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 September 30, 1999 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 November 12, 1999 Common Stock, $1.00 par value 49,041 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. . . . . . . . . . . . . . . . . . . . . .-8- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. . -13- 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, September 30, 1998 1999 ---------- ----------- CURRENT ASSETS: Cash $ 15,817 $ 8,578 Accounts receivable- Oil and gas sales 7,255 9,845 Joint interest and other, net 7,733 4,794 Inventories 4,627 4,824 Prepaid expenses 168 2,504 Advances to affiliates 1 1 ---------- ---------- Total current assets 35,601 30,546 ---------- ---------- PROPERTY AND EQUIPMENT: Oil and gas properties Producing properties 241,358 248,042 Nonproducing leaseholds 47,583 44,194 Gas gathering and processing facilities 24,709 26,041 Service properties, equipment and other 15,989 16,103 ---------- ---------- Total property and equipment 329,639 334,380 Less--Accumulated depreciation, depletion and amortization (121,061) (133,680) ---------- ---------- Net property and equipment 208,578 200,700 OTHER ASSETS: Debt issuance costs 9,023 8,154 Other assets 537 280 ---------- ---------- Total other assets 9,560 8,434 ---------- ---------- Total assets $ 253,739 $ 239,680 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 10,532 $ 6,711 Current portion of long-term debt 337 326 Revenues and royalties payable 5,855 6,193 Accrued liabilities and other 9,224 5,738 Short-term debt - stockholder 10,000 - ---------- ---------- Total current liabilities 35,948 18,968 ---------- ---------- LONG-TERM DEBT, net of current portion 157,302 156,948 OTHER NONCURRENT LIABILITIES 205 166 COMMITMENTS AND CONTINGENCIES (Note 4) STOCKHOLDERS' EQUITY: Common stock, $1 par value, 75,000 shares authorized, 49,041 shares issued and outstanding 49 49 Additional paid-in-capital 2,721 2,721 Retained earnings 57,514 60,828 ---------- ---------- Total stockholders' equity 60,284 63,598 ---------- ---------- Total liabilities and stockholders' equity $ 253,739 $ 239,680 ========== ========== 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 September 30, -------------------------------- 1998 1999 ---- ---- REVENUES: Oil and gas sales $ 14,316 $ 18,744 Crude oil marketing 123,586 49,158 Gathering, marketing and processing 3,808 5,164 Oil and gas service operations 1,928 1,698 ---------- ---------- Total revenues 143,638 74,764 ---------- ---------- OPERATING COSTS AND EXPENSES: Production expenses 6,486 4,090 Production taxes 925 1,344 Exploration expenses 1,499 1,852 Crude oil marketing purchases and expenses 119,859 48,133 Gathering, marketing and processing 3,702 4,270 Oil and gas service operations 614 979 Depreciation, depletion and amortization 10,817 4,105 General and administrative 2,423 1,842 ---------- ---------- Total operating costs and expenses 146,325 66,615 ---------- ---------- OPERATING INCOME (2,687) 8,149 ---------- ---------- OTHER INCOME AND EXPENSES Interest income 155 109 Interest expense (3,117) (4,032) Other income (expense), net 443 78 ---------- ---------- Total other income and (expenses) ( 2,519) (3,845) ---------- ---------- NET INCOME (LOSS) ($ 5,206) $ 4,304 ========== ========== EARNINGS (LOSS) PER COMMON SHARE ($ 106.15) $ 87.76 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share data) Nine Months Ended September 30, ------------------------------- 1998 1999 ---- ---- REVENUES: Oil and gas sales $ 45,606 $ 44,492 ---------- ---------- Crude oil marketing 123,587 173,491 Gathering, marketing and processing 13,612 12,358 Oil and gas service operations 4,991 4,792 ---------- ---------- Total revenues 187,796 235,133 ---------- ---------- OPERATING COSTS AND EXPENSES: Production expenses 13,748 10,395 Production taxes 2,737 2,965 Exploration expenses 4,149 5,139 Crude oil marketing purchases and expenses 119,859 167,157 Gathering, marketing and processing 12,111 10,126 Oil and gas service operations 2,439 2,358 Depreciation, depletion and amortization 27,300 13,789 General and administrative 7,338 6,015 ---------- ---------- Total operating costs and expenses 189,681 217,944 ---------- ---------- OPERATING INCOME (1,885) 17,189 ---------- ---------- OTHER INCOME AND EXPENSES Interest income 935 296 Interest expense (8,291) (12,236) Other income (expense), net 536 113 ---------- ---------- Total other income and (expenses) ( 6,820) ( 11,827) ---------- ---------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ( 8,705) 5,362 ---------- ---------- CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - (2,048) ---------- ---------- NET INCOME (LOSS) ($ 8,705) $ 3,314 ========== ========== EARNINGS (LOSS) PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ($ 177.51) $ 109.35 ========== ========== EARNINGS (LOSS) PER COMMON SHARE AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ($ 177.51) $ 67.58 ========== ========== 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) Nine Months Ended September 30, ------------------------------- 1998 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) ($ 8,705) $ 3,314 ---------- ---------- Adjustments