, all on
terms reasonably satisfactory to QRI and the Company.
(g) CONSENTS. All consents required pursuant to SECTIONS 6.09 and
6.10 shall have been obtained.
Section 7.2. ADDITIONAL CONDITIONS TO OBLIGATIONS OF QRI. The
obligations of QRI to effect the merger and the other transactions contemplated
by this Agreement are also subject to the following conditions (any or all of
which may be waived by QRI in writing, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations
and warranties of the Company contained in this Agreement shall have
been true and correct in all material respects at and as of the date
made and, except as contemplated or permitted by this Agreement, at and
as of the Effective Time as if made at and as of such time. QRI shall
have received a certificate of the President and the Chief Executive
Officer of the Company, in his capacity as such, dated the Closing Date,
to the effect that each of the representations and warranties of the
Company contained in this Agreement were true and correct in all
material respects as of the date made and, except as contemplated or
permitted by this Agreement, at and as of the Effective Time as if made
at and as of such time.
(b) AGREEMENTS AND COVENANTS. The Company shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it at or
prior to the Effective Time. QRI shall have received a certificate of
the President and the Chief Executive Officer of the Company, in his
capacity as such, dated the Closing Date, to such effect.
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(c) CONSENTS. All consents, authorizations, orders and approvals
of, or filings or registrations with, any Governmental Entity required
in connection with the execution, delivery and performance of this
Agreement shall have been obtained or made, except for filings required
under the DGCL in connection with the merger and the Company shall have
obtained all consents, authorizations, waivers and approvals required
from third parties required under all material agreements and
instruments by reason of the merger and the consummation of the
transactions contemplated hereby.
(d) NO GOVERNMENTAL PROCEEDINGS OR LITIGATION. There shall not be
pending or threatened any action, proceeding, claim or counterclaim by
any Governmental Entity or by any third party which seeks to or would
(i) prohibit or restrict the consummation of the merger, (ii) require
the disposition of or the holding separate of any of the stock or assets
of the Company or its subsidiaries or impose material limitations on the
ability of QRI to control in any material respect the business, assets
or operations of either QRI or the Company, or (iii) have a material
adverse effect on QRI's business or materially impair the ability of the
Company to perform their obligations hereunder. There shall not be
pending any action, proceeding or claim by any stockholder of MSR based
on the provisions of subsections (1) and (2) of Article 11 of board of
directors certificate of incorporation. There shall not be in effect any
order, decree or injunction (whether preliminary, final or appealable) of
a United States Federal or state court of competent jurisdiction, and no
statute, rule or regulation shall have been enacted or promulgated by
any Governmental Entity, which (i) prohibits or restricts consummation
of the merger or the transactions contemplated hereby, (ii) requires QRI
to hold separate or dispose of any of the stock or assets of the Company
or its subsidiaries or imposes material limitations on the ability of
QRI to control in any material respect the business, assets or
operations of either QRI or the Company or (iii) has a material adverse
effect on the business of QRI or on the Company and its subsidiaries or
materially impairs the ability of QRI to perform its obligations
hereunder.
(e) AFFILIATE AGREEMENTS. The Company shall have delivered to QRI
the letter agreements called for by SECTION 6.04.
(f) DISSENTING SHARES. The aggregate number of Dissenting Shares
held by Shareholders of the Company shall not exceed 5% of the aggregate
number of shares of Company Common Stock outstanding as of the date of
this Agreement.
Section 7.3. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The
obligations of the Company to effect the merger and the other transactions
contemplated hereby are also subject to the following conditions (any or all of
which may be waived by the Company in writing, in whole or in part):
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations
and warranties of QRI contained in this Agreement shall have been true
and correct in all material respects at and as of the date made and,
except as contemplated or permitted by this Agreement, at and as of the
Effective Time as if made at and as of such time. The Company shall have
received a certificate of the President and the Chief Executive Officer
of QRI, in their capacities as such, dated as of the Effective Time, to
the effect that each of the
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representations and warranties of QRI contained in this Agreement were
true and correct in all material respects as of the date made and,
except as contemplated by this Agreement, at and as of the Effective
Time as if made at and as of such time.
(b) AGREEMENTS AND COVENANTS. QRI shall have performed or complied
in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by them at or prior to
the Effective Time. The Company shall have received a certificate of
the Chairman and Chief Executive Officer of QRI, in such capacities,
dated the Closing Date, to that effect.
(c) CONSENTS. All consents, authorizations, orders and approvals
of, or filings or registrations with, any Governmental Entity required
in connection with the execution, delivery and performance of this
Agreement shall have been obtained or made, except for filings required
under the DGCL in connection with the merger, and QRI shall have
obtained all consents, authorizations, waivers and approvals required
from third parties required under all material agreements and
instruments by reason of the merger and the consummation of the
transactions contemplated hereby, except for such consents,
authorizations, waivers and approvals where the failure to obtain such
could not reasonably be expected to result in a QRI Material Adverse
Effect.
(d) NO GOVERNMENTAL PROCEEDINGS OR LITIGATION. There shall not be
pending or threatened any action, proceeding, claim or counterclaim by
any Governmental Entity or by any third party that seeks to or would (i)
prohibit or restrict the consummation of the merger, (ii) require the
disposition of or the holding separate of any of the stock or assets of
the Company or its subsidiaries or impose material limitations on the
ability of the Surviving Corporation to control in any material respect
the business, assets or operations of either the Surviving Corporation
or the Company, or (iii) have a material adverse effect on the Surviving
Corporation's business or materially impair the ability of the Company
to perform their obligations hereunder. There shall not be in effect
any order, decree or injunction (whether preliminary, final or
appealable) of a United States Federal or state court of competent
jurisdiction, and no statute, rule or regulation shall have been enacted
or promulgated by any Governmental Entity, which (i) prohibits or
restricts consummation of the merger or the transactions contemplated
hereby, (ii) requires QRI to hold separate or dispose of any of the
stock or assets of the Company or its subsidiaries or the Surviving
Corporation or imposes material limitations on the ability of QRI to
control in any material respect the business, assets or operations of
either QRI or the Surviving Corporation, or (iii) has a material adverse
effect on the business of QRI or on the Surviving Corporation or
materially impairs the ability of QRI to perform its obligations
hereunder.
(e) FAIRNESS OPINION. EVEREN Securities, Inc. shall have confirmed
in writing to the Special Committee that on each of (i) the date of
mailing of the Proxy Statement/Prospectus and (ii) the Closing Date the
merger Consideration to be paid to holders of the Company Common Stock
(other than holders of shares held by Mercury Exploration, Company or
the Darden family members or Affiliates thereof) is fair, from a
financial point of view, to such holders as of the mailing date and the
Closing Date (as applicable).
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.1. TERMINATION. This Agreement may be terminated and the
merger hereby contemplated may be abandoned at any time notwithstanding approval
of this Agreement by the stockholders of the Company and/or QRI, but prior to
the Effective Time:
(a) by mutual written consent duly authorized by the board of
directors of QRI and the Special Committee of the board of directors of
the Company;
(b) by QRI, if there has been a material breach of the
representations and warranties of the Company contained in this
Agreement or if the Company has failed to comply in any material respect
with any of its covenants or agreements set forth in this Agreement, and
the Company shall not have cured such breach or failure within ten days
of receipt of written notice thereof from QRI (a "TERMINATING COMPANY
BREACH"); and PROVIDED, HOWEVER, if such breach or failure is incapable
of cure within such ten day period, such breach or failure shall
constitute a Terminating Company Breach immediately upon receipt of
written notice thereof from QRI;
(c) by the Company, if there has been a material breach of the
representations and warranties of QRI contained in this Agreement or if
QRI has failed to comply in any material respect with any covenant or
agreement on the part of QRI set forth in this Agreement, and QRI shall
not have cured such breach or failure within ten days of receipt of
written notice thereof from the Company (a"Terminating QRI Breach"); and
PROVIDED, HOWEVER, if such breach or failure is incapable of cure within
such ten day period such breach or failure shall constitute a
Terminating QRI Breach immediately upon receipt of written notice
thereof from the Company.
(d) by either QRI or the Company, if any court of competent
jurisdiction in the United States or other United States governmental
body shall have issued an order, decree or ruling or taken any other
action restraining, enjoining or otherwise prohibiting any of the
transactions contemplated hereby and such order, decree, ruling or other
action shall have become final and non-appealable preventing the
consummation of the merger;
(e) by either QRI or the Company, if the Effective Time shall not
have occurred on or before January 31, 1999; PROVIDED that neither the
Company nor QRI shall be entitled to terminate this Agreement pursuant
to this paragraph if such party's material breach of this Agreement has
been the cause of or resulted in the failure of the Effective Time to
occur at or prior to such time;
(f) by either QRI or the Company, if at the meetings of their
respective stockholders (including any adjournment thereof) called for
by SECTION 6.01 hereof, this Agreement and the merger shall fail to be
approved and adopted by the affirmative vote of
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the stockholders of QRI and the Company required under the DGCL and
their respective certificates of incorporation; PROVIDED, HOWEVER, that
QRI shall not be permitted to terminate this Agreement pursuant to this
paragraph if any of the Contributing Entities and/or the members of the
Darden family, or any of the Affiliates, shall have failed to comply
with the voting provisions of the voting agreement.
(g) by the Special Committee, upon three (3) Business Days' prior
notice to QRI, following receipt of a proposal for an Alternative
Transaction with respect to the Company that the Special Committee, in the
exercise of its fiduciary duty, after consideration of advice from its
legal and financial advisors, has determined to be more beneficial to the
Company's stockholders than the merger (a "Superior Proposal"); PROVIDED,
HOWEVER, that prior to any such termination, the Company shall advise QRI
in writing of the determination by the Special Committee that the Special
Committee has determined that such proposal is a Superior Proposal, which
notice will include a summary of such proposal. During such three (3)
business day period QRI may propose to the Special Committee an Alternative
Transaction, and the Special Committee shall, and shall cause its
respective financial and legal advisors to, negotiate with QRI in good
faith with respect to such adjustments in the terms and conditions of this
Agreement so that such proposal would not constitute a Superior Proposal
and thereby enable the Company to proceed with the transactions
contemplated herein.
Section 8.02. EFFECT OF TERMINATION; REMEDIES. Except as provided in
SECTION 9.01, SECTION 9.13 and SECTION 8.05 of this Agreement and in this
SECTION 8.02, in the event of the termination of this Agreement pursuant to
SECTION 8.01, this Agreement shall forthwith become void, there shall be no
liability on the part of QRI or the Company or any of their respective officers
or directors to the other and all rights and obligations of any party hereto
shall cease, except that nothing herein shall relieve any party from its
obligations with respect to any breach of this Agreement; provided, however,
notwithstanding anything herein to the contrary except to the extent such breach
relates to the payment of amounts owed under SECTION 8.05, the liability of any
party for any breach (other than a willful or intentional breach) of this
Agreement shall be limited to the difference of (i) $100,000 less (ii) the
amount of any payments made by such party pursuant to clauses (i), (iii) and
(iv) of the last proviso of the penultimate sentence of SECTION 8.05(a) provided
the foregoing shall not limit either party's rights under SECTION 9.12 to
specific performance.
Section 8.03. AMENDMENT. This Agreement may be amended by the Company
and QRI by action taken by or on behalf of the board of directors of QRI, the
Special Committee and the board of directors of the Company (with members of
the Darden family abstaining) at any time prior to the Effective Time;
PROVIDED, HOWEVER, that after approval of the merger by the stockholders of
the Company or the stockholders of QRI, any such amendment shall be subject
to the provisions of Section 251 of the DGCL; AND FURTHER PROVIDED, that this
Agreement may not be amended unless JEDI and TCW shall have consented thereto
in writing. This Agreement may not be amended except by an instrument in
writing signed by the Company and QRI and with the written consent of JEDI
and TCW.
