QUICKSILVER RESOURCES INC, 10-K, 2000-03-24

QUICKSILVER RESOURCES INC
10-K, 2000-03-24
CRUDE PETROLEUM & NATURAL GAS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1999

[_] 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

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QUICKSILVER RESOURCES INC.
(Exact name of registrant as specified in its charter)

Delaware 75-2756163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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

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Securities registered pursuant to Section 12 (b) of the Act:

<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
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<S> <C>
Common Stock, par value $0.01 per share American Stock Exchange
</TABLE>

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 [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

Documents incorporated by reference: Proxy statement of Quicksilver
Resources Inc. relating to the annual meeting of stockholders to be held on
May 17, 2000, which is incorporated into Part III of this Form 10-K.

As of February 29, 2000, 18,388,473 shares of common stock of Quicksilver
Resources Inc. were outstanding, and the aggregate market value of the voting
stock held by non-affiliates of Quicksilver Resources Inc. was approximately
$33,638,000 based on the American Stock Exchange composite trading closing
price of $3.875 on February 29, 2000, and using the definition of beneficial
ownership contained in Rule 16a-1(a) (2) promulgated pursuant to the
Securities Exchange Act of 1934.

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INDEX TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1999

<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I
Item 1. Description of Business................................................................ 3
Item 2. Description of Properties.............................................................. 8
Item 3. Legal Proceedings...................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................................... 12

Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 13
Item 6. Selected Financial Data................................................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 16
Item 8. Financial Statements and Supplementary Data............................................ 21
Item 9. Changes in and Disagreements with Accountants on Financial Disclosure.................. 70

Part III
Item 10. Directors and Executive Officers of the Company........................................ 70
Item 11. Executive Compensation................................................................. 71
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 71
Item 13. Certain Relationships and Related Transactions......................................... 71

Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K...................... 71
SIGNATURES............................................................................. 75
</TABLE>

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PART I

ITEM 1. Description of Business

Formation of Quicksilver

Quicksilver Resources Inc. (the "Company" or "Quicksilver") was formed as a
Delaware corporation in December 1997 for the purpose of combining certain oil
and gas properties owned by Mercury Exploration Company ("Mercury"),
Quicksilver Energy, L.C. ("QELC") and Michigan Gas Partners Limited
Partnership ("Michigan Gas Partners"). On January 1, 1998 Mercury, QELC,
Michigan Gas Partners, Trust Company of the West ("TCW"), Joint Energy
Development Investments Limited Partnership ("JEDI") and Quicksilver entered
into an agreement and a plan of reorganization and merger. Michigan Gas
Partners was merged into Quicksilver and Mercury and QELC transferred certain
assets, principally natural gas and crude oil producing properties, and
liabilities to Quicksilver.

Business Combination

On March 4, 1999, the stockholders of MSR Exploration Ltd. ("MSR") approved
the merger of MSR into Quicksilver pursuant to the terms of an Agreement and
Plan of Merger, dated September 1, 1998, by and among Quicksilver and MSR. As
a result of the MSR merger, the separate corporate existence of MSR ceased and
all of the properties, rights, privileges, powers and franchises of MSR vested
in Quicksilver, the surviving corporation of the merger. All the debts,
liabilities and duties of MSR were transferred to Quicksilver. Each share of
common stock of MSR outstanding immediately prior to the effective time of the
merger was converted into the right to receive one tenth of one share of
common stock of Quicksilver. Quicksilver became a publicly traded corporation
and shares of Quicksilver common stock became listed for trading on the
American Stock Exchange under the symbol "KWK".

Business of Quicksilver

Quicksilver is an independent energy company engaged in the acquisition,
development, exploration, production and sale of natural gas, crude oil and
condensate and the gathering, processing and transmission of natural gas.
Quicksilver pursues its business through the acquisition and development of
oil and gas mineral leases, gas gathering systems and producing natural gas
and crude oil properties. Based upon the specifics of each mineral lease, as
well as geological and engineering interpretations, Quicksilver develops its
inventory of leases by drilling wells, redrilling wells or recompleting
existing wells located on those leases for the recovery of the reserves
located there. Quicksilver currently has an interest in natural gas and crude
oil mineral leases, gas gathering pipeline systems and wells producing
hydrocarbons that are located principally in the states of Michigan, Wyoming,
and Montana, as well as Canada. Quicksilver evaluates other opportunities for
the development of reserves and related assets as they become available and,
under certain circumstances, may explore opportunities in regions other than
those in which Quicksilver is currently involved.

As part of its formation, Quicksilver entered into a management agreement
with Mercury to act as operator of Quicksilver's oil and gas properties. In
this capacity, Mercury is responsible for the daily activities of producing
natural gas and crude oil from Quicksilver's individual wells and leases.
Mercury supervises its field employees and manages Quicksilver's properties
with a view toward maximizing profitability. For some wells, Mercury also
contracts with individuals doing business in proximity to the wells (who are
more commonly referred to as "pumpers") for performance of various tasks that
are required to maintain production from the wells. Upon completion of the MSR
merger on March 4, 1999, the management agreement with Mercury terminated and
Quicksilver and Mercury entered into a new management agreement. Under this
new management agreement, Mercury provides administrative and accounting
services, and continues to provide operations services under existing
operating agreements. The Company plans to begin performing its own accounting
function prior to the end of the second quarter of 2000.

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Quicksilver is not a user or refiner of the natural gas or crude oil it
produces, except when related to the operation of wells that produce natural
gas. Once extracted from the ground, Quicksilver either connects the
production to a pipeline gathering system, in the case of natural gas and
condensate, or stores the crude oil in storage tanks located close to the
producing field for collection by oil purchasers.

Quicksilver owns or holds working interests in over 1,677 producing wells.
Quicksilver also holds interests in properties that contain proved undeveloped
natural gas and crude oil reserves that require additional drilling,
workovers, water flooding or other forms of enhancement in order to become
productive.

The Company controls capital expenditures and timing of all field activities
and strives to manage its producing properties to maximize economic production
over the life of the properties through a combination of development well
drilling, existing well recompletions and workovers and enhanced recovery
operations. Quicksilver uses advanced drilling technologies to minimize costs
and performs regular operational reviews to minimize operating expenses.

Quicksilver continually evaluates producing property acquisition
opportunities and may increase its total annual capital expenditures depending
upon its success in identifying and completing attractive acquisitions.

Business Strategy

Quicksilver's business strategy focuses on achieving growth in value per
share while maintaining profitability. The Company accomplishes this by (i)
pursuing low-cost development projects within its existing property base, (ii)
pursuing selective complementary acquisitions of high-quality, long-lived
producing properties with the potential for operating cost reductions, (iii)
managing exposure to commodity price volatility through an aggressive hedging
program, and (iv) pursuing limited low-risk exploration drilling projects.

Low-cost Development of Existing Property Base

A principal component of Quicksilver's strategy is to increase production
and reserves through aggressive management of operations and low-risk
development drilling. The Company's principal properties possess geological
and reservoir characteristics that make them well-suited for production
increases through exploitation activity and development drilling. The Company
initiates projects to reduce operating costs and increase production through
the repair and upgrading of lifting equipment; the redesigning of equipment to
improve production from different zones; the modification of gathering and
other surface facilities; and the conducting of restimulations and
recompletions. Through these and other techniques, the Company regularly
reviews operations and mechanical data on operated properties to determine if
actions can be taken to profitably increase reserves and production.

Pursuit of Selective Complementary Acquisitions

Quicksilver seeks to acquire operated, long-lived producing properties that
present opportunities to profitably increase reserves and production levels
through the implementation of technically advanced reservoir management
techniques and the reduction of expenses through the consolidation and active
management of field operations. Quicksilver targets acreage that would expose
the Company to high potential prospects located in areas that are geologically
similar to neighboring areas with large developed fields. Quicksilver believes
that the Company will be able to continue this cost-effective acquisition
strategy in the foreseeable future as larger oil and gas companies continue to
divest domestic onshore properties in order to focus on projects in offshore
and international areas.

Management of Product Price Risk

Quicksilver is focused on growing its oil and gas operations while
minimizing the effect of commodity price swings on EBITDA, net income and cash
flow from operations. To help ensure a level of predictability in the prices
received for the Company's natural gas and crude oil production and,
therefore, the resulting cash flow,

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Quicksilver has entered into natural gas sales contracts of up to ten years in
length as well as financial hedges for approximately 60% of its natural gas
production, and has short-term hedges and contracts in place for approximately
75% of the Company's crude oil production. The Company's strategy is to seek
arrangements that provide a guaranteed minimum price that assures acceptable
rates of return on that portion of the Company's production committed under
those contracts. As incremental production is added or contracts or financial
instruments expire, the Company will opportunistically enter into similar
contracts for up to 80% of production on then-favorable terms. The Company's
commodity risk management strategy helps to ensure a predictable, base level
of cash flow which allows the Company to execute its drilling and exploitation
program, meet debt service requirements, and pursue acquisition opportunities,
even in times of weakness in the prices of natural gas and crude oil. The
Company expects to enter into additional financial hedges or natural gas sales
contracts upon completion of the CMS acquisition described below (see Recent
Events).

Participation in Exploratory Drilling Projects

Quicksilver will continue to focus the bulk of activities on lower risk
exploitation activity and development drilling. Quicksilver may, however,
allocate up to 10% of future capital expenditures to exploratory projects. In
particular, Quicksilver anticipates pursuing exploratory and follow-on
development and exploitation drilling in areas which are believed to be
attractive prospects for coal bed methane gas projects, to which the Company's
technical and operational expertise is well suited. Whenever possible, the
Company will seek to fund the initial higher-risk portion of capital
expenditures associated with the exploration phase of these projects through
farmouts to larger, better capitalized industry participants while maintaining
the ability to participate in any subsequent lower risk development and
exploitation activities.

Recent Events

Unocal Acquisition

On May 17, 1999, Quicksilver 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 assets purchased, consisting of ownership interest
in the Garfield Unit and the Beaver Creek Unit, include approximately 20,000
net leasehold acres and about 13.0 Mmcfe per day of production. As a result of
the acquisition, Quicksilver increased its ownership in fields the Company
already controlled, obtained assets which complemented existing assets and
increased its total production substantially. The Company's ownership in the
Garfield Unit increased from 54% to 99%. The purchase price for the Unocal
acquisition was $30 million, consisting of $27 million in cash, adjusted to
$25.8 million cash at closing, and 404,381 unregistered shares of Quicksilver
common stock. The stock portion of the purchase price was placed in escrow and
may be distributed to Unocal over a three-year period, subject to downward
adjustment in correlation to costs, expenses, and liabilities which may be
incurred during this period.

Beaver Creek Pipeline, L.L.C.

In June 1999, Quicksilver and Mercury Michigan, Inc., an affiliate of the
Company's largest stockholder, formed Beaver Creek Pipeline, L.L.C.
Quicksilver and Mercury Michigan, Inc. each acquired a 50% interest in Beaver
Creek. Beaver Creek purchased from Dow Chemical a 125-mile natural gas
pipeline extending from the Company's Beaver Creek field in northern Michigan
to the Midland, Michigan industrial corridor. A number of large end-use
customers, including Dow Chemical, are located in the area of the pipeline and
the Company expects demand for natural gas to significantly increase due to
increasing industrial activity and power generation in the area. Quicksilver
expects this pipeline acquisition to decrease its transportation expenses and,
as a result, increase the net prices the Company receives for its natural gas.

MGV Energy, Inc.

On August 26, 1999, the Company purchased a 89.5% 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

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identifies acquisition and development prospects for Pan Canadian within a
36,000 square mile area of mutual interest primarily 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% level. MGV is free to pursue on
its own any prospects outside of the area of mutual interest and also may take
100% of any prospects within the area of mutual interest which Pan Canadian
rejects. Subsequent to the Company's purchase of an interest in MGV, MGV made
its first acquisition of an interest in 375 existing gas 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 and 10.1 Bcf
of proved reserves.

Sale of Additional Common Stock

During November 1999 the Company completed the sale of 5,100,000 shares of
its common stock at $5 per share. As a result of the sale, the interest in
Quicksilver of the Darden family, principal stockholders of Quicksilver,
decreased from 75.3% to 54.3%. After underwriter's commission and selling
costs, net proceeds of $23,180,000 were used to pay down $20,000,000 of long-
term debt and the remainder is being used for capital projects.

CMS Acquisition

In March 2000, the Company entered into a Purchase and Sale Agreement with
CMS Oil and Gas Company, a subsidiary of CMS Energy Corporation, providing for
the Company's acquisition of properties of CMS located in Michigan for
approximately $164 million, subject to adjustments. The CMS Properties consist
of interests in 3,049 gross (650 net) active producing oil and gas wells
located on 511,641 gross (449,784 net) acres. Proved reserves attributable to
the CMS acquisition are expected to be 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. Approximately 80% of the proved reserve volumes are
classified as proved developed. Current daily production from the CMS
properties is estimated to be 48 Mmcfe. The acquisition of the CMS properties
will complement the current operations and infrastructure that Quicksilver has
established in Michigan, further positioning the Company to continue to
increase its ownership position in that region on a cost competitive basis.
The Company issued 3,650,000 shares of its common stock to and deposited $1.4
million in cash with CMS as an earnest money performance deposit. Such shares
will be returned to the Company at closing, expected to occur on or before
March 31, 2000. If CMS terminates the Purchase and Sale Agreement due to the
Company's misrepresentations, breach of warranties, or non-performance of
material obligations, covenants, and agreements by Quicksilver under the
Purchase and Sale Agreement, and the transaction does not close, CMS will be
entitled to retain the 3,650,000 shares and the cash portion of the earnest
money performance deposit. Further, CMS will have the right to require the
Company to repurchase 25% of the shares on each of June 30, 2000, September
30, 2000, December 31, 2000, and March 31, 2000 at $4.125 per share, $4.25 per
share, $4.375 per share, and $4.50 per share, respectively. The Company will
have a call option on not less than 25% of such stock from time to time at a
price that is the sum of $4 per share plus interest at a rate of 12 1/2%
computed from March 31, 2000 to the date such option is exercised. The Company
plans to finance the acquisition by the issuance of $50 million senior
subordinated notes, the incurrence of $94 million in incremental bank credit
facility indebtedness and the sale of $25 million of Internal Revenue Code
Section 29 tax credits.

Organization

Mercury operates the majority of Quicksilver's oil and gas properties and
performs all accounting and field operations on behalf of Quicksilver. In its
present capacity as operator, Mercury handles payment of all direct costs and
expenses of operations and distributes all net revenues associated with
Quicksilver's properties. Quicksilver reimburses Mercury for its actual direct
expenses incurred by Mercury for the benefit of Quicksilver and its
properties. The accounting and other indirect expenses incurred by Mercury are
covered by the well overhead charges specified in joint operating agreements.

Marketing

The oil and gas produced from Quicksilver properties has typically been
marketed through normal channels for such products. Quicksilver generally
sells its oil at local field prices paid by the principal purchasers of crude

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oil in the respective area of operations. The majority of Quicksilver's
natural gas production is sold under long-term contracts of one to 10 years,
and is transported through intrastate pipelines.

Quicksilver's natural gas and crude oil are purchased by refineries, major
oil companies, public utilities, industrial customers and other users and
processors of petroleum products. Quicksilver is not confined to, nor
dependent upon, any one purchaser or small group of purchasers. Accordingly,
the loss of a single purchaser, or a few purchasers, would not materially
affect Quicksilver business because there are numerous purchasers in the areas
in which Quicksilver sells its production. For 1999, however, purchases by the
following companies exceeded 10% of the total oil and gas revenues of
Quicksilver: Consumers Power Company, Reliant Energy Services Inc., and
Coenergy Trading Company.

Competition

The Company encounters substantial competition in acquiring oil and gas
leases and properties, marketing oil and gas, securing personnel and
conducting its drilling and field operations. Many competitors have financial
and other resources, which substantially exceed those of the Company. The
competitors in development, exploration, acquisitions and production include
the major oil companies as well as numerous independents, individual
proprietors and others. Therefore, competitors may be able to pay more for
desirable leases and evaluate, bid for and purchase a greater number of
properties or prospects than the financial or personnel resources of the
Company permit. The ability of the Company to replace and expand its reserve
base in the future will be dependent upon its ability to select and acquire
suitable producing properties and prospects for future drilling.

The Company's acquisitions have been financed through debt and internally
generated cash flow. There is competition for capital to finance oil and gas
acquisitions and drilling. The ability of the Company to obtain such financing
is uncertain and can be affected by numerous factors beyond its control. The
inability of the Company to raise capital in the future could have an adverse
effect on certain areas of its business.

Governmental Regulation

The Company's operations are affected from time to time in varying degrees
by political developments and federal, state and local laws and regulations.
In particular, natural gas and crude oil production and related operations are
or have been subject to price controls, taxes and other laws and regulations
relating to the industry. Failure to comply with such laws and regulations can
result in substantial penalties. The regulatory burden on the industry
increases the Company's cost of doing business and affects its profitability.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations such laws and regulations are frequently
amended or reinterpreted so the Company is unable to predict the future cost
or impact of complying with such laws and regulations.

Environmental Matters

The Company's oil and natural gas exploration, development, production and
pipeline gathering operations are subject to stringent federal, state and
local laws governing the discharge of materials into the environment or
otherwise relating to environmental protection. Numerous governmental agencies
such as the Environmental Protection Agency ("EPA") issue regulations to
implement and enforce such laws, and compliance is often difficult and costly
and failure to comply may result in substantial civil and criminal penalties.
These laws and regulations may require the acquisition of a permit before
drilling commences; restrict the types, quantities and concentrations of
various substances that can be released into the environment in connection
with drilling, production and pipeline gathering activities; limit or prohibit
drilling activities on certain lands lying within wilderness, wetlands,
frontier and other protected areas; require some form of remedial action to
prevent pollution from former operations such as plugging abandoned wells; and
impose substantial liabilities for pollution resulting from the Company's
operations. In addition, these laws, rules and regulations may restrict the
rate of natural gas and crude oil production below the rate that would
otherwise exist. The regulatory burden on the industry increases the cost of
doing business and consequently affects its profitability. Changes in

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environmental laws and regulations occur frequently, and any changes that
result in more stringent and costly waste handling, disposal or clean-up
requirements could adversely affect the Company's operations and financial
position, as well as the industry in general. While management believes that
the Company is in substantial compliance with current applicable environmental
laws and regulations and the Company has not experienced any materially
adverse effect from compliance with these environmental requirements, there is
no assurance that this will continue in the future.

The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include the present or past
owners or operators of the disposal site or sites where the release occurred
and the companies that transported or arranged for the disposal of the
hazardous substances at the site where the release occurred. Under CERCLA,
such persons may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment, for damages to natural resources and for the costs of certain
health studies; it is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damages allegedly
caused by the release of hazardous substances or other pollutants into the
environment. Furthermore, although petroleum, including natural gas and crude
oil, is exempt from CERCLA, at least two courts have ruled that certain wastes
associated with the production of crude oil may be classified as "hazardous
substances" under CERCLA and thus such wastes may become subject to liability
and regulation under CERCLA. State initiatives to further regulate the
disposal of crude oil and natural gas wastes are also pending in certain
states, and these various initiatives could have a similar impact on the
Company.

Stricter standards in environmental legislation may be imposed on the
industry in the future. For instance, legislation has been proposed in
Congress from time to time that would reclassify certain exploration and
production wastes as "hazardous wastes" and make the reclassified wastes
subject to more stringent handling, disposal and clean-up restrictions. If
such legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, as well as on the industry in general.
Compliance with environmental requirements generally could have a materially
adverse effect upon the capital expenditures, earnings or competitive position
of the Company. Although the Company has not experienced any materially
adverse effect from compliance with environmental requirements, no assurance
may be given that this will continue in the future.

The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other petroleum
wastes into navigable waters. Permits must be obtained to discharge pollutants
into state and federal waters. The FWPCA and analogous state laws provide for
civil, criminal and administrative penalties for any unauthorized discharges
of crude oil and other hazardous substances in reportable quantities and may
impose substantial potential liability for the costs of removal, remediation
and damages. Federal affluent limitations guidelines prohibit the discharge of
produced water and sand, and some other substances related to the natural gas
and crude oil industry, into coastal waters. Although the costs to comply with
zero discharge mandated under federal or state law may be significant, the
entire industry will experience similar costs and the Company believes that
these costs will not have a materially adverse impact on the Company's
financial condition and results of operations. Some oil and gas exploration
and production facilities are required to obtain permits for their stormwater
discharges. Costs may be incurred in connection with treatment of wastewater
or developing storm water pollution prevention plans.

The Resource Conservation and Recovery Act ("RCRA"), as amended, generally
does not regulate most wastes generated by the exploration and production of
natural gas and crude oil. RCRA specifically excludes from the definition of
hazardous waste "drilling fluids, produced waters, and other wastes associated
with the exploration, development, or production of crude oil, natural gas or
geothermal energy." However, these wastes may be regulated by the EPA or state
agencies as solid waste. Moreover, ordinary industrial wastes, such as paint
wastes, waste solvents, laboratory wastes and waste compressor oils, are
regulated as hazardous wastes. Although the costs of managing solid hazardous
waste may be significant, the Company does not expect to experience more
burdensome costs than would be borne by similarly situated companies in the
industry.

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In addition, the U.S. Oil Pollution Act ("OPA") requires owners and
operators of facilities that could be the source of an oil spill into "waters
of the United States" (a term defined to include rivers, creeks, wetlands and
coastal waters) to adopt and implement plans and procedures to prevent any
spill of oil into any waters of the United States. OPA also requires affected
facility owners and operators to demonstrate that they have at least $35
million in financial resources to pay for the costs of cleaning up an oil
spill and compensating any parties damaged by an oil spill. Substantial civil
and criminal fines and penalties can be imposed for violations of OPA and
other environmental statutes.

Employees

As of January 1, 2000, the Company had 23 full time employees, including
officers.