to reconcile to net cash provided by operating activities-- Depreciation, depletion and amortization 27,300 13,789 Gain on sale of assets (56) (9) Dry hole cost and impairment of undeveloped leases 1,262 4,003 Other noncurrent assets (22) 257 Other Noncurrent Liabilities - (38) Changes in current assets and liabilities-- Decrease in accounts receivable 10,445 349 Increase in inventories (2,046) (197) (Increase)/decrease in prepaid expenses 172 (2,336) Decrease in accounts payable (9,791) (3,821) Increase/(Decrease) in revenues and royalties payable (3,701) 338 Decrease in accrued liabilities and other 1,289 (3,486) ---------- ---------- Net cash provided by operating activities 16,147 12,163 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Exploration and development (34,688) (6,248) Gas gathering and processing facilities and service properties, equipment and other (4,136) (1,487) Purchase of producing properties (85,100) (1,329) Proceeds from sale of assets 42,972 26 Advances from affiliates 59 - ---------- ---------- Net cash used in investing activities (80,893) (9,038) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit and other 265,515 4,600 Repayment of line of credit and other (188,427) (4,964) Debt issuance costs (9,455) - Repayment of short-term note due to stockholder - (10,000) ---------- ---------- Net cash provided by (used in) financing activities 67,633 (10,364) ---------- ---------- NET INCREASE(DECREASE) IN CASH 2,887 (7,239) CASH, beginning of period 1,301 15,817 ---------- ---------- CASH, end of period $ 4,188 $ 8,578 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid - - Interest paid $ 8,291 $ 16,399 NONCASH INVESTING AND FINANCING ACTIVITIES: Advance to affiliate made with sale of 50% interest in producing properties $ 19,581 - Satisfaction of note payable to principal stockholder through sale of 50% interest in producing properties $ 22,969 - 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 September 30, 1999,the results of operations for the three months and nine months ended September 30, 1998 and 1999 and cash flows for the nine months ended September 30, 1998 and 1999. The unaudited consolidated financial statements for the interim periods presented do not contain all information required by generally accepted accounting principles. 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, 1998. 2. LONG-TERM DEBT: Long-term debt as of December 31, 1998 and September 30, 1999 consists of the following: December 31, 1998 September 30, 1999 ----------------- ------------------ (dollars in thousands) Senior Subordinated Notes $ 150,000 $ 150,000 Credit Facility 4,000 4,000 Notes payable to General Electric Capital Corporation 3,582 3,247 Capital lease agreements 57 27 ---------- ---------- Outstanding debt 157,639 157,274 Less current portion 337 326 ---------- ---------- Total long-term debt $ 157,302 $ 156,948 ========== ========== In February 1999, the Company borrowed $4.6 million against its revolving credit facility. Subsequent to September 30, 1999 the Company has made payments of $4.0 million to reduce the borrowings against its Credit Facility to $0. The current borrowing base of the Credit Facility is $25 million until May 1, 2000 when the next redetermination is expected to take place. 3. CRUDE OIL MARKETING: On July 1, 1998, the Company began entering 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 September 30, 1999, the Company had revenues of $49.2 million on purchases of $48.1 million, while incurring expenses of $0.1million, resulting in a margin from crude oil marketing activities during the quarter of $1.0 million. Year to date the Company has had revenues of $173.5 million on purchases of $166.4 million, while incurring expenses of $0.8 million, resulting in a year to date margin from crude oil marketing activities of $6.3 million. In December 1998, the Emerging Issues Task Force ("EITF") released their consensus on 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. The Company adopted EITF 98- 10 effective January 1, 1999. As a result, the Company recorded an expense for the cumulative effect of change in accounting principle of $2.0. At September 30, 1999, the market value of the Company's open energy trading contracts resulted in an unrealized gain of $2.4 million which is recorded in crude oil marketing revenues in the accompanying consolidated statement of operations and prepaid expenses in the accompanying consolidated balance sheet. During the third quarter of 1999, the Company entered into forward fixed price sales contracts in accordance with its hedging policy, to mitigate its exposure to the price volatility associated with its crude oil production. The monthly contracts range from 90,000 to 100,000 barrels per month and extend through February 2000. The Company accounts for changes in the market value of its hedging instruments as deferred gains or losses until the production month of the hedged transaction, at which time the realized gain or loss is recognized in the results of operations. At September 30, 1999, the Company had open contracts totaling approximately 480,000 barrels with unrealized deferred losses of approximately $1.9 million. 