Section 8.04. WAIVER. At any time prior to the Effective Time, any
party hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other party or parties hereto, (b) waive any
inaccuracies in the representations and warranties of the other party or
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parties contained herein or in any document delivered pursuant hereto and (c)
waive compliance by the other party or parties with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid
only if set forth in an instrument in writing signed by the party or parties
to be bound thereby.
Section 8.5. FEES, EXPENSES AND OTHER PAYMENTS.
(a) All Expenses (as defined in paragraph (b) of this SECTION 8.05)
incurred by the parties hereto shall be borne solely and entirely by the
party that has incurred such Expenses; PROVIDED, HOWEVER, that the
allocable share of each of QRI and the Company for all expenses related to
printing, filing and mailing the Registration Statement and the Proxy
Statement and all SEC and other regulatory filing fees incurred in
connection with the Registration Statement and the Proxy Statement, and all
filing fees incurred in connection with all regulatory filings made under
the HSR Act, shall be one-half; FURTHER, PROVIDED, that (i) in the event
that either the Company or QRI terminates this Agreement pursuant to clause
(b), (e) or (f) of SECTION 8.01 (except in the case of a termination under
clause (f) of SECTION 8.01 under circumstances in which this Agreement and
the merger shall fail to be approved and adopted by the Stockholders of QRI
as required under QRI's certificate of incorporation, its stockholders
agreement and the DGCL) and (a) either this Agreement has not been
submitted to stockholders of the Company or the stockholders of the Company
have failed to approve this Agreement by the requisite vote; (b) after the
date of this Agreement but at or before the time this Agreement is so
terminated, the Company or the Special Committee shall have received a
proposal for an Alternative Transaction; and (c) any Alternative
Transaction is consummated within one year after the date of this
Agreement, the Company shall promptly pay to QRI the sum of $500,000 in
cash upon the consummation of the Alternative Transaction; (ii) in the
event that the Company terminates this Agreement pursuant to clause (g) of
SECTION 8.01 the Company shall promptly pay to QRI the sum of $500,000 in
cash; (iii) in the event that (a) the Company or QRI terminates this
Agreement pursuant to clause (f) of SECTION 8.01 because the stockholders
of the Company have failed to approve this Agreement by the requisite vote
or (b) QRI terminates this Agreement pursuant to clause (b) of SECTION
8.01, or (c) the closing condition specified in clause (e) of SECTION 7.03
hereof shall not have been fulfilled or waived on the Closing Date, and
this Agreement shall have been terminated by the Company or QRI pursuant to
clause (e) of SECTION 8.01 by reason of such failure of condition, the
Company promptly shall pay to QRI the sum of $100,000 in cash as
reimbursement for an agreed upon estimate of Expenses incurred by QRI in
connection with the transactions contemplated hereby, which amount shall
not reduce any amounts owed, if any, to QRI pursuant to clause (i) above;
(iv) in the event that (a) the Company or QRI terminates this Agreement
pursuant to clause (f) of SECTION 8.01 because the stockholders of QRI
shall have failed to approve this Agreement by the requisite vote required
by QRI's certificate of incorporation, its stockholders agreement and the
DGCL; or (b) the Company terminates this Agreement pursuant to clause (c)
of SECTION 8.01, QRI promptly shall pay to the Company the sum of $100,000
in cash as reimbursement for an agreed upon amount of Expenses incurred by
the Company in connection with the transactions contemplated hereby.
Notwithstanding anything herein to the contrary, the Company and QRI
acknowledge that the sole and exclusive remedy for termination of this
Agreement under clause (b) or clause (c) of SECTION 8.01 shall be the
payments provided for
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in clauses (iii) and (iv) and, if applicable, clause (i) of the last
proviso of the preceding sentence of this Section 8.05(a), and neither
QRI nor the Company shall have any liability for any other damages
incurred by the other party in connection therewith, including, but not
limited to consequential or special damages.
(b) "EXPENSES" as used in this Agreement shall include all
out-of-pocket expenses (including, without limitation, all fees and
expenses of counsel, accountants, investment bankers, experts and
consultants to a party hereto and its Affiliates) incurred by a party or
on its behalf in connection with or related to the authorization,
preparation, negotiation, execution and performance of this Agreement,
the preparation, printing, filing and mailing of the Registration
Statement and the Proxy Statement/Prospectus, the solicitation of
stockholder approvals and all other matters related to the consummation
of the transactions contemplated hereby.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS.
(a) Except as set forth in SECTION 9.01(b) of this Agreement, the
representations, warranties, covenants and agreements of each party hereto
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any other party hereto, any person
controlling any such party or any of their officers, directors,
representatives or agents whether prior to or after the execution of this
Agreement.
(b) The representations and warranties in this Agreement shall
terminate at the Effective Time. This SECTION 9.01(b) shall not limit any
covenant or agreement of the parties hereto that by its terms contemplates
performance after the Effective Time.
Section 9.2. NOTICES. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given upon receipt, if delivered personally, sent by nationally recognized
overnight courier service, mailed by registered or certified mail (postage
prepaid, return receipt requested) to the parties at the following addresses (
or at such other address for a party as shall be specified by like changes of
address) or sent by electronic transmission to the telecopier number specified
below:
(a) If to QRI, to:
Quicksilver Resources Inc.
1619 Pennsylvania Avenue
Fort Worth, Texas 76104
Attention: Chief Executive Officer
Telecopier No.: (817) 877-3829
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with copies to:
Cantey & Hanger, L.L.P.
801 Cherry Street
Fort Worth, Texas 76012
Attn: Sloan Blair, Esq.
Telecopier No.: (817) 877-2807
Enron Capital & Trade Resources
1400 Smith Street
Houston, Texas 77002
Attention: Gareth S. Bahlman, Esq.
Telecopier: (713) 646-3393
Milbank, Tweed, Hadley & McCloy
601 South Figueroa, 30th Floor
Los Angeles, California
Attention: David A. Lamb, Esq.
Telecopier No.: (213) 629-5063
(b) If to the Company, to:
MSR Exploration Ltd.
1619 Pennsylvania Avenue
Fort Worth, Texas 76014
Attention: Vice President-Finance
Telecopier No.: (817) 322-1883
with copies to:
Jenkens & Gilchrist
a Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202-2799
Attention: L. Steven Leshin, Esq.
Telecopier No.: (214) 855-4300
Section 9.3. CERTAIN DEFINITIONS. For purposes of this Agreement, the
term:
(a) "AFFILIATE" means a person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person; PROVIDED THAT, for purposes of
this Agreement, JEDI and TCW are not "Affiliates" of QRI, the Darden
family, Mercury or QELC.
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(b) "BUSINESS DAY" means any day other than a day on which banks in
the State of New York, State of California or the State of Texas are
authorized or obligated to be closed;
(c) "CONTROL" (including the terms "CONTROLLED," "CONTROLLED BY" and
"UNDER COMMON CONTROL WITH") means the possession, directly or indirectly
or as trustee or executor, of the power to direct or cause the direction of
the management or policies of a person, whether through the ownership of
stock or as trustee or executor, by contract or credit arrangement or
otherwise;
(d) "ENVIRONMENTAL LAWS": any all laws, rules, orders, regulations,
statues, ordinances, guidelines, codes or decrees of the United States or
any other nation, or any state, local, municipal or other Governmental
Authority or other Laws (including common law) regulating, relating to or
imposing liability or standards of conduct concerning protection of human
health or the environment, as now or may at any time hereafter be in
effect.
(e) "KNOWLEDGE" or "KNOWN" shall mean, with respect to any matter in
question, the actual knowledge of an executive officer of the Company or
QRI, as the case may be, of such matter after having made due and diligent
inquiry with respect to such matter of all appropriate personnel of the
party in question who would reasonably be expected to be familiar with the
matter involved;
(f) "PERSON" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d) of the Exchange Act);
(g) "PROXY STATEMENT/PROSPECTUS" or "JOINT PROXY
STATEMENT/PROSPECTUS" shall mean a joint proxy statement/prospectus or
joint information statement/prospectus included in the Registration
Statement at the time the Registration Statement is declared effective
under the Securities Act and meeting the requirements of Schedule 14A or
Schedule 14C of the SEC's Proxy Rules promulgated pursuant to the Exchange
Act;
(h) "REGISTRATION STATEMENT" shall mean a registration statement of
QRI on Form S-4 filed with the SEC pursuant to the Securities Act for the
purpose of registering thereunder the offering and sale of the QRI Common
Stock to be issued pursuant to the merger;
(i) "SIGNIFICANT SUBSIDIARY" means any subsidiary of the Company or
QRI, as the case may be, that would constitute a Significant Subsidiary of
such party within the meaning of Rule 1-02 of Regulation S-X of the SEC;
(j) "SUBSIDIARY" or "SUBSIDIARIES" of the Company, QRI, the Surviving
Corporation or any other person, means any corporation, partnership, joint
venture or other legal entity of which the Company, QRI, the Surviving
Corporation or any such other Person, as the case may be (either alone or
through or together with any other subsidiary), owns, directly or
indirectly, 50% or more of the stock or other equity interests the holders
of which
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are generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other legal
entity; and
(k) "TAX" or "TAXES" shall mean any and all taxes, charges, fees,
levies, assessments, duties or other amounts payable to any federal, state,
local or foreign taxing authority or agency, including, without limitation,
(i) income, franchise, profits, gross receipts, minimum, alternative
minimum, estimated, ad valorem, value added, sales, use, service, real or
personal property, capital stock, license, payroll, withholding,
disability, employment, social security, workers compensation, unemployment
compensation, utility, severance, excise, stamp, windfall profits, transfer
and gains taxes, (ii) customs, duties, imposts, charges, levies or other
similar assessments of any kind, and (iii) interest, penalties and
additions to tax imposed with respect thereto.
Section 9.04. HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 9.05. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
Section 9.06. ENTIRE AGREEMENT. This Agreement (together with the
Exhibits, the Company Disclosure Schedule and the QRI Disclosure Schedule)
constitutes the entire agreement of the parties, and supersede all prior
agreements and undertakings, both written and oral, among the parties, with
respect to the subject matter of this Agreement.
Section 9.07. ASSIGNMENT. This Agreement shall not be assigned by
operation of law or otherwise.
Section 9.08. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto and the beneficiaries of
the provisions of SECTION 6.11 herein, and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other person any right, benefit
or remedy of any nature whatsoever under or by reason of this Agreement.
Section 9.09. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right.
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Section 9.10. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law.
Section 9.11. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
Section 9.12. SPECIFIC PERFORMANCE. The parties hereby acknowledge and
agree that the failure of any party to this Agreement to perform the provisions
in accordance with their specific terms or to otherwise breach such provisions,
including its failure to take all actions as are necessary on its part to the
consummation of the merger, will cause irreparable injury to the other parties
to this Agreement for which damages, even if available, will not be an adequate
remedy. Accordingly, each of the parties hereto hereby consents to the issuance
of injunctive relief by any court of competent jurisdiction to compel
performance of any party's obligations, including an injunction to prevent
breaches, and to the granting by any such court of the remedy of specific
performance of the terms and conditions hereof.
Section 9.13. CONFIDENTIALITY AGREEMENT.
