SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................... To.....................
Commission file number: 001-14837
QUICKSILVER RESOURCES INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
75-2756163 (I.R.S. Employer Identification No.)
1619 Pennsylvania Avenue, Fort Worth, Texas 76104
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (817) 877-3151
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------ -----------------------------------------
Common Stock, par value American Stock Exchange
$0.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of August 5, 1999, the registrant had 12,888,500 outstanding shares
of its common stock, $0.01 par value.
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Quicksilver Resources Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Quicksilver Resources Inc. (the Company) as of June 30, 1999, and the related
condensed consolidated statements of operations for the three and six-month
periods ended June 30, 1999, and 1998, and condensed consolidated statements
of cash flows for the six month periods ended June 30, 1999 and 1998. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1998, and the related consolidated statement of operations, stockholders'
equity and cash flows for the year then ended (not presented herein); and in
our report dated March 29, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1998, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
August 5, 1999
2
QUICKSILVER RESOURCES INC.
Condensed Consolidated Balance Sheets
In thousands, except for share and per share amounts
June 30, December 31,
ASSETS 1999 1998
------------ -------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 157 $ 294
Accounts receivable, net of allowance for doubtful accounts of
$1,350 at June 30, 1999 7,609 7,776
Inventories and other current assets 751 751
------------ -------------
Total current assets 8,517 8,821
PROPERTIES, PLANT AND EQUIPMENT - NET ("full cost") 167,478 134,810
OTHER ASSETS 1,689 969
------------ -------------
$ 177,684 $ 144,600
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 30 $ 67
Accounts payable 2,665 5,772
Accrued liabilities 1,476 1,691
------------ -------------
Total current liabilities 4,171 7,530
LONG-TERM DEBT 114,945 84,972
UNEARNED REVENUE 892 1,338
DEFERRED INCOME TAXES 14,953 11,953
MINORITY INTEREST in MSR Exploration Ltd. 6,219
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01
Authorized 10,000,000 shares,
issued and outstanding - none - -
Common stock, $0.01 par value
Authorized 40,000,000 shares,
issued and outstanding 12,888,500 and 11,510,800 129 115
Paid in capital in excess of par value 37,956 27,574
Retained earnings 4,638 4,899
------------ -------------
Total stockholders' equity 42,723 32,588
------------ -------------
$ 177,684 $ 144,600
------------ -------------
------------ -------------
The accompanying notes are an integral part of these financial statements.
3
QUICKSILVER RESOURCES INC.
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1999 and 1998
In thousands, except for per share data
(unaudited)
For the three months For the six months
ended June 30, ended June 30,
---------------------------------- ------------------------------------
1999 1998 1999 1998
---------------- ------------- ---------------- ---------------
REVENUE
Gas sales $ 7,809 $ 8,127 $ 15,005 $ 16,257
Oil sales 2,499 1,805 3,430 3,793
Other income 1,246 703 2,150 1,376
---------------- ------------- ---------------- ---------------
Total revenues 11,554 10,635 20,585 21,426
---------------- ------------- ---------------- ---------------
EXPENSES
Operating expenses 4,842 3,664 8,069 7,398
Depletion and depreciation 3,314 3,043 6,129 6,043
Provision for doubtful accounts - - 1,350 -
General and administrative 1,016 321 1,836 548
Interest 2,043 1,736 3,738 3,660
---------------- ------------- ---------------- ---------------
Total expenses 11,215 8,764 21,122 17,649
---------------- ------------- ---------------- ---------------
Income (loss) before income taxes
and minority interest 339 1,871 (537) 3,777
Minority interest in net loss
of MSR Exploration Ltd. - 164 141 268
---------------- ------------- ---------------- ---------------
Income (loss) before income taxes 339 2,035 (396) 4,045
Income taxes (benefit) 115 745 (135) 1,459
---------------- ------------- ---------------- ---------------
NET INCOME (LOSS) $ 224 $ 1,290 $ (261) $ 2,586
---------------- ------------- ---------------- ---------------
---------------- ------------- ---------------- ---------------
Basic and diluted earnings per share $ 0.02 $ 0.11 $ (0.02) $ 0.22
Basic and diluted weighted average number
of shares outstanding for the periods 12,889 11,511 12,417 11,511
The accompanying notes are an integral part of this financial statement.
