ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which management believes will have a material adverse effect on the Company’s consolidated results of operations or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company’s security holders during the fourth quarter of 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company’s common stock is listed for trading on the New York Stock Exchange under the symbol “CRK”. The following table sets forth, on a per share basis for the periods indicated, the high and low sales prices by calendar quarter for the periods indicated as reported by the New York Stock Exchange.
High Low --------- --------- 1999 First Quarter................. $ 3.88 $ 2.19 Second Quarter................ 5.13 2.44 Third Quarter................. 5.88 3.38 Fourth Quarter................ 4.50 2.63
2000 First Quarter................. $ 5.94 $ 2.44 Second Quarter................ 9.13 4.06 Third Quarter................. 13.13 6.13 Fourth Quarter................ 15.00 8.13
As of March 9, 2000, the Company had 29,139,469 shares of common stock outstanding, which were held by 526 holders of record and approximately 6,500 beneficial owners who maintain their shares in "street name" accounts.
The Company has never paid cash dividends on its common stock. The Company presently intends to retain any earnings for the operation and expansion of its business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of dividends will depend upon results of operations, capital requirements, the financial condition of the Company and such other factors as the Board of Directors of the Company may deem relevant. In addition, the Company is limited under its bank credit facility, its 1999 Series A Preferred Stock and the indenture for its senior notes due in 2007 from paying or declaring cash dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The historical financial data presented in the table below as of and for each of the years in the five-year period ended December 31, 2000 are derived from the Consolidated Financial Statements of the Company. The financial results are not necessarily indicative of the Company’s future operations or financial results. The data presented below should be read in conjunction with the Company’s Consolidated Financial Statements and the notes thereto included elsewhere herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Year Ended December 31, ------------------------------------------------------------- 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- Statement of Operations Data: ($ in thousands, except per share data) Revenues: Oil and gas sales ......................... $ 68,915 $ 88,555 $ 92,961 $ 90,103 $ 169,350 Gain on sales of property ................. 1,447 85 -- 130 33 Other income .............................. 593 704 274 1,911 319 --------- --------- --------- --------- --------- Total revenues .......................... 70,955 89,344 93,235 92,144 169,702 --------- --------- --------- --------- --------- Expenses: Oil and gas operating (1) ................. 13,838 17,919 24,747 23,714 29,707 Exploration ............................... 436 2,810 8,301 1,832 3,192 Depreciation, depletion and amortization .. 18,269 26,235 51,005 45,171 44,958 General and administrative, net ........... 2,239 2,668 1,617 2,399 3,537 Interest .................................. 10,086 5,934 16,977 23,361 24,611 Impairment of oil and gas properties ...... -- -- 17,000 -- -- --------- --------- --------- --------- --------- Total expenses .......................... 44,868 55,566 119,647 96,477 106,005 --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes ....................... 26,087 33,778 (26,412) (4,333) 63,697 Income tax benefit (expense) .............. -- (11,622) 9,244 1,517 (22,294) --------- --------- --------- --------- --------- Net income (loss) from continuing operations . 26,087 22,156 (17,168) (2,816) 41,403 Preferred stock dividends ................. (2,021) (410) -- (1,853) (2,471) --------- --------- --------- --------- --------- Net income (loss) from continuing operations attributable to common stock ............... 24,066 21,746 (17,168) (4,669) 38,932 Income from discontinued operations ....... 1,866 -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) attributable to common stock $ 25,932 $ 21,746 $ (17,168) $ (4,669) $ 38,932 ========= ========= ========= ========= ========= Weighted average shares outstanding: Basic ..................................... 15,449 24,186 24,275 24,601 26,290 ========= ========= ========= ========= ========= Diluted ................................... 21,199 26,008 34,219 ========= ========= ========= Basic earnings per share: Net income (loss) from continuing operations $ 1.56 $ 0.90 $ (0.71) $ (0.19) $ 1.48 Net income (loss)........................... 1.68 0.90 (0.71) (0.19) 1.48 Diluted earnings per share: Net income (loss) from continuing operations $ 1.23 $ 0.85 $ 1.21 Net income (loss)........................... 1.32 0.85 1.21 Other Financial Data: EBITDA(2)..................................... $ 54,878 $ 68,757 $ 66,871 $ 66,031 $ 136,458 Ratio of EBITDA to interest expense........... 5.4 11.3 3.5 2.8 5.5
As of December 31, ------------------------------------------------------------- 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- Balance Sheet Data: Cash and cash equivalents.................... $ 16,162 $ 14,504 $ 5,176 $ 7,648 $ 7,105 Property and equipment, net.................. 185,928 410,781 404,017 395,862 434,913 Total assets................................. 222,002 456,800 429,672 434,973 489,930 Total debt................................... 80,108 260,000 278,104 254,131 234,101 Stockholders' equity......................... 118,216 124,594 109,663 137,174 180,173 ------- (1) Includes lease operating costs and production and ad valorem taxes. (2) EBITDA means income (loss) from continuing operations before income taxes, plus interest, depreciation, depletion and amortization, exploration expense and impairment of oil and gas properties. EBITDA is a financial measure commonly used in the Company's industry and should not be considered in isolation or as a substitute for net income, cash flow provided by operating activities or other income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table reflects certain summary operating data for the periods presented:
Year Ended December 31, ---------------------------------------- 1998 1999 2000 ---------- ----------- ----------- Net Production Data: Oil (Mbbls).................................. 2,571 2,128 1,807 Natural gas (Mmcf)........................... 26,713 23,872 26,990 Natural gas equivalent (Mmcfe)............... 42,141 36,642 37,833 Average Sales Price: Oil (Mbbls).................................. $ 12.73 $ 17.35 $ 30.02 Natural gas (Mmcf)........................... 2.25 2.23 4.26 Average equivalent price (per Mcfe).......... 2.21 2.47 4.48 Expenses ($ per Mcfe): Oil and gas operating(1)..................... $ 0.59 $ 0.65 $ 0.79 General and administrative................... 0.04 0.07 0.09 Depreciation, depletion and amortization(2)........................... 1.20 1.20 1.15
Cash Margin ($ per Mcfe)(3)...................... $ 1.58 $ 1.75 $ 3.60
---- (1)Includes lease operating costs and production and ad valorem taxes. (2)Represents depreciation, depletion and amortization of oil and gas properties only. (3)Represents average equivalent price per Mcfe less oil and gas operating expenses per Mcfe and general and administrative expenses per Mcfe.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Comstock’ s oil and gas sales increased $79.2 million (88%) in 2000 to a record level of $169.4 million from $90.1 million in 1999. The substantial increase in revenues is due to significantly higher oil and gas prices in 2000 combined with a 3% increase in production. In 2000, the Company’s average oil price increased by 73% and its average gas price increased by 92% from 1999. Oil production decreased by 15% and natural gas production increased by 13% in 2000 as compared to 1999. Comstock expects production to increase to approximately 45 Bcfe in 2001 as result of its drilling activities.
Other income for the year ended December 31, 2000 decreased $1.7 million to $352,000 from $1.9 million for the year ended December 31, 1999. Included in other income for 1999 was an insurance recovery in the amount of $1.7 million received by the Company.
Oil and gas operating expenses, including production taxes, increased $6.0 million (25%) to $29.7 million in 2000 from $23.7 million in 1999. Oil and gas operating expenses per equivalent Mcf produced increased $0.14 to $0.79 in 2000 from $0.65 for 1999. The increases are related to higher production taxes resulting from the higher oil and gas prices in 2000 as well as an increase of $3.6 million in Comstock’s lifting costs relating to new wells put into production in 2000.
In 2000, the Company had $3.2 million in exploration expense which represents the write-off of five offshore exploratory dry holes (1.5 net). Exploration expense for 1999 was $1.8 million which related to the write-off of four dry holes (0.9 net).