(a) Each party hereto agrees that all Confidential Information (as
defined below) received by such party (the "Receiving Party") from the any
other party hereto (the "Disclosing Party") shall be kept confidential by
the receiving party and shall not be disclosed by the receiving party in
any manner whatsoever; provided, however, that (i) any of such Confidential
Information may be disclosed to such directors, (and, in the case of QRI,
its stockholders) officers, employees, and authorized representatives
(including without limitation attorneys, accountants, consultants, bankers,
and financial advisors) of the receiving party (collectively, the
"Receiving Party's Representatives") as need to know such information for
the purpose of evaluating the merger (it being understood that such
receiving party's representatives shall be informed by the receiving party
of the confidential nature of such information and shall be required to
treat such information confidentially), (ii) any disclosure of Confidential
Information may be made to the extent to which the disclosing party
consents in writing, (iii) Confidential Information may be disclosed by the
receiving party or any receiving party's representatives to the extent
that, in the opinion of counsel for the receiving party or such receiving
party's representatives is legally compelled to do so, provided that, prior
to making such disclosure, the party being legally compelled to disclose
such information advises and consults with the disclosing party regarding
such disclosure and provided further that the party being legally compelled
to disclose such information discloses only that portion of the
Confidential Information as is legally required, and (iv) any of such
Confidential Information may be disclosed to any banks or other financial
institutions or other prospective investors that may provide Financing if
such banks or other financial institutions or other prospective investors
agree to comply with the provisions of this Section. The term "Confidential
Information", as used herein, means all information (irrespective of the
form of communication) obtained by or on behalf of a receiving party from a
disclosing party or its representatives, other than information which
(i) was or becomes generally available to the public other than as a result
of disclosure by the receiving party or any receiving party's
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representative, (ii) was or becomes available to the receiving party on
a nonconfidential basis prior to disclosure to the receiving party or
its representatives, or (iii) was or becomes available to the receiving
party from a source other than the disclosing party or its
representatives, provided that such source is not known by the receiving
party to be bound by a confidentiality agreement with the disclosing
party.
(b) If this Agreement is terminated, each receiving party shall
promptly return, and shall use their reasonable best efforts to cause all
receiving party representatives to promptly return, all Confidential
Information to the disclosing party without retaining any copies thereof,
provided that such portion of the Confidential Information as consists of
notes, compilations, analyses, reports, studies, or other documents
prepared by the receiving party or the receiving party's representatives
shall be destroyed.
Section 9.14. LIMITATION ON LIABILITY. NOTWITHSTANDING ANYTHING
CONTAINED HEREIN TO THE CONTRARY, NEITHER PARTY HERETO SHALL BE LIABLE HEREUNDER
FOR ANY LOSS OF PROFITS, INCIDENTAL OR CONSEQUENTIAL DAMAGES, EVEN IF THE OTHER
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THE SOLE REMEDIES
FOR BREACHES OF THIS AGREEMENT (OTHER THAN WILLFUL OR INTENTIONAL BREACHES)
SHALL BE AS PROVIDED IN SECTIONS 8.02 AND 9.12.
Section 9.15. DISPUTE RESOLUTION. Notwithstanding any other provisions
hereof, any disputes ("DISPUTES") arising out of or relating to this Agreement
shall be governed by the following procedures in the following order until
finally resolved:
(a) If a Dispute arises out of or relates to this Agreement, or the
breach thereof, within 30 days of receipt of receipt of written notice of a
Dispute, the parties hereto shall attempt in good faith to resolve such
dispute by negotiation among senior executives of their respective
companies who have authority to settle the controversy;
(b) If the Dispute cannot be settled through such negotiations within
the 30 day period set forth in Subsection (a), the parties agree to attempt
in good faith to settle the dispute by mediation within 20 days immediately
following the 30 day period set forth in Subsection (a) in Dallas, Texas
under the Commercial Mediation Rules of the American Arbitration
Association.
(c) If the Dispute cannot be settled by such mediation, the parties
agree to submit the dispute to binding arbitration in Dallas, Texas, under
Texas state and applicable Federal law upon receipt of a written demand for
arbitration by either of the parties setting forth the names of the other
party or parties. Within 15 days after such commencement, each party shall
select one person to act as arbitrator, and the two selected shall select a
third arbitrator within 10 days of appointment. If the arbitrators fail to
select a third arbitrator, then the American Arbitration Association shall
select the third arbitrator (such arbitrators that are selected pursuant to
this Section 9.15(c) shall be referred to herein as the "Arbitrators").
Except as otherwise provided herein, the Arbitrators shall have the
authority to award any remedy or relief a state or federal court of the
state of Texas could order or grant, including,
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without limitation, specific performance, the awarding of compensatory
damages, the issuance of an injunction and other equitable relief, but
excluding any punitive or consequential damages. If the remedy sought
is a monetary award, each party shall simultaneously, on the twentieth
business day following the commencement of the arbitration, propose to
the Arbitrators the amount that party believes should be awarded, and
with respect to compensatory damages, the Arbitrators shall make an
award in whichever of ht two amounts they deem most reasonable. The
Arbitrators' decision shall be issued with findings of fact and
conclusions of law and shall be non-appealable. Notwithstanding anything
in this subsection (c) to the contrary, the losing party in a Dispute
hereunder shall pay all reasonable legal fees and expenses incurred by
the prevailing party in connection with the arbitration.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
QUICKSILVER RESOURCES INC.
By: /s/ Glenn Darden
-----------------------------------
Name: Glenn Darden
---------------------------------
Title: Vice President
--------------------------------
MSR EXPLORATION LTD.
By: /s/ Howard Boals
-----------------------------------
Name: Howard Boals
---------------------------------
Title: Vice President
--------------------------------
<PAGE>
EXHIBIT A
Form of certificate of incorporation of Quicksilver Resources Inc.
<PAGE>
RESTATED
CERTIFICATE OF INCORPORATION
OF
QUICKSILVER RESOURCES INC.
Quicksilver Resources Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that this Restated certificate of
incorporation has been duly adopted in accordance with the provisions of
Sections 242 and 245 of the General Corporation Law of the State of Delaware.
This Restated certificate of incorporation restates, integrates, and amends the
provisions of the Corporation's certificate of incorporation as originally filed
on December 18, 1997, omitting such matters as may be omitted pursuant to the
provisions of Section 245(c) of the General Corporation Law of the State of
Delaware. Notice of the adoption of this Restated certificate of incorporation
has been given to all nonconsenting stockholders of the Corporation in
accordance with Section 228(d) of the Delaware General Corporation Law.
FIRST: The name of the Corporation is Quicksilver Resources Inc.
SECOND: The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered
agent at such address is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or
promoted is: To engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law
of Delaware.
FOURTH: The aggregate number of shares of all classes of stock which the
Corporation shall be authorized to issue is 50,000,000, divided
into the following: 40,000,000 shares of Common Stock, par value
of one cent ($0.01) per share (the "Common Stock") and 10,000,000
shares of Preferred Stock, par value of one cent ($0.01) per
share (the "Preferred Stock").
The board of directors of the Corporation is expressly vested
with authority to issue one or more series of Preferred Stock
having such voting powers, full or limited, or no voting powers,
and such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations
or restrictions thereof as are permitted by law and as shall be
stated and expressed in the resolution or resolutions providing
for the issue of each such series of stock adopted by the board
of directors.
FIFTH: The Corporation is to have perpetual existence.
<PAGE>
SIXTH: In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized:
To make, alter or repeal the by-laws of the Corporation.
SEVENTH: Elections of directors need not be by written ballot unless the
by-laws of the Corporation shall so provide.
Meetings of stockholders may be held within or without the State
of Delaware, as the by-laws may provide. The books of the
Corporation may be kept (subject to any provision contained in
the statutes) outside the State of Delaware at such place or
places as may be designated from time to time by the board of
directors or in the by-laws of the Corporation.
EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated certificate of
incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
NINTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director except for liability
(i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which
the director derived any improper personal benefit. Neither the
amendment nor repeal of this Article Nine, nor the adoption of
any provision of the Corporation's certificate of incorporation
inconsistent with this Article Nine, shall eliminate or reduce
the effect of this Article Nine in respect of any matter
occurring, or any cause of action, suit or claim that, but for
this Article Nine, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
TENTH: To the fullest extent permitted by applicable law, the
Corporation shall indemnify any officer or director as set forth
in the bylaws of the Corporation, pursuant to Section 145 of the
Delaware General Corporation Law.
In witness whereof the Corporation has caused this Restated certificate of
incorporation to be signed by its authorized officer this _____ day of
_____________, 1998.
2
<PAGE>
QUICKSILVER RESOURCES INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
THE STATE OF TEXAS
COUNTY OF TARRANT
This instrument was acknowledged before me on the _____ day of
______________, 1998, by _____________________, ____________________ of
Quicksilver Resources Inc., a Delaware corporation, on behalf of said
corporation.
----------------------------------
Notary Public, State of Texas
My Commission Expires:
- --------------------------
3
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EXHIBIT B
Form of Bylaws of Quicksilver Resources, Inc.
<PAGE>
BY-LAWS
QUICKSILVER RESOURCES INC.
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. OTHER OFFICES. The Corporation may also have offices at
such other place or places, both within and without the State of Delaware, as
the board of directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. TIME AND PLACE OF MEETINGS. All meetings of the
stockholders for the election of directors shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the board of directors and stated in the notice of the
meeting. Meetings of stockholders for any other purpose may be held at such
time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. ANNUAL MEETINGS. Annual meetings of stockholders,
commencing with the year 1998, shall be held on such date and at such time as
shall be designated from time to time by the board of directors and stated in
the notice of the meeting, at which meeting the stockholders shall elect by a
plurality vote a board of directors and transact such other business as may
properly be brought before the meeting.
Section 3. NOTICE OF ANNUAL MEETINGS. Written notice of the annual
meeting, stating the place, date, and hour of the meeting, shall be given to
each stockholder of record entitled to vote at such meeting not less than 10 or
more than 60 days before the date of the meeting.
Section 4. SPECIAL MEETINGS. Special meetings of the stockholders for
any purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called at any time by order of the board
of directors, the Chairman of the Board or the President. Such request shall
state the purpose or purposes of the proposed special meeting. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice.
Section 5. NOTICE OF SPECIAL MEETINGS. Written notice of a special
meeting, stating the place, date, and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be given to each stockholder of
record entitled to vote at such meeting not less than 10 or more than 60 days
before the date of the meeting.
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Section 6. QUORUM. Except as otherwise provided by statute or the
certificate of incorporation, the holders of stock having a majority of the
voting power of the stock entitled to be voted thereat, present in person or
represented by proxy, shall constitute a quorum for the transaction of business
at all meetings of the stockholders. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time without notice (other than
announcement at the meeting at which the adjournment is taken of the time and
place of the .adjourned meeting) until a quorum shall be present or represented.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than 30 days, or if after
the adjournment a new record date is fixed for the adjourned meeting, notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 7. ORGANIZATION. At each meeting of the stockholders, the
Chairman of the Board or the President, determined as provided in Article V of
these By-Laws, or if those officers shall be absent therefrom, another officer
of the Corporation chosen as chairman present in person or by proxy and entitled
to vote thereat, or if all the officers of the Corporation shall be absent
therefrom, a stockholder holding of record shares of stock of the Corporation so
chosen, shall act as chairman of the meeting and preside thereat. The
Secretary, or if he shall be absent from such meeting or shall be required
pursuant to the provisions of this Section 7 to act as chairman of such meeting,
the person (who shall be an Assistant Secretary, if an Assistant Secretary shall
be present thereat) whom the chairman of such meeting shall appoint, shall act
as secretary of such meeting and keep the minutes thereof.
Section 8. VOTING. Except as otherwise provided in the certificate of
incorporation, each stockholder shall, at each meeting of the stockholders, be
entitled to one vote in person or by proxy for each share of stock of the
Corporation held by him and registered in his name on the books of the
Corporation on the date fixed pursuant to the provisions of Section 5 of Article
VII of these By-Laws as the record date for the determination of stockholders
who shall be entitled to notice of and to vote at such meeting. Shares of its
own stock belonging to the Corporation or to another corporation, if a majority
of the shares entitled to vote in the election of directors of such other
corporation is held directly or indirectly by the Corporation, shall not be
entitled to vote. Any vote by stock of the Corporation may be given at any
meeting of the stockholders by the stockholder entitled thereto, in person or by
his proxy appointed by an instrument in writing subscribed by such stockholder
or by his attorney thereunto duly authorized and delivered to the Secretary of
the Corporation or to the secretary of the meeting; provided, however, that no
proxy shall be voted or acted upon after three years from its date, unless said
proxy shall provide for a longer period. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and unless otherwise made
irrevocable by law. At all meetings of the stockholders all matters, except
where other provision is made by law, the Certificate of incorporation, or these
By-Laws, shall be decided by the vote of a majority of the votes cast by the
stockholders present in person or by proxy and entitled to vote thereat, a
quorum being present. Unless demanded by a stockholder of the Corporation
present in person or by proxy at any meeting of the stockholders
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and entitled to vote thereat, or so directed by the chairman of the meeting,
the vote thereat on any question other than the election or removal of
directors need not be by written ballot. Upon a demand of any such
stockholder for a vote by written ballot on any question or at the direction
of such chairman that a vote by written ballot be taken on any question, such
vote shall be taken by written ballot. On a vote by written ballot, each
ballot shall be signed by the stockholder voting, or by his proxy, if there
be such proxy, and shall state the number of shares voted.
