<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............. To .............
Commission file number: 001-14837
Quicksilver Resources Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
75-2756163 (I.R.S. Employer Identification No.)
1619 Pennsylvania Avenue, Fort Worth, Texas 76104
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (817) 877-3151
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value American Stock Exchange
$0.01 per share
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 11, 1999, the registrant had 12,877,692 outstanding shares
of its common stock, $0.01 par value.
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Quicksilver Resources Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Quicksilver Resources Inc. (the Company) as of September 30, 1999, and the
related condensed consolidated statements of operations for the three and nine-
month periods ended September 30, 1999, and 1998, and condensed consolidated
statements of cash flows for the nine month periods ended September 30, 1999 and
1998. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1998, and the related consolidated statement of operations, stockholders' equity
and cash flows for the year then ended (not presented herein); and in our report
dated March 29, 1999, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1998, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
November 2, 1999
2
<PAGE>
Quicksilver Resources Inc.
Condensed Consolidated Balance Sheets
In thousands, except share and per share amounts
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,174 $ 294
Accounts receivable, net of allowance for doubtful accounts of
$1,350 at September 30, 1999 11,382 7,776
Inventories and other current assets 807 751
----------- -----------
Total current assets 15,363 8,821
INVESTMENTS IN EQUITY AFFILIATES 3,089 -
PROPERTIES, PLANT AND EQUIPMENT - NET ("full cost") 171,286 134,810
OTHER ASSETS 1,582 969
----------- -----------
$191,320 $144,600
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 14 $ 67
Accounts payable 9,457 5,772
Accrued liabilities 2,687 1,691
----------- -----------
Total current liabilities 12,158 7,530
LONG-TERM DEBT 117,060 84,972
OTHER LONG-TERM LIABILITIES 2,800 1,338
DEFERRED INCOME TAXES 15,466 11,953
MINORITY INTEREST 228 6,219
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01
Authorized 10,000,000 shares,
issued and outstanding - none - -
Common stock, $0.01 par value
Authorized 40,000,000 shares,
issued and outstanding 12,877,692 and 11,510,800 129 115
Paid in capital in excess of par value 37,904 27,574
Treasury Stock of 10,808 shares (74) -
Retained earnings 5,649 4,899
----------- -----------
Total stockholders' equity 43,608 32,588
----------- -----------
$191,320 $144,600
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Quicksilver Resources Inc.
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1999 and 1998
In thousands, except per share data
(unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Gas sales $10,499 $ 9,495 $26,763 $27,360
Oil sales 3,225 1,378 6,708 5,222
Other income 1,097 905 3,247 2,281
-------- -------- -------- --------
Total revenues 14,821 11,778 36,718 34,863
-------- -------- -------- --------
EXPENSES
Operating expenses 5,833 4,382 15,214 13,439
Depletion and depreciation 3,981 3,332 10,110 9,375
Provision for doubtful accounts - - 1,350 -
General and administrative 897 527 2,733 1,075
Interest 2,586 1,291 6,324 4,951
-------- -------- -------- --------
Total expenses 13,297 9,532 35,731 28,840
-------- -------- -------- --------
Income before income taxes
and minority interest 1,524 2,246 987 6,023
Minority interest in net loss
of MSR Exploration Ltd. - 315 141 583
-------- -------- -------- --------
Income before income taxes 1,524 2,561 1,128 6,606
Income taxes 513 603 378 2,062
-------- -------- -------- --------
NET INCOME $ 1,011 $ 1,958 $ 750 $ 4,544
======== ======== ======== ========
Basic and diluted earnings per share $ 0.08 $ 0.17 $ 0.06 $ 0.39
Basic and diluted weighted average number
of shares outstanding for the periods 12,883 11,511 12,578 11,511
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Quicksilver Resources Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
In thousands
<TABLE>
<CAPTION>
1999 1998
------------ ------------
OPERATING ACTIVITIES (unaudited)
<S> <C> <C>
Net income $ 750 $ 4,544
Charges and credits to net income not affecting cash
Depletion and depreciation 10,110 9,375
Deferred income taxes 378 2,412
Recognition of unearned revenue (538) (994)
Minority interest in loss of subsidiary (141) (583)
Amortization of deferred loan costs 258 75
Provision for doubtful accounts 1,350 -
Changes in assets and liabilities
Accounts receivable (4,956) (5,591)
Inventory, prepaid expenses and other (77) (48)
Accounts payable 3,685 5,497
Accrued liabilities 996 1,408
------------ ------------
NET CASH FROM OPERATING ACTIVITIES 11,815 16,095
------------ ------------
INVESTING ACTIVITIES
Acquisition of properties and equipment (36,659) (13,601)
Acquisition of pipeline and facilities (3,089) -
------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES (39,748) (13,601)
------------ ------------
FINANCING ACTIVITIES
Notes payable, bank proceeds 35,339 6,850
Principal payments on long-term debt (3,304) (8,731)
Payments to acquire treasury stock (74) -
Deferred financing costs (800) (600)
Stock registration fees (348) -
------------ ------------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES 30,813 (2,481)
------------ ------------
NET INCREASE IN CASH 2,880 13
CASH AT BEGINNING OF PERIOD 294 643
------------ ------------
CASH AT END OF PERIOD $ 3,174 $ 656
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense $ 5,245 $ 3,503
============ ============
Cash payments for income taxes $ - $ -
Common stock of 1,377,000 shares used for acquisition of
minority interest in MSR $ 10,327 $ -
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Quicksilver Resources Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three and Nine Months Ended September 30, 1999 and 1998
1. ACCOUNTING POLICIES AND DISCLOSURES
In the opinion of management of Quicksilver Resources Inc. ("Quicksilver or the
Company"), the Company's Condensed Consolidated Financial Statements contain all
adjustments (consisting of only normal, recurring accruals) necessary to present
fairly the financial position of the Company as of September 30, 1999, and the
results of operations for the three and nine months ended September 30, 1999 and
1998 and cash flows for the nine months ended September 30, 1999 and 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1998. The
results of operations for the three and nine-month periods ended September 30,
1999, are not necessarily indicative of the operating results to be expected for
the full fiscal year.
In June 1999, the Company reclassified marketing and processing costs to
operating expense. These costs were previously reported as deductions from
revenue. All prior periods have been reclassified.
2. RECENT DEVELOPMENTS
On October 18, 1999 the Company announced it had filed a registration statement
with the Securities and Exchange Commission relating to a public offering of
7,000,000 shares of common stock to be sold by the Company, plus an additional
1,050,000 shares that will be subject to an option granted by the Company to the
underwriters to cover any over allotments. Proceeds from the sale of common
stock will be used to repay a portion of existing debt.
3. MERGERS AND ACQUISITIONS
Merger of MSR Exploration Ltd. with and into Quicksilver
On March 4, 1999, Quicksilver completed a merger with MSR Exploration Ltd. (The
"MSR Merger"). Accounting Principles Board Opinion (APB) No. 16 provides that
exchanges or transfers of net assets between companies under common control be
accounted for at historical cost in a manner similar to that of pooling of
interest accounting. Furthermore, APB 16 indicates that the purchase method of
accounting should be used if the effect of a transfer or exchange is to acquire
all of the outstanding shares held by minority interests. Prior to the merger,
Quicksilver Energy, L.C., Mercury Exploration Company, and the principal
stockholders of Mercury Exploration Company, comprised of the Darden family (the
"Mercury Group"), controlled Quicksilver through their approximate 74 percent
ownership of Quicksilver. The Mercury Group was considered to control MSR
because the Mercury Group and two other individuals affiliated with Mercury
owned approximately 46.5 percent of MSR's common stock, controlled the executive
committee of MSR's board of directors, and held warrants to purchase 11 million
shares of MSR common stock. Accordingly, Quicksilver was considered the
"accounting acquirer" in the MSR Merger, and MSR was considered as having
transferred approximately 46.5 percent of MSR's net assets to Quicksilver at
historical cost. The remainder of MSR's net assets, the approximate 53.5
percent related to minority interests, was valued and recorded by Quicksilver
based on the purchase method of accounting in March 1999. The minority interest
reflected on the Company's December 31, 1998 balance sheet and statements of
operations is approximately 53.5 percent of MSR's net assets and results of
operations for the periods prior to March 4, 1999. Although the merger did not
occur until 1999, MSR's financial statements as of December 31, 1998, and
September 30, 1998, have been combined with the Company's since the entities
were under common control.
The MSR Merger qualified as a tax-free exchange. In connection with the merger,
the Company issued 2,577,700 shares of its common stock in exchange for all of
the outstanding common stock of MSR based on a conversion ratio of one share of
the Company's common stock for ten shares of MSR common stock (the merger
exchange ratio).
6
<PAGE>
MSR's outstanding common stock options and warrants were converted into
Quicksilver common stock options and warrants to purchase approximately 24,857
shares and 1,133,750 shares, respectively.
Unocal Property Acquisition
On May 17, 1999, the Company and Union Oil Company of California ("Unocal")
completed the previously announced purchase by the Company from Unocal of
substantially all of Unocal's natural gas and crude oil assets in Michigan. The
assets purchased, consisting of ownership interests in the Garfield unit and the
Beaver Creek unit, include approximately 20,000 net leasehold acres and about
13,000 Mcf net equivalent production per day. Quicksilver's ownership in
Garfield increased to 99 percent from 54 percent.
The purchase price for the Unocal acquisition consisted of $27 million in cash,
subject to certain adjustments, which resulted in a cash purchase price of $25.8
million cash and 404,381 unregistered shares of the Company's common stock. The
stock component of the purchase price was placed in escrow and will be
distributed to Unocal over a three-year period, subject to downward adjustment
in correlation to certain costs, expenses, and liabilities which may be incurred
during this period. The purchase price was determined in an arms length
negotiation with Unocal following a competitive bid process. The Company
financed the cash portion of the purchase price with borrowings under a bank
credit facility, which permits the Company to obtain revolving credit loans and
to issue letters of credit from time to time in an aggregate amount not to
exceed the lesser of a borrowing base limitation or $200 million. Lenders under
the bank credit facility include Bank of America, Frost National Bank, and
Paribas.
Beaver Creek Pipeline Acquisition
On June 23, 1999 the Company, together with Mercury Michigan, Inc., an affiliate
of the Company's largest stockholder, formed Beaver Creek Pipeline, L.L.C. to
acquire the Beaver Creek Pipeline, a 125-mile natural gas pipeline extending
from the Beaver Creek field in northern Michigan to Midland, Michigan. The
Company invested $2,644,000 for its 50 percent interest in Beaver Creek
Pipeline, L.L.C.
MGV Energy Acquisition
On August 26, 1999, the Company purchased an 89.5 percent interest in MGV
Energy, Inc., which is a Calgary-based natural gas production company, for $1.6
million. MGV is involved in a joint venture relationship with Pan Canadian, one
of the largest independent oil and gas companies in Canada. Under the
arrangement, MGV identifies acquisition and development prospects for Pan
Canadian within a 36,000 square mile area of mutual interest in southern
Alberta. Should Pan Canadian decide to acquire a submitted prospect, MGV has a
right to participate in the acquisition at up to a 20 percent level. MGV is
free to pursue on its own any prospects outside of the area of mutual interest
and also may take 100 percent of any prospect within the area of mutual interest
which Pan Canadian rejects. MGV recently made its first acquisition of an
interest in 375 existing wells in southern Alberta, Canada, incurring
approximately $2.1 million of debt to finance its purchase. MGV acquired
current daily net production of 1.2 Mmcf of natural gas and 10.1 Bcf of proved
reserves.
7
<PAGE>
4. LONG TERM DEBT
<TABLE>
<CAPTION>
September 30, 1999 December 31,1998
------------------ ----------------
(unaudited)
<S> <C> <C>
Long-term debt, in thousands, consists of:
Notes payable to banks
(8.315% at September 30, 1999 and
7.1% at December 31, 1998) $84,850 $84,841
(7.515% at September 30,1999) 28,000 -
(8.25% at September 30, 1999) 2,000 -
(7.0 % at September 30, 1999) 2,108 -
Various Loans 116 198
------- -------
117,074 85,039
Less current maturities (14) (67)
------- -------
$117,060 $84,972
======== =======
</TABLE>
Long-term maturities are as follows, in thousands of dollars:
<TABLE>
<CAPTION>
Periods Ending September 30, 1999 December 31, 1998
-------------- ------------------ -----------------
(unaudited)
<S> <C> <C>
1999 $ 6 $ 67
2000 8 20
2001 - 20
2002 - 4
2003 - 4
Thereafter 117,060 84,924
-------- -------
$117,074 $85,039
======== =======
</TABLE>
As part of the merger of the Company with MSR on March 4, 1999, the Company
entered into a new five year credit facility ("Credit Facility") agreement. The
existing debt of $73,993,000 and $10,848,000 from, respectively, Quicksilver and
MSR was transferred into the new Credit Facility. The Credit Facility permits
the Company to obtain revolving credit loans and to issue letters of credit for
the account of the Company from time to time in an aggregate amount not to
exceed the lesser of $200 million or the Borrowing Base. Under an amendment to
the Credit Facility dated May 17, 1999, the Borrowing Base is $115 million at
September 30, 1999 and is subject to semi-annual determination and certain other
redeterminations based upon a variety of factors, including the discounted
present value of estimated future net cash flow from the Company's natural gas
and crude oil production. On December 1, 1999, the borrowing base will be
revised and the Company could be required to repay up to $20,000,000 of the
outstanding balance. As of September 30, 1999, $114,850,000 was outstanding
under, the Credit Facility. At the Company's option, loans may be prepaid, and
revolving credit commitments may be reduced in whole or in part at any time in
certain minimum amounts. The Company can designate the interest rate on amounts
outstanding at either the London Interbank Offered Rate (LIBOR) + 2.375 percent,
or at bank prime rate. On September 7,1999, the Company designated its interest
rate for six months at 8.315 percent for $84,850,000 of the debt. An additional
$28,000,000 was designated in at 7.515 percent through November 16, 1999. The
collateral for the Credit Facility consists of substantially all of the existing
assets of the Company and any future reserves acquired. The loan agreement
contains certain dividend restrictions and restrictive covenants, which, among
other things, require the maintenance of a minimum current ratio. The Company
currently is in compliance with all such restrictions.
MGV Energy Inc., (see note 3) incurred US$2,108,000 in debt in the acquisition
of the Monogram Unit in August, 1999. The interest rate is 0.75 percent over
Canadian Imperial Bank of Commerce ("CIBC") prime.
8
<PAGE>
5. UNEARNED REVENUES
Quicksilver's 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 natural 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 the 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 September 30, 1999, and December 31, 1998, a balance of
$800,000 and $1,338,000, respectively, in unearned revenues existed as a result
of the cash consideration received in excess of the tax benefit earned. Such
amounts are included in other long-term liabilities.
6. 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).
As part of the merger with MSR, the Company agreed to exchange one share of its
common stock for each ten shares of MSR common stock. To provide for the
desired percentage ownership in the Company by the former MSR stockholders, the
founding stockholders of the Company were issued an additional 10,210,800
shares, prior to the merger, in the form of a stock dividend. Upon completion
of the merger, the founding stockholders owned 10,310,800 (80%) of the shares of
the Company and former MSR stockholders owned approximately 2,577,700 (20%) of
the common shares of the Company. A total of 1,200,000 shares of MSR common
stock were held under common control, and 1,377,700 shares were held by minority
stockholders. All references to numbers of shares and per share amounts in the
financial statements dated prior to the effective date of the merger, March 4,
1999, have been restated to reflect the stock dividend plus 1,200,000 shares
held under common control or a total of 11,510,800 common shares.
The Company now has 12,877,692 shares of common stock outstanding. As part of
the Unocal Property addition, the Company placed 404,381 unregistered shares in
escrow (see note 2 and 7). Outstanding options and warrants for MSR stock were
converted into options and warrants to purchase Company common stock as part of
the MSR Merger. As a result of the merger, the Company has outstanding warrants
to purchase common stock of 550,000 shares at $12.50 per share, 550,000 shares
at $20.00 per share, 28,000 shares at $33.75 per share, and 5,750 shares at
$0.10 per share (only exercisable when the Company's common stock price is at
least $10.00), and options to purchase 24,857 shares of common stock at $8.75
per share. Such options and warrants are anti-dilutive at September 30, 1999
and therefore are not included in earnings per share.
7. CONTINGENCIES
The Company's customers are large natural gas and crude oil purchasers. The
Company does not generally require collateral, and receivables are usually due
and collected in 30 to 60 days. On March 10, 1999, one of the Company's natural
gas purchasers filed for protection under Chapter 11 of the Federal Bankruptcy
Code. Management considers a portion of the approximately $2,450,000 account
receivable associated with this purchaser to be uncollectible; accordingly, an
allowance for doubtful accounts of $1,350,000 was established in the first
quarter and remains in place at September 30, 1999. All contracts with that
purchaser have been terminated, and the gas has been recontracted with a credit-
worthy purchaser. The Company believes that based on information currently
available regarding the bankruptcy proceeding, the net receivable will be
recovered.
In connection with the purchase of certain properties from Unocal (see note 2),
the Company placed 404,381 unregistered shares of Company common stock in
escrow. These shares will be distributed to Unocal over a three-year period,
subject to downward adjustment pending the resolution of certain contingencies.
Such shares, which are not considered outstanding at September 30, 1999, will
become outstanding as they are distributed following the resolution of the
contingencies.
9
<PAGE>
Quicksilver Resources Inc.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 ("Securities Act") and
Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). Such
forward-looking statements involve risks and uncertainties. The Company's
actual results could differ materially from those set forth in the forward-
looking statements as a result of certain factors including those set forth as
risk factors in the Company's filings under the Securities Act.
LIQUIDITY AND CAPITAL RESOURCES
General
The following discussion compares the Company's financial condition at September
30, 1999, to its financial condition at December 31, 1998.
Prior to March 4, 1999, the stockholders of the Company approved the merger with
MSR. Pursuant to the merger, stockholders of MSR received approximately
2,577,700 shares of the Company's common stock. As a result of the merger, MSR
ceased to exist, and all of its assets and liabilities were transferred to the
Company. The merger was accounted for, in part, as a pooling of interest;
therefore the financial statements have been combined. The merged net assets
attributable to the minority interest stockholders have been reported as a
minority interest at December 31, 1998. Such minority interest was acquired in
March of 1999 and was accounted for under the purchase method of accounting.
Cash Flow
The Company believes that its cash flows from operations are adequate to meet
the requirements of its business. However, future cash flows are subject to a
number of variables including the level of production and prices, and there can
be no assurance that operations and other capital resources will provide cash in
sufficient amounts to maintain planned levels of capital expenditures.
The Company's principal operating sources of cash include sales of natural gas
and crude oil and revenues from transportation and processing. Quicksilver
sells approximately 70 percent of its natural gas production under long- term
contracts. As a result, the Company benefits from significant predictability of
its natural gas revenues. Commodity market prices affect cash flow for that
portion of natural gas not under contract as well as most of the Company's crude
oil sales.
The Company's net cash provided by operations for the nine months ended
September 30, 1999, was $11,815,000 compared to $16,095,000 for the same period
last year. The reduction resulted from lower earnings and a $2,450,000 account
receivable not collected, which was partially offset by other working
capital changes.
The Company's net cash used in investing for the nine months ended September 30,
1999 was $39,748,000 including $25.8 million for the Unocal property acquisition
(see note 2 to the condensed consolidated financial statements). Investing
activities were comprised primarily of additions to oil and gas properties
through acquisitions and development and, to a lesser extent, exploration and
additions of field service assets. The Company's activities have been financed
through a combination of operating cash flow and bank borrowings.
The Company's net cash from financing activities for the nine months ended
September 30, 1999 was $30,813,000. Sources of financing used by the Company
primarily have been borrowings under its Credit Facility.
RESULTS OF OPERATIONS
Quicksilver's revenue, profitability, and future rate of growth are
substantially dependent upon prevailing prices for natural gas and crude oil,
which are dependent upon numerous factors such as economic, political, and
regulatory developments as well as competition from other sources of energy.
The energy markets historically have been highly
10
<PAGE>
volatile, and future decreases in prices could have a materially adverse effect
on Quicksilver's financial position, results of operations, quantities of
reserves that may be economically produced, and access to capital.
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto and with the
Company's audited combined consolidated financial statements and notes thereto
for the fiscal year ended December 31, 1998.
Three Months Ended September 30, 1999 Compared with the Three Ended
September 30, 1998
Revenues: Total revenues for the three months ended September 30, 1999 were
$14,821,000, an increase of almost 26 percent from the $11,778,000 reported in
the three months ended September 30, 1998.
