United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 333-61547 CONTINENTAL RESOURCES, INC. (Exact name of registrant as specified in its charter) Oklahoma 73-0767549 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 302 N. Independence, Suite 300, Enid, Oklahoma 73701 - ---------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (580) 233-8955 -------------- (Registrant's telephone number, including area code) NONE ---- (Former name, former address and former fiscal year, if change since last report) 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 report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding as of May 14, 2002 ----- ------------------------------ Common Stock, $.01 par value 14,368,919 TABLE OF CONTENTS PART I. Financial Information ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . .3 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . .12 PART II. Other Information ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . .13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . 14 PART I. Financial Information ITEM 1. FINANCIAL STATEMENTS CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) ASSETS (Unaudited) December 31, March 31, 2001 2002 ---- ---- CURRENT ASSETS: Cash ..................................................... $ 7,225 $ 10,866 Accounts receivable- Oil and gas sales.................................... 7,731 9,885 Joint interest and other, net........................ 10,526 8,558 Inventories............................................... 6,321 6,607 Prepaid expenses.......................................... 487 360 --------- --------- Total current assets...................... 32,290 36,276 --------- --------- PROPERTY AND EQUIPMENT: Oil and gas properties Producing properties................................. 395,559 412,722 Nonproducing leaseholds.............................. 50,889 51,132 Gas gathering and processing facilities................... 28,176 30,242 Service properties, equipment and other................... 17,427 17,522 --------- --------- Total property and equipment.................. 492,051 511,618 Less--Accumulated depreciation, depletion and amortization.................................. (174,720) (182,762) --------- --------- Net property and equipment.................... 317,331 328,856 --------- --------- OTHER ASSETS: Debt issuance costs, net.................................. 4,851 5,717 Other assets.............................................. 13 13 --------- --------- Total other assets............................ 4,864 5,730 --------- --------- Total assets.................................. $ 354,485 $ 370,862 ========= ========= CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) December 31, March 31, 2002 2001 ---- ---- CURRENT LIABILITIES: Accounts payable.......................................... $ 22,576 $ 19,010 Current debt.............................................. 5,400 -- Revenues and royalties payable............................ 3,404 3,790 Accrued liabilities and other............................. 9,906 7,722 ---------- ---------- Total current liabilities..................... 41,286 30,522 ---------- ---------- LONG-TERM DEBT, net of current portion........................ 177,995 207,650 OTHER NONCURRENT LIABILITIES.................................. 91 103 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 1,000,000 shares authorized, 0 shares issued and outstanding. Common stock, $0.01 par value, 20,000,000 shares authorized, 14,368,919 shares issued and outstanding...... 144 144 Additional paid-in-capital................................ 25,087 25,087 Retained earnings......................................... 109,882 107,356 ---------- ---------- Total stockholders' equity.................... 135,113 132,587 ---------- ---------- Total liabilities and stockholders' equity.... $ 354,485 $ 370,862 ========== ========== The accompanying notes are an integral part of these consolidated balance sheets. CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share data) Three Months Ended March 31, ---------------------------- 2001 2002 ---- ---- REVENUES: Oil and gas sales ....................................... $ 34,221 $ 22,729 Crude oil marketing...................................... 60,099 47,350 Gathering, marketing and processing...................... 12,990 7,164 Oil and gas service operations........................... 2,011 1,605 ---------- ---------- Total revenues .......................................... 109,321 78,848 ---------- ---------- OPERATING COSTS AND EXPENSES: Production expenses ...................................... 6,476 6,489 Production taxes ......................................... 2,678 1,536 Exploration expenses...................................... 2,572 2,223 Crude oil marketing purchases and expenses................ 59,637 48,163 Gathering, marketing and processing....................... 10,562 5,137 Oil and gas service operations............................ 1,428 1,679 Depreciation, depletion and amortization.................. 5,242 8,475 General and administrative................................ 2,504 3,851 ---------- ---------- Total operating costs and expenses................... 