4
QUICKSILVER RESOURCES INC.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 1998
In thousands
1999 1998
----------- -----------
(unaudited)
OPERATING ACTIVITIES
Net income (loss) $ (261) $ 2,586
Charges and credits to net income not affecting cash
Depletion and depreciation 6,129 6,043
Deferred income taxes (135) 1,459
Recognition of unearned revenue (446) (723)
Minority interest in loss of subsidiary (141) (268)
Amortization of deferred loan costs 182 -
Provision for doubtful accounts 1,350 -
Changes in assets and liabilities
Accounts receivable (1,183) (4,477)
Inventory, prepaid expenses and other 18 (31)
Accounts payable (3,107) 4,948
Accrued liabilities (215) 1,611
----------- -----------
NET CASH FROM OPERATING ACTIVITIES 2,191 11,148
----------- -----------
INVESTING ACTIVITIES
Acquisition of properties and equipment (31,097) (7,638)
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (31,097) (7,638)
----------- -----------
FINANCING ACTIVITIES
Notes payable, bank proceeds 33,231 6,850
Principal payments on long-term debt (3,295) (10,182)
Deferred financing costs (871) (244)
Stock registration fees (296) -
----------- -----------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES 28,769 (3,576)
----------- -----------
NET DECREASE IN CASH (137) (66)
CASH AT BEGINNING OF PERIOD 294 643
----------- -----------
CASH AT END OF PERIOD $ 157 $ 577
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense $ 3,547 $ 1,918
----------- -----------
----------- -----------
Cash payments for income taxes $ - $ -
Common stock used for acquisition of minority interest in MSR 1,377
-----------
-----------
The accompanying notes are an integral part of these financial statements.
5
Quicksilver Resources Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three and Six Months Ended June 30, 1999 and 1998
1. ACCOUNTING POLICIES AND DISCLOSURES
In the opinion of management of Quicksilver Resources Inc. (Quicksilver or
the "Company"), the Company's Condensed Consolidated Financial Statements
contain all adjustments (consisting of only normal, recurring accruals)
necessary to present fairly the financial position of the Company as of June
30, 1999, and the results of operations and cash flows for the three and six
months ended June 30, 1999, and June 30, 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1998. The results of operations for the three-and six-month periods ended
June 30, 1999, are not necessarily indicative of the operating results to be
expected for the full fiscal year.
MERGER OF MSR EXPLORATION LTD. WITH AND INTO QUICKSILVER
On March 4, 1999, Quicksilver completed a merger with MSR Exploration Ltd.
(the "MSR merger"). Accounting Principles Board Opinion (APB) No. 16 provides
that exchanges or transfers of net assets between companies under common
control be accounted for at historical cost in a manner similar to that of
pooling of interest accounting. Furthermore, APB 16 indicates that the
purchase method of accounting should be used if the effect of a transfer or
exchange is to acquire all of the outstanding shares held by minority
interests. Prior to the merger Quicksilver Energy, L.C., Mercury Exploration
Company, and the principal stockholders of Mercury Exploration Company,
comprised of the Darden family (the "Mercury Group"), controlled Quicksilver
through their approximate 74 percent ownership of Quicksilver. The Mercury
Group was considered to control MSR because the Mercury Group and two other
individuals affiliated with Mercury owned approximately 46.5 percent of MSR's
common stock, controlled MSR's executive committee of its board of directors,
and held warrants to purchase 11 million shares of MSR common stock.
Accordingly, Quicksilver was considered the "accounting acquirer" and
transferred approximately 46.5 percent of MSR's net assets to Quicksilver at
historical cost. The remainder of MSR's net assets, the approximate 53.5
percent related to minority interests, was valued and recorded based on the
purchase method of accounting in March 1999. Although the merger did not
occur until 1999, MSR's financial statements as of December 31, 1998, and
June 30, 1998, have been combined with the Company's since the entities were
under common control.
2. MERGERS AND ACQUISITIONS
MSR MERGER
On March 4, 1999, the Company completed the MSR merger. The merger qualified
as a tax-free exchange and was accounted for in part as a pooling of
interests for entities under common control, with the minority interest
accounted for under the purchase method. In connection with the merger, the
Company issued 2,577,700 shares of its common stock in exchange for all of
the outstanding common stock of MSR Exploration Ltd. based on a conversion
ratio of one share of the Company's common stock for ten shares of MSR common
stock (the merger exchange ratio). MSR's outstanding common stock options and
warrants were converted into Quicksilver common stock options and warrants to
purchase approximately 58,857 shares and 1,110,000 shares, respectively. The
minority interest reflected on the Company's December 31, 1998 balance sheet
and statements of operations is approximately 53.5 percent of MSR's net
assets and results of operations for the periods prior to March 4, 1999.
