UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF x THE SECURITIES EXCHANGE ACT OF 1934 ---- For The Quarter Ended March 31, 2002 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) ---- Commission File No. 0-16741 COMSTOCK RESOURCES, INC. (Exact name of registrant as specified in its charter) NEVADA 94-1667468 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034 (Address of principal executive offices) Telephone No.: (972) 668-8800 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 filing requirements for the past 90 days. Yes x No --- The number of shares outstanding of the registrant's common stock, par value $.50, as of May 14, 2002 was 28,826,678.COMSTOCK RESOURCES, INC. QUARTERLY REPORT For The Quarter Ended March 31, 2002 INDEX PART I. Financial Information Page Item 1. Financial Statements: Consolidated Balance Sheets - March 31, 2002 and December 31, 2001................................4 Consolidated Statements of Operations - Three Months ended March 31, 2002 and 2001..........................5 Consolidated Statement of Stockholders' Equity - Three Months ended March 31, 2002...................................6 Consolidated Statements of Cash Flows - Three Months ended March 31, 2002 and 2001..........................7 Notes to Consolidated Financial Statements...............................8 Independent Accountants' Review Report..................................13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................14 Item 3. Quantitative and Qualitative Disclosure About Market Risks..........17 PART II. Other Information Item 4. Submission of Matters to a Vote of Security Holders................19 Item 6. Exhibits and Reports on Form 8-K....................................20 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS March 31, December 31, 2002 2001 --------- --------- (Unaudited) (In thousands) Cash and Cash Equivalents ................................................. $ 1,334 $ 6,122 Accounts Receivable: Oil and gas sales ..................................................... 18,531 20,015 Joint interest operations ............................................. 1,515 4,717 Derivatives ............................................................... 1,412 1,342 Other Current Assets ...................................................... 8,495 7,418 --------- --------- Total current assets .......................................... 31,287 39,614 Property and Equipment: Unevaluated oil and gas properties .................................... 15,450 13,416 Oil and gas properties, successful efforts method ..................... 896,142 901,206 Other ................................................................. 2,541 2,633 Accumulated depreciation, depletion and amortization .................. (277,109) (278,679) --------- --------- Net property and equipment .................................... 637,024 638,576 Derivatives ............................................................... 89 254 Other Assets .............................................................. 6,539 4,627 --------- --------- $ 674,939 $ 683,071 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Portion of Long-Term Debt ......................................... $ 42 $ 229 Accounts Payable and Accrued Expenses ..................................... 29,798 37,389 Derivatives ............................................................... 1,833 798 --------- --------- Total current liabilities ..................................... 31,673 38,416 Long-Term Debt, less current portion ...................................... 378,002 372,235 Deferred Taxes Payable .................................................... 45,553 47,911 Derivatives ............................................................... 1,273 1,053 Reserve for Future Abandonment Costs ...................................... 7,169 7,794 Stockholders' Equity: Preferred stock--$10.00 par, 5,000,000 shares authorized, 1,757,310 shares outstanding ........................................ 17,573 17,573 Common stock--$0.50 par, 50,000,000 shares authorized, 28,572,553 and 28,552,553 shares outstanding at March 31, 2002 and December 31, 2001, respectively .................. 14,286 14,276 Additional paid-in capital ............................................ 131,265 130,956 Retained earnings ..................................................... 48,758 54,183 Deferred compensation-restricted stock grants ......................... (1,128) (1,187) Accumulated other comprehensive income (loss) ......................... 515 (139) --------- --------- Total stockholders' equity .................................... 211,269 215,662 --------- --------- $ 674,939 $ 683,071 ========= ========= The accompanying notes are an integral part of these statements. 4 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, 2002 2001 -------- -------- (In thousands, except per share amounts) Revenues: Oil and gas sales ..................................... $ 26,678 $ 67,257 Other income .......................................... 