4. COMMITMENTS AND CONTINGENCIES: On May 15, 1998, the Company and an unrelated third party entered into a definitive agreement to exchange undivided interests in approximately 65,000 gross (59,000 net) leasehold acres in the northern half of the Cedar Hills Field. On August 19, 1998, the Company instituted a declaratory judgment action against the unrelated third party in the District Court of Garfield County, Oklahoma. The Company seeks a declaratory judgment determining that it is excused from further performance under its exchange agreement with the third party. The third party has denied the Company's allegations and seeks specific performance by the Company, plus monetary damages of an unspecified amount. The Cedar Hills unitization process is expected to continue. On March 31, 1999, the North Dakota Industrial Commission (NDIC) held a hearing to discuss the status of the unitization process. As a result of the hearing, effective August 1, 1999, the NDIC will require the Company to curtail production on less than ten wells. This will result in an estimated reduction of less than 100 barrels a day of crude oil production of the estimated production by the Company in the field of a total of 5,500 barrels a day. 5. GUARANTOR SUBSIDIARIES The Company's wholly owned subsidiaries, Continental Gas, Inc. (CGI) and Continental Crude Co. (CCC), have guaranteed the Senior Subordinated Notes and the Credit Facility. The following is a summary of the financial information of Continental Gas, Inc. as of December 31, 1998 and September 30, 1999 and for the three month and nine month periods ended September 30, 1998 and 1999. AS OF: (dollars in thousands) December 31, 1998 September 30, 1999 ----------------- ------------------ Current assets $ 2,493 $ 1,708 Noncurrent assets 22,263 21,961 ---------- ---------- Total assets $ 24,756 $ 23,669 ========== ========== Current liabilities $ 13,503 $ 12,502 Noncurrent liabilities 616 -0- Stockholder's equity 10,637 11,167 ---------- ---------- Total liabilities and stockholder's equity $ 24,756 $ 23,669 ========== ========== FOR THE THREE MONTH AND NINE MONTH PERIOD ENDED SEPTEMBER 30, (dollars in thousands) 1998 1999 ---- ---- 3 month 9 month 3 month 9 month ------- ------- ------- ------- Total revenues $ 4,422 $ 16,106 $ 6,225 $ 14,976 Operating costs and expenses 5,101 16,602 6,021 14,998 -------- -------- -------- -------- Operating income (loss) (679) (496) 204 (22) Other expenses (179) (446) (179) (564) -------- -------- -------- -------- Net loss $ (858) $ (942) $ 25 $ (586) ======== ======== ======== ======== At September 30, 1999, current liabilities payable to the Company by CGI totaled approximately $9.5 million. For the three months ended September 30, 1998 and 1999, depreciation, depletion and amortization included in CGI's operating costs totaled approximately $0.6 million and $0.5 million, respectively. For the nine month periods ended September 30, 1998 and 1999 depreciation, depletion and amortization included in operating costs totaled $1.5 million and $1.6 million, respectively. A corresponding entry was made on the parents books. This entry was made to transfer prior year deferred tax liabilities and other noncurrent liabilities to the parent company. During the third quarter of 1999 approximately $1.1 million of current and noncurrent liabilities were transferred to CRI and reflected as additional stockholder's equity of CGI. Since its incorporation, CCC has had no operations, has acquired no assets and has incurred no liabilities. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 The following discussion and analysis should be read in conjunction with the Company's unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report. The Company's 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, increased $5.6 million, or 28%, to $25.6 million during the three months ended September 30, 1999 from $20.0 million during the comparable period in 1998. The increase is attributable to higher oil prices and higher gas prices which more than offset lower oil and gas production. During the third quarter of 1998, the Company began marketing crude oil that had been purchased from third parties. This activity generated $49.2 million in revenue to the Company for the three month period ending September 30, 1999 compared to $123.6 for the three month period ending September 30, 1998. The third quarter of 1998 was the first quarter the Company engaged in crude oil marketing. This activity generated $173.5 million in revenue for the nine month period ended September 30, 1999 compared to $123.6 for the nine month period ended September 30, 1998. The company has scaled back on it's crude oil marketing since the third and fourth quarters of 1998. OIL AND GAS Oil and gas sales revenue for the three months ended September 30, 1999 increased $4.4 million, or 31%, to $18.7 million from $14.3 million during the comparable period in 1998. Oil production decreased by 210 MBbls to 803 MBbls, or 21%, for the three months ended September 30, 1999 from 1,013 MBbls for the comparable period in 1998. The production decrease was mainly due to the natural production declines