6
UNOCAL PROPERTY ACQUISITION
On May 17, 1999, the Company and Union Oil Company of California ("Unocal")
completed the previously announced purchase by the Company from Unocal of
substantially all of Unocal's natural gas and crude oil assets in Michigan.
The assets purchased, consisting of ownership interests in the Garfield unit
and the Beaver Creek unit, include approximately 20,000 net leasehold acres
and about 13,000 MCF net equivalent production per day. Quicksilver's
ownership in Garfield increased to 99% from 54%.
The purchase price for the Unocal acquisition consisted of $27 million in
cash, subject to certain adjustments, which resulted in a final purchase
price of $25.8 million cash and 404,381 unregistered shares of the Company's
common stock. The stock component of the purchase price was placed in escrow
and will be distributed to Unocal over a three-year period, subject to
downward adjustment in correlation to certain costs, expenses, and
liabilities incurred during this period. The purchase price was determined in
an arms length negotiation with Unocal following a competitive bid process.
The Company financed the cash portion of the purchase price with borrowings
under a bank credit facility, which permits the Company to obtain revolving
credit loans and to issue letters of credit from time to time in an aggregate
amount not to exceed the lesser of a borrowing base limitation or $200
million. Lenders under the bank credit facility include NationsBank, N.A.,
Frost National Bank, and Paribas.
3. LONG-TERM DEBT
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
Long-term debt, in thousands, consists of:
Notes payable to banks
(7.38% at June 30, 1999 and
7.1% at December 31, 1998) $ 84,867 $ 84,841
Line of credit
(7.015% at June 30, 1999) 30,000
Various loans 108 198
------------- ---------------
114,975 85,039
Less current maturities (30) (67)
------------- ---------------
$ 114,945 $ 84,972
------------- ---------------
------------- ---------------
Long-term debt maturities are as follows, in thousands of dollars:
Periods Ending June 30, 1999 December 31, 1998
-------------- -------------- -----------------
(unaudited)
1999 $ 30 $ 67
2000 720 20
2001 20 20
2002 4 4
2003 4 4
Thereafter 114,197 84,924
-------- -------
$114,975 $85,039
-------- -------
-------- -------
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 existing debt of
$73,993,000 and $10,848,000 from, respectively, Quicksilver and MSR was
transferred into the new Credit Facility. The Credit Facility permits the
Company to obtain revolving credit loans and to issue letters of credit for
the account of the Company from time to time in an aggregate amount not to
exceed the lesser of $200 million on the Borrowing Bases. Under an amendment
to the Credit Facility dated May 17, 1999 the Borrowing Base is $115 million
at June 30, 1999 and is subject to semi-annual
7
determination and certain other redeterminations based upon a variety of
factors, including the discounted present value of estimated future net cash
flow from the Company's natural gas and crude oil production. At the
Company's option, loans may be prepaid, and revolving credit commitments may
be reduced in whole or in part at any time in certain minimum amounts. The
Company can designate the interest rate on amounts outstanding at either the
London Interbank Offered Rate (LIBOR) + 2.375 percent, or at bank prime rate.
On March 4, 1999, the Company locked in its interest rate at 7.38 percent for
six months. 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 dividend restrictions and restrictive
covenants, which, among other things, require the maintenance of a minimum
current ratio. The Company currently is in compliance with all such
restrictions.
4. UNEARNED REVENUES
The Quicksilver properties include certain properties which carry IRS code
Section 29 income tax benefits. Code Section 29 allows a credit against
regular federal income tax liability for certain eligible natural gas
production. During 1997, these credits were conveyed through the sale of the
working interests to a bank. The agreement with the bank provided that the
Company would receive cash payment for future production on the properties
and payment for a portion of the tax credits taken by the bank. The agreement
included a fixed payment note which provides for the Company to receive a
minimum of approximately $7 million plus interest for the future production
on the properties. A portion of the initial cash payment represented an
advance payment for the first eighteen months of tax benefits. As of June 30,
1999, and December 31, 1998, a balance of $892,000 and $1,338,000,
respectively, in unearned revenues existed as a result of the cash
consideration received in excess of the tax benefit earned.
5. STOCKHOLDERS' EQUITY
The Company is authorized to issue 40 million shares of common stock with a
par value of one cent ($0.01) and 10 million shares of preferred stock with a
par value of one cent ($0.01).
