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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................. To ...................
Commission file number: 001-14837
QUICKSILVER RESOURCES INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization)
75-2756163 (I.R.S. Employer Identification No.)
1619 Pennsylvania Avenue, Fort Worth, Texas 76104
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (817) 877-3151
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- ----------------------------------------
Common Stock, par value American Stock Exchange
$0.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of March 15, 1999, 12,888,504 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
$8,933,000 based on the American Stock Exchange composite trading closing price,
and using the definition of beneficial ownership contained in Rule 16a-1(a) (2)
promulgated pursuant to the Securities Exchange Act of 1934 and excluding shares
held by directors and executive officers, some of whom may not be held to be
affiliates upon judicial determination.
PART I
Item 1. Description of Business................................................. 3
Item 2. Description of Properties............................................... 7
Item 3. Legal Proceedings....................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..................... 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters... 13
Item 6. Selected Financial Data................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 16
Item 8. Financial Statements and Supplementary Data............................. 22
Item 9. Changes in and Disagreements with Accountants on Financial Disclosure... 23
PART III
Item 10. Directors and Executive Officers of the Company.......................... 23
Item 11. Executive Compensation................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 25
Item 13. Certain Relationships and Related Transactions........................... 27
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K....... 27
2
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 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 a plan of reorganization and merger
to combine certain oil and gas properties owned by Mercury, QELC and Michigan
Gas Partners. Michigan Gas Partners was merged with and into Quicksilver, and
Mercury and QELC transferred certain assets, principally natural gas and crude
oil producing properties and liabilities, to Quicksilver. Quicksilver was the
surviving corporation of this merger.
BUSINESS COMBINATION
On March 4, 1999, MSR Exploration Ltd. ("MSR") held a Special Meeting
of Shareholders and approved the merger of MSR with and into Quicksilver,
pursuant to the terms of the Agreement and Plan of Merger dated September 1,
1998 (the "Merger Agreement"), by and between Quicksilver and MSR.
As a result of the 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, and 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. The shares of Quicksilver common stock are listed
for trading on the American Stock Exchange under the symbol "KWK."
MSR's principal line of business was the exploration, development,
production and sale of crude oil and natural gas. The assets of MSR consisted of
oil and gas property interests owned and operated principally in Montana and
Texas.
This Annual Report on Form 10-K contains all of the operations of
Quicksilver and its predecessors including MSR.
BUSINESS OF QUICKSILVER
Quicksilver engages in the acquisition, 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 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 either
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,
Montana and Texas. 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.
Quicksilver is not a user or refiner of the natural gas or crude oil
produced, except as needed in the operation of wells that produce gas. Once
extracted from the ground, Quicksilver connects the production to a pipeline
gathering system, and 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 1,150 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.
Quicksilver presently employs only its officers and top managers.
The Company outsources some of its accounting, administrative and the
management of its operations under a management agreement with Mercury. At
December 31, 1998, Mercury operated over 635 wells on behalf of Quicksilver.
3
The Company controls capital expenditures and timing of all field
activities. Quicksilver 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 has an active exploration program targeting a wide variety
of reserve creation opportunities. In the Company's exploration and development
projects, Quicksilver's geoscientists integrate 3-D seismic, 2-D seismic and all
available subsurface well control data on geologic and geophysical
interpretation workstations. Substantially all of Quicksilver's undeveloped
acreage is the subject of active exploration efforts. Additional undeveloped
acreage is regularly added as existing exploration plays are expanded and new
plays are pursued.
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 objective is to enhance stockholder value through
sustained growth in its reserve base, production levels and the resulting cash
flow. To further this strategy, Quicksilver expects to (1) acquire properties
with exploration and development potential, (2) acquire properties that provide
it with the ability to control or significantly influence operations and (3)
balance lower-risk, shallow-target exploration in the Northern Michigan Antrim
trend and similar geologic areas with higher-risk, large-target exploration.
DEVELOPMENT ACTIVITIES. Quicksilver currently conducts its exploration
and development activities in four areas. In Michigan, Quicksilver primarily
seeks gas deposits located near existing production facilities at vertical
depths of between 500 and 2,000 feet. This area is generally known for its
relatively low exploration and development costs and long-life, successful
wells. Quicksilver conducts operations in the Prairie du Chien ("PdC") sands
located in central to southern Michigan. PdC wells produce natural gas and
condensate from an average depth of 11,000 feet with higher exploration and
development costs but with a relatively high production rate and correspondingly
quicker return on investment.
During 1998, Quicksilver completed two PdC wells that were drilled in
1997, drilled 42 gross (30 net) successful development wells and drilled nine
gross (nine net) successful exploratory wells in Michigan for a drilling success
rate of 100 percent. This drilling activity added an estimated 27 billion cubic
feet (Bcf) of proved producing reserves. Primarily as a result of these wells,
Quicksilver's average daily production at year-end 1998 increased to 46.7
Mmcfe/day, a 13 percent increase over the production rates for the same
properties as of year-end 1997.
Quicksilver has 194 wells in the Rocky Mountain Region producing
principally low-gravity crude oil. These wells make up the highest potential oil
reserves of Quicksilver. The South Casper Creek Steamflood Project has estimated
oil in place of 49 million barrels and, with improved oil prices and a reliable
source of gas to fire steamers, Quicksilver believes 20 percent of these
reserves are recoverable - some 10 million barrels.
EXPLORATION FOR NEW RESERVES. Quicksilver is placing increasing
emphasis on exploration as a source of future growth and has an active
exploration program targeting a wide variety of reserve creation opportunities
in its core areas of operations as well as in select new areas. Quicksilver
pursues a balanced portfolio of exploration prospects where it believes multiple
additional new reserve opportunities could result if a significant discovery
were made. At December 31, 1998, Quicksilver had approximately 170,000 gross
(128,000 net) undeveloped acres on which it was actively conducting exploration
activities.
Quicksilver's exploration team includes geologists, engineers,
geophysicists and petrophysicists who have developed in-depth knowledge and
expertise in each of Quicksilver's core operating areas and related exploration
projects areas. Joint venture and contract technical personnel and consultants
who have demonstrated experience and expertise in select areas of interest to
Quicksilver provide supplemental support as needed. The technical staff uses
in-house 3-D seismic evaluation software as well as other modern exploration
techniques.
4
UTILIZATION OF RISK MANAGEMENT TECHNIQUES. Quicksilver uses a variety
of techniques to reduce Quicksilver's exposure to the risks involved in its oil
and gas activities. Quicksilver conducts operations in diverse geographic
regions in order to gain benefits from distinct geologic settings, local
commodity price differences and specific regional operating characteristics.
Quicksilver seeks to reduce risks normally associated with exploration through
the use of advanced technologies, such as 3-D seismic surveys; by spreading
projects over various geologic settings and geographic areas; by balancing
exposure to natural gas and crude oil projects; by balancing potential rewards
against evaluated risks and by participating in projects with other experienced
industry partners at working interest levels appropriate for Quicksilver.
Quicksilver attempts to reduce its exposure to short-term fluctuations in the
price of natural gas and crude oil by entering into various hedging
arrangements. The Company also attempts to increase the predictability of its
interest costs by entering into rate locks of various time frames.
MAINTENANCE OF LOW-COST OPERATING STRUCTURE. Quicksilver implements and
maintains a low-cost operating structure. The Company manages all field
activities and thereby exercises greater control over the cost and timing of
exploration, drilling and development activities in order to help improve
project returns. Quicksilver focuses on reducing lease operating expenses (on a
per-unit-of-production basis), general and administrative expenses and drilling
and recompletion costs in order to improve project returns.
ACQUISITION OF SELECT PROPERTIES. Quicksilver actively seeks to acquire
oil and gas properties that are either complementary to existing production
operations or that provide significant exploration and development opportunities
beyond any proved reserves acquired. Quicksilver has an experienced management
team with a comprehensive interdisciplinary approach encompassing technical,
financial, legal and strategic considerations in evaluating potential
acquisitions of natural gas and crude oil properties.
ORGANIZATION
Mercury, an affiliate of Quicksilver, operates the majority of
Quicksilver's oil and gas properties under a management agreement 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 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 the joint operating agreements.
MARKETING
The natural gas and crude oil produced from Quicksilver properties has
typically been marketed through normal channels for such products. Quicksilver
generally sells its crude oil production at local field prices paid by the
principal purchasers of crude 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 1998, however, purchases by the following companies
exceeded 10 percent of the total oil and gas revenues of Quicksilver: Consumers
Power Company, Howard Energy, 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 that 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.
5
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 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
departments such as the Environmental Protection Agency ("EPA") issue
regulations to implement and enforce such laws and compliance is often difficult
and costly. Failure to comply carries 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 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 owner or operator of
the disposal site or sites where the release occurred and the companies that
disposed 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, damages to natural resources and 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.
6
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. State water discharge regulations and federal (NPDES)
permits prohibit or are expected to prohibit within the next year the discharge
of produced water, 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 storm water discharges.