for new wells. Oil prices increased to an average of $19.73/Bbl, or 75%, during the three months ended September 30, 1999 from $11.29/Bbl, for the comparable 1998 period. Gas sales decreased $26 thousand for the three month period in 1999 compared to 1998. Gas production for the period decreased 177 Mmcf, or 10%, to 1, 678 Mmcf from 1,855 Mmcf in 1998. The decrease in production for the period was partially offset by a 10% increase in realized gas sales prices to $1.72/Mcf in 1999 from $1.57/Mcf in 1998. The year to date oil and gas sales revenue for the period ended September 30, 1999 decreased $1.1 million, or 2%, to $44.5 from $45.6 million during the comparable period in 1998. Oil revenues for the period decreased $0.8 million. Gas revenues for the nine month period ended September 30, 1999 also decreased by $0.3 million, or 4% to $7.8 million from $8.1million in the comparable period in 1998. The average realized price on gas sales decreased to $1.56 per mcf in 1999 from $1.70 per mcf in 1998. CRUDE OIL MARKETING The Company began marketing crude oil purchased from third parties in July 1998. During the three month period ended September 30, 1999, the Company recognized revenues on crude oil purchased for resale of $49.2 million compared to $123.6 for the three month period ended September 30, 1998. For the year to date period ended September 30, 1999 the Company has recognized $173.5 million in revenue from these sales compared to $123.6 for the nine month period ended September 30, 1998. The Company has scaled back on it's crude oil marketing since the third and fourth quarters of 1998. GATHERING, MARKETING AND PROCESSING Gathering, marketing and processing revenue in the third quarter of 1999 was $5.2 million, an increase of $1.4 million, or 36%, from $3.8 million in the same period in 1998. This increase in revenue during the third quarter was attributable to higher natural gas and liquids prices in the 1999 period. Gathering, marketing and processing revenue for the nine months ended September 30, 1999 were $12.4 million, a $1.2 million, or 9% decrease, from $13.6 million in the comparable 1998 period. The decrease for the nine month period was partially due to the elimination of purchases and resales of third party gas for marketing purposes and a refocus on purchases to supply the Company's gas plants during the first three months of the period. OIL AND GAS SERVICE OPERATIONS There was no material change in the Company's revenues from Oil and Gas Service Operations between the quarter or year to date periods ended September 30, 1999 and September 30, 1998. COSTS AND EXPENSES PRODUCTION EXPENSES Production expenses decreased by $2.4 million, or 37%, to $4.1 million during the three months ended September 30, 1999 from $6.5 million during the comparable period in 1998. This decrease is due to lower production volumes and greater operating efficiencies. Production expenses decreased by $3.3 million, or 24%, to $10.4 million for the year to date period ended September 30, 1999 from $13.7 million during the comparable period in 1998. The decrease was seen in all areas of direct costs associated with Company operations including a reduction in labor costs. PRODUCTION TAXES Production taxes increased by $0.4 million , or 45%, to $1.3 million during the three months ended September 30, 1999 from $0.9 million during the comparable period in 1998 due to higher oil and gas prices and higher tax rates on wells in North Dakota that have reached the expiration date of tax relief given on newly drilled wells. Production taxes for the nine month period ended September 30, 1999 have increased by $0.3 million, or 8%, to $3.0 million in 1999 compared to $2.7 million in the comparable period of 1998. The expiration of lower tax rates on 45 newly drilled wells in North Dakota since April 1, 1998 has increased the tax rate to be applied to the sales prices on these wells, resulting in a higher tax rate on these wells. The Company expects the expiration of the remaining tax exemptions on newly drilled wells to have minimal impact on the companies overall production tax rate. As oil prices continue to rise, so will production taxes. EXPLORATION EXPENSES For the three month period ended September 30, 1999, exploration expenses increased $0.4 million, or 24%, to $1.9 million from $1.5 million during the comparable period of 1998. The increase was due to a $.4 million increase in expired lease costs to $1.1 million in the three month period in 1999 from $0.7 million for the comparable period in 1998. The year to date exploration expense as of September 30, 1999 increased $1.0 million, or 24%, to $5.1 million from $4.1 million incurred in the comparable period in 1998. The increase was due to a $3.2 million increase in expired lease costs to $4.0 million in the nine month period in 1999 from $0.8 million in the nine month period in 1998. The increase in expired lease costs was partially offset by a decrease in intangible drilling expense and development costs related to repair work overs of $1.2 million to $1.0 million in 1999 from $2.2 million in the comparable period of 1998. Other exploration costs were reduced by an additional $1.0 million. CRUDE OIL MARKETING The Company began marketing crude oil purchased from third parties in July 1998. For the three months ended September 30, 1999, the Company recognized expense for the purchases of crude oil purchased for resale of $48.0 million, and marketing expenses of $0.1 million compared to crude oil purchased for resale of $119.7 million, and marketing expenses of $0.2 for the three months ended September 30, 1998. Year to date 1999 the Company has recognized expense of $166.4 million and $0.8 million respectively for the purchase of crude oil and for marketing expenses compared to expense of $119.7 million and $0.2 million respectively for the purchase of crude oil and for marketing expense for the nine month period ended September 30, 1998. The Company has scaled back on it's crude oil marketing since the third and fourth quarters of 1998. GATHERING, MARKETING, AND PROCESSING During the three months ended September 30, 1999, the Company incurred gathering, marketing and processing expenses of $4.3 million, representing a $0.6 million, or 15% increase from the $3.7 million incurred in the third quarter of 1998 due to higher natural gas and liquids prices. Gathering, marketing and processing expenses for the nine months ended September 30, 1999 were $10.1 million, a $2.0 million, or 16% decrease, from $12.1 million in the comparable 1998 period. The decrease for the nine month period was partially due to the elimination of purchases for resale of third party gas for marketing purposes and a refocus on purchases to supply the Company's gas plants during the first three months of the period. OIL AND GAS SERVICE OPERATIONS During the three months ended September 30, 1999, the Company incurred oil and gas service operations expense of $1.0 million, a $0.4 million, or 59% increase over the $0.6 million for the comparable period in 1998. This increase was due to increased maintenance and work over expense on salt water disposal wells. Oil and gas service operations expenses decreased by $0.1 million, or 3% to $2.3 million for the nine months ended September 30, 1999 compared to $2.4 million for the same period in 1998. DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A) For the three months ended September 30,1999, DD&A expense decreased $6.7 million, or 62%, to $4.1 million in 1999 from $10.8 million for the comparable period in 1998. The DD&A expense for oil and gas producing properties in the 1998 period reflected a Unit of Production depreciation rate based on reserves calculated at the lower June 30, 1998 prices. Due to the lower reserves, higher production rates, and higher net investment in oil and gas producing properties in 1998 compared to 1999, the per barrel of oil equivalent (BOE) DD&A rate for 1998 was $8.18 compared to $3.05 for 1999. For the nine months ended September 30, 1999, DD&A expense decreased $14.3 million, or 52% to $13 million from $27.3 for the comparable period in 1998. The DD&A expense for oil and gas producing properties in the 1998 period reflected a Unit of Production depreciation rate based on reserves calculated at the lower June 30, 1998 prices. Due to the lower reserves, higher production rates, and higher net investment in oil and gas producing properties in 1998 compared to 1999, the per BOE DD&A rate for 1998 was $7.20 compared to $3.94 for 1999. The 1998 DD&A includes a write down under FASB 121 of $1.3 million. GENERAL AND ADMINISTRATIVE ("G&A") For the three months ended September 30, 1999 G&A expense was $1.8 million, net of overhead reimbursement of $0.8 million, for a period total of $1.0 million or a decrease of $0.3 million or 23%, from G&A expense of $2.4 million net of overhead reimbursement of $1.1 million for a net of $1.3 million during the comparable period in 1998. This decrease was primarily due to decreased office expenses and reduced employment expense. G&A expenses per BOE for the third quarter of 1999 was $.97 compared to $1.00 for the third quarter of 1998. For the nine month period ended September 30, 1999 G&A expense was $6.0 million, net of overhead reimbursement of $2.2 million, for a period total of $3.8 million or a decrease of $1.4 million, or 27%, from G&A expense of $7.3 million net of overhead reimbursement of $2.1 million for a total of $5.2 million during the comparable period in 1998. The 1999 year to date G&A rate per BOE sold is $1.14 compared to a 1998 rate of $1.38. Included in the 1999 year to date rate is $.31/BOE of overhead associated with Oil Marketing, Oil and Gas Service Operations, and Gas Gathering, Processing and Marketing activities, which was approximately the same as the amount included in the 1998 year to date G&A. INTEREST EXPENSE Interest expense for the three months ended September 30, 1999 was $4.0 million, an increase of $0.9 million, or 29%, from $3.1 million in the comparable 1998 period. The increase in the 1999 interest expense is attributable primarily to higher levels of indebtedness outstanding through the period in 1999. The interest rate on most of the debt during the 1999 period is at 10.25% compared to the lower Credit Facility rate of approximately 8.5% incurred for the first month