As part of the merger with MSR Exploration Ltd., the Company agreed to
exchange one share of its common stock for each ten shares of MSR common
stock. To effect the exchange ratio, the founding shareholders of the Company
were issued an additional 10,210,800 shares, prior to the merger, in the form
of a stock dividend. Upon completion of the merger, the founding shareholders
owned 10,310,800 (80%) of the shares of the Company and former MSR
shareholders owned approximately 2,577,700 (20%) of the common shares of the
Company. A total of 1,200,000 shares of MSR common stock were held under
common control, and 1,377,700 shares were held by minority shareholders. All
references to numbers of shares and per share amounts in the financial
statements dated prior to the effective date of the merger, March 4, 1999,
have been restated to reflect the stock dividend plus 1,200,000 shares held
under common control or a total of 11,510,800 common shares.
The Company now has 12,888,500 shares of common stock outstanding. As part of
the Unocal Property addition, the Company placed 404,381 unregistered shares
in escrow (see note 2 and 6). Outstanding options and warrants for MSR stock
were converted into options and warrants to purchase Company common stock. As
a result of the merger, the Company has outstanding warrants to purchase
common stock of 555,000 shares at $12.50 per share, 555,000 shares at $20.00
per share, 28,000 shares at $33.75 per share, and 6,000 shares at $0.01 per
share, and options to purchase 24,857 shares of common stock at $8.75 per
share. Such options and warrants are anti-dilutive at June 30, 1999 and
therefore are not included in earnings per share.
6. CONTINGENCIES
The Company's customers are large natural gas and crude oil purchasers. The
Company does not generally require collateral, and receivables are usually
due and collected in 30 to 60 days. On March 10, 1999, one of the Company's
natural gas purchasers filed for protection under Chapter 11 of the Federal
Bankruptcy Code. Management considers a portion of the approximately
$2,450,000 account receivable associated with this purchaser to be
uncollectible; accordingly, an allowance for doubtful accounts of $1,350,000
was established in the first
8
quarter and remains in place at June 30, 1999. All contracts with that
purchaser have been terminated, and the gas has been recontracted with a
credit-worthy purchaser. The Company believes that based on information
currently available regarding the bankruptcy proceeding, the net receivable
will be recovered.
In connection with the purchase of certain properties from Unocal (see note
2), the Company placed 404,381 unregistered shares of Company common stock in
escrow. These shares will be distributed to Unocal over a three-year period,
subject to downward adjustment pending the resolution of certain
contingencies. Such shares, which are not considered outstanding at June 30,
1999, will become outstanding as they are distributed following the
resolution of the contingencies.
QUICKSILVER RESOURCES INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 ("Securities Act")
and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). Such
forward-looking statements involve risks and uncertainties. The Company's actual
results could differ materially from those set forth in the forward-looking
statements as a result of certain factors including those set forth as risk
factors in the Company's other filings under the Securities Act and the
Exchange Act.
LIQUIDITY AND CAPITAL RESOURCES
General
The following discussion compares the Company's financial condition at June
30, 1999, to its financial condition at December 31, 1998.
Prior to March 4, 1999, the stockholders of the Company approved the merger
with MSR. Pursuant to the merger, stockholders of MSR received approximately
2,577,700 shares of the Company's common stock. As a result of the merger,
MSR ceased to exist, and all of its assets and liabilities were transferred
to the Company. The merger was accounted for, in part, as a pooling of
interest; therefore the financial statements have been combined. The merged
net assets attributable to the minority interest shareholders have been
reported as a minority interest at December 31, 1998. Such minority interest
was acquired in March of 1999 and was accounted for under the purchase method
of accounting.
The Company believes that its cash flows from operations are adequate to meet
the requirements of its business. However, future cash flows are subject to a
number of variables including the level of production and prices, and there
can be no assurance that operations and other capital resources will provide
cash in sufficient amounts to maintain planned levels of capital expenditures.
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 approximately 70 percent of its natural gas production
under long term 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 as well as most
of the Company's crude oil sales. Because of price weakness of oil and
natural gas in 1998 and early 1999, the Company has reduced its development
and exploration budget.
The Company's net cash provided by operations for the six months ended June
30, 1999, was $2,166,000 compared to $11,148,000 for the same period last
year. The reduction resulted from lower earnings and the repayment of a
portion of the amounts owed Mercury Exploration Company.
