UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF [ X ] THE SECURITIES EXCHANGE ACT OF 1934 For The Quarter Ended September 30, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File No. 0-16741 COMSTOCK RESOURCES, INC. (Exact name of registrant as specified in its charter) NEVADA 94-1667468 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034 (Address of principal executive offices) Telephone No.: (972) 668-8800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes [ X ] No The number of shares outstanding of the registrant's common stock, par value $.50, as of November 12, 1999 was 25,037,481.
COMSTOCK RESOURCES, INC. QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1999 INDEX PART I. Financial Information Page No. Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1999 and December 31, 1998............................4 Consolidated Statements of Operations - Three Months and Nine Months ended September 30, 1999 and 1998......5 Consolidated Statement of Stockholders' Equity - Nine Months ended September 30, 1999................................6 Consolidated Statements of Cash Flows - Nine Months ended September 30, 1999 and 1998.......................7 Notes to Consolidated Financial Statements...............................8 Report of Independent Public Accountants................................12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................................13 Item 3. Quantitative and Qualitative Disclosure About Market Risks..........17 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K....................................19 2
PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS 3
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> ASSETS September 30, December 31, 1999 1998 ------------ ------------ (Unaudited) (In thousands) <S> <C> <C> Cash and Cash Equivalents ...................................... $ 6,088 $ 5,176 Accounts Receivable: Oil and gas sales ......................................... 17,582 13,355 Joint interest operations ................................. 1,658 4,506 Other Current Assets ........................................... 2,601 1,457 --------- --------- Total current assets ........................... 27,929 24,494 Property and Equipment: Unevaluated oil and gas properties ........................ 1,629 436 Oil and gas properties, successful efforts method ......... 560,888 547,372 Other ..................................................... 2,106 1,648 Accumulated depreciation, depletion and amortization ...... (179,481) (145,439) --------- --------- Net property and equipment ..................... 385,142 404,017 Other Assets ................................................... 6,991 1,161 --------- --------- $ 420,062 $ 429,672 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Portion of Long-term Debt .............................. $ 229 $ 38,104 Accounts Payable and Accrued Expenses .......................... 25,823 34,652 --------- --------- Total current liabilities ...................... 26,052 72,756 Long-term Debt, less Current Portion ........................... 254,000 240,000 Deferred Taxes Payable ......................................... -- 1,778 Reserve for Future Abandonment Costs ........................... 5,884 5,475 Stockholders' Equity: Preferred stock-$10.00 par, 5,000,000 shares authorized, 3,000,000 shares outstanding at September 30, 1999 ... 30,000 -- Common stock--$0.50 par, 50,000,000 shares authorized, 25,037,481 and 24,350,452 shares outstanding at September 30, 1999 and December 31, 1998, respectively 12,519 12,175 Additional paid-in capital ................................ 114,205 112,432 Retained deficit .......................................... (21,776) (14,934) Less: Deferred compensation-restricted stock grants ....... (822) (10) --------- --------- Total stockholders' equity ..................... 134,126 109,663 --------- --------- $ 420,062 $ 429,672 ========= ========= </TABLE> The accompanying notes are an integral part of these statements. 4
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 1999 1998 -------- -------- -------- -------- (In thousands, except per share amounts) <S> <C> <C> <C> <C> Revenues: Oil and gas sales ...................... $ 22,922 $ 21,461 $ 63,309 $ 71,725 Other income ........................... 52 56 1,845 244 Gain on sale of properties ............. -- -- 130 -- -------- -------- -------- -------- Total revenues ................. 22,974 21,517 65,284 71,969 -------- -------- -------- -------- Expenses: Oil and gas operating .................. 6,028 6,070 17,829 18,515 Exploration ............................ 920 3,875 1,584 7,752 Depreciation, depletion and amortization 10,016 12,334 34,779 38,131 General and administrative, net ........ 408 358 1,318 1,374 Interest ............................... 6,252 4,091 17,232 12,538 -------- -------- -------- -------- Total expenses ................. 23,624 26,728 72,742 78,310 -------- -------- -------- -------- Loss before income taxes ................. (650) (5,211) (7,458) (6,341) Provision for income taxes ............... -- 1,824 1,778 2,219 -------- -------- -------- -------- Net loss ................................. (650) (3,387) (5,680) (4,122) Preferred stock dividends ................ (689) -- (1,162) -- -------- -------- -------- -------- Net loss attributable to common stock .... $ (1,339) $ (3,387) $ (6,842) $ (4,122) ======== ======== ======== ======== Net loss per share........................ $ (0.05) $ (0.14) $ (0.28) $ (0.17) ======== ======== ======== ======== Weighted average number of common and common stock equivalent shares outstanding.......................... 24,822 24,306 24,523 24,251 ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 5
