ITEM 1. FINANCIAL STATEMENTS
DEVX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- --------------
ASSETS
Current assets:
Cash $ 11,168,000 $ 10,985,000
Other current assets 6,080,000 10,740,000
-------------- --------------
Total current assets 17,248,000 21,725,000
Net property and equipment 110,275,000 97,091,000
Other assets 5,215,000 4,174,000
-------------- --------------
$ 132,738,000 $ 122,990,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other $ 10,697,000 $ 7,507,000
Derivatives -- 1,507,000
-------------- --------------
Total current liabilities 10,697,000 9,014,000
Long-term obligations, net of current portion 50,000,000 50,000,000
Derivatives 1,779,000 12,246,000
Commitments -- --
Stockholders' equity:
Common stock, $0.234 par value, authorized 100,000,000 shares:
Issued and outstanding 12,649,522 and 12,748,612 shares at
September 30, 2001 and December 31, 2000, respectively 2,983,000 2,983,000
Additional paid-in capital 60,165,000 60,159,000
Treasury stock, at cost: 100,000 shares (525,000) --
Retained earnings 9,418,000 834,000
Accumulated other comprehensive loss (1,779,000) (12,246,000)
-------------- --------------
Total stockholders' equity 70,262,000 51,730,000
-------------- --------------
Total liabilities and stockholders' equity $ 132,738,000 $ 122,990,000
============== ==============
</Table>
See accompanying notes to unaudited consolidated condensed financial statements.
1
DEVX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Oil and gas sales $ 580,000 $ 1,317,000 $ 2,768,000 $ 3,501,000
Net profits and royalty interests 5,552,000 8,944,000 24,653,000 21,605,000
Interest and other income 118,000 15,000 377,000 74,000
------------ ------------ ------------ ------------
Total revenues 6,250,000 10,276,000 27,798,000 25,180,000
------------ ------------ ------------ ------------
Expenses:
Oil and gas production expenses 162,000 464,000 1,160,000 1,558,000
Depreciation, depletion and amortization 2,424,000 2,074,000 7,087,000 6,354,000
General and administrative 2,051,000 924,000 4,139,000 2,475,000
Interest and financing expense 1,836,000 4,941,000 5,518,000 14,348,000
------------ ------------ ------------ ------------
Total expenses 6,473,000 8,403,000 17,904,000 24,735,000
------------ ------------ ------------ ------------
Operating income (loss) (223,000) 1,873,000 9,894,000 445,000
Change in fair value of derivatives 535,000 (496,000) 3,730,000 (496,000)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
accounting change 312,000 1,377,000 13,624,000 (51,000)
Cumulative effect of accounting change, net
of tax -- 413,000 -- 413,000
------------ ------------ ------------ ------------
Income before income taxes 312,000 1,790,000 13,624,000 362,000
Income taxes (114,000) -- (5,040,000) --
------------ ------------ ------------ ------------
Net income $ 198,000 $ 1,790,000 $ 8,584,000 $ 362,000
============ ============ ============ ============
Earnings per common share:
Basic $ 0.02 $ 3.46 $ 0.67 $ 0.91
============ ============ ============ ============
Diluted $ 0.02 $ 1.08 $ 0.67 $ 0.34
============ ============ ============ ============
Weighted average shares outstanding:
Basic 12,744,274 517,237 12,747,150 397,034
============ ============ ============ ============
Diluted 12,745,568 1,652,224 12,804,465 1,076,644
============ ============ ============ ============
</Table>
See accompanying notes to unaudited consolidated condensed financial statements.
2
DEVX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net income $ 8,584,000 $ 362,000
Depreciation, depletion and amortization 7,660,000 7,648,000
Cumulative effect of accounting change -- (413,000)
Change in fair value of derivatives (3,730,000) 496,000
Net change in operating assets and liabilities 8,465,000 (8,710,000)
------------ ------------
Net cash provided by (used in) operating activities 20,979,000 (617,000)
------------ ------------
Cash flows used in investing activities:
Additions to property and equipment (20,573,000) (8,324,000)
Proceeds from sale of oil & gas properties 302,000 3,551,000
------------ ------------
Net cash used in investing activities (20,271,000) (4,773,000)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt -- 4,894,000
Payments on long-term obligations -- (877,000)
Purchase of treasury stock (525,000) --
------------ ------------
Net cash provided by (used in) financing activities (525,000) 4,017,000
------------ ------------
Net increase (decrease) in cash 183,000 (1,373,000)
Cash at beginning of period 10,985,000 3,376,000
------------ ------------
Cash at end of period $ 11,168,000 $ 2,003,000
============ ============
</Table>
See accompanying notes to unaudited consolidated condensed financial statements.
3
DEVX ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of DevX
Energy, Inc. and its wholly owned subsidiaries (collectively, the "Company")
after elimination of all significant intercompany balances and transactions. The
financial statements have been prepared in conformity with generally accepted
accounting principles which require management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. While management has based their assumptions and estimates on the facts
and circumstances currently known, final amounts may differ from such estimates.