9
The Company's net cash used in investing for the six months ended June 30,
1999, was $31,097,000, including $25.8 million for the Unocal property
acquisition (see note 2 to the condensed consolidated financial statements).
Investing activities were comprised primarily of additions to oil and gas
properties through acquisitions and development and, to a lesser extent,
exploration and additions of field service assets. The Company's activities
have been financed through a combination of operating cash flow and bank
borrowings. The Company's net cash from financing activities for the three
months ended June 30, 1999, was $28,769,000. Sources of financing used by the
Company primarily have been borrowings under its Credit Facility.
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. Under an amendment to the Credit
Facility dated May 17, 1999 the Borrowing Base is $115 million at June 30,
1999, and is subject to semi-annual determination and certain other
redeterminations based upon a variety of factors, including the discounted
present value of estimated future net cash flow from 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) + 2.375
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 dividend restrictions
and restrictive covenants, which, among other things, require the maintenance
of a minimum current ratio.
RESULTS OF OPERATIONS
Quicksilver's revenue, profitability, and future rate of growth are
substantially dependent upon prevailing prices for natural gas and crude oil,
which are dependent upon numerous factors such as economic, political, and
regulatory developments as well as competition from other sources of energy.
The energy markets historically have been highly volatile, and future
decreases in prices could have a materially adverse effect on Quicksilver's
financial position, results of operations, quantities of reserves that may be
economically produced, and access to capital.
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto and with the
Company's audited combined consolidated financial statements and notes
thereto for the fiscal year ended December 31, 1998.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Total revenues for the three months ended June 30, 1999 were
$11,554,000, an increase of almost 9% from the $10,635,000 reported in the
three months ended June 30, 1998.
Gas sales of $7,809,000 in the three month 1999 period were down 4% from the
$8,127,000 in 1998. Although volumes were stronger at 4,028,000 Mcf in 1999,
compared to 3,848,000 in 1998, average prices decreased from $2.11 per Mcf in
1998 to $1.94 average per Mcf in 1999. Volumes increased as the result of the
property purchase from Unocal during the second quarter 1999, somewhat offset
by an over allocation of gas during the second quarter 1998. During 1999 the
Company received its normal allocations. The decrease in average gas sales
prices reflects the sale of certain volumes, which were previously sold under
contract to a customer who declared bankruptcy, to a new customer in the
second quarter of 1999 at a lower price. That volume has now been contracted
for sale at higher prices.
Oil sales in the second three- month period of 1999 totaled $2,499,000, an
increase of 38% over the same period in 1998. Volumes of 186,000 barrels sold
in 1999 were the same as the volumes of barrels sold in 1998. Average prices
received for the sales of oil in the three months ended June 30, 1999 were
$13.44, up from the average price of $9.70 received in the 1998 three-months
period, reflecting the improvement in oil prices during 1999 compared to 1998.
10
Other income increased to $1,246,000 in the three months ended June 30, 1999,
compared to $703,000 in 1998, the result of higher gas processing and
transportation fees earned.
EXPENSES. Total expenses of $11,215,000 in the three months ended June 30,
1999 were 28% higher than the $8,764,000 expenses incurred during the
comparable period in 1998. Operating expenses were $4,842,000 in the second
quarter of 1999, a 32% increase from the $3,664,000 in the 1998 quarter.
Higher volumes sold, certain well workovers, the settlement of an audit
dispute on some expenses from an earlier acquisition, and the addition of the
properties acquired from Unocal during the 1999 period all contributed to the
higher expenses.
Depletion and depreciation increased to $3,314,000 in the three months ended
June 30, 1999, from the $3,043,000 for the same period in 1998. Higher sales
volumes in 1999 resulted in higher depletion expense.
General and administrative expenses of $1,016,000 in the second quarter of
1999 increased significantly from the $321,000 reported in the second quarter
of 1998. Legal and professional fees were higher as a result of the
additional compliance costs required of a larger, public company, and
salaries increased due to the required increase in personnel.
Interest expense was $2,043,000 in the three months ended June 30, 1999
compared to $1,736,000 incurred in the same period of 1998. Higher debt
levels during 1999, primarily for the acquisition of the properties from
Unocal, caused this increase in interest expense.
NET INCOME. Net income of $224,000 in the second quarter of 1999 decreased
from the 1998 period as higher operating and other expenses were only
somewhat offset by higher revenues.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Total revenues for the six months ended June 30, 1999 were
$20,585,000, a 4% decrease from the $21,426,000 of total revenues for the
same period in 1998.