91,049 77,553 ---------- ---------- OPERATING INCOME ............................................. 18,272 1,295 ---------- ---------- OTHER INCOME AND EXPENSES Interest income .......................................... 235 103 Interest expense ......................................... (3,637) (3,963) Other income (expense), net............................... (184) 39 ---------- ---------- Total other income and (expenses).................... (3,586) (3,821) ---------- ---------- NET INCOME (LOSS)............................................. $ 14,686 $ (2,526) ========== ========== EARNINGS PER COMMON SHARE: Basic ................................................... $ 1.02 $ (0.18) ========== ========== Diluted ................................................. $ 1.02 $ (0.18) ========== ========== The accompanying notes are an integral part of these consolidated financial statements. CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Three Months Ended March 31, ---------------------------- 2001 2002 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income/(Loss) ............................................ $ 14,686 $ (2,526) Adjustments to reconcile to net income/(loss) to cash provided by operating activities-- Depreciation, depletion and amortization.................. 5,242 8,475 (Gain)/Loss on sale of assets............................. 107 (25) Dry hole cost and impairment of undeveloped leases........ 634 1,075 Other noncurrent assets................................... 84 (101) Other noncurrent liabilities.............................. (15) 12 Changes in current assets and liabilities-- (Increase)/Decrease in accounts receivable................ 830 (186) Increase in inventories................................... (537) (286) Decrease/(Increase) in prepaid expenses.................. (49) 127 Decrease in accounts payable.............................. (1,002) (3,566) Increase/(Decrease) in revenues and royalties payable..... (529) 386 Decrease in accrued liabilities and other................. (3,009) (2,184) ---------- ---------- Net cash provided by operating activities..... 16,442 1,201 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Exploration and development............................... (18,630) (18,726) Gas gathering and processing facilities and service properties, equipment and other.............. (856) (2,265) Proceeds from sale of assets.............................. 258 42 ---------- ---------- Net cash used in investing activities......... (19,228) (20,949) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit ............................. 2,500 93,830 Repayment of line of credit ............................. -- (69,575) Debt issuance costs ...................................... -- (866) ---------- ---------- Net cash provided by financing activities..... 2,500 23,389 ---------- ---------- NET INCREASE/(DECREASE) IN CASH............................... (286) 3,641 CASH AND CASH EQUIVALENTS, beginning of period................ 7,151 7,225 ---------- ---------- CASH AND CASH EQUIVALENTS, end of period...................... $ 6,865 $ 10,866 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid ............................................ $ 7,084 $ 7,287 The accompanying notes are an integral part of these consolidated financial statements. CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. CONTINENTAL RESOURCES, INC.'S FINANCIAL STATEMENTS: In the opinion of Continental Resources, Inc. ("CRI" or the "Company") the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company's financial position as of March 31, 2002, the results of operations and cash flows for the three months ended March 31, 2001 and 2002. The unaudited consolidated financial statements for the interim periods presented do not contain all information required by accounting principles generally accepted in the United States. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on form 10-K for the year ended December 31, 2001. On June 19, 2001, the Company formed a new subsidiary, Continental Resources of Illinois, Inc. (CRII), an Oklahoma corporation. On July 9, 2001, the Company through CRII purchased the assets of Farrar Oil Company. 2. ACQUISITIONS: On July 9, 2001, the Company's subsidiary, CRII, purchased the assets of Farrar Oil Company, Inc. for $33.7 million using funds borrowed under the Company's credit facility. This purchase was accounted for as a purchase and the cost of the acquisition was allocated to the acquired assets and liabilities. The allocation of the $33.7 million of purchase price on July 9, 2001, was as follows: Current assets $ 950 Producing properties 30,603 Non-producing properties 1,117 Service properties 1,000 -------- $ 33,670 The unaudited pro forma information set forth below includes the operations of Farrar Oil Company, Inc. assuming the acquisition of Farrar Oil Company by CRII occurred on January 1, 2001. The unaudited pro forma information is presented for information purposes only and is not necessarily indicative of the results of operations that actually would have achieved had the acquisition been consummated at that time: Pro Forma --------- Three Months Ended March 31, 2001 ---- ($ in thousands, except per share data) Revenue ..................................... $ 115,988 Net Income .................................. 