Section 9. LIST OF STOCKHOLDERS. It shall be the duty of the Secretary
or other officer of the Corporation who shall have charge of its stock
ledger, either directly or through another officer of the Corporation
designated by him or through a transfer agent appointed by the board of
directors, to prepare and make, at least 10 days before every meeting of the
stockholders, a complete list of the stockholders entitled to vote thereat,
arranged in alphabetical order, and showing the address of each stockholder
and the number of shares registered in the name of each stockholder. Such
list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at
least 10 days before said meeting, either at a place within the city where
said meeting is to be held, which place shall be specified in the notice of
said meeting, or, if not so specified, at the place where said meeting is to
be held. The list shall also be produced and kept at the time and place of
said meeting during the whole time thereof, and may be inspected by any
stockholder of record who shall be present thereat. The stock ledger shall
be the only evidence as to who are the stockholders entitled to examine the
stock ledger, such list or the books of the Corporation, or to vote in person
or by proxy at any meeting of stockholders.
Section 10. INSPECTORS OF VOTES. At each meeting of the stockholders,
the chairman of such meeting may appoint two Inspectors of Votes to act
thereat, unless the board of directors shall have theretofore made such
appointments. Each Inspector of Votes so appointed shall first subscribe an
oath or affirmation faithfully to execute the duties of an Inspector of Votes
at such meeting with strict impartiality and according to the best of his
ability. Such Inspectors of Votes, if any, shall take charge of the ballots,
if any, at such meeting and, after the balloting thereat on any question,
shall count the ballots cast thereon and shall make a report in writing to
the secretary of such meeting of the results thereof. An Inspector of Votes
need not be a stockholder of the Corporation, and any officer of the
Corporation may be an Inspector of Votes on any question other than a vote
for or against his election to any position with the Corporation or on any
other question in which he may be directly interested.
Section 11. ACTIONS WITHOUT A MEETING. Any action required to be taken at
any annual or special meeting of stockholders of the Corporation, or any action
which may by taken at any annual or special meeting of stockholders, may be
taken without a meeting, without prior notice, and without a vote if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereat were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
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ARTICLE III
BOARD OF DIRECTORS
Section 1. POWERS. The business and affairs of the Corporation shall be
managed by its board of directors, which shall have and may exercise all such
powers of the Corporation and do all such lawful acts and things as are not
by statute, the certificate of incorporation, or these By-Laws directed or
required to be exercised or done by the stockholders.
Section 2. NUMBER, QUALIFICATION, AND TERM OF OFFICE. The number of
directors which shall constitute the whole board of directors shall not be
less than one (1) or more than eight (8). Within the limits above specified,
the number of directors which shall constitute the whole board of directors
shall be determined by resolution of the board of directors or by the
stockholders at any annual or special meeting or otherwise pursuant to action
of the stockholders. Directors need not be stockholders. The directors shall
be elected at the annual meeting of the stockholders, except as provided in
Sections 4 and 5 of this Article III, and each director elected shall hold
office until the annual meeting next after his election and until his
successor is duly elected and qualified, or until his death or retirement or
until he resigns or is removed in the manner hereinafter provided. Directors
shall be elected by a plurality of the votes of the shares present in person
or represented by proxy and entitled to vote on the election of directors at
any annual or special meeting of stockholders. Such election shall be by
written ballot.
Section 3. RESIGNATIONS. Any director may resign at any time by giving
written notice of his resignation to the Corporation. Any such resignation
shall take effect at the time specified therein, or if the time when it shall
become effective shall not be specified therein, then it shall take effect
immediately upon its receipt by the Secretary. Unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
Section 4. REMOVAL OF DIRECTORS. Any director may be removed, either
with or without cause, at any time, by the affirmative vote by written ballot
of a majority in voting interest of the stockholders of record of the
Corporation entitled to vote, given at an annual meeting or at a special
meeting of the stockholders called for that purpose or otherwise. The
vacancy in the board of directors caused by any such removal shall be filled
by the stockholders at such meeting or, if not so filled, by the board of
directors as provided in Section 5 of this Article III.
Section 5. VACANCIES. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the
annual meeting next after their election and until their successors are elected
and qualified, unless sooner displaced. If there are no directors in office,
then an election of directors may be held in the manner provided by statute.
Section 6. PLACE OF MEETINGS. The board of directors of the
Corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
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Section 7. ANNUAL MEETINGS. The first meeting of each newly elected
board of directors shall be held immediately following the annual meeting of
stockholders, and no notice of such meeting to the newly elected directors
shall be necessary in order legally to constitute the meeting, provided a
quorum shall be present. In the event such meeting is not held immediately
following the annual meeting of stockholders, the meeting may be held at such
time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the board of directors, or as shall be
specified in a written waiver signed by all of the directors.
Section 8. REGULAR MEETINGS. Regular meetings of the board of
directors may be held without notice at such time and at such place as shall
from time to time be determined by the board of directors.
Section 9. SPECIAL MEETINGS; NOTICE. Special meetings of the board of
directors may be called by the Chairman of the Board, the President, or the
Secretary on 24 hours' notice to each director, either personally or by
telephone or by mail, telegraph, telex, cable, wireless, or other form of
recorded communication; special meetings shall be called by the Chairman of
the Board, the President, or the Secretary in like manner and on like notice
on the written request of two directors. Notice of any such meeting need not
be given to any director, however, if waived by him in writing or by
telegraph, telex, cable, wireless, or other form of recorded communication,
or if he shall be present at such meeting.
Section 10. QUORUM AND MANNER OF ACTING. At all meetings of the board
of directors, a majority of the directors at the time in office (but not less
than one-third of the whole board of directors) shall constitute a quorum for
the transaction of business, and the act of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
board of directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be
present at any meeting of the board of directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 11. REMUNERATION. Unless otherwise expressly provided by
resolution adopted by the board of directors, none of the directors shall, as
such, receive any stated remuneration for his services; but the board of
directors may at any time and f rom time to time by resolution provide that a
specified sum shall be paid to any director of the Corporation, either as his
annual remuneration as such director or member of any committee of the board
of directors or as remuneration for his attendance at each meeting of the
board of directors or any such Committee. The board of directors may also
likewise provide that the corporation shall reimburse each director for any
expenses paid by him on account of his attendance at any meeting. Nothing in
this Section 11 shall be construed to preclude any director f rom serving the
Corporation in any other capacity and receiving remuneration therefor.
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COMMITTEES OF DIRECTORS
Section 12. EXECUTIVE COMMITTEE; HOW CONSTITUTED AND POWERS. The board
of directors, by majority vote of the whole board of directors, may designate
an Executive Committee consisting of three of the directors of the
Corporation. Subject to the provisions of Section 141 of the Delaware General
Corporation Law, the Executive Committee shall have and may exercise all the
powers and authority of the board of directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it. The board of
directors shall have the power at any time, by majority vote of the whole
board of directors, to change the membership of the Executive Committee, to
fill all vacancies in it, or to dissolve it, either with or without cause.
Section 13. ORGANIZATION. The Chairman of the Executive Committee, to
be selected by the board of directors, shall act as chairman at all meetings
of the Executive Committee and the Secretary shall act as secretary thereof.
In case of the absence from any meeting of the Executive Committee of the
Chairman of the Executive Committee or the Secretary, the Executive Committee
may appoint a chairman or secretary, as the case may be, of the meeting.
Section 14. MEETINGS. Regular meetings of the Executive Committee, of
which no notice shall be necessary, may be held on such days and at such places,
within or without the State of Delaware, as shall be fixed by resolution adopted
by a majority of the Executive Committee and communicated in writing to all its
members. Special meetings of the Executive Committee shall be held whenever
called by the Chairman of the Executive Committee or a majority of the members
of the Executive Committee then in office. Notice of each special meeting of
the Executive Committee shall be given by mail, telegraph, telex, cable,
wireless, or other form of recorded communication or be delivered personally or
by telephone to each member of the Executive Committee not later than the day
before the day on which such meeting is to be held. Notice of any such meeting
need not be given to any member of the Executive Committee, however, if waived
by him in writing or by telegraph, telex, cable, wireless, or other form of
recorded communication, or if he shall be present at such meeting; and any
meeting of the Executive Committee shall be a legal meeting without any notice
thereof having been given, if all the members of the Executive Committee shall
be present thereat. Subject to the provisions of this Article III, the
Executive Committee, by resolution adopted by a majority of the whole Executive
Committee, shall fix its own rules of procedure.
Section 15. QUORUM AND MANNER OF ACTING. A majority of the Executive
Committee shall constitute a quorum for the transaction of .business,, and the
act of a majority of those present at a meeting thereof at which a quorum is
present shall be the act of the Executive Committee.
Section 16. OTHER COMMITTEES. The board of directors may, by
resolution or resolutions passed by a majority of the whole board of
directors, designate one or more other committees consisting of one or more
directors of the Corporation, which, to the extent provided in said
resolution or resolutions, shall have and may exercise, subject to the
provisions of Section 141 of the General Corporation Law of the State of
Delaware, the certificate of incorporation, and these By-Laws, the powers and
authority of the board of directors in the management of the business
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and affairs of the Corporation, and shall have the power to authorize the
seal of the Corporation to be affixed to all papers which may require it; but
no such committee shall have the power to fill vacancies in the board of
directors, the Executive Committee, or any other committee or in their
respective membership, to appoint or remove officers of the Corporation, or
to authorize the issuance of shares of the capital stock of the Corporation,
except that such a committee may, to the extent provided in said resolutions,
grant and authorize options and other rights with respect to the common stock
of the Corporation pursuant to and in accordance with any plan approved by
the board of directors. Such committee or committees shall have such name or
names as may be determined from time to time by resolution adopted by the
board of directors. A majority of all the members of any such E committee may
determine its action and fix the time and place of its meetings and specify
what notice thereof, if any, shall be given, unless the board of directors
shall otherwise provide. The board of directors shall have power to change
the members of any such committee at any time to fill vacancies, and to
discharge any such committee, either with or without cause, at any time.
Section 17. ALTERNATE MEMBER OF COMMITTEES. The board of directors may
designate one or more directors as alternate members of the Executive
Committee or any other committee, who may replace any absent or disqualified
member at any meeting of the committee, or if none be so appointed, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously
appoint another member of the board of directors to act at the meeting in the
place of any such absent or disqualified member.
Section 18. MINUTES OF COMMITTEES. Each committee shall keep regular
minutes of its meetings and proceedings and report the same to the board of
directors at the next meeting thereof.
GENERAL
Section 19. ACTIONS WITHOUT A MEETING. Unless otherwise restricted by
the certificate of incorporation or these By-Laws, any action required or
permitted to be taken at any meeting of the board of directors or of any
committee thereof may be taken without a meeting, if all members of the board
of directors or committee, as the case may be, consent thereto in writing and
the writing or writings are filed with the minutes of proceedings of the
board of directors or the committee.
Section 20. PRESENCE AT MEETINGS BY MEANS OF COMMUNICATIONS EQUIPMENT.
Members of the board of directors, or of any committee designated by the
board of directors, may participate in a meeting of the board of directors or
such committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting conducted pursuant to this Section
20 shall constitute presence in person at such meeting.