Depreciation, depletion and amortization ("DD&A") decreased $213,000 to $45.0 million in 2000 from $45.2 million in 1999. DD&A per equivalent Mcf produced was $1.15 for 2000, a decrease from the DD&A rate of $1.20 in 1999.
General and administrative expenses, which are reported net of overhead reimbursements, increased $1.1 million (47%) to $3.5 million in 2000 from $2.4 million in 1999. The increase was primarily due to higher compensation paid to the Company’s personnel in 2000.
Interest expenses increased $1.2 million (5%) to $24.6 million for 2000 from $23.4 million for 1999. The increase is related to a higher average interest rate on the Company’s debt. The interest rate on the Company’s senior notes (11.25%) issued to refinance $150.0 million of indebtedness under the bank credit facility on April 29, 1999 was significantly higher than the interest rates charged under the bank credit facility. The weighted average interest rate under the Company’s bank credit facility was 6.9% for 2000, a decrease from the weighted average rate of 7.2% in 1999.
For 2000 the Company reported net income of $38.9 million, after preferred stock dividends of $2.5 million, as compared to a net loss of $4.7 million for year ended December 31, 1999, after preferred stock dividends of $1.9 million. Net income per share for 2000 was $1.21 on diluted weighted average shares outstanding of 34.2 million as compared to net loss per share of $0.19 for 1999 on weighted average shares outstanding of 24.6 million.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The Company’s oil and gas sales decreased $2.9 million (3%) in 1999, to $90.1 million from $93.0 million in 1998 due to a decrease in oil and natural gas production largely offset by higher oil prices in 1999. In 1999, the Company’s average oil price increased by 36% and its average gas price decreased by 1%. The Company hedged 39% of its 1999 natural gas production at a fixed price of $2.03 per Mcf. Without the impact of the hedge, the Company would have realized $2.43 per Mcf in 1999. In 1999, the Company’s oil production decreased by 17% and natural gas production decreased by 11%. The production declines in 1999 were principally attributable to the significantly lower drilling activity in the first half of 1999.
Other income for the year ended December 31, 1999 increased $1.6 million to $1.9 million from $274,000 for the year ended December 31, 1998. Included in other income for 1999 is a $1.7 million insurance recovery received by the Company on an exploratory well drilled in 1998 which was written off when the well was abandoned due to encountering numerous well control problems.
Oil and gas operating expenses, including production taxes, decreased $1.0 million (4%) to $23.7 million in 1999 from $24.7 million in 1998. Oil and gas operating expenses per equivalent Mcf produced increased $0.06 to $0.65 for the year ended December 31, 1999 from $0.59 for the year ended 1998 due to the 13% decrease in oil and natural gas production (on an equivalent Mcf basis) and the fixed nature of most of the Company’s lifting costs.
In 1999, the Company had $1.8 million in exploration expense which represents the write off of four offshore exploratory dry holes (.9 net). Exploration expense for 1998 of $8.3 million relates to the write off of the six dry holes (2.9 net) drilled in the Gulf of Mexico during 1998.
DD&A decreased $5.8 million (11%) to $45.2 million in 1999 from $51.0 million in 1998 due to the 13% decrease in oil and natural gas production. DD&A per equivalent Mcf produced was $1.20 for the year ended December 31, 1999 which remained unchanged from 1998‘s DD&A rate. Included in DD&A in 1999 is $538,000 relating to the amortization of costs associated with the issuance of the Company’s senior notes in April 1999.
General and administrative expenses, which are reported net of overhead reimbursements, increased $782,000 (48%) to $2.4 million in 1999 from $1.6 million in 1998. The increase relates to a $225,000 litigation settlement paid in 1999, a decrease in drilling overhead reimbursements received by the Company in 1999 due to the lower level of drilling in 1999 and higher personnel costs incurred in 1999.
Interest expense increased $6.4 million (38%) to $23.4 million for the year ended December 31, 1999 from $17.0 million for the year ended December 31, 1998. The Company capitalized interest expense of $2.3 million in 1998 on its unevaluated properties, while in 1999, no interest expense was capitalized. The remaining increase is related to a higher average interest rate on the Company’s debt. The weighted average annual interest rate under the Company’s bank credit facility was 7.2% for 1999, the same as the weighted average rate in 1998. The interest rate on the Company’s senior notes issued to refinance $150.0 million of amounts outstanding under the bank credit facility on April 29, 1999 (11.25%) was significantly higher than the 7.2% rate charged under the bank credit facility in 1998.
The Company reported a net loss of $4.7 million after preferred stock dividends of $1.9 million for the year ended December 31, 1999, as compared to a net loss of $17.2 million for year ended December 31, 1998. Net loss per share for 1999 was $0.19 on weighted average shares outstanding of 24.6 million as compared to net loss per share of $0.71 for 1998 on weighted average shares outstanding of 24.3 million.
Liquidity and Capital Resources
Funding for the Company’s activities has historically been provided by operating cash flow, debt and equity financings and asset dispositions. In 2000, the Company’s net cash flow provided by operating activities totaled $112.1 million before changes to other working capital accounts. The other primary funding source in 2000 was borrowings of $18.0 million under the Company’s revolving bank credit facility.
The Company’s primary needs for capital, in addition to funding of ongoing operations, relate to the acquisition, development and exploration of oil and gas properties and the repayment of debt. In 2000, the Company incurred capital expenditures of $83.4 million primarily for development, exploration and acquisition activities and reduced amounts outstanding under its bank credit facility by $38.0 million.
The Company’s annual capital expenditure activity is summarized as follows:
Year Ended December 31, ---------------------------- 1998 1999 2000 ------- ------- ------- Acquisitions of oil and gas properties... $ 2,453 $ 4,458 $ 9,684 Other leasehold costs ................... 3,622 2,258 6,964 Workovers and recompletions ............. 10,198 4,472 10,252 Offshore production facilities .......... -- 4,462 1,629 Development drilling .................... 20,361 11,521 35,047 Exploratory drilling .................... 30,423 8,126 19,202 Other ................................... 330 684 616 ------- ------- ------- Total ............................... $67,387 $35,981 $83,394 ======= ======= =======
The timing of most of the Company’s capital expenditures is discretionary with no material long-term capital expenditure commitments. Consequently, the Company has a significant degree of flexibility to adjust the level of such expenditures as circumstances warrant. The Company spent $64.6 million, $30.8 million and $73.1 million on development and exploration activities in 1998, 1999 and 2000, respectively. The Company currently anticipates spending approximately $100.0 million on development and exploration projects in 2001. The Company intends to primarily use internally generated cash flow to fund capital expenditures other than significant acquisitions.
The Company spent $2.5 million, $4.5 million and $9.7 million on acquisition activities in 1998, 1999 and 2000 respectively. The Company does not have a specific acquisition budget for 2001 as a result of the unpredictability of the timing and size of forthcoming acquisition activities. The Company intends to use borrowings under its bank credit facility, or other debt or equity financings to the extent available, to finance significant acquisitions. The availability and attractiveness of these sources of financing will depend upon a number of factors, some of which will relate to the financial condition and performance of the Company, and some of which will be beyond the Company’s control, such as prevailing interest rates, oil and gas prices and other market conditions.
