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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, 2000
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.)
777 West Rosedale, Fort Worth, Texas 76104
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 665-5000
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 9, 2000, the registrant had 18,283,334 outstanding shares of
its common stock, $0.01 par value.
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Quicksilver Resources Inc.
INDEX
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PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
<S> <C>
Independent Accountants' Report 3
Condensed Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2000
and 1999 6
Condensed Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
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ITEM 1. Financial Statements
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, 2000, and the
related condensed consolidated statements of operations for the three and nine
month periods ended September 30, 2000 and 1999, and condensed consolidated
statements of cash flows for the nine month periods ended September 30, 2000 and
1999. 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 auditing standards generally accepted in the United States of
America, 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 accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 1999, 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 10, 2000, 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, 1999, 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 9, 2000
3
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<TABLE>
<CAPTION>
Quicksilver Resources Inc.
Condensed Consolidated Balance Sheets
In thousands, except share and per share amounts - Unaudited
September 30, December 31,
ASSETS 2000 1999
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 14,623 $ 2,557
Accounts receivable, net of allowance for doubtful accounts
of $0 and $1,350, respectively 27,059 15,555
Inventories and other current assets 1,476 780
------------- ------------
Total current assets 43,158 18,892
INVESTMENTS IN EQUITY AFFILIATES 8,119 3,100
PROPERTIES, PLANT AND EQUIPMENT - NET ("full cost") 352,802 170,800
DEFERRED FINANCING COSTS 5,798 1,203
OTHER ASSETS 1,500 307
------------- ------------
$ 411,377 $ 194,302
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 2,179 $ 2,134
Accounts payable 4,889 7,234
Accrued liabilities 18,298 2,356
------------- ------------
Total current liabilities 25,366 11,724
LONG-TERM DEBT 240,102 94,952
UNEARNED REVENUE 21,267 800
OTHER LONG-TERM LIABILITIES 136 2,000
DEFERRED INCOME TAXES 42,810 15,088
MINORITY INTEREST 151 187
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value
Authorized 10,000,000 shares, issued and outstanding-none - -
Common stock, $0.01 par value
Authorized 40,000,000 shares, 22,049,281 issued and 18,283,334
outstanding at September 30, 2000, and 17,994,900 issued and
17,984,092 outstanding at December 31, 1999 220 180
Paid in capital in excess of par value 78,123 61,383
Treasury stock of 3,765,947 and 10,808 shares (14,673) (73)
Retained earnings 17,875 8,061
------------- ------------
Total stockholders' equity 81,545 69,551
------------- ------------
$ 411,377 $ 194,302
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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Quicksilver Resources Inc.
Condensed Consolidated Statements of Operations
In thousands, except per share data - Unaudited
<TABLE>
For the Three Mopnths Ended For the Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE
Oil, gas and related product sales $ 28,140 $ 13,724 $ 72,270 $ 33,471
Other income 2,846 509 6,431 1,666
---------- ---------- ---------- ----------
Total revenues 30,986 14,233 78,701 35,137
---------- ---------- ---------- ----------
EXPENSES
Operating expenses 9,507 5,245 26,028 13,633
Depletion and depreciation 6,283 3,981 17,595 10,110
Provision for doubtful accounts (279) - (279) 1,350
General and administrative 1,816 897 4,771 2,733
Interest 6,526 2,586 15,413 6,324
---------- ---------- ---------- ----------
Total expenses 23,853 12,709 63,528 34,150
---------- ---------- ---------- ----------
Income before income taxes
and minority interest 7,133 1,524 15,173 987
Minority interest in net loss
of MSR Exploration Ltd. - - - 141
---------- ---------- ---------- ----------
Income before income taxes 7,133 1,524 15,173 1,128
Income tax expense 2,366 513 5,359 378
---------- ---------- ---------- ----------
NET INCOME $ 4,767 $ 1,011 $ 9,814 $ 750
========== ========== ========== ==========
Basic earnings per share $ 0.26 $ 0.08 $ 0.54 $ 0.06
========== ========== ========== ==========
Diluted earnings per share $ 0.26 $ 0.08 $ 0.53 $ 0.06
========== ========== ========== ==========
Basic weighted average number
of shares outstanding for the periods 18,283 12,883 18,283 12,578
========== ========== ========== ==========
Diluted weighted average number
of shares outstanding for the periods 18,528 12,883 18,473 12,578
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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Quicksilver Resources Inc.
Condensed Consolidated Statements of Cash Flows
In thousands - Unaudited
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,814 $ 750
Charges and credits to net income not affecting cash
Depletion and depreciation 17,595 10,110
Deferred income taxes 5,873 378
Recognition of unearned revenue (4,533) (538)
Future site restoration costs 30 -
Minority interest in loss of subsidiary - (141)
Amortization of deferred loan costs 985 258
Provision for doubtful accounts - 1,350
Equity interest in loss of affiliate 175 -
Changes in assets and liabilities, excluding the effect of the acquisition
Accounts receivable (5,719) (4,956)
Other current and noncurrent assets (710) (77)
Accounts payable (5,822) 3,685
Accrued and other liabilities 11,200 996
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,888 11,815
---------- ----------
INVESTING ACTIVITIES
Acquisition of properties and equipment (173,913) (36,659)
Acquisition of pipeline and facilities (2,469) (3,089)
Advances to affiliate (5,221) -
Proceeds from sale of properties 175 -
---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (181,428) (39,748)
---------- ----------
FINANCING ACTIVITIES
Notes payable, bank proceeds 250,324 35,339
Principal payments on long-term debt (105,129) (3,304)
Monetization of Section 29 tax credits 25,000 (74)
Deferred financing costs (5,580) (800)
Stock registration fees (9) (348)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 164,606 30,813
---------- ----------
NET INCREASE IN CASH 12,066 2,880
CASH AT BEGINNING OF PERIOD 2,557 294
---------- ----------
CASH AT END OF PERIOD $ 14,623 $ 3,174
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense $ 12,545 $ 5,245
========== ==========
Cash payments for income taxes $ 140 $ -
========== ==========
Common stock of 1,377,000 shares used for acquisition of
minority interest in MSR $ - $ 10,327
========== ==========
Common stock of 299,242 shares used for acquisition of Unocal $ 2,220 $ -
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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Quicksilver Resources Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2000, and the results of operations for the three and nine months
ended September 30, 2000 and 1999 and cash flows for the nine months ended
September 30, 2000 and 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America 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, 1999. The results of operations for the three and nine month
periods ended September 30, 2000 are not necessarily indicative of the operating
results to be expected for the full fiscal year.
In May 2000, the Company reclassified transportation and processing fees to
operating expense. The revenues were previously reported as other income. All
prior periods have been reclassified.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" which
summarized the application of accounting principles generally accepted in the
United States of America to revenue recognition in financial statements. The
Company does not believe the adoption of Staff Accounting Bulletin 101 will have
any impact on its consolidated financial position or results of operations since
it recognizes revenue upon completion of the earnings process. Sales from
producing wells are recognized as the title passes to the purchasers.
The Company has reviewed the requirements under Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
The Company believes that it has one segment and its operations outside of the
U.S. are insignificant.
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," and SFAS No. 137, which defers the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. SFAS No. 133
requires that all derivatives be recognized on the balance sheet and measured at
fair value. The Company plans to adopt SFAS No. 133 in the first quarter of 2001
and has determined that its oil and gas hedges and interest rate swaps will
qualify as cash flow and fair value hedges, respectively, under SFAS No. 133.
Accordingly, the Company will recognize assets and liabilities based upon the
fair value of the derivative instruments with the corresponding gains and losses
recorded to other comprehensive income to the extent that the hedge is
effective. Gains and losses on the derivatives will be deferred until
recognition of the sale of the oil and gas production hedged by the derivative
instruments. Hedge ineffectiveness will be recorded in earnings.
The Company continues to evaluate the impact of SFAS No. 133 as well as the
ongoing implementation issues currently being addressed by the Derivatives
Implementation Group. As a result, the direct financial impact of the
application of hedge accounting and the transition adjustment of the Company's
financial position and results of operations has yet to be determined.
Net Income per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted net income per common share is calculated in the same manner but also
considers the impact on net income and common shares for the potential dilution
from stock options, stock warrants, and any other convertible securities
outstanding. For the nine months ended September 30, 2000 and 1999 there were no
adjustments to net income for purposes of calculating diluted net income per
common share. The following is a reconciliation of the weighted average common
shares used in the basic and diluted net income per common share calculations
for the nine months ended September 30, 2000 and 1999.
7
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2000 1999 2000 1999
------------------------ -----------------------
(Unaudited, in thousands) (Unaudited, in thousands)
<S> <C> <C> <C> <C>
Weighted average common shares-basic 18,283 12,883 18,283 12,578
Potentially dilutive securities
Stock options 241 - 186 -
Stock warrants 4 - 4 -
--------- --------- --------- --------
Weighted average common shares-diluted 18,528 12,883 18,473 12,578
========= ========= ========= ========
</TABLE>
In connection with the Company's acquisition of properties from Unocal
Corporation's Spirit Energy 76 Unit in May of 1999, 404,381 contingently
issuable unregistered shares of common stock were held in escrow. The Company
released 93,773 shares in the second quarter of 2000. Of the remaining 310,608
shares, 205,469 shares were released from escrow and 105,139 shares were
returned to the Company on August 28, 2000. Accordingly a total of 299,242
shares are included in the basic and diluted net income per share computation
for the three and nine months ended September 30, 2000 (see note 2, Unocal).
Approximately 25,000 shares under option and warrants representing 1,128,000
shares have been excluded from the diluted net income per share calculation for
all periods because exercise prices exceed the average market price of the
Company's common stock.
2. ACQUISITIONS
CMS Acquisition
On March 31, 2000, the Company completed the previously announced
acquisition from CMS Oil and Gas Company, a subsidiary of CMS Energy
Corporation, of oil and gas properties located primarily in Michigan ("CMS
Properties" or "CMS Acquisition"). The purchase price was approximately
$164,000,000, subject to subsequent adjustments. The CMS Properties consist of
interests in approximately 3,050 (650 net) producing oil and gas wells on
approximately 512,000 gross (450,000 net) acres. Holditch-Reservoir Technologies
Consulting Services, a Schlumberger company, estimated proved reserves
attributable to the CMS Properties of 315.1 Bcf of natural gas, 747.8 Mbbls of
crude oil and condensate and 143.9 Mbbls of natural gas liquids, or a total of
320.4 Bcfe with an estimated value of approximately $184,000,000 as of January
1, 2000. Approximately 81% of the proved reserve volumes are classified as
proved developed.
The CMS Acquisition was financed through restructuring of Quicksilver's
senior bank facility, the sale of $53,000,000 in Subordinated Notes, and the
monetization of a portion of the accompanying Internal Revenue Service ("IRS")
Code Section 29 income tax credits related to the CMS Properties with a major
financial institution (see notes 4 and 5).
The CMS Acquisition was accounted for under the purchase accounting method,
and consists of both CMS oil and gas properties as well as 100% of the common
stock of Terra Energy Ltd.
The following table represents the preliminary allocation of the assets
acquired and liabilities assumed, based upon their fair value on the date of the
CMS Acquisition. In accordance with SFAS 109, a deferred tax liability was
recognized for the differences between the allocated values and the tax bases of
the acquired assets and liabilities for Terra Energy Ltd. Any additional
adjustments to the allocation of the purchase price are not anticipated to be
material to the consolidated financial statements of the Company.
Working capital $ (2,077,000)
Other assets/liabilities 536,000
Property, plant and equipment 187,390,000
Deferred taxes (21,849,000)
------------
Total purchase price $164,000,000
============
The purchase price is subject to adjustments including those for actual
results for the period from January 1, 2000 through March 31, 2000 (the interim
period) compared to estimated results included in the preliminary
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purchase price. The Company anticipates resolution of disputed interim period
results during the fourth quarter 2000, which should result in a minor decrease
of the final purchase price.
Unocal Acquisition
On May 17, 1999, the Company completed a purchase from Unocal Corporation's
Spirit Energy 76 Unit of substantially all of Unocal's natural gas and crude oil
assets in Michigan. The purchase price consisted of $25,800,000 in cash and
404,381 unregistered shares of the Company's common stock. The stock component
of the purchase price totaling $3,000,000 was placed in escrow. On August 28,
2000 an agreement was reached with Unocal whereby Unocal retained 299,242 shares
and 105,139 shares were returned to Quicksilver and are held as treasury shares.
3. DEFERRED FINANCING COSTS
The Company amended its credit facility agreement (see note 4) on March 31,
2000 and incurred additional deferred loan costs to be amortized over the
remainder of the agreement terminating March 21, 2003.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(In thousands)
<S> <C> <C>
Deferred financing costs $ 7,090 $ 1,510
Less accumulated amortization (1,292) (307)
------------- ------------
Net deferred financing costs $ 5,798 $ 1,203
============= ============
</TABLE>
During the third quarter, Quicksilver settled an interest rate swap that
hedged the fair value of variable rate debt outstanding. Upon settlement of the
contract, the Company received $446,000 based upon the fair value of the
contract at the date of settlement, August 16, 2000. The Company will recognize
the reduction of interest expense over the remaining interest rate swap contract
period.
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(In thousands)
<S> <C> <C>
Long-term debt, in thousands, consists of:
Notes payable to banks
(8.78% at September 30, 2000 and 8.315% at December 31, 1999) $180,000 $84,850
(9.16% at September 30, 2000 and 8.465% at December 31, 1999) 4,000 8,000
(8.99% at September 30, 2000 and 8.5% at December 31, 1999) 3,000 2,000
Subordinated Notes (14.75%, second mortgage note) 53,000 -
Other loans 2,281 2,236
-------- -------
242,281 97,086
Less current maturities (2,179) (2,134)
-------- -------
$240,102 $94,952
======== =======
</TABLE>
Maturities are as follows, in thousands of dollars:
Periods Ending September 30, 2000
-------------- ------------------
2000 $ 2,179
2001 -
2002 -
2003 187,000
2004 -
Thereafter 53,102
--------
$242,281
========
As part of the acquisition of the CMS properties and Terra Energy Ltd, the
Company amended the agreement setting forth the terms of its credit facility
("Credit Facility"). The Credit Facility permits the Company to obtain
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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 $225,000,000.
The Borrowing Base is $195,000,000 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. 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 interest rate is determined by
the ratio of outstanding credit to the borrowing base with a margin for
Eurodollar Tranches. The collateral for the Credit Facility consists of
substantially all of the existing assets of the Company and any future reserves
acquired. The loan agreements prohibit the declaration or payment of dividends
by the Company and contain other restrictive covenants, which, among other
things, require the maintenance of a minimum current ratio. The Company
currently is in compliance with all such restrictions. At September 30, 2000,
the Company had $8,000,000 available under the Credit Facility, which terminates
March 31, 2003.
The Company also sold $43,000,000 of 14.75% Second Mortgage Notes
("Subordinated Notes") on March 31, 2000 and an additional $10,000,000 on April
24, 2000. The Company may not prepay the Subordinated Notes, in whole or any
part, until after March 28, 2003. Prepayments will require a premium payment
ranging from 3% to 6%. Quarterly interest payments to the note holders may be
paid in kind with respect to all or any portion of interest in excess of 10% by
issuing additional notes. The collateral for the Subordinated Notes consists of
substantially all of the existing assets of the Company and any future reserves
acquired. The Subordinated Notes contain restrictive covenants, which, among
other things, require maintenance of working capital, collateral coverage ratio
and an earnings ratio before interest, taxes, depreciation and amortization and
costs associated with seismic geological and geophysical services in connection
and attributable to oil and gas exploration ("EBITDAX"). The Company currently
is in compliance with such restrictions. The Subordinated Notes are due and
payable in full on March 30, 2009.
MGV Energy Inc., a majority owned subsidiary of the Company, has a balance
of US $2,178,545, as of September 30, 2000, in debt related to the August 1999
acquisition of the Monogram Unit, a Canadian property. The interest rate is
0.75% over Canadian Imperial Bank of Commerce ("CIBC") prime. CIBC's prime was
7.5% and 6.5%, respectively, as of September 30, 2000 and December 31, 1999.
5. UNEARNED REVENUE
On March 31, 2000, the Company conveyed to a bank Section 29 tax credits for
99.5% of the interests acquired from CMS and the Terra interests in Devonian
shale gas production from certain wells located in Michigan. Cash proceeds
received from the sale were $25,000,000 and were recorded as unearned revenue.
The purchase and sale agreement and ancillary agreements with the bank include a
production payment in favor of Quicksilver burdening future production on the
properties. As of September 30, 2000, the $25,000,000 liability had decreased to
$20,466,518. Revenue is recognized as reserves are produced.
6. STOCKHOLDERS' EQUITY
The Company has warrants outstanding to purchase 550,000 shares of common
stock at $12.50 per share, 550,000 shares of common stock at $20.00 per share,
28,000 shares of common stock at $33.75 per share, and 5,750 shares of common
stock at $0.10 per share (exercisable only after the market price of the
Company's common stock reaches $10.00 per share), and options outstanding to
purchase 24,857 shares of common stock at $8.75 per share, 432,203 shares of
common stock at $3.6875 per share and 200,000 shares of common stock at $7.125
per share.
On October 4, 1999, the Board of Directors adopted the 1999 Stock Option and
Stock Retention Plan (`the Plan"), which was approved by the stockholders on
June 6, 2000. There are 1,300,000 shares of common stock reserved for issuance
under the Plan, which provides for the grant of incentive stock options, non-
qualified stock options, stock appreciation rights and retention stock awards.
No employee of the Company or subsidiary may receive options or awards
aggregating more than 20% of the shares of common stock available under the
Plan.
On February 10, 2000, the Company granted incentive stock options under the
plan covering 459,203 shares of common stock to nine of its employees. One of
these options, covering 27,000 shares, has expired due to an employee
resignation. These options were granted at an exercise price of $3.6875 and
vest equally in three annual installments beginning one year from the date of
grant. On June 30, 2000, the Company granted options covering an additional
200,000 shares at an exercise price of $7.125, and vesting requirements of the
June options are identical to those of the February options. No compensation
cost was recognized at date of grant because the
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exercise price at date of grant was equal to the fair value of the common stock
at date of grant. There were no options exercisable at September 30, 2000.
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. At that time, the Company estimated it would ultimately collect
$1,100,000 of the $2,450,000 accounts receivable balance and established a
$1,350,000 allowance for doubtful accounts. The Company recovered $1,629,000 in
the second and third quarters. As a result, $279,000 was recorded as a recovery
of the prior year's provision for doubtful accounts.
8. RELATED PARTY TRANSACTIONS
The Darden family has effective beneficial ownership of approximately 56% of
Quicksilver's shares outstanding including shares owned by Mercury Exploration
Company ("Mercury") and Quicksilver Energy L.C. Frank Darden, Thomas Darden,
Glenn Darden and Anne Darden Self are also Directors of the Company. Until July
1, 2000, Mercury operated the Company's oil and gas properties, and until April
1, 2000, provided most of the Company's accounting, treasury and administrative
functions. On April 1, 2000 accounting employees were transferred from Mercury
to Quicksilver. On July 1, 2000, employees involved in operating Quicksilver's
oil and gas properties were transferred to the Company. As a result,
Quicksilver's dependence on Mercury has been substantially eliminated. All
transactions with any affiliates are at arms length and require approval of a
majority of the disinterested members of the Board of Directors. During the
first nine months of 2000, Quicksilver paid $1,351,119 for services rendered by
affiliated companies.
In October 2000, the Company entered into a non-binding agreement in
principle to purchase all of the oil and gas-related assets of Mercury,
including ownership interest in three entities. This transaction is subject to
approval by the disinterested members of the Company's Board of Directors and is
expected to be completed in the fourth quarter 2000, effective July 1, 2000.
This acquisition will complete the transfer of oil and gas properties from
Mercury to Quicksilver, which began in 1999 as part of the formation of the
Company. Independent appraisers retained by the disinterested members of the
Company's Board of Directors are determining the value of the last of Mercury's
oil and gas related assets to be transferred to the Company. Payment for these
assets will be made in cash, by issuance of a note payable to Mercury bearing a
current market interest rate, assumption of existing debt and through
application of a $7,200,000 account receivable at September 30, 2000 owed to
Quicksilver by Mercury. The account receivable is related to revenue and expense
activity previously performed by Mercury on behalf of Quicksilver under the
Management Agreement, which was terminated July 1, 2000.
11
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following should be read in conjunction with the Company's financial
statements contained herein and in its Form 10-K for the year ended December 31,
1999, along with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in such Form 10-K. Any capitalized terms used
but not defined in the following discussion have the same meaning given to them
in the Form 10-K.
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements, as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, that involve a number of risks and uncertainties. Such forward-looking
statements may be or may concern, among other things, capital expenditures,
drilling activity, acquisition plans and proposals and dispositions, development
activities, cost savings, production efforts and volumes, hydrocarbon reserves,
hydrocarbon prices, liquidity, regulatory matters and competition. Such
forward-looking statements generally are accompanied by words such as "plan,"
"estimate," "budgeted," "expect," "predict," "anticipate," "projected,"
"should," "assume," "believe" or other words that convey the uncertainty of
future events or outcomes. Such forward-looking information is based upon
management's current plans, expectations, estimates and assumptions and is
subject to a number of risks and uncertainties that could significantly affect
current plans, anticipated actions, the timing of such actions and the Company's
financial condition and results of operations. As a consequence, actual results
may differ materially from expectations, estimates or assumptions expressed in
or implied by any forward-looking statements made by or on behalf of the
Company. Among the factors that could cause actual results to differ materially
are: fluctuations of the prices received or demand for the Company's oil and
natural gas, the uncertainty of drilling results and reserve estimates,
operating hazards, acquisition risk, requirements for capital, general economic
conditions, competition and government regulations, as well as the risks and
uncertainties discussed in this Quarterly Report, including, without limitation,
the portions referenced above, and the uncertainties set forth from time to time
in the Company's other public reports, filings and public statements.
Recent Events
On March 31, 2000 the Company completed the acquisition of oil and gas
properties from CMS Oil and Gas Company, a subsidiary of CMS Energy Corporation
("CMS Properties" or "CMS Acquisition"). The purchase price was approximately
$164,000,000, subject to subsequent adjustments. The CMS Properties are located
primarily in Michigan and consist of interests in approximately 3,050 (650 net)
producing oil and gas wells on approximately 512,000 gross (450,000 net) acres.
Holditch-Reservoir Technologies Consulting Services, a Schlumberger company,
estimated proved reserves attributable to the CMS Properties of 315.1 Bcf of
natural gas, 747.8 Mbbls of crude oil and condensate and 143.9 Mbbls of natural
gas liquids, or a total of 320.4 Bcfe with an estimated value of approximately
$184,000,000 as of January 1, 2000. Approximately 81% of the proved reserve
volumes are classified as proved developed.
The Company acquired a 95% interest in Indiana oil and gas producing
properties from Dominion Reserves, Inc. for $2,177,347, subject to certain
adjustments, on October 23, 2000.
In October 2000, the Company entered into a non-binding agreement in
principle to purchase all of the oil and gas-related assets currently owned by
Mercury Exploration Company ("Mercury"). This transaction is subject to approval
by the disinterested members of the Company's Board of Directors and is expected
to be completed in the fourth quarter, effective July 1, 2000. This acquisition
will complete the transfer of oil and gas properties from Mercury to
Quicksilver, which began in 1999 as part of the formation of the Company.
Independent appraisers retained by the disinterested members of the Company's
Board of Directors are determining the value of the last of Mercury's oil and
gas related assets to be transferred to the Company. Payment for these assets
will be made in cash, by issuance of a note payable to Mercury bearing a current
market interest rate, assumption of existing debt and through application of a
$7,200,000 account receivable at September 30, 2000 owed to Quicksilver by
Mercury. The account receivable is related to revenue and expense activity
previously performed by Mercury on behalf of Quicksilver under a management
agreement, which was terminated July 1, 2000.
During the fourth quarter, the Company anticipates purchasing the remaining
interests in its Canadian subsidiary MGV Energy Inc. ("MGV"), currently owned by
MGV's management, to bring Quicksilver's ownership to 100%. Consideration for
the acquisition will be in the form of MGV securities convertible into
Quicksilver common stock.
12
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
General
The following discussion compares the Company's financial condition at
September 30, 2000, to its financial condition at December 31, 1999. The
discussions of cash flow and results of operations also compare the three- and
nine-month periods ended September 30, 2000, with the comparable periods of
1999. For the twelve months ended December 31, 1999 and the nine months ended
September 30, 2000, the Company spent approximately $43,500,000 and
$176,382,000, respectively, on acquisition and development activities. The
capital program was financed from operations, additional borrowings,
restructured bank facility, monetization of a portion of acquired Section 29 tax
credits and the sale of Subordinated Notes.
Cash Flow
The Company believes that its capital resources 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 oil and gas 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. The Company
sells approximately 86% of its natural gas production under long- term, fixed
price contracts, and swap agreements. 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, 2000 was $28,888,000, compared to $11,815,000 for the same period
last year. The increase resulted from higher earnings, primarily as a result of
the acquisition of CMS Properties, but was partially offset by an increase in
working capital.
The Company's net cash used in investing for the nine months ended
September 30, 2000 was $181,428,000. Investing activities were comprised
primarily of additions to oil and gas properties through the acquisition of CMS
properties and development and, to a lesser extent, exploration of oil and gas
properties and additions of field service assets. In addition, Quicksilver
advanced $5,221,000 to its affiliate, Beaver Creek Pipeline.
The Company's activities have been financed through a combination of
operating cash flow, bank borrowings, Subordinated Notes and monetization of a
portion of acquired Section 29 tax credits. The Company's net cash from
financing activities for the nine months ended September 30, 2000 was
$164,606,000. Sources of financing used by the Company have been borrowings
under its Credit Facility, Subordinated Notes and monetization of a portion of
Section 29 tax credits.
13
<PAGE>
RESULTS OF OPERATIONS
Primarily as a result of increased production and product prices, net income
and cash flow from operations increased, comparing the nine months of 1999 and
the nine months of 2000. These increases on a Mcf equivalent ("Mcfe") basis are
as shown below.
Nine Months Ended
September 30,
---------------------------------
(Per Mcfe data)
2000 1999
------------ -------------
Revenue $ 3.21 $ 2.39
Production taxes (0.18) (0.11)
Lease operating expenses (0.88) (0.81)
------------ -------------
Production netback 2.15 1.47
General and administrative expenses (0.19) (0.19)
Net cash interest expense (0.51) (0.36)
------------ -------------
Cash flow from operations (a) 1.45 0.92
Depletion and depreciation (0.72) (0.69)
Income tax expense (0.22) (0.03)
Other non-cash items (0.11) (0.15)
------------ -------------
Net income $ 0.40 $ 0.05
============ =============
(a) Represents cash flow provided by operations, exclusive of depletion,
depreciation and amortization, income taxes and the net change in non-cash
working capital balances.
Three Months Ended September 30, 2000 Compared with the Three Months Ended
September 30, 1999
The acquisition of oil and gas properties in Michigan from CMS Oil and Gas
Company on March 31, 2000, significantly increased Quicksilver's results of
operations for the quarter ended September 30, 2000 as compared to the prior
year quarter.
<TABLE>
<CAPTION>
For the Three Months Ended
September 30, 2000
----------------------------------------------------------------
QRI, excluding
CMS CMS TOTAL
-------------------- ----------------- -----------------
(In thousands, except volumes)
<S> <C> <C> <C>
REVENUE
Production 16,717 $ 11,423 $ 28,140
Other income 2,837 9 2,846
-------------------- ----------------- -----------------
Total revenue 19,554 11,432 30,986
==================== ================= =================
EXPENSES
Operating expenses 6,824 2,683 9,507
Depletion and depreciation 3,757 2,526 6,283
Provision for doubtful accounts (279) - (279)
General and administrative 1,799 17 1,816
Interest 2,174 4,352 6,526
-------------------- ----------------- -----------------
Total expenses 14,275 9,578 23,853
-------------------- ----------------- -----------------
Income before income taxes $ 5,279 $ 1,854 $ 7,133
==================== ================= =================
Sales volumes (Mcfe) 5,434,694 3,625,220 9,059,914
==================== ================= =================
</TABLE>
Revenues: Total revenues for the three months ended September 30, 2000 were
$30,986,000; an increase of 118% from the $14,233,000 reported in the three
months ended September 30, 1999. Higher volumes contributed $10,630,000 of the
revenue increase while increased prices added $3,786,000 to revenue. Volume
increases were primarily the result of production from the CMS Properties
acquired March 31, 2000.
14
<PAGE>
The Company's revenues for the third quarter of 2000 increased significantly
over the comparable quarter last year as further shown below.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Average daily production volume
Gas - Mcf/d 75,841 45,900
Oil - Bbls/d 3,311 2,348
Natural gas liquid ("NGL") - Bbls/d 462 168
Product sale revenues (in thousands)
Natural gas sales $20,343 $10,388
Oil sales 6,840 3,225
NGL sales 957 111
------------ ------------
Total oil, gas and related product sales $28,140 $13,724
============ ============
Unit prices-including impact of hedges
Gas price per thousand cubic feet ("Mcf") $ 2.92 $ 2.46
Oil price per barrel ("Bbls") $ 22.45 $ 14.93
NGL per barrel ("Bbls") $ 22.53 $ 7.19
</TABLE>
Gas sales of $20,343,000 in the third quarter of 2000 were 96% higher than
the $10,388,000 for the third quarter 1999. Gas volumes increased 65% over the
1999 period as a result of the CMS Properties. Sales volumes of 6,977,000 Mcf
contributed $8,031,000 of additional revenue over the 1999 period. Average gas
prices were $2.92 per Mcf in the third quarter ended September 30, 2000, $0.46
per Mcf higher than the average price received in the 1999 period. Increased
prices added $1,924,000 of revenue as compared to the 1999 period.
Oil sales grew 112% to $6,840,000 in the third quarter period ended
September 30, 2000 compared to $3,225,000 in the 1999 period. Crude oil
production for the third quarter 2000 was 305,000 barrels compared to 216,000
barrels in 1999 primarily as a result of the CMS Properties and contributed
revenue of $1,989,000 over the 1999 period. Average oil sales prices in the
third quarter were $22.45 per barrel compared to $14.93 per barrel in the 1999
period increasing revenues $1,626,000.
NGL sales of $957,000 for the third quarter of 2000 increased significantly
over sales for the 1999 period. NGL prices increased from $7.19 to $22.53 per
Bbl and volumes increased 175% due to the CMS Acquisition.
Other income, which primarily consists of the recognition of deferred income
associated with the monetization of Section 29 tax credits, increased by
$2,337,000 to $2,846,000 in the third quarter of 2000 compared to $509,000 in
the comparable 1999 period as a result of production on the properties related
to the Section 29 tax credits monetization.
Expenses: Total expenses of $23,853,000 in the third quarter of 2000 were
88% higher than the $12,709,000 incurred in the third quarter of 1999 reflecting
the addition of CMS Properties in 2000. Production expenses increased 66%, or
$2,994,000, to $7,522,000 reflecting higher sales volumes of 61%. Production
costs per Mcfe rose $0.02 over the 1999 period to $0.83 per Mcfe. Severance
taxes increased 177%, or $1,268,000, to $1,985,000 due to sales volume increases
as a result of the CMS Acquisition and higher prices.
Depletion and Depreciation
<TABLE>
<CAPTION>
Three Months Ended
(In thousands, except per unit amounts) September 30,
-----------------------------------------
2000 1999
------------------- ------------------
<S> <C> <C>
Depletion $5,990 $3,762
Depreciation of other fixed assets 293 219
------ ------
Total depletion and depreciation $6,283 $3,981
====== ======
Average DD&A cost per Mcfe $ 0.69 $ 0.71
====== ======
</TABLE>
Depletion and depreciation increased to $6,283,000 in the third quarter of
2000 from $3,981,000 in the same period of 1999, as a result of production
volumes associated with the CMS Acquisition properties.
15
<PAGE>
General and Administrative Expenses
General and administrative costs incurred during the third quarter of 2000
were $1,816,000, 102% higher than in the 1999 period, reflecting higher salaries
and related payroll expenses ($569,000), office and building rent expense
($167,000), professional fees ($119,000), franchise taxes ($110,000), and
Canadian office expenses ($160,000). These increases are related to the growth
of the Company through the CMS Acquisition and increased activity associated
with MGV, Quicksilver's Canadian subsidiary.
Interest Expense
Interest expense of $6,526,000 in the third quarter increased 152% from the
comparable 1999 period reflecting higher debt levels due to the CMS Acquisition
and higher effective interest rates in 2000.
Nine Months Ended September 30, 2000 Compared with the Nine Months Ended
September 30, 1999
The acquisition of oil and gas properties in Michigan from CMS Oil and Gas
Company on March 31, 2000, significantly increased Quicksilver's results of
operations for the nine months ended September 30, 2000.
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 2000
----------------------------------------------------------------
QRI, excluding CMS CMS TOTAL
-------------------- ----------------- -----------------
(In thousands, except volumes)
<S> <C> <C> <C>
REVENUE
Production $ 46,669 $ 25,601 $ 72,270
Other income 6,420 11 6,431
-------------------- ----------------- -----------------
Total revenue 53,089 25,612 78,701
-------------------- ----------------- -----------------
EXPENSES
Operating expenses 18,380 7,648 26,028
Depletion and depreciation 11,887 5,708 17,595
Provision for doubtful accounts (279) (279)
General and administrative 4,741 30 4,771
Interest 6,523 8,890 15,413
-------------------- ----------------- -----------------
Total expenses 41,252 22,276 63,528
-------------------- ----------------- -----------------
Income before income taxes $ 11,837 $ 3,336 $ 15,173
==================== ================= =================
Sales volumes (Mcfe) 16,372,148 8,160,617 24,532,765
==================== ================= =================
</TABLE>
Revenues: Total revenues for the nine months ended September 30, 2000 were
$78,701,000; an increase of 124% from the $35,137,000 reported in the nine
months ended September 30, 1999. Additional volumes, resulting primarily from
the CMS Acquisition, increased revenue $28,653,000 over the 1999 period while
increasing prices added $10,146,000 of revenue.
16
<PAGE>
The Company's revenues for the first nine months of 2000 increased
significantly over the comparable period last year as further shown below.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Average daily production volume
Gas - Mcf/d 69,935 41,377
Oil - Bbls/d 2,823 1,846
NGL - Bbls/d 443 239
Product sale revenues (in thousands)
Natural gas sales $53,871 $26,209
Oil sales 15,914 6,708
NGL sales 2,485 554
--------------- ---------------
Total oil, gas and related product sales $72,270 $33,471
=============== ===============
Unit prices-including impact of hedges
Gas price per thousand cubic feet ("Mcf") $ 2.81 $ 2.32
Oil price per barrel ("Bbls") $ 20.57 $ 13.31
NGL per barrel ("Bbls") $ 20.46 $ 8.50
</TABLE>
Gas sales of $53,871,000 in the first nine months of 2000 were 106% higher
than the $26,209,000 for the same period in 1999 as gas volumes increased 69% to
19,162,000 Mcf in 2000 reflecting additional production volumes. Production
increases, primarily related to the additional production from the CMS
Acquisition and Unocal properties, contributed $21,999,000 of revenue over the
prior year period. Average gas prices of $2.81 per Mcf for the nine months ended
September 30, 2000, were $0.49 per Mcf higher than the average received in the
1999 period and increased revenues by $5,663,000 from the prior year period.
Oil sales grew 137% to $15,914,000 in the nine months ended September 30,
2000 compared to $6,708,000 in the comparable 1999 period primarily as a result
of higher volumes from the CMS Acquisition and higher prices. The additional oil
production contributed $5,509,000 of revenue as compared to the prior year
period. Crude oil production for the nine months ended September 30, 2000 was
774,000 barrels compared to 506,000 barrels for the 1999 nine-month period.
Average oil sales prices in the first nine months of 2000 were $20.57 per barrel
compared to $13.31 per barrel for the 1999 nine-month period and provided
additional revenue of $3,697,000 over the prior year period.
NGL sales increased to $2,485,000 for first nine months of 2000 compared to
the 1999 nine-month period. NGL prices increased from $8.50 to $20.46 per Bbl.
Volume increased 85% from 65,500 barrels to 121,500 barrels primarily due to
production from the CMS Acquisition properties.
Other income primarily consists of the recognition of deferred income
associated with the monetization of Section 29 tax credits. Other income for
the first nine months of 2000 increased by $4,765,000 to $6,431,000 compared to
$1,666,000 in the 1999 nine-month period as a result of production on the
properties related to the 2000 Section 29 tax credits monetization.
Expenses: Total expenses of $63,528,000 in the first nine months of 2000
were 86% higher than the $34,150,000 incurred in the first nine months of 1999.
Operating expenses of $26,028,000 increased 91% from the 1999 comparable period
reflecting increased sales volumes and certain other costs. Severance taxes
increased $2,695,000 as a result of higher sales volumes relating to the CMS
Properties and higher product prices. Significant increases in production
expenses included field payroll ($1,388,000), transportation fees ($2,178,000),
compressor charges ($1,337,000), gas processing fees ($1,176,000), office and
building rent ($740,000) and vehicle expenses ($262,000) and were partially
offset by overhead recoveries ($2,361,000). These increases were primarily the
result of operating the acquired Unocal and CMS properties.
17
<PAGE>
Depletion and Depreciation
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands, except per unit amounts) September 30,
---------------------------------------------
2000 1999
------------------- ------------------
<S> <C> <C>
Depletion $16,754 $ 9,581
Depreciation of other fixed assets 841 529
------- -------
Total depletion and depreciation $17,595 $10,110
======= =======
Average DD&A cost per Mcfe $ 0.72 $ 0.69
======= =======
</TABLE>
Depletion and depreciation increased to $17,595,000 in the first nine months
of 2000 from $10,110,000 in the comparable 1999 period as a result of higher
production volumes associated with the Unocal properties and CMS Acquisition and
a higher depletion rate.
General and Administrative Expenses
General and administrative costs incurred during the first nine months of
2000 totaled $4,771,000 and were 75% higher than the comparable 1999 period,
reflecting higher salaries ($1,462,000), building and office rent ($256,000),
franchise taxes ($220,000), professional fees ($162,000) and Canadian office
expenses ($366,000). These increases are related to the growth of the Company
through the CMS Acquisition and increased activity associated with MGV,
Quicksilver's Canadian subsidiary.
Interest Expense
Interest expense of $15,413,000 in the first nine months of 2000 increased
144% from the comparable 1999 period reflecting higher debt levels in 2000 due
to the CMS Acquisition and higher effective interest rates in 2000.
Income Taxes
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------------------
<S> <C> <C>
2000 1999
------------------- ------------------
Income tax provision (in thousands) $5,359 $ 378
Average income tax expense per Mcfe $ 0.22 $ 0.03
Effective tax rate 35.30% 33.50%
</TABLE>
Based on the Company's pre-tax income of $15,173,000 for the nine months
ended September 30, 2000, the income tax provision for the nine-month period was
established using an effective tax rate of 35.3%. As of September 30, 2000, the
Company had a deferred tax liability of $42,810,000. The increase in the
deferred tax liability over the December 31, 1999 balance includes $21,849,000
as a result of the acquisition of Terra stock in the CMS Acquisition. The
remainder is due to 2000 year-to-date deferred tax expense.
18
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company uses derivative financial instruments in limited instances and
for other trading purposes to manage risk as it relates to gas and oil sales and
interest rates. Where the Company has fixed interest rates or gas and oil sales
through the use of swaps, futures or forward contracts, the Company has
mitigated the downside risk of adverse price and rate movements: however, it has
also limited future gains from favorable movements.
Market and Credit Risk
The Company addresses market risk related to these instruments by selecting
instruments whose value fluctuations highly correlate with the underlying item
being hedged. Credit risk related to derivative financial instruments, which is
minimal, is managed by requiring high credit standards for counter parties and
monthly settlements.
Commodity Price Risk
The Company enters into various financial contracts to hedge its exposure to
commodity price risk associated with anticipated future oil and gas production.
These contracts consist of price ceilings and floors, no-cost collars and fixed
price swaps.
The Company sells approximately 36% of its natural gas under long-term fixed
price contracts, and approximately 50% under swap agreements and therefore,
benefits from significant predictability of its natural gas revenues. Commodity
market price fluctuations affect those natural gas volumes that are not sold
under contract, and also affect crude oil sales that are not hedged.
As of September 30, 2000, the Company had zero-cost financial contracts
("collars") in place that hedged a total of 500 barrels of oil per day
("MBbls/d") through November 2000. The contract had a ceiling price of $25.85
per barrel. These contracts had a floor price of $21.00 per barrel.
The Company also has fixed price swaps for 7,500 mcf per day at $2.40 per
mcf through April 2004. MGV has a fixed price swap for an average of 20,852 Giga
Joules (which approximates 20,800 mcf) per month at $3.09 Canadian through
October 2004.
Gain or loss on these derivative commodity contracts would be offset by a
corresponding gain or loss on the hedged commodity positions. Based on the
future market prices at September 30, 2000 the Company would expect to pay
approximately $60,357,000 on the natural gas contracts, and $245,000 on crude
oil contracts.
As a result of these hedging activities for the nine months ended
September 30, 2000, gas revenues were decreased by $8,886,285 and oil revenues
were decreased by $3,457,342.
Interest Rate Risk
The Company has an interest rate swap agreement covering $25,000,000 of its
debt through June 17, 2002, which converts the debt floating LIBOR base rate to
a 6.86% fixed rate. The Company had another agreement covering $25,000,000
which expired May 8, 2000, that converted the debt floating LIBOR base rate to a
5.75% fixed rate. On October 2, 2000, the Company entered into an additional
interest rate swap agreement covering $50,000,000 of its debt through March 31,
2003, which converts the debt floating LIBOR base rate to a 6.78% fixed rate.
Interest expense for the nine months ended September 30, 2000 was $192,678 lower
as a result of interest rate swaps.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. Other Information
In October 2000, the Company entered into a non-binding agreement in
principle to purchase all of the oil and gas-related assets currently owned by
Mercury Exploration Company ("Mercury"). This transaction is subject to approval
by the disinterested members of the Company's Board of Directors and is expected
to be completed in the fourth quarter, effective July 1, 2000. This acquisition
will complete the transfer of oil and gas properties from Mercury to
Quicksilver, which began in 1999 as part of the formation of the Company.
Independent appraisers retained by the disinterested members of the Company's
Board of Directors are determining the value of the last of Mercury's oil and
gas related assets to be transferred to the Company. Payment for these assets
will be made in cash, by issuance of a note payable to Mercury bearing a current
market interest rate, assumption of existing debt and through application of a
$7,200,000 account receivable at September 30, 2000 owed to Quicksilver by
Mercury. The account receivable is related to revenue and expense activity
previously performed by Mercury on behalf of Quicksilver under a management
agreement, which was terminated July 1, 2000.
During the fourth quarter, the Company anticipates purchasing the remaining
interests in its Canadian subsidiary MGV Energy Inc. ("MGV"), currently owned by
MGV's management, to bring Quicksilver's ownership to 100%. Consideration for
the acquisition will be in the form of MGV securities convertible into
Quicksilver common stock.
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
15 Awareness letter of Deloitte & Touche LLP.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
20
<PAGE>
Quicksilver Resources Inc.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 13, 2000
<TABLE>
<S> <C>
Quicksilver Resources Inc.
By: /s/ Glenn Darden
-------------------------------------------------------------------
Glenn Darden
President and Chief Executive Officer
By: /s/ Bill Lamkin
-------------------------------------------------------------------
Bill Lamkin
Executive Vice President, Chief Financial Official and Secretary
</TABLE>
21