18,235 Earnings Per Common Share Basic ................................ $1.27 Diluted .............................. $1.27 3. LONG-TERM DEBT: Long-term debt as of December 31, 2001 and March 31, 2002 consists of the following: December 31, 2001 March 31, 2002 ----------------- -------------- (dollars in thousands) Senior Subordinated Notes..................$ 127,150 $ 127,150 Credit facility ........................... 56,245 80,000 Note payable to principal stockholder...... -- 500 ---------- ---------- Outstanding debt ..................... 183,395 207,650 Less current portion ...................... 5,400 -- ---------- ---------- Total long-term debt..................$ 177,995 $ 207,650 ========== ========== During the quarter ended March 31, 2002, the Company executed a Fourth Amended and Restated Credit Agreement in which a group of lenders agreed to provide a $175.0 million senior secured revolving credit facility with a current borrowing base of $140.0 million. Borrowings under the credit facility are secured by liens on all oil and gas properties and associated assets of the Company. Borrowings under the credit facility bear interest, payable quarterly, at (a) a rate per annum equal to the rate at which eurodollar deposits for one, two, three or six months are offered by the lead bank plus a margin ranging from 150 to 200 basis points, or (b) at the lead bank's reference rate plus an applicable margin ranging from 25 to 50 basis points. The Company paid approximately $1.2 million in debt issuance fees for the new credit facility. The credit facility matures on March 28, 2005. As of March 31, 2002, the Company had $80.0 million outstanding debt on its line of credit. 4. CRUDE OIL MARKETING: The Company enters into third party contracts to purchase and resell crude oil at prices based on current month NYMEX prices, current posting prices or at a stated contract price. Purchases and sales are recorded at the stated contract price. During the quarter ended March 31, 2002, the Company had revenues from the sale of crude oil and expenses for the purchase of crude oil of $47.4 million and $48.2 million, respectively, resulting in a loss from crude oil marketing activities during the quarter of $0.8 million. The Company accounts for its crude oil marketing activities in accordance with EITF 98-10 "Accounting for Energy Trading and Risk Management Activities." This statement requires that contracts for the purchase and sale of energy commodities which are entered into for the purpose of speculating on market movements or otherwise generating gains from market price differences to be recorded at their market value, as of the balance sheet date, with any corresponding gains or losses recorded as income from operations. 5. EARNINGS PER SHARE: Earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of shares outstanding for the period. The weighted-average number of shares used to compute earnings per common share was 14,368,919 in 2001 and 2002. The weighted-average number of shares used to compute diluted EPS was 14,393,132 for 2001. The effect of common stock equivalents at March 31, 2002, was anti-diluted. 6. GUARANTOR SUBSIDIARIES: The Company's wholly owned subsidiaries, Continental Gas, Inc. (CGI), Continental Resources of Illinois, Inc. (CRII), and Continental Crude Co. (CCC), have guaranteed the Company's outstanding Senior Subordinated Notes and its bank credit facility. The following is a summary of the condensed consolidating financial information of CGI and CRII as of December 31, 2001, and March 31, 2002, and for the three month periods ended March 31, 2001, and 2002. As Farrar Oil Company was acquired by CRII in July 2001, the March 31, 2001, activity does not include any activity of CRII. Since its incorporation, CCC has had no operations, has acquired no assets and has incurred no liabilities. Condensed Consolidating Balance Sheet as of December 31, 2001 (dollars in thousands) Guarantor Subsidiaries Parent Eliminations Consolidated ------------- ------------ ------------ ------------ Current Assets $ 6,310 $ 51,915 $ (25,935) $ 32,290 Noncurrent Assets 42,063 280,143 (11) 322,195 ------------ ------------ ------------- ------------ Total Assets $ 48,373 $ 332,058 $ (25,946) $ 354,485 ============ ============ ============ ============ Current Liabilities $ 11,039 $ 38,629 $ (8,382) $ 41,286 Noncurrent Liabilities 17,553 178,086 (17,553) 178,086 Stockholder's Equity 19,781 115,343 (11) 135,113 ------------ ------------ ------------- ------------ Total Liabilities and Stockholder's Equity $ 48,373 $ 332,058 $ (25,946) $ 354,485 ============ ============ ============ ============ Condensed Consolidated Balance Sheet as of March 31, 2002 (dollars in thousands) Guarantor Subsidiaries Parent Eliminations Consolidated ------------- ------------ ------------ ------------ Current Assets $ 6,129 $ 54,409 $ (24,262) $ 36,276 Noncurrent Assets 43,229 291,371 (14) 334,586 ------------ ------------ ------------- ------------ Total Assets $ 49,358 $ 345,780 $ (24,276) $ 370,862 ============ ============ ============ ============ Current Liabilities $ 3,654 $ 26,696 $ 172 $ 30,522 Noncurrent Liabilities 24,811 207,253 (24,311) 207,753 Stockholder's Equity 20,893 111,831 (137) 132,587 ------------ ------------ ------------ ------------ Total Liabilities and Stockholder's Equity $ 49,358 $ 345,780 $ (24,276) $ 370,862 ============ ============ ============ ============ Condensed Consolidating Statements of Operations For the Three Months Ended March 31, 2001 (dollars in thousands) Guarantor Subsidiaries Parent Eliminations Consolidated ------------- ------------ ------------ ------------ Total Revenues $ 14,494 $ 96,110 $ (1,283) $ 109,321 Operating Costs and Expenses 12,728 79,604 (1,283) 91,049 Other Income (Expense) (102) (3,484) 0 (3,586) ------------- ------------ ------------ ------------ Net Income $ 1,664 $ 13,022 $ 0 $ 14,686 ============= ============ ============ ============ Condensed Consolidating Statements of Operations For the Three Months Ended March 31, 2002 (dollars in thousands) Guarantor Subsidiaries Parent Eliminations Consolidated ------------- ------------ ------------ ------------ Total Revenues $ 10,929 $ 68,726 $ (807) $ 78,848 Operating Costs and Expenses 9,377 68,983 (807) 77,553 Other Income (Expense) (443) (3,255) (123) (3,821) ------------ ---------- ------------ ------------ Net Income (Loss) $ 1,109 $ (3,512) $ (123) $ (2,526) ============ ============ ============ ============ At March 31, 2002, current liabilities payable to the Company by the guarantor subsidiaries totaled approximately $24.3 million. For the three months ended March 31, 2001 and 2002, depreciation, depletion and amortization included in the guarantor subsidiaries operating costs were approximately $0.5 million and $1.5 million, respectively. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No.143 will affect the Company's accrued abandonment costs for oil and gas properties and will require that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. If a reasonable estimate of fair value cannot be made in the period the asset retirement is incurred, the liability shall be recognized when a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Adoption of SFAS No. 143 is required for financial statements for periods beginning after June 15, 2002. The Company will adopt this new standard effective January 1, 2003. Management has not yet determined what the impact of this new standard will be on its financial position or results of operation. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that an impairment loss be recognized only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and that the measurement of an impairment loss be the difference between the carrying amount and fair value of the asset. Adoption of SFAS No. 144 is required for financial statements for periods beginning after December 15, 2001. The Company adopted this new standard effective January 1, 2002. The adoption of this new standard did not have a material impact on the Company's financial position or results of operation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001 The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report. Our operating results for the periods discussed may not be indicative of future performance. In the text below, financial statement numbers have been rounded; however, the percentage changes are based on unrounded amounts. RESULTS OF OPERATIONS REVENUES GENERAL Revenues, excluding crude oil marketing, decreased $17.7 million, or 36%, to $31.5 million during the three months ended March 31, 2002, from $49.2 million during the comparable period in 2001. The decrease is attributable to lower oil prices which averaged $19.60 Bbl in the first quarter of 2002 compared to $27.46 Bbl in the first quarter of 2001 and lower gas prices which averaged $1.87 Mcf in the first quarter of 2002 and $6.42 Mcf in the first quarter of 2001. Crude oil marketing generated $47.4 million in revenue for the three month period ending March 31, 2002, compared to $60.1 million for the three month period ending March 31, 2001. OIL AND GAS SALES Oil and gas sales revenue for the three months ended March 31, 2002, decreased $11.5 million, or 34%, to $22.7 million from $34.2 million during the comparable period in 2001. Oil sales decreased $4.3 million, or 19%, to $18.3 million for the three months of 2002 from $22.6 million in 2001. Oil production increased by 113 MBbls to 936 MBbls, or 14%, for the three months ended March 31, 2002 from 823 MBbls for the comparable period in 2001. The increased production was due to the acquisition of the assets of Farrar Oil Company in July 2001 offset by normal production declines. Oil prices, exclusive of hedging, decreased $7.86/Bbl to an average of $19.60/Bbl, or 29%, during the three months ended March 31, 2002, from $27.46/Bbl, for the comparable 2001 period. Gas sales decreased $7.3 million, or 63%, to $4.3 million for the three month period in 2002 compared to $11.6 million in 2001. Gas production for the period increased 490 Mmcf, or 27%, to 2,294 Mmcf from 1,804 Mmcf in 