of the third quarter 1998 period. Interest expense for the year to date period ended September 30, 1999 was $12.2 million, an increase of $3.9 million, or 48%, from $8.3 million in the comparable 1998 period. The increase in the 1999 interest expense is attributable primarily to higher levels of indebtedness outstanding through the period in 1999. The interest rate on most of the debt during the 1999 period is at 10.25% compared to the lower credit Facility rate incurred for the first seven months of the 1998 period. OTHER INCOME Other income for the three months and year to date periods ended September 30, 1999 and 1998 remained insignificant. NET INCOME For the three months ended September 30, 1999 net income was $4.3 million, an increase in net income of $9.5 million from the loss of $5.2 million for the comparable period in 1998. This increase in net income is due primarily to higher oil and gas prices, improved margin on oil marketing activities and reduced operating expenses discussed previously. Also, a reduction in DD&A expense due to higher reserves and due to the fact that the 1998 DD&A includes a write down under FASB 121 of $1.3 million. For the nine months ended September 30, 1999 net income was $3.3 million, an increase in net income of $12 million from the loss of $8.7 million for the nine months ended September 30, 1998. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW FROM OPERATIONS Net cash provided by operating activities for the nine months ended September 30, 1999 was $12.2 million, a decrease of $3.9 million, or 24%, from $16.1 million provided by operating activities during the comparable 1998 period. Cash as of September 30, 1999 was $8.6 million, a decrease of $7.2 million or 46% of the balance of $15.8 million held at December 31, 1998. Of the $8.6 million balance at September 30, 1999, $2.5 million has been set aside, and will be used by the Company to make its February 1, 2000 interest payment on its 10.25% Senior Subordinated Notes. DEBT The Company borrowed $10.0 million from their majority stockholder in December, 1998. The note was repaid in January, 1999. Long-term debt at December 31, 1998 and September 30, 1999 was $157.3 million and $156.9 million, respectively. Subsequent to September 30, 1999 the Company made payments of $4.0 million to pay off all outstanding borrowings against its Bank Line of Credit. CREDIT FACILITY Long-term debt outstanding under the line of credit at December 31, 1998 and September 30, 1999 included $4.0 million and $4.0 million, respectively, of revolving credit debt under the Credit Facility. The effective rate of interest under the line of credit agreement was 7.75% at December 31, 1998 and 8.00% at September 30, 1999. The Credit Facility, which matures May 14, 2001, charges interest based on the prime rate of Bank One Oklahoma, N.A., or the London Interbank Offered Rate for 1, 2, 3 or 6-month offshore deposits as offered by Bank One to major banks in the London Interbank Market, rounded upwards, if necessary, to the nearest 1/16%, and adjusted for maximum cost of reserves, if any. The borrowing base of the Credit Facility is $25 million until November 1, 1999 when the next redetermination is expected to take place. Management does not expect a change in it's Credit Facility borrowing base. CAPITAL EXPENDITURES The Company's 1999 capital expenditures budget is $16.3 million, exclusive of acquisitions. During the three months ended September 30, 1999, the Company incurred $2.8 million of capital expenditures, for a year to date total of $7.7 million, exclusive of acquisitions, compared to $38.8 million, exclusive of acquisitions, in the nine month period of 1998. The $31.1 million decrease was the result of the completion of the Cedar Hills drilling program in the second quarter of 1998. The Company expects to fund the remainder of it's 1999 capital budget through cash flow from operations. 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 the Company's financial position, business strategy, plans and objectives of management of the Company for future operations and industry conditions, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's 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 of the Company filed with the Securities and Exchange Commission (the "Commission"). All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. YEAR 2000 The Company is reviewing its computer software and hardware, telecommunications systems, process control systems and business relationships to locate potential operational problems associated with the year 2000. The Company's computer consultant has reviewed the Company's mainframe hardware, and operating software and updates to both have been performed at a cost of approximately $35,000. The financial software package utilized on the mainframe computer has been tested and updated by the software vendor. The Company has completed additional testing and believes the mainframe hardware and operating software to be compatible with the year 2000. Assessment of other less critical software systems and various types of computer equipment is continuing, however the Company believes that the potential impact, if