Gas sales for the 1999 period were $15,005,000, an 8% decrease from 1998
revenues of $16,257,000. Sales volumes decreased from 7,741,000 Mcf to
7,381,000 Mcf as the result of over allocation of gas to the Company in 1998
and the 1999 workover projects at the Garfield Unit. During the first six
months of 1999, the Company sold its gas at an average price of $2.03 per Mcf
compared to $2.10 in the 1998 period.
Oil sales during the first half of 1999 of $3,430,000 were down 10% from the
1998 period; a 16% increase in average prices was more than offset by a 22%
decrease in volumes. Shutting-in of wells during the period of historically
low oil prices causing the drop in oil production volumes. Other income
increased from higher processing and transportation fees.
EXPENSES. Total expenses for the first half of 1999 were $21,122,000, a 20%
increase over 1998. Operating expenses of $8,069,000 increased 9% over 1998
as the result of higher workovers and the settlement of an audit dispute.
Depletion and depreciation expense of $6,129,000 was slightly higher than in
1998 as decreased sales volumes was more than offset by a higher depletion
cost per unit. The provision for doubtful accounts was established in the
first quarter of 1999 to provide for amounts due from the natural gas
purchaser that declared bankruptcy. General and administrative expenses of
$1,836,000 increased significantly over the 1998 period reflecting the higher
costs associated with being a larger, public company. Interest expense rose
to $3,738,000 from higher debt levels in 1999, primarily from the acquisition
of the properties from Unocal.
NET INCOME (LOSS). The Company reported a net loss of $261,000 during the
first half of 1999 compared to net income of $2,586,000 in 1998. Lower
revenues and higher expenses, including the provision for doubtful accounts
and the general and administrative expense increase, resulted in the loss.
YEAR 2000
Quicksilver Resources Inc. has developed a plan (the "Year 2000 Plan") to
address the Year 2000 issue created by computer programs and applications
that utilize two digit rather than four digit date fields to designate a
year. As a
11
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 Company believes that all of its computer equipment and software
as well as its operational and control systems are currently Year 2000
compliant.
Quicksilver is also monitoring the compliance efforts of the significant
suppliers, customers, and service providers with whom it does business and
whose IT and non-IT systems interface with those of the Company to ensure
that they will be Year 2000 compliant. Management believes that ongoing
communications with and assessment of the compliance efforts of these third
parties will minimize any noncompliance risks.
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 likely worst case scenario, which to date has
not been clearly identified. The Company plans to continue such analysis and
complete a plan by the end of the third quarter of 1999.
Although the Company does not expect to experience significant operational
problems due to the Year 2000 issue, there can be no assurance that this
issue will not materially impact the Company's results of operations or
adversely affect its relationship with customers or vendors. 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 3. MARKET RISK.
The Company sells approximately 70% of its natural gas under long term, fixed
price contracts, and, therefore, has significant predictability of its
natural gas revenues. Commodity market price fluctuations affect those
natural gas volumes, which are not sold under contract, and also affect the
Company's crude oil sales, which were not hedged. In April of 1999,
Quicksilver entered into a contract to swap 7,500 Mcf per day at $2.40 per
Mcf. The contract, which expires in April 2004, increased the Company's
revenues by an insignificant amount in the second quarter of 1999.
In addition, the Company has entered into interest rate swap agreements
covering $50,000,000 of its debt; these agreements convert floating rate debt
to 5.7% fixed rate debt. Interest expense increased $61,000 over the six
months ended June 30, 1998, as a result of these rate swaps.
QUICKSILVER RESOURCES INC.
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities:
Reference is made to Note 2 of the condensed notes to consolidated financial
statements appearing in Part I of this report. The 404,381 unregistered
shares of the Company's common stock issued to Unocal in May 1999 were issued
in reliance upon the exemption contained in Section H(2) of the Securities
Act of 1933, as amended.
12
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 15. Letter re unaudited interim financial information.
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K:
May 17, 1999 purchase by the Company of certain properties from Union
Oil Company of California.
QUICKSILVER RESOURCES INC.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 5, 1999
Quicksilver Resources Inc.
By: /s/ Glenn M. Darden
----------------------------------------
Glenn M. Darden
President and Chief Operating Officer
By: /s/ Bill Lamkin
-----------------------------------------
Bill Lamkin, Executive Vice President
and Chief Financial Officer
13