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 1999 (Unaudited) <TABLE> Deferred Additional Retained Compensation- Preferred Common Paid-In Earnings Restricted Stock Stock Capital (Deficit) Stock Grants Total --------- --------- --------- --------- --------- --------- (In thousands) <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 1998 ....... $ -- $ 12,175 $ 112,432 $ (14,934) $ (10) $ 109,663 Issuance of preferred stock ..... 30,000 -- -- -- -- 30,000 Issuance of common stock ........ -- 231 1,227 -- -- 1,458 Stock issuance costs ............ -- -- (711) -- -- (711) Value of stock options issued for exploration prospect .......... -- -- 498 -- -- 498 Restricted stock grants ......... -- 113 759 -- (812) 60 Net loss attributable to common stock .................. -- -- -- (6,842) -- (6,842) --------- --------- --------- --------- --------- --------- Balance at September 30, 1999 ...... $ 30,000 $ 12,519 $ 114,205 $ (21,776) $ (822) $ 134,126 ========= ========= ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of this statement. 6
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> Nine Months Ended September 30, 1999 1998 --------- --------- (In thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................................. $ (5,680) $ (4,122) Adjustments to reconcile net loss to net cash provided by operating activities: Compensation paid in common stock ...................... 60 133 Exploration ............................................ 1,584 7,752 Depreciation, depletion and amortization ............... 34,779 38,131 Deferred income taxes .................................. (1,778) (2,219) Gain on sale of properties ............................. (130) -- --------- --------- Working capital provided by operations ............... 28,835 39,675 (Increase) decrease in accounts receivable ............. (1,379) 15,476 Increase in other current assets ....................... (1,144) (1,763) Decrease in accounts payable and accrued expenses ...... (8,829) (26,804) --------- --------- Net cash provided by operating activities ............ 17,483 26,584 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of properties ...................... 778 7 Capital expenditures ................................... (16,619) (45,979) --------- --------- Net cash used for investing activities ............... (15,841) (45,972) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings ............................................. 10,378 13,238 Proceeds from senior notes issuance .................... 149,221 -- Debt issuance costs .................................... (5,661) (1,059) Principal payments on debt ............................. (184,253) (5,067) Proceeds from preferred stock issuance ................. 30,000 -- Proceeds from common stock issuance .................... 296 288 Stock issuance costs ................................... (711) -- --------- --------- Net cash provided by (used for) financing activities . (730) 7,400 --------- --------- Net increase (decrease) in cash and cash equivalents 912 (11,988) Cash and cash equivalents, beginning of period ..... 5,176 14,504 --------- --------- Cash and cash equivalents, end of period ........... $ 6,088 $ 2,516 ========= ========= </TABLE> The accompanying notes are an integral part of these statements. 7
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (Unaudited) (1) SIGNIFICANT ACCOUNTING POLICIES - Basis of Presentation - In management's opinion, the accompanying consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position of Comstock Resources, Inc. and subsidiaries (the "Company") as of September 30, 1999 and the related results of operations for the three months and nine months ended September 30, 1999 and 1998 and cash flows for the nine months ended September 30, 1999 and 1998. The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The results of operations for the nine months ended September 30, 1999 are not necessarily an indication of the results expected for the full year. Supplementary Information with Respect to the Statements of Cash Flows - <TABLE> <CAPTION> For the Nine Months Ended September 30, 1999 1998 ------- ------- (In thousands) <S> <C> <C> Cash Payments - Interest $10,523 $11,506 Income taxes -- 276 Noncash Investing and Financing Activities - Common stock issued for preferred stock dividends $ 1,162 $ -- Common stock issued for director compensation -- 128 Value of vested stock options under exploration joint venture 498 498 </TABLE> Income Taxes - Deferred income taxes are provided to reflect the future tax consequences of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. 8