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ARTICLE IV
NOTICES
Section 1. TYPE OF NOTICE. Whenever, under the provisions of any
applicable statute, the certificate of incorporation, or these By-Laws,
notice is required to be given to any director or stockholder, it shall not
be construed to mean personal notice, but such notice may be given in
writing, in person or by mail, addressed to such director or stockholder, at
his address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail. Notice to directors
may also be given in any manner permitted by Article III hereof and shall be
deemed to be given at the time when first transmitted by the method of
communication so permitted.
Section 2. WAIVER OF NOTICE. Whenever any notice is required to be
given under the provisions of any applicable statute, the certificate of
incorporation, or these By-Laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto, and transmission of a
waiver of notice by a director or stockholder by mail, telegraph, telex,
cable, wireless, or other form of recorded communication may constitute such
a waiver.
Section 3. WHEN NOTICE UNNECESSARY. Whenever, under the provisions of
the Act, the certificate of incorporation or these bylaws, any notice is
required to be given to any stockholder, such notice need not be given to the
stockholder if:
(a) notice of two consecutive annual meetings and all notices of meetings
held during the period between those annual meetings, if any, or
(b) all (but in no event less than two) payments (if sent by first class
mail) of distributions or interest on securities during a 12-month
period, have been mailed to that person, addressed at his address as
shown on the records of the Corporation, and have been returned
undeliverable. Any action or meeting taken or held without notice to
such a person shall have the same force and effect as if the notice
had been duly given. If such a person delivers to the Corporation a
written notice setting forth his then current address, the requirement
that notice be given to that person shall be reinstated.
ARTICLE V
OFFICERS
Section 1. ELECTED AND APPOINTED OFFICERS. The elected officers of the
Corporation shall be a President, one or more Vice Presidents, with or
without such descriptive titles as the board of directors shall deem
appropriate, a Secretary, and a Treasurer, and, if the board of directors so
elects, a Chairman of the Board (who shall be a director) and a Controller.
The board of directors or the Executive Committee of the board of directors
by resolution also may appoint one or more Assistant Vice Presidents,
Assistant Treasurers, Assistant Secretaries, Assistant
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Controllers, and such other officers and agents as from time to time may
appear to be necessary or advisable in the conduct of the affairs of the
Corporation.
Section 2. TIME OF ELECTION OR APPOINTMENT. The board of directors at
its annual meeting shall elect or appoint, as the case may be, the officers
to fill the positions designated in or pursuant to Section I of this Article
V. Officers of the Corporation may also be elected or appointed, as the case
may be, at any other time.
Section 3. SALARIES OF ELECTED OFFICERS. The salaries of all elected
officers of the Corporation shall be fixed by the board of directors.
Section 4. TERM. Each officer of the Corporation shall hold his office
until his successor is duly elected or appointed and qualified or until his
earlier resignation or removal. Any officer may resign at any time upon
written notice to the Corporation. Any officer elected or appointed by the
board of directors or the Executive Committee may be removed at any time by
the affirmative vote of a majority of the whole board of directors. Any
vacancy occurring in any office of the Corporation by death, resignation,
removal, or otherwise may be filled by the board of directors or the
appropriate committee thereof.
Section 5. DUTIES OF THE CHAIRMAN OF THE BOARD. The Chairman of the
Board, if one be elected, shall be the chief executive officer of the
Corporation and shall have all of the powers and duties as are provided for
the chief executive officer of the Corporation as specified in Section 6
below, in the absence of any person designated and elected to be the Chairman
of the Board, and shall preside when present at all meetings of the board of
directors and at all meetings of the stockholders. In addition, he shall
advise and counsel the President and other officers of the Corporation, and
shall exercise such powers and perform such duties as shall be assigned to or
required of him from time to time by the board of directors.
Section 6. DUTIES OF THE PRESIDENT. In the absence of any person
designated and elected to be the Chairman of the Board, The President shall
be the chief executive officer of the Corporation and, subject to the
provisions of these By-Laws, shall have the general supervision of the
affairs of the Corporation and shall have general and active control of all
of its business. He shall preside, when present, at all meetings of
stockholders and all meetings of the board of directors, except when the
Chairman of the Board presides and as may otherwise be provided by statute or
by the By-Laws. The chief executive officer shall see that all orders and
resolutions of the board of directors and the stockholders are carried into
effect. The chief executive officer shall have general authority to execute
bonds, deeds, and contracts in the name of the Corporation and affix the
corporate seal thereto; to sign stock certificates; to cause the employment
or appointment of such employees and agents of the Corporation as the proper
conduct of operations may require, and to fix their compensation, subject to
the provisions of the By-Laws; to remove or suspend any employee or agent who
shall have been employed or appointed under his authority or under authority
of an officer subordinate to him; to suspend for cause, pending final action
by the authority which shall have elected or appointed him, any officer
subordinate to the chief executive officer; and, in general, to exercise all
powers and authority usually appertaining to the chief executive officer of a
corporation and except as otherwise provided in these By-Laws. The
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President shall advise and counsel the Chairman of the Board and the officers
of the Corporation, and shall exercise such powers and perform such duties
as shall be assigned to or required of him from time to time by the board of
directors and the Chairman of the Board.
Section 7. DUTIES OF VICE PRESIDENTS. In the absence of the President
or in the event of his inability or refusal to act, the Vice President (or in
the event there be more than one Vice President, the Vice Presidents in the
order designated, or in the absence of any designation, then in the order of
their election) shall perform the duties of the President and, when so
acting, shall have all the powers of and be subject to all the restrictions
upon the President. The Vice Presidents shall perform such other duties and
have such other powers as the board of directors or the President may from
time to time prescribe.
Section 8. DUTIES OF ASSISTANT VICE PRESIDENTS. In the absence of a
Vice President or in the event of his inability or refusal to act, the
Assistant Vice President (or in the event there shall be more than one, the
Assistant Vice Presidents in the order designated by the board of directors,
or in the absence of any designation, then in the order of their appointment)
shall perform the duties and exercise the powers of that Vice President, and
shall perform such other duties and have such other powers as the board of
directors, the President, or the Vice President under whose supervision he is
appointed may from time to time prescribe.
Section 9. DUTIES OF THE SECRETARY. The Secretary shall attend all
meetings of the board of directors and all meetings of the stockholders and
record all the proceedings of the meetings of the corporation and of the
board of directors in a book to be kept for that purpose and shall perform
like duties for the Executive Committee or other standing committees when
required. He shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the board of directors, and shall
perform such other duties as may be prescribed by the board of directors or
the President, under whose supervision he shall be. He shall have custody of
the corporate seal of the Corporation, and he, or an Assistant Secretary,
shall have authority to affix the same to any instrument requiring it, and
when so affixed, it may be attested by his signature or by the signature of
such Assistant Secretary. The board of directors may give general authority
to any other officer to affix the seal of the Corporation and to attest the
affixing by his signature. The Secretary shall keep and account for all
books, documents, papers, and records of the Corporation, except those for
which some other officer or agent is properly accountable. He shall have
authority to sign stock certificates and shall generally perform all the
duties usually appertaining to the office of the secretary of a corporation.
Section 10. DUTIES OF ASSISTANT SECRETARIES. In the absence of the
Secretary or in the event of his inability or refusal to act, the Assistant
Secretary (or, if there shall be more than one, the Assistant Secretaries in
the order designated by the board of directors, or in the absence of any
designation, then in the order of their appointment) shall perform the duties
and exercise the powers of the Secretary and shall perform such other duties
and have such other powers as the board of directors, the President, or the
Secretary may from time to time prescribe.
Section 11. DUTIES OF THE TREASURER. The Treasurer shall have the
custody of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in
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books belonging to the Corporation and shall deposit all moneys and other
valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the board of directors. He shall
disburse the funds of the Corporation as may be ordered by the board of
directors, taking proper vouchers for such disbursements, and shall, render
to the President and the board of directors, at its regular meetings or when
the board of directors so requires, an account of all his transactions as
Treasurer and of the financial condition of the Corporation. If required by
the board of directors, he shall give the Corporation a bond (which shall be
renewed every six years) in such sum and with such surety or sureties as
shall be satisfactory to the board of directors for the faithful performance
of the duties of his office and for the restoration to the Corporation, in
case of his death, resignation, retirement, or removal from office, of all
books, papers, vouchers, money, and other property of whatever kind in his
possession or under his control belonging to the Corporation. The Treasurer
shall be under the supervision of the Vice President in charge of finance, if
one is so designated, and he shall perform such other duties as may be
prescribed by the board of directors, the President, or any such Vice
President in charge of finance.
Section 12. DUTIES OF ASSISTANT TREASURERS. The Assistant Treasurer or
Assistant Treasurers shall assist the Treasurer, and in the absence of the
Treasurer or in the event of his inability or refusal to act, the Assistant
Treasurer (or in the event there shall be more than one, the Assistant
Treasurers in the order designated by the board of directors, or in the
absence of any designation, then in the order of their appointment) shall
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the board of directors, the
President, or the Treasurer may from time to time prescribe.
Section 13. DUTIES OF THE CONTROLLER. The Controller, if one is
appointed, shall have supervision of the accounting practices of the
Corporation and shall prescribe the duties and powers of any other accounting
personnel of the Corporation. He shall cause to be maintained an adequate
system of financial control through a program of budgets and interpretive
reports. He shall initiate and enforce measures and procedures whereby the
business of the Corporation shall be conducted with the maximum efficiency
and economy. If required, he shall prepare a monthly report covering the
operating results of the Corporation. The Controller shall be under the
supervision of the Vice President in charge of finance, if one is so
designated, and he shall perform such other duties as may be prescribed by
the board of directors, the President, or any such Vice President in charge
of finance.
Section 14. DUTIES OF ASSISTANT CONTROLLER. The Assistant Controller
or Assistant Controllers shall assist the Controller, and in the absence of
the Controller or in the event of his inability or refusal to act, the
Assistant Controller (or, if there shall be more than one, the Assistant
Controllers in the order designated by the board of directors, or in the
absence of any designation, then in the order of their appointment) shall
perform the duties and exercise the powers of the Controller and perform such
other duties and have such other powers as the board of directors, the
President, or the Controller may from time to time prescribe.
11
<PAGE>
ARTICLE VI
INDEMNIFICATION
Section 1. ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative (other than an action by or in the right of the Corporation),
by reason of the fact that he is or was a director, officer, employee, or
agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise (all of
such persons being hereafter referred to in this Article as a "Corporate
Functionary"), against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred by him
in connection with such action, suit, or proceeding, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order,
settlement, or conviction, or upon a plea of nolo contenders or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the Corporation or, with respect to
any criminal action or proceeding, that he had reasonable cause to believe
that his conduct was unlawful.
Section 2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending, or completed action or suit by
or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a Corporate Functionary against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Corporation, except that no indemnification
shall be made in respect of any claim, issue, or matter as to which such
person shall have been adjudged to be liable to the Corporation, unless and
only to the extent that the Court of Chancery or the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 3. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any
indemnification under Sections 1 or 2 of this Article VI (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the Corporate Functionary
is proper in the circumstances because he has met the applicable standard of
conduct set forth in Sections 1 or 2 of this Article VI. Such determination
shall be made (i) by the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit, or
proceeding, or (ii) if such a quorum is not obtainable, or, even if
obtainable if a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (iii) by the stockholders.
12
<PAGE>
Section 4. RIGHT TO INDEMNIFICATION. Notwithstanding the other
provisions of this Article VI, to the extent that a Corporate Functionary has
been successful on the merits or otherwise in defense of any action, suit, or
proceeding referred to in Sections 1 or 2 of this Article VI (including the
dismissal of a proceeding without prejudice or the settlement of a proceeding
without admission of liability), or in defense of any claim, issue, or,
matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
Section 5. PREPAID EXPENSES. Expenses incurred in defending a civil or
criminal action, suit, or proceeding shall be paid by the corporation in
advance of the final disposition of such action, suit, or proceeding, upon
receipt of an undertaking by or on behalf of the Corporate Functionary to
repay such amount if it shall ultimately be determined he is not entitled to
be indemnified by the Corporation as authorized in this Article VI.