any, of these systems not being year 2000 compliant may, at most, require employees to manually complete otherwise automated tasks or calculations. The telephone system billing software utilized in tracking telephone usage was updated July 28, 1999 to make it year 2000 compatible at a cost of approximately $14,000. The Company believes that the radios being used for communications with field operations will not be impacted. The Company also relies on various public telephone companies to supply normal voice and electronic data service and service to operating locations which utilize process control alarms. These alarms notify Company personnel if there are operations abnormalities that need to be checked and, if necessary, corrected. If the telephone service were disrupted, the operations would need to be more closely monitored by Company personnel, but because the operations are not actually controlled through the phone systems, there should be no interruption in operations. Surveys will be made of all telephone companies to determine their system readiness and contingency plans will be developed for those areas where service that is year 2000 compliant has not been verified. The gas measurement systems and gas processing facilities operated by the Company use various Program Logic Controllers (PLC's) and alarm mechanisms. The Company has been verbally notified that the measurement systems that it currently uses are year 2000 compatible and Company tests have been done to verify that information. There can be no assurance that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems would not have a material adverse effect on the Company. The Company will evaluate its relationships with third parties to determine any critical services, suppliers, or customers. The third parties will include financial services, utility services, oil and gas purchasers and parts and supply vendors. Once critical relationships have been identified the third parties will be surveyed and their preparedness for year 2000 evaluated. If the Company believes that the third parties have not minimized risk satisfactorily it will evaluate alternatives to the current relationships. The survey and evaluation of preparedness has been delayed from the original September 30, 1999 target date, but will be completed during the fourth quarter of 1999. The Company believes that there is minimal risk associated with internal operating systems in relation to year 2000 compatibility. Plans are already in place to address other known areas of incompatibility at costs estimated to be less than $50,000. Because of the immaterial nature of the expenditures on an individual basis, the Company plans to finance all costs through normal operating funds. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk in the normal course of its business operations. Management believes that the Company is well positioned with its 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, the Company, from time to time, has used derivative hedging and may do so in the future as a means of controlling its exposure to price changes. During 1998, the Company had no oil or gas hedging transactions for its production, however, the company did begin marketing crude oil. Most of the Company's purchases are made at either a NYMEX based price or a fixed price. As of September 30, 1999, for the periods July, 1999 through July, 2000 the Company has fixed price purchase and sales contracts in place that will result in a net gain to the Company of $2.4 million. There are no net long or short fixed price positions at September 30, 1999. PART II. Other Information ITEM 1. LEGAL PROCEEDINGS From time to time, the Company is party to litigation or other legal proceedings that it considers to be a part of the ordinary course of its business. Except as discussed below, the Company is not involved in any legal proceedings nor is it party to any pending or threatened claims that could reasonably be expected to have a material adverse effect on its financial condition or results of operations. On May 15, 1998, the Company and an unrelated third party entered into a definitive agreement to exchange undivided interests in approximately 65,000 gross (59,000 net) leasehold acres in the northern half of the Cedar Hills Field. On August 19, 1998, the Company instituted a declaratory judgment action against the unrelated third party in the Garfield County, Oklahoma District Court. The Company seeks a declaratory judgment determining that it is excused from further performance under its exchange agreement with the third party. The third party has denied the Company's allegations and seeks specific performance by the Company, plus monetary damages of an unspecified amount. The Cedar Hills unitization process is expected to continue. On March 31, 1999, the North Dakota Industrial Commission held a hearing to discuss the status of the unitization process. As a result of this hearing, effective August 1, 1999 the NDIC will require the Company to curtail production on less than ten wells. This will result in an estimated reduction of less than 100 barrels a day of crude oil production of the estimated production by the Company in the field of 5,500 barrels a day. Trial was held October 18, 1999 and testimony concluded October 29, 1999 in Garfield County, Oklahoma District Court. Trial briefs, closing arguments and findings of fact and conclusions of law are due November 12, 1999 and a decision will be rendered subsequent thereto. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a). Exhibits DESCRIPTION 3.1 Amended and Restated Certificate of Incorporation of Continental Resources, Inc.(1) [3.1] 3.2 Amended and Restate Bylaws of Continental Resources, Inc.(1) [3.2] 3.3 Certificate of Incorporation of Continental Gas, Inc.(1) [3.3] 3.4 Bylaws of Continental Gas, Inc., as amended and restated.(1) [3.4] 3.5 Certificate of Incorporation of Continental Crude Co.(1) [3.5] 3.6 Bylaws of Continental Crude Co.(1) [3.6] 4.1 Restated Credit Agreement dated May 12, 1998 among Continental Resources, Inc. and Continental Gas, Inc., as Borrowers and Bank One, Oklahoma, N.A. and the Institutions named therein as Banks and Bank One, Oklahoma, N.A. as Agent (the "Credit Agreement")(1) [4.1] 4.1.1 First Amendment to the Credit Agreement between Registrant, the financial institutions named therein and Bank One, Oklahoma, N.A., as Agent dated February 10, 1999.(2) [4.1.1] 4.2 Form of Revolving Note under the Credit Agreement (1) [4.2] 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 (1) [4.3] 4.4 Exchange and Registration Rights Agreement dated July 24, 1998 between Continental Resources, Inc., the Subsidiary Guarantors named therein and Chase Securities, Inc.(1) [4.4] 10.1 Purchase and Sale Agreement dated March 28, 1998 by and between Bass Enterprises Production co., et al. As Sellers and Continental Resources, Inc. as Buyer (1) [10.1] 10.2 Worland Area Purchase and Sale Agreement, as amended, dated June 25, 1998 by and between Continental Resources, Inc. as Seller and Harold G. Hamm, Trustee of the Harold G. Hamm Revocable Intervivos Trust dated April 23, 1984 as Buyer.(1) [10.2] 10.3 Illinois Purchase and Sale Agreement dated October 7, 1998 by and between Continental Resources, Inc. as Seller and Farrar Oil Company as Buyer (2) [10.3] 21.0 Subsidiaries (2) [21.0] 27* Financial Data Schedule _______________ * Filed herewith (1) Filed as an exhibit to the Company's Form S-4 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 incorporated by reference herein. (2) Filed as an exhibit to the Company's 1998 Annual Report on Form 10-K which was filed with the Securities and Exchange Commission. The exhibit number is indicated in brackets and incorporated by reference herein. (b): Reports on Form 8-K No reports on Form 8-K were filed by the Company during the three months ended September 30, 1999. 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: November 12, 1999 EXHIBIT INDEX Exhibit No. Description Method of Filing - ------- ----------- ---------------- 3.1 Amended and Restated Certificate of Incorporated herein by reference Incorporation of Continental Resources, Inc. 3.2 Amended and Restate Bylaws of Incorporated herein by reference Continental Resources, Inc. 3.3 Certificate of Incorporation of Incorporated herein by reference Continental Gas, Inc. 3.4 Bylaws of Continental Gas, Inc., as Incorporated herein by reference amended and restated 3.5 Certificate of Incorporation of Incorporated herein by reference Continental Crude Co. 3.6 Bylaws of Continental Crude Co. Incorporated herein by reference 4.1 Restated Credit Agreement dated May Incorporated herein by reference 12, 1998 among Continental Resources, Inc. and Continental Gas, Inc., as Borrowers and Bank One, Oklahoma, N.A. and the Institutions named therein as Banks and Bank One, Oklahoma, N.A. as Agent (the "Credit Agreement") 4.1.1 First Amendment to the Credit Incorporated herein by reference Agreement between Registrant, the financial institutions named therein and Bank One, Oklahoma, N.A., as Agent dated February 10, 1999. 4.2 Form of Revolving Note under the Incorporated herein by reference Credit Agreement 4.3 Indenture dated as of July 24, 1998 Incorporated herein by reference between Continental Resources, Inc., as Issuer, the Subsidiary Guarantors named therein and the United States Trust Company of New York, as Trustee 4.4 Exchange and Registration Rights Incorporated herein by reference Agreement dated July 24, 1998 between Continental Resources, Inc., the Subsidiary Guarantors named therein and Chase Securities, Inc. 10.1 Purchase and Sale Agreement dated Incorporated herein by reference March 28, 1998 by and between Bass Enterprises Production Co., et al. as Sellers and Continental Resources, Inc. as Buyer 10.2 Worland Area Purchase and Sale Incorporated herein by reference Agreement, as amended, dated June 25, 1998 by and between Continental Resources, Inc. as Seller and Harold G. Hamm, Trustee of the Harold G. Hamm Revocable Intervivos Trust dated April 23, 1984 as Buyer 10.3 Illinois Purchase and Sale Agreement Incorporated herein by reference dated October 7, 1998 by and between Continental Resources, Inc. as Seller and Farrar Oil Company as Buyer 21.0 Subsidiaries Incorporated herein by reference 27 Financial Data Schedule Filed herewith electronically