Costs may be incurred in connection with treatment of wastewater or developing
storm water pollution prevention plans.
The Resources 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.
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, 1999, the Company had 15 full-time employees,
including officers.
ITEM 2. DESCRIPTION OF PROPERTY
Quicksilver owns significant interests in the following properties by
region:
MICHIGAN PROPERTIES:
Quicksilver's Michigan properties consist principally of natural gas
wells producing primarily from two reservoirs: the Antrim Shale, located in
Antrim, Crawford, Montmorency and Otsego Counties, and the Prairie du Chien
("PdC') reservoir, located in Arenac, Bay, Clare, Crawford, Kalkaska, Iosco,
Mecosta, Newaygo, Ogemaw and Osceola Counties. As of December 31, 1998,
Quicksilver had interests in over 706 (229 net) producing oil and gas wells in
Michigan with net production of 39.2 Mmcfd and 386 Bopd.
7
The Antrim Shale is a fractured shale reservoir producing from depths
ranging from 500 feet to 2,000 feet. As water is produced, the gas is released
from the rock very similarly to coalbed methane production. As of December 31,
1998, Quicksilver had 664 gross (206-net) wells producing in the Antrim shale
with net production of 16.2 Mmcfd. Quicksilver drilled 41 development and nine
exploratory Antrim wells in 1998 and plans to drill 54 vertical wells and two
horizontal development wells in 1999 at an estimated cost of $10.7 million.
Quicksilver is currently evaluating or is in the process of acquiring additional
Antrim acreage that could also be developed in 1999 and beyond.
The Prairie du Chien wells (the "Prairie du Chien Group") produce from
several Ordovician age reservoirs. The majority of these reservoirs are in the
massive Prairie du Chien Group of formations, containing three major sands: the
Lower PdC, Middle PdC and Upper PdC. Many of these wells also have pay in the
Zone of Unconformity (ZOU), which is also called the St. Peter Sandstone, and
the Glenwood Formation, 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, natural gas and condensate or
crude oil with associated gas. The average depth of these wells is 11,000 feet.
Two new PdC wells, State Garfield 2-8 and State Garfield 8-9, were
drilled in the Garfield 8 Field, which is operated by Spirit Energy, a division
of Unocal. These wells were drilled in late 1997 and early 1998 as acceleration
wells to recover PdC reserves; first production occurred in early 1998. These
two wells produced a combined average of 13 Mmcfd during 1998. At December 31,
1998, average daily production from the Garfield 8 Field was over 23 Mmcf.
Quicksilver has a 54 percent working interest in the field.
At December 31, 1998, Quicksilver had 42 gross (23.2 net) wells
producing in the PdC with net production of 23 Mmcfd and 382 Bopd. Many of the
PdC wells have behind pipe reserves within the Prairie du Chien Group as well as
in the ZOU and Glenwood. Quicksilver has budgeted approximately $1.1 million for
1999 to be used principally for recompletions and workovers in this area.
ROCKY MOUNTAIN REGION:
Quicksilver's properties in the Rocky Mountain Region consist of wells
in six fields within the state of Wyoming as well as a steamflood project,
several producing properties in northwest Montana and one outside-operated well
in south-central Montana, as well as interests in several other
projects/operations as described below. Production is primarily oil obtained
from depths ranging from 1,000 feet to 16,000 feet. Net production for the month
of December 1998 was 1,139 barrels of oil, 1,374 Mcf of gas and 46 barrels of
natural gas liquids per day from 355 gross producing wells (348.61 net producing
wells).
WYOMING PROPERTIES. The Company owns and operates six crude oil and
natural gas properties in Wyoming, located in Campbell (Am-Kirk and Big Hand
fields), Natrona (West Poison Spider Unit and South Casper Creek) and Fremont
(Dallas and Derby Dome fields) Counties. Production is from various formations
with producing depths ranging from 1,000 feet to 16,000 feet. Net production
from properties in Wyoming for the month of December 1998 was 643 barrels of oil
and 1,156 Mcf of natural gas per day from 141 gross producing wells (140.41 net
producing wells). Production is mainly primary production with the exception of
secondary production from a waterflood at the Am-Kirk Unit and residual tertiary
production from a discontinued steamflood project at South Casper Creek (see
details below).
No development wells were drilled in 1998. One exploratory well, the
Gypsum Bluff #1, located approximately one mile southeast of the Derby Dome
Field (in Fremont County), was drilled in 1998 and was plugged and abandoned.
Total depth of the well was 2,200 feet.
The South Casper Creek Steamflood Project is in Natrona County,
Wyoming. Unocal, the previous owner of the property, had conducted several
steamflood pilots during the 1970s and 1980s in the Tensleep Formation, but
until the late 1980s results were mixed due to design problems. At that point,
the drilling of two five-spot pilots verified the technical viability of
steaming operations. Based on these pilot results, Unocal proceeded to drill new
injection wells, and in 1991 initiated a full-scale steamflood employing four 50
Mmbtu/hour generators providing 14,400 barrels of water per day as 80 percent
steam to 11 injectors.
8
The full-scale steamflood proved technically successful with a
production peak in early 1992 at 1,500 Bopd, compared to a pre-steam production
high of about 800 Bopd. At this point, the field performance was exceeding
Unocal's simulation forecast. Despite this success, Unocal decided to cut costs
by discontinuing the operation of two generators and three injectors, which
resulted in a flattening of the production. After one year of this partial
operation, Unocal shut down the project to reduce costs, citing internal
economic pressure.
Quicksilver believes the steamflood potential in this area has been
proven. The project has all of the necessary wells, steam generators and
operational infrastructure in place, and constitutes a demonstrated and tested
reserve. Quicksilver's delay in re-initiating steaming operations is due to the
lack of sufficient available gas reserves for fueling the steam generators and
the present low prices of crude oil.
MONTANA PROPERTIES. The Company owns and operates several crude oil and
natural gas producing properties in Glacier, Pondera, Teton and Toole Counties
in northwest Montana near Cut Bank, as well as other operations described below.
The Company also owns an interest in one well in Stillwater County that is
operated by another party. Production is primarily oil from the Cut Bank
Formation, produced from depths of approximately 1,600 feet to 3,500 feet. Net
production for the month of December 1998 was 496 barrels of oil, 218 Mcf of
gas, and 46 barrels of natural gas liquids per day from 214 gross producing
wells (208.20 net producing wells). Production is primary and secondary, with
the bulk of the secondary production being from a waterflood in the South
Central Cut Bank Sand Unit in Glacier County.
No development or exploratory wells were drilled in 1998 on company-owned
properties in Montana.
The Company, under an agreement with a utility company in Montana, holds
the rights and obligations related to approximately 304,000 acres of largely
undeveloped oil and gas properties centered over the Cut Bank Field complex in
northwestern Montana. For wells drilled by either party in this area of mutual
interest, the Company holds 100 percent of the oil rights and the rights to 30
percent of the revenue interest pertaining to liquids produced from gas wells.
The geologic complexity of the Cut Bank Field has resulted in the
inefficient development of the field by former operators; consequently a
significant amount of oil, which is potentially recoverable, remains in the
rock. Quicksilver is using modern technology in an attempt to accurately model
these depositional complexities and identify bypassed oil reserves that could be
recovered by proper development of the Cut Bank Field. Along these lines,
Quicksilver's predecessor (MSR) shot a 3-D seismic survey in late 1997 over
approximately nine square miles of the Cut Bank Field, the first time this
technology had been used there. This data is currently being evaluated using
methods and techniques that will seismically image the sand deposits and
integrate all available geologic and reservoir engineering data to create the
most accurately detailed model possible. This technology is being used to locate
areas of future potential (mainly oil bypassed or banked from flooding) with
future well locations being selectively highgraded using the previously
unavailable seismic data and techniques. Once commodity prices improve, the
Company plans to drill a series of test wells (up to five) in the seismic area,
which will allow the seismic model to be tested and refined. The seismic program
has also identified some areas where uphole recompletions may be possible.
Again, these will be tested once commodity prices strengthen.
In northwestern Montana, the Company owns the Red River Gas Plant, which
consists of a compressor and a dehydration unit, and an associated gathering and
transmission system. The company purchases sweet gas from wells in the field and
dries and transports it to the Montana Power System in the north Cut Bank area.
The Company also owns the Gypsy-Highview Gas Plant and a natural gas-gathering
and transmission pipeline system located in northwestern Montana.
TEXAS PROPERTIES
The Company owns a 100 percent working interest in a producing property
near Winters, Texas, in Runnels County that produces primarily crude oil. During
December 1998, the Company's net production from this property averaged
approximately 33 barrels of crude oil and 109 Mcf per day of natural gas from 24
producing wells (24 net producing wells).
9
In southeast Texas, the Company owns interests in two natural gas wells,
the Cinco Ltd. #1 and the Josey Ranch #3. The Company holds a 74 percent and 42
percent working interest in the wells, which are located in Fort Bend and Harris
Counties, respectively. During December 1998, the Company's net production from
these properties averaged approximately 786 Mcf per day of natural gas and 11
barrels of crude oil per day.