Section 6. RIGHT TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON
APPLICATION. Any indemnification under Sections 2, 3 and 4, or any .advance
under Section 5, of this Article VI shall be made promptly upon, and in any
event within 60 days after, the written request of the Corporate Functionary,
unless with respect to applications under sections 2, 3 or 5 of this Article
VI, a determination is reasonably and promptly made by the board of directors
by majority vote of a quorum consisting of disinterested directors that such
Corporate Functionary acted in a manner set forth in such Sections as to
justify the corporation in not indemnifying or making an advance of expenses
to the corporate Functionary. If no quorum of disinterested directors is
obtainable, the board of directors shall promptly direct that independent
legal counsel shall decide whether the Corporate Functionary acted in a
manner set forth in such Sections as to justify the Corporation's not
indemnifying or making an advance of expenses to the Corporate Functionary.
The right to indemnification or advance of expenses granted by this Article
VI shall be enforceable by the Corporate Functionary in any court of
competent jurisdiction if the board of directors or independent legal counsel
denies his claim, in whole or in part, or if no disposition of such claim is
made within 60 days. The expenses of the Corporate Functionary incurred in
connection with successfully establishing his right to indemnification, in
whole or in part, in any such proceeding shall also be indemnified by the
Corporation.
Section 7. OTHER RIGHTS AND REMEDIES. The indemnification and
advancement of expenses or provided by or granted pursuant to this Article VI
shall not be deemed exclusive of any other rights to which any person seeking
indemnification and advancement of expenses or may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased
to be a Corporate Functionary and shall inure to the benefit of the heirs,
executors, and administrators of such a person. Any repeal or modification
of these by-laws or relevant provisions of the Delaware General Corporation
Law and other applicable law, if any, shall not affect any then existing
rights of a Corporate Functionary to indemnification or advancement of
expenses.
13
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Section 8. INSURANCE. Upon resolution passed by the board of
directors, the Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article VI.
Section 9. MERGERS. For purposes of this Article VI, references to
"the Corporation" shall include, in addition to the resulting or surviving
corporation, constituent corporations (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, or agents, so .that any person who is or was
a director, officer, employee, or agent of such constituent corporation or is
or was serving at the request of such constituent corporation as a director,
officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise shall stand in the same position under
the provisions of this Article VI with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if
its separate existence had continued.
Section 10. SAVINGS PROVISION. If this Article VI or any portion
hereof shall be invalidated on any ground by a court of competent
Jurisdiction, the Corporation shall nevertheless indemnify each Corporate
Functionary as to expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement with respect to any action, suit, proceeding, or
investigation, whether civil, criminal, or administrative, including a grand
jury proceeding or action or suit brought by or in the right of the
Corporation, to the full extent permitted by any applicable portion of this
Article VI that shall not have been invalidated.
ARTICLE VII
CERTIFICATES REPRESENTING STOCK
Section 1. RIGHT TO CERTIFICATE. Every holder of stock in the
Corporation shall be entitled to have a certificate, signed by, or in the
name of the Corporation by, the Chairman of the Board, the President, or a
Vice President and by the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by him in the Corporation.
If the Corporation shall be authorized to issue more than one class of stock
or more than one series of any class, the powers, designations, preferences,
and relative, participating, optional, or other special rights of each class
of stock or series thereof and the qualifications, limitations, or
restrictions of such preferences or rights shall be set forth in full or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock; provided, that, except as
otherwise provided in Section 202 of the General Corporation Law of the State
of Delaware; in lieu of the foregoing requirements, there may be set forth on
the face or back of the certificate which the Corporation shall issue to
represent such class or series of stock a statement that the Corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences, and relative, participating, optional, or other
14
<PAGE>
special rights of each class of stock or series thereof and the
qualifications, limitations, or restrictions of such preferences or rights.
Section 2. FACSIMILE SIGNATURES. Any of or all the signatures on the
certificate may be facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or
registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent,
or registrar at the date of issue.
Section 3. NEW CERTIFICATES. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation and alleged to have been
lost, stolen, or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate of stock to be lost, stolen, or
destroyed. When authorizing such issue of a new certificate or certificates,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate or certificates, or his legal representative, to advertise the
same in such manner as it shall require or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen, or destroyed or the issuance of such new certificate.
Section 4. TRANSFERS. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation, or authority to
transfer, it shall be the duty of the Corporation, subject to any proper
restrictions on transfer, to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction upon its
books.
Section 5. RECORD DATE. The board of directors may fix in advance a
date, not preceding the date on which the resolution fixing the record date
is adopted, and (i) not more than 60 days nor less than 10 days preceding the
date of any meeting of stockholders, as a record date for the determination
of the stockholders entitled to notice of, and to vote at, any such meeting
and any adjournment thereof, (ii) not more than 10 days after the date on
which the resolution fixing the record date is adopted, as a record date in
connection with obtaining a consent of the stockholders in writing to
corporate action without a meeting, or (iii) not more than 60 days before the
date for payment of any dividend or distribution, or the date for the
allotment of rights, or the date when any change, or conversion or exchange
of capital stock shall go into effect, or the date on which any other lawful
action shall be taken, as the record date for determining the stockholders
entitled to receive payment of any such dividend or distribution, or to
receive any such allotment of rights, or to exercise the rights in respect of
any such change, conversion or exchange of capital stock or other lawful
action of the corporation, and in such case such stockholders and only such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to such notice of, and to vote at, any such meeting and any
adjournment thereof (provided, however, that the board of directors may fix a
new record date for an adjourned meeting), or to give such consent, or to
receive payment of such dividend or distribution, or to receive such
allotment of rights, or to exercise such rights, as the case may be,
notwithstanding any transfer of any stock on the books of the corporation
after any such record date fixed as aforesaid.
15
<PAGE>
Section 6. REGISTERED STOCKHOLDERS. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not provided by the laws of the State of Delaware.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock of the
corporation, if any, subject to the provisions of the certificate of
incorporation, may be declared by the board of directors (but not any
committee thereof) at any regular meeting, pursuant to law. Dividends may be
paid in cash, in property, or in shares of the capital stock, subject to the
provisions of the certificate of incorporation.
Section 2. RESERVES. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the board of directors from time to time, in their absolute
discretion, thinks proper as a reserve or reserves to meet contingencies, or
for equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the board of directors shall think
conducive to the interest of the Corporation, and the board of directors may
modify or abolish any such reserve in the manner in which it was created.
Section 3. ANNUAL STATEMENT. The board of directors shall present at
each annual meeting, and at any special meeting of the stockholders when
called for by vote of the stockholders, a full and clear statement of the
business and condition of the Corporation.
Section 4. CHECKS. All checks or demands for money and promissory
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the board of directors may f rom time to time
prescribe.
Section 5. FISCAL YEAR. The fiscal year of the Corporation shall be
determined by the board of directors.
Section 6. CORPORATE SEAL. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization, and the
word "Delaware." The seal may be used by causing it or a facsimile thereof
to be impressed, affixed, reproduced, or otherwise.
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ARTICLE IX
AMENDMENTS
These By-Laws may be altered, amended, or repealed or new By-Laws may be
adopted by the stockholders or by the board of directors at any regular
meeting of the stockholders or the board of directors or at any special
meeting of the stockholders or the board of directors if notice of such
alteration, amendment, repeal, or adoption of new By-Laws be contained in the
notice of such special meeting.
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EXHIBIT C
Form of Affiliate Agreement<PAGE>
<PAGE>
COMPANY AFFILIATE AGREEMENT
AGREEMENT (hereinafter referred to as the "Agreement") entered into as of
_________, 1998, between Quicksilver Resources Inc., a Delaware corporation
(hereinafter referred to as the "Acquiror"), and the stockholder (the
"Stockholder") of MSR Exploration Ltd., a Delaware corporation (hereinafter
referred to as the "Company").
W I T N E S S E T H:
WHEREAS, the Acquiror and the Company, propose to enter, or have entered
into an Agreement and Plan of Merger and Reorganization expected to be dated, or
dated _______, 1998 (hereinafter referred to as the "merger agreement"),
pursuant to which the Company will be merged into Acquiror (the "merger"); and
WHEREAS, upon the consummation of the merger and in connection therewith,
the Stockholder will become the owner of shares of Common Stock of Acquiror
(hereinafter referred to as the "Acquiror Shares").
NOW, THEREFORE, in consideration of the promises and the mutual agreements,
provisions and covenants set forth in the merger agreement, and hereinafter in
this Agreement, it is hereby agreed as follows:
1. The Stockholder hereby agrees that:
(a) It or he may be deemed to be an "affiliate" of the Company within
the meaning of Rule 145 under the Securities Act of 1933, as amended (the
"Securities Act"), of the Commission.
(b) He agrees not to offer, sell, pledge, transfer or otherwise
dispose of any of the Acquiror Shares unless at that time either:
(i) such transaction shall be permitted pursuant to the
provisions of Rule 145(d) under the Securities Act;
(ii) counsel representing the Stockholder, satisfactory to the
Acquiror, shall have advised the Acquiror in a written opinion letter
satisfactory to the Acquiror and the Acquiror's counsel and upon which the
Acquiror and its counsel may rely, that no registration under the Securities Act
would be required in connection with the proposed sale, transfer or other
disposition;
(iii) a registration statement under the Securities Act
covering the Acquiror Shares proposed to be sold, transferred or otherwise
disposed of, describing the manner and terms of the proposed sale, transfer
or other disposition, and containing a current prospectus under the
Securities Act, shall be effective under the Securities Act; or
(iv) an authorized representative of the Commission shall have
rendered written advice to the Stockholder (sought by the Stockholder or counsel
to the Stockholder, with a copy thereof and of all other related communications
delivered to the Acquiror) to the effect that the
<PAGE>
Commission would take no action, or that the staff of the Commission would
not recommend that the Commission take action, with respect to the proposed
sale, transfer or other disposition if consummated.
The Stockholder understands that the Acquiror is under no obligation to
register the sale, transfer or other disposition of the Acquiror Common Stock by
the Stockholder on its behalf or to take any other action necessary in order to
make compliance with an exemption from registration available.
(c) Until a public sale of the Acquiror Shares represented by such
certificate has been made in compliance with one of the alternative conditions
set forth in the subparagraphs of paragraph (b) of this Section 1, all
certificates representing the Acquiror Shares deliverable to the Stockholder
pursuant to the merger agreement and in connection with the merger and any
certificates subsequently issued with respect thereto or in substitution
therefor shall bear a legend substantially as follows:
"The shares represented by this certificate may not be
offered, sold, pledged, transferred or otherwise disposed of
except in compliance with paragraph (d) of Rule 145
promulgated by the Securities and Exchange Commission."
Acquiror, at its discretion, may cause stop transfer orders to be placed with
its transfer agent(s) with respect to the certificates for the Acquiror Shares
but not as to the certificates for any part of the Acquiror Shares as to which
said legend is no longer appropriate as hereinabove provided.
(d) The Stockholder will observe and comply with the Securities Act
and the General Rules and Regulations thereunder, as now in effect and as from
time to time amended and including those hereafter enacted or promulgated, in
connection with any offer, sale, pledge or transfer or other disposition of the
Acquiror Shares or any part thereof.
2. From and after the Effective Time of the merger and for so long as
necessary in order to permit the Stockholder to sell the Acquiror Shares
pursuant to Rule 145 and, to the extent applicable, Rule 144 under the
Securities Act, Acquiror will use its best efforts to file on a timely basis all
reports required to be filed by it pursuant to Section 13 of the Securities
Exchange Act of 1934, referred to in paragraph (c)(1) of Rule 144 under the
Securities Act (or, if applicable, Acquiror will use its best efforts to make
publicly available the information regarding itself referred to in paragraph
(c)(2) of Rule 144) in order to permit the Stockholder to sell, pursuant to the
terms and conditions of Rule 145 and the applicable provisions of Rule 144, the
Acquiror Shares.