The Company has a bank credit facility consisting of a $250.0 million revolving credit commitment provided by a syndicate of banks for which Bank One, NA serves as administrative agent. Indebtedness under the bank credit facility is secured by substantially all of the Company’s assets and is subject to borrowing base availability which is generally redetermined semiannually based on the banks’ estimates of the future net cash flows of the Company’s oil and gas properties. The borrowing base under the bank credit facility is currently $205.0 million. Such borrowing base may be affected from time to time by the performance of the Company’s oil and gas properties and changes in oil and gas prices. The determination of the Company’s borrowing base is at the sole discretion of the administrative agent and the bank group. The revolving credit line under the bank credit facility bears interest at the option of the Company, based on the utilization of the borrowing base, at either (i) LIBOR plus 1.25% to 2.0% or (ii) the “corporate base rate” plus 0.25% to 1.0%. The Company incurs a commitment fee, based on the utilization of the borrowing base, of 0.25% to 0.5% per annum on the unused portion of the borrowing base. As of December 31, 2000, $84.0 million was outstanding under the bank credit facility. The revolving credit line matures on December 9, 2002 or such earlier date as the Company may elect. The bank credit facility contains covenants which, among other things, restrict the payment of cash dividends, limit the amount of consolidated debt, and limit the Company’s ability to make certain loans and investments. Significant financial covenants include the maintenance of a current ratio, as defined, (1.0 to 1.0), maintenance of tangible net worth ($105.0 million), and maintenance of an interest coverage ratio (2.5 to 1.0).
The Company believes that cash flow from operations and available borrowings under the Company’s bank credit facility will be sufficient to fund its operations and future growth as contemplated under its current business plan. However, if the Company’s plans or assumptions change or if its assumptions prove to be inaccurate, the Company may be required to seek additional capital. Management cannot be assured that the Company will be able to obtain such capital or, if such capital is available, that the Company will be able to obtain it on acceptable terms.
Federal Taxation
At December 31, 2000, the Company had federal income tax net operating loss (“NOL”) carryforwards of approximately $38.0 million. The NOL carryforwards expire from 2009 through 2019. The value of these carryforwards depends on the ability of the Company to generate federal taxable income and to utilize the carryforwards to reduce such income.
Year 2000
“Year 2000,” or the ability of computer systems to process dates with years beyond 1999, affects almost all companies and organizations. Computer systems that were not Year 2000 compliant by January 1, 2000 may cause an adverse effect to companies and organizations that rely upon those systems. The Company assessed and corrected computer systems that were unable to properly process dates beyond 1999. The Company’s significant financial information systems are outsourced and the Company is relying on assurances from the providers that they are Year 2000 compliant. The Company’s costs related to Year 2000 have not been significant. The Company has not experienced any significant problems or delays related to Year 2000 subsequent to January 1, 2000. In addition, the Company does not expect any future material effects to arise from Year 2000.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company’s operations are impacted by fluctuations in crude oil and natural gas commodity prices and interest rates. The following discussion is intended to identify the nature of these market risks, describe the Company’s strategy for managing such risks, and to quantify the potential affect of market volatility on the Company’s financial condition and results of operations.
Oil and Natural Gas Prices
The Company’s financial condition, results of operations, and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond the control of the Company. These factors include the level of global demand for petroleum, foreign supply of oil and gas, the establishment of and compliance with production quotas by oil exporting countries, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic. It is impossible to predict future oil and natural gas prices with any degree of certainty. Sustained weakness in oil and natural gas prices may adversely affect the Company’s financial condition and results of operations, and may also reduce the amount of net oil and gas reserves that the Company can produce economically. Any reduction in oil and natural gas reserves, including reductions due to price fluctuations, can have an adverse affect on the Company’s ability to obtain capital for its exploration and development activities. Similarly, any improvements in oil and natural gas prices can have a favorable impact on the Company’s financial condition, results of operations and capital resources. Based on the Company’s oil and natural gas production in 2000, before taking into account any hedging transactions, a $1.00 change in the price per barrel of oil would result in a change in the Company’s cash flow for such period of approximately $1.9 million and a $1.00 change in the price per Mcf of natural gas would result in a change in the Company’s cash flow of approximately $28.3 million.
The Company periodically has utilized hedging transactions with respect to a portion of its oil and natural gas production to mitigate its exposure to price fluctuations. While the use of these hedging arrangements limits the downside risk of price declines, such use may also limit any benefits which may be derived from price increases. The Company has primarily used price swaps, whereby monthly settlements are based on differences between the prices specified in the instruments and the settlement prices of certain futures contracts quoted on the NYMEX or certain other indices. Generally, when the applicable settlement price is less than the price specified in the contract, the Company receives a settlement from the counterparty based on the difference. Similarly, when the applicable settlement price is higher than the specified price, the Company pays the counterparty based on the difference. During 2000, the Company did not hedge any of its oil and natural gas production. As of December 31, 2000, the Company had no open derivative financial instruments held for price risk management.
Interest Rates
At December 31, 2000, the Company had long-term debt of $234.0 million; of this amount, $150.0 million bears interest at a fixed rate of 11.25%. The fair market value of the fixed rate debt as of December 31, 2000 was $155.3 million based on the market price of 103.5 of the face amount as of the closing day of 2000. The remaining outstanding long-term debt of $84.0 million is under the Company’s bank credit facility which is subject to floating market rates of interest. Borrowings under the bank credit facility bear interest at a fluctuating rate that is linked to LIBOR or the corporate base rate, at the Company’s option. Any increases in these interest rates can have an adverse impact on the Company’s results of operations and cash flow. The Company entered into interest rate swap agreements to hedge the impact of interest rate changes on a large portion of its floating rate debt for part of 2000. As a result of the interest rate swaps in place, the Company realized gains of $1.0 million in 2000. As of December 31, 2000, the Company had no open derivative financing instruments held for interest rate management.
New Accounting Pronouncement
In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") which has been amended by SFAS 137 and SFAS 138. The Statement establishes accounting and reporting standards that are effective for fiscal years beginning after June 15, 2000 which require that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Such derivatives are reported at cost, if any, and gains and losses on such derivatives are reported when the hedged transaction occurs. Accordingly, if the Company uses derivatives in the future, SFAS 133 will have an impact on the reported financial position and comprehensive income of the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The Consolidated Financial Statements for Comstock Resources, Inc. and Subsidiaries are included on pages to of this report.
The financial statements have been prepared by the management of the Company in conformity with generally accepted accounting principles. Management is responsible for the fairness and reliability of the financial statements and other financial data included in this report. In the preparation of the financial statements, it is necessary to make informed estimates and judgments based on currently available information on the effects of certain events and transactions.
The Company maintains accounting and other controls which management believes provide reasonable assurance that financial records are reliable, assets are safeguarded, and that transactions are properly recorded in accordance with management’s authorizations. However, limitations exist in any system of internal control based upon the recognition that the cost of the system should not exceed benefits derived.
The Company’s independent public accountants, Arthur Andersen LLP, are engaged to audit the financial statements of the Company and to express an opinion thereon. Their audit is conducted in accordance with generally accepted auditing standards to enable them to report whether the financial statements present fairly, in all material respects, the financial position and results of operations of the Company in accordance with generally accepted accounting principles.
The Audit Committee of the Board of Directors of the Company, composed of three directors who are not employees, meets periodically with the independent public accountants and management. The independent public accountants have full and free access to the Audit Committee to meet, with and without management being present, to discuss the results of their audits and the quality of financial reporting.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2000.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2000.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the Company's definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2000.
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
The following exhibits are included on pages E-1 to E-4 of this report.
Exhibit No. Description ------------- ------------------------------------------------------------ 3.1(a) Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995).
3.1(b) Certificate of Amendment to the Restated Articles of Incorporation dated July 1, 1997 (incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-3, dated October 25, 1996).
4.1 Rights Agreement dated as of December 14, 2000, by and between the Company and American Stock Transfer and Trust Company, as Rights Agent (incorporated herein by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A dated January 11, 2001).
4.2 Certificate of Voting Powers, Designations, Preferences, and Relative, Participating, Optional or Other Special Rights of the Series A 1999 Convertible Preferred Stock and Series B 1999 Non-Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated April 29, 1999).
4.3 Stock Purchase Agreement dated April 29, 1999 between the Company and certain purchasers (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 29, 1999).
4.4 Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 2 to the Company Registration Statement on Form 8-A dated January 11, 2001.