The Company also owns minor working and royalty interests in Western Canada.
EXPLORATION ACTIVITIES
Quicksilver has interests in 15 exploratory prospects located in
Montana and Wyoming. Eight are oil prospects and the remaining seven are gas
prospects. These prospects are located in the Big Horn Basin, the Crazy Mountain
Basin and the Montana Thrust Belt. Quicksilver's interest in these prospects
ranges from 25 percent to 100 percent, with 50 percent being the most common
Quicksilver interest. The target depths of these prospects range from 3,000 feet
to 19,500 feet, with 7,000 feet being the median depth. The potential impact of
these prospects to Quicksilver is considerable, with several of the gas
prospects having reserve potential in the one TCF range. The shallow depths of
many of these prospects will allow Quicksilver to test all of them at a
relatively low cost.
CRAZY MOUNTAIN BASIN. The Crazy Mountain Basin is located in south
central Montana and is an extension of the Big Horn Basin. Quicksilver's
prospects are approximately 30 miles from production and consist of two Fort
Union coal bed methane prospects and a deep Frontier prospect. The two Fort
Union prospects are less than 4,000 feet deep and are set up by a well drilled
on Quicksilver acreage in 1996 that encountered numerous thin gassy coal beds
between 500 feet and 4,500 feet. The deep prospect, which is at a depth of
14,600 feet, is designed to test the Big Elk member of the Frontier Formation on
a seismically defined structural closure.
BIG HORN BASIN. The Big Horn Basin is located in northern Wyoming and
southern Montana. Several of the prospects in the Big Horn are known to contain
oil. However, the oil is a low-gravity, high-viscous crude. Due to the heavy
nature of the oil, drawdown pressures are high, resulting in early water
encroachment. Quicksilver believes that the less concentrated pressure drawdown
associated with horizontal wells would reduce early water encroachment. A
producing horizontal well on one of these prospects is currently being
evaluated; the other prospects will be developed based on the results of this
well. Other projects in the Big Horn consist of seismically defined structural
and stratigraphic traps. Quicksilver believes that some of these prospects will
yield gas and others will yield high-gravity oil.
MONTANA THRUST BELT. The Montana Thrust Belt is located in western
Montana. These prospects target fractured rocks of the Mississippian Madison
Formation, which has been over-thrust from the west by older Pre-Cambrian rocks.
The structural style is believed to be similar to the Alberta Foothills area
where the Waterton Field has reserves of over 2.3 Tcf gas. Quicksilver has five
prospects in the Thrust Belt area.
OIL AND GAS RESERVES
The following reserve quantity and future net cash flow before income
tax information for Quicksilver represents proved reserves that are located in
the United States. The reserves have been estimated by S. A. Holditch &
Associates, Inc., petroleum engineers. The determination of oil and gas reserves
is based on estimates that are highly complex and interpretive. The estimates
are subject to continuing change, as additional information becomes available.
Under the guidelines set forth by the SEC, the calculation is performed using
year-end prices held constant (unless a contract provides otherwise) and is
based on a 10 percent 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.
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.
10
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,
1998.
PROVED RESERVES:
December 31, 1998 January 1, 1998
Proved reserves:
Oil (Bbl) 17,983,000 24,536,000
Natural gas (Mcf) 153,202,000 138,834,000
------------ ------------
Total (Mcfe)(2) 261,100,000 286,050,000
Estimated future net cash flows,
before income tax $275,737,000 $329,226,000
Standardized measure of discounted
future net cash flows, before income tax $160,495,000 $170,650,000
Proved developed reserves:
Oil (Bbl) 9,829,000 8,932,000
Natural gas (Mcf) 123,743,000 119,669,000
------------ ------------
Total (Mcfe)(2) 182,717,000 173,276,000
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.
FOR THE YEAR ENDED DECEMBER 31, 1998
Production:
Oil (Bbl) 667,000
Natural gas (Mmcf) 15,315,000
Total (Mcfe)(2) 19,319,000
Weighted average sales price:
Oil (per Bbl) $ 9.40
Natural gas (per Mcf) $ 2.13
Production operating expense:
(per Mcfe)(1)(2) $ 0.76
(1) Includes production taxes.
(2) Mcfe. Million cubic feet equivalent, determined using ratio of six mcf of
natural gas to one barrel of crude oil, condensate or natural gas liquids.
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 producing properties.
FOR THE YEAR ENDED DECEMBER 31, 1998
Development costs $ 8,283,000
Exploration costs 1,095,000
Acquisition of producing properties 1,715,000
-----------
Total $11,093,000
------------
------------
11
PRODUCTIVE OIL AND GAS WELLS
The following table summarizes the number of productive oil and gas
wells as of December 31, 1998, attributable to Quicksilver's direct interests.
GROSS NET
----- ---
Productive Wells
Oil 367 361
Natural gas 720 242
----- ---
Total 1,087 603
----- ---
----- ---
OIL AND GAS ACREAGE
The following table sets forth the developed and undeveloped leasehold
acreage held directly by Quicksilver as of December 31, 1998. Developed acres
are acres that are spaced or assignable to productive wells. Undeveloped acres
are acres on which wells have not been drilled or completed to a point that
would permit the production of commercial quantities of oil or gas, regardless
of whether or not such acreage contains proved reserves. Gross acres are the
total number of acres in which Quicksilver has a working interest. Net acres are
the sum of Quicksilver's fractional interests owned in the gross acres. States
in which Quicksilver holds undeveloped acreage include Michigan, Montana and
Wyoming.
GROSS NET
----- ---
Developed acreage 212,800 129,000
Undeveloped acreage 314,100 181,700
------- -------
Total 526,900 310,700
------- -------
------- -------
DRILLING ACTIVITY
The following table sets forth the number of wells attributable to
Quicksilver direct interest drilled during and for the year ended December 31,
1998.
GROSS NET
----- ---
Development Wells:
Productive 42 30.4
Dry 0 0
---- ----
Total 42 30.4
---- ----
---- ----
Exploratory Wells:
Productive 9 9
Dry 1 1
---- ----
Total 10 10
---- ----
---- ----
ITEM 3. LEGAL PROCEEDINGS
The Company was not and currently is not a party to any material
pending legal proceedings.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Stockholder's Meeting on March 3, 1999,
at which the stockholders elected the following directors: Frank Darden,
Thomas F. Darden, Glenn M. Darden, W. Yandell Rogers III, Steven M. Morris,
Mark Warner and D. Randall Kent and appointed Deloitte & Touche LLP as
accountants for Quicksilver. The Merger with MSR was approved by Quicksilver
stockholders by unanimous consent on February 3, 1999.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMPARATIVE MARKET DATA
Quicksilver's common stock started trading publicly on March 5, 1999,
on the American Stock Exchange under the symbol "KWK" at $7.50 per share,
approximately 10 times MSR's closing price the previous day, which is relational
to the conversion ratio.
MSR's common stock was previously traded on the American Stock
Exchange under the symbol "MSR."
The following table sets forth the quarterly high and low closing sales
prices of MSR's common stock for the periods indicated below.
MSR COMMON STOCK
HIGH LOW
-----------------------
1996
First Quarter $ 1 1/4 $ 13/16
Second Quarter 1 1/16 3/4
Third Quarter 1 3/4
Fourth Quarter 15/16 11/16
1997
First Quarter $ 1 $ 13/16
Second Quarter 1 1/8 15/16
Third Quarter 1 1/8 3/4
Fourth Quarter 1 3/8 15/16
1998
First Quarter $ 1 3/16 $ 7/8
Second Quarter 1 5/16 15/16
Third Quarter 1 1/8 3/4
Fourth Quarter 15/16 1/2
As of March 3, 1999, there were approximately 1,372 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.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, as of the dates and for the periods
indicated, selected financial information for the Company. The financial
information for the year ended December 31, 1998, has been derived from the
audited combined Consolidated Financial Statements of the Company for such
period. The information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the combined Consolidated Financial Statements and Notes thereto. The
following information is not necessarily indicative of future results for the
Company.
SELECTED FINANCIAL DATA OF QUICKSILVER
For the year ended December 31, 1998, in thousands:
COMBINED CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues
Gas sales $ 32,647
Oil sales 6,276
Interest and other income 3,607
--------
Total revenues 42,530
--------
Expenses
Operating expenses 14,624
Depletion and depreciation 12,365
General and administrative 1,430
Interest 6,698
--------
Total expenses 35,117
--------
Income before income taxes and minority interest 7,413
Minority interest 758
Income tax expense (3,286)
--------
Net income $ 4,885
--------
--------
Basic weighted average number of shares
outstanding for the periods 11,511
Basic and diluted earnings per share $ 0.42
COMBINED CONSOLIDATED STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities $ 16,355
Investing activities (16,097)
Financing activities (607)
OTHER COMBINED CONSOLIDATED FINANCIAL DATA:
Capital expenditures $ 16,097
EBITDA(1) 26,476
COMBINED CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 294
Working capital 1,291
Total assets 144,600
Long-term debt (includes current portion) 85,039
Total stockholders' equity 32,588
14
(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.