3. The Stockholder agrees that it or he will not perfect any dissenter's
appraisal rights under the certificate of incorporation or the Appraisal
Provisions (as defined in the merger agreement)
4. The Stockholder represents that it or he knows of no plan (written or
oral) pursuant to which the stockholders of the Company intend to sell or
otherwise dispose of any Acquiror Shares to be received by them pursuant to the
merger agreement which would reduce their holdings of such
2
<PAGE>
Acquiror Shares to an amount having in the aggregate a value at the time of
the merger of less than 50% of all Common Stock of the Company outstanding
prior to the merger.
5. No waiver by any party hereto of any condition or of any breach of any
provision of this Agreement shall be effective unless in writing.
6. All notices, requests, demands or other communications which are
required or may be given pursuant to the terms of this Agreement shall be in
writing and shall be deemed to have been duly given if delivered by hand or
(except where receipt thereof is specifically required for purposes of this
Agreement) mailed by registered or certified mail, postage prepaid, as follows:
If to the Stockholder, at the address set forth below the Stockholder's
signature at the end hereof.
If to Acquiror:
To:
Quicksilver Resources Inc.
1619 Pennsylvania Drive
Fort Worth, Texas 76104
or to such other address as any party hereto or any Stockholder may designate
for itself by notice given as herein provided
7. For the convenience of the parties hereto this Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
document. This Agreement shall be enforceable by, and shall inure to the
benefit of and be binding upon, the parties hereto and their respective
successors and assigns.
8. This Agreement shall be governed by and construed, interpreted and
enforced in accordance with the laws of the State of Delaware.
9. If a court of competent jurisdiction determines that any provision of
this Agreement is unenforceable or enforceable only if limited in time and/or
scope, this Agreement shall continue in full force and effect with such
provision stricken or so limited.
3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
Stockholder:
--------------------------------------
[signature]
--------------------------------------
--------------------------------------
--------------------------------------
[print name and address]
Accepted and agreed to as of
______________, 1998.
Acquiror:
QUICKSILVER RESOURCES INC.
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
4
<PAGE>
[EVEREN SECURITIES, INC. LETTERHEAD]
September 1, 1998
Special Committee of the board of directors
MSR Exploration Ltd.
612 Eighth Avenue
Fort Worth, Texas 76104
Gentlemen:
You have advised EVEREN Securities, Inc. ("EVEREN") that Quicksilver
Resources Inc. ("Quicksilver") has proposed to acquire 100% of the outstanding
common stock of MSR Exploration Ltd., ("MSR" or the "Company") in a tax-free
exchange of 0.10 shares of Quicksilver common stock for each share of MSR common
stock (the "Transaction"). We further understand that the shares of Quicksilver
will be listed and freely traded on the American Stock Exchange effective at the
time of closing of the Transaction. You have requested that EVEREN issue an
opinion ("Opinion") as to the fairness to the common stockholders of MSR (other
than shares held by Mercury Exploration Company and shares held by members of
the Darden family and their affiliates) of the consideration to be received from
a financial point of view.
In arriving at our Opinion we have, among other things:
1. Reviewed a draft of the Agreement and Plan of Merger and
Reorganization By and Among Quicksilver and MSR dated July 7, 1998
(the "Agreement").
2. Reviewed actual financial results for MSR and Quicksilver for the
years ended December 31, 1996 and 1997 and for the six months ended
June 30, 1998, as well as, other publicly available SEC Filings with
the Securities and Exchange Commission for MSR;
3. Reviewed independently prepared oil and gas reserve estimates as of
December 31, 1997 for MSR and Quicksilver, which include details of
projected production flows, product prices, operating expenses and
capital costs and discussed such estimates with MSR's reserve
engineers;
4. Reviewed terms of acquisitions of oil and gas reserves prepared by an
independent research firm;
5. Discussed with senior management of MSR the operations of and business
prospects for MSR; and
6. Considered such other information, financial studies, analyses and
investigations as we deemed relevant under the circumstances.
In connection with our review, we have not independently verified any of
the information concerning the Company and have relied on its being complete and
accurate in all material respects. We have assumed that the pro forma financial
and reserve information reviewed by us has been
<PAGE>
reasonably prepared on bases reflecting the best currently available
estimates and judgments of the Company's management as to the future
performance reflected therein. In addition, we have not made any independent
evaluation or appraisal of the assets of the Company, nor have we been
furnished with any such independent evaluations or appraisals (other than
certain reserve reports prepared by independent petroleum engineers for the
Company).
Our Opinion is necessarily based solely upon the information set forth
herein as reviewed by us and circumstances existing as of the date hereof.
Events occurring after the date hereof could materially affect the assumptions
used both in preparing this opinion and in the documents reviewed by us.
This letter shall be for the use of the board of directors of the
Company in considering the Transaction. The Company may not publish or refer
to this letter (either in its entirety or through excerpt or summaries) or
disclose the existence of our engagement hereunder or describe or
characterize the advice provided by us without the prior approval of EVEREN,
which approval shall not be unreasonably withheld. It is expressly
understood that this letter may be included in certain regulatory filings,
including any proxy statement to be mailed to the stockholders of the Company
in connection with the Transaction, or as otherwise required by law, rule or
regulation of any governmental authority or the rules of the American Stock
Exchange and that such approval hereby is provided subject to EVEREN's prior
review of disclosures relating to EVEREN's engagement and the letter.
As part of our investment banking business, we regularly issue fairness
opinions and are continually engaged in the valuation of companies and their
securities in connection with business reorganizations, private placements,
negotiated underwritings, mergers and acquisitions and valuations for estate,
corporate and other purposes. In the ordinary course of business, EVEREN and
its affiliates at any time may hold long or short positions, and may trade or
otherwise effect transactions as principal or for the accounts of customers, in
debt or equity securities or options on securities of the Company.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our Opinion that, on the date hereof,
the consideration to be received pursuant to the proposed Transaction is fair to
the common stockholders of MSR (other than shares held by Mercury Exploration
Company and shares held by the Darden family and their affiliates) from a
financial point of view.
Very truly yours,
/S/ EVEREN Securities, Inc.
EVEREN Securities, Inc.
<PAGE>
APPENDIX C
DISSENTERS' RIGHTS UNDER THE
ALBERTA BUSINESS CORPORATIONS ACT
SECTION 184
(1) Subject to sections 185 and 234, a holder of shares of any class of a
corporation may dissent if the corporation resolves to
(a) amend its articles under section 167 or 168 to add, change or remove
any provisions restricting or constraining the issue or transfer of
shares of that class,
(b) amend its articles under section 167 or 168 to add, change or remove
any restrictions on the business or businesses that the corporation
may carry on,
(c) amalgamate with another corporation, otherwise than under section 178
or 180.1,
(d) be continued under the laws of another jurisdiction under section 182,
or
(e) sell, lease or exchange all or substantially all its property under
section 183.
(2) A holder of shares of any class or series of shares entitled to subsection
(20), a stockholder entitled to vote under section 170, other than section
170(1)(a), may dissent if the corporation resolves to amend its articles
in a manner described in that section.
(3) In addition to any other right he may have, but subject to section (20), a
stockholder entitled to dissent under this section and who complies with
this section is entitled to be paid by the corporation the fair value of
the shares held by him in respect of which he dissents, determined as of
the close of business on the last business day before the day on which the
resolution from which he dissents was adopted.
(4) A dissenting stockholder may only claim under this section with respect to
all the shares of a class held by him or on behalf of any one beneficial
owner and registered in the name of the dissenting stockholder.
(5) A dissenting stockholder shall send to the corporation a written objection
to a resolution referred to in subsection (1) or (2)
(a) at or before any meeting of stockholders at which the resolution is to
be voted on, or
(b) if the corporation did not send notice to the stockholder of the
purpose of the meeting or of his right to dissent, within a reasonable
time after he learns that the resolution has been adopted.
(6) An application may be made to the Court by originating notice after the
adoption of a resolution referred to in subsection (1) or (2)
(a) by the corporation, or
(b) by a stockholder if he has sent an objection to the corporation under
subsection(5)
to fix the fair value in accordance with subsection (3) of the shares of a
stockholder who dissents under this section.
(7) If an application is made under subsection (6), the corporation shall,
unless the Court otherwise orders, send to each dissenting stockholder a
written offer to pay him an amount considered by the directors to be the
fair value of the shares.
C-1
<PAGE>
(8) Unless the Court otherwise orders, an offer referred to in subsection (7)
shall be sent to each dissenting stockholder
(a) at least 10 days before the date on which the application is
returnable, if the corporation is the applicant, or
(b) within 10 days after the corporation is served with a copy of the
originating notice, if a stockholder is the applicant.
(9) Every offer made under subsection (7) shall
(a) be made on the same terms, and
(b) contain or be accompanied by a statement showing how the fair value
was determined.
(10) A dissenting stockholder may make an agreement with the corporation for
the purchase of his shares by the corporation, in the amount of the
corporation's offer under subsection (7) or otherwise, at any time before
the Court pronounces an order fixing the fair value of the shares.
(11) A dissenting stockholder
(a) is not required to give security for costs in respect of an
application under subsection (6), and
(b) except in special circumstances shall not be required to pay the costs
of the application or appraisal.
(12) In connection with an application under subsection (6), the Court may give
directions for
(a) joining as parties all dissenting stockholders whose shares have not
been purchased by the corporation and for the representation of
dissenting stockholders who, in the opinion of the Court, are in need
of representation, and
(b) the trial of issues and interlocutory matters, including pleadings and
examinations for discovery.
(13) On an application under subsection (6), the Court shall make an order
(a) fixing the fair value of the shares in accordance with subsection (3)
of all dissenting stockholders who are parties to the application,
(b) giving judgment in that amount against the corporation and in favor of
each of those dissenting stockholders, and
(c) fixing the time within which the corporation must pay that amount to a
stockholder.
(14) On
(a) the action approved by the resolution from which the stockholder
dissents becoming effective,
(b) the making of an agreement under subsection (10) between the
corporation and the dissenting stockholder as to the payment to be
made by the corporation for his shares, whether by the acceptance of
the corporation's offer under subsection (7) or otherwise, or
(c) the pronouncement of an order under subsection (13),
whichever first occurs, the stockholder ceases to have any rights as a
stockholder other than the right to be paid the fair value of his shares
in the amount agreed to between the corporation and the stockholder or in
the amount of the judgment, as the case may be.
(15) Subsection 14(a) does not apply to a stockholder referred to in subsection
(5)(b).
C-2
<PAGE>
(16) Until one of the events mentioned in subsection (14) occurs,
(a) the stockholder may withdraw his dissent, or
(b) the corporation may rescind the resolution,
and in either event proceedings under this section shall be discontinued.
(17) The Court may in its discretion allow a reasonable rate of interest on the
amount payable to each dissenting stockholder, from the date on which the
stockholder ceases to have any rights as a stockholder by reason of
subsection (14) until the date of payment.
(18) If subsection (20) applies, the corporation shall, within 10 days after
(a) the pronouncement of an order under subsection (13), or
(b) the making of an agreement between the stockholder and the corporation
as to the payment to be made for his shares,
notify each dissenting stockholder that it is unable lawfully to pay
dissenting stockholders for their shares.
(19) Notwithstanding that a judgment has been given in favor of a dissenting
stockholder under subsection (13)(b), if subsection (20) applies, the
dissenting stockholder, by written notice delivered to the corporation
within 30 days after receiving the notice under subsection (18), may
withdraw his notice of objection, in which case the corporation is deemed
to consent to the withdrawal and the stockholder is reinstated to his full
rights as a stockholder, failing which he retains a status as a claimant
against the corporation, to be paid as soon as the corporation is lawfully
able to do so or, in a liquidation, to be ranked subordinate to the rights
of creditors of the corporation but prior to its stockholders.