The interim financial statements contained herein are unaudited but, in the
opinion of management, include all adjustments (consisting only of normal
recurring entries) necessary for a fair presentation of the financial position
and results of operations of the Company for the periods presented. The results
of operations for the three months and the nine months ended September 30, 2001
are not necessarily indicative of the operating results for the year ending
December 31, 2001. Moreover, these financial statements do not purport to
contain complete disclosure in conformity with generally accepted accounting
principles and should be read in conjunction with the Company's Annual Report on
Form 10-K for the transition period ended December 31, 2000.
2. DERIVATIVES
The Company utilizes certain derivative financial instruments -- primarily
swaps, floors and collars -- to reduce the risk of adverse changes in future oil
and natural gas prices. Effective July 1, 2000, the Company adopted Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133), which requires the Company to recognize
all derivatives on the balance sheet at fair value. The Company estimates fair
value based on quotes obtained from the counter-parties to the derivative
contracts. The Company recognizes the fair value of derivative contracts that
expire in less than one year as current assets or liabilities. Those that expire
in more than one year are recognized as long-term assets or liabilities.
Derivatives that are not accounted for as hedges are adjusted to fair value
through income. If the derivative is designated as a hedge, depending on the
nature of the hedge, changes in fair value are either offset against the change
in fair value of the hedged assets, liabilities or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings.
4
The Company has designated a natural gas swap as a cash flow hedge. For
derivatives classified as cash flow hedges, changes in fair value are recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of any change in the fair value of a derivative
designated as a hedge is immediately recognized in earnings. Hedge effectiveness
is measured quarterly based on the relative fair value between the derivative
contract and the hedged item over time. During the three months ended September
30, 2001, the Company recognized a decrease in the derivative liability and an
associated decrease in other comprehensive loss totaling approximately
$2,405,000. During the nine months ended September 30, 2001, the Company
recognized a decrease in the derivative liability and an associated decrease in
other comprehensive loss totaling approximately $10,467,000. As of September 30,
2001, other current assets included $738,000 and other assets include $1,699,000
related to the fair value of derivative contracts.
During the three and nine months ended September 30, 2001, the Company
recognized non-cash gains of $535,000 and $3,730,000, respectively, in earnings
related to the net change in fair value of derivative contracts which have not
been designated as hedges.
During the three months ended September 30, 2001, the Company received $464,000
and for the nine months ended September 30, 2001, the Company paid $3,428,000 in
cash settlements on its natural gas hedges, which are included in net profits
and royalty interests.
3. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. For the three months ended September 30, 2001, the Company's
comprehensive income differed from net income by approximately $2,405,000
related to the change in fair value of a natural gas swap contract designated as
a hedge. For the three months ended September 30, 2000, the Company's
comprehensive income differed from net income by $8,866,000. For the nine-month
period ending September 30, 2001, the Company's comprehensive income differed
from net income by approximately $10,467,000 related to the change in fair
market value of a natural gas swap contract designated as a hedge. For the nine
months ended September 30, 2000, the Company's comprehensive income differed
from net income by $8,866,000.
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4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Numerator:
Numerator for basic earnings per
common share - net income $ 198,000 $ 1,790,000 $ 8,584,000 $ 362,000
============ ============ ============ ============
Denominator:
Denominator for basic earnings per
common share - weighted average
shares 12,744,274 517,237 12,747,150 397,034
Dilutive effect of stock options and
warrants 1,294 -- 57,315 --
Dilutive effect of common stock
repricing rights -- 1,134,987 -- 679,610
------------ ------------ ------------ ------------
Denominator for diluted earnings per
common share - adjusted weighted
average shares 12,745,568 1,652,224 12,804,465 1,076,644
============ ============ ============ ============
Earnings per common share
Basic $ 0.02 $ 3.46 $ 0.67 $ 0.91
============ ============ ============ ============
Diluted $ 0.02 $ 1.08 $ 0.67 $ 0.34
============ ============ ============ ============
</Table>
Weighted average common shares outstanding and losses per common share for the
three and nine months ended September 30, 2000 have been restated for the
effects of a 156-to-1 reverse stock split.
5. CEILING TEST WRITEDOWN
Based on oil and natural gas prices in effect on September 30, 2001, a ceiling
test writedown in the amount of $37.8 million would have been required to be
charged against earnings. Due to the increases in natural gas prices subsequent
to September 30, 2001, this writedown was not recorded. However, if prices
decline to third quarter levels at year end, such an adjustment will be
required.
6. SUBSEQUENT EVENT
The Company announced on November 13, 2001 that it has entered into a definitive
agreement which provides for a wholly owned subsidiary of Comstock Resources,
Inc. to acquire the Company in a transaction in which DevX shareholders would
receive $7.32 in cash per DevX share.
The acquisition will be effected by a first step cash tender offer for all of
the Company's outstanding common stock. The tender offer is expected to commence
on November 15, 2001 and to remain open for at least 20 business days. The
tender offer will be followed by a merger in which shareholders whose shares are
not acquired in the tender offer will receive $7.32 per share in cash. The offer
is conditioned on, among other things, greater than 50% of the Company's
outstanding shares being tendered. There is no assurance that a transaction will
be completed.
6