Gas sales of $10,499,000 in the third quarter of 1999 were 11 percent higher
than the $9,495,000 for the third quarter 1998. Gas volumes increased 8 percent
to 4,315,000 Mcf in 1999 reflecting the additional production from the interests
purchased from Unocal in May 1999 somewhat offset by natural declines in certain
other properties. Average gas prices were $2.43 per Mcf in the three months
ended September 30, 1999, $0.05 per Mcf higher than the average received in the
1998 period.
Oil sales grew 134 percent to $3,225,000 in the three month period ended
September 30, 1999 compared to $1,378,000 in the 1998 quarter as a result of
higher volumes and prices. During 1998 oil production in Montana and Wyoming was
curtailed because of the low crude oil prices. In 1999 these wells were
returned to full production, and oil sales were 216,000 barrels in the 1999
quarter compared to 154,000 barrels in 1998. Prices realized in the 1999
quarter were $14.93 per barrel compared to $8.95 per barrel in 1998.
Other income, which primarily consists of pipeline and processing fees,
increased to $1,097,000 in the September 30, 1999 quarter compared to $905,000
in the comparable 1998 period as a result of higher transportation and
processing fees.
Expenses: Total expenses of $13,297,000 in the third quarter of 1999 were 39
percent higher than the $9,532,000 incurred in the third quarter 1998.
Operating expenses of $5,833,000 increased 33 percent from the 1998 quarter
reflecting the higher production and well workover activity in 1999.
Depletion and depreciation increased to $3,981,000 in the September 30, 1999
quarter form $3,332,000 in the 1998 quarter, as a result of higher production
volumes and higher depletion rates.
General and administrative costs incurred during the third quarter of $897,000
were 70 percent higher than in the 1998 period, reflecting higher salaries and
professional fees required of a larger public company, and additional legal fees
for the bankruptcy of one of the Company's customers in the first quarter of
1999.
Interest expense of $2,586,000 in the 1999 quarter doubled from the 1998 period
reflecting the higher debt levels in 1999.
Nine Months Ended September 30, 1999 Compared with the Nine Months Ended
September 30, 1998
Revenues: Revenues for the nine months ended September 30, 1999 of $36,718,000
were 5 percent higher than the $34,863,000 for the comparable 1998 period.
Natural gas sales for the first three quarters of 1999 of $26,763,000 were down
2 percent from 1998 reflecting a $0.04 per Mcf decrease in average sales prices.
Crude oil sales of $6,708,000 were $1,486,000 higher than the comparable 1998
period as a result of a 34 percent increase in average sales prices to $13.31
per barrel in 1999. Other income rose almost $1,000,000 to $3,247,000 as a
result of stronger transportation and processing income.
Expenses: Expenses of $35,731,000 were up 24 percent for the first nine months
of 1999 reflecting higher well workover costs, a higher depletion unit rate, a
$1,350,000 bad debt provision recorded in the first quarter of 1999, higher
staffing levels and an interest expense increase from higher debt levels.
11
<PAGE>
YEAR 2000
Quicksilver has developed a plan (the "Year 2000 Plan") to address the Year 2000
issue created by computer programs and applications that utilize two digit
rather than four digit date fields to designate a year. As a result, computer
equipment, software, and devices with embedded technology that are date-
sensitive may be unable to recognize or may misinterpret the actual date. This
could result in a system failure or miscalculations causing disruptions of
operations.
The Company has assessed its information technology, referred to as "IT," and
its non-IT systems. The Company believes that all of its computer equipment and
software as well as its operational and control systems are currently Year 2000
compliant.
Quicksilver is also monitoring the compliance efforts of the significant
suppliers, customers, and service providers with whom it does business and whose
IT and non-IT systems interface with those of the Company to ensure that they
will be Year 2000 compliant. Management believes that ongoing communications
with and assessment of the compliance efforts of these third parties will
minimize any noncompliance risks.
Although the Company does not expect to experience significant operational
problems due to the Year 2000 issue, there can be no assurance that this issue
will not materially impact the Company's results of operations or adversely
affect its relationship with customers or vendors.
The inability of third parties to complete their Year 2000 resolution in a
timely fashion could materially impact the Company's results of operations and
cash flows. The effect of non-compliance by third parties is not determinable.
The most reasonable likely "worst case" impacts would be:
. Impairment of the Company's ability to deliver production to, or
receive payment from, third parties gathering and/or purchasing its
production from affected facilities;
. Impairment of the ability of third-party suppliers or service
companies to provide needed materials or services to planned or
ongoing operations, necessitating deferral or shut-in of exploration,
development or production operations;
. Impairment of the Company's ability to receive and process data, which
would hinder its ability to generate development drilling and
exploitation activities; and
. The Company's inability to execute financial transactions with its
banks or other third parties whose systems fail or malfunctioned.
The Company does not anticipate significant operational or financial problems
due to the Year 2000 issue. However, there are currently no commercially
reasonable alternatives to its current IT and non-IT systems. As a result,
contingency plans would include working with vendors, suppliers and various
third parties to remedy any Year 2000 related problems as quickly as possible.
Costs incurred to date for Year 2000 compliance have been insignificant and the
Company expects the remaining costs to be minimal.
ITEM 3. Market Risk.
The Company sells approximately 70 percent of its natural gas under long term,
fixed price contracts, and swap agreements and therefore, has significant
predictability of its natural gas revenues. Commodity market price fluctuations
affect those natural gas volumes which are not sold under contract, and also
affect the Company's crude oil sales which are not hedged. In April 1999, we
entered into a contract to swap 7,500 Mmbtu per day at $2.40 per Mmbtu. The
contract, which expires in April 2004, increased our revenues by an
insignificant amount in the third quarter of 1999
In addition, the Company has entered into interest rate swap agreements covering
$50,000,000 of its debt. These agreements consist of one covering $25,000,000
through May 8, 2000, which converts the debt floating LIBOR base rate to a 5.75
percent fixed rate, and a second for $25,000,000 through June 17, 2002, which
converts the debt floating LIBOR base rate to a 5.70 percent fixed rate.
Interest expense for the nine months ended September 30, 1999 was $251,000
higher as a result of these rate swaps.
12
<PAGE>
Quicksilver Resources Inc.
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities:
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 15. Letter re unaudited interim financial information.
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K:
Quicksilver Resources Inc.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 2, 1999
Quicksilver Resources Inc.
By: /s/ Glenn M. Darden
------------------------------
Glenn M. Darden
President and Chief Operating Officer
By: /s/ Bill Lamkin
------------------------------
Bill Lamkin, Executive Vice President and
Chief Financial Officer
13
<PAGE>
EXHIBIT 15
[LETTERHEAD OF QUICKSILVER RESOURCES APPEARS HERE]
November 2, 1999
Deloitte & Touche LLP
301 Commerce Street Suite 2950
Fort Worth, TX 76102
We are providing this letter in connection with your review of the interim
financial information of Quicksilver Resources Inc. (the "Company") for the
quarter ended September 30, 1999 to be included in the quarterly report to
shareholders and in Form 10-Q, for the purpose of reporting whether material
modifications should be made for such information to conform to generally
accepted accounting principles. We confirm that we are responsible for the fair
presentation of the financial information in conformity with generally accepted
accounting principles.
We confirm, to the best of our knowledge and belief, the following
representations made to you during your review:
1. The financial information referred to above is fairly presented in
conformity with generally accepted accounting principles applied on a
consistent basis with that of the interim report for the quarter ended
September 30, 1998 and substantially consistent with the audited financial
statements as of and for the year ended December 31, 1998.
2. The Company has made available to you (a) all financial records and related
data that would have a bearing on the purpose of your review and (b) all
minutes of the meetings of stockholders, directors, and committees of
directors, or summaries of actions of recent meetings for which minutes have
not yet been prepared.
3. The Company believes that a net receivable of $1,100,000 from a natural gas
purchaser who filed for bankruptcy will be recovered.
4. No events have occurred subsequent to the date of the above-described
financial information that would require adjustment to, or disclosure in,
the information.
5. In connection with your audit of the Company's annual financial statements
for the year ended December 31, 1998, we have previously provided
representations to you dated March 29, 1999. No matters have since come to
our attention that would cause us to believe that any of those
representations are no longer true.
We understand that your review was not an audit in accordance with generally
accepted auditing standards, and therefore cannot be relied upon to disclose all
matters of significance with respect to the interim financial information.
/s/ Glenn Darden
- -------------------------------------------------
Glenn Darden, President & Chief Operating Officer
/s/ Bill Lamkin
- --------------------------------------------------
Bill Lamkin, Executive Vice President & Chief Financial Officer
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