(20) A corporation shall not make a payment to a dissenting stockholder under
this section if there are reasonable grounds for believing that
(a) the corporation is or would after the payment be unable to pay its
liabilities as they become due, or
(b) the realizable value of the corporation's assets would thereby be less
than the aggregate of its liabilities.
C-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's bylaws provide that the Registrant shall indemnify any
person who or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by or in the right of the
Registrant), by reason of the fact that he is or was a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise (all of such persons being hereafter referred to as a
"Corporate Functionary"), against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit, or proceeding, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Registrant and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
or conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the Registrant or, with respect to any criminal action or
preceding, that he had reasonable cause to believe that his conduct was
unlawful.
The Registrant shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Registrant to procure a judgment in its favor by
reason of the fact that he is or was a Corporate Functionary against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, except that no indemnification shall be made
in respect of any claim, issue, or matter as to which such person shall have
been adjudged to be liable to the Registrant, unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Any indemnification under the bylaws of the Registrant (unless ordered
by a court) shall be made by the Registrant only as authorized in the
specific case upon a determination that indemnification of the Corporate
Functionary is proper in the circumstances because he has met the applicable
standard of conduct set forth in the bylaws of the Registrant. Such
determination shall be made (i) by the board of directors by a majority vote
of a quorum consisting of directors who were not parties to such action,
suit, or proceeding, or (ii) if such a quorum is not obtainable, or, even if
obtainable if a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (iii) by the stockholders.
Notwithstanding the other provisions of the bylaws of the Registrant to
the extent that a Corporate Functionary has been successful on the merits or
otherwise in defense of any action, suit, or proceeding (including the dismissal
of a proceeding without prejudice or the settlement of a proceeding without
admission of liability), or in defense of any claim, issue, or matter therein,
he shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith.
Expenses incurred in defending a civil or criminal action, suit, or
proceeding shall be paid by the Registrant in advance of the final deposition of
such action, suit, or proceeding, upon receipt of an undertaking by or on behalf
of the Corporate Functionary to repay such amount if it shall ultimately be
determined he is not entitled to be indemnified by the Registrant as authorized
in the bylaws of the Registrant.
Any indemnification under the bylaws of the Registrant shall be made
promptly upon, and in any event within 60 days after, the written request of
the Corporate Functionary, unless determination is reasonably and promptly
made by the board of directors by majority vote of a quorum consisting of
disinterested directors that such Corporate Functionary acted in a manner set
forth so as to justify the Registrant in not indemnifying or making an
advance of expenses to the Corporate Functionary. If no quorum of
disinterested directors is obtainable, the board of directors shall promptly
direct that independent legal counsel shall decide whether the Corporate
Functionary acted in a manner so as to justify the Registrant's not
indemnifying or making an advance of expenses to the Corporate Functionary.
The right to indemnification or advance of expenses granted by the bylaws of
the Registrant shall be enforceable by the Corporate
<PAGE>
Functionary in any court of competent jurisdiction if the board of directors
or independent legal counsel denies his claim, in whole or in part, or if no
disposition of such claim is made within 60 days. The expenses of the
Corporate Functionary incurred in connection with successfully establishing
his right to indemnification, in whole or in part, in any such preceding
shall also be indemnified by the Registrant.
The indemnification and advancement of expenses or provided by or granted
pursuant to the bylaws of the Registrant shall not be deemed exclusive of any
other rights to which any person seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a Corporate Functionary and shall inure to the
benefit of the heirs, executors, and administrators of such a person. Any
repeal or modification of these bylaws or relevant provisions of the Delaware
General Corporation Law and other applicable law, if any, shall not affect any
then existing rights of a Corporate Functionary to indemnification or
advancement of expenses.
Upon resolution passed by the board of directors, the Registrant may
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee, or agent of the Registrant, or is or was serving
at the request of the Registrant as a director, officer, employee, or agent
of another corporation, partnership, joint venture, trust, or other
enterprise against any liability asserted against him and incurred by him in
any such capacity, or rising out of his status as such, whether or not the
Registrant would have the power to indemnify him against such liability under
the provisions of the bylaws of the Registrant.
References to "the Corporation" in the bylaws of the Registrant shall
include, in addition to the resulting or surviving corporation, constituent
corporations (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees, or
agents, so that any person who is or was a director, officer, employee, or agent
of such constituent corporation or is or was serving at the request of such
another corporation, partnership, joint venture, trust, or other enterprise
shall stand in the same position under the provisions of the bylaws of the
Registrant with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
If the provisions in the bylaws of the Registrant relating to mergers or a
consolidation, or any portion thereof shall be invalidated on any ground by a
court of competent jurisdiction, the Registrant shall nevertheless indemnify
each Corporate Functionary as to expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement with respect to any action,
suit, proceeding, or investigation, whether civil, criminal or administrative,
including a grant jury proceeding or action or suit brought by or in the right
of the Registrant, to the full extend permitted by any applicable portion of the
provisions in the bylaws relating to mergers or a consolidation, that shall not
have been invalidated.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES [QRI TO CONFIRM/EXPAND AND
PROVIDE DISKETTES]
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description
------ -----------
<S> <C>
*2.1 Agreement and Plan of Merger, dated September 1,
1998, among Quicksilver Resources Inc. and MSR
Exploration Ltd. is included as Appendix A to
the Proxy Statement/Prospectus included in Part
I of this Registration Statement and is
incorporated herein by reference.
**2.2 Amendment No. 1 to Agreement and Plan of Merger.
*4.1 Restated certificate of incorporation of
Quicksilver Resources Inc.
*4.2 Bylaws of Quicksilver Resources Inc.
*4.3 Form of Quicksilver Resources Inc. Common Stock
Certificate.
<PAGE>
**5.1 Opinion of Cantey & Hanger, L.L.P., regarding legality
of the shares being registered.
**8.1 Opinion of Jenkens & Gilchrist regarding tax matters.
*10.1 Consent and Voting Agreement, dated September 1,
1998, by and among Quicksilver Resources Inc.,
MSR Exploration Ltd, Mercury Exploration
Company, Quicksilver Energy, L.C., Frank Darden,
Thomas F. Darden, Glenn M. Darden, Anne Darden
Self, Trust Company of the West and Joint Energy
Development Investment Limited Partnership.
*10.2 Agreement and Plan of Reorganization and Merger,
dated March 31, 1998, by and among Quicksilver
Resources Inc., Quicksilver Energy, L.C.,
Michigan Gas Partners, Limited Partnership,
Mercury Exploration Company, Trust Company of
the West and Joint Energy Development
Investments Limited Partnership.
*10.3 Agreement Regarding Merger Agreement, dated
April 9, 1998, by and among Quicksilver
Resources Inc., Quicksilver Energy, L.C.,
Michigan Gas Partnership, Limited Partnership,
Mercury Exploration Company, Trust Company of
the West and Joint Energy Development
Investments Limited Partnership.
*10.4 Registration Rights Agreement, dated April 9,
1998, by and among Quicksilver Resources Inc.,
Joint Energy Development Investments Limited
Partnership and Trust Company of the West.
*10.5 Stockholders Agreement, dated April 9, 1998, by
and among Quicksilver Resources, Inc., Mercury
Exploration Company, Quicksilver Energy, L.C.,
Frank Darden, Thomas F. Darden, Glenn M. Darden,
Anne Darden Self, Jeff Cook, Jack L. Thurber,
Trust Company of the West, Joint Energy
Development Investments Limited Partnership and
Mercury Production Company.
*10.6 Amendment No. 1 to Stockholders Agreement, dated
September 1, 1998, by and among Quicksilver
Resources Inc., Mercury Exploration Company,
Quicksilver Energy, L.C., Frank Darden, Thomas
F. Darden, Glenn M. Darden, Anne Darden Self,
Jeff Cook, Jack L. Thurber, Trust Company of the
West, Joint Energy Development Investments
Limited Partnership and Mercury Production
Company.
*10.7 Stock Transfer Agreement, dated April 9, 1998,
by and among Mercury Exploration Company and
Joint Energy Development Investment Limited
Partnership.
<PAGE>
*10.8 Amendment No. 1 to Stock Transfer Agreement,
dated September 1, 1998, by and among Mercury
Exploration Company and Joint Energy Limited
Partnership.
*10.9 Amended and Restated Credit Agreement, dated
April 9, 1998, by and among Quicksilver
Resources Inc. and NationsBank of Texas, N.A.
*10.10 Put/Call Agreement between, dated April 9, 1998,
by and among Mercury Exploration Company and
Trust Company of the West.
*10.11 Amendment No. 1 to Put/Call Agreement, dated
September 4, by and among Mercury Exploration
Company and Trust Company of the West.
*10.12 Management Agreement, dated April 9, 1998, by
and among Mercury Exploration Company and
Quicksilver Resources Inc.
*10.13 Agreement regarding Warrants, dated September 1,
1998, by and among Quicksilver Resources Inc.,
Mercury Exploration Company, Frank Darden,
Thomas F. Darden, Glenn M. Darden, Anne Darden
Self, Joint Energy Development Investments
Limited Partnership and Trust Company of the
West.
*10.14 Agreement, dated September 1, 1998, by and among
Quicksilver Resources Inc., Joint Energy
Development Investments Limited Partnership,
Trust Company of the West and Mercury
Exploration Company.
*10.15 Management Agreement, dated September 1, 1998,
by and among Mercury Exploration Company and
Quicksilver Resources Inc.
10.16 Wells Agreement, filed as an exhibit to the
Registration Statement on Form S-4 (File No.
333-29769) and incorporated herein by reference.
*10.17 Letter Agreement and Fee Letter from NationsBank,
N.A., dated July 17, 1998.
*10.18 Agreement Regarding Future Financings, dated April
9, 1998 by and among Quicksilver Resources, Inc.,
Enron Trade & Capital Resources Corp., Trust Company
of the West and NationsBank of Texas, N.A.
*10.19 Amendment No. 2 to Put/Call Agreement dated as of January
8, 1999 by and between Mercury Exploration Company and Trust
Company of the West.
*15 Letter from Deloitte & Touche LLP regarding unaudited
financial information.
**23.1 Consent of Jenkens & Gilchrist, a Professional
Corporation (included in its opinion filed as
Exhibit 8.1 hereto)
**23.2 Consent of Weaver & Tidwell LLP
**23.3 Consent of Deloitte & Touche LLP to Amendment No. 1 to
Registration Statement.
**23.4 Consent of EVEREN Securities, Inc.
*23.5 Consent of Citadel Engineering Ltd.
*24 Power of Attorney (included on the signature
page)
**99.1 Form of Proxy of MSR
*99.2 Reserve Report of Citadel Engineering Ltd.
</TABLE>
<PAGE>
- -------------------------------------
* Previously filed.
* * Filed herewith.
ITEM 22. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) of section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to section 15(d)
of the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(2) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus that is a part of this Registration Statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect
to reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(3) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports
to meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(4) The undersigned registrant undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused Amendment No. 3 to this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Fort Worth, Texas, on January 25, 1999.
QUICKSILVER RESOURCES, INC.
By: /s/ Frank Darden*
--------------------------------------
Frank Darden
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to this Registration Statement has been signed below by the
following persons in the capacities and on the date indicated. Each person
whose signature appears below in so signing also makes, constitutes and
appoints Mr. Glenn Darden, his true and lawful attorney-in-fact, with full
power of substitution, for him in any and all capacities, to execute and
cause to be filed with the Securities and Exchange Commission any or all
amendments and post-effective amendments to this Registration Statement, with
exhibits thereto and other documents in connection therewith, and hereby
ratifies and confirms all that said attorney-in-fact or his substitute or
substitutes may do or cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ Frank Darden* Chairman of the Board and January 25, 1999
------------------------ Director (Principal Executive
Frank Darden Officer)
/s/ Thomas F. Darden* President and Director January 25, 1999
------------------------ (Principal Financial and
Thomas F. Darden Accounting Officer)
/s/ Glenn M. Darden Vice President and Director January 25, 1999
------------------------
Glenn M. Darden
* By Glenn M. Darden as attorney in fact