120 147 -------- -------- Total revenues ............................... 26,798 67,404 -------- -------- Expenses: Oil and gas operating ................................. 8,136 9,440 Exploration ........................................... 1,953 2,831 Depreciation, depletion and amortization .............. 13,561 11,980 General and administrative, net ....................... 930 829 Interest .............................................. 6,810 5,505 Loss from derivatives ................................. 1,964 -- -------- -------- Total expenses ............................... 33,354 30,585 -------- -------- Income (loss) from continuing operations before income taxes (6,556) 36,819 Income tax benefit (expense) ......................... 2,295 (12,887) -------- -------- Net income (loss) from continuing operations ............... (4,261) 23,932 Preferred stock dividends ............................ (395) (395) -------- -------- Net income (loss) from continuing operations attributable to common stock ....................................... (4,656) 23,537 Income (loss) from discontinued operations, including loss on disposal, net of income taxes .. (769) 41 -------- -------- Net income (loss) attributable to common stock ............. $ (5,425) $ 23,578 ======== ======== Net income (loss) per share: Basic - Net income (loss) from continuing operations per share.. $ (0.16) $ 0.81 ======== ======== Net income (loss) per share............................. $ (0.19) $ 0.81 ======== ======== Diluted - Net income (loss) from continuing operations per share.. $ 0.68 ======== Net income (loss) per share............................. $ 0.68 ======== Weighted average shares outstanding: Basic................................................... 28,560 29,001 ======== ======== Diluted................................................. 35,074 ======== The accompanying notes are an integral part of these statements. 5 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Three Months Ended March 31, 2002 (Unaudited) Deferred Accumulated Additional Compensation- Other Preferred Common Paid-In Retained Restricted Comprehensive Stock Stock Capital Earnings Stock Grants Income (Loss) Total --------- --------- ---------- ---------- ---------- ------------ -------- (In thousands) Balance at December 31, 2001.........$ 17,573 $ 14,276 $130,956 $ 54,183 $(1,187) $ (139) $215,662 Restricted stock grants............ -- -- -- -- 59 -- 59 Value of warrants issued for exploration prospects....... -- -- 213 -- -- -- 213 Exercise of stock options.......... -- 10 96 -- -- -- 106 Net loss attributable to common stock.................... -- -- -- (5,425) -- -- (5,425) Unrealized hedge gains............. -- -- -- -- -- 654 654 -------- -------- -------- --------- ------- -------- -------- Balance at March 31, 2002............$ 17,573 $ 14,286 $131,265 $ 48,758 $(1,128) $ 515 $211,269 ======== ======== ======== ========= ======= ======== ======== The accompanying notes are an integral part of these statements. 6 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, 2002 2001 -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .......................................... $ (5,030) $ 23,973 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Compensation paid in common stock ........................ 59 56 Exploration .............................................. 1,953 2,831 Depreciation, depletion and amortization ................. 13,561 11,999 Deferred income taxes .................................... (2,824) 10,328 Unrealized losses from derivatives ....................... 2,356 -- Loss (gain) on sale of properties ........................ 1,182 (12) -------- -------- Working capital provided by operations ................. 11,257 49,175 Decrease in accounts receivable ............................ 4,986 1,114 Increase in other current assets ........................... (1,077) (299) Increase (decrease) in accounts payable and accrued expenses (7,352) 9,777 -------- -------- Net cash provided by operating activities .............. 7,814 59,767 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of properties .......................... -- 46 Capital expenditures and acquisitions ...................... (15,721) (27,973) -------- -------- Net cash used for operating activities ................. (15,721) (27,927) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings ................................................. 6,000 -- Proceeds from issuance of senior notes ..................... 75,000 -- Debt issuance costs ........................................ (2,172) -- Proceeds from issuance of common stock ..................... 106 867 Principal payments on debt ................................. (75,420) (35,101) Dividends paid on preferred stock .......................... (395) (395) -------- -------- Net cash provided by (used for) financing activities ....... 3,119 (34,629) -------- -------- Net decrease in cash and cash equivalents .............. (4,788) (2,789) Cash and cash equivalents, beginning of period ......... 6,122 7,105 -------- -------- Cash and cash equivalents, end of period ............... $ 1,334 $ 4,316 ======== ======== The accompanying notes are an integral part of these statements. 7 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) (1) SIGNIFICANT ACCOUNTING POLICIES - Basis of Presentation - In management's opinion, the accompanying consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position of Comstock Resources, Inc. and subsidiaries ("Comstock") as of March 31, 2002 and the related results of operations and cash flows for the three months ended March 31, 2002 and 2001. The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to those rules and regulations, although Comstock believes that the disclosures made are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in Comstock's Annual Report on Form 10-K for the year ended December 31, 2001. The results of operations for the three months ended March 31, 2002 are not necessarily an indication of the results expected for the full year. Supplementary Information With Respect to the Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 2002 2001 ------ ------ (In thousands) Cash Payments - Interest payments........................... $2,367 $1,373 Income tax payments......................... -- 243 Noncash Investing and Financing Activities - Value of warrants issued under exploration agreement ............ $ 327 $ 997 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. 8 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Earnings Per Share - Basic earnings per share is determined without the effect of any outstanding potentially dilutive stock options or other convertible securities and diluted earnings per share is determined with the effect of outstanding stock options and other convertible securities that are potentially dilutive. Due to the net loss for the three months ended March 31, 2002, common stock equivalents and convertible securities are anti- dilutive. Therefore basic and diluted loss per share for the three months ended March 31, 2002 are the same. Basic and diluted earnings per share for the three months ended March 31, 2002 and 2001 were determined as follows: For the Three Months Ended March 31, ----------------------------------------------------------------------- 2002 2001 --------------------------------- ----------------------------------- Income Per Income Per (Loss) Shares Share (Loss) Shares Share -------- -------- ------- -------- -------- ------- (Amounts in thousands except per share data) Basic Earnings Per Share: Income (Loss) from Continuing Operations....$ (4,261) 28,560 $ 23,932 29,001 Less Preferred Stock Dividends............................... (395) -- (395) -- -------- -------- -------- -------- Net Income (Loss) from Continuing Operations Available to Common Stockholders........ (4,656) 28,560 $ (0.16) 23,537 29,001 $ 0.81 ======== ======== Income (Loss) from Discontinued Operations (769) 28,560 (0.03) 41 29,001 -- -------- ======== -------- -------- ======== -------- Net Income (loss) Available to Common Stockholders............................$ (5,425) 28,560 $ (0.19) $ 23,578 29,001 $ 0.81 ======== ======== ======== Diluted Earnings Per Share: Effect of Dilutive Securities: Stock Options........................... 721 1,679 Convertible Preferred Stock............. 4,393 395 4,393 -------- -------- -------- Net Income (Loss) from Continuing Operations Available to Common Stockholders and Assumed Conversions.............. 33,674 47,551 35,073 $ 0.68 ======== ======== Income (Loss) from Discontinued Operations 33,674 41 35,073 -- ======== ---------- ======== -------- Net Income (loss) Available to Common Stockholders............................ 33,674 $ 47,592 35,073 $ 0.68 ======== ========== ======== ======== 9 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Derivative Instruments and Hedging Activities Comstock uses swaps, floors and collars to hedge oil and natural gas prices. Swaps are settled monthly based on differences between the prices specified in the instruments and the settlement prices of futures contracts quoted on the New York Mercantile Exchange. Generally, when the applicable settlement price is less than the price specified in the contract, Comstock receives a settlement from the counterparty based on the difference multiplied by the volume hedge. Similarly, when the applicable settlement price exceeds the price specified in the contract, Comstock pays the counterparty based on the difference. Comstock generally receives a settlement from the counterparty for floors when the applicable settlement price is less than the price specified in the contract, which is based on the difference multiplied by the volumes hedged. For collars, Comstock generally receives a settlement from the counterparty when the settlement price is below the floor and pays a settlement to the counterparty when the settlement price exceeds the cap. No settlement occurs when the settlement price falls between the floor and cap. In March 2002, Comstock entered into natural gas price swaps covering 10,640,000 MMbtus of its natural gas production at an average price of $3.46. Comstock has designated these positions as cash flow hedges. The following table sets out the derivative financial instruments outstanding at March 31, 2002, which are held for natural gas price risk management: Volume Type Floor Ceiling Swap Period Beginning Period Ending (MMBtu) of Instrument Price Price Price - ----------------- ------------------ ------------ ------------- ----------- ----------- ---------- April 1, 2002 October 31, 2002 5,320,000 Swap -- -- $3.44 April 1, 2002 October 31, 2002 2,800,000 Swap -- -- $3.50 April 1, 2002 October 31, 2002 2,520,000 Swap -- -- $3.48 April 1, 2002 December 31, 2002 480,000 Floor $1.90 -- -- April 1, 2002 December 31, 2002 1,912,500 Floor $2.00 -- -- April 1, 2002 December 31, 2002 1,200,000 Swap -- -- $2.40 April 1, 2002 December 31, 2002 675,000 Collar $4.00 $6.75 -- ------------ 14,907,500 ------------ January 1, 2003 December 31, 2003 560,000 Floor $1.90 -- -- January 1, 2003 December 31, 2003 2,250,000 Floor $2.00 -- -- January 1, 2003 December 31, 2003 1,400,000 Swap -- -- $2.40 ------------ 4,210,000 ------------ 19,117,500 ============ The counterparty for the $1.90 floor position and $2.40 swap price position is a subsidiary of Enron Corporation which has filed for bankruptcy protection. The net liability owed to Enron as of March 31, 2002 was $3.0 million. Comstock intends to monitor this position and will assess the credit exposure to the extent this position becomes a net asset. These positions together with the other floor and collar postions have not been designated as cash flow hedges. 10 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Comstock periodically enters into interest rate swap agreements to hedge the impact of interest rate changes on its floating rate long-term debt. As of March 31, 2002, Comstock had an interest rate swap agreement covering $25.0 million of its floating rate debt, which fixed the LIBOR rate at 4.5% for the period through April 2002. Comstock has designated this position as a hedge. As a result of certain hedging transactions for interest rates, Comstock has realized losses of $159,000 for the three months ended March 31, 2002 which were included in interest expense. The fair value of all derivative financial instruments is included on the consolidated balance sheet at the fair value. Comstock estimates fair value based on quotes obtained from the counterparties to the derivative contract. The fair value of derivative contracts that expire in less than one year are recognized as current assets or liabilities. Those that expire in more than one year are recognized as long-term assets or liabilities. Derivative financial instruments that are not accounted for as hedges are adjusted to fair value through income. If the derivative is designated as a cash flow hedge, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings. The change in fair value of the derivative contracts not accounted for hedges resulted in a loss of $2.0 million for the three months ended March 31, 2002. The loss on derivatives was comprised of a $2.4 million unrealized loss and a $392,000 realized gain. For the derivative contracts designated as cash flow hedges, the change in fair value of these instruments resulted in an unrealized after tax gain of $654,000 which was recognized in other comprehensive income. (2) LONG-TERM DEBT - As of March 31, 2002, Comstock's long-term debt was comprised of the following: (In thousands) Revolving Bank Credit Facility........... $ 158,000 11 1/4% Senior Notes due 2007............ 220,000 Other.................................... 44 ----------- 378,044 Less current portion..................... (42) ----------- $ 378,002 =========== Comstock's bank credit facility consists of a $350.0 million three-year revolving credit commitment provided by a syndicate of banks for which Toronto Dominion (Texas), Inc. serves as administrative agent. The credit facility is subject to borrowing base availability, which is redetermined semiannually based on the banks' estimates of the future net cash flows of Comstock's oil and natural gas properties. The borrowing base at March 31, 2002 was $240.0 million. The revolving credit line bears interest, based on the utilization of the borrowing base, at the option of Comstock at either (i) LIBOR plus 1.5% to 2.375% or (ii) the base rate plus 0.5% to 1.375%. The facility matures on January 2, 2005. Indebtedness under the bank credit facility is secured by substantially all of Comstock's assets. The bank credit facility contains covenants that, among other things, restrict the payment of cash dividends, limit the amount of consolidated debt and limit Comstock's ability to make certain loans and investments. Financial covenants include the maintenance of a current ratio, maintenance of tangible net worth and maintenance of an interest coverage ratio. Comstock was in compliance with all the covenants during the three months ended March 31, 2002. 