SELECTED HISTORICAL FINANCIAL DATA OF QUICKSILVER PREDECESSORS
MERCURY EXPLORATION COMPANY
(Includes Quicksilver Energy, LC)
(In thousands, except for per share data)
Fiscal Years Ended
Three Months Ended September 30,
December 31, 1997 1997 1996 1995
----------------- ---- ---- ----
STATEMENTS OF OPERATIONS DATA:
Revenues ............................ $ 11,049 $ 41,328 $17,388 $ 6,703
Net income (loss) ................... 2,354 5,115 2,248 1,463
Net income (loss) per common share... 9.38 20.38 8.96 5.83
Weighted average shares outstanding.. 251 251 251 251
Cash dividends ...................... 0 0 0 0
OTHER INFORMATION:
Capital expenditures................. $ 27,750 $ 54,231 $19,779 $ 2,227
BALANCE SHEET DATA:
Working capital (deficit)............ $ (9,324) $(13,133) $ 5,813 $(4,076)
Total assets ........................ 126,506 102,880 50,186 31,272
Long-term debt ...................... 65,275 47,174 19,560 2,150
Stockholders' equity ................ 17,670 15,316 10,427 8,179
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
STATEMENTS OF OPERATIONS DATA:
Revenues ..................... $ 3,021 $ 3,368 $ 1,930
Net income (loss) ............ 19 (617) (613)
OTHER INFORMATION:
Capital expenditures ......... $ 13 $ 132 $ 4,837
BALANCE SHEET DATA:
Working capital (deficit) $ 343 $ 261 $ 324
Total assets ................. 9,835 10,551 12,348
Long-term debt ............... 0 0 0
Partners' equity ............. 9,453 10,313 12,212
15
MSR EXPLORATION, LTD.
For the Period from Inception March 7, 1997, to December 31, 1997
(in thousands)
STATEMENTS OF OPERATIONS DATA:
Revenues $ 854
Net income (loss) 30
OTHER INFORMATION:
Capital expenditures $ 592
BALANCE SHEET DATA:
Working capital (deficit) $ 42
Total assets 25,963
Long-term debt 10,560
Stockholders' equity 13,070
Financial data for the years ended 1994 and 1993 are not presented because the
operations and net assets contained in the predecessor entities for these
periods is not material to the formation of Quicksilver.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- QUICKSILVER RESOURCES INC.
FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K and
other materials filed or to be 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 the
Private Securities Litigation Reform Act of 1995. 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 results 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," "estimate," "expect," "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 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, 1998, to its financial condition at December 31, 1997. During 1998,
the Company spent approximately $16.1 million on acquisition, development and
exploration activities. At December 31, 1998, the Company had $8.1 million in
cash and accounts receivable and total assets of $145 million. Long-term debt
was $85 million at December 31, 1998.
16
Prior to March 4, 1999, the stockholders of the Company approved the
Merger with MSR. Pursuant to the Merger, stockholders of MSR received
approximately 2,577,700 shares of the Company's Common Stock. As a result of
the Merger, MSR ceased to exist and all of its assets and liabilities were
transferred to the Company. The Merger was accounted for, in part, as a
pooling of interest, and therefore the financial statements for 1998 have
been combined. The merged net assets attributable to the minority
shareholders have been reported as minority interest. Such minority interest
was acquired in March 1999 and will be accounted for under the purchase
method of accounting.
The Company believes that its cash flow from operations are adequate
to meet the requirements of its business. However, future cash flows are
subject to a number of variables including the level of production and
prices, and there can be no assurance that operations and other capital
resources will provide cash in sufficient amounts to maintain planned levels
of capital expenditures.
Cash Flow
The Company's principal operating sources of cash include sales of
natural gas and crude oil and revenues from transportation and processing.
Quicksilver sells the majority of its natural gas production under long-term
pricing contracts with approximately 60 percent under ten-year contracts and
approximately 35 percent under one- to three-year contracts. As a result, the
Company experiences significant predictability to its natural gas revenues.
Commodity market prices affect cash flow for that portion of natural gas not
under contract and most of the Company's crude oil sales. Because of the recent
price weakness of oil and natural gas, the Company has set its development
and exploration budget between $10 million and $12 million in 1999. However,
1999 expenditures will be funded by internally generated cash flow and,
depending upon commodity prices, may be increased.
The Company's net cash provided by operations for the year ended
December 31, 1998, was $16.4 million. The only component of net cash provided by
operations that showed a negative variance of any magnitude was revenues from
sales of crude oil, a function of sharply lower crude oil prices.
The Company's net cash used in investing for the year ended December
31, 1998, was $16.1 million. Investing activities were comprised primarily of
additions to oil and gas properties through acquisitions and development and, to
a lesser extent, exploration and additions of field service assets. The
Company's activities have been financed through a combination of operating cash
flow and bank borrowings. The Company's net cash used by financing activities
for the year ended December 31, 1998, was $0.6 million. Sources of financing
used by the Company have been primarily borrowings under its Credit Facility.
Capital Requirements
In 1998, $16.1 million of capital was expended primarily on development
and exploration activities. The Company's exploration and development capital
budget for 1999 is expected to be between $10 million and $12 million. These
development and exploration expenditures are currently expected to be funded
entirely by internally generated cash flow. The remaining cash flow will be
available for debt repayment. Higher product prices may allow the Company to
increase its exploration and development activities or allow it to make greater
debt repayments. Any acquisitions, joint ventures or additional projects may
require greater capital expenditures, but such contingencies will be factored
into any financing activities required for any significant capital expenditures.
17
Bank Facilities
As part of the Merger of the Company with MSR on March 4, 1999, the
Company entered into a new five-year Credit Facility agreement. The then
existing debt of $73,993,000 from Quicksilver and $10,848,000 from MSR was
transferred into the new Credit Facility. The Credit Facility permits the
Company to obtain revolving credit loans and to issue letters of credit for the
account of the Company from time to time in an aggregate amount not to exceed
the lesser of $200 million or the borrowing base. The Borrowing Base is
currently $85 million and is subject to semi-annual determination and certain
other redeterminations based upon a variety of factors, including the discounted
present value of estimated future net cash flow from oil and gas production. At
the Company's option, loans may be prepaid, and revolving credit commitments may
be reduced, in whole or in part at any time in certain minimum amounts. The
Company can designate the interest rate on amounts outstanding at either the
London Interbank Offered Rate (LIBOR) + 1.65 percent or at bank prime. The
collateral for this loan agreement consists of substantially all of the existing
assets of the Company and any future reserves acquired. The loan agreement
contains certain restrictive covenants, which, among other things, require the
maintenance of a minimum current ratio, net worth and debt service ratio. It
also contains certain dividend restrictions.
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 natural gas and crude oil prices. The
Company's ability to maintain current borrowing capacity and to obtain
additional capital on attractive terms is also substantially dependent on
natural gas and crude oil prices. These prices are subject to significant
seasonal and other fluctuations that are beyond the Company's ability to control
or predict. During 1998, the Company received an average of $9.40 per barrel of
oil and $2.13 per Mcf of gas. Although certain of the Company's costs and
expenses are affected by the level of inflation, inflation did not have a
significant effect in 1998. Should conditions in the industry improve, causing
an increase in competition and a resultant relative shortage of oilfield
supplies and/or services, inflationary cost pressures may resume.
RESULTS OF OPERATIONS
Quicksilver's revenue, profitability and future rate of growth are substantially
dependent upon prevailing prices for natural gas and crude oil, which are
dependent upon numerous factors, such as economic, political and regulatory
developments as well as competition from other sources of energy. The energy
markets have historically been highly volatile, and future decreases in prices
could have a materially adverse effect on Quicksilver's financial position,
results of operations, quantities of reserves that may be economically produced
and access to capital.
Quicksilver uses the full-cost method of accounting for its investments in
properties. Under this method, all costs of exploration, development and
acquisition of oil and natural gas reserves are capitalized into separate
country-by- country "full cost pools" as incurred. Properties in each pool are
depleted and charged to operations using the unit-of-production method, based on
a ratio of current production to total proved natural gas and crude oil
reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization), less deferred taxes, exceed the
present value (using a 10 percent discount rate) of estimated future net cash
flows from proved oil and natural gas reserves and the lower of cost or fair
value of unproved properties, such excess costs are charged to operations. If a
write-down were required, it would result in a non-cash charge to earnings but
would not have an impact on cash flows.
Due to the limited existence of the Company, comparisons of the Company's and
its predecessor's results of operations may not be meaningful. The Company's
1998 results of operations include MSR's for all of 1998. 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, which result primarily from contract operating
and maintenance, were not conveyed to the Company.