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Earnings Per Share - Basic earnings per share is determined without the effect of any outstanding potentially dilutive stock options or other convertible securities and diluted earnings per share is determined with the effect of outstanding stock options and other convertible securities that are potentially dilutive. Basic earnings per share for the three months and nine months ended September 30, 1999 and 1998 were determined as follows: <TABLE> <CAPTION> For the Three Months Ended September 30, 1999 1998 ------------------------- ------------------------ Per Per Loss Shares Share Loss Shares Share -------- ------- ------ -------- ------- ----- (In thousands, except per share amounts) <S> <C> <C> <C> <C> <C> <C> Net Loss $ (650) 24,822 $ (3,387) 24,306 Less Preferred Stock Dividends (689) - - - -------- ------- -------- ------- Net Loss to Common Stockholders $ (1,339) 24,822 $(0.05) $ (3,387) 24,306 $(0.14) ======== ======= ====== ======== ======= ====== </TABLE> <TABLE> <CAPTION> For the Nine Months Ended September 30, 1999 1998 ------------------------- ------------------------ Per Per Loss Shares Share Loss Shares Share -------- ------- ------ -------- ------- ----- (In thousands, except per share amounts) <S> <C> <C> <C> <C> <C> <C> Net Loss $ (5,680) 24,523 $ (4,122) 24,251 Less Preferred Stock Dividends (1,162) - - - -------- ------- -------- ------- ------ Net Loss to Common Stockholders $ (6,842) 24,523 $(0.28) $ (4,122) 24,251 $(0.17) ======== ======= ====== ======== ======= ====== </TABLE> Diluted earnings per share are not presented since the effect of outstanding stock options and other convertible securities would be anti-dilutive. New Accounting Standard - In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") which has been amended by SFAS No. 137. The Statement establishes accounting and reporting standards that are effective for fiscal years beginning after June 15, 2000 which require that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company is currently using derivatives to hedge floating interest rate and natural gas price risks. Such derivatives are reported at cost, if any, and gains and losses on such derivatives are reported when the hedged transaction occurs. Accordingly, the Company's adoption of SFAS No. 133 will have an impact on the reported financial position of the Company, and although such impact has not been determined, it is currently not believed to be material. Adoption of SFAS No. 133 should have no significant impact on reported earnings, but could materially affect comprehensive income. 9
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (2) LONG-TERM DEBT - As of September 30, 1999 Long-term debt is comprised of the following: (In thousands) Revolving Bank Credit Facility $ 104,000 11 1/4% Senior Notes due 2007 150,000 Other 229 --------- $ 254,229 Less current portion (229) --------- $ 254,000 ========= On April 29, 1999, the Company closed the sale of $150.0 million in aggregate principal amount of 11 1/4% Senior Notes due in 2007 (the "Notes"). Interest on the Notes is payable semiannually on May 1 and November 1, commencing on November 1, 1999. Proceeds from the sale of the Notes were used to reduce amounts outstanding under the Company's bank credit facility. The Notes are unsecured obligations of the Company and are guaranteed by all of the Company's principal operating subsidiaries. The Company can redeem the Notes beginning on May 1, 2004. The Company's bank credit facility consists of a $162.5 million revolving credit commitment provided by a syndicate of banks for which Bank One, NA serves as administrative agent. The borrowing base under the bank credit facility is $162.5 million. Such borrowing base may be affected from time to time by the performance of the Company's oil and gas properties and changes in oil and gas prices. The determination of the Company's borrowing base is at the sole discretion of the administrative agent and the bank group. The revolving credit line under the bank credit facility bears interest at the option of the Company, based on the utilization of the borrowing base, at either (i) LIBOR plus 1.25% to 2.0%, or (ii) the "corporate base rate" plus 0.25% to 1.0%. The Company incurs a commitment fee, based on the utilization of the borrowing base, of 0.25% to 0.5% per annum on the unused portion of the borrowing base. The revolving credit line matures on December 9, 2002 or such earlier date as the Company may elect. The bank credit facility contains covenants which, among other things, restrict the payment of cash dividends, limit the amount of consolidated debt, and limit the Company's ability to make certain loans and investments. Significant financial covenants include the maintenance of a current ratio, as defined, (1.0 to 1.0), maintenance of tangible net worth ($105.0 million), and maintenance of an interest coverage ratio (2.5 to 1.0). The Company's bank credit facility is secured by the Company's oil and gas properties. 10
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (3) PREFERRED STOCK - On April 29, 1999, the Company sold 3,000,000 shares of its convertible preferred stock with a $10 par value in a private placement for $30.0 million. The preferred stock accrues dividends at an annual rate of 9% which are payable quarterly in cash or in shares of the Company's common stock, at the election of the Company. Shares of the preferred stock are convertible, at the option of the holder, into shares of common stock of the Company. Based on the initial conversion price of $4.00 per share of common stock, each share of preferred stock is convertible into 2.5 shares of common stock. On May 1, 2005 and on each May 1, thereafter, so long as any shares of the preferred stock are outstanding, the Company is obligated to redeem an amount of shares of preferred stock equal to one-third of the shares of the preferred stock outstanding on May 1, 2005 at $10.00 per share plus accrued and unpaid dividends. The mandatory redemption price may be paid either in cash or in shares of common stock, at the option of the Company. The Company has the option to redeem the shares of preferred stock upon payment to the holders of the preferred stock a specified rate of return on the initial purchase. Upon a change of control of the Company, the holders of the preferred stock have the right to require the Company to purchase all or a portion of the preferred stock. 