11 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Comstock issued $150.0 million in aggregate principal amount of 11 1/4% Senior Notes due in 2007 (the "Notes") on April 29, 1999. Interest on the Notes is payable semiannually on May 1 and November 1, commencing on November 1, 1999. The Notes are unsecured obligations of Comstock. Comstock repurchased $5.0 million of the Notes in July 2001. The Notes can be redeemed beginning on May 1, 2004. On March 7, 2002, Comstock closed on a private placement of $75.0 million of the Notes at a net price of 97.25% after placements agents' discount. As a result of this transaction, $220.0 million of the aggregate principal amount of the Notes was outstanding. The net proceeds were used to reduce amounts outstanding under the bank credit facility. (3) DISCONTINUED OPERATIONS - In April 2002, Comstock sold certain marginal oil and gas properties for cash proceeds of $300,000 plus forgiveness of certain accounts payable related to the properties. The properties sold include various interests in nonoperated properties in Nueces, Hardeman and Montague counties in Texas. These properties had become unprofitable for Comstock. The properties sold were written down to the net realizable value in March 2002 resulting in a loss of $769,000, net of income taxes and have been presented as discontinued operations in the accompanying consolidated statements of operations. 12 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Shareholders of Comstock Resources, Inc.: We have reviewed the accompanying consolidated balance sheet of Comstock Resources, Inc. and subsidiaries (a Nevada corporation) as of March 31, 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for the three-month period then ended. These consolidated 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 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 the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. (signed) KPMG LLP Dallas, Texas May 7, 2002 13 ITEM 2: 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: Three Months Ended March 31, 2002 2001 ------- -------- Net Production Data: Oil (Mbbls) ............................... 344 415 Natural gas (MMcf) ........................ 8,269 7,436 Natural gas equivalent (Mmcfe) ............ 10,335 9,923 Average Sales Price: Oil (per Bbl) ............................. $ 20.67 $ 28.19 Natural gas (per Mcf) ..................... 2.37 7.47 Average equivalent price (per Mcfe) ....... 2.58 6.78 Expenses ($ per Mcfe): Oil and gas operating(1) .................. $ 0.79 $ 0.95 General and administrative ................ 0.09 0.08 Depreciation, depletion and amortization(2) 1.28 1.17 Cash Margin ($ per Mcfe)(3) ................. $ 1.70 $ 5.74 - --------- (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 an gas operating expenses per Mcfe and general and administrative expenses per Mcfe. Revenues - Our oil and gas sales decreased $40.6 million (60%) in the first quarter of 2002, to $26.7 million from $67.3 million in 2001's first quarter due to a significant drop in our realized crude oil and natural gas prices. Our average crude oil price fell by 27% and our average natural gas price decreased by 68% in the first quarter of 2002 as compared to 2001. Production in the first quarter of 2002 increased 14% over production in the fourth quarter of 2001 and 4% over production in the first quarter of 2001. Other income decreased to $120,000 in the first quarter of 2002 as compared to $147,000 in 2001's first quarter, primarily due to a decrease in interest earned on short-term cash deposits. Costs and Expenses - Oil and gas operating expenses, including production taxes, decreased $1.3 million (14%) to $8.1 million in the first quarter of 2002 from $9.4 million in the first quarter of 2001. Oil and gas operating expenses per equivalent Mcf produced decreased $0.16 to $0.79 in the first quarter of 2002 from $0.95 in the first quarter of 2001. The decrease in operating expenses is due to lower production taxes as a result of the significantly lower crude oil and natural gas prices. In the first quarter of 2002, we had a $2.0 million provision for exploration expense as compared to a $2.8 million provision for exploration in 2001's first quarter. The provision in the first quarter of 2002 primarily relates to an exploratory well drilled at South Timbalier Block 30, which was abandoned after numerous drilling problems were encountered culminating with the drill pipe being stuck. Approximately 43 net feet of productive pay had been discovered prior to the well being lost. We plan to redrill this prospect pending the results from other exploration activity in this block. 14 Depreciation, depletion and amortization ("DD&A") increased $1.6 million (13%) to $13.6 million in the first quarter of 2002 from $12.0 million in the first quarter of 2001 due to the 4% increase in oil and natural gas production and an increase in our DD&A rate. DD&A per equivalent Mcf produced increased by $0.11 to $1.28 for the three months ended March 31, 2002 from $1.17 for the three months ended March 31, 2001. General and administrative expenses, which are reported net of overhead reimbursements, of $930,000 for the first quarter of 2002 were 12% higher than general and administrative expenses of $829,000 for the first quarter of 2001 due primarily to an increase in personnel costs in 2002. Interest expense increased $1.3 million (24%) to $6.8 million for the first quarter of 2002 from $5.5 million for the first quarter of 2001. The increase is attributable to higher borrowings outstanding under our bank credit facility and the issuance of an additional $75.0 million of our 11 1/4% Senior Notes on March 7, 2002. The average outstanding balance under our bank credit facility increased to $200.1 million in the first quarter of 2002 as compared to $70.5 million in the first quarter of 2001. The higher debt was offset partially by a lower interest rate on our bank credit facility. The weighted average annual interest rate for borrowings under our bank credit facility decreased to 4.1% for the first quarter of 2002 as compared to 7.2% for the same period in 2001. Comstock reported a net loss from continuing operations of $4.7 million for the three months ended March 31, 2002, as compared to net income from continuing operations of $23.5 million for the three months ended March 31, 2001. Net loss per share from continuing operations for the first quarter was $0.16 on weighted average shares outstanding of 28.6 million as compared to net income per share from continuing operations of $0.68 for the first quarter of 2001 on weighted average diluted shares outstanding of 35.1 million. In April 2002, we sold certain marginal oil and gas properties, which resulted in a loss of $1.2 million. The operating results of these properties have been reflected as discontinued operations in the consolidated financial statements including the expected loss on disposal. Liquidity and Capital Resources Funding for our activities has historically been provided by our operating cash flow, debt or equity financings or asset dispositions. For the three months ended March 31, 2002, our net cash flow provided by operating activities before changes to other working capital accounts totaled $11.3 million. Our other primary funding sources in the first quarter of 2002 were borrowings of $6.0 million under our bank credit facility and proceeds of $72.8 million received from the issuance of our 11 1/4% Senior Notes. Our primary needs for capital, in addition to funding our ongoing operations, relate to the acquisition, development and exploration of our oil and gas properties and the repayment of our debt. In the first quarter of 2002, we incurred capital expenditures of $15.7 million for development and exploration activities. We also repaid $75.0 million of borrowings under our bank credit facility. 15 The following table summarizes our capital expenditure activity for the three months ended March 31, 2002 and 2001: Three Months Ended March 31, 2002 2001 ------- ------- (In thousands) Leasehold costs $ 2,034 $ 1,139 Development drilling 5,649 11,878 Exploratory drilling 6,634 13,173 Offshore production facilities 620 107 Workovers and recompletions 777 1,634 Other 7 42 ------- ------- $15,721 $27,973 ======= ======= The timing of most of our capital expenditures is discretionary because we have no material long-term capital expenditure commitments. Consequently, we have a significant degree of flexibility to adjust the level of our capital expenditures as circumstances warrant. We spent $15.7 million and $27.9 million on development and exploration activities in the three months ended March 31, 2002 and 2001, respectively. We have budgeted approximately $75.0 million for development and exploration projects in 2002. We expect to use internally generated cash flow to fund development and exploration activity. We do not have a specific acquisition budget for 2002 since the timing and size of acquisitions are not predictable. We intend to use borrowings under our 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 our financial condition and performance and some of which will be beyond our control, such as prevailing interest rates, oil and natural gas prices and other market conditions. On December 17, 2001, we entered into a new three year $350.0 million revolving credit facility with Toronto Dominion (Texas), Inc. as administrative agent. Indebtedness under the new bank credit facility is secured by substantially all of our assets. The revolving credit line is subject to borrowing base availability, which will be redetermined semiannually based on the banks' estimates of the future net cash flows of our oil and gas properties. The current borrowing base is $240.0 million. The borrowing base may be affected by the performance of our properties and changes in oil and gas prices. The determination of the borrowing base is at the sole discretion of the administrative agent and the bank group. The revolving credit line bears interest, based on the utilization of the borrowing base, at our option at either (i) LIBOR plus 1.5% to 2.375% or (ii) the base rate plus 0.5% to 1.375%. The bank credit facility matures on January 2, 2005 and contains covenants that, among other things, restrict our ability to pay cash dividends, limit the amount of our consolidated debt and limit our ability to make certain loans and investments. Financial covenants include the maintenance of a current ratio, maintenance of tangible net worth and maintenance of an interest coverage ratio. On March 7, 2002, we closed the sale in a private placement of $75.0 million of our 11 1/4% Senior Notes due 2007 (the "Notes") at a net price of 97.25% after the placements agents' discount. As a result of this transaction, $220.0 million of aggregate principal amount of the Notes were outstanding. The net proceeds were used to reduce amounts outstanding under our bank credit facility. We believe that our cash flow from operations and our available borrowings under the new bank credit facility will be sufficient to fund our operations and future growth as contemplated under our current business plan. However, if our plans or assumptions change or if our assumptions prove to be inaccurate, we may be required to seek additional capital. We cannot provide any assurance that we will be able to obtain such capital, or if such capital is available, that we will be able to obtain it on acceptable terms. 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Oil and Natural Gas Prices Our financial condition, results of operations and capital resources are highly dependent upon the prevailing market prices of oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond our control. Factors influencing oil and natural gas prices include the level of global demand for crude oil, the foreign supply of oil and natural gas, the establishment of and compliance with production quotas by oil exporting countries, weather conditions that determine the demand for natural gas, the price and availability of alternative fuels and overall economic conditions. 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 our financial condition and results of operations, and may also reduce the amount of oil and natural gas reserves that we can produce economically. Any reduction in our oil and natural gas reserves, including reductions due to price fluctuations, can have an adverse effect on our ability to obtain capital for our exploration and development activities. Similarly, any improvements in oil and natural gas prices can have a favorable impact on our financial condition, results of operations and capital resources. Based on our oil and natural gas production in the three months ended March 31, 2002, a $1.00 change in the price per barrel of oil would have resulted in a change in our cash flow for such period by approximately $0.3 million and a $1.00 change in the price per Mcf of natural gas would have changed our cash flow by approximately $7.4 million. We periodically use hedging transactions with respect to a portion of our oil and natural gas production to mitigate our exposure to price changes. While the use of these hedging arrangements limits the downside risk of price declines, such use may also limit any benefits that may be derived from price increases. We use swaps, floors and collars to hedge oil and natural gas prices. Swaps are settled monthly based on differences between the prices specified in the instruments and the settlement prices of futures contracts quoted on the New York Mercantile Exchange. Generally, when the applicable settlement price is less than the price specified in the contract, we receive a settlement from the counterparty based on the difference multiplied by the volume hedge. Similarly, when the applicable settlement price exceeds the price specified in the contract, we pay the counterparty based on the difference. We generally receive a settlement from the counterparty for floors when the applicable settlement price is less than the price specified in the contract, which is based on the difference multiplied by the volumes hedged. For collars, we generally receive a settlement from the counterparty when the settlement price is below the floor and pay a settlement to the counterparty when the settlement price exceeds the cap. No settlement occurs when the settlement price falls between the floor and cap. In March 2002, we hedged a portion of our natural gas production for the period April 2002 through October 2002 in order to increase the predictability of our cash flow from operations in order to support our planned 2002 drilling program. The hedges cover approximately 45% to 50% of our expected 2002 natural gas production from April 2002 to October 2002. We entered into price swaps covering 50 MMBtus per day of our natural gas production at an average price of $3.46. The price swaps will be settled using the closing index price for natural gas delivered to the Houston Ship Channel for 38.2 MMBtus per day and the closing contract price for natural gas delivered to the Henry Hub on the New York Mercantile Exchange for 11.8 MMBtus per day. 17 The following table sets out the derivative financial instruments outstanding at March 31, 2002, which are held for natural gas price risk management: Volume Type Floor Ceiling Swap