2001. The increased production was due to the acquisition of the assets of Farrar Oil Company in July 2001 offset by normal production declines. The decrease in revenues is mainly attributable to lower gas prices which averaged $1.87 Mcf in the first quarter of 2002 and $6.42 Mcf in the first quarter of 2001, or a decrease of $4.55 per Mcf, or 71%. CRUDE OIL MARKETING During the three month period ended March 31, 2002, we recognized revenues on crude oil purchased for resale of $47.4 million compared to $60.1 million for the three month period ended March 31, 2001. A decrease in volume and a decrease in prices made up the difference between 2002 and 2001. We have recorded a loss of $1.2 million to reflect the mark-to-market exposure at March 31, 2002. This is a financial derivative that pays $24.25 anytime the NYMEX price is between $19.00 and $24.25. This derivative is effective from April 2002 to December 2003. GATHERING, MARKETING AND PROCESSING Gathering, marketing and processing revenue in the first quarter of 2002 was $7.2 million, a decrease of $5.8 million, or 45%, from $13.0 million in the same period in 2001. This decrease in revenue during the first quarter was attributable to lower natural gas and liquids prices in the 2002 period compared to the 2001 period. OIL AND GAS SERVICE OPERATIONS Oil and gas service operations for the three months ended March 31, 2002, was $1.6 million, a decrease of $0.4 million, or 20%, from $2.0 million for the three months ended March 31, 2001. The decrease was primarily due to a decrease in reclaimed oil income of $0.6 million due to lower prices and volumes received at our central treating unit. COSTS AND EXPENSES PRODUCTION EXPENSES Production expenses for the three months ended March 31, 2001, and March 31, 2002, remained constant at $6.5 million but resulted in a lowed LOE cost per BOE in 2002 of $4.91 from $5.76 for the three months in 2001 due to increased production. PRODUCTION TAXES Production taxes decreased $1.1 million, or 42%, to $1.5 million during the three months ended March 31, 2002, from $2.6 million during the comparable period in 2001. The decrease was due to lower prices in the three months ended March 31, 2002, compared to the three months ended March 31, 2001. EXPLORATION EXPENSES For the three months ended March 31, 2002, exploration expenses decreased $0.4 million, or 15%, to $2.2 million from $2.6 million during the comparable period of 2001. The decrease was mainly due to a decrease in dry hole expense and plugging expenses of $1.2 million offset by increases in expired leases and other expenses of $0.7 million. CRUDE OIL MARKETING For the three months ended March 31, 2002, we recognized expenses for the purchases of crude oil for resale of $48.2 million compared to purchases of crude oil for resale of $59.6 million for the three months ended March 31, 2001. A decrease in volume and a decrease in prices made up the difference between 2001 and 2002. GATHERING, MARKETING, AND PROCESSING During the three months ended March 31, 2002, we incurred gathering, marketing and processing expenses of $5.1 million, representing a $5.5 million, or 52%, decrease from $10.6 million incurred in the first quarter of 2001 due to lower natural gas and liquids prices on natural gas we purchased for resale. OIL AND GAS SERVICE OPERATIONS During the three months ended March 31, 2002, we incurred oil and gas service operations expense of $1.7 million, a $0.3 million, or 21%, increase over the $1.4 million for the comparable period in 2001. This increase was due to increased expenses attributable to the assets of Farrar Oil Company that we acquired in July 2001. DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A) For the three months ended March 31, 2002, DD&A expense increased $3.2 million, or 62%, to $8.5 million in 2002 from $5.2 million for the comparable period in 2001. In the first quarter of 2002, DD&A expense on oil and gas properties was calculated at $5.57 per BOE compared to $3.67 per BOE for the first quarter of 2001. The DD&A expense attributable to the assets of Farrar Oil Company that we acquired in July 2001 and lower oil and gas prices resulting in higher depletion rates were the main causes for this increase. GENERAL AND ADMINISTRATIVE ("G&A") For the three months ended March 31, 2002, net G&A expense was $3.2 million, or an increase of $1.2 million or 60%, from net G&A expense of $2.0 million during the comparable period in 2001. Overhead reimbursement of $0.6 million and $0.5 million for 2002 and 2001, respectively, was netted from G&A expense. The increase was primarily due to increased employment expense of $0.7 million, a variety of smaller increases in other office expenses aggregating $0.5 million, and G&A expenses resulting from the assets of Farrar Oil Company that we acquired in July 2001. G&A expenses per BOE for the first quarter of 2002 was $2.43 compared to $1.79 for the first quarter of 2001. INTEREST EXPENSE For the three months ended March 31, 2002, interest expense was $4.0 million, an increase of $0.4 million, or 11%, from $3.6 million for the three months ended March 31, 2001. This increase was due to additional interest paid on our credit facility due to higher average debt balances outstanding. OTHER INCOME Other income for the three months ended March 31, 2002, was income of $0.04 million compared to an expense of $0.2 million for the same period in 2001. This difference reflects a gain on the sale of assets in 2002 compared to a loss on the sale of assets in 2001. NET INCOME For the three months ended March 31, 2002, net income was a loss of $2.5 million, a decrease of $17.2 million from profit of $14.7 million for the comparable period in 2001. The decrease in net income was primarily due to lower oil and gas prices and increased DD&A and G&A expenses of $3.2 million and $1.2 million, respectively. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW FROM OPERATIONS Net cash provided by operating activities for the three months ended March 31, 2002, was $1.2 million, a decrease of $15.2 million from $16.4 million provided by operating activities during the comparable 2001 period. Cash as of March 31, 2002, was $10.9 million, an increase of $3.5 million or 49%, from the balance of $7.2 million held at December 31, 2001. Of the $10.7 million balance at March 31, 2002, $2.2 million will be used to make the August 1, 2002, interest payment on our 10.25% Senior Subordinated Notes. DEBT Our Long-term debt at December 31, 2001, was $178.0 million and at March 31, 2002, $207.7 million. During the quarter ended March 31, 2002, we entered into a Fourth Amended and Restated Credit Agreement in which our syndicated bank group agreed to provide a $175.0 million senior secured revolving credit facility with a current borrowing base of $140.0 million. We have $80.0 million of outstanding debt under this credit facility at March 31, 2002. CREDIT FACILITY Long-term debt outstanding at March 31, 2002, included $80.0 million of revolving credit debt under our credit facility. The effective rate of interest under the credit facility was 4.00% at March 31, 2002. The credit facility, which matures March 28, 2005, charges interest based on a rate per annum equal to the rate at which eurodollar deposits for one, two, three or six months are offered by the lead bank plus an applicable margin ranging from 150 to 250 basis points or the lead bank's reference rate plus an applicable margin ranging from 25 to 50 basis points. The borrowing base of our credit facility is $140.0 million and is re-determined semi-annually. CAPITAL EXPENDITURES Our 2002 capital expenditures budget, exclusive of acquisitions, is $91.3 million, of which $64.9 million is dedicated to our Cedar Hills secondary recovery project. During the three months ended March 31, 2002, we incurred $21.0 million of capital expenditures, exclusive of acquisitions, compared to $19.5 million, exclusive of acquisitions, in the three month period of 2001. The $1.5 million, or 8%, increase was the result of our increased drilling activity in the Rocky Mountain and Gulf Coast regions. We expect to fund the remainder of our 2002 capital budget through cash flow from operations and borrowings under our credit facility. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report includes "forward-looking statements". All statements other than statements of historical fact, including, without limitation, statements contained under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our financial position, business strategy, plans and objectives of our management for future operations and industry conditions, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") include, without limitation, future production levels, future prices and demand for oil and gas, results of future exploration and development activities, future operating and development cost, the effect of existing and future laws and governmental regulations (including those pertaining to the environment) and the political and economic climate of the United States as discussed in this quarterly report and the other documents we filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed to market risk in the normal course of our business operations. Our management believes that we are well positioned with our mix of oil and gas reserves to take advantage of future price increases that may occur. However, the uncertainty of oil and gas prices continues to impact the domestic oil and gas industry. Due to the volatility of oil and gas prices, we, from time to time, have used derivative hedging and may do so in the future as a means of controlling our exposure to price changes. Most of our purchases are made at either a NYMEX based price or a fixed price. Forward sales contracts that will result in the physical delivery of our production are deemed to be normal course of business sales and are not accounted for as derivatives. As of March 31, 2002, we had the following fixed sales contracts in order to mitigate our price risk exposure on our production: Time Period Barrels per Month Price per Barrel ----------- ----------------- ---------------- 11/01-03/03 60,000 $21.98 07/02-06/03 30,000 $24.01 07/02-01/04 30,000 $24.01 RISK MANAGEMENT The risk management process we have established is designed to measure both