4.5 Indenture dated as April 29, 1999 between the Company and U.S. Trust Company of Texas, N.A., Trustee for the $150,000,000 11 1/4% Senior Notes due 2007 (incorporated herein by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K dated April 29, 1999).
10.1 Amended and Restated Credit Agreement dated as of November 7, 2000, between the Company, the Banks Party thereto and Bank One, NA, as Administrative Agent, Toronto Dominion (Texas), Inc., as Syndication Agent and Paribas, as Documentation Agent (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
10.2# Employment Agreement dated May 16, 2000, by and between the Company and M. Jay Allison (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
10.3# Employment Agreement dated May 16, 2000, by and between the Company and Roland O. Burns (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
10.4# Comstock Resources, Inc. 1999 Long-term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.5# Form of Nonqualified Stock Option Agreement between the Company and certain officers and directors of the Company (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the year ended June 30, 1999).
10.6# Form of Restricted Stock Agreement between the Company and certain officers of the Company (incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.7 Warrant Agreement dated December 9, 1997 by and between the Company and Bois d' Arc Resources (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
10.8 Joint Exploration Agreement dated December 8, 1997 by and between the Company and Bois d' Arc Resources (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
10.9 Office Lease Agreement dated August 12, 1997 between the Company and Briar Center LLC (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).
21* Subsidiaries of the Company.
23* Consent of Arthur Andersen LLP.
---------------- *Filed herewith. # Management contract or compensatory plan document.
Reports on Form 8-K:
Form 8-K Reports filed subsequent to September 30, 2000 are as follows:
Date Item Description --------------------- ------- ------------------------- December 8, 2000 5 Stock Repurchase Plan December 18, 2000 5 Stockholder Rights Plan
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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.
COMSTOCK RESOURCES, INC
By:/s/M. JAY ALLISON
M. Jay Allison
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 9, 2001
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.
/s/M. JAY ALLISON
M. Jay Allison President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
March 9, 2001
/s/ROLAND O. BURNS
Roland O. Burns Senior Vice President, Chief Financial
Officer, Secretary, Treasurer and Director
(Principal Financial and Accounting Officer)
March 9, 2001
/s/FRANKLIN B. LEONARD
Franklin B. Leonard Director
March 9, 2001
/s/CECIL E. MARTIN, JR.
Cecil E. Martin, Jr. Director
March 9, 2001
/s/DAVID W. SLEDGE
David W. Sledge Director
March 9, 2001
CONSOLIDATED FINANCIAL STATEMENTS OF COMSTOCK RESOURCES, INC. AND SUBSIDIARIES INDEX
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 2000
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1999 and 2000
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Comstock Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Comstock Resources, Inc. (a Nevada corporation) and subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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, the financial statements referred to above present fairly, in all material respects, the financial position of Comstock Resources, Inc. and subsidiaries as of December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 16, 2001
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 2000
ASSETS December 31, ---------------------- 1999 2000 --------- --------- (In thousands) Cash and Cash Equivalents .................................. $ 7,648 $ 7,105 Accounts Receivable: Oil and gas sales ........................................ 18,200 34,637 Joint interest operations ................................ 5,415 4,574 Other Current Assets ....................................... 909 2,842 --------- --------- Total current assets .............................. 32,172 49,158 Property and Equipment: Unevaluated oil and gas properties ....................... 2,231 5,206 Oil and gas properties, successful efforts method ........ 581,247 659,505 Other .................................................... 2,163 2,589 Accumulated depreciation, depletion and amortization ..... (189,779) (232,387) --------- --------- Net property and equipment ........................ 395,862 434,913
Other Assets ............................................... 6,939 5,859 --------- --------- $ 434,973 $ 489,930 ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Portion of Long-Term Debt .......................... $ 131 $ 101 Accounts Payable and Accrued Expenses ...................... 35,587 45,544 --------- --------- Total current liabilities ......................... 35,718 45,645 Long-Term Debt, less current portion ....................... 254,000 234,000 Deferred Taxes Payable ..................................... 261 22,555 Reserve for Future Abandonment Costs ....................... 7,820 7,557 Stockholders' Equity: Preferred stock--$10.00 par, 5,000,000 shares authorized, 3,000,000 and 1,757,310 shares outstanding at December 31, 1999 and 2000, respectively.. 30,000 17,573 Common stock--$0.50 par, 50,000,000 shares authorized, 25,375,197 and 28,837,755 shares outstanding at December 31, 1999 and 2000, respectively.. 12,688 14,419 Additional paid-in capital ................................ 114,855 129,896 Retained earnings (deficit) ............................... (19,603) 19,329 Deferred compensation-restricted stock grants ............. (766) (1,044) --------- --------- Total stockholders' equity .......................... 137,174 180,173 --------- --------- $ 434,973 $ 489,930 ========= =========
The accompanying notes are an integral part of these statements.
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1999 and 2000
1998 1999 2000 --------- --------- --------- (In thousands, except per share amounts) Revenues: Oil and gas sales ....................... $ 92,961 $ 90,103 $ 169,350 Gain on sales of property ............... -- 130 33 Other income ............................ 274 1,911 319 --------- --------- --------- Total revenues ................. 93,235 92,144 169,702 --------- --------- --------- Expenses: Oil and gas operating ................... 24,747 23,714 29,707 Exploration ............................. 8,301 1,832 3,192 Depreciation, depletion and amortization 51,005 45,171 44,958 General and administrative, net ......... 1,617 2,399 3,537 Interest ................................ 16,977 23,361 24,611 Impairment of oil and gas properties .... 17,000 -- -- --------- --------- --------- Total expenses ................. 119,647 96,477 106,005 --------- --------- --------- Income (loss) before income taxes ............ (26,412) (4,333) 63,697 Income tax benefit (expense) ................. 9,244 1,517 (22,294) --------- --------- --------- Net income (loss) ............................ (17,168) (2,816) 41,403 Preferred stock dividends .................... -- (1,853) (2,471) --------- --------- --------- Net income (loss) attributable to common stock $ (17,168) $ (4,669) $ 38,932 ========= ========= ========= Net income (loss) per share: Basic........................... $ (0.71) $ (0.19) $ 1.48 ========= ========= ========= Diluted......................... $ 1.21 ========= Weighted average shares outstanding: Basic........................... 24,275 24,601 26,290 ========= ========= ========= Diluted......................... 34,219 =========
The accompanying notes are an integral part of these statements.