Period Beginning Period Ending (MMBtu) of Instrument Price Price Price - ----------------- ------------------ ------------ ------------- ----------- ----------- ---------- April 1, 2002 October 31, 2002 5,320,000 Swap -- -- $3.44 April 1, 2002 October 31, 2002 2,800,000 Swap -- -- $3.50 April 1, 2002 October 31, 2002 2,520,000 Swap -- -- $3.48 April 1, 2002 December 31, 2002 480,000 Floor $1.90 -- -- April 1, 2002 December 31, 2002 1,912,500 Floor $2.00 -- -- April 1, 2002 December 31, 2002 1,200,000 Swap -- -- $2.40 April 1, 2002 December 31, 2002 675,000 Collar $4.00 $6.75 -- ------------ 14,907,500 ------------ January 1, 2003 December 31, 2003 560,000 Floor $1.90 -- -- January 1, 2003 December 31, 2003 2,250,000 Floor $2.00 -- -- January 1, 2003 December 31, 2003 1,400,000 Swap -- -- $2.40 ------------ 4,210,000 ------------ 19,117,500 ============ The counterparty for the $1.90 floor position and $2.40 swap price position is a subsidiary of Enron Corporation, which has filed for bankruptcy protection. The net liability owed to Enron as of March 31, 2002 was $3.0 million. We intend to monitor this position and will assess the credit exposure to the extent this position becomes a net asset. The fair value of the commodity price derivative financial instruments at March 31, 2002 was a net liability of $1.5 million. Certain of the positions have not designated as cash flow hedges. Changes in fair value of the derivative financial instruments not designated as cash flow hedges are recorded in earnings. Interest Rates At March 31, 2002, we had long-term debt of $378.0 million. Of this amount, $220.0 million bears interest at a fixed rate of 11 1/4%. We had $158.0 million outstanding under our revolving 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 our option. Any increases in these interest rates can have an adverse impact on our results of operations and cash flow. In March 2001, we entered into an interest rate swap agreement to hedge the impact of interest rate changes on $25.0 million of our floating rate debt beginning on April 30, 2001 and expiring on April 30, 2002. As a result of this interest rate swap, we realized a loss of $159,000 in the first quarter of 2002. The fair value of this interest rate derivative financial instrument was a net liability of $59,000 at March 31, 2002. 18 PART II - OTHER INFORMATION ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's annual meeting of stockholders was held in Frisco, Texas at 4:00 p.m., local time, on May 13, 2002. (b) Proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to the nominees listed in the proxy statement for election as Class B directors and such nominees were elected. (c) Out of a total 33,139,128 shares of the Company's common stock and preferred stock outstanding and entitled to vote, 30,730,254 shares were present at the meeting in person or by proxy, representing approximately 93%. Matters voted upon at the meeting were as follows: (i) Two Class B Director was reelected to Company's board of directors. The vote tabulation was as follows: Nominee For Withheld ----------------- ---------- ---------- M. Jay Alllison 27,733,439 2,996,815 David W. Sledge 30,359,854 370,400 Other directors of the Company whose term of office as a Director continued after the meeting are as follows: Class A Director Class C Directors ------------------- -------------------- Cecil E. Martin Roland O. Burns David K. Lockett (ii) The appointment of KPMG LLP as the Company's certified public accountants for 2002 was ratified by a vote of 33,129,128 shares for, no shares against and no shares abstaining. This ratification was not listed in the proxy statement but was voted on by the named proxies. 19 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits -------- 10.1 Amendment No. 3 dated April 15, 2002 to the Credit Agreement, dated as of December 17, 2001, by and among Comstock, as borrower, each lender from time to time party thereto, Toronto Dominion (Texas), Inc., as administrative agent, and Toronto-Dominion Bank, as Issuing Bank. - ------------- b. Reports on Form 8-K ------------------- Form 8-K Reports filed subsequent to December 31, 2001 are as follows: Date Item Description - ---------------- ------- --------------------------------------------- February 6, 2002 2 Historical and Proforma Financial Information of DevX Energy, Inc. March 12, 2002 5 Issued $75 million of 11 1/4% Senior Notes due 2007 April 26, 2002 4 Changes in registrant's certifying accountant 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. COMSTOCK RESOURCES, INC. /s/M. JAY ALLISON ----------------- Date May 14, 2002 M. Jay Allison, Chairman, President and Chief ------------ Executive Officer (Principal Executive Officer) /s/ROLAND O. BURNS ------------------ Date May 14, 2002 Roland O. Burns, Senior Vice President, ------------ Chief Financial Officer, Secretary, and Treasurer (Principal Financial and Accounting Officer) 20
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10-Q Filing
Comstock Resources (CRK) 10-Q2002 Q1 Quarterly report
Filed: 14 May 02, 12:00am