11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Comstock Resources, Inc.: We have reviewed the accompanying consolidated balance sheet of Comstock Resources, Inc. as of September 30, 1999, and the related consolidated statements of operations for the three months and nine months ended September 30, 1999 and 1998 and the consolidated statements of cash flows for the nine months ended September 30, 1999 and 1998. These financial statements are the responsibility of the company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP November 8, 1999 Dallas, Texas 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table reflects certain summary operating data for the periods presented: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ------- ------- ------- ------- <S> <C> <C> <C> <C> Net Production Data: Oil (MBbls).................................... 439 611 1,689 1,987 Natural gas (MMcf)............................. 6,032 6,654 17,712 19,988 Average Sales Price: Oil (per Bbl).................................. $ 20.82 $ 12.35 $ 15.67 $ 13.30 Natural gas (per Mcf).......................... 2.28 2.09 2.08 2.27 Average equivalent price (per Mcfe)............ 2.64 2.08 2.27 2.25 Expenses ($ per Mcfe): Oil and gas operating(1)....................... $ 0.70 $ 0.59 $ 0.64 $ 0.58 General and administrative..................... 0.05 0.03 0.05 0.04 Depreciation, depletion and amortization(2).... 1.09 1.19 1.22 1.19 Cash Margin ($ per Mcfe)(3)...................... 1.90 1.46 1.59 1.62 - ---------- <FN> (1) Includes lease operating costs and production and ad valorem taxes. (2) Represents depreciation, depletion and amortization of oil and gas properties only. (3) Represents average equivalent price per Mcfe less oil and gas operating expenses per Mcfe and general and administrative expenses per Mcfe. </FN> </TABLE> Revenues - The Company's oil and gas sales increased $1.4 million (7%) in the third quarter of 1999, to $22.9 million from $21.5 million in 1998's third quarter due to higher oil and gas prices realized by the Company in 1999. The Company's average third quarter oil price increased by 69% and its average third quarter gas price increased by 9%. The price increases were partially offset by a 28% decrease in the Company's oil production and a 9% decrease in the Company's natural gas production. For the nine months ended September 30, 1999, oil and gas sales decreased $8.4 million (12%), to $63.3 million from $71.7 million for the nine months ended September 30, 1998. The decrease is attributable to a 11% decrease in natural gas production and a 15% decrease in oil production combined with 8% lower realized natural gas prices and 18% higher realized oil prices. The Company hedged a significant amount of its 1999 natural gas production in February 1999 at a fixed price of $2.03 per Mcf. Without the impact of the hedge, the Company would have realized $2.78 per Mcf and $2.31 per Mcf for its natural gas production for the three months and nine months ended September 30, 1999, respectively. The production declines in 1999 are attributable to the significantly lower drilling activity in the first half of 1999. The Company has significantly increased its drilling activity in the third and fourth quarters and anticipates that production levels will begin to increase in the fourth quarter of 1999. Other income decreased slightly to $52,000 in the third quarter of 1999 as compared to $56,000 in 1998's third quarter. Other income for the nine months ended September 30, 1999 increased $1.6 million to $1.8 million from $244,000 for the nine months ended September 30, 1998. Included in other income in the second quarter of 1999 is a $1.7 million insurance recovery received by the Company on the Habenero prospect which was drilled in the second quarter of 1998 and was written off when the well was abandoned due to numerous well control problems encountered. 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Costs and Expenses - Oil and gas operating expenses, including production taxes, decreased slightly to $6.0 million in the third quarter of 1999 from $6.1 million in the third quarter of 1998. Oil and gas operating expenses per equivalent Mcf produced increased 11 cents to 70 cents in the third quarter of 1999 from 59 cents in the third quarter of 1998 due to the 16% decrease in oil and natural gas production (on an equivalent Mcf basis) and the fixed nature of the Company's lifting costs. Oil and gas operating costs for the nine months ended September 30, 1999 decreased to $17.8 million from $18.5 million for the nine months ended September 30, 1998. Oil and gas operating expenses per equivalent Mcf produced increased 6 cents to 64 cents for nine months ended September 30, 1999 from 58 cents for the same period in 1998. In the third quarter of 1999, the Company had $920,000 in exploration expense for two offshore exploratory dry holes. Exploration expense for the first nine months of 1999 was $1.6 million which relates to the write off of the three dry holes drilled in the Gulf of Mexico during 1999. Depreciation, depletion and amortization ("DD&A") decreased $2.3 million (19%) to $10.0 million in the third quarter of 1999 from $12.3 million in the third quarter of 1998 due to the 16% decrease in oil and natural gas production. DD&A per equivalent Mcf produced decreased by 10 cents to $1.09 for the three months ended September 30, 1999 from $1.19 for the three months ended September 30, 1998. For the nine months ended September 30, 1999, DD&A decreased $3.3 million (9%) to $34.8 million from $38.1 million for the nine months ended September 30, 1998. The decrease is due to the 13% decrease in oil and natural gas production. DD&A per equivalent Mcf increased by 3 cents to $1.22 for the nine months ended September 30, 1999 from $1.19 for the nine months ended September 30, 1998. General and administrative expenses, which are reported net of overhead reimbursements, of $408,000 for the third quarter of 1999 were 14% higher than general and administrative expenses of $358,000 for the third quarter of 1998. For the first nine months of 1999, general and administrative expenses decreased 4% to $1.3 from $1.4 million for the nine months ended September 30, 1998. Interest expense increased $2.2 million (53%) to $6.3 million for the three months ended September 30, 1999 from $4.1 million for the three months ended September 30, 1998. Interest expense for the nine months ended September 30, 1999 increased $4.7 million (37%) to $17.2 million in 1999 from $12.5 million for the nine months ended September 30, 1998. The Company capitalized interest expense of $688,000 in the third quarter of 1998 and $1.8 million in the nine months ended September 30, 1998 on its unevaluated properties. In 1999, no interest expense was capitalized. The remaining increases are related to a higher average interest rate on the Company's debt. The weighted average annual interest rate under the Company's bank credit facility increased to 7.3% for the three months and nine months ended September 30, 1999 as compared to 7.1% for the same periods in 1998. The interest rate on the Company's Senior Notes issued to refinance $150.0 million of amounts outstanding under the bank credit facility on April 29, 1999 of 11.25% is significantly higher than the 7.1% rate charged under the bank credit facility in 1998. 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company reported a net loss of $1.3 million after preferred stock dividends of $689,000 for the three months ended September 30, 1999, as compared to a net loss of $3.4 million for the three months ended September 30, 1998. Net loss per share for the third quarter was 5 cents on weighted average shares outstanding of 24.8 million as compared to net loss per share of 14 cents for the third quarter of 1998 on weighted average shares outstanding of 24.3 million. The net loss for the nine months ended September 30, 1999 was $6.8 million after preferred stock dividends of $1.2 million, as compared to a net loss of $4.1 million for the nine months ended September 30, 1998. Net loss per share for the nine months ended September 30, 1999 was 28 cents on weighted average shares outstanding of 24.5 million as compared to a net loss per share of 17 cents for the nine months ended September 30, 1998 on weighted average shares outstanding of 24.3 million. Capital Expenditures The following table summarizes the Company's capital expenditure activity for the nine months ended September 30, 1999 and 1998: Nine Months Ended September 30, 1999 1998 ------- ------- (In thousands) Acquisitions $ -- $ 2,261 Other leasehold costs 1,859 2,822 Development drilling 2,437 12,517 Offshore production facilities 3,500 -- Exploratory drilling 5,809 19,142 Workovers and recompletions 2,419 8,888 Other 595 349 ------- ------- Total $16,619 $45,979 ======= ======= The timing of most of the Company's capital expenditures is discretionary with no material long-term capital expenditure commitments. Consequently, the Company has a significant degree of flexibility to adjust the level of such expenditures as circumstances warrant. For the nine months ended September 30, 1999 and 1998, the Company spent $16.0 million and $43.4 million, respectively, on development and exploration activities. The Company has substantially increased its drilling activity for the remainder of 1999 and expects to spend an additional $27.0 million on development and exploration projects in the last quarter of 1999. The Company intends to primarily use internally generated cash flow to fund capital expenditures other than significant acquisitions. The Company does not have a specific acquisition budget as a result of the unpredictability of the timing and size of potential acquisition activities. The Company intends to use borrowings under its bank credit facility, or other debt or equity financings to the extent available, to finance significant acquisitions. The availability and attractiveness of these sources of financing will depend upon a number of factors, some of which will relate to the financial condition and performance of the Company, and some of which will be beyond the Company's control, such as prevailing interest rates, oil and gas prices and other market conditions. 