Item 2. Description of Property

Quicksilver owns significant interests in the following properties:

Michigan

<TABLE>
<CAPTION>
Reserve and Production Data
Average Daily
Reserve Data as of Production Data for
December 31, 1999 1999
--------------------- ---------------------
Gas Oil Total Gas Oil Total
(Bcf) (Mmbbls) (Bcfe) (Mmcf) (Bbls) (MMcfe)
----- -------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Producing Formation:
Antrim Shale...................... 100.6 -- 100.6 16.4 -- 16.4
Prairie du Chien and Other........ 80.4 3.2 99.5 25.3 587 28.9
----- --- ----- ---- --- ----
Total........................... 181.0 3.2 200.1 41.7 587 45.3
===== === ===== ==== === ====
</TABLE>

Michigan has very favorable natural gas supply/demand characteristics in
that Michigan has been importing an increasing percentage of its natural gas,
and currently imports approximately 75%. This supply/demand situation
generally allows Michigan producers to sell their natural gas at a slight
premium to typical industry benchmark prices. It also provides opportunities
for long-term contracts at favorable terms with end users who value such
supply arrangements.

The Antrim Shale

The Antrim Shale underlies a large percentage of the Company's Michigan
acreage and is fairly homogeneous in terms of reservoir quality; wells tend to
produce relatively predictable amounts of natural gas. While subsurface
fracturing can increase reserves and production attributable to any particular
well, the over 6,400 wells drilled in the trend and the approximately 500
wells Quicksilver has drilled suggest typical per well reserves of 600 Mmcf to
800 Mmcf and a total productive life of more than 20 years, with an average
reserve life index well in excess of 15 years. As new wells produce and the
de-watering process takes place, they tend to reach a production level of 150
Mcf to 200 Mcf per day in six to 12 months, remaining at these levels for one
to two years, then declining at 8% to 10% per year thereafter. The total cost
to drill and complete an Antrim well is approximately $225,000, including all
acreage, production facilities and flowlines, and the wells tend to produce
the best economic results when drilled in large numbers in a fairly
concentrated area. This well concentration provides for a more rapid de-
watering of a specific area, which decreases the time to natural gas
production and increases the amount of natural gas production. It also enables
Quicksilver to maximize the use of existing production infrastructure, which
decreases per unit operating costs. Since reserve quantities and production
levels over a large number of wells are fairly predictable, maximizing per
well recoveries and minimizing per unit production costs through a sizeable
well-engineered drilling program are the keys to profitable Antrim
development.

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At December 31, 1999, Quicksilver owned interests in 769 Antrim wells and
operated 409 of these wells, or 53% of the Company's total Antrim wells.
During 1999, average net production was 16.4 Mmcf per day. Since 1996, the
Company has drilled 134 Antrim wells and successfully completed 132 for a
success rate of 99%. Quicksilver has 104 identified Antrim drilling locations
of which 65 are currently classified as proved undeveloped locations. In 1998,
Quicksilver drilled 49 gross (37.7 net) Antrim wells, successfully completing
all of them. In 1999, the Company drilled 23 gross (23 net) Antrim wells, of
which 22 were successfully completed. For 2000, Quicksilver has budgeted for
the drilling of 63 gross (43.5 net) Antrim wells at a cost of approximately
$8.7 million. The CMS acquisition will add 3,049 (650 net) wells, of which
more than 97% are Antrim gas wells. CMS operates 86 Antrim project areas
concentrated in Northern Michigan, which complement Quicksilver's current
properties owned in this region.

The Prairie du Chien

Quicksilver's Prairie du Chien ("PdC") wells produce from several Ordovician
age reservoirs with the majority being in the 1,000 feet to 1,200 feet thick
Prairie du Chien Group that has three major sands: the Lower PdC, Middle PdC
and Upper PdC. Many of these wells also can produce from the St. Peter
sandstone and the Glenwood formations, both of which lie directly above the
PdC. Some of the wells are producing from two or more of these zones.
Depending upon the area and the particular zone, the PdC will produce dry gas,
gas and condensate or oil with associated gas. The average depths of these
wells range from 7,000 feet to 12,000 feet.

As a result of an acquisition from Unocal Corporation's Spirit Energy 76
Unit in May 1999, Quicksilver owns an average working interest of 68%, on a
Bcfe basis, in the wells comprising the Company's PdC reserves. Quicksilver
operates over 92% of these reserves. The CMS acquisition will add 76 wells
which produce primarily in the Niagaran and, secondarily, from the Prairie du
Chien formations, further increasing Quicksilver's production in these areas.
The Company's PdC production is well established, and three development wells
have been drilled in recent years to increase production from existing fields.
As a result of some of this work and the Unocal acquisition, Quicksilver has
identified nine additional proved undeveloped locations. In addition, there
are numerous proved non-producing zones in existing wellbores that provide
recompletion opportunities, allowing the Company to maintain or, in some
cases, increase production from its PdC wells as currently producing
reservoirs deplete. As of December 31, 1999, the Company had 39 gross (31.6
net) PdC wells producing 29.3 Mmcfe per day. For 2000, the Company has
budgeted $733,000 for various workovers and recompletions on its PdC wells,
and plans to spend $5.2 million in 2000 to drill four new wells.

Richfield/Detroit River

The Unocal acquisition included 111 producing oil wells in the Beaver Creek
field, which is being waterflooded in the Devonian Richfield formation.
Additional interests were also acquired in the nearby Garfield Richfield
field, which has seven producing oil wells. The Company's average daily
production from the Richfield and Detroit River formations totals
approximately 3.6 Mmcfe.

Rocky Mountain Region

Quicksilver's Rocky Mountain properties are located in Montana and Wyoming,
and production, which is primarily crude oil, is from well-established
producing formations at depths ranging from 1,000 feet to 17,000 feet. These
properties typically have multiple producing zones, some of which include the
Phosphoria at 750 feet to 1,000 feet, the Tensleep at 1,000 feet to 3,000 feet
and the Muddy/Morrow at 8,400 feet to 9,000 feet. The Company's Rocky Mountain
producing properties possess significant development drilling, secondary
recovery and other exploitation opportunities. As of December 31, 1999, the
Company's Rocky Mountain proved reserves were 12 Mmbbls of crude oil and 5.9
Bcf of natural gas, for total equivalent reserves of 77.7 Bcfe. In 1999, daily
production averaged 9.5 Mmcfe, and during the month of December 1999 daily
production averaged 10.3 Mmcfe. In 1998, Quicksilver drilled no wells in the
area; however, the Company spent $160,000 on various exploitation projects. In
1999, the Company spent $474,000 on the drilling of five gross (4.7 net)
wells, three of which were successful. Quicksilver has also spent
approximately $187,000 on various exploitation activities. The

10
<PAGE>

Company is currently conducting an active exploitation program on several of
its Rocky Mountain fields that involves recompletions in existing wells. In
2000, Quicksilver has budgeted $1.5 million for the drilling of 1 gross (1
net) wells and $0.8 million for exploitation activities.

South Casper Creek Steamflood Project

In October 1995, Quicksilver acquired the South Casper Creek steamflood
project in Natrona County, Wyoming as part of a larger acquisition from
Unocal. In the 1970s and 1980s, Unocal had conducted several steamflood
evaluations of the Tensleep formation, a producing horizon that contains 14
degree gravity crude oil which is relatively heavy and is more effectively
recovered when heated with steam, allowing the oil to flow toward the wellbore
at a faster rate. In the late 1980s, Unocal attempted several additional
redesigned pilot steamfloods and had encouraging results. Based on these
results, Unocal undertook full development of the project, drilling additional
steam injection wells and installing four 50 Mmbtu per hour generators
providing 13,000 barrels of steam per day through eleven injection wells. The
post-steamflood production peaked in 1992 at 1,500 barrels per day, an 88%
increase from the pre-steamflood production of 800 barrels per day, exceeding
Unocal's original expectations. Despite this success, Unocal decided to cut
the project's budget, resulting in a decrease in steam injection, a decrease
in production and the eventual discontinuation of the project. Quicksilver's
acquisition of this project included all of the associated steam generating
equipment in place that had been installed by Unocal. This equipment is in
good condition and could be restarted at an estimated cost of under $2.4
million. While the project is economically viable at current crude oil prices,
the Company has excluded this project from its reserve report and is studying
options in light of the project's sensitivity to long-term oil prices.

Canada

Quicksilver believes that a number of producing areas in Canada offer
excellent opportunities for acquisition and exploitation oriented companies.
The Company's August 1999 purchase of MGV Energy, Inc. ("MGV"), a Calgary-
based independent energy company, provides a vehicle for the Company to
evaluate and selectively participate in such opportunities. MGV's main
strength lies in conducting detailed reservoir engineering studies over
producing fields to identify remaining reserves not currently being exploited
by the current operator. MGV's technical staff has developed proprietary
reservoir analysis software designed to integrate large amounts of engineering
and geologic data to identify such opportunities. Additionally, MGV has an
arrangement with PanCanadian Petroleum Limited ("PanCanadian") where MGV
identifies opportunities in a 36,000 square mile area of mutual interest. This
area of mutual interest is primarily in southern Alberta, which has
historically and continues to produce significant amounts of hydrocarbons.
When MGV identifies a prospect, it has the right to acquire up to a 20%
interest if PanCanadian participates, and a 100% interest if PanCanadian
declines. MGV recently made its first acquisition of 375 existing gas wells in
southern Alberta with net daily production of 1.2 Mmcf and 9.9 Bcf of proved
reserves. The Company has budgeted for the drilling of 60 gross (4.6 net)
infill wells in 2000. The Company believes MGV will allow the Company to
methodically build a reserve and production base in Canada in a fashion
similar to the development of its Michigan reserves.

Oil and Gas Reserves

The following reserve quantity and future net cash flow information for
Quicksilver represents proved reserves that are primarily located in the
United States. The Canadian reserves are not significant. Holditch-Reservoir
Technologies Consulting Services, petroleum engineers, have estimated the
reserves. The determination of oil and gas reserves is based on estimates that
are highly complex and interpretive. The estimates are subject to continuing
change, as additional information becomes available. Under the guidelines set
forth by the SEC, the calculation is performed using year-end prices held
constant (unless a contract provides otherwise) and is based on a 10% discount
rate. Future production costs are based on year-end costs and include
production taxes. This standardized measure of discounted future net cash
flows is not necessarily representative of the market value of Quicksilver
properties.

11
<PAGE>

There are numerous uncertainties inherent in estimating oil and gas reserves
and their estimated values, including many factors beyond Quicksilver's
control. The reserve data set forth in this document represents only
estimates. Although Quicksilver believes the reserve estimates contained in
this document are reasonable, reserve estimates are imprecise and are expected
to change, as additional information becomes available.

The following table summarizes Quicksilver's proved reserves, the estimated
future net revenues from such proved reserves and the standardized measure of
discounted future net cash flows attributable thereto at December 31, 1999 and
1998.

Proved reserves:

<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Proved reserves:
Natural gas (Mcf).................... 198,033,000 153,202,000
Oil (Bbl)............................ 15,281,000 17,983,000
Total (Mcfe)....................... 289,719,000 261,100,000
Estimated future net cash flows, before
income tax............................ $450,663,000 $275,737,000
Standardized measure of discounted
future net cash flows, before income
tax................................... $253,506,000 $160,495,000
Proved developed reserves:
Natural gas (Mcf).................... 140,354,000 123,743,000
Oil (Bbl)............................ 9,954,000 9,829,000
Total (Mcfe)....................... 200,078,000 182,717,000
</TABLE>

Volumes, Sales Prices and Oil and Gas Production Expense

The following table sets forth certain information regarding the production
volumes and weighted average sales prices received for and average production
costs associated with Quicksilver's sale of oil and gas for the periods
indicated.

<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Production:
Natural gas (Mmcf)........................................ 16,042 15,315
Oil (Bbl)................................................. 724 667
Total (Mcfe)............................................ 20,386 19,317
Weighted average sales price:
Natural gas (per Mcf)..................................... $ 2.31 $ 2.33
Oil (per Bbl)............................................. $ 14.55 $ 9.55
Production operating expense (per Mcfe) (1)................. $ 1.03 $ 0.92
</TABLE>
- --------
(1) Includes production taxes.

Development, Exploration and Acquisition Capital Expenditures

The following table sets forth certain information regarding the approximate
costs incurred by Quicksilver in its development and exploration activities
and purchase of oil in place, (in thousands):

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Acquisition of producing properties................. $ 40,272 $ 1,715
Development costs................................... 9,486 8,283
Exploration costs................................... -- 1,095
----------- -----------
Total............................................. $ 49,758 $ 11,093
=========== ===========
</TABLE>

12
<PAGE>

Productive Oil and Gas Wells

The following table summarizes the productive oil and gas wells as of
December 31, 1999, attributable to Quicksilver's direct interests.

<TABLE>
<CAPTION>
Productive Wells Gross Net
---------------- ----- ---
<S> <C> <C>
Natural Gas........................................................ 1,130 326
Oil................................................................ 547 517
----- ---
Total............................................................ 1,677 843
===== ===
</TABLE>

Oil and Gas Acreage

The following table sets forth the developed and undeveloped leasehold
acreage held directly by Quicksilver as of December 31, 1999 and 1998.
Developed acres that are spaced or able to be assigned to productive wells.
Undeveloped acres are acres on which wells have not been drilled or completed
to a point that would permit the production of commercial quantities of oil or
gas, regardless of whether or not such acreage contains proved reserves. Gross
acres are the total number of acres in which Quicksilver has a working
interest. Net acres are the sum of Quicksilver's fractional interests owned in
the gross acres. States in which Quicksilver holds undeveloped acreage include
Michigan, Montana and Wyoming.

<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
Gross Net Gross Net
----------------- -----------------
<S> <C> <C> <C> <C>
Developed acreage........................ 268,412 132,458 212,800 129,000
Undeveloped acreage...................... 368,438 203,825 314,100 181,700
-------- -------- -------- --------
Total.................................. 636,850 336,283 526,900 310,700
======== ======== ======== ========
</TABLE>

Drilling Activity

The following table sets forth the number of wells attributable to
Quicksilver direct interest drilled during and for the years ended.

<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
-------------- --------------
Gross Net Gross Net
------- ------ ------- ------
<S> <C> <C> <C> <C>
Development Wells:
Productive....................................... 25.0 24.8 41.0 29.7
Dry.............................................. 3.0 2.9 -- --
------ ------ ------ ------
Total.......................................... 28.0 27.7 41.0 29.7
====== ====== ====== ======
Exploratory Wells:
Productive....................................... -- -- 9.0 9.0
Dry.............................................. -- -- 1.0 .5
------ ------ ------ ------
Total.......................................... -- -- 10.0 9.5
====== ====== ====== ======
</TABLE>

ITEM 3. Legal Proceedings

The Company was not during 1999 and currently is not a party to any material
pending legal proceedings.

ITEM 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a stockholder vote during the fourth
quarter of 1999.

13
<PAGE>

PART II.

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

Comparative Market Data

MSR's common stock was traded on the American Stock Exchange under the
symbol "MSR". Quicksilver's common stock is traded on the American Stock
Exchange under the symbol "KWK".

The following table sets forth the quarterly high and low closing sales
prices of MSR's common stock and Quicksilver's common stock for the periods
indicated below.

MSR COMMON STOCK

<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1997
First Quarter................................................ $1.000 $ .8125
Second Quarter............................................... 1.125 .9375
Third Quarter................................................ 1.125 .7500
Fourth Quarter............................................... 1.375 .9375

<CAPTION>
High Low
------- -------
<S> <C> <C>
1998
First Quarter................................................ $1.1875 $ .8750
Second Quarter............................................... 1.3125 .9375
Third Quarter................................................ 1.1250 .7500
Fourth Quarter............................................... .9375 .5000

QRI COMMON STOCK

<CAPTION>
High Low
------- -------
<S> <C> <C>
1999
First Quarter................................................ $7.625 $7.2500
Second Quarter............................................... 7.375 6.1250
Third Quarter................................................ 7.375 6.5000
Fourth Quarter............................................... 7.625 3.8125
</TABLE>

As of December 31, 1999, there were approximately 1,293 common stockholders
of record.

The Company has not paid dividends on the common stock and intends to retain
its cash flow from operations for the future operation and development of its
business. In addition, the Company's primary credit facility restricts
payments of dividends on its common stock.

Recent Sales of Unregistered Securities

On May 25, 1999, the Company's board of directors approved the issuance of
$10,000 worth of the Company's common stock to each of Frank Darden, Steven
Morris, D. Randall Kent and Yandell Rogers, III as compensation for their
services during l998. Based upon the closing price for the Company's common
stock on that date, the Company issued 1,600 shares of its common stock to
each of these non-employee directors in December of 1999. The issuance of
these securities was exempt from registration under the Securities Act of 1933
in reliance on Section 4(2) of the Securities Act of 1933.

ITEM 6. Selected Financial Data

The following table sets forth, as of the dates and for the periods
indicated, and selected financial information for the Company. The financial
information for each year ended December 31, 1999 and 1998 has been derived
from the audited Consolidated Financial Statements of the Company for such
periods. The information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto. The following
information is not necessarily indicative of future results for the Company.

14
<PAGE>

Selected Financial Data of Quicksilver
(in thousands, except for per share data)

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Consolidated Statements of Operations Data:
Revenues
Gas sales......................................... $ 37,076 $ 35,713
Oil sales......................................... 10,540 6,367
Interest and other income......................... 4,704 3,607
----------- -----------
Total revenues.................................. 52,320 45,687
----------- -----------
Expenses
Operating expenses................................ 21,045 17,781
Depletion and depreciation........................ 14,036 12,365
Provision for doubtful accounts................... 1,350 --
General and administrative........................ 4,163 1,430
Interest.......................................... 8,703 6,698
----------- -----------
Total expenses.................................. 49,297 38,274
----------- -----------
Income before income taxes and minority interest.... 3,023 7,413
Minority Interest................................... 141 758
Income tax expense.................................. (2) (3,286)
----------- -----------
Net income.......................................... $ 3,162 $ 4,885
=========== ===========
Basic weighted average number of shares outstanding
for the periods.................................... 13,151 11,511
Basic and diluted earnings per share................ $ 0.24 $ 0.42

Consolidated Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities.............................. $ 10,220 $ 16,355
Investing activities.............................. (42,288) (16,097)
Financing activities.............................. 34,331 (607)

Other Consolidated Financial Data:
Capital expenditures.............................. $ 43,452 $ 16,097
EBITDA(1)......................................... 25,762 26,476

Consolidated Balance Sheet Data:
Cash and cash equivalents......................... $ 2,557 $ 294
Working capital................................... 7,168 1,291
Total assets...................................... 194,302 144,600
Long-term debt (includes current portion)......... 97,086 85,039
Total stockholders' equity........................ 69,551 32,588
</TABLE>
- --------
(1) EBITDA (as used in this financial data) is calculated by adding interest,
income taxes, and depreciation, depletion and amortization to net income.
Interest includes interest expense accrued and amortization of deferred
financing costs. EBITDA is presented here not as a measure of operating
results, but rather as a measure of Quicksilver's operating performance
and ability to service debt. EBITDA should not be considered as an
alternative to earnings or operating earnings, as defined by generally
accepted accounting principles, as an indicator of the Quicksilver's
financial performance, as an alternative to cash flow, as a measure of
liquidity or as being comparable to other similarly titled measures of
other companies.

15
<PAGE>

Selected Historical Financial Data of Quicksilver Predecessors

Mercury Exploration Company
(Includes Quicksilver Energy, LC)
(In thousands, except for per share data)

<TABLE>
<CAPTION>
Years Ended September
30,
Three Months Ended --------------------------
December 31, 1997 1997 1996 1995
------------------ -------- ------- -------
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenues...................... $11,049 $ 41,328 $17,388 $ 6,703
Net income (loss)............. 2,354 5,115 2,248 1,463
Net income (loss) per common
share........................ 9.38 20.38 8.96 5.83
Weighed average shares
outstanding.................. 251 251 251 251
Cash dividends................ -- -- -- --
Other Information:
Capital expenditures.......... $27,750 $ 54,231 $19,779 $ 2,227
Balance Sheet Data:
Working capital (deficit)..... $(9,324) $(13,133) $(5,813) $(5,068)
Total assets.................. 126,506 102,880 50,186 28,743
Long-term debt................ 65,275 47,174 19,560 2,150
Stockholders' equity.......... 17,670 15,316 10,427 6,988
</TABLE>

Michigan Gas Partners Limited Partnership
(in thousands)

<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Statements of Operations Data:
Revenues............................................. $3,021 $ 3,368 $ 1,930
Net income (loss).................................... 19 (617) (613)
Other Information:
Capital expenditures................................. $ 13 $ 132 $ 4,837
Balance Sheet Data:
Working Capital...................................... $ 343 $ 261 $ 324
Total Assets......................................... 9,835 10,551 13,160
Long-term debt....................................... -- -- --
Partners' equity..................................... 9,453 10,313 13,025
</TABLE>

MSR Exploration, Ltd.
For the Period from Inception March 7, 1997, to December 31, 1997
(in thousands)

<TABLE>
<S> <C>
Statements of Operations Data:
Revenues........................................................... $ 854
Net income (loss).................................................. 30
Other Information:
Capital expenditures............................................... $ 592
Balance Sheet Data:
Working capital.................................................... $ 42
Total assets....................................................... 25,963
Long-term debt..................................................... 10,560
Stockholders' equity............................................... 13,070
</TABLE>

16
<PAGE>

ITEM 7. Management's discussion and analysis of financial condition and
results of operations of Quicksilver Resources Inc.

Forward-Looking Information

Certain statements contained in this Annual Report on Form 10-K and other
materials filed by the Company with the Securities and Exchange Commission (as
well as information included in oral statements or other written statements
made or to be made by the Company), other than statements of historical fact,
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements may relate to a variety of
matters not currently ascertainable, such as future capital expenditures,
drilling activity, acquisitions and dispositions, development or exploratory
activities, cost savings efforts, production activities and volumes,
hydrocarbon reserves, hydrocarbon prices, hedging activities and the result
thereof, financing plans, liquidity, regulatory matters, competition and the
Company's ability to realize efficiencies related to certain transactions or
organizational changes. Forward-looking statements generally are accompanied
by words such as "anticipate," "believe," "expect," "intend," "intend,"
"plan," "project," "potential," or similar statements. Although the Company
believes that the expectations reflected in such forward-looking statements
are reasonable, no assurance can be given that such expectations will prove
correct. Factors that could cause the Company's results to differ materially
from the results discussed in such forward-looking statements include:
fluctuations in crude oil and natural gas prices; failure or delays in
achieving expected production from oil and gas development projects;
uncertainties inherent in predicting oil and gas reserves and oil and gas
reservoir performance; the effects of existing and future laws and
governmental regulations; liability resulting from litigation; world economic
and political conditions; changes in tax and other laws applicable to the
Company's business and certain factors discussed elsewhere in this Annual
Report on Form 10-K. All forward-looking statements are expressly qualified in
their entirety by the cautionary statements in this section. The following
discussion and analysis should be read in conjunction with "Selected Financial
Data" and the Consolidated Financial Statements and Notes thereto, appearing
elsewhere in this annual report.

Factors effecting financial condition and liquidity

Liquidity and Capital Resources

General

The following discussion compares the Company's financial condition at
December 31, 1999 and its financial condition at December 31, 1998. During
1999, the Company spent approximately $43.5 million on acquisition and
development activities. The capital program was financed from operations,
additional borrowings and from the sale of the Company's common stock.

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 60% 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 year ended December
31, 1999 was $10.2 million compared to $16.4 million for the same period last
year. The reduction resulted from lower earnings, a $2.45 million account
receivable not collected, and other working capital uses of cash.

17
<PAGE>

The Company's net cash used in investing for the year ended December 31,
1999 was $42.3 million, including $25.8 million for the Unocal property
acquisition, $2.6 million for the 50% share of Beaver Creek Pipeline and $1.6
million for MGV Energy (see note 2 to the Consolidated Financial Statements).
Other investing activities comprised development of oil and gas properties.
The Company's activities have been financed through a combination of operating
cash flow and bank borrowings, and the sale of additional common stock.

The Company's net cash provided by financing activities for the year ended
December 31, 1999 was $34.3 million. Borrowings increased a net $12.1 million,
and the Company received $23.2 million net from the sale of 5,100,000 shares
in a public offering in the fourth quarter 1999.

Credit Facilities

As part of the merger with MSR on March 4, 1999, the Company entered into a
new five-year credit facility. The existing debt of $74 million and $10.8
million from MSR was transferred into the new credit facility. The credit
facility permits the Company to obtain revolving credit loans and to issue
letters of credit for the Company's account from time to time in a total
amount not to exceed the lesser of $200 million or the borrowing base. As of
December 31, 1999, the borrowing base was $95 million and it is subject to
semi-annual determination and other redeterminations based upon a variety of
factors, including the PV-10 value of reserves. As of December 31, 1999, $94.9
million 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 specified minimum amounts. The Company can
designate the interest rate on amounts outstanding at either the London
Interbank Offered Rate (LIBOR) + 2.375% or at bank prime. The collateral for
this loan agreement consists of substantially all existing assets and any
future reserves acquired. The loan agreement contains a number of dividend
restrictions and restrictive covenants, which, among other things, require the
maintenance of a minimum current ratio.

The Company intends to refinance the US$2,133,730 of debt related to MGV
Energy Inc. in 2000.

Market Risk

The Company sells approximately 60% of its natural gas under long-term,
fixed price contracts, and swap agreements and therefore, benefits from
significant predictability of its natural gas revenues. Commodity market price
fluctuations affect natural gas volumes that are not sold under contract, and
also affect crude oil sales that are not hedged.

In addition, the Company has entered into interest rate swap agreements
covering $50 million in debt. These agreements consist of one covering $25
million through May 8, 2000, which converts the debt floating LIBOR base rate
to a 5.75% fixed rate, and a second for $25 million through June 17, 2002,
which converts the debt floating LIBOR base rate to a 5.70% fixed rate.
Interest expense for the year ended December 31, 1999 was $283,645 higher as a
result of these rate swaps.

Inflation and Changes in Prices

The Company's revenues and the value of its oil and gas properties have been
and will be affected by changes in oil and gas prices. The Company's ability
to maintain current borrowing capacity and to obtain additional capital on
attractive terms is also substantially dependent on crude oil and natural gas
prices. Oil and gas prices are subject to significant seasonal and other
fluctuations that are beyond the Company's ability to control or predict.
During 1999, the Company received an average of $14.55 per barrel of crude oil
and $2.31 per Mcf of natural gas. Although the level of inflation affects
certain of the Company's costs and expenses, inflation did not have a
significant effect in 1999. Should conditions in the industry improve,
inflationary cost pressures may resume.

18
<PAGE>

Results of Operations

Quicksilver's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, which
are dependent upon numerous factors, such as economic, political and
regulatory developments and competition from other sources of energy. The
energy markets have historically been highly volatile, and future decreases in
oil or natural gas prices could have a material adverse effect on
Quicksilver's financial position, results of operations, quantities of oil and
natural gas reserves that may be economically produced, and access to capital.

On March 4, 1999, the Company merged with MSR Exploration Ltd. 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.

Due to the Company's limited existence comparisons of the Company's and it
predecessor's results of operations may not be meaningful. The Company's
results of operations include MSR's for all of 1998 and 1999. The 1997 results
of operations are from the Company's predecessors and include MSR's from
inception March 7, 1997 through December 31, 1997, Mercury Exploration Company
for the fiscal year ended September 30, 1997, and Michigan Gas Partners for
the year ended December 31, 1997. A significant portion of Mercury's assets
and associated revenue and expenses were not conveyed to the Company when it
was formed on January 1, 1998.

The following discussion and analysis should be read in conjunction with
Quicksilver's statements of operations for the years ended December 31, 1998
and 1999, and the Company's predecessor's statements of operations, which are
contained elsewhere in this annual report.

Year Ended December 31, 1999 Compared with Year December 31, 1998

Revenue: Total revenue for the year ended December 31, 1999 was $52,320,000,
an increase of almost 15% over the $45,687,000 for the comparable 1998 period.
Oil and natural gas revenues for the twelve months ended December 31, 1999
were $47,616,000, up 13% compared to $42,080,000 for 1998.

Gas revenues for the 1999 period were $37,076,000 approximately 4% higher
than 1998 gas revenues of $35,713,000. Gas sales volumes for the 1999 period
were 16,042,000 Mcf, a 5% increase compared to 15,315,000 Mcf in 1998. This
increase reflects the acquisition of certain properties from Unocal in the
second quarter 1999, somewhat offset by natural declines in other properties.
Average gas sale prices in 1999 were $2.31 per Mcf compared to $2.33 for 1998.
For 1999, approximately 78% of Quicksilver's product sales were the sale of
natural gas. A majority of Quicksilver's natural gas production is sold under
long-term contracts of one to 10 years, which provides the Company with a
certain amount of predictability to its natural gas sales.

Oil revenues for 1999 were $10,540,000, a 66% increase compared to
$6,367,000 for the same period in 1998. Crude oil production in the 1999
period was 724,000 barrels compared to 667,000 barrels in 1998, an increase of
9%. Average oil sales price for 1999 was $14.55 per barrel, an increase of 52%
compared to $9.55 average price in 1998.

Other income for the year ended December 31, 1999 was $4,704,000 and
primarily consisted of $1,280,000 from the sale of tax credits and $2,413,000
from transportation and processing of natural gas.

Expenses: Total expenses were $49,297,000 for the year ended December 31,
1999, a 29% increase over the $38,274,000 reported in the 1998 period.

19
<PAGE>

Operating expenses of $21,045,000 were $3,264,000 higher than in 1998 from
increased production and more well work-over projects.

Depletion and depreciation increased by $1,671,000 to $14,036,000 for the
year as the result of greater production and a higher per unit depletion rate.

During the first quarter of 1999 Quicksilver recorded $1,350,000 of bad debt
expense related to the bankruptcy of a major natural gas purchaser. No bad
debt expense was recorded in 1998.

General and administrative expense of $4,163,000 was significantly higher
than the $1,430,000 reported for 1998, reflecting the higher cost of being a
public company. Salaries and wages were $1,200,000 higher in 1999 as
Quicksilver staffed its own officers and employees. In 1998 Mercury performed
all administrative work for Quicksilver. The remaining cost increase resulted
from higher professional fees and rent expense.

Minority interest in net loss of MSR Exploration Ltd. of $141,000 represents
56% of MSR's net loss incurred during the first quarter, which relates to the
former minority owners of MSR. On March 23, 1999 Quicksilver acquired the
remaining interest in MSR. The 1998 amount represents the loss for the entire
year related to the minority shareholders.

Income Taxes: Federal income tax expense of $1,028,000 was almost fully
offset by the recognition of additional net operating losses available from
prior years.

Net Income: Net income for the year ended December 31, 1999 was $3,162,000,
which was approximately 6% of total revenues.

Year Ended December 31, 1998 Compared With Predecessors' 12 Month Periods
Ended September 30, 1997 and December 31, 1997

Revenue: Total oil and natural gas revenues for the twelve months ended
December 31, 1998 were $45,687,000, an increase of 25% over $36,588,000 of
combined predecessor revenue for 1997. Natural gas revenues for the 1998
period were $35,713,000, approximately 31% higher than 1997 predecessor
natural gas revenues of $27,264,000. Natural gas sales volumes for the 1998
period were 15,315,000 Mcf, a 29% increase over 11,854,000 Mcf in 1997.
Average natural gas sale prices increased from $2.30 per Mcf in the 1997
period to $2.33 in 1998. For 1998, approximately 84% of our product sales were
natural gas. A majority of our natural gas production was sold under long-term
contracts with approximately 35% under one- to three-year contracts and 60%
under 10-year contracts. Crude oil revenues for 1998 were $6,367,000, a 31%
decrease from $9,171,000 of predecessor revenues for the same period in 1997.
Crude oil production in the 1998 period was 667,000 barrels compared to
619,000 predecessor barrels, an increase of 8%. Average crude oil sales price
for 1998 was $9.55 per barrel, compared to an average price of $14.62 per
barrel in 1997, a decrease of 35%.

Interest and Other Income: Interest and other income for the year ended
December 31, 1998 was $3,607,000 and primarily consisted of $1,632,000 from
the sale of tax credits and $1,879,000 from transportation and processing of
natural gas.

Minority Interest: The minority interest in net loss of MSR for 1998 was
$758,000. This was the minority interest's 53.5% share of MSR's before tax net
loss of approximately $1,416,000. As described in the footnotes to the
financial statements, this minority interest relates to the portion of the
merger with MSR that was accounted for under the purchase method of
accounting.

Expenses: Operating expenses for the year ended December 31, 1998 were
$17,781,000 or $0.92 per Mcfe, a 5% decrease compared to $18,786,000 or $1.20
per Mcfe of predecessor operating expenses for the same period in 1997.
Depreciation and depletion expense was $12,365,000 or approximately $0.64 per
Mcfe, compared to $7,093,000 for 1997. General and administrative expenses was
$1,430,000 or approximately $0.07 per Mcfe in 1997. Our interest rate averaged
approximately 7.4%.

20
<PAGE>

Income Tax Expense: Income taxes for the year ended December 31, 1998
consisted of $950,000 due currently and deferred taxes of $2,336,000. The
effective tax rate was 40%.

Net Income: Net income for the year ended December 31, 1998 was $4,885,000
or $0.42 per share, which was approximately 10% of total revenues.

Year 2000 Computer Issues

Year 2000 issues relate to the ability of computer programs or equipment to
accurately calculate, store or use dates after December 31, 1999. To date in
2000, the Company has not had any significant problems relating to these
issues. The Company did not incur any significant costs relating to the
assessment and remediation of year 2000 issues.

ITEM 7A. Market Risk

21
<PAGE>

QUICKSILVER RESOURCES INC.

ITEM 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
QUICKSILVER RESOURCES INC.
Independent Auditors' Report.............................................. 23
Consolidated Balance Sheets December 31, 1999 and 1998.................... 24
Consolidated Statements of Income for the Years Ended December 31, 1999
and 1998................................................................. 25
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1999 and 1998............................................... 26
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999 and 1998............................................................ 27
Notes to Consolidated Financial Statements for the Year Ended December 31,
1999..................................................................... 28

PREDECESSOR FINANCIAL STATEMENTS

MSR EXPLORATION LTD. AND SUBSIDIARIES
Independent Auditors' Report.............................................. 42
Consolidated Statement of Income for the Period Ended December 31, 1997... 43
Consolidated Statement of Cash Flows for the Period Ended December 31,
1997..................................................................... 44
Notes to Consolidated Financial Statements for the Period Ended December
31, 1997................................................................. 45

MERCURY EXPLORATION COMPANY--TRANSITION REPORTS
Independent Auditors' Report.............................................. 54
Consolidated Statements of Income for the Year Ended September 30, 1997
and the Three Months Ended December 31, 1997............................. 56
Consolidated Statement of Cash Flows for the Year Ended September 30,
1997..................................................................... 57
Consolidated Statement of Cash Flows for the Three Months Ended December
31, 1997................................................................. 58
Notes to Consolidated Financial Statements for the Year Ended September
30, 1997 and the Three Months Ended December 31, 1997.................... 60

MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
Independent Auditors' Report.............................................. 69
Statement of Income for the Year Ended December 31, 1997.................. 70
Statement of Cash Flows for the Year Ended December 31, 1997.............. 71
Notes to Financial Statements............................................. 72
</TABLE>

22
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Quicksilver Resources Inc.
Fort Worth, Texas

We have audited the accompanying consolidated balance sheets of Quicksilver
Resources Inc. (the Company) as of December 31, 1999 and December 31, 1998,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
31, 1999 and 1998, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.

Deloitte & Touche LLP
Fort Worth, Texas
March 10, 2000

23
<PAGE>

QUICKSILVER RESOURCES INC.

CONSOLIDATED BALANCE SHEETS
For the Years Ended December 31, 1999 and December 31, 1998
(In thousands, except for share and per share data)

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 2,557 $ 294
Accounts receivable, net of allowance for doubtful
accounts of $1,350 at December 31, 1999.................. 15,555 7,776
Inventories and other current assets...................... 780 751
-------- --------
Total current assets.................................... 18,892 8,821
Investments in Equity Affiliates............................ 3,100 --
Properties, Plant and Equipment -- Net ("full cost")........ 170,800 134,810
Other Assets................................................ 1,510 969
-------- --------
$194,302 $144,600
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt......................... $ 2,134 $ 67
Accounts payable.......................................... 7,234 5,772
Accrued liabilities....................................... 2,356 1,691
-------- --------
Total current liabilities............................... 11,724 7,530
Long-term debt.............................................. 94,952 84,972
Other Long-Term Liabilities................................. 2,800 1,338
Deferred Income Taxes....................................... 15,088 11,953
Minority Interest........................................... 187 6,219
Stockholders' Equity
Preferred stock, par value $0.01 Authorized 10,000,000
shares issued and outstanding -- none.................... -- --
Common Stock, par value $0.01 Authorized 40,000,000 shares
issued 17,994,900 and 11,510,800 outstanding 17,984,092
and 11,510,800........................................... 180 115
Paid in capital in excess of par value...................... 61,383 27,574
Treasury Stock of 10,808 shares............................. (73) --
Retained earnings........................................... 8,061 4,899
-------- --------
Total stockholders' equity.............................. 69,551 32,588
-------- --------
$194,302 $144,600
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

24
<PAGE>

QUICKSILVER RESOURCES INC.

CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999 and 1998
(In thousands, except for per share data)

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revenues
Gas sales................................................... $37,076 $35,713
Oil sales................................................... 10,540 6,367
Other income................................................ 4,704 3,607
------- -------
Total revenues............................................ 52,320 45,687
Expenses
Operating expenses.......................................... 21,045 17,781
Depletion and depreciation.................................. 14,036 12,365
Provision for doubtful accounts............................. 1,350 --
General and administrative.................................. 4,163 1,430
Interest.................................................... 8,703 6,698
------- -------
Total expenses............................................ 49,297 38,274
------- -------
Income before income taxes and minority interest.............. 3,023 7,413
------- -------
Minority interest in net loss of MSR Exploration Ltd.......... 141 758
------- -------
Income before income taxes.................................... 3,164 8,171
Total income tax expense...................................... 2 3,286
------- -------
Net Income.................................................... $ 3,162 $ 4,885
======= =======
Basic and diluted earnings per share.......................... $ 0.24 $ 0.42
======= =======
Basic and diluted weighted average number of shares
outstanding.................................................. 13,151 11,511
======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

25
<PAGE>

QUICKSILVER RESOURCES INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999 and 1998
(In thousands, except for share and per share data)

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Common Stock, par value $0.01 authorized 40,000,000 shares
Balance at January 1, 1999 (11,510,800 shares outstanding)
and inception January 1, 1998 (100,000 shares
outstanding).............................................. $ 115 $ 1
Sale of common stock (5,100,000 shares).................... 51 --
Stock dividend retroactively applied (10,211,000 shares)... -- 102
Merger with MSR Exploration Ltd., shares under common
control for merger effective on March 4, 1999,
retroactively applied (1,200,000 shares issued)........... -- 12
Common stock issued for purchase of minority interest...... 14
------- -------
Balance at end of year (17,984,092 shares at December 31,
1999 and 11,510,800 at December 31, 1998)................. 180 115
------- -------
Paid in Capital in Excess of Par Value
Balance at beginning of Year............................... 27,574 27,851
Acquisition of minority interest........................... 10,629 --
Sale of common stock....................................... 23,806 --
Stock registration fees.................................... (626) (149)
Merger with MSR Exploration Ltd., retroactively applied.... -- (128)
------- -------
Balance at end of year..................................... 61,383 27,574
------- -------
Treasury Stock
Balance at beginning of Year............................... -- --
Purchase of treasury stock (10,808 shares)................. (73) --
------- -------
Balance at end of year, at cost............................ (73) --
------- -------
Retained Earnings
Balance at beginning of Year............................... 4,899 --
Merger with MSR Exploration Ltd., retroactively applied.... -- 14
Net income................................................. 3,162 4,885
------- -------
Balance at end of year..................................... 8,061 4,899
------- -------
Total Common Stockholders' Equity............................ $69,551 $32,588
======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

26
<PAGE>

QUICKSILVER RESOURCES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except number of shares)

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Activities:
Net income......................................... $ 3,162 $ 4,885
Charges and credits to net income not affecting
cash
Depletion and depreciation....................... 14,036 12,365
Deferred income taxes............................ -- 2,336
Recognition of unearned revenues................. (538) (1,342)
Change in minority interest in subsidiary........ (141) (758)
Loss from equity affiliates...................... 99 --
Amortization of deferred loan costs.............. 244 66
Provision for doubtful accounts.................. 1,350 --
Changes in assets and liabilities
Accounts receivable.............................. (9,129) (6,609)
Inventory, prepaid expenses and other............ (14) (97)
Accounts payable................................. 1,462 4,410
Accrued liabilities.............................. (311) 1,099
----------- -----------
Net Cash from Operating Activities................... 10,220 16,355
----------- -----------
Investing Activities:
Acquisition of properties and equipment............ (40,253) (16,097)
Acquisition of pipeline and facilities............. (3,199) --
Proceeds from sale of properties................... 1,164 --
----------- -----------
Net Cash Used for Investing Activities............... (42,288) (16,097)
----------- -----------
Financing Activities:
Notes payable, bank proceeds....................... 35,365 10,493
Principal payments on long-term debt............... (23,342) (10,271)
Payments to acquire treasury stock................. (73) --
Deferred financing and stock registration costs.... (800) (829)
Sale of common stock............................... 23,180 --
----------- -----------
Net Cash from (used for) Financing Activities........ 34,330 (607)
----------- -----------
Net Increase (Decrease) in Cash...................... 2,263 (349)
Cash at Beginning of Period.......................... 294 643
----------- -----------
Cash at End of Period................................ $ 2,557 $ 294
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash payments for interest expense................. $ 8,190 $ 5,617
=========== ===========
Cash payments for income taxes..................... $ 306 $ 600
=========== ===========
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.

27
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1999

1. FORMATION OF QUICKSILVER

Quicksilver Resources Inc. (the "Company" or "Quicksilver") was formed as a
Delaware Corporation in December 1997 to combine certain oil and gas
properties pursuant to a merger. On January 1, 1998, Mercury Exploration
Company ("Mercury"), Quicksilver Energy, L.C. ("QELC"), Michigan Gas Partners
Limited Partnership ("Michigan Gas Partners"), Trust Company of the West
("TCW"), Joint Energy Development Investments Limited Partnership ("JEDI"),
and Quicksilver Resources Inc. entered into an agreement and plan of
reorganization and merger to combine certain oil and gas properties owned by
Mercury, QELC, and Michigan Gas Partners by causing Michigan Gas Partners to
be merged with Quicksilver and by causing certain assets and liabilities of
Mercury and QELC to be transferred to and assumed by Quicksilver. Quicksilver
was the surviving corporation of the merger.

In exchange for the contribution of properties and debt, Quicksilver issued
shares of common stock. The common stock was issued to contributing parties
based on their ownership interest in the oil and gas properties. The oil and
gas properties were evaluated based on the net present value of their
reserves, discounted at 10% and reduced for any associated debt. The
conversion of debt to equity was valued at its face value. The net values for
all properties and debt were summarized, and the percentage of each
contributed piece to the total was used to allocate shares of common stock
back to the shareholders.

2. SIGNIFICANT EVENTS

The year 1999 was a transition year for Quicksilver including significant
acquisitions and the sale of 5,100,000 shares of common stock.

Mergers and Acquisitions

On March 4, 1999, Quicksilver completed a merger with MSR Exploration Ltd.
Prior to the merger Quicksilver Energy, L.C., Mercury, and the principal
stockholders of Mercury, comprised of the Darden family (the "Mercury Group"),
controlled Quicksilver through their approximate 74% ownership of Quicksilver.
The Mercury Group was considered to control MSR because the Mercury Group and
two other individuals affiliated with Mercury own approximately 46.5% of the
MSR common stock, controlled MSR's executive committee of its board of
directors, and held warrants to purchase 11 million shares of MSR common
stock. Accordingly, Quicksilver was considered the "accounting acquirer" and
transferred approximately 46.5% of MSR's net assets to Quicksilver at
historical cost. The remainder of MSR's net assets, approximately 53.5% that
relate to minority interests, were valued and recorded based on the purchase
method of accounting. Although the merger did not occur until 1999, MSR's
financial statements have been combined with the Company's as the entities
were under common control. Also, a minority interest has been reflected on the
December 31, 1998, balance sheet and statement of income since the merger
occurred subsequent to year-end.

The merger qualified as a tax-free exchange and was accounted for in part as
a pooling of interest for entities under common control, with the minority
interest accounted for under the purchase method. In connection with the
merger, the Company issued 2,577,700 shares of its common stock in exchange
for all of the outstanding common stock of MSR Exploration Ltd. based on a
conversion ratio of 1 share (the merger exchange ratio) of the Company's
common stock for ten (10) shares of MSR common stock. 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. The minority interest reflected on the Company's 1998
balance sheet and statement of income was approximately 53.5% of MSR's net
assets and results of operations for the period.

28
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's financial statements have been restated for the period prior
to the business combination to include the combined financial results of the
Company and MSR. There were no significant inter-company transactions between
the Company and MSR Exploration Ltd. Total revenues, income (loss) before
income taxes, and net income for the year ended December 31, 1998, for the
individual companies prior to the merger are as follows in thousands:

<TABLE>
<CAPTION>
Quicksilver Resources Inc. MSR Exploration Ltd. Total
-------------------------- -------------------- -------
<S> <C> <C> <C>
Total Revenues.......... $41,873 $ 3,814 $45,687
Income (loss) before
income taxes........... $ 8,829 $(1,416) $ 7,413
Net income (loss)....... $ 5,559 $ (674) $ 4,885
</TABLE>

Unocal Property Acquisition

On May 17, 1999, the Company purchased from Union Oil Company of California
("Unocal") 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% from 54% and now contributes approximately 38% of
Quicksilver's revenue.

The purchase price for the Unocal acquisition was $25.8 million cash and
404,381 unregistered shares of the Company's common stock. The stock component
of the purchase price totaling $3 million 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 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% interest in Beaver Creek
Pipeline, L.L.C.

MGV Energy Acquisition

On August 26, 1999, the Company purchased an 89.5% 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% level. MGV is free to
pursue on its own any prospects outside of the area of mutual interest and
also may take 100% of any prospect within the area of mutual interest, which
Pan Canadian rejects. In August 1999, MGV 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 9.9 Bcf of proved
reserves.

29
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Sale of Additional Common Stock

During November 1999 the Company completed the sale of 5,100,000 shares of
its common stock at $5 per share. As a result of the sale, the Darden Family
interest in Quicksilver decreased from 75.3% to 54.3%. Net proceeds, after
underwriter's commission and selling costs, of $23,180,000 were used to pay
down $20,000,000 of long-term debt. The remainder is being used for capital
projects.

3. SIGNIFICANT ACCOUNTING POLICIES

The nature of operations and other significant accounting policies are as
follows:

Nature of Operations

Quicksilver was formed to own various oil and gas properties in the states
of Michigan and Wyoming. Substantially all of the Company's revenue is derived
from the production and sale of natural gas, crude oil, condensate, and plant
products.

The consolidated financial statements include the accounts of Quicksilver
and its subsidiaries. Investments in affiliated companies (20% to 50% owned)
are accounted for on the equity method. All material inter-company
transactions are eliminated.

Cash Equivalents and Time Deposits

The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.

Accounts Receivable

The Company's customers are large oil and natural gas purchasers. The
Company does not require collateral, and receivables are generally due in 30-
60 days. When collections of specific amounts due are no longer reasonably
assured, an allowance for doubtful accounts is established.

Major Customers

During 1999, three purchasers accounted for approximately 31%, 24%, and 10%,
respectively, of the Company's total consolidated oil and gas sales. The
Company does not anticipate that the loss of any of its present purchasers
would adversely effect the Company's consolidated business. The Company also
believes that, in the event of a loss of a present purchaser, other oil and
gas purchasers located in the Company's areas of production would offer
competitive prices for such production.

Inventories

Inventories are valued at the lower of cost (first-in, first-out method) or
market and consist of crude oil in tanks and well equipment spare parts and
supplies.

Properties, Plant, and Equipment

30
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

geophysical expenses, carrying charges on non-producing properties, costs of
drilling both productive and non-productive wells, and overhead charges
directly related to acquisition, exploration, and development activities.

The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves as determined by petroleum engineers. Investments in unproved
properties are not amortized until proven reserves associated with them can be
determined or until impairment occurs. Oil and natural gas reserves and
production are converted into equivalent units based upon estimated relative
energy content.

The capitalized costs less accumulated depletion and depreciation in each
cost center are limited to an amount equal to the estimated future net revenue
from proved reserves discounted at a 10% interest rate (based on prices and
costs at the balance sheet date) plus the lower of cost (net of impairments)
or fair market value of unproved properties.

Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized unless such a sale would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.

Other plant and equipment are depreciated on the straight-line basis as
follows:

Gas processing plants and gathering systems--over fifteen to twenty years

Other equipment--over ten years

Building--over forty years

Potential impairment of producing properties and significant unproved
properties and other plant and equipment are assessed annually (unless
economic events warrant more frequent reviews). In addition, a quarterly
impairment analysis of aggregated properties is performed by the Company using
discounted future net cash flows determined based upon current prices and
costs.

Joint Venture Operations

Certain of the Company's exploration and development activities relating to
oil and gas are conducted jointly with others. The accompanying financial
statements reflect only the Company's proportionate interest in such
activities.

Revenue Recognition

The Company recognizes revenue as quantities of oil and gas are sold or
volumes of gas are transported to the buyer, and utilizes the sales method of
accounting for oil and gas imbalances. The Company's net imbalance was
immaterial at December 31, 1999.

Environmental Compliance and Remediation

Environmental compliance costs, including on going maintenance and
monitoring, are expensed as incurred. Environmental remediation costs, which
improve the condition of a property, are capitalized.

31
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred Charges

Financing charges related to the acquisition of debt are deferred and
amortized on a straight-line basis over the term of that debt.

Income Taxes

Deferred taxes are established for all temporary differences between the
book and the tax basis of assets and liabilities, at rates, which will be in
effect in years the temporary differences, are expected to reverse. Net
operating loss carry forward (NOL) deferred tax assets are reviewed annually
for recoverability, and are recorded net of a valuation allowance if
necessary.

Disclosure of Fair Value of Financial Instruments

The Company's financial instruments include cash, time deposits, accounts
receivable, and notes payable, accounts payable, and long-term debt. The fair
value of long-term debt is estimated at the present value of future cash flows
discounted at rates consistent with comparable maturities for credit risk. The
carrying amounts reflected in the balance sheet for financial assets
classified as current assets and the carrying amounts for financial
liabilities classified as current liabilities approximate fair value due to
the short maturity of such instruments.

Hedging Transactions

The Company hedges a portion of its natural gas and crude oil sales not sold
under fixed price contracts, and a portion of its interest expense. Product
sale hedges are settled monthly, any gains or losses are recognized in revenue
in the applicable month.

The differential to be paid or received on interest rate swaps is accrued as
interest rates change and recognized in interest expense over the life of the
agreements. The effect of extinguishments, maturities, terminations and sales
is recorded in earnings in the period the instrument terminates.

Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Change in Presentation

Certain reclassifications have been made for presentations adopted in 1999,
including reclassification of marketing and processing costs to operating
expense. These costs were previously reported as deductions from revenue, all
prior periods have been reclassified.

Earnings per share

Basic EPS is computed by dividing income by the weighted-average number of
common shares outstanding for the period. Diluted EPS include shares issuable
on the exercise of stock options and warrants if the conversion is dilutive.

Recently Issued Accounting Standards

The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which has now been deferred to fiscal years beginning
after June 15, 2000. This statement establishes accounting and

32
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

reporting standards for derivative instruments and for hedging activities.
Management anticipates additional disclosure when the standard is adopted.

4. ACCOUNTS RECEIVABLE

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 year-end. 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.

5. PROPERTIES, PLANT, AND EQUIPMENT

Capitalized costs are shown below in thousands.

<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Proved oil and gas properties...................... $ 223,746 $ 178,128
Unproved oil and gas interests..................... 4,926 3,584
Accumulated depletion and depreciation............. (65,075) (53,225)
----------- -----------
$ 163,597 $ 128,487
Other equipment.................................... 11,758 10,064
----------- -----------
Accumulated depreciation........................... (4,554) (3,741)
$ 170,800 $ 134,810
=========== ===========

6. OTHER ASSETS

Other assets, in thousands, consist of:

<CAPTION>
Year Ended December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred loan cost................................. $ 1,510 $ 755
Less accumulated amortization...................... (307) (91)
----------- -----------
Net deferred loan costs............................ 1,203 664
Environmental escrow bonds......................... 307 305
----------- -----------
$ 1,510 $ 969
=========== ===========

7. NOTES PAYABLE AND LONG-TERM DEBT

<CAPTION>
Year Ended December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Long-term debt, in thousands, consists of:
Notes payable to a bank.......................... $ 94,850 $ 84,841
Various loans.................................... 2,236 198
----------- -----------
97,086 85,039
Less current maturities.......................... (2,134) (67)
----------- -----------
$ 94,952 $ 84,972
=========== ===========
</TABLE>

33
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Long-term debt maturities are as follows, in thousand of dollars:

<TABLE>
<CAPTION>
Years Ending
------------
<S> <C>
2000................................................................. $ 2,134
2001................................................................. --
2002................................................................. --
2003................................................................. --
Thereafter........................................................... 94,952
-------
$97,086
=======
</TABLE>

As part of merger of the Company with MSR on March 4, 1999, the Company
entered into a new five year Credit Facility agreement. The existing debt of
$73,993,000 and $10,848,000 from Quicksilver and MSR was transferred into the
new Credit Facility. The Credit Facility permits the Company to obtain
revolving credit loans and to issue letters of credit for the account of the
Company from time to time in an aggregate amount not to exceed $200 million.
The Borrowing Base is currently $95 million and is subject to semi-annual
determination and certain other redeterminations based upon a variety of
factors, including the discounted present value of estimated future net cash
flow from oil and gas production. At the Company's option, loans may be
prepaid, and revolving credit commitments may be reduced, in whole or in part
at any time in certain minimum amounts. The Company can designate the interest
rate on amounts outstanding at either the London Interbank Offered Rate
(LIBOR) + 1.65% or bank prime. On December 16, 1999, the Company locked in its
interest rate at 8.465% for the next six months on $8,000,000. On September
9,1999, the Company locked in its interest rate at 8.315% for the next six
months on $84,850,000. The Company's interest rate was 8.5% for November 17,
1999 through December 31, 1999 on $2,000,000. The collateral for these loan
agreements consists of substantially all of the existing assets of the Company
and any future reserves acquired. The loan agreements contains certain
dividend restrictions and restrictive covenants, which, among other things,
require the maintenance of a minimum current ratio, net worth, and debt
service ratio. The Company currently is in compliance with all such
restrictions.

MGV Energy Inc., (see note 2) incurred US$2,133,730 in debt in the
acquisition of the Monogram Unit in August, 1999. The interest rate is 0.75%
over Canadian Imperial Bank of Commerce ("CIBC") prime. CIBC prime was 6.5% as
of December 31, 1999.

8. FINANCIAL INSTRUMENTS

Strategy and 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

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.

34
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

As of December 31, 1999, the Company has zero-cost financial contracts
("collars") in place that hedged a total of 1,000 barrels of oil per day
("MMcf/d") through July 2000 and 500 barrels of oil per day through November
2000. The first set of contracts had a weighted average ceiling price of
approximately $20.65 per barrel and the second set of contracts had a ceiling
price of $25.85 per barrel. These contracts had a floor price of $18.50 and
$21.00 per barrel, respectively.

The Company also has fixed price swaps for 500 barrels per day at $19.35 per
barrel through July 2000 and 7,500 mcf per day at $2.40 per mcf through April
2004. MGV Energy Inc. 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
futures market prices at December 31, 1999, the Company would expect to pay
approximately $1.0 million on the oil hedge contracts and pay approximately
$1.1 million on the natural gas hedge contract. If the futures market prices
were to increase 10% from those in effect at December 31, 1999, the Company
would be required to make additional cash payments of approximately $737,000
under the oil contracts and $2.25 million under the gas contracts.

As a result of these hedging activities in 1999, gas revenues were decreased
by $245,150 and oil revenues were decreased by $776,099.50.

Interest Rates

The Company controls its overall risk of fluctuations in interest rates by
managing the proportion of fixed and floating rate debt instruments within its
debt portfolio over a given period. Derivatives are used as one of the tools
to obtain the targeted mix.

At December 31, 1999, the Company had outstanding interest rate swaps on $50
million of notional principal amount of debt (51% of the total debt
portfolio). These agreements consist of one covering $25 million through May
8, 2000, which converts the debt floating LIBOR base rate to a 5.75% fixed
rate, and a second for $25 million through June 17, 2002, which converts the
debt floating LIBOR base rate to a 5.70% fixed rate. Interest expense for the
year ended December 31, 1999 was $283,645 higher as a result of these rate
swaps.

9. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1999,
and December 31, 1998, are as follows in thousands:

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets
Tax credit sale and unearned income....................... $ 3,709 $ 3,811
Net operating loss carry-forwards......................... 4,171 2,500
Reserve for bad debt...................................... 459 --
Other carryforwards..................................... 1,097 --
------- -------
Total deferred tax assets............................... 9,436 6,311
Deferred tax liabilities
Properties, plant, and equipment.......................... 24,524 18,264
------- -------
Net deferred tax liabilities............................ $15,088 $11,953
======= =======
</TABLE>

35
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The provisions for income taxes for the years ended December 31, 1999 and
1998 are as follows, in thousands:

<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
United States Federal
Current.................................................... $ (934) $ 950
Deferred................................................... 936 2,336
------ ------
$ 2 $3,286
====== ======

A reconciliation of the statutory federal income tax rate and the effective
tax rate for the years ended December 31, 1999 and 1998 are as follows:

<CAPTION>
1999 1998
------ ------
<S> <C> <C>
U.S. federal statutory tax rate............................. 34.00 % 34.0%
Change in net operating loss carry-forwards................. (33.49)% 6.2%
Permanent differences....................................... (0.51)% 0%
------ ------
Effective income tax rate................................... 0 % 40.2%
====== ======
</TABLE>

Net operating losses of approximately $12,500,000 are available for
carryover beginning in the year 2000 to reduce future US taxable income. The
net operating losses will begin to expire in 2001. Under Internal Revenue Code
Section 382, a change of ownership was deemed to have occurred for MSR in
1998. Due to the limitations imposed by Section 382, a portion of MSR's net
operating losses could not be utilized and are not included in deferred tax
assets.

10. OTHER LONG-TERM LIABILITIES

The Quicksilver Properties include certain properties which carry IRS Code
Section 29 income tax benefits. Code Section 29 allows a credit against
regular federal income tax liability for certain eligible gas production.
During 1997 these credits were conveyed through the sale of the working
interests to a bank. The agreement with the bank provided that the Company
would receive cash, payment for future production on the properties, and
payment for a portion of tax credits taken by the bank. The agreement included
a fixed payment note which provides for the Company to receive a minimum of
approximately $7 million plus interest for the future production on the
properties. A portion of the initial cash payment represented an advance
payment for the first eighteen months of tax benefits. As of December 31,
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. The balance of
$800,000 will remain unearned until the tax benefits of the IRS Code Section
29 expire at December 31, 2002. Long-term liabilities also include $2 million
representing the non-current portion of the Unocal Property acquisition
discussed in note 2.

11. STOCKHOLDERS' EQUITY

The Company is authorized to issue 40 million shares of common stock with a
par value of one cent ($0.01) and 10 million shares of preferred stock with a
par value of one cent ($0.01). At December 31, 1999, the Company had
17,984,092 shares of common stock outstanding, excluding the 404,381
unregistered shares contingently issuable to Unocal (see note 2) and no shares
of preferred stock outstanding.

The Company has outstanding warrants to sell 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

36
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(exercisable only after the closing price of the Company's common stock
reaches $10 per share) and options to sell 24,857 shares of common stock at
$8.75 per share.

Sale of Additional Common Stock

During November 1999 the Company completed the sale of 5,100,000 shares of
its common stock at $5 per share. As a result of the sale, the Darden Family
interest in Quicksilver decreased from 75.3% to 54.3%. Net proceeds, after
underwriter's commission and selling costs of $23,180,000 were used to pay
down $20,000,000 of long-term debt and the remainder is being used for capital
projects.

Stock Option Plan

On October 4, 1999 the Board of Directors adopted the 1999 Stock Option and
Stock Retention Plan, which will be submitted to stockholders for approval at
the next annual stockholders' meeting expected to be held in the second
quarter of 2000. There are 1.3 million shares of common stock reserved under
the plan, which provides for the grant of incentive stock options, non-
qualified stock options, stock appreciation rights and retention stock awards.

12. RELATED PARTY TRANSACTIONS

As of December 31, 1999, the Darden Family directly and beneficially own
10.43% of Quicksilver's outstanding common stock. The Darden family
effectively has 56.53% beneficial ownership in Quicksilver including shares
owned by Mercury Exploration Company (Mercury), and Quicksilver Energy L.C.,
company's owned by the Darden's. Under an operating agreement entered into
1998, Mercury managed Quicksilver's business and acted as operator of oil and
gas properties. In March 1999 Quicksilver and Mercury entered into a new
agreement whereby Mercury provides certain accounting services and operates
the oil and gas properties, including the daily activity of producing oil
and/or gas from individual wells and leases, and continues to provide services
as an operator under existing operating agreements. Mercury's compensation
consists of payments and overhead reimbursements to which it or the Company is
entitled as operator under existing and future operating agreements for the
properties. Mercury was paid $1,987,000 under the management agreement in
1999. In addition, the Company reimbursed Mercury or one of its affiliates for
office rent, computer services, marketing services, interest on debt and other
administrative costs not covered under the management agreement in the amount
of $614,000 during 1999.

Under terms of the management agreement with Mercury, Mercury pays account
payable attributable to the Company's operations for which it is reimbursed.
At any point in time, the average balance of the amount owed to Mercury as
reimbursement ranges from $2,400,000 to $2,900,000. As of December 31, 1999
the Company had no significant outstanding balances payable to Mercury under
the management agreement.

In June 1999, Quicksilver and its affiliate, Mercury, formed Beaver Creek
Pipeline, L.L.C. Quicksilver and Mercury each acquired a 50% interest in
Beaver Creek. Beaver Creek purchased from Dow Chemical a 125-mile natural gas
pipeline extending from our Beaver Creek field in northern Michigan to the
Midland, Michigan industrial corridor. A number of large end-use customers,
including Dow Chemical, are located in the area of the pipeline and the
Company expects demand for natural gas to significantly increase from those
end-users due to increasing industrial activity and power generation in the
area. Quicksilver expects this pipeline acquisition to decrease its
transportation expenses and, as a result, increase the net prices received for
its natural gas.

13. SUBSEQUENT EVENTS

On March 5, 2000, the Company signed a purchase and sale agreement with CMS
Oil & Gas Company ("CMS"), a subsidiary of CMS Energy Corporation, to acquire
CMS' upstream oil and gas companies and

37
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

related properties (the "CMS Properties") located in Michigan for $163
million, subject to adjustments (the "CMS Acquisition"). The CMS Properties
consist of interests in 3,049 gross (650 net) active producing oil and gas
wells located on 511,641 gross (449,784 net) acres. Holditch-Reservoir
Technologies Consulting Services ("Holditch"), a Schlumberger company,
estimates proved reserves attributable to the CMS Acquisition of 315.1 Bcf of
natural gas and 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 SEC PV-10
value of $184.0 million. Approximately 81% of the proved reserve volumes is
classified as proved developed. Current daily production from the CMS
properties is estimated to be 48 Mmcfe. Located primarily in the Antrim Shale
and Niagaran formations in Michigan, the CMS properties will complement
Quicksilver's existing assets and will more than double the Company's total
production. The acquisition of the CMS properties will complement the current
operations and infrastructure that Quicksilver has established in Michigan,
further positioning the Company to continue to increase its ownership position
in that region on a cost competitive basis. The Company issued 3,650,000
shares of its common stock to CMS as part of an earnest money performance
deposit. Such shares will be refunded to the Company at closing, expected to
occur on or before March 31, 2000. If CMS terminates the Purchase and Sale
Agreement due to misrepresentations, breach of warranties, or non-performance
of material obligations, covenants, and agreements by Quicksilver under the
Purchase and Sale Agreement, and the transaction does not close, CMS will be
entitled to retain the 3,650,000 shares. Further, CMS will have the right to
require the Company to repurchase 25% of the shares on each of June 30, 2000;
September 30, 2000; December 31, 2000; and March 31, 2000 at $4.125 per share,
$4.25 per share, $4.375 per share, and $4.50 per share, respectively.

The Company plans to finance the acquisition by the issuance of $50 million
Senior Subordinated Notes, the incurrence of $94 million incremental bank
credit facility and the sale of $25 million of Section 29 tax credits.

14. SUPPLEMENTAL INFORMATION (UNAUDITED)

Selected Quarterly Data

<TABLE>
<CAPTION>
Mar 31 Jun 30 Sep 30 Dec 31
-------- -------- -------- --------
In thousands, except per share data
<S> <C> <C> <C> <C>
1998
Operating Revenues.................... $ 11,629 $ 11,456 $ 11,778 $ 10,824
Income before income taxes and
minority interest.................... 1,906 1,871 2,246 1,390
Net income............................ 1,296 1,290 1,958 341
Basic and diluted net income (loss)
per share............................ 0.11 0.11 0.17 0.03
1999
Operating Revenues.................... $ 9,031 $ 11,554 $ 14,821 $ 15,602
Income (loss) before income taxes and
minority interest.................... (876) 339 1,524 2,036
Net income (loss)..................... (485) 224 1,011 2,412
Basic and diluted net income (loss)
per share............................ (0.04) 0.02 0.08 0.18
</TABLE>

Supplemental Information for Oil and Gas Producing Activities

The Company's proved oil and gas reserves at December 31, 1999 and 1998,
have been estimated by Holditch-Reservoir Technologies Consulting Services in
accordance with guidelines established by the Securities and Exchange
Commission ("SEC"). Accordingly, the following reserve estimates are based
upon existing economic and operating conditions.

38
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

should not be construed as the current market value of the Company's oil and
gas properties or the cost that would be incurred to obtain equivalent
reserves.

Estimated Reserves

Changes in the estimated net quantities of crude oil and natural gas
reserves, which are primarily located in the continental United States,
Canadian reserves are immaterial, are as follows:

Reserve Quantities

<TABLE>
<CAPTION>
Gas Oil
------- ------
(Mmcf) (Mbbl)
<S> <C> <C>
Proved Reserves
As of January 1, 1998..................................... 138,834 24,536
Revision of estimates................................... -- (5,886)
Extensions and discoveries.............................. 29,683 --
Production for 1998..................................... (15,315) (667)
------- ------
As of January 1, 1999..................................... 153,202 17,983
Revision of estimates................................... 16,323 (4,646)
Purchases for 1999...................................... 45,163 2,673
Sales of reserves in place.............................. (613) (5)
Production for 1999..................................... (16,042) (724)
------- ------
As of December 31, 1999................................... 198,033 15,281
======= ======
Proved Developed Reserves
As of January 1, 1998..................................... 119,669 8,932
As of January 1, 1999..................................... 123,743 9,829
As of December 31, 1999................................... 140,354 9,954
</TABLE>

Standardized Measure

These regulations provide that the oil, condensate, and gas price structure
utilized to project future net cash flows reflects current prices at each date
presented and have been escalated only when known and determinable price
changes are provided by contract. Future production, development, and net
abandonment costs are based on current costs without escalation. The resulting
net future cash flows have been discounted to their present values based on a
10% annual discount factor for the years ended December 31, 1999, 1998 and
1997, in thousands of dollars.

<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Future cash flows......................... $ 913,485 $ 607,336 $ 629,499
Future production and development costs... (462,822) (331,599) (300,273)
Future income tax expense................. (104,715) (55,106) (46,733)
--------- --------- ---------
Future net cash flows..................... 345,948 220,631 282,493
10% annual discount for estimated timing
of cash flows............................ (141,899) (92,212) (134,848)
--------- --------- ---------
Standardized measure of discounted future
net cash flows........................... $ 204,049 $ 128,419 $ 147,645
========= ========= =========
</TABLE>

39
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Changes in Standardized Measure of Discounted Future Net Cash Flows

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net changes in price and production costs........ $ 72,641 $ 3,199 $ (5,362)
Development costs incurred....................... 9,486 8,283 3,303
Revision of estimates............................ (17,089) (21,708) 2,908
Changes in estimated future development costs.... (7,196) (13,763) (1,654)
Purchase and sale of reserves, net............... 61,919 1,715 32,247
Extensions, discoveries and improved recovery,
net of future production and development costs.. -- 18,246 --
Net change in income taxes....................... (26,829) (7,871) 13,519
Sales of oil and gas net of production costs..... (26,571) (24,346) (28,013)
Accretion of discount............................ 12,842 14,765 11,558
Other............................................ (3,573) 2,254 (10,217)
-------- -------- --------
Net increase (decrease).......................... $ 75,630 $(19,226) $ 18,289
======== ======== ========
</TABLE>

Estimated future cash inflows are computed by applying year-end prices of
oil and gas to year-end quantities of proved reserves. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves in
future years, based on year end costs and assuming continuation of existing
economic conditions.

These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the SEC. Because of
unpredictable variances in expenses and capital forecasts, crude oil and
natural gas price changes, and the fact that the bases for such estimates vary
significantly, management believes the usefulness of these projections is
limited. Estimates of future net cash flows do not necessarily represent
management's assessment of future profitability or future cash flow to the
Company.

Costs incurred in oil and gas property acquisition, exploration, and
development activities for the year ended December 31, 1999 and 1998, in
thousands:

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Acquisition of properties................................... $40,272 $ 1,715
Exploration costs........................................... -- 1,095
Development costs........................................... 9,486 8,283
------- -------
Total..................................................... $49,758 $11,093
======= =======
</TABLE>

Capitalized cost for oil and gas properties at December 31, 1999 and 1998,
in thousands:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Proved oil and gas properties............................ $223,746 $178,128
Unproved oil and gas interests........................... 4,926 3,584
Accumulated depletion and depreciation................... (65,075) (53,225)
-------- --------
$163,597 $128,487
======== ========
</TABLE>

40
<PAGE>

QUICKSILVER RESOURCES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Results of operations from producing activities, for the year ended December
31, 1999 and 1998, in thousands:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Oil and gas sales...................................... $ 47,616 $ 42,080
Operating expenses..................................... (21,045) (17,781)
Depletion and depreciation............................. (13,315) (12,198)
-------- --------
13,256 12,148
Income taxes........................................... (2) (4,130)
-------- --------
Results of operations from producing activities
(excluding corporate overhead and interests costs).... $ 13,254 $ 8,018
======== ========
</TABLE>

41
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
MSR Exploration Ltd. and Subsidiaries
Fort Worth, Texas

We have audited the accompanying consolidated statements of income and cash
flows of MSR Exploration Ltd. and subsidiaries (the Company) for the period
from inception March 7, 1997 to December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of the Company's operations and its cash
flows for the period from inception March 7, 1997 to December 31, 1997, in
conformity with generally accepted accounting principles.

Deloitte & Touche LLP
Fort Worth, Texas
March 25, 1998
(December 18, 1998 as to Note 12)

42
<PAGE>

MSR EXPLORATION, LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME
For the Period from Inception, March 7, 1997 to December 31, 1997

<TABLE>
<S> <C>
Revenue
Oil sales...................................................... $ 257,000
Gas sales...................................................... 570,000
Interest and other income...................................... 27,000
-----------
Total revenues............................................... 854,000
-----------
Expenses
Operating expenses............................................. 228,000
Production taxes............................................... 68,000
Depletion and depreciation..................................... 220,000
General and administrative..................................... 146,000
Interest....................................................... 147,000
-----------
Total expenses............................................... 809,000
-----------
Income before income taxes....................................... 45,000
Income tax (expense) benefit..................................... (15,000)
-----------
Net income....................................................... $ 30,000
===========
Basic and diluted earnings per share............................. $ --
===========
Basic weighted average number of shares outstanding for the peri-
od.............................................................. 14,801,000
===========
Diluted weighted average number of shares outstanding for the pe-
riod............................................................ 14,838,000
===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

43
<PAGE>

MSR EXPLORATION, LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from Inception, March 7, 1997 to December 31, 1997

<TABLE>
<S> <C>
Operating Activities:
Net income...................................................... $ 30,000
Charges and credits to net loss not affecting cash
Depletion and depreciation.................................... 220,000
Deferred income taxes......................................... 15,000
Changes in assets and liabilities
Receivables................................................... 236,000
Inventories and prepaid expenses.............................. (22,000)
Accounts payable and accrued liabilities...................... (153,000)
------------
Net Cash from (used for) Operating Activities..................... 326,000
------------
Investing Activities:
Property, plant and equipment expenditures...................... (592,000)
Cash received in merger......................................... 350,000
Change in cumulative foreign currency translation............... (30,000)
------------
Net Cash from (used for) Investing Activities..................... (272,000)
------------
Financing Activities:
Principal payments on long-term debt............................ 10,575,000
Proceeds from debt borrowings................................... (10,040,000)
Payment of financing costs...................................... (61,000)
------------
Net Cash from (used for) Financing Activities..................... 474,000
------------
Cash at End of Period............................................. $ 528,000
============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

44
<PAGE>

MSR EXPLORATION LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period Ended December 31, 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements of operations and cash
flows include the accounts of MSR Exploration Ltd. (the Company), and its
wholly owned subsidiaries. The Company's consolidated financial statements
include the operations and cash flows of the Company from its inception on
March 7, 1997 and Old MSR's operations since October 31, 1997, the effective
date of the merger. All significant inter-company transactions and balances
have been eliminated in consolidation.

Principal Business Activity and Merger

MSR Exploration Ltd. ("the Company"), formerly Mercury Montana, Inc., was
organized on March 7, 1997, under the laws of the State of Delaware for the
purpose of acquiring from Mercury Exploration Company (Mercury) and thereafter
exploring, developing and operating all of the Company's oil and natural gas
properties located in Montana (the "Mercury Properties"). Upon formation of
the Company, Mercury conveyed to the Company the Mercury Properties and
associated debt in exchange for a majority of the then outstanding Company
common stock and warrants to purchase additional shares of Company common
stock. Certain directors, officers and agents of Mercury also conveyed to the
Company certain contractual rights in the Mercury Properties in exchange for
shares of Company common stock and warrants. The Mercury Properties included
approximately 75 crude oil producing wells, which were subject to a prior
production payment, forward-sale agreement between Mercury and a third party
covering a period from October 1996 through December 1997. The agreement was
the obligation of Mercury; consequently the oil revenue and associated
expenses from these properties belonged to Mercury through December 31, 1997,
and started accruing to the Company on January 1, 1998.

On March 26, 1997, MSR Exploration Ltd., ("Old MSR"), an Alberta, Canada
corporation, entered into an agreement with the Company, then known as Mercury
Montana, Inc. and its majority shareholder at that time, Mercury, both of Fort
Worth, Texas, to combine all of the Company's oil and gas assets in Montana
with all the oil and gas assets of Old MSR by way of a merger of the Company
and Old MSR. The Company was the surviving corporation in the merger and
changed its name to MSR Exploration Ltd. after the merger was effective. The
merger was accounted for under the purchase method of accounting.

At a combined Annual, General and Special Meeting of Shareholders of the Old
MSR held on October 30, 1997, the shareholders elected directors and approved
the domestication or continuance of Old MSR from Alberta, Canada to Delaware,
U.S.A. The domestication of Old MSR into Delaware was required for the merger
to become effective. The merger was subsequently approved on October 31, 1997,
by written consent of the stockholders of Old MSR.

As part of the merger, the Company issued to Old MSR shareholders one share
of common stock of the Company for each of the 13,777,014 outstanding shares
of Old MSR common stock. Each of the 12,000,000 shares of common stock of the
Company outstanding prior to the merger remained outstanding. The combined
total number of outstanding shares is 25,777,014. All such shares are listed
for trading on the American Stock Exchange. In addition, the Company paid $4
million of Mercury Exploration Company bank debt. Outstanding warrants to
purchase 5.5 million shares of common stock of the Company at $1.25 per share
and 5.5 million shares at $2.00 per share also remained outstanding after the
merger, as did Company stock options to purchase an aggregate of 228,570
shares of Company common stock at $0.875 per share granted in lieu of
salaries. An outstanding warrant to purchase 280,000 shares of common stock of
the Old MSR at $3.375 per share was converted to an equivalent right to
acquire shares of the Company.

45
<PAGE>

MSR EXPLORATION LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Three members of Old MSR's Board of Directors, Otto J. Buis, Patrick M.
Montalban and Steven M. Morris, together with two independent directors, D.
Randall Kent and W. Yandell Rogers, III, were elected to the Board of
Directors of Old MSR at its October 30, 1997 meeting. With the completion of
the merger, Messrs. Buis, Montalban, Morris, Kent and Rogers became directors
of the Company joined by Frank Darden, Thomas F. Darden and Glenn M. Darden,
the directors of the Company prior to the merger and also directors of
Mercury.

On October 31, 1997, the Company restructured the Old MSR's revolving credit
facility and entered into a new credit agreement with a bank. The closing of
the loan was subject to the successful completion of the Company's merger with
Old MSR. The new agreement is for a $25,000,000 senior secured revolving
credit facility with an initial borrowing base of $12,000,000, which matures
in five years.

U.S. Dollar Reporting

The majority of the Company's business is transacted in U.S. dollars and,
accordingly, the consolidated financial statements are expressed in that
currency.

Major Customers

For the period from inception March 7, 1997 to December 31, 1997, three
purchasers, Rio Vista Energy, Ltd., Montana Power Company, and J.N. Petroleum
Marketing, Inc., accounted for approximately 42%, 22% and 11%, respectively of
the Company's total consolidated oil and gas sales. The Company has a contract
with Montana Power Company which expires January 1, 2004 to sell all gas
processed through one of the company's gas plants. Gas prices are re-
determined each January during the contract term. The Company does not
anticipate that the loss of any of its present purchasers would adversely
effect the Company's consolidated business. The Company also believes that, in
the event of a loss of a present purchaser, other oil and gas purchasers
located in the Company's areas of production would offer competitive prices
for such production.

Properties, Plant and Equipment

The Company follows the "full cost" method of accounting for oil and gas
properties whereby all costs associated with acquiring, exploring for, and
developing oil and gas reserves are capitalized and accumulated in cost
centers established on a country-by-country basis. Such costs include land
acquisition costs, geological and geophysical expenses, carrying charges on
non-producing properties, costs of drilling both productive and non-productive
wells, and overhead charges directly related to acquisition, exploration and
development activities.

The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves as determined by independent petroleum engineers. Investments
in unproved properties are not amortized until proven reserves associated with
them can be determined or until impairment occurs. Oil and natural gas
reserves and production are converted into equivalent units based upon
estimated relative energy content.

Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.

46
<PAGE>

MSR EXPLORATION LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Other plant and equipment are depreciated on the straight-line basis as
follows:

Gas processing plants and gathering systems--over eight years

Other equipment--over three to seven years

Revenue Recognition

The Company recognizes revenue as quantities of oil and gas sold or volumes
of gas transported, and utilizes the entitlement method of accounting for oil
and gas imbalances. Under this method, the Company recognizes revenue for its
proportionate share of volumes sold. Any over-produced amount is recorded as
deferred revenue and any under-produced amount is recorded as current revenue
and revenue receivable.

Environmental Compliance and Remediation

Environmental compliance costs, including on going maintenance and
monitoring, are expensed as incurred. Environmental remediation costs, which
improve the condition of a property, are capitalized.

Deferred Charges

Financing charges related to the acquisition of debt are deferred and
amortized over the term of that debt using the effective interest method.

Foreign Currency Translation

The functional currency for the Company's foreign operations is the
applicable local currency; therefore, translation is performed for balance
sheet accounts using current exchange rates in effect at the balance sheet
date, and for revenue and expense accounts using a weighted average exchange
rate for the year.

Joint Venture Operations

Income Taxes

Income taxes provide for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of properties, plant and
equipment for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.

Earnings per Share

In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share"
("EPS") which established new standards for computing

47
<PAGE>

MSR EXPLORATION LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and presenting EPS. SFAS No. 128 replaced the presentation of primary EPS with
a presentation of basic EPS. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The diluted
weighted average number of shares outstanding includes 16,000 shares for the
period attributable to the assumed exercise of dilutive common stock options.
Earnings per share amounts for 1997 have been presented to conform to the SFAS
No. 128 requirements.

Stock-Based Compensation

Compensation expense is recorded with respect to stock option grants to
employees using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25. The Company has not elected the fair value method of
accounting for stock-based compensation encouraged, but not required, by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation."

Accounting Estimates

Recently Issued Accounting Standards

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general
purpose statements. It requires (a) classification of items of other
comprehensive income by their nature in a financial statement and (b) display
of the accumulated balance of other comprehensive income separate from
retained earnings and additional paid-in surplus in the equity section of the
statement of financial position. The Company plans to adopt SFAS No. 130 for
the quarter ended March 31, 1998.

2. PRODUCTION PAYMENT/FORWARD SALE OF OIL

The Mercury Properties contributed to the Company by Mercury, upon its
inception, were subject to a production payment. Mercury and Supply
Development Group, Inc. (SDG) entered into a Production Payment Agreement in
October 1996. Pursuant to the agreement SDG was entitled to an aggregate of
320,000 barrels of oil produced from certain properties of Mercury, including
the Mercury Properties. Mercury could satisfy this obligation by delivering to
SDG proceeds from the sale of oil produced rather than delivering the oil "in
kind", unless SDG elected to take oil "in kind". Pursuant to the Merger
Agreement among the Company, Old MSR and Mercury dated as of March 26, 1997,
as amended, Mercury was entitled to all of the oil revenue and income
attributable to the Mercury Properties until the Production Payment Amount had
been delivered to SDG; provided that Mercury must reimburse the Company for
all costs and expenses of oil production. Mercury's obligation to SDG was
satisfied on December 31, 1997. No amounts associated with the Production
Payment Agreement are reflected in the Company's financial statements, as the
Production Payment Agreement was an obligation of Mercury.

3. PRO FORMA CONDENSED CONSOLIDATED DATA

The following pro forma condensed consolidated data for the year ended
December 31, 1997 is presented as if the merger of the Company with Old MSR
had been consummated on January 1, 1996, which includes

48
<PAGE>

MSR EXPLORATION LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

adjustments to Old MSR. The Company's revenue and expenses subject to a prior
forward sale were excluded from the Company's statement of operations and from
this pro forma data. Oil revenues and direct operating expenses subject to the
forward sale for 1997 were approximately $2,180,000 and $1,536,000
respectively. Revenues and expenses associated with the forward sale began to
accrue to the Company on January 1, 1998.

<TABLE>
<CAPTION>
1997
-------------------------------------
January 1 to From Inception
March 6 March 7 to
Predecessor December 31 Pro Forma
Historical Historical Unaudited
------------ -------------- ---------
(In thousands, except for per share
amounts)
<S> <C> <C> <C>
Revenue.............................. $ 57 $ 854 $ 4,454
Expenses............................. 31 824 4,604
------- ------- -------
Net income (loss).................... $ 26 $ 30 $ (150)
======= ======= =======
Basic and diluted earnings (loss) per
share............................... $ -- $ -- $ (0.01)
======= ======= =======
Weighted average number of shares
outstanding......................... 12,000 12,000 25,777
======= ======= =======
</TABLE>

4. INTEREST EXPENSE

As part of the formation of the Company on March 7, 1997, the Company agreed
to guarantee the repayment of $4.0 million of debt owed by Mercury Exploration
Company to a bank. On October 31, 1997, the Company restructured the Old MSR
revolving credit facility and entered into a new credit agreement with a bank.
Proceeds from the new facility were used to repay the $4.0 million of debt
guarantee by the Company and repay $6.0 million of debt owed by Old MSR. The
closing of the loan was subject to the successful completion of the Company's
merger with Old MSR. The new agreement is for a $25,000,000 senior secured
revolving credit facility with an initial borrowing base of $12,000,000, which
matures in five years. The Company can designate the interest rate on amounts
outstanding at either the London Interbank Offered Rate (LIBOR) + 1.75%, or
bank prime plus 1%. The collateral for this loan agreement consists of
substantially all of the existing assets of the Company and any future
reserves acquired. The loan agreement contains certain restrictive covenants,
which, among other things, require the maintenance of a minimum current ratio,
net worth, debt service ratio and contains certain dividend restrictions.

5. INCOME TAXES

The income tax expense for the period from inception March 7, 1997 to
December 31, 1997 was $15,000. This amount represents a deferred provision as
no current tax provision or benefit was realized. No valuation allowance is
required because the deferred tax assets will be used up by the reversal of
the deferred tax liabilities. As the deferred tax liabilities reverse and
create taxable income, the tax assets will offset this tax liability.

The Company has U.S. net operating loss carry-forwards of approximately
$6,500,000 available to reduce future U.S. taxable income subject to certain
limitations. These U.S. net operating loss carry-forwards begin to expire in
2001. The Company also has Canadian expense carry-forwards totaling
approximately $2,000,000 available to reduce future Canadian taxable income.
These Canadian expense carry-forwards have no expiration date. Use of these
U.S. and Canadian carry-forwards is dependent on future taxable income.

6. STOCK OPTION PLAN

The 1997 Stock Option Plan of the Company (the "Plan") was adopted by the
Board of Directors of the Company and approved by its shareholders and became
effective as of March 7, 1997. The Plan permits the

49
<PAGE>

MSR EXPLORATION LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

granting of options to purchase shares of the Company's common stock. All
employees and directors of the Company are eligible to participate in the
Plan. An aggregate of 250,000 shares of the Company's common stock have been
authorized and reserved for issuance under the Plan. The Company's Board of
Directors has increased the authorized share to a total of 500,000 shares,
subject to shareholder approval. As of December 31, 1997, options to purchase
an aggregate of 248,570 shares of the Company's common stock have been granted
under the Plan at an exercise price of $0.875 per share. Options are totally
vested when granted and must be exercised within five years of the date of
grant. The Company's Compensation Committee of the Board of Directors
determines who shall be granted options under the Plan and the terms thereof,
and administers the Plan. No options may be granted under the Plan after March
7, 2007.

No compensation cost has been recognized at date of grant of the stock
options because the exercise price at date of grant was equal to the fair
value of the common stock at date of grant. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant date for awards under the plan, the Company's net income would have been
reduced by $62,000 for the period ended December 31, 1997. The fair value of
the options were calculated in accordance with the Black-Scholes option
pricing model using an expected volatility of 26%, expected option term of
five years and a risk-free rate of return of 6%. Pro forma basic and diluted
earnings per share were $0.00.

7. RELATED PARTY TRANSACTIONS

On October 31, 1997, the Company and Mercury Exploration Company (Mercury)
have entered into a Management Agreement. Pursuant to the Agreement, Mercury
will be managing all of the operations of the Company's various oil and gas
properties and gas gathering and compression facilities located in Montana and
Texas. Mercury will also provide accounting, administrative, and advisory
services. The Company agreed to reimburse Mercury for its costs and expenses
incurred in connection with managing such operations and pay a management fee
equal to 10% of such costs and expenses.

The term of the Management Agreement is for two years and thereafter for
successive one-year terms. At December 31, 1997 the Company owed Mercury
approximately $52,000 for payment of costs incurred on behalf of the Company.
No management fee has been paid or accrued for the period ended December 31,
1997.

Mercury owns 6,480,000 shares of the Company's common stock and three of
Mercury's directors and officers--Frank Darden, Thomas Darden, and Glenn
Darden--are also directors and officers of the Company.

8. SUPPLEMENTAL CASH FLOW INFORMATION

For the period from inception, March 7, 1997, to December 31, 1997, in
thousands:

<TABLE>
<S> <C>
Cash paid during the year:
Interest......................................................... $ 134
=======
Income taxes..................................................... $ --
=======
Non-cash financing activities
Purchase of the net assets of Old MSR by issuance of 13,777,014
shares of common stock. Amount includes assets totaling
$20,034,000, including cash of $350,000, and liabilities
totaling $8,496,000, including long-term debt of $6,114,000..... $12,538
=======
Consideration for financing costs by issuance of common stock
warrants........................................................ $ 75
=======
</TABLE>

50
<PAGE>

MSR EXPLORATION LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. STATEMENTS OF REVENUE AND DIRECT OPERATING EXPENSES

<TABLE>
<CAPTION>
For the Period From January 1
to March 6, 1997
-----------------------------
(in thousands)
<S> <C>
Revenues
Oil sales.................................. $--
Gas sales.................................. 57
----
Total.................................... 57
----
Direct operating expenses
Operating expenses......................... --
Production taxes........................... 7
----
Total.................................... 7
----
Excess of revenues over direct operating
expenses.................................... $ 50
====
</TABLE>

a. Basis of Presentation

Historical financial statements reflecting financial position, results of
operations and cash flows required by generally accepted accounting principles
are not presented for the period for January 1 to March 6, 1997, as such
information is neither readily available on an individual property basis nor
meaningful for the properties included in the merger. Accordingly, this
statement of revenues and direct operating expenses is presented in lieu of
the financial statements required under Rule 3-05 of Securities and Exchange
Commission Regulation S-X.

The accompanying statement of revenues and direct operating expenses
represent the Company's pre-merger net ownership interest in the properties
included in the merger and are presented on the full cost accrual basis of
accounting. Depreciation, depletion, and amortization, allocated general and
administrative expenses, interest expense, and income taxes have been excluded
because the property interests included in the merger were from a newly formed
business, and the expenses incurred would not necessarily be indicative of the
expenses to be incurred by the Company after the merger.

b. Forward Sale of Oil Revenues

The Mercury Properties were subject to a Production Payment Agreement
entered into in October 1996 between Mercury and a third party. The Agreement
was the obligation of Mercury and was for the period from October 1, 1996 to
December 31, 1997. The Company's oil revenues and associated operating
expenses included in the statements of revenues and direct operating expenses
do not include any amounts which were subject to the Agreement. The oil
revenues and associated expenses relating to the production payment forward
sale started accruing to the Company on January 1, 1998.

The oil revenues and associated expenses dedicated to the production payment
forward sale from October 1, 1996, through December 31, 1996 were excluded
from the Statement of Revenues and Direct Operating Expenses. Such amounts
were also excluded from the Company's statement of operations for the period
from Inception, March 7, 1997 to December 31, 1997. To provide information
about the Company for 1998 and beyond, revenues subject to the forward sales
agreement amounted to $689,000 for 1996.

51
<PAGE>

MSR EXPLORATION LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES --(Unaudited)

The following information about the Company's oil and gas producing
activities has been prepared in accordance with Statement of Financial
Standards No. 69, Disclosures about Oil and Gas Producing Activities.

The Company believes that the valuation method prescribed by Statement of
Financial Standards No. 69 does not provide the best estimate of current
economic value of its oil and gas reserves as unproved reserves are not
attributed any economic value and the use of year end price assumptions and a
10% discount rate are arbitrary. The pro forma amounts for 1996 are presented
as if the Company had been in existence, owned the Mercury Properties, and had
been combined with Old MSR since January 1, 1996.

Proved Oil and Gas Quantities

The following information summarizes the Company's estimated net quantities
of proved and proved-developed oil and gas reserves. The December 31, 1997 end
of year reserves are based on estimates of Citadel Engineering Ltd., petroleum
consultants.

<TABLE>
<CAPTION>
Year Ended
December 31,
1997
-------------
Oil Gas
----- ------
(MBbl) (Mmcf)
<S> <C> <C>
Proved reserved
Beginning of year--pro forma................................ 5,281 1,339
Revisions of previous estimates............................. 686 332
Purchase of reserves in place--Old MSR...................... 3,646 19,870
Production.................................................. (143) (322)
----- ------
End of year................................................. 9,470 21,219
===== ======
Proved developed reserves
Beginning of year--pro forma................................ 1,628 1,339
===== ======
End of year................................................. 4,412 16,484
===== ======
</TABLE>

The following standardized measure of discounted future net cash flows
relating to proved oil and gas reserves has been computed using year end
prices, except where contractual arrangements in place at year end provide for
future price changes and costs, in thousands.

<TABLE>
<CAPTION>
December 31,
1997
------------
(pro forma)
<S> <C>
Future cash flows............................................... $178,672
Future production and development costs......................... (70,242)
Future income tax expense....................................... (25,474)
--------
82,956
10% annual discount for timing of cash flows.................... (44,581)
--------
Standardized measure of discounted cash flows................... $ 38,375
========
</TABLE>

52
<PAGE>

MSR EXPLORATION LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The standardized measure of discounted cash flows does not include any value
relating to the Company's gathering, processing, and transmission of gas
reserves owned by other companies. The following table sets out in aggregate
the principle source of change in the standardized measure of discounted future
net cash flows for the year ended December 31, 1997, in thousands.

<TABLE>
<CAPTION>
1997
-----------------
<S> <C>
Sales of oil and gas produced, net of production costs... $ (531)
Net changes in price and production costs................ (5,628)
Purchase of reserves in place............................ 20,817
Revisions of previous quantity estimates................. 2,908
Development costs incurred during the year............... 62
Accretion of discount.................................... 1,705
Net change in income taxes............................... 1,234
Other.................................................... 761
-------
Net increase (decrease).................................. 21,328
Balance at beginning of year--pro forma.................. 17,047
-------
Balance at end of year................................... $38,375
=======

Costs incurred in oil and gas property acquisition, exploration and
development activities, in thousands:

<CAPTION>
Inception-
March 7, 1997 to
December 31, 1997
-----------------
<S> <C>
Property acquisition costs............................... $19,583
=======
Exploration costs........................................ $ 530
=======
Development costs........................................ $ 62
=======

Results of operations from producing activities, in thousands:

<CAPTION>
Inception-
March 7, 1997 to
December 31, 1997
-----------------
<S> <C>
Oil and gas sales........................................ $ 827
Operating expenses....................................... (228)
Production taxes......................................... (68)
Depletion and depreciation............................... (220)
-------
311
Income taxes............................................. (106)
-------
Results of operations from producing activities
(excluding corporate overhead and interest costs)....... $ 205
=======
</TABLE>

53
<PAGE>

INDEPENDENT AUDITOR'S REPORT

To the Stockholders
Mercury Exploration Company
Fort Worth, Texas

We have audited the accompanying consolidated statements of income and cash
flows of Mercury Exploration Company for the year ended September 30, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Mercury Exploration Company for the year ended September 30, 1997, in
conformity with generally accepted accounting principles.

As described in Note 13, the Company has changed its accounting policy for
accounting for oil and gas properties from the successful efforts method to
the full cost method.

Weaver and Tidwell, L.L.P.

Fort Worth, Texas
October 26, 1998

54
<PAGE>

INDEPENDENT AUDITOR'S REPORT

To the Stockholders
Mercury Exploration Company
Fort Worth, Texas

We have audited the accompanying consolidated statements of income and cash
flows of Mercury Exploration Company for the three months ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Mercury Exploration Company for the three months ended December 31,
1997, in conformity with generally accepted accounting principles.

Weaver and Tidwell, L.L.P.

Fort Worth, Texas
November 30, 1998

55
<PAGE>

MERCURY EXPLORATION COMPANY

CONSOLIDATED STATEMENTS OF INCOME
(in thousands)

<TABLE>
<CAPTION>
Three Months
Year Ended Ended
September 30, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Oil and gas revenue................................. $41,328 $11,049
Costs and expenses
Production........................................ 16,454 4,736
General and administrative expenses............... 1,784 532
Depreciation, depletion and amortization.......... 5,918 2,466
------- -------
Income from operations.......................... 17,172 3,315
Other income (expense)
Interest expense.................................. (5,414) (27)
Interest income................................... 196 78
Equity in partnership income...................... 731 78
Management fee income............................. 204 54
Rental income..................................... 221 32
Miscellaneous income (expense).................... 386 (1,418)
Income from litigation settlement................. -- 2,781
------- -------
Income before minority interest and income
taxes.......................................... 13,496 4,869
Minority interest in income of subsidiaries......... 5,687 1,277
------- -------
Income before income taxes...................... 7,809 3,592
Income taxes........................................ 2,694 1,238
------- -------
Net income.......................................... $ 5,115 $ 2,354
======= =======
Weighted average shares outstanding................. 250,950 250,950
======= =======
Earnings per share.................................. $ 20.38 $ 9.38
======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

56
<PAGE>

MERCURY EXPLORATION COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended September 30, 1997
(in thousands)

<TABLE>
<S> <C>
Cash flows from operating activities:
Cash received from customers........................................ $ 39,687
Rent received....................................................... 221
Interest received................................................... 196
Cash paid to suppliers and employees................................ (19,204)
Interest paid....................................................... (5,414)
Income tax paid..................................................... (130)
--------
Net cash provided by operating activities......................... 15,356
Cash flows from investing activities:
Proceeds from sale of marketable equity securities.................. 14
Proceeds from sale of assets........................................ 586
Redemption of bonds................................................. 112
Distribution received from partnerships............................. 1,194
Payments received on notes receivable............................... 12
Advance from affiliates............................................. (61)
Purchases of marketable equity securities........................... (4)
Investments in partnerships......................................... (1,200)
Capital expenditures................................................ (54,231)
--------
Net cash used in investing activities............................. (53,578)
Cash flows from financing activities:
Proceeds from notes payable......................................... 89,052
Proceeds from production loans...................................... 5,271
Payments on production loans........................................ (3,199)
Distributions to minority interest.................................. (11)
Principal paid on long-term debt.................................... (51,319)
--------
Net cash provided by financing activities......................... 39,794
--------
Net increase (decrease) in cash................................... 1,572
Cash, beginning of period............................................. 2,958
--------
Cash, end of period................................................... $ 4,530
========
</TABLE>

The accompanying notes are an integral part of these financial statements.

57
<PAGE>

MERCURY EXPLORATION COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended September 30, 1997
(in thousands)

<TABLE>
<S> <C>
Reconciliation of Net Income to Net Cash Provided by Operating
Activities:
Net income.......................................................... $ 5,115
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and depletion........................................ 5,918
Minority interest in income....................................... 5,687
Partnership income................................................ (731)
Deferred income taxes............................................. 2,710
Changes in operating assets and liabilities
Accounts receivable............................................. (2,732)
Inventory....................................................... 134
Accounts payable................................................ 1,400
Accrued liabilities............................................. (1,937)
Advances payable................................................ (479)
Royalties payable............................................... 501
Income taxes payable............................................ (147)
Other........................................................... (83)
-------
Net cash provided by operating activities......................... $15,356
=======
</TABLE>

SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

During 1997, notes payables were issued in exchange for assets of
approximately $152,000.

In 1997, stockholders' equity was reduced by approximately $226,000 as a
result of transfer of property to shareholders.

The accompanying notes are an integral part of these financial statements.

58
<PAGE>

MERCURY EXPLORATION COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOW
For the Three Months Ended December 31, 1997
(in thousands)

<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net income.......................................................... $ 2,354
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and depletion........................................ 2,466
Minority interest in undistributed subsidiary earnings............ 1,277
Partnership income................................................ (78)
Reduction of unearned revenues.................................... (1,593)
Deferred income taxes............................................. 273
Changes in operating assets and liabilities
Accounts Receivable............................................... (7)
Inventory......................................................... (223)
Accounts payable.................................................. 575
Accrued liabilities............................................... (859)
Advances payable.................................................. 1,060
Royalties payable................................................. (353)
Income taxes payable.............................................. 964
Other............................................................. (205)
-------
Net cash provided by operating activities........................... 5,651
-------
Cash Flows from Investing Activities:
Capital expenditures................................................ (27,750)
Proceeds from sale of marketable equity securities.................. 4
Proceeds from bond maturities....................................... 65
Distribution received from partnerships............................. 458
Advances on notes receivable........................................ (15)
Investments in common stock not held for resale..................... (119)
-------
Net cash used in investing activities............................... (27,327)
Cash Flows from Financing Activities:
Proceeds from notes payable......................................... 25,435
Receipt of unearned revenues........................................ 2,088
Principal paid on long-term debt.................................... (3,533)
-------
Net cash provided by financing activities......................... 23,990
-------
Net increase (decrease) in cash................................... 2,314
Cash, beginning of period........................................... 4,530
-------
Cash, end of period................................................. $ 6,844
=======
</TABLE>

The accompanying notes are an integral part of this financial statement.

59
<PAGE>

MERCURY EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Year Ended September 30, 1997 and the Three Months Ended December 31,
1997

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The nature of operations and significant accounting policies are as follows:

Nature of Operations

Mercury Exploration Company's (the Company) operations consist primarily of
oil and gas development and production in Texas, New Mexico, Montana, Wyoming,
Michigan, Indiana, Kansas, Oklahoma, Kentucky and North Dakota.

Consolidation Policy

The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiary, Mercury Michigan, Inc., Quicksilver
Pipeline, L.L.C. (organized in 1996) of which the Company owns 52%,
Quicksilver Energy, L.C. (organized in 1996) of which the Company owns 52%,
and Mercury Montana, Inc. (organized in 1997) of which the Company owns 54%.
As a result of the consolidation, inter-company transactions have been
eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Oil and Gas Property and Equipment

The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves as determined by independent petroleum engineers. Investments
in unproved properties are not amortized until proven reserves associated with
them can be determined or until impairment occurs. Oil and natural gas
reserves and production are converted into equivalent units based upon
estimated relative energy content.

60
<PAGE>

MERCURY EXPLORATION LTD. COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Other Property and Equipment

Property and equipment is stated at cost. Depreciation is provided for using
the straight-line and accelerated methods. Depreciation methods are designed
to amortize the cost of assets over their estimated useful lives. Estimated
useful lives of major categories of property and equipment are as follows:

<TABLE>
<S> <C>
Land, buildings and leasehold
improvement......................... 40 years
Furniture and equipment.............. 5-10 years
Transportation equipment............. 5 years
</TABLE>

Maintenance, repairs, renewals and betterment's, which do not enhance the
value or increase the basic productive capacity of assets are charged to
expense as incurred.

Cash Flow Presentation

For purposes of the statement of cash flows, time deposits that mature in
three months or less, certificates of deposit and restricted cash are
considered cash and cash equivalents.

Earnings Per Common Share

The Company has adopted Statement No. 128, Earnings Per Share, issued by the
Financial Standards Accounting Board. Adoption of Statement No. 128 had no
effect upon 1997 earnings per share computations.

Basic earnings per common share was computed based on the weighted average
number of common shares outstanding for the period. Diluted earnings per share
have not been presented since the Company has no outstanding options or
warrants to purchase its common stock.

Accounting Changes

The Financial Accounting Standards Board has issued the following Statements
of Financial Accounting Standards effective for fiscal years beginning after
December 15, 1997:

No. 130--Reporting Comprehensive Income

Requires that all items are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.

No. 131--Disclosures About Segments of an Enterprise and Related
Information

Requires disclosure of operating segments based upon information used
internally for evaluating segment performance and allocating resources.

No. 132--Employers' Disclosures About Pensions and other Post-retirement
Benefits

Revises employers' disclosures about pensions and other post-retirement
plans.

The Company will adopt the above standards effective January 1, 1998.
Adoption is not expected to have a significant effect upon current financial
statements.

61
<PAGE>

MERCURY EXPLORATION LTD. COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 2. SECURITIES AVAILABLE FOR SALE

Included in net income for the year ended September 30, 1997 and the three
months ended December 31, 1997 is a $241 and $594 gain, respectively, from
sales of marketable equity securities. The cost of the securities sold was
determined by the specific identity method.

NOTE 3. PARTNERSHIP INCOME

Investment in partnerships is stated at cost plus the proportionate share of
invested accumulated income. The Company's investment in partnerships consists
of a 10% interest in Michigan Gas Partners, Ltd., a 6% interest in Frederic
HOF Limited Partnership, and a 50% interest in Wilderness Energy, L.C. None of
these entities individually is considered a significant subsidiary of the
Company. The following is a summary of the combined results of operations of
the Company's investments in partnerships for the year ended September 30,
1997 and the three months ended December 31, 1997:

<TABLE>
<CAPTION>
Year Ended Three Months Ended
September 30, 1997 December 31, 1997
------------------ ------------------
(in thousands)
<S> <C> <C>
Oil and gas revenue.................... $9,830 $3,209
====== ======
Net income............................. $2,857 $ 767
====== ======
</TABLE>

NOTE 4. INCOME TAXES

The Company provides for deferred income taxes resulting from temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. Temporary differences result primarily from
intangible development costs being capitalized and amortized for financial
reporting purposes but expensed for tax reporting purposes and different
income recognition criteria for debt extinguishments. Also included in income
taxes is the portion of state taxes based on income.

The Company's income tax provision is as follows:

<TABLE>
<CAPTION>
Year Ended Three Months Ended
September 30, 1997 December 31, 1997
------------------ ------------------
(in thousands)
<S> <C> <C>
Current................................ $ (16) $ 965
Deferred............................... $2,710 $ 273
------ ------
$2,694 $1,238
====== ======
</TABLE>

There is no material difference between the statutory tax rate and the
provision for taxes used in the accompanying financial statements.

The Company has U.S. net operating loss carry-forwards of approximately
$1,600,000 available to reduce future U.S. taxable income subject to certain
limitations. These U.S. net operating loss carry-forwards will expire in 2012.

The Company has tax credit carryforwards available to offset regular federal
income taxes of approximately $738,000 due to expire in 2002.

62
<PAGE>

MERCURY EXPLORATION LTD. COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 5. PROFIT SHARING AND SAVINGS PLAN

The Company sponsors a defined contribution pension plan. All full-time
employees are eligible for participation upon completion of one year's
service. The Company made contributions of $200,000 in 1997. The Company made
no contributions for the three months ended December 31, 1997.

NOTE 6. OPERATING LEASES

The Company's leasing operations consist principally of the leasing of
automobiles under operating leases that expire over the next three years.

The future minimum annual rentals on non-cancellable leases in effect at
December 31, 1997, which have initial or remaining terms of more than one
year, are as follows:

Total rental expense under operating leases was $129,000 in 1997 and $26,000
for the three months ended December 31, 1997.

NOTE 7. FUTURES CONTRACT

The Company has entered into an agreement for the future delivery of
approximately 41,800 barrels of oil. The contract qualifies as a hedge for
financial reporting purposes. Accordingly, changes in the value of the
contract are recognized in income when the effects of changes in oil prices
are recognized. There were no significant realized or unrealized gains or
losses on this agreement at September 30, 1997. The Company has entered into
this agreement as a hedge against any downward movement in the commodity price
of oil through December 31, 1997. The agreement terminates at December 31,
1997. The Company has received a cash payment in advance of the delivery of
the oil at a fixed price of approximately $17.48 per barrel. The market price
for oil at September 30, 1997, was less than this price.

NOTE 8. TAX CREDIT SALE

In December 1997, the Company transferred certain properties, which carry
IRS Code Section 29 income tax benefits, to an unrelated party and received
consideration as follows:

a.Initial payment of $2,553,000
b.Fixed payment note of $5,093,000
c.Credit payment note
d.Production payment

Code Section 29 allows a credit against regular federal income tax liability
for certain eligible gas production. A portion of the initial cash payment
represented an advance payment for the first eighteen months of tax benefits.
As of December 31, 1997, a balance of $2,448,000 in unearned revenues existed
as a result of cash consideration received in excess of the tax benefit
earned. For accounting purposes, the transfer does not qualify for sale or
gain recognition. Accordingly, the accompanying financial statements continue
to include the Company's costs, revenues and expenses associated with the
assets transferred.

63
<PAGE>

MERCURY EXPLORATION LTD. COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION

In October 1997, the Company exchanged its 54% interest in a subsidiary,
Mercury Montana, Inc., for a 25% interest in MSR Exploration Ltd. The
investment in MSR Exploration Ltd. is being accounted for under the equity
method of accounting. Assets and liabilities of Mercury Montana, Inc. at the
date of exchange were as follows:

Non-Cash Investing and Financing Activities:

<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Assets
Inventory................................................... $ 78
Oil and gas properties, net................................. 4,345
Other assets................................................ 50
------
Total Assets.............................................. $4,473
======
Liabilities
Accounts payable............................................ $ 395
Accrued liabilities......................................... 13
Deferred income taxes....................................... (147)
Long-term debt.............................................. 4,000
Minority interest........................................... 93
------
Total Liabilities......................................... 4,354
======
Investment in MSR Exploration Ltd............................. $ 119
======
</TABLE>

NOTE 10. CONTINGENCIES

The Company is a defendant in a lawsuit filed by a former employee with
potential exposure of $500,000. The Company believes the lawsuit is without
merit and is vigorously defending its position, and does not expect the
ultimate outcome to materially affect the Company's financial position.

NOTE 11. SUBSEQUENT EVENTS

The Company settled a lawsuit in December of 1997, which resulted in a gain
of approximately $2,781,000.

Effective January 1, 1998, Mercury transferred substantially all producing
oil and gas properties to a newly formed related company, Quicksilver
Resources Inc., in exchange for common stock in Quicksilver.

Subsequently on September 1, 1998, Quicksilver Resources Inc. entered into a
merger agreement with MSR Exploration Ltd.

NOTE 12. ACQUISITIONS

On November 14, 1996, Quicksilver Energy L.C., a 52% owned subsidiary of
Mercury, consummated the acquisition of certain property interests from Shell
Western Exploration & Production, Inc. (the Shell Properties). Such interests
are primarily located in Michigan and, as of January 1, 1998, had combined
proved reserves of approximately 42.5 Bcfe. The aggregate purchase price for
the interests was approximately $57.7 million, which was paid in cash
principally with bank debt.

64
<PAGE>

MERCURY EXPLORATION LTD. COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following unaudited pro forma summary presents the consolidated results
of operations of Mercury for the years ended September 30, 1997, 1996 and 1995
as if the acquisition had occurred at the beginning of each fiscal year.

<TABLE>
<CAPTION>
Year Ended
September 30, 1997
---------------------
(in thousands, except
per share data)
<S> <C>
Revenues............................................... $44,599
Net income............................................. 5,457
Earnings per share..................................... 21.74
</TABLE>

On October 9, 1997, Mercury consummated the acquisition of certain property
interests from ECT Enocene Enterprises II (the Destec Properties). Such
interests are primarily located in Michigan and, as of January 1, 1998, had
combined proved reserves of approximately 25.4 Bcfe. The aggregate purchase
price for the interests was approximately $23.5 million, which was paid in
cash principally with debt from Mercury's credit facility.

The following unaudited pro forma summary presents the consolidated results
of operations of Mercury for the years ended September 30, 1997 as if the
acquisition had occurred at the beginning of each fiscal year.

<TABLE>
<CAPTION>
Year Ended
September 30, 1997
---------------------
(in thousands, except
per share data)
<S> <C>
Revenues............................................... $51,856
Net income............................................. 8,330
Earnings per share..................................... 33.19
</TABLE>

NOTE 13. CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES

Pursuant to the merger agreement with MSR Exploration Ltd. dated September
1, 1998, the Company has changed its accounting policy for oil and gas
properties from the successful efforts method to the full cost method.
Accordingly, the Company's financial statements have been restated to apply
the change retroactively. The effect of the accounting change on income as
previously reported for 1997:

<TABLE>
<CAPTION>
1997
---------------------
(in thousands, except
per share data)
<S> <C>
Effect on:
Income before extraordinary item and net income..... $4,219
Earnings per common share........................... $16.81
</TABLE>

Adoption of the full cost method of accounting for oil and gas properties
was mandated in the September 1998 merger agreement with MSR and is consistent
with the accounting policy of MSR previously disclosed to its shareholders and
the general public. In addition, the Company believes the full cost method of
accounting for oil and gas properties more accurately reflects management's
exploration objectives and results by including all costs incurred in oil and
gas producing activities as integral to the acquisition, discovery and
development of whatever reserves ultimately result from its efforts as a
whole.

NOTE 14. SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED)

The Company's proved oil and gas reserves at September 30, 1997 have been
estimated by the Company's petroleum engineers in accordance with guidelines
established by the Securities and Exchange Commission

65
<PAGE>

MERCURY EXPLORATION LTD. COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

("SEC"). Accordingly, the following reserve estimates are based upon existing
economic and operating conditions.

There are numerous uncertainties inherent in establishing quantities of
proved reserves. The following reserve data represent estimates only and
should not be construed as being exact. In addition, the present values should
not be construed as the current market value of the Company's oil and gas
properties or the cost that would be incurred to obtain equivalent reserves.

Estimated Reserves

Changes in the estimated net quantities of crude oil and natural gas
reserves, all of which are located in the continental United States, are as
follows:

Reserve Quantities

<TABLE>
<CAPTION>
September 30, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Proved reserves:
Crude Oil (Mbbls)
Beginning of period............................. 20,473 21,074
Sale of reserves-in-place....................... -- (5,840)
Purchase of reserves in place................... 1,436 --
Production...................................... (835) (168)
------ -------
End of period................................... 21,074 15,066
====== =======
Natural Gas (Mmcf):
Beginning of period............................. 20,571 77,952
Revisions of previous estimates................. (881) --
Purchase of reserves in place................... 66,114 30,831
Sale of reserves in place....................... -- (1,339)
Production...................................... (7,852) (3,339)
------ -------
End of period................................... 77,952 104,105
====== =======
Proved developed reserves:
Crude Oil (Mbbls)
Beginning of period............................. 5,955 --
End of period................................... 6,873 4,520
Natural Gas (Mmcf):
Beginning of period............................. 18,542 --
End of period................................... 69,883 90,585
Company's proportional interest in proved reserves
of investor's accounted for by the equity method--
end of year........................................ 1,352 --
</TABLE>

Standardized Measure

The following tables present the Company's standardized measure of
discounted future net cash flows and changes therein relating to proved oil
and gas reserves and were computed using reserve valuations based on
regulations prescribed by the SEC. These regulations provide that the oil,
condensate and gas price structure utilized to project future net cash flows
reflects current prices at each date presented and have been escalated

66
<PAGE>

MERCURY EXPLORATION LTD. COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

only when known and determinable price changes are provided by contract.
Future production, development and net abandonment costs are based on current
costs without escalation. The resulting net future cash flows have been
discounted to their present values based on a 10% annual discount factor.

Standardized Measure (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Future cash flows................................ $ 457,196 $ 417,051
Future production and development costs.......... (255,999) (213,408)
Future income tax expense........................ (48,301) (40,965)
--------- ---------
152,896 162,678
10% annual discount for timing of cash flows..... (70,805) (71,774)
Standardized measure of discounted cash flows.... $ 82,091 $ 90,904
========= =========
Company's share of equity method investor's
standardized measure of discounted future net
cash flows...................................... $ 1,101 $ 1,101
========= =========
</TABLE>

Primary changes in standardized measure of discounted future net cash flows
(in thousands):

<TABLE>
<CAPTION>
September 30, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Net changes in prices and production costs....... $ (2,176) $ 1,708
Sale of reserves-in-place........................ -- (20,443)
Development costs incurred....................... (1,755) (1,486)
Changes in estimated future development costs.... (1,654) --
Purchases of reserves-in-place................... 62,355 32,247
Net change in income taxes....................... (5,932) 2,052
Sales of oil and gas, net of production costs.... (21,923) (6,313)
Accretion of discount............................ 4,940 2,052
Other............................................ (1,164) (1,004)
-------- --------
$ 32,691 $ 8,813
======== ========
</TABLE>

Estimated future cash inflows are computed by applying year-end prices of
oil and gas to year-end quantities of proved developed reserves. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves in future years, based on year end costs and assuming continuation of
existing economic conditions.

These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standard Board and the SEC. Because of
unpredictable variances in expenses and capital forecasts, crude oil and
natural gas price changes, and the fact that the bases for such estimates vary
significantly, management believes the usefulness of these projections is
limited. Estimates of future net cash flows do not necessarily represent
management's assessment of future profitability or future cash flow to
Mercury.

67
<PAGE>

MERCURY EXPLORATION LTD. COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Costs incurred in oil and gas property acquisition, exploration and
development activities (in thousands):

<TABLE>
<CAPTION>
Three Months
Year Ended Ended
September 30, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Property acquisition costs....................... $53,162 $25,152
Exploration costs................................ 3,027 32
Development costs................................ -- 2,566
Company's share of equity method investor's costs
of property acquisition, exploration and
development..................................... $ -- $ --
</TABLE>

Results of operations from producing activities (in thousands):

<TABLE>
<CAPTION>
Three Months
Year Ended Ended
September 30, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Oil and gas sales............................... $ 34,440 $ 9,456
Operating expenses.............................. (17,312) (2,661)
Production taxes................................ (2,169) (563)
Depletion and depreciation...................... (5,361) (2,442)
-------- -------
9,598 3,790
Income taxes.................................... (3,263) (1,289)
-------- -------
Results of operations from producing activities
(excluding corporate overhead and internal
costs)......................................... $ 6,335 $ 2,501
======== =======
Minority interest in results of operations...... $ (5,667) $ 1,269
======== =======
Company's share of equity method investor's
results of operations from producing
activities..................................... $ (81) $ 12
======== =======
</TABLE>

68
<PAGE>

INDEPENDENT AUDITOR'S REPORT

To the Partners
Michigan Gas Partners Limited Partnership

We have audited the statements of income and cash flows of Michigan Gas
Partners Limited Partnership for the year ended December 31, 1997. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Michigan
Gas Partners Limited Partnership for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.

As described in Note 7, the Company has changed its accounting policy for
accounting for oil and gas properties from the successful efforts method to
the full cost method.

Weaver and Tidwell, L.L.P.

Fort Worth, Texas
October 26, 1998

69
<PAGE>

MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP

STATEMENT OF INCOME
For the Year Ended December 31, 1997
(in thousands)

<TABLE>
<S> <C>
Revenues
Oil and gas sales..................................................... $2,894
Gas compressor reimbursement.......................................... 110
Other income.......................................................... 17
------
Total revenues...................................................... 3,021
Costs and expenses
Lease operating expenses.............................................. 1,922
Production taxes...................................................... 114
Depletion, depreciation and amortization.............................. 955
Impairment of oil and gas properties.................................. --
General and administrative............................................ 11
------
Total costs and expenses............................................ 3,002
------
Net income (loss)....................................................... $ 19
======
</TABLE>

The accompanying notes are an integral part of this financial statement.

70
<PAGE>

MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP

STATEMENT OF CASH FLOWS
Year Ended December 31, 1997
(in thousands)

<TABLE>
<S> <C>
Cash flows from operating activities:
Cash received from oil and gas sales................................ $ 2,938
Cash received from gas compressor reimbursement..................... 90
Cash paid to suppliers and employees................................ (2,135)
-------
Net cash provided by operating activities....................... 893
Cash flows from investing activities:
Capital expenditures................................................ (13)
-------
Net cash used in investing activities........................... (13)
Cash flows from financing activities:
Partnership distributions........................................... (879)
Capital contributions............................................... --
-------
Net cash provided by (used in) financing activities............. (879)
-------
Net increase (decrease) in cash................................. 1
Cash, beginning of period............................................. 55
-------
Cash, end of period................................................... $ 56
=======
Reconciliation of net income (loss) to net cash provided by operating
activities:
Net income (loss)................................................... $ 19
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization............................ 955
Impairment of oil and gas properties................................ --
Changes in operating assets and liabilities
Oil and gas revenue receivable.................................... (225)
Accounts payable.................................................. (88)
Deferred liabilities.............................................. 232
-------
Net cash provided by operating activities....................... $ 893
=======
</TABLE>

The accompanying notes are an integral part of this financial statement.

71
<PAGE>

MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

For the Year Ended December 31, 1997

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

The accounting policy relative to the carrying value of property and
equipment is indicated in the caption on the balance sheets. The nature of
operations and other significant accounting policies are as follows:

Nature of Operations

Michigan Gas Partners Limited Partnership was formed to own and operate
various oil and gas properties in the state of Michigan. Substantially all of
the Company's revenue is derived from the production and sale of natural gas.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Oil and Gas Property and Equipment

The Partnership follows the "full cost" method of accounting for oil and gas
properties whereby all costs associated with acquiring, exploring for, and
developing oil and gas reserves are capitalized and accumulated in cost
centers established on a country-by-country basis. Such costs include land
acquisition costs, geological and geophysical expenses, carrying charges on
non-producing properties, costs of drilling both productive and non-productive
wells, and overhead charges directly related to acquisition, exploration and
development activities.

The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves as determined by independent petroleum engineers. Investments
in unproved properties are not amortized until proven reserves associated with
them can be determined or until impairment occurs. Oil and natural gas
reserves and production are converted into equivalent units based upon
estimated relative energy content.

Statement of Cash Flows

For purposes of the statement of cash flows, the Partnership considers all
highly liquid investments with an original maturity of ninety days or less to
be cash equivalents.

Federal Income Taxes

Federal income taxes are not recorded, as the results of operations are not
taxable to the Partnership, but are included in the respective income tax
returns of the partners.

72
<PAGE>

MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(Continued)

NOTE 2. RELATED PARTY TRANSACTIONS

In accordance with the partnership agreement, the Partnership contracts with
a partner for all property exploration costs and continuing costs of
operations. In addition, approximately $220,000 of oil and gas receivables at
December 31, 1997 are due from the partner and substantially all accounts
payable are due to the partner.

NOTE 3. SALE OF PROPERTIES

In December 1997, the Partnership transferred certain properties with a cost
of $6,195,000 to an unrelated party and received consideration as follows:

a.Initial payment of $232,000

b.Fixed payment note of $2,017,000

c.Credit payment note with a maximum amount of $4,000,000

d. Production payment

For accounting purposes, the transfer does not qualify for sale or gain
recognition. Accordingly, the accompanying financial statements continue to
include the partnership's costs, revenues and expenses associated with the
assets transferred. Any gain on the properties transferred will be recognized
based upon future production of the properties.

NOTE 4. ALLOCATION OF NET INCOME OR LOSSES AND DISTRIBUTION OF CASH FLOWS

Net income equal to adjusted federal taxable income, as defined, is
allocated to the partners' capital accounts to the extent of cash flows, so
distributable, as defined. Remaining net income and net loss, as defined, are
allocated to the partners' capital accounts in proportion to their prospective
capital accounts and partnership interests in a manner specified in the
partnership agreement.

NOTE 5. SUBSEQUENT EVENTS

Effective January 1, 1998, the Michigan Gas Partners transferred
substantially all producing oil and gas properties to a newly formed related
company, Quicksilver Resources Inc., in exchange for common stock of
Quicksilver.

NOTE 6. SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS ACTIVITIES--UNAUDITED

Quantities of Oil and Gas Reserves

The following table presents estimates of the Partnership's proved reserves,
all of which have been prepared by the engineers of the Partnership's General
Partner. Substantially all of the Partnership's crude oil and natural gas
activities are conducted in the United States.

73
<PAGE>

MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(Continued)

Reserve Quantities for the year ended December 31, 1997.

<TABLE>
<CAPTION>
1997
------
<S> <C>
Proved reserves:
Natural Gas (Mmcf):
Beginning of period............................................ 17,014
Production..................................................... (1,199)
Revisions of previous estimates................................ (2,288)
------
End of period.................................................. 13,527
======
Proved developed reserves:
Natural Gas (Mmcf):
Beginning of year.............................................. 15,956
End of year.................................................... 12,600
</TABLE>

The reduction in the reserves of Michigan Gas Partners from 1996 to 1997 is
due primarily to the decision not to spend $3.2 million for drilling and
development of existing leases. Michigan Gas Partners put its properties up
for sale in 1997 and elected not to spend the capital to develop its reserves.
Because no additional development was planned, the 1997 reserve report removed
those potential reserves from its report and increased the decline in
production. No reasonable sales price was received for the properties, and the
assets were eventually merged into Quicksilver in 1998.

Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Reserves

The following standardized measure of discounted future net cash flows was
computed in accordance with the rules and regulations of the Securities and
Exchange Commission and Financial Accounting Standards Board Statement No. 69
using year end prices and costs. No values are given to unproved properties or
to probable reserves that may be recovered from proved properties.

The inexactness associated with estimating reserve quantities, future
production and revenue streams and future development and production
expenditures, together with the assumptions applied in valuing future
production, substantially diminishes the reliability of this data. The values
so derived are not considered to be an estimate of fair market value. The
Partnership therefore cautions against its simplistic use.

The following tabulation reflects the Partnership's estimated discounted
future cash flows from natural gas production:

<TABLE>
<CAPTION>
Year Ended
December 31,
1997
--------------
(in thousands)
<S> <C>
Future cash flows............................................. $ 39,203
Future production and development costs....................... (23,680)
Future income tax expense..................................... --
--------
10% annual discount for timing of cash flows.................. 15,523
(4,509)
--------
Standardized measure of discounted cash flows................. $ 11,014
========
</TABLE>

74
<PAGE>

MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(Continued)

Primary changes in the standardized measure of discounted future net cash
flows, in thousands:

<TABLE>
<CAPTION>
1997
-------
<S> <C>
Sales of oil and gas produced, net of production costs............. $ (858)
Net changes in price and production costs.......................... 3,164
Change in estimated future development costs....................... 468
Revisions of previous quantity estimates........................... (2,254)
Development costs incurred during the year......................... (13)
Accretion of discount.............................................. 1,047
Other.............................................................. (1,016)
-------
Net increase (decrease)............................................ 538
Balance at beginning of year....................................... 10,476
-------
Balance at end of year............................................. $11,014
=======
</TABLE>

Changes in the supply and demand for oil, natural gas liquids, hydrocarbon
price volatility, inflation, timing of production, reserve revisions and other
factors make these estimates inherently imprecise and subject to substantial
revision. As a result, these measures are not the Partnership's estimates for
future cash flows nor do these measures serve as an estimate of current market
value.

NOTE 7. CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES

Pursuant to the merger agreement with MSR Exploration Ltd. dated September
1, 1998, the partnership has changed its accounting policy for oil and gas
properties from the successful efforts method to the full cost method.
Accordingly, the Partnership's financial statements have been restated to
apply the change retroactively. The effect of the accounting change on income
as previously reported for 1997 is:

<TABLE>
<CAPTION>
1997
--------------
(in thousands)
<S> <C>
Effect on:
Income before extraordinary item and net income............. $1,738
</TABLE>

75
<PAGE>

ITEM 9. Change in Accountants and Disagreements on Accounting and Financial
Disclosure

None.

PART III

ITEM 10. Directors and Executive Officers of the Company

The information set forth under Item 1--Election of Directors, in the
Company's proxy statement, for the annual meeting of stockholder's to be held
May 17, 2000 (the "Proxy Statement"), is incorporated herein by reference.

The following information is provided with respect to the executive officers
of the Company.

<TABLE>
<CAPTION>
Position (s)
Name Age Held With Quicksilver
- ---- --- ----------------------------------------------------
<S> <C> <C>
Glenn M. Darden....... 44 President, Chief Executive Officer and Director
Bill Lamkin........... 54 Executive Vice President and Chief Financial Officer
Houston Kauffman...... 45 Vice President--Acquisitions
Fred van Naerssen..... 58 Vice President and Controller
Robert N. Wagner...... 36 Vice President--Engineering
</TABLE>

The following biographies describe the business experience of our executive
officers.

GLENN M. DARDEN has served on the board of Quicksilver since December 1997.
He also served with Mercury for 14 years, and for the last five years as the
Executive Vice President of that company. Prior to working for Mercury, Mr.
Darden worked as a geologist for Mitchell Energy Corporation. Mr. Darden
graduated from Tulane University in 1979 with a BA in Earth Sciences. Mr.
Darden became a director and Vice President of MSR on March 7, 1997. Mr.
Darden has been a director of Quicksilver since its inception in December
1997. Mr. Darden served as Vice President of Quicksilver until he was elected
President and Chief Executive Officer on March 4, 1999 and was named President
and Chief Operating Officer of MSR on January 1, 1998.

BILL LAMKIN is a Certified Management Accountant and a Certified Cash
Manager with over 20 years of experience in the oil and gas industry. He
graduated from Texas Wesleyan University with a BBA in Accounting in 1968. He
served as Controller/Chief Financial Officer at Whittaker Corporation and
Sargeant Industries, Inc. between 1970 and 1978, he worked as Treasurer,
Controller, and Director of Financial Services at Union Pacific until he
became our Executive Vice President and Chief Financial Officer when he joined
us in June 1999.

HOUSTON KAUFFMAN is a professional landman having graduated from the
University of Texas in 1978 with a degree in petroleum land management. From
1979 to 1991, he held various staff and supervisory positions with Amoco
Production Company. After receiving his master's degree in business
administration from Houston Baptist University in 1991, he was a land manager
and ultimately land acquisition and divestment manager with CNG Producing
Company. He became manager of business development for Mercury Exploration
Company in 1995, and is now Quicksilver's manager of acquisitions, divestments
and trades. On March 4, 1999 Mr. Kauffman was elected Vice President of
Acquisitions of Quicksilver.

FRED VAN NAERSSEN is a Certified Public Accountant with over 30 years
experience in public and industry accounting. He was with
PricewaterhouseCoopers for seven years before joining Union Pacific
Corporation in 1973. At Union Pacific he served in various capacities in the
financial field, including 13 years at Union Pacific Resources. Mr. van
Naerssen joined us in July 1999 after retiring from Union Pacific Corporation.

ROBERT N. WAGNER has served as our Vice President--Engineering since July
1999. From January 1999 to July 1999, he was our manager of eastern region
field operations. From November 1995 to January 1999,

76
<PAGE>

Mr. Wagner held the position of district engineer with Mercury. Prior to 1995,
Mr. Wagner was with Mesa, Inc. for over 8 years and served as both drilling
engineer and production engineer. Mr. Wagner received a BS in Petroleum
Engineering from the Colorado School of Mines in Golden, Colorado in 1986.

ITEM 11. Executive Compensation

The information set forth under "Executive Compensation" of the Proxy
Statement is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

The information set forth under "Security Ownership of Management and
Certain Beneficial Holders" in the Proxy Statement is incorporated herein by
reference.

ITEM 13. Certain Relationships and Related Transactions

The information set forth under "Transactions with Management and Certain
Stockholders" in the Proxy Statement is incorporated herein by reference.

ITEM 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.

(a)The following documents are filed as part of this report:

1.Financial Statements:

The following financial statements of the Company and the Report of the
Company's Independent Public Accountants thereon as well as predecessor
financial statements, notes and Independent Public Accountants' Reports
are included on pages 23 through 75 of this Form 10-K.

Report of Independent Public Accountants

Consolidated Balance Sheets as of December 31, 1999 and 1998

Consolidated Statement of Income for the years ended December 31, 1999
and 1998

Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1999 and 1998

Consolidated Statement of Cash Flows for the years ended December 31,
1999 and 1998

Notes to the Consolidated Financial Statements

Predecessor Financial Statements and Notes for MSR Exploration, Ltd.
and subsidiaries, Mercury Exploration Company and Michigan Gas
Partners.

2.Financial Statement Schedules:

[All schedules are omitted because the required information is
inapplicable or the information is presented in the Financial
Statements or the notes thereto.]

77
<PAGE>

(b)Exhibits:

<TABLE>
<CAPTION>
Exhibit No. Sequential Description
----------- ----------------------
<C> <S>
3.1 Restated Certificate of Incorporation of Quicksilver Resources
Inc. (filed as Exhibit 4.1 to the Company's Form S-4 File No. 333-
66709, filed November 3, 1998 and included herein by reference.)
3.2 Bylaws of Quicksilver Resources Inc. (filed as Exhibit 4.2 to the
Company's Form S-4 File No. 333-66709, filed November 3, 1998 and
included herein by reference.)
4.1 Form of Quicksilver Resources Inc. Common Stock Certificate (filed
as Exhibit 4.3 to the Company's Form S-4/A File No. 333-66709,
filed January 20, 1999 and included herein by reference.)
10.1 Agreement and Plan of Reorganization and Merger, dated March 31,
1998, by and among Quicksilver Resources Inc., Quicksilver Energy,
L.C., Michigan Gas Partners, Limited Partnership, Mercury
Exploration Company, Trust Company of the West and Joint Energy
Development Investments Limited Partnership. (filed as Exhibit
10.2 to the Company's Form S-4 File No. 333-66709, filed November
3, 1998 and included herein by reference.)
10.2 Agreement Regarding Merger Agreement, dated April 9, 1998, by and
among Quicksilver Resources Inc., Quicksilver Energy, L.C.,
Michigan Gas Partnership, Limited Partnership, Mercury Exploration
Company, Trust Company of the West and Joint Energy Development
Investments Limited Partnership. (filed as Exhibit 10.3 to the
Company's Form S-4 File No. 333-66709, filed November 3, 1998 and
included herein by reference.)
10.3 Registration Rights Agreement, dated April 9, 1998, by and among
Quicksilver Resources Inc., Joint Energy Development Investments
Limited Partnership and Trust Company of the West. (filed as
Exhibit 10.4 to the Company's Form S-4 File No. 333-66709, filed
November 3, 1998 and included herein by reference.)
10.4 Stock Transfer Agreement, dated April 9, 1998, by and among
Mercury Exploration Company and Joint Energy Development
Investment Limited Partnership. (filed as Exhibit 10.7 to the
Company's Form S-4 File No. 333-66709, filed November 3, 1998 and
included herein by reference.)
10.5 Amendment No. 1 to Stock Transfer Agreement, dated September 1,
1998, by and among Mercury Exploration Company and Joint Energy
Limited Partnership. (filed as Exhibit 10.8 to the Company's Form
S-4 File No. 333-66709, filed November 3, 1998 and included herein
by reference.)
10.6 Second Amended and Restated Credit Agreement, dated March 1, 1999,
by and among Quicksilver Resources Inc. and NationsBank, N.A.,
Paribas, Bank One Texas, N.A. and Frost National Bank. (Filed as
Exhibit 10.8 to the Company's Form S-1 File No. 333-89229, filed
October 18, 1999 and included herein by reference.)
10.7 First Amendment to Second Amended and Restated Credit Agreement,
dated May 17, 1999, by and among NationsBank, N.A., Paribas, Bank
One Texas, N.A. and Frost National Bank. (Filed as Exhibit 10.9 to
the Company's Form S-1 File No. 333-89229, filed October 18, 1999
and included herein by reference.)
10.8 Master Gas Purchase and Sale Agreement, dated March 1, 1999 by and
between Quicksilver Resources Inc. and Reliant Energy Services,
Inc. (Filed as Exhibit 10.10 to the Company's Form S-1 File No.
333-89229, filed October 18, 1999 and included herein by
reference.)
10.9 Agreement regarding Warrants, dated September 1, 1998, by and
among Quicksilver Resources Inc., Mercury Exploration Company,
Frank Darden, Thomas F. Darden, Glenn M. Darden, Anne Darden Self,
Joint Energy Development Investments Limited Partnership and Trust
Company of the West. (filed as Exhibit 10.13 to the Company's Form
S-4 File No. 333-66709, filed November 3, 1998 and included herein
by reference.)
+10.10 Management Agreement, dated September 1, 1998, by and among
Mercury Exploration Company and Quicksilver Resources Inc. (filed
as Exhibit 10.15 to the Company's Form S-4 File No. 333-66709,
filed November 3, 1998 and included herein by reference.)
</TABLE>

78
<PAGE>

<TABLE>
<CAPTION>
Exhibit No. Sequential Description
----------- ----------------------
<C> <S>
+10.11 Wells Agreement, (filed as an exhibit to the Registration
Statement on Form S-4 File No. 333-29769, and included herein by
reference.)
10.12 Agreement and Plan of Merger, dated September 1, 1998, among
Quicksilver Resources Inc. and MSR Exploration Ltd. (filed as
Appendix A to the Proxy Statement/Prospectus included in Part I of
the Company's Form S-4 File No. 333-66709, filed November 3, 1998
and included herein by reference.)
10.13 Purchase and Sale Agreement, dated March 31, 1999, between Union
Oil Company of California and Quicksilver Resources Inc. (filed as
Exhibit 2.1 to the Company's Form 8-K File No. 001-14837, filed
May 28, 1999 and included herein by reference.)
10.14 Amendment to Purchase and Sale Agreement, dated May 17, 1999,
between Union Oil Company of California and Quicksilver Resources
Inc. (filed as Exhibit 2.2 to the Company's Form 8-K File No. 001-
14837, filed May 28, 1999 and included herein by reference.)
+10.15 Quicksilver Resources Management Incentive Plan. (Filed as Exhibit
10.27 to the Company's Form S-1 File No. 333-89229, filed October
18, 1999 and included herein by reference.)
+10.16 Quicksilver Resources 1999 Stock Option and Retention Stock Plan.
(Filed as Exhibit 10.28 to the Company's Form S-1 File No. 333-
89229, filed October 18, 1999 and included herein by reference.)
10.17 Second Amendment to Second Amended and Restated Credit Agreement,
dated October 6, 1999, by and among Quicksilver Resources, Inc.,
Bank of America, N.A., Paribas, Frost National Bank, CIBC, Inc.
and Christiana Bank. (Filed as Exhibit No. 10.29 to the Company's
Form S-1 File No. 333-89229, filed October 18, 1999 and included
herein by reference.)
*10.18 Agreement Among Stockholders, dated October 15, 1999, by and among
Quicksilver Resources Inc., Mercury Exploration Company,
Quicksilver Energy, L.C., Frank Darden, Thomas F. Darden, Glenn M.
Darden, Anne Darden Self, and Joint Energy Development Investments
Limited Partnership.
21.1 List of subsidiaries of Quicksilver Resources Inc. (Filed as
Exhibit No. 10.29 to the Company's Form S-1 File No. 333-89229,
filed October 18, 1999 and included herein by reference.)
*23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Weaver and Tidwell, L.L.P.
*23.3 Consent of Holditch-Resevoir Technologies Consulting Services
27 Financial Data Schedule
</TABLE>
- --------
* Filed herewith
+ Identifies management contracts and compensatory plans or arrangements.

(b)Reports on Form 8-K

No Form 8-K was filed in the last reporting period covered by this Form 10-K.

79
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 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.

Quicksilver Resources Inc.
(the "Registrant")

/s/ Glenn M. Darden
Dated: March 24, 2000 by: _________________________________
Glenn M. Darden
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Thomas F. Darden Chairman of the Board March 24, 1999
______________________________________
Thomas F. Darden

/s/ Glenn M. Darden President, Chief Executive March 24, 1999
______________________________________ Officer and Director
Glenn M. Darden

/s/ Bill Lamkin Executive Vice-President March 24, 1999
______________________________________ and Chief Financial
Bill Lamkin Officer

/s/ Fred Van Naerssen Vice President and March 24, 1999
______________________________________ Controller and Chief
Fred Van Naerssen Accounting Officer

/s/ Frank Darden Director March 24, 1999
______________________________________
Frank Darden

/s/ W. Yandell Rogers, III Director March 24, 1999
______________________________________
W. Yandell Rogers, III

/s/ Anne Darden Self Director March 24, 1999
______________________________________
Anne Darden Self
</TABLE>

<PAGE>

AGREEMENT AMONG STOCKHOLDERS

This Agreement Among Stockholders (this "Agreement") dated October 15,
1999, is by and among Quicksilver Resources Inc., a Delaware corporation (the
"Company"), Mercury Exploration Company, a Texas corporation ("Mercury"),
Quicksilver energy, L.C., a Michigan limited liability company ("QELC"), Frank
Darden, Thomas F. Darden, Glenn Darden, Anne Darden Self, and Joint Energy
Development Investments Limited Partnership, a Delaware limited partnership
("JEDI").

WHEREAS, except for the Company, the parties hereto (collectively the
"Stockholders" and each, a "Stockholder") are holders of shares of the Company's
common stock, par value $.01 per share (the "Common Stock"); and

WHEREAS, the parties hereto and others were parties to that certain
Stockholders Agreement dated April 9, 1998 as amended by Amendment No. 1 dated
September 1, 1998 (as so amended, the "Stockholders Agreement");

NOW, THEREFORE, in consideration of the execution and delivery by each of
the parties hereto of the Termination Agreement of even date herewith,
terminating the Stockholders Agreement, the parties hereto agree as follows:

1. Board Representation.

(a) The Company, subject to its fiduciary duties under applicable
state law, and each of the Stockholders agree and acknowledge that JEDI and/or
its Permitted Transferees (defined below) shall have the right, exercisable at
any time and acting alone (or, if more than one, in concert with each other), to
elect one or more members of the Board of Directors of the Company as determined
below, until such time (the "Termination Date") as JEDI and/or its Permitted
Transferees have transferred in the aggregate 1,340,405 shares of Company Stock
to one or more persons other than Permitted Transferees. The number of directors
that JEDI and/or its Permitted Transferees shall be entitled to elect shall be
that number of directors that represents a percentage of the entire Board of
Directors at the time of election that is as close as possible to the percentage
of outstanding shares of Common Stock then held collectively by JEDI and/or its
Permitted Transferees. In calculating that percentage, the number of outstanding
shares of Common Stock held by JEDI and/or its Permitted Transferees shall not
exceed 1,340,405 shares less any number of shares theretofore transferred by
JEDI and/or its Permitted Transferees to one or more persons other than
Permitted Transferees. In no case before the Termination Date shall JEDI and/or
its Permitted Transferees be entitled to elect less than one director. Any
director elected by JEDI and/or its Permitted Transferees pursuant to this
Section 1 may be removed only by JEDI and/or its Permitted Transferees and any
vacancy resulting from the resignation, removal or death of any director elected
by JEDI and/or its Permitted Transferees may be filled only by JEDI and/or its
Permitted Transferees, and neither the Company nor any Stockholder other than
JEDI and/or its Permitted Transferees shall take any action to remove any such
director or fill any such vacancy.

(b) In order to facilitate the rights of JEDI and/or its Permitted
Transferees set forth in paragraph (a) of this Section 1, each of the
Stockholders other than JEDI hereby grants to JEDI its proxy, which (being
coupled with an interest) shall be irrevocable, to take any of the following
actions, either by written consent or at a meeting of the Company's
stockholders: (i) to elect the number of directors that JEDI and/or its
Permitted Transferees are entitled to elect pursuant to

<PAGE>

paragraph (a) of this Section 1; (ii) to remove a director elected by JEDI
and/or its Permitted Transferees; and (iii) to fill any vacancy on the Board of
Directors resulting from the removal, resignation or death of a director elected
by JEDI and/or its Permitted Transferees. The proxy granted hereby shall
terminate upon the termination of JEDI's and/or its Permitted Transferees's
right to elect directors pursuant to paragraph (a) of this Section 1.

2. Tag Along Rights; Limitation on Transfers by Certain Stockholders.
Each of Mercury and QELC (collectively the "Restricted Stockholders", and each,
a "Restricted Stockholder") agrees that until the Termination Date such
Restricted Stockholder will not transfer any shares of Common Stock without
first providing JEDI and/or its Permitted Transferees the right to join in such
transfer in accordance with the following provisions:

(1) If a Restricted Stockholder desires to transfer shares of
Common Stock (a "Proposed Transfer") the Restricted Stockholder shall cause the
proposed transferee (the "Proposed Transferee") to make a written offer (the
"Offer") to JEDI and/or its Permitted Transferees to purchase, on the same terms
offered to the Restricted Stockholder, from JEDI and/or its Permitted
Transferees a number of shares of Common Stock (rounded to the nearest whole
number of shares) (the "Offered Shares") equal to the product of (A) a fraction
the numerator of which is the number of shares of Common Stock then held
collectively by JEDI and/or its Permitted Transferees but not to exceed
1,340,405 shares less any number of shares theretofore transferred by JEDI
and/or its Permitted Transferees to one or more persons other than Permitted
Transferees and the denominator of which is the total number of then outstanding
shares of Common Stock and (B) the total number of shares of Common Stock to be
purchased from the Restricted Stockholder in the Proposed Transfer. The Offer
shall specify the total number of shares of Common Stock to be purchased from
the Restricted Stockholder, the per share consideration to be paid and the other
terms of the Proposed Transfer, including the closing date for the Proposed
Transfer, which shall not be less than twenty days nor more than ninety days
after the date the Offer is received by JEDI and/or its Permitted Transferees.

(2) JEDI and/or its Permitted Transferees shall have the right,
for a period of twenty days following receipt of an Offer, to elect to accept
the Offer with respect to all or a portion of the Offered Shares by delivering
to the Proposed Transferee within such twenty-day period a written acceptance
(an "Acceptance") of the Offer, specifying the number of shares to be
transferred by JEDI and/or its Permitted Transferees. The number of shares of
Common Stock to be transferred by the Restricted Stockholder in the Proposed
Transfer shall be reduced by the number of shares of Common Stock to be
transferred by JEDI and/or its Permitted Transferees in the Proposed Transfer.
Closing of the Proposed Transfer shall be made on reasonable terms specified in
the Offer, which terms shall include only those terms that are customary in
transactions similar to the Proposed Transfer. If JEDI and/or its Permitted
Transferees does not deliver an Acceptance within twenty days after receipt of
an Offer, the Offer shall expire.

3. Certain Shares Held by Mercury; Agreement Does Not Apply.
Notwithstanding anything in this Agreement to the contrary, this Agreement does
not apply to 1,340,405 shares of the Common Stock now owned by Mercury (the
"Excepted Shares"). Mercury may transfer all or any portion of the Excepted
Shares at any time or from time to time without restriction, and the transferees
will have no rights or obligations under this Agreement. Shares of Common Stock
that

2
<PAGE>

are transferred by Mercury pursuant to a transaction in which JEDI and/or its
Permitted Transferees have been given the right to join under Section 2 shall
not be deemed Excepted Shares.

4. Legend on Certificates; Stop Transfer Orders. The parties
hereto agree to the placement on certificates representing shares of Common
Stock (other than Excepted Shares) of a legend indicating that such securities
are subject to the terms of this Agreement. In addition, Mercury and QELC agree
to the placement on certificates representing shares of Common Stock owned by
them (other than Excepted Shares) of a legend indicating that such securities
may not be transferred except in accordance with this Agreement and to the entry
of a stop transfer order with the transfer agent for such securities against the
transfer of such securities except in accordance with this Agreement.

5. Miscellaneous.

(a) This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of the parties hereto, except that no transferee
of Common Stock from JEDI and/or its Permitted Transferees (except Permitted
Transferees) shall have any rights or obligations hereunder and no transferee
(except Permitted Transferees) of Common Stock from any party shall have any
rights or obligations under Section 2.

(b) Each of the parties hereto acknowledges and agrees that the
other parties would be damaged irreparably in the event any of the provisions of
this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the parties agrees that the other
parties shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the parties and the
matter in addition to any other remedy to which it may be entitled, at law or in
equity, and if any action should be brought in equity to enforce any of the
provisions of this Agreement, none of the parties hereto shall raise the defense
that there is an adequate remedy at law.

(c) This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which counterparts, when so executed and delivered, shall be deemed to be an
original and all of which counterparts, taken together, shall constitute but one
and the same Agreement.

(d) The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

(e) The laws of the State of Texas shall govern this Agreement
without regard to principles of conflict of laws.

(f) Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting or impairing the validity or
enforceability of such provision in any other jurisdiction.

3
<PAGE>

(g) All notices and other communications provided for or permitted
hereunder shall be made in writing by telecopy, courier service or personal
delivery at the respective addresses of the parties as shown in Section 9(j) of
the Stockholders Agreement or to such other address as any such party may
designate by notice in the manner provided above. All notices and other
communications to a Permitted Transferee will be given to such party and to such
address as JEDI shall have notified all other parties hereto in writing. All
such notices shall be deemed to have been delivered and received at the time
delivered by hand, if personally delivered, when receipt acknowledged, if
telecopied, and on the next business day, if timely delivered to an air courier
guaranteeing overnight delivery.

(h) The obligations of the parties to this Agreement are several and
not joint, and no party shall be liable for a breach by any other party of such
other party's obligations hereunder.

(i) This Agreement may be amended only by means of a written
amendment signed by all of the parties hereto.

(j) All references in this Agreement to shares of Common Stock shall
apply to such shares as adjusted to take into account subdivisions,
distributions, reclassifications, and stock splits, dividends or combinations.

(k) As used in this Agreement the term "Permitted Transferee" shall
mean (i) an Affiliate (defined below) of JEDI to which JEDI or another of its
Affiliates shall have transferred all or any portion of the 1,340,405 shares of
Common Stock held by JEDI on the date of this Agreement, (ii) any transferee
from JEDI of all or any portion of such shares by operation of law or judicial
decree and (iii) Mercury if JEDI transfers shares of Common Stock to it pursuant
to the Stock Transfer Agreement between them dated April 9, 1998, as amended.
For purposes of this Agreement, "Affiliate," when used to refer to Affiliates of
JEDI, shall exclude the Company and its Affiliates. As used herein "Affiliate"
of any person means any other person directly or indirectly controlling,
controlled by or under direct or indirect common control with such person. For
purposes of this definition "control" when used with respect to any person,
means the power to direct the management and policies of such person, whether
through the ownership of voting securities, by contract or otherwise, and the
terms "controlling" and "controlled" have correlative meanings.

Executed effective as of the date first written above.

QUICKSILVER RESOURCES INC.

By: /s/ Glenn Darden
---------------------------
Name: Glenn Darden
---------------------------
Title: President
---------------------------

<PAGE>

MERCURY EXPLORATION COMPANY

By: /s/ FRANK DARDEN
------------------------------
Name: Frank Darden
----------------------------
Title: Chairman
---------------------------

QUICKSILVER ENERGY, L.C.

By: /s/ GLENN DARDEN
------------------------------
Name: Glenn Darden
----------------------------
Title: Administrative Manager
---------------------------

JOINT ENERGY DEVELOPMENT
INVESTMENTS LIMITED PARTNERSHIP

By: Enron Capital Management Limited
Partnership, its general partner

By: Enron Capital Corp.,
its general partner

By: /s/ MARK WARNER
------------------------------
Name: Mark Warner
----------------------------
Title: Agent and Attorney-in-fact
---------------------------

5
<PAGE>

/s/ Frank Darden
-------------------------
Frank Darden

/s/ Thomas F. Darden
-------------------------
Thomas F. Darden

/s/ Glenn M. Darden
-------------------------
Glenn M. Darden

/s/ Anne Darden Self
-------------------------
Anne Darden Self

<PAGE>

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement No.
333-94387 of Quicksilver Resources Inc. on Form S-8 of our report dated March
10, 2000, appearing in this Annual Report on Form 10-K of Quicksilver
Resources Inc. for the year ended December 31, 1999.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Fort Worth, Texas
March 22, 2000

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITOR

We hereby consent to the incorporation in this Annual Report on Form 10-K of
Quicksilver Resources, Inc. (the Company) of our report dated October 26,
1998, relating to the consolidated statements of income and cash flows of
Mercury Exploration Company for the year ended September 30, 1997; our report
dated November 30, 1998 relating to the consolidated statements of income and
cash flows of Mercury Exploration Company for the three months ended December
31, 1997; and our report dated October 26, 1998, relating to the statements of
income and cash flows of Michigan Gas Partners Limited Partnership for the
year ended December 31, 1997. We further consent to the incorporation by
reference of the Form 10-K into the Company's Registration Statement on Form
S-8 (Registration No. 333-94387).

/s/ Weaver and Tidwell, L.L.P.

WEAVER AND TIDWELL, L.L.P.

Fort Worth, Texas
March 21, 2000

<PAGE>

EXHIBIT 23.3
Holditch-Reservoir Technologies Consulting Services

[LOGO]

1310 Commerce Drive
Park Ridge 1
Pittsburgh, PA 15275-1011
Tel: 412-787-5403
Fax: 412-787-2906

22 March, 2000

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS

Holditch-Reservoir Technologies Consulting Services hereby consents to the
references to our firm in the form and context in which they appear in the
Annual Report on Form 10-K of Quicksilver Resources Inc. (the "Company") for
the year ended December 31, 1999. We hereby further consent to the use of
information contained in our reports, as of January 1, 1999 and January 1,
2000 setting forth the estimates of revenues from the Company's oil and gas
reserves. We further consent to the incorporation by references of the Form
10-K into the Company's Registration Statement on Form S-8 (Registration No.
333-94387).

Very truly yours,

/s/ Nelson R. Fairchild, Jr.

Nelson R. Fairchild, Jr.
Project Manager

<PAGE>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
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