quantitative and qualitative risks in our businesses. We are exposed to market risk, including changes in interest rates and certain commodity prices. To manage the volatility relating to these exposures, periodically we enter into various derivative transactions pursuant to our policies on hedging practices. Derivative positions are monitored using techniques such as mark-to-market valuation and value-at-risk and sensitivity analysis. COMMODITY PRICE EXPOSURE The market risk inherent in our market risk-sensitive instruments and positions is the potential loss in value arising from adverse changes in our commodity prices. The prices of crude oil, natural gas, and natural gas liquids are subject to fluctuations resulting from changes in supply and demand. To partially reduce price risk caused by these market fluctuations, we may hedge (through the utilization of derivatives) a portion of our production and sale contracts. Because the commodities covered by these derivatives are substantially the same commodities that we buy and sell in the physical market, no special studies other than monitoring the degree of correlation between the derivative and cash markets, are deemed necessary. A sensitivity analysis has been prepared to estimate the price exposure to the market risk of our crude oil, natural gas and natural gas liquids commodity positions. Our daily net commodity position consists of crude inventories, commodity purchase and sales contracts and derivative commodity instruments. The fair value of such position is a summation of the fair values calculated for each commodity by valuing each net position at quoted futures prices. Market risk is the estimated potential loss in fair value resulting from a hypothetical 10 percent adverse change in such prices over the next 12 months. Based on this analysis, we estimate the potential market risk loss, assuming a hypothetical 10% adverse change, to be approximately $1.5 million related to our crude trading or hedging portfolios. In June 1998, the Financial Accounting Standards Board ("FASB") issued statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and for Hedging Activities", with an effective date for periods beginning after June 15, 1999. In July 1999 the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". As a result of SFAS No. 137, adoption of SFAS No. 133 is now required for financial statements for periods beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities. SFAS No. 133 sweeps in a broad population of transactions and changes the previous accounting definition of a derivative instrument. Under SFAS No. 133 every derivative instrument is recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. During 2000, management reviewed all of our contracts to identify both freestanding and embedded derivatives which meet the criteria set forth in SFAS No. 133 and SFAS No. 138. We adopted the new standards effective January 1, 2001. We had no outstanding hedges or derivatives which had not been previously marked to market through our accounting for trading activity. As a result, the adoption of SFAS No. 133 and SFAS No. 138 had no significant impact. INTEREST RATE RISK Our exposure to changes in interest rates relates primarily to long-term debt obligations. We manage our interest rate exposure by limiting ours variable-rate debt to a certain percentage of total capitalization and by monitoring the effects of market changes in interest rates. We may utilize interest rate derivatives to alter interest rate exposure in an attempt to reduce interest rate expense related to existing debt issues. Interest rate derivatives are used solely to modify interest rate exposure and not to modify the overall leverage of the debt portfolio. The fair value of long-term debt is estimated based on quoted market prices and management's estimate of current rates available for similar issues. The following table itemizes our long-term debt maturities and the weighted-average interest rates by maturity date. - ------------------------------------------------------------------------------------------------------------------- 2002 (dollars in thousands) 2002 2003 2004 2005 Thereafter Total Fair Value - ------------------------------------------------------------------------------------------------------------------- Fixed rate debt: Principal amount $127,150 $127,150 $127,150 Weighted-average interest rate 10.25% 10.25% -- Variable-rate debt: Principal amount -- -- -- $80,000 -- $80,000 $80,000 Weighted-average interest rate -- -- -- -- -- 4.00% -- - ------------------------------------------------------------------------------------------------------------------- PART II. Other Information ITEM 1. LEGAL PROCEEDINGS From time to time, we are a party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not involved in any legal proceedings nor are we a party to any pending or threatened claims that could reasonably be expected to have a material adverse effect on our financial condition or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a.) Exhibits: DESCRIPTION 2.1 Agreement and Plan of Recapitalization of Continental Resources, Inc. dated October 1, 2000.