18
YEAR ENDED DECEMBER 31, 1998, COMPARED WITH PREDECESSOR'S 12 MONTHS ENDED
SEPTEMBER 30, 1997, AND DECEMBER 31, 1997
REVENUE. Total oil and gas revenues for the 12 months ended December 31, 1998,
were $38,923,000, an increase of 6 percent over $36,588,000 of predecessor
revenue for 1997. Gas revenues for the 1998 period were $32,647,000,
approximately 20 percent higher than 1997 predecessor gas revenues of
$27,264,000. Gas sales volumes for the 1998 period were 15,319,000 Mcf, a 29
percent increase over 11,854,000 Mcf in 1997. Average gas sale prices declined
from $2.30 per Mcf in the 1997 period to $2.13 in 1998. For 1998, approximately
84 percent of Quicksilver's product sales were natural gas. A majority of
Quicksilver's natural gas production is sold under long-term contracts with
approximately 35 percent under one- to three-year contracts and 60 percent under
10-year contracts. These contracts provide the Company with a significant amount
of predictability for its natural gas sales. Oil revenues for 1998 were
$6,276,000, a 32 percent 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 percent.
Average oil sales price for 1998 was $9.40 per barrel, compared to $14.62
average price in 1997, a decrease of 36 percent.
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 percent 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
$14,624,000, or $0.76 per Mcf equivalent, a 22 percent decrease compared to
$18,786,000 or $1.20 per Mcf equivalent of predecessor operating expenses for
the same period in 1997. Depreciation and depletion expense was $12,365,000
or approximately $0.64 per Mcf equivalent compared to $7,093,000 for 1997.
General and administrative expense was $1,430,000 or approximately $0.07 per
Mcf equivalent compared to $1,941,000 for 1997. Interest expense was
$6,698,000 compared to $5,561,000 for 1997. Quicksilver's interest rate
averaged approximately 7.4 percent.
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 percent.
NET INCOME. Net income for the year ended December 31, 1998, was $4,885,000
or $0.42 per share, which was approximately 11 percent of total revenues.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- MERCURY EXPLORATION COMPANY
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Mercury's statements of income contained elsewhere in this annual report on
Form 10-K.
YEAR ENDED SEPTEMBER 30, 1997, COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996
Mercury acquired the Shell Michigan properties on November 14, 1996. The results
of operations of these properties have been included in Mercury's results since
November 1, 1996. Unless otherwise indicated, the changes in operating results
were primarily the result of the acquisition of these properties.
19
REVENUES. Total oil and gas revenues for the 1997 period were $41,328,000, an
increase of 138 percent compared to $17,388,000 for the 1996 period. In 1997,
$32,714,000 of the revenues related to the sale of crude oil and natural gas,
compared to $11,771,000 for the 1996 period. Sales volumes for 1997 were
2,144,000 barrels of crude oil equivalent, sold at an average price of $15.26
per barrel, compared to 722,000 barrels of crude oil equivalent sold in the 1996
period at an average price of $16.31 per barrel. This increase in sales was
principally due to the purchase of the Shell Michigan properties. The remainder
of the revenue for 1997 of approximately $8,614,000, and $5,617,000 in 1996
resulted from contract operations, providing services such as field operations,
well supervision, well maintenance and gas marketing.
COSTS AND EXPENSES. Total costs and expenses for the 1997 period were
$24,156,000, a 69 percent increase compared to $14,265,000 for the 1996 period.
Production expenses for the 1997 period were $16,454,000 ($7.67 per barrel of
oil equivalent ("BOE"), a 38 percent increase compared to $11,907,000 ($16.49
per Boe). General and administrative expenses for 1997 were $1,784,000, a 30
percent increase compared to $1,372,000 for 1996. Depreciation and depletion for
the 1997 period was $5,918,000 ($2.67 per Boe) compared to $986,000 ($1.37 per
BOE) for 1996.
INTEREST EXPENSE. Interest expense for the nine months ended September 30, 1997,
was $5,414,000 compared to $1,620,000 for the 1996 period. Almost all of the
increase in interest expense relates to the approximately $57 million borrowed
to purchase the Shell Michigan properties.
OTHER INCOME AND EXPENSES. Excluding interest expense noted above, the remainder
of other income totals $1,738,000 for the 1997 period, a decrease of $254,000
(13 percent) from $1,992,000 for 1996. Most of the change is attributable to the
$279,000 decrease in equity in partnership income. The decrease in net income
from the partnerships was primarily due to higher operating costs.
INCOME. Income before minority interest and income taxes was $13,496,000 for the
1997 period compared to $3,495,000 for 1996. These amounts include 100 percent
of the results of operations of QELC, a 52 percent-owned subsidiary of Mercury.
The minority interest in income of subsidiaries principally applies to QELC.
EARNINGS. Net income was $5,115,000 ($20.38 per share) for the 1997 period
compared to $2,248,000 ($8.96 per share) for 1996. Most of the increase
relates to the acquisition of the Shell Michigan properties.
LIQUIDITY AND CAPITAL RESOURCES.
CASH FLOW FROM OPERATING ACTIVITIES. Mercury's net cash flow from operations for
the year ended September 30, 1997, was $15,356,000 compared to $3,951,000 for
the same period in 1996. The increase was principally attributable to the Shell
Michigan properties.
CASH FLOW FROM INVESTING ACTIVITIES. Mercury used $53,578,000 for investing
activities during the twelve months ended September 30, 1997. Of this amount,
$54,231,000 was for capital expenditures, which were principally used for the
acquisition of the Shell Michigan properties.
CASH FLOW FROM FINANCING ACTIVITIES. For the year ended September 30, 1997, cash
provided by financing activities totaled $39,794,000. Mercury borrowed
$94,323,000 and repaid $54,529,000 of debt.
On October 9, 1997, Mercury completed the acquisition of the Destec properties
in Michigan from ECT Enocene Enterprises II, Inc. The properties consist of 143
wells with combined proved reserves of approximately 30.8 Bcfe. The purchase
price was approximately $23.5 million, which was paid in cash provided primarily
by bank debt.
Effective January 1, 1998, Mercury exchanged most of its oil and gas producing
properties and most of its long-term debt for Quicksilver common shares.
20
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997, COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1996
REVENUES. Total oil and gas revenues for the three months ended December 31,
1997, were $11,049,000, an increase of 10 percent compared to $10,016,000 for
the 1996 period. In 1997, $9,456,000 of the revenues related to the sale of
crude oil and natural gas, compared to $8,178,000 for the 1996 period. Sales
volumes for the 1997 period were 723,800 barrels of crude oil equivalent sold at
an average price of $13.06 per barrel, compared to 529,500 barrels of oil
equivalent sold in the 1996 period at an average price of $15.45 per barrel. The
increase in crude oil and natural gas sales was primarily due to the purchase of
the Shell Michigan and the Destec properties. The remainder of the revenue
(approximately $1,593,000 for the 1997 period and $1,838,000 in 1996) was from
oil and gas contract operations, providing services such as field operations,
well supervision, well maintenance, and gas marketing.
COSTS AND EXPENSES. Total costs and expenses for the 1997 period were
$7,734,000, an increase of 28 percent over $6,039,000 for the 1996 period.
Generally, the increase in expense is the result of the acquisition of the
Destec and Shell Michigan properties. The Destec results have been included
since October 1, 1997, and Shell Michigan since November 1, 1996. Operating
expenses for the three months ended December 31, 1997, were $4,736,000 or $6.54
per barrel of oil equivalent (BOE), compared to $4,114,000, or $7.77 per barrel
of oil equivalent for the 1996 period. A portion of the improvement in cost per
unit of sales was due to economies of scale. The recent acquisitions included
mostly producing natural gas properties. Natural gas properties generally cost
less to operate on a per unit of sales basis than do oil properties.
Depletion and depreciation expense for the 1997 period was $2,466,000 ($3.41 per
BOE) compared to $1,479,000 ($2.79 per BOE) for 1996. The increase in 1997 was
due to Mercury's property acquisitions.
General and administrative expenses for the 1997 period were $532,000,
a 19 percent increase over $446,000 for the 1996 period.
OTHER INCOME (EXPENSE). Interest expense for the three months ended December 31,
1997, was $1,879,000, an increase of 39 percent over $1,353,000 for the 1996
period. The increase in interest expense primarily was due to the increase in
debt related to Mercury's property acquisitions. During the 1997 period, Mercury
received a settlement on a lawsuit in the amount of $2,781,000, which was
included in other income. The other income items for the 1997 period totaled
$652,000, down slightly compared to $750,000 for 1996.
INCOME. Income before income taxes and minority interest was $4,869,000 for the
1997 period compared to $3,374,000 in 1996. These amounts include 100 percent of
the results of operations of QELC, a 52 percent-owned subsidiary of Mercury.
The minority interest in income of subsidiary of $1,277,000 for the 1997
period and $1,422,000 for 1996 primarily applies to QELC.
Income taxes were calculated using a statutory rate of 34 percent.
EARNINGS. Net income was $2,354,000 ($9.38 per share) for the 1997 period
compared to $1,279,000 ($5.10 per share) for 1996. Most of the increase in
earnings relates to the recent property acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATING ACTIVITIES. Mercury's net cash flow from operations
for the three months ended December 31, 1997, was $5,651,000.