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 1998, 1999 and 2000
Deferred Additional Retained Compensation- Preferred Common Paid-In Earnings Restricted Stock Stock Capital (Deficit) Stock Grants Total ---------- ---------- ---------- ---------- ---------- ---------- (In thousands) Balance at December 31, 1997........ $ -- $ 12,104 $ 110,273 $ 2,234 $ (17) $ 124,594 Issuance of common stock.......... -- 71 664 -- -- 735 Value of stock options issued for exploration prospects...... -- -- 1,495 -- -- 1,495 Restricted stock grants........... -- -- -- -- 7 7 Net loss attributable to common stock................... -- -- -- (17,168) -- (17,168) ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1998........ -- 12,175 112,432 (14,934) (10) 109,663 ---------- ---------- ---------- ---------- ---------- ---------- Issuance of preferred stock....... 30,000 -- -- -- -- 30,000 Issuance of common stock.......... -- 400 1,166 -- -- 1,566 Value of stock options issued for exploration prospects...... -- -- 498 -- -- 498 Restricted stock grants........... -- 113 759 -- (756) 116 Net loss attributable to common stock................... -- -- -- (4,669) -- (4,669) ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1999........ 30,000 12,688 114,855 (19,603) (766) 137,174 ---------- ---------- ---------- ---------- ---------- ---------- Conversion of preferred stock..... (12,427) 1,553 10,874 -- -- -- Issuance of common stock.......... -- 150 706 -- -- 856 Value of stock options issued for exploration prospects...... -- -- 2,990 -- -- 2,990 Restricted stock grants........... -- 28 471 -- (278) 221 Net income attributable to common stock................... -- -- -- 38,932 -- 38,932 ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2000........ $ 17,573 $ 14,419 $ 129,896 $ 19,329 $ (1,044) $ 180,173 ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1999 and 2000
1998 1999 2000 --------- --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ....................................... $ (17,168) $ (2,816) $ 41,403 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Compensation paid in common stock ..................... 269 247 314 Depreciation, depletion and amortization .............. 51,005 45,171 44,958 Impairment of oil and gas properties .................. 17,000 -- -- Deferred income taxes ................................. (9,244) (1,517) 22,294 Exploration ........................................... 8,301 1,832 3,192 Gain on sales of property ............................. -- (130) (33) --------- --------- --------- Working capital provided by operations .............. 50,163 42,787 112,128 Decrease (increase) in accounts receivable .............. 13,380 (5,754) (15,596) Decrease (increase) in other current assets ............. (1,285) 548 (1,933) Increase (decrease) in accounts payable and accrued expenses ...................................... (21,532) 935 9,957 --------- --------- --------- Net cash provided by operating activities ........... 40,726 38,516 104,556 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of properties ....................... -- 778 33 Capital expenditures and acquisitions ................... (67,387) (35,981) (83,394) --------- --------- --------- Net cash provided by operating activities ........... (67,387) (35,203) (83,361) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings .............................................. 23,238 10,378 18,408 Proceeds from senior notes offering ..................... -- 149,221 -- Debt issuance costs ..................................... (1,059) (5,671) -- Principal payments on debt .............................. (5,134) (184,351) (38,438) Proceeds from preferred stock offering .................. -- 30,000 -- Proceeds from common stock issuances .................... 288 296 763 Stock issuance costs .................................... -- (714) -- Dividends paid on preferred stock ....................... -- -- (2,471) --------- --------- --------- Net cash provided by financing activities ............... 17,333 (841) (21,738) --------- --------- --------- Net increase (decrease) in cash and cash equivalents (9,328) 2,472 (543) Cash and cash equivalents, beginning of year ........ 14,504 5,176 7,648 --------- --------- --------- Cash and cash equivalents, end of year .............. $ 5,176 $ 7,648 $ 7,105 ========= ========= =========
The accompanying notes are an integral part of these statements.
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Business and Organization Comstock Resources, Inc., a Nevada corporation (together with its subsidiaries, the “Company”), was formed in 1919 as Comstock Tunnel and Drainage Company. In 1987, the Company’s name was changed to Comstock Resources, Inc. The Company is primarily engaged in the acquisition, development, production and exploration of oil and natural gas properties in the United States.
(2) Significant Accounting Policies Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
Although the Company’s cash equivalents and accounts receivable are exposed to credit loss, the Company does not believe such risk to be significant. Cash equivalents are high-grade, short-term securities, placed with highly rated financial institutions. Most of the Company’s accounts receivable are from a broad and diverse group of oil and gas companies and, accordingly, do not represent a significant credit risk.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil and gas operations. Under this method, costs of productive wells, development dry holes and productive leases are capitalized and amortized on a unit-of-production basis over the life of the remaining related oil and gas reserves. Cost centers for amortization purposes are determined on a field area basis. The estimated future costs of dismantlement, restoration and abandonment are accrued as part of depreciation, depletion and amortization expense and included in the accompanying Consolidated Balance Sheets as Reserve for Future Abandonment Costs.
Oil and gas leasehold costs are capitalized. Unproved oil and gas properties with significant acquisition costs are periodically assessed and any impairment in value is charged to expense. The costs of unproved properties which are determined to be productive are transferred to proved oil and gas properties. Exploratory expenses, including geological and geophysical expenses and delay rentals for unevaluated oil and gas properties, are charged to expense as incurred. Exploratory drilling costs are initially capitalized as unproved property but charged to expense if and when the well is determined not to have found proved oil and gas reserves.
In accordance with the Statement of Financial Accounting Standards 121 “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of”, the Company assesses the need for an impairment of capitalized costs of oil and gas properties on a property by property basis. If an impairment is indicated based on undiscounted expected future cash flows, then an impairment is recognized to the extent that net capitalized costs exceed discounted expected future cash flows. No impairment was required in 1999 or 2000. Due to the substantial drop in oil and gas prices during 1998, the Company provided an impairment of $17.0 million in 1998.
Other Property and Equipment
Other property and equipment of the Company consists primarily of work boats, gas gathering systems, computer equipment and furniture and fixtures which are depreciated over estimated useful lives on a straight-line basis.
Other Assets
Other assets of the Company primarily consists of deferred costs associated with issuance of the Company’s 11¼% senior notes and borrowings under the Company’s bank credit facility. These costs are amortized over the lives of the respective debt instruments on a straight-line basis.
Income Taxes
Deferred income taxes are provided to reflect the future tax consequences of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates.
Earnings Per Share
Basic and diluted earnings per share for 1998, 1999 and 2000 were determined as follows:
Year Ended December 31, -------------------------------------------------------------------------------------------- 1998 1999 2000 ----------------------------- ------------------------------ ---------------------------- Income Per Income Per Income Per (Loss) Shares Share (Loss) Shares Share (Loss) Shares Share -------- -------- -------- --------- --------- -------- -------- --------- -------
Basic Earnings Per Share: Income (Loss)............. $(17,168) 24,275 $ (2,816) 24,601 $ 41,403 26,290 Less Preferred Stock Dividends................ -- -- (1,853) -- (2,471) -------- -------- --------- --------- -------- -------- --------- ------- Net Income (Loss) Available to Common Stockholders... $(17,168) 24,275 $ (0.71) $ (4,669) 24,601 $ (0.19) 38,932 26,290 $ 1.48 ======== ======== ======== ========= ========= ======== ======== ========= ======= Diluted Earning Per Share: Effect of Dilutive Securities: Stock Options............ -- 1,184 Convertible Preferred Stock 2,471 6,745 -------- --------- Net Income Available to Common Stockholders and Assumed Conversions.... $ 41,403 34,219 $ 1.21 ======== ======== =======
Statements of Cash Flows
For the purpose of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
The following is a summary of all significant noncash investing and financing activities and cash payments made for interest and income taxes:
------------------------------ 1998 1999 2000 --------- --------- --------- Noncash activities - Common stock issued for compensation .................. $ 269 $ 131 $ 93 Value of vested stock options under exploration venture 1,495 498 2,990 Common stock issued in payment of preferred stock dividends .............................. -- 1,853 --
Cash payments - Interest payments ..................................... 19,898 20,840 24,731 Income tax payments ................................... -- -- --
Comprehensive Income
The Company had no comprehensive income components in each of the three years ended December 31, 2000; therefore, comprehensive income/ loss is the same as net income/ loss for all periods presented.
Segment Reporting
The Company presently operates in one business segment.
Derivative Instruments and Hedging Activities
In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) which has been amended by SFAS 137 and SFAS 138. The Statement establishes accounting and reporting standards that are effective for fiscal years beginning after June 15, 2000 which require that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met.
The Company periodically uses derivatives to hedge floating interest rates and oil and gas price risks. Such derivatives are reported at cost, if any, and gains and losses on such derivatives are reported when the hedged transaction occurs. Accordingly, if the Company uses derivatives in the future, SFAS 133 will have an impact on the reported financial position and comprehensive income of the Company. The Company adopted SFAS 133 on January 1, 2001, and since the Company had no outstanding derivatives, there was no effect on the Company’s financial statements as a result of such adoption.
(3) Oil and Gas Producing Activities Set forth below is certain information regarding the aggregate capitalized costs of oil and gas properties and costs incurred in oil and gas property acquisition, development and exploration activities:
Capitalized Costs
As of December 31, ---------------------- 1999 2000 --------- --------- (In thousands) Proved properties .............. $ 581,247 $ 659,505 Unproved properties ............ 2,231 5,206 Accumulated depreciation, depletion and amortization.... (189,270) (231,667) --------- --------- $ 394,208 $ 433,044 ========= =========
Costs Incurred
For the Year Ended December 31, ---------------------------- 1998 1999 2000 ------- ------- ------- (In thousands) Property acquisitions Proved properties.... $ -- $ 4,458 $11,302 Unproved properties.. 6,075 2,258 5,346 Development costs ....... 30,559 20,455 46,928 Exploration costs ....... 30,423 8,126 19,202 ------- ------- ------- $67,057 $35,297 $82,778 ======= ======= =======
The following presents the results of operations of oil and gas producing activities:
For the Year Ended December 31, ----------------------------------- 1998 1999 2000 --------- --------- --------- (In thousands) Oil and gas sales ............................. $ 92,961 $ 90,103 $ 169,350 Production costs .............................. (24,747) (23,714) (29,707) Exploration ................................... (8,301) (1,832) (3,192) Depreciation, depletion and amortization ...... (50,738) (44,118) (43,478) Impairment of oil and gas properties .......... (17,000) -- -- --------- --------- --------- Operating income (loss) ....................... (7,825) 20,439 92,973 Income tax benefit (expense)................... 2,739 (7,154) (32,541) --------- --------- --------- Results of operations (excluding general and administrative and interest expenses) $ (5,086) $ 13,285 $ 60,432 ========= ========= =========
(4) Long-Term Debt Long-term debt is comprised of the following:
As of December 31, 1999 2000 --------- --------- (In thousands) Revolving Bank Credit Facility $ 104,000 $ 84,000 11 1/4% Senior Notes due 2007 150,000 150,000 Other ........................ 131 101 --------- --------- 254,131 234,101 Less current portion ......... (131) (101) --------- --------- $ 254,000 $ 234,000 ========= =========
On April 29, 1999, the Company closed the sale of $150.0 million in aggregate principal amount of 11¼% Senior Notes due in 2007 (the “Notes”). Interest on the Notes is payable semiannually on May 1 and November 1, commencing on November 1, 1999. Proceeds from the sale of the Notes were used to reduce amounts outstanding under the Company’s bank credit facility. The Notes are unsecured obligations of the Company and are guaranteed by all of the Company’s principal operating subsidiaries. The Company can redeem the Notes beginning on May 1, 2004. The fair market value of the Notes as of December 31, 2000 was $155.3 million based on the market price of 103.5 of the face amount as of the closing day of 2000.
The Company’s bank credit facility consists of a $250.0 million revolving credit commitment provided by a syndicate of banks for which Bank One, NA serves as administrative agent. The borrowing base under the bank credit facility is $205.0 million. Such borrowing base may be affected from time to time by the performance of the Company’s oil and gas properties and changes in oil and gas prices. The determination of the Company’s borrowing base is at the sole discretion of the administrative agent and the bank group. The revolving credit line under the bank credit facility bears interest at the option of the Company, based on the utilization of the borrowing base, at either (i) LIBOR plus 1.25% to 2.0%, or (ii) the “corporate base rate” plus 0.25% to 1.0%. The Company incurs a commitment fee, based on the utilization of the borrowing base, of 0.25% to 0.5% per annum on the unused portion of the borrowing base. The revolving credit line matures on December 9, 2002 or such earlier date as the Company may elect. The bank credit facility contains covenants which, among other things, restrict the payment of cash dividends, limit the amount of consolidated debt, and limit the Company’s ability to make certain loans and investments. Significant financial covenants include the maintenance of a current ratio, as defined, (1.0 to 1.0), maintenance of tangible net worth ($124.5 million), and maintenance of an interest coverage ratio (2.5 to 1.0). The Company’s bank credit facility is secured by the Company’s oil and gas properties.
(5) Lease Commitments The Company rents office space under a noncancellable lease. Minimum future payments under the lease are as follows:
2001 ..... $ 423 2002 ..... 416 2003 ..... 416 2004 ..... 452 2005 ..... 477 Thereafter 196 ------ $2,380 ======
(6) Stockholders’ Equity Preferred Stock
On April 29, 1999, the Company sold 3,000,000 shares of newly issued convertible preferred stock with a $10 par value in a private placement for $30.0 million. The preferred stock accrues dividends at an annual rate of 9% which are payable quarterly in cash or in shares of the Company’s common stock, at the election of the Company. Shares of the preferred stock are convertible, at the option of the holder, into shares of common stock of the Company. Based on the initial conversion price of $4.00 per share of common stock, each share of preferred stock is convertible into 2.5 shares of common stock. On May 1, 2005 and on each May 1, thereafter, so long as any shares of the preferred stock are outstanding, the Company is obligated to redeem an amount of shares of preferred stock equal to one-third of the shares of the preferred stock outstanding on May 1, 2005 at $10.00 per share plus accrued and unpaid dividends. The mandatory redemption price may be paid either in cash or in shares of common stock, at the option of the Company. The Company has the option to redeem the shares of preferred stock upon payment to the holders of the preferred stock at a specified rate of return on the initial purchase. Upon a change of control of the Company, the holders of the preferred stock have the right to require the Company to purchase all or a portion of the preferred stock.
In September and October 2000, holders of 1,242,690 shares of the Company’s convertible preferred stock converted their shares into 3,106,725 shares of common stock. As a result of these conversions, $12.4 million of preferred stockholders’ equity was transferred to common stockholders’ equity.
Common Stock
Under a plan adopted by the Board of Directors, non-employee directors can elect to receive shares of common stock valued at the then current market price in payment of annual director and consulting fees. Under this plan, the Company issued 39,678, 44,255 and 8,182 shares of common stock in 1998, 1999 and 2000 respectively, in payment of fees aggregating $263,000, $130,000 and $93,000 for 1998, 1999 and 2000 respectively.
The Company’s outstanding preferred stock series provides that the Company can issue common stock in lieu of cash for payment of quarterly dividends. The Company issued 640,525 shares of common stock in 1999 in payment of dividends on its preferred stock of $1.9 million. The Company paid the preferred stock dividends in cash in 2000.
Options and warrants to purchase common stock of the Company were exercised for 102,000 shares, 115,000 shares and 291,400 shares in 1998, 1999 and 2000, respectively. Such exercises yielded net proceeds to the Company of approximately $288,000, $295,000 and $763,000 in 1998, 1999 and 2000, respectively.
Stock Options and Warrants
On June 23, 1999, the Company’s stockholders approved the 1999 Long-term Incentive Plan for the Company’s management including officers, directors and managerial employees which replaced the Company’s 1991 Long-term Incentive Plan. The 1999 Long-term Incentive Plan together with the 1991 Long-term Incentive Plan (the “Incentive Plans”) authorize the grant of non-qualified stock options and incentive stock options and the grant of restricted stock to key executives of the Company. As of December 31, 2000, the Incentive Plans provide for future awards of stock options or restricted stock grants of up to 292,382 shares of common stock plus 1% of the outstanding shares of common stock each year beginning January 1, 2001.
The following table summarizes stock option activity during 1998, 1999 and 2000 under the Incentive Plans:
Weighted Number Average of Shares Exercise Price Exercise Price --------- --------------- -------------- Outstanding at December 31, 1997.... 3,218,500 $2.00 to $12.38 $8.43 Granted ....................... 767,000 $3.44 to $11.94 $4.57 Exercised .......................... (85,000) $2.00 to $2.50 $2.38 Forfeited ..................... (10,000) $3.44 $3.44 --------- Outstanding at December 31, 1998.... 3,890,500 $2.00 to $12.38 $7.81 Granted ....................... 1,010,000 $3.88 $3.88 Exercised........................... (115,000) $2.00 to $3.00 $2.57 Forfeited ..................... (155,500) $3.00 to $12.38 $7.81 --------- Outstanding at December 31, 1999.... 4,630,000 $2.00 to $12.38 $7.08 Granted ....................... 351,250 $6.69 to $8.88 $8.24 Exercised........................... (291,400) $2.00 to $4.81 $2.62 --------- Outstanding at December 31, 2000.... 4,689,850 $2.00 to $12.38 $7.45 ========= Exercisable at December 31, 2000.... 2,765,100 $2.00 to $12.38 $7.33 =========
The following table summarizes information about the Incentive Plans stock options outstanding at December 31, 2000:
Number of Number of Shares Weighted Average Shares Exercise Price Outstanding Remaining Life Exercisable -------------- ----------- ---------------- -------------- (Years) $2.00 248,300 0.2 248,300 $2.50 20,000 1.5 20,000 $3.44 498,300 6.8 362,800 $3.88 1,005,000 7.3 288,750 $4.81 224,000 0.6 224,000 $6.56 235,000 1.1 235,000 $6.69 102,000 6.5 40,000 $6.94 150,000 3.0 150,000 $8.88 249,250 8.5 -- $9.63 90,000 1.5 90,000 $11.00 1,269,000 4.7 809,000 $11.94 40,000 2.4 40,000 $12.38 559,000 4.5 257,250 ---------- ------ -------------- 4,689,850 4.9 2,765,100 ========== ====== ==============
The Company accounts for the stock options issued under the Incentive Plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards 123 (“SFAS 123”) “Accounting for Stock-Based Compensation,” the Company’s net income attributable to common stock and earnings per share from continuing operations would have been reduced to the following pro forma amounts:
1998 1999 2000 --------- --------- -------- (In thousands, except per share amounts) Net income: As Reported.......... $ (17,168) $ (4,669) $ 38,932 Pro Forma............ (20,651) (6,644) 34,832 Basic earnings per share: As Reported.......... (0.71) (0.19) 1.48 Pro Forma............ (0.85) (0.27) 1.32 Diluted earnings per share: As Reported.......... 1.21 Pro Forma............ 1.02
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1998, 1999 and 2000, respectively: average risk-free interest rates of 5.3, 5.7 and 6.2 percent; average expected lives of 8.2, 8.8 and 7.8 years; average expected volatility factors of 58.8, 64.2 and 66.4; and no dividend yield. The estimated weighted average fair value of options to purchase one share of common stock issued under the Company’s Incentive Plans was $2.98 in 1998, $2.86 in 1999 and $5.98 in 2000.
On December 8, 1997, the Company awarded warrants to purchase up to 1,000,000 shares of the Company’s common stock at $14.00 per share under a five-year joint exploration venture. The warrants become exercisable in increments of 50,000 shares upon the election by the Company to complete a successful exploration well on a prospect generated under the joint exploration venture. Warrants which become exercisable under the exploration venture expire on December 31, 2007. The fair value of each warrant to purchase one share of common stock is estimated at the date of grant at $9.97 using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6.35 percent; expected life of 10.1 years; expected volatility factor of 51.9 percent; and no dividend yield. Warrants to purchase 150,000, 50,000 and 300,000 shares became vested in 1998, 1999 and 2000, respectively. The estimated value of the warrants which vested in 1998, 1999 and 2000 of $1.5 million, $0.5 million and $3.0 million, respectively, was included as exploration costs in each year.
Restricted Stock Grants
Under the Incentive Plans, officers and managerial employees of the Company may be granted a right to receive shares of the Company’s common stock without cost to the employee. The shares vest over a specified period with credit given for past service rendered to the Company. Restricted stock grants for 611,250 shares have been awarded under the Incentive Plans. As of December 31, 2000, 414,375 shares of such awards are vested. A provision for the restricted stock grants is made ratably over the vesting period.
Compensation expense recognized for restricted stock grants for the years ended December 31, 1998, 1999 and 2000 was $7,000, $116,000 and $221,000, respectively.
(7) Significant Customers The Company had sales to one purchaser of crude oil which accounted for 25%, 33%, and 29% of the Company’s oil and gas sales in 1998, 1999 and 2000, respectively. The Company had two purchasers of natural gas which accounted for 17% and 12% of the Company’s oil and gas sales in 1998 and 21% and 11% of the Company’s oil and gas sales in 2000. In 1999, the Company had one purchaser of natural gas which accounted for 20% of the Company’s oil and gas sales.
(8) Income Taxes The tax effects of significant temporary differences representing the net deferred tax liability at December 31, 1999 and 2000 were as follows:
1999 2000 -------- -------- (In thousands) Net deferred tax assets (liabilities): Property and equipment ............ $(15,804) $(36,562) Net operating loss carryforwards .. 14,993 13,457 Other carryforwards ............... 550 550 -------- -------- $ (261) $(22,555) ======== ========
The following is an analysis of the consolidated income tax benefit (expense):
1999 2000 -------- -------- (In thousands) Current.............................. $ -- $ -- Deferred ............................ 1,517 22,294 ------- ------- $ 1,517 $ 22,294 ======= ========
There were no differences between income taxes computed using the statutory rate of 35% and the Company’s effective tax rate in 1999 and 2000 of 35%.
The Company has net operating loss carryforwards of approximately $38.0 million as of December 31, 2000 for income tax reporting purposes which expire in varying amounts from 2009 to 2019.
(9) Risk Management The Company’s market risk exposures relate primarily to commodity prices and interest rates. Therefore, the Company periodically uses commodity price swaps to hedge the impact of natural gas price fluctuations and uses interest rate swaps to hedge interest rates on floating rate debt. The Company does not engage in activities using complex or highly leveraged instruments. These instruments are generally put in place to limit risk of adverse natural gas price or interest rate movements, however, these instruments usually limit future gains from favorable natural gas prices or lower interest rates. Recognition of realized gains or losses in the Consolidated Statements of Operations is deferred until the underlying physical product is purchased or sold. Unrealized gains or losses on derivative financial instruments are not recorded. The cash flow impact of derivative and other financial instruments is reflected as cash flows from operating activities in the Consolidated Statements of Cash Flows.
As a result of certain hedging transactions for natural gas the Company realized the following gains and losses:
1998 1999 2000 ------- ------- -------- (In thousands) Realized Gains.... $ 367 $ 248 $ -- Realized Losses... -- (5,178) --
As of December 31, 1999 and 2000, the Company had no open derivative financial instruments held for price risk management.
The Company periodically enters into interest rate swap agreements to hedge the impact of interest rate changes on a portion of its long-term debt. Gains and losses attributable to the swap agreements are accounted for as a hedge. Gains from the swap agreements reduced interest expense by $59,000, $169,000 and $988,000 in 1998, 1999 and 2000, respectively. As of December 31, 1999 and 2000, the Company had no open derivative financial instruments held for interest rate management.