[2.1](4) 3.1 Amended and Restated Certificate of Incorporation of Continental Resources, Inc.[3.1](1) 3.2 Amended and Restate Bylaws of Continental Resources, Inc. [3.2](1) 3.3 Certificate of Incorporation of Continental Gas, Inc. [3.3](1) 3.4 Bylaws of Continental Gas, Inc., as amended and restated. [3.4](1) 3.5 Certificate of Incorporation of Continental Crude Co. [3.5](1) 3.6 Bylaws of Continental Crude Co. [3.6](1) 4.1 Restated Credit Agreement dated April 21, 2000 among Continental Resources, Inc. and Continental Gas, Inc., as Borrowers and MidFirst Bank as Agent (the "Credit Agreement") [4.4](3) 4.1.1 Form of Consolidated Revolving Note under the Credit Agreement [4.4](3) 4.1.2 Second Amended and Restated Credit Agreement among Continental Resources, Inc., Continental Gas, Inc. and Continental Resources of Illinois, Inc., as Borrowers, and MidFirst Bank, dated July 9, 2001.[10.1](5) 4.1.3 Third Amended and Restated Credit Agreement among Continental Resources, Inc., Continental Gas, Inc. and Continental Resources of Illinois, Inc., as Borrowers, and MidFirst Bank, dated January 17, 2002.[4.13](7) 4.1.4 Fourth Amended and Restated Credit Agreement dated March 28, 2002, among the Registrant, Union Bank of California, N.A., Guaranty Bank, FSB and Fortis Capital Corp. [10.1](8) 4.3 Indenture dated as of July 24, 1998 between Continental Resources, Inc., as Issuer, the Subsidiary Guarantors named therein and the United States Trust Company of New York, as Trustee [4.3](1) 10.1 Unlimited Guaranty Agreement dated March 28, 2002.[10.2](8) 10.2 Security Agreement dated March 28, 2002, between Registrant and Guaranty Bank, FSB, as Agent.[10.3](8) 10.3 Stock Pledge Agreement dated March 28, 2002, between Registrant and Guaranty Bank, FSB, as Agent.[10.4](8) 10.4 Conveyance Agreement of Worland Area Properties from Harold G. Hamm, Trustee of the Harold G. Hamm Revocable Intervivos Trust dated April 23, 1984 to Continental Resources, Inc. [10.4](2) 10.5 Purchase Agreement signed January 2000, effective October 1, 1999, by and between Patrick Energy Corporation as Buyer and Continental Resources, Inc. as Seller [10.5](2) 10.6+ Continental Resources, Inc. 2000 Stock Option Plan. [10.6](4) 10.7+ Form of Incentive Stock Option Agreement. [10.7](4) 10.8+ Form of Non-Qualified Stock Option Agreement. [10.8](4) 10.9 Purchase and Sales Agreement between Farrar Oil Company and Har-Ken Oil Company, as Sellers, and Continental Resources of Illinois, Inc. as Purchaser, dated May 14, 2001.[2.1](5) 10.10 Collateral Assignment of Contracts dated March 28, 2002, between Registrant and Guaranty Bank, FSB, as Agent. [10.5](8) 12.1 Statement re computation of ratio of debt to Adjusted EBITDA[12.1](7) 12.2 Statement re computation of ratio of earning to fixed charges[12.2](7) 12.3 Statement re computation of ratio of Adjusted EBITDA to interest expense[12.3](7) 21.0 Subsidiaries of Registrant.[21](6) 99.1 Letter to the Securities and Exchange Commission dated March 28, 2002, regarding the audit of the Registrant's financial statements by Arthur Andersen LLP.[99.1](7) _________________________ + Represents management compensatory plan * Filed herewith (1) Filed as an exhibit to the Company's Registration Statement on Form S-4, as amended (No. 333-61547) which was filed with the Securities and Exchange Commission. The exhibit number is indicated in brackets and is incorporated herein by reference. (2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. The exhibit number is indicated in brackets and is incorporated herein by reference. (3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2000. The exhibit number is indicated in brackets and is incorporated herein by reference. (4) Filed as an exhibit to the Company's Quarterly Report on Form 10-K for the fiscal quarter ended December 31, 2000. The exhibit number is indicated in brackets and is incorporated herein by reference. (5) Filed as an exhibit to current report on Form 8-K dated July 18, 2001. The exhibit number is indicated in brackets and is incorporated herein by reference. (6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001. The exhibit number is indicated in brackets and is incorporated herein by reference. (7) Filed as an exhibit to the Company's Annual report on Form 10-K for the fiscal year ended December 31, 2001. The exhibit number is indicated in brackets and is incorporated herein by reference. (8) Filed as an exhibit to current report on Form 8-K dated April 11, 2002. The exhibit number is indicated in brackets and is incorporated herein by reference. (b.) REPORTS ON FORM 8-K On July 18, 2001, the Registrant filed a current report on Form 8-K describing the purchase of certain oil and gas properties from Farrar Oil Company and Har-Ken Oil Company, and the Second Amended and Restated Credit Agreement with MidFirst Bank. On April 11, 2002, the Registrant filed a current report on Form 8-K describing the execution of the Fourth Amended and Restated Credit Agreement. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONTINENTAL RESOURCES, INC. ROGER V. CLEMENT Roger V. Clement Senior Vice President (Chief Financial Officer) Date: May 14, 2002