CASH FLOW FROM INVESTING ACTIVITIES. Mercury used $27,327,000 for investing
activities during the three months ended December 31, 1997. Of this amount,
$27,750,000 was for capital expenditures, which was principally used for the
acquisition of the Destec properties.
21
CASH FLOW FROM FINANCING ACTIVITIES. For the three months ended December 31,
1997, cash provided by financing activities totaled $23,990,000. Mercury
borrowed $25,435,000 and repaid $3,533,000 of debt. Most of the borrowings were
from banks and were used principally to purchase the Destec properties.
Effective January 1, 1998, Mercury exchanged most of its oil and gas producing
properties and most of its long-term debt for Quicksilver common shares.
YEAR 2000
The Company has developed a plan (the "Year 2000 Plan") to address the
Year 2000 issue caused by computer programs and applications that utilize
two-digit date fields rather than four to designate a year. As a result,
computer equipment, software and devices with embedded technology that are
date-sensitive may be unable to recognize or may misinterpret the actual date.
This could result in a system failure or miscalculations causing disruptions of
operations.
The Company has assessed its information technology ("IT") and its
non-IT systems. The term "computer equipment and software" includes systems that
are commonly thought of as IT systems, including personal computers,
accounting/data processing and other miscellaneous systems. Quicksilver has
replaced most of the computer equipment and software it currently uses to become
Year 2000 compliant. The Company believes that all of its computer equipment and
software are currently Year 2000 compliant. Also, in the ordinary course of
replacing computer equipment and software, the Company plans to obtain
replacements that are in compliance with the Year 2000.
The non-IT systems include operational and control equipment with
embedded chip technology that is utilized in the offices and field operations.
These systems were reviewed as part of the Year 2000 plan. Most of the wells are
operated by non-computerized equipment. The affected areas were gas processing,
telemetry and safety shutdown controls. The Company believes that its
operational and control systems are currently Year 2000 compliant.
Quicksilver is also monitoring the compliance efforts of the
significant suppliers, customers and service providers with whom it does
business and whose IT and non-IT systems interface with those of the Company to
ensure that they will be Year 2000 compliant. If they are not, such failure
could affect the ability of the Company to sell its oil and gas and receive
payments therefrom and the ability of vendors to provide products and services
in support of the Company's operations. Although the Company has no reason to
believe that its vendors and customers will not be compliant by the year 2000,
the Company is unable to determine the extent to which Year 2000 issues will
effect its vendors and customers. However, management believes that ongoing
communication with and assessment of the compliance efforts of these third
parties will minimize these risks.
The discussion of the Company's efforts and management's expectations
relating to Year 2000 compliance contains forward-looking statements.
Quicksilver is continuing its analysis of the operational problems and costs
that would be reasonably likely to result from failure by the Company and
significant third parties to complete efforts necessary to achieve Year 2000
compliance on a timely basis. The Company plans to establish a contingency plan
for dealing with the most reasonably likely worst case scenario. To date, such
scenario has not been clearly identified. The Company plans to continue such
analysis and complete a plan by the third quarter of 1999.
Quicksilver presently does not expect to experience significant
operational problems due to the Year 2000 issue. However, if all Year 2000
issues are not properly and timely identified, assessed, remediated and tested,
there can be no assurance that the Year 2000 issue will not materially impact
the Company's results of operations or adversely affect its relationship with
customers, vendors or others. Additionally, there can be no assurance that the
Year 2000 issues of other entities will not have a material impact on
Quicksilver's systems or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS. The audited Company's combined consolidated financial
statements as of December 31, 1998, and for the Company's predecessors, are
submitted herewith as part of this Form 10-K. See Item 14.
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers and directors of the Company are listed
below, together with a description of their experience and certain other
information. Each of the directors was elected for a one-year term at the
Company's 1999 annual meeting of stockholders. Executive officers are appointed
by the Board of Directors.
Positions(s) Office Held Term
Name Held With Quicksilver Age Since Expires
- - ----------------- ---------------------------------- --- ----------- -------
Thomas F. Darden Chairman of the Board and Chief 45 1997 2000
Executive Officer
Glenn M. Darden President, Chief Operating Officer 43 1997 2000
and Director
Houston Kauffman Vice President Acquisitions 44 1999 2000
Howard N. Boals Vice President Finance, 55 1999 2000
Secretary and Treasurer
Frank Darden Director 71 1997 2000
Steven M. Morris Director 46 1997 2000
D. Randall Kent Director 72 1997 2000
W. Yandell Rogers Director 35 1997 2000
Mark Warner Director 35 1999 2000
The business experience of each director and officer is set forth below.
THOMAS F. DARDEN has served on the board of Quicksilver since December
1997. Previously, he served as President of Mercury. While he was President of
Mercury, Mercury developed and acquired interests in over 1,200 producing wells
in Michigan, Indiana, Kentucky, Wyoming, Montana, New Mexico and Texas. A
graduate of Tulane University with a BA in Economics in 1975, Mr. Darden had
been employed by Mercury or its parent corporation, Mercury Production Company,
for 22 years. He became a director and the President of MSR on March 7, 1997. On
January 1, 1998, he was named Chairman of the Board and Chief Executive Officer
of MSR. Mr. Darden has been director and President of Quicksilver since its
inception in December 1997 and was elected Chairman of the Board and Chief
Executive Officer on March 4, 1999.
GLENN M. DARDEN has served on the board of Quicksilver since December
1997. He also served with Mercury for 18 years, and for the last five years was
the Executive Vice President of that company. Prior to working for Mercury, Mr.
Darden worked as a geologist for Mitchell Energy Corporation. He 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, and was named President and
Chief Operating Officer of MSR on January 1, 1998. Mr. Darden has been a
director of Quicksilver since its inception in December 1997. He served as Vice
President of Quicksilver until he was elected President and Chief Operating
Officer on March 4, 1999.
FRANK DARDEN is a registered professional engineer and Chairman of the
Board of Mercury. He founded Mercury's parent corporation and has served as its
Chairman since 1965 and as chairman of Mercury since its founding in 1978. Mr.
Darden commenced his career in the oil and gas business with Humble Oil and
Refining Company in 1948. From 1954 through 1955, he was retained by Empresa
Colombiana de Petroleos to organize an engineering department and guide the
company's planning for the secondary recovery program in the La Cira Field in
the Magdelena Valley of Colombia. From 1956 through 1964, Mr. Darden served as
Manager of Operations for Newmont Oil Company, the energy subsidiary of Newmont
Mining Corporation, and as Executive Vice President and director of Yucca Water
Company. He was a director of MSR from March 7, 1997, until the Merger. Mr.
Darden became a director of Quicksilver upon its formation in December 1997.
23
HOUSTON KAUFFMAN is a professional landman and 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.
HOWARD N. BOALS is a certified public accountant with over 20 years
experience as a controller for publicly and privately held oil and gas
exploration and production companies. From 1992 through 1994, he was the
accounting manager for PG & E Resources Inc. of Dallas and, during the prior
five years, was controller for Sinclair Resources, Inc. Mr. Boals joined MSR as
controller in January 1995. In September 1995, he was named Vice President -
Finance and Administration. On October 30, 1997, Mr. Boals was elected to serve
as the Vice President - Finance and Administration, Secretary and Treasurer of
MSR. On March 4, 1999, he was elected to the same position with Quicksilver.
STEVEN M. MORRIS is a certified public accountant and President of
Morris & Co., a private investment firm in Houston, Texas. From 1988 to 1991, he
was Vice President of Finance for ITEX Enterprises, Inc. From 1981 to 1988, Mr.
Morris was Financial Vice President of Hanson Minerals Company, a Houston-based
oil and gas exploration company. From 1978 to 1981, he was a partner in the
certified public accounting firm of Haley & Morris. He served as Senior
Accountant with the Houston office of Arthur Young and Company from 1974 to
1977. Mr. Morris was elected a director of MSR in October 1994. Upon the Merger
between Quicksilver and MSR on March 4, 1999, Mr. Morris became a director of
Quicksilver.
D. RANDALL KENT is a retired Vice President of the General Dynamics
Corporation. He joined General Dynamics/Ft. Worth Division in 1949 and served in
various engineering management positions, including Vice President and Chief
Engineer of the F-16 Fighter Program. Following his retirement in 1991, Mr. Kent
served as a consultant to the Lockheed-Martin Corporation. He graduated from
Louisiana State University in 1947 with a BS in mechanical engineering, and from
Cornell University in 1949 with an MS in engineering. Mr. Kent was elected a
director of MSR in 1997 and, upon the Merger between MSR and Quicksilver, became
a director of Quicksilver.
W. YANDELL ROGERS III has served as Vice President and General Manager
of Ridgway's, Inc., based in Houston, Texas, since July 1997. For more than five
years prior, he served as Regional Manager for Ridgway's, the largest privately
held reprographics firm in the U.S., with more than 60 locations nationwide. He
graduated from Southern Methodist University in 1986 with a B.B.A. in finance.
Mr. Rogers was elected a director of MSR in 1997 and, upon the Merger between
Quicksilver and MSR, became a director of Quicksilver.
MARK WARNER is currently a Director of Domestic Energy Finance for
Enron Capital & Trade Resources in Houston, Texas, where he has worked since
1995. He received a Bachelor's degree in geological engineering from the
University of Missouri-Rolla in 1985 and a Master's degree in petroleum
engineering from the University of Oklahoma in 1987. From 1987 to 1989, he
was a reservoir engineer with Marathon Oil Company in Lafayette, Louisiana,
working in the offshore Gulf of Mexico. From 1989 to 1993, he served as
Manager of Petroleum Engineering for Remington Oil Company (formerly Box
Energy) in Dallas, Texas. In 1995, he received an MBA from the Edwin L. Cox
School of Business at Southern Methodist University in Dallas. Mr. Warner
currently serves as a member of the board of directors of HV Marine Services,
Inc., an integrated marine transportation company in New Orleans, Louisiana.
Mr. Warner was elected a director at Quicksilver's 1999 annual meeting.
DIRECTOR COMPENSATION
Quicksilver has not yet determined the fees to be paid to its
directors.
24
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation
that Quicksilver's Chairman of the Board and Chief Executive Officer earned for
services rendered in all capacities to Quicksilver during the year ended
December 31, 1998. No other executive officer currently employed by Quicksilver
received salary and bonus in excess of $100,000 during 1998.
Summary Compensation Table
Long-Term
Compensation
------------
Awards
----------
Salary Compensation Securities
----------------------- Underlying
Name and Principal Position Salary($) Bonus($) Options(#)
- - --------------------------- --------- -------- ----------
Thomas F. Darden (1) None None 11,428
Chairman of the Board
and Chief Executive Officer
(1) Mr. Darden was granted MSR options in lieu of salary on March 7, 1997.
Mr. Darden's common stock options amount to 45 percent of the Company's
stock options outstanding.
Option Grants in Last Fiscal Year.
No stock option or appreciation rights were granted to the individuals during
1998.
The following table sets forth information concerning the year-end
number and value of unexercised options with respect to the officer named in the
two immediately preceding tables. Mr. Darden has not exercised any stock options
during 1998. The value of the unexercised in-the-month options is based on a
value of $7.50 per share of common stock, which is the trading closing price as
of March 15, 1999. Amounts reflected are based on the assumed value minus the
exercise price multiplied by the number of shares acquired on exercise.
Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options December 31, 1998
at December 31, 1998
Name Vested Unvested Vested Unvested
- - ---- ------ -------- ------ --------
Thomas F. Darden 11,428 -0- -0- -0-
Stock Option Plan
Pursuant to the Merger Agreement with MSR, the Company converted the outstanding
options of MSR into options to purchase Quicksilver common shares. During 1997,
an aggregate of 24,857 shares were granted under MSR's Plan at an exercise price
of $8.75 per share. Options are totally vested and must be exercised within five
years of the date of grant. No additional options will be granted under the
Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, with respect to the Company, certain information
as of March 16, 1999, regarding the beneficial ownership of the Company's common
stock of (i) directors, (ii) executive officers, (iii) executive officers and
directors as a group and (iv) holders of 5 percent or more of such securities.
25
SHARES BENEFICIALLY
OWNED
-------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- - ------------------------ ------ -------
DIRECTORS
Frank Darden (1)............................. 462,443 3.5
Glenn M. Darden (1).......................... 495,850 3.8
Thomas F. Darden (1)......................... 501,110 3.9
Steven M. Morris............................. 172,222 1.3
D. Randall Kent.............................. 3,000 0.0
W. Yandell Rogers III........................ 5,000 0.0
Mark Warner (2).............................. 0 0
EXECUTIVE OFFICERS NOT NAMED ABOVE
Houston Kauffman............................. 3,900 0.0
Howard N. Boals (3).......................... 2,500 0.0
DIRECTORS AND EXECUTIVE OFFICES AS A GROUP (4)........ 2,986,429 22.6
HOLDERS OF 5 PERCENT OR MORE NOT NAMED ABOVE
Mercury Exploration Company (5).............. 4,493,822 33.3
Quicksilver Energy LC (6).................... 3,030,861 23.5
Trust Company of the West.................... 1,340,405 10.4
Joint Energy Development Investments
Limited Partnership........................ 1,340,405 10.4
Darden Family Group (7)...................... 9,975,312 71.2
1) Does not include shares beneficially owned by Mercury Exploration Company
or Quicksilver Energy LC. See footnotes 4, 5 and 6 below. Does include with
respect to each person 110,000 shares subject to immediately exercisable
warrants. Also includes with respect to each of Thomas F. Darden and Glenn
M. Darden 11,428 shares subject to immediately exercisable options. Also
includes with respect to each of Thomas F. Darden and Glenn M. Darden
18,660 and 15,250 shares respectively, for which each is co-trustee for
family member trusts.
2) Mr. Warner was designated as director under the Stockholder agreement
dated April 9, 1998 among Quicksilver and Joint Energy Development
Investments Limited Partnership.
3) Includes 20,000 shares subject to currently exercisable options.
4) Includes 330,000 shares subject to immediately exercisable warrants and
24,857 shares subject to immediately exercisable options. Does not include
shares beneficially owned by Mercury Exploration Company.
5) Number of shares indicated includes 594,000 shares subject to immediately
exercisable warrants. Each of Frank Darden, Thomas F. Darden and Glenn M.
Darden are directors and shareholders of Mercury and share voting and
investment power with respect to the 4,493,822 shares of the Company's
Common Stock beneficially owned by Mercury. Each such person disclaims
beneficial ownership of all such shares.
6) Each of Frank Darden, Thomas F. Darden and Glenn M. Darden are partners of
Quicksilver Energy LC and share voting and investment power with respect to
the 3,030,861 shares of the Company's Common Stock beneficially owned by
Quicksilver Energy LC. Each such person disclaims beneficial ownership of
such shares.
7) The Darden Family Group includes Darden family members, Quicksilver Energy,
L.C., Mercury Exploration Company and affiliates of Mercury which presently
control 8,832,000, (68.5 percent) of the outstanding shares and
beneficially approximately 9,975,312 (71.2 percent) shares.
The address of each of Mercury Exploration Company, Quicksilver Energy LC,
Frank Darden, Glenn M. Darden, Houston Kauffman and Howard N. Boals is 1619
Pennsylvania Avenue, Fort Worth, Texas 76104. The address of Thomas F.
Darden is 720 South Otsego, Gaylord, Michigan 49735.
26
The address of Steven M. Morris is 952 Echo Lane, Suite 335, Houston, Texas
77024. The address of D. Randall Kent is 4421 Tamworth Road, Fort Worth,
Texas 76116. The address of W. Yandell Rogers III is 5711 Hillcroft,
Houston, Texas 77036. The address for Mark Warner is 1400 Smith Street,
Houston, Texas, 77002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the Merger with MSR, Quicksilver did not have any direct
employees other than its top management and officers. Instead, Quicksilver's
businesses were managed under a management agreement entered into with Mercury
in April 1998. According to the management agreement, Mercury was responsible
for the supervision and management of Quicksilver's day-to-day operations. These
services included administrative and management activities. In addition, Mercury
acted as the operator of Quicksilver's oil and gas properties in Michigan,
Wyoming and Montana. Quicksilver paid Mercury a fee based on the number of hours
each Mercury employee spent on activities relating to Quicksilver, less overhead
expenses paid by Quicksilver under any joint operating agreements. In addition,
Quicksilver reimbursed Mercury for specified out-of-pocket expenses. For the
year ended December 31, 1998, Quicksilver had paid Mercury a total of
approximately $1.2 million under the management agreement.
Upon completion of the Merger, the existing management agreement was
terminated. Quicksilver and Mercury have entered into a new agreement, under
which Mercury will provide accounting services to the surviving corporation and
will operate its oil and natural gas properties, including the daily activities
of producing oil and/or gas from an individual wells and leases, and will
continue to provide services as an operator under existing operating agreements.
Mercury's compensation will consist of payments and overhead reimbursements to
which it or Quicksilver is entitled as operator under existing and future
operating agreements for the properties.
Mercury owns 3,899,822 (30.3 percent) shares of the Company's common
stock. Three of Mercury's principal common stock shareholders and directors --
Frank Darden, Thomas Darden and Glenn Darden -- are also directors and officers
of the Company.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires that the Company's officers and directors, and persons who own more
than 10 percent of a registered class of the Company's equity securities, file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than 10 percent stockholders are
required by regulation to furnish to the Company copies of all Section 16(a)
forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that during its 1998 fiscal year, all such filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners were complied
with.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
Financial Statements: Page in this Form 10-K
- - --------------------- ----------------------
INDEX TO FINANCIAL STATEMENTS
QUICKSILVER RESOURCES INC.
Independent Auditors' Report...............................................F-1
Combined Consolidated Balance Sheet December 31, 1998 and 1997.............F-2
Combined Consolidated Statement of Income for the year ended
December 31, 1998.........................................................F-3
Combined Consolidated Statement of Cash Flows for the year ended
December 31, 1998.........................................................F-4
Combined Consolidated Statement of Stockholders' Equity for the
year ended December 31, 1998..............................................F-5
Notes to Combined Consolidated Financial Statements........................F-6
27
PREDECESSOR FINANCIAL STATEMENTS
MSR EXPLORATION LTD.
Independent Auditors' Report..............................................F-17
Consolidated Balance Sheet at December 31, 1997...........................F-18
Consolidated Statement of Operations
for the period from inception March 7, 1997, to December 31, 1997.....F-19
Consolidated Statement of Stockholders' Equity
for the period from inception March 7, 1997, to December 31, 1997.....F-20
Consolidated Statement of Cash Flows
for the period from inception March 7, 1997, to December 31, 1997.....F-21
Notes to Financial Statements.............................................F-22
MERCURY EXPLORATION COMPANY
Independent Auditors' Report..............................................F-36
Consolidated Balance Sheet at September 30, 1997 and 1996.................F-37
Consolidated Statements of Income for the years ended September 30,
1997, 1996 and 1995...................................................F-38
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997, 1996 and 1995.....................................F-40
Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1996 and 1995...................................................F-41
Notes to Consolidated Financial Statements................................F-42
MERCURY EXPLORATION COMPANY -- TRANSITION REPORTS
Independent Auditors' Report..............................................F-54
Consolidated Balance Sheet at December 31, 1997...........................F-55
Consolidated Statement of Income for the three months ended
December 31, 1997.....................................................F-56
Consolidated Statement of Stockholders' Equity for the three months
ended December 31, 1997...............................................F-57
Consolidated Statement of Cash Flows for the three months
ended December 31, 1997...............................................F-58
Notes to Financial Statements.............................................F-59
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
Independent Auditors' Report..............................................F-69
Balance Sheet at December 31, 1997 and 1996...............................F-70
Statements of Operations for the years ended December 31,
1997, 1996 and 1995...................................................F-71
Statements of Partner's Capital for the years ended December 31,
1997, 1996 and 1995...................................................F-72
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995...................................................F-73
Notes to Financial Statements.............................................F-74
(a) Exhibits:
Exhibit Sequential
Number Description
- - ------ -----------
* 2.1 Agreement and Plan of Merger, dated September 1, 1998, among
Quicksilver Resources Inc. and MSR Exploration Ltd. is included as
Appendix A to the Proxy Statement/Prospectus included in Part I
of this Registration Statement and is incorporated herein by reference.
* 2.2 Amendment No. 1 to Agreement and Plan of Merger.
2.3 Second Amended and Restated Credit Agreement among Quicksilver
Resources Inc., as borrower, NationsBank, N.A., as administrative agent
and the financial institutions listed therein, dated March 1, 1999, and
effective March 4, 1999 (filed herewith).
28
* 4.1 Restated certificate of incorporation of Quicksilver Resources Inc.
* 4.2 Bylaws of Quicksilver Resources Inc.
* 4.3 Form of Quicksilver Resources Inc. Common Stock Certificate.
*10.2 Agreement and Plan of Reorganization and Merger, dated March 31, 1998,
by and among Quicksilver Resources Inc., Quicksilver Energy, L.C.,
Michigan Gas Partners, Limited Partnership, Mercury Exploration
Company, Trust Company of the West and Joint Energy Development
Investments Limited Partnership.
*10.3 Agreement Regarding Merger Agreement, dated April 9, 1998, by and
among Quicksilver Resources Inc., Quicksilver Energy, L.C., Michigan
Gas Partnership, Limited Partnership, Mercury Exploration Company,
Trust Company of the West and Joint Energy Development Investments
Limited Partnership.
*10.4 Registration Rights Agreement, dated April 9,1998, by and
among Quicksilver Resources Inc., Joint Energy Development
Investments Limited Partnership and Trust Company of the West.
*10.5 Stockholders Agreement, dated April 9, 1998, by and among Quicksilver
Resources, Inc., Mercury Exploration Company, Quicksilver Energy,
L.C., Frank Darden, Thomas F. Darden, Glenn M. Darden, Anne Darden
Self, Jeff Cook, Jack L. Thurber, Trust Company of the West, Joint
Energy Development Investments Limited Partnership and Mercury
Production Company.
*10.6 Amendment No. 1 to Stockholders Agreement, dated September 1, 1998,
by and among Quicksilver Resources Inc., Mercury Exploration
Company, Quicksilver Energy, L.C., Frank Darden, Thomas F. Darden,
Glenn M. Darden, Anne Darden Self, Jeff Cook, Jack L. Thurber, Trust
Company of the West, Joint Energy Development Investments Limited
Partnership and Mercury Production Company.
*10.7 Stock Transfer Agreement, dated April 9, 1998, by and between Mercury
Exploration Company and Joint Energy Development Investment Limited
Partnership.
*10.8 Amendment No. 1 to Stock Transfer Agreement, dated September 1, 1998,
by and between Mercury Exploration Company and Joint Energy Limited
Partnership.
*10.9 Amended and Restated Credit Agreement, dated April 9, 1998, by and
between Quicksilver Resources Inc. and NationsBank of Texas, N.A.
*10.10 Put/Call Agreement dated April 9, 1998, by and between Mercury
Exploration Company and Trust Company of the West.
*10.11 Amendment No. 1 to Put/Call Agreement, dated September 4, 1998, by
and between Mercury Exploration Company and Trust Company of the West.
*10.12 Management Agreement, dated April 9, 1998, by and between Mercury
Exploration Company and Quicksilver Resources Inc.
*10.13 Agreement regarding Warrants, dated September 1, 1998, by and among
Quicksilver Resources Inc., Mercury Exploration Company, Frank
Darden, Thomas F. Darden, Glenn M. Darden, Anne Darden Self, Joint
Energy Development Investment Limited Partnership and Trust Company
of the West.
*10.14 Agreement, dated September 1, 1998, by and among Quicksilver Resources
Inc., Joint Energy Development Investments Limited Partnership,
Trust Company of the West and Mercury Exploration Company.
*10.15 Management Agreement, dated September 1, 1998, by and between Mercury
Exploration Company and Quicksilver Resources Inc.
29
10.16 Wells Agreement, filed as an exhibit to the Registration Statement on
Form S-4 (File No. 333-29769) and incorporated herein by reference.
*10.17 Letter Agreement and Fee Letter from NationsBank, N.A., dated
July 17, 1998.
*10.18 Agreement Regarding Future Financing, dated April 9, 1998, by and among
Quicksilver Resources Inc., Enron Trade & Capital Resources Corp.,
Trust Company of the West and NationsBank of Texas, N.A.
*10.19 Amendment No. 2 to Put/Call Agreement dated January 8, 1999, by and
between Mercury Exploration Company and Trust Company of the West.
27. Financial Data Schedule (filed herewith)
* Filed as part of Quicksilver's Registration Statement on Form S-4
(SEC. No. 33-66709.) and incorporated herein by reference.
REPORTS ON FORM 8-K
The Company filed a Form 8-K on March 18, 1999, announcing the completion of the
Merger with and between the Company and MSR effective March 4, 1999.
30
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")
Dated: March 30, 1999 by: /s/ Thomas F. Darden
------------------------------------
Thomas F. Darden
Chairman of the Board
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.
SIGNATURE TITLE DATE
- - --------- ----- ----
/s/ Thomas F. Darden Chairman of the Board, March 30, 1999
- - -------------------------------- Chief Executive Officer
Thomas F. Darden and Director
/s/ Glenn M. Darden President, March 30, 1999
- - -------------------------------- Chief Operating Officer
Glenn M. Darden and Director
/s/ Howard N. Boals Vice President - Finance March 30, 1999
- - -------------------------------- Chief Accounting Officer
Howard N. Boals
/s/ Frank Darden Director March 30, 1999
- - --------------------------------
Frank Darden
/s/ Steven M. Morris Director March 30, 1999
- - --------------------------------
Steven M. Morris
/s/ D. Randall Kent Director March 30, 1999
- - --------------------------------
D. Randall Kent
/s/ W. Yandell Rogers, III Director March 30, 1999
- - --------------------------------
W. Yandell Rogers, III
/s/ Mark Warner Director March 30, 1999
- - --------------------------------
Mark Warner
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Quicksilver Resources Inc.
Fort Worth, Texas
We have audited the accompanying combined consolidated balance sheets of
Quicksilver Resources Inc. (the Company) as of December 31, 1998 and 1997,
and the related combined consolidated statement of income, stockholders'
equity and cash flows for the year ended December 31, 1998. 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 combined consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 29, 1999
F-1
QUICKSILVER RESOURCES INC.
Combined Consolidated Balance Sheets
December 31, 1998 and 1997
In thousands, except for share and per share data
ASSETS 1998 1997