(10) Supplementary Quarterly Financial Data (Unaudited)
First Second Third Fourth Total -------- -------- -------- -------- -------- (In thousands, except per share amounts) 1999 - Total revenues ............... $ 19,634 $ 22,676 $ 22,974 $ 26,860 $ 92,144 ======== ======== ======== ======== ======== Net income (loss) attributable to common stock ........... $ (4,119) $ (1,384) $ (1,339) $ 2,173 $ (4,669) ======== ======== ======== ======== ======== Net income (loss) per share .. $ (0.17) $ (0.06) (0.05) $ 0.09 $ (0.19) ======== ======== ======== ======== ======== 2000 - Total revenues ............... $ 33,143 $ 38,634 $ 44,987 $ 52,938 $169,702 ======== ======== ======== ======== ======== Net income attributable to common stock ........... $ 4,085 $ 7,934 $ 12,135 $ 14,778 $ 38,932 ======== ======== ======== ======== ======== Net income per share: Basic ..................... $ 0.16 $ 0.31 $ 0.47 $ 0.52 $ 1.48 ======== ======== ======== ======== ======== Diluted ................... $ 0.14 $ 0.25 $ 0.37 $ 0.44 $ 1.21 ======== ======== ======== ======== ========
(11) Oil and Gas Reserves Information (Unaudited) The estimates of proved oil and gas reserves utilized in the preparation of the financial statements were estimated by independent petroleum engineers in accordance with guidelines established by the Securities and Exchange Commission and the Financial Accounting Standards Board, which require that reserve reports be prepared under existing economic and operating conditions with no provision for price and cost escalation except by contractual agreement. All of the Company’s reserves are located onshore in or offshore to the continental United States.
Future prices received for production and future production costs may vary, perhaps significantly, from the prices and costs assumed for purposes of these estimates. There can be no assurance that the proved reserves will be developed within the periods indicated or that prices and costs will remain constant. There can be no assurance that actual production will equal the estimated amounts used in the preparation of reserve projections. In accordance with the Securities and Exchange Commission’s guidelines, the Company’s independent petroleum engineers’ estimates of future net cash flows from the Company’s proved properties and the present value thereof are made using oil and natural gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties. Average prices used in estimating the future net cash flows were as follows: $24.56 and $26.34 per barrel of oil at December 31, 1999 and 2000, respectively, and $2.51 and $10.51 per Mcf of natural gas at December 31, 1999 and 2000, respectively.
There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and estimates of other engineers might differ materially from those shown below. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Results of drilling, testing and production after the date of the estimate may justify revisions. Accordingly, reserve estimates are often materially different from the quantities of oil and gas that are ultimately recovered. Reserve estimates are integral in management’s analysis of impairments of oil and gas properties and the calculation of depreciation, depletion and amortization on those properties.
The following unaudited table sets forth proved oil and gas reserves at December 31, 1998, 1999 and 2000:
1998 1999 2000 -------------------- -------------------- -------------------- Oil Gas Oil Gas Oil Gas (MBbls) (MMcf) (MBbls) (MMcf) (MBbls) (MMcf) -------- -------- -------- -------- -------- -------- Proved Reserves: Beginning of year .............. 20,927 240,117 20,245 250,402 19,467 258,121 Revisions of previous estimates ................. (3,284) 12,025 (1,695) (14,272) (1,725) 1,205 Extensions and discoveries ..... 5,173 24,973 3,029 39,534 1,599 54,574 Purchases of minerals in place.. -- -- 16 6,329 416 11,059 Sales of minerals in place ..... -- -- -- -- (499) (134) Production ..................... (2,571) (26,713) (2,128) (23,872) (1,807) (26,990) -------- -------- -------- -------- -------- -------- End of year .................... 20,245 250,402 19,467 258,121 17,451 297,835 ======== ======== ======== ======== ======== ======== Proved Developed Reserves: Beginning of year .............. 16,635 188,102 16,585 182,955 14,379 184,123 ======== ======== ======== ======== ======== ======== End of year .................... 16,585 182,955 14,379 184,123 12,290 200,349 ======== ======== ======== ======== ======== ========
The following table sets forth the standardized measure of discounted future net cash flows relating to proved reserves at December 31, 1999 and 2000:
1999 2000 ----------- ----------- (In thousands) Cash Flows Relating to Proved Reserves: Future Cash Flows ................................... $ 1,124,796 $ 3,590,711 Future Costs: Production ...................................... (250,068) (527,939) Development ..................................... (80,519) (126,904) ----------- ----------- Future Net Cash Flows Before Income Taxes ........... 794,209 2,935,868 Future Income Taxes ................................. (144,048) (825,033) ----------- ----------- Future Net Cash Flows ............................... 650,161 2,110,835 10% Discount Factor ................................. (181,448) (822,071) ----------- ----------- Standardized Measure of Discounted Future Net Cash Flows.. $ 468,713 $ 1,288,764 =========== ===========
The following table sets forth the changes in the standardized measure of discounted future net cash flows relating to proved reserves for the years ended December 31, 1998, 1999 and 2000:
1998 1999 2000 ----------- ---------- ---------- (In thousands) Standardized Measure, Beginning of Year ............ $ 418,276 $ 304,993 $ 468,713 Net Change in Sales Price, Net of Production Costs (146,742) 179,042 1,141,880 Development Costs Incurred During the Year Which Were Previously Estimated ..................... 20,361 5,303 17,340 Revisions of Quantity Estimates .................. (7,391) (35,727) (44,256) Accretion of Discount ............................ 45,956 30,531 51,506 Changes in Future Development Costs .............. (19,318) (437) (41,525) Changes in Timing and Other ...................... (39,805) (2,271) (166,410) Extensions and Discoveries ....................... 60,906 91,911 375,632 Purchases of Reserves in Place ................... -- 7,787 62,621 Sales of Reserves in Place ....................... -- -- (3,355) Sales, Net of Production Costs ................... (68,214) (66,389) (139,643) Net Changes in Income Taxes ...................... 40,964 (46,030) (433,739) ---------- ----------- ---------- Standardized Measure, End of Year .................. $ 304,993 $ 468,713 $1,288,764 =========== ========== ==========
EXHIBIT INDEX
Exhibit No. Description Page -------------- ---------------------------------------------- -------- 3.1(a) Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 3.1(b) Certificate of Amendment to the Restated Articles of Incorporation dated July 1, 1997 (incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-3, dated October 25, 1996). 4.1 Rights Agreement dated as of December 14, 2000, by and between the Company and American Stock Transfer and Trust Company, as Rights Agent (incorporated herein by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A dated January 11, 2001). 4.2 Certificate of Voting Powers, Designations, Preferences, and Relative, Participating, Optional or Other Special Rights of the Series A 1999 Convertible Preferred Stock and Series B 1999 Non-Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated April 29, 1999). 4.3 Stock Purchase Agreement dated April 29, 1999 between the Company and certain purchasers (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 29, 1999). 4.4 Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 2 to the Company Registration Statement on Form 8-A dated January 11, 2001. 4.5 Indenture dated as April 29, 1999 between the Company and U.S. Trust Company of Texas, N.A., Trustee for the $150,000,000 11 1/4% Senior Notes due 2007 (incorporated herein by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K dated April 29, 1999). 10.1 Amended and Restated Credit Agreement dated as of November 7, 2000, between the Company, the Banks Party thereto and Bank One, NA, as Administrative Agent, Toronto Dominion (Texas), Inc., as Syndication Agent and Paribas, as Documentation Agent (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10- Q for the quarter ended September 30, 2000).
E - 1
Exhibit No. Description Page -------------- ---------------------------------------------- -------- 10.2# Employment Agreement dated May 16, 2000, by and between the Company and M. Jay Allison (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
10.3# Employment Agreement dated May 16, 2000, by and between the Company and Roland O. Burns (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.4# Comstock Resources, Inc. 1999 Long-term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 10.5# Form of Nonqualified Stock Option Agreement between the Company and certain officers and directors of the Company (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the year ended June 30, 1999). 10.6# Form of Restricted Stock Agreement between the Company and certain officers of the Company (incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 10.7 Warrant Agreement dated December 9, 1997 by and between the Company and Bois d' Arc Resources (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.8 Joint Exploration Agreement dated December 8, 1997 by and between the Company and Bois d' Arc Resources (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10- K for the year ended December 31, 1997). 10.9 Office Lease Agreement dated August 12, 1997 between the Company and Briar Center LLC (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 21* Subsidiaries of the Company. E-3 23* Consent of Arthur Andersen LLP. E-4
*Filed herewith. # Management contract or compensatory plan document.
E - 2