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Capital Resources and Liquidity Funding for the Company's activities has historically been provided by operating cash flow, debt and equity financings and asset dispositions. In the first nine months of 1999, the Company's net cash flow provided by operating activities totaled $28.8 million before changes to other working capital accounts and the Company borrowed $10.0 million under its revolving bank credit facility. On April 29, 1999, the Company closed the sale of $150.0 million in aggregate principal amount of 11 1/4% Senior Notes due in 2007 (the "Notes"). Concurrently with the sale of the Notes, the Company also sold 3,000,000 shares of its preferred stock in a private placement for $30.0 million. After transaction related costs, the sale of the Notes and the preferred stock generated proceeds of $172.8 million. The Company's primary needs for capital, in addition to funding of ongoing operations, relate to the acquisition, development and exploration of oil and gas properties and the repayment of debt. In the first nine months of 1999, the Company incurred capital expenditures of $16.6 million primarily for development and exploration activities and reduced amounts outstanding under its bank credit facility by $184.0 million. The Company has a bank credit facility consisting of a $162.5 million revolving credit commitment provided by a syndicate of banks for which Bank One, NA serves as administrative agent. Indebtedness under the bank credit facility is secured by substantially all of the Company's assets and is subject to borrowing base availability which is generally redetermined semiannually based on the banks' estimates of the future net cash flows of the Company's oil and gas properties. The borrowing base under the bank credit facility is $162.5 million. Such borrowing base may be affected from time to time by the performance of the Company's oil and gas properties and changes in oil and gas prices. The determination of the Company's borrowing base is at the sole discretion of the administrative agent and the bank group. The revolving credit line under the bank credit facility bears interest at the option of the Company, based on the utilization of the borrowing base, at either (i) LIBOR plus 1.25% to 2.0% or (ii) the "corporate base rate" plus 0.25% to 1.0%. The Company incurs a commitment fee, based on the utilization of the borrowing base, of 0.25% to 0.5% per annum on the unused portion of the borrowing base. The revolving credit line matures on December 9, 2002 or such earlier date as the Company may elect. The bank credit facility contains covenants which, among other things, restrict the payment of cash dividends, limit the amount of consolidated debt, and limit the Company's ability to make certain loans and investments. Significant financial covenants include the maintenance of a current ratio, as defined, (1.0 to 1.0), maintenance of tangible net worth ($105.0 million), and maintenance of an interest coverage ratio (2.5 to 1.0). The Company believes that cash flow from operations and available borrowings under the Company's bank credit facility will be sufficient to fund its operations and future growth as contemplated under its current business plan. However, if the Company's plans or assumptions change or if its assumptions prove to be inaccurate, the Company may be required to seek additional capital. Management cannot be assured that the Company will be able to obtain such capital or, if such capital is available, that the Company will be able to obtain it on acceptable terms. Year 2000 "Year 2000," or the ability of computer systems to process dates with years beyond 1999, affects almost all companies and organizations. Computer systems that are not Year 2000 compliant by January 1, 2000 may cause an adverse effect to companies and organizations that rely upon those systems. The Company is assessing and correcting computer processing chips that are unable to properly 16
process dates beyond 1999. The Company has outsourced its significant financial information systems. Based on information received from the Company's providers, the Company is relying on assurances from the providers that they are Year 2000 compliant. The Company's costs related to Year 2000 have not been significant and it expects future costs will not be material. Because the Company outsources its information technology systems and software, it believes that there is little risk associated with Year 2000 for its information systems. The Company also believes that there is minimal risk with embedded technology associated with its operations because it does not own any significant gas processing plants or pipelines, nor does it have any significant electronic field data capture systems on its wells. However, the Company cannot provide assurance that all significant third parties will achieve compliance in a timely manner. Such failure to achieve Year 2000 compliance could have an adverse effect on the Company's operations and cash flow due to potential shut-in production or delay in drilling schedules. Although the Company does not have a formal contingency plan, it stands ready to switch from vendors that are not Year 2000 compliant. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS The Company's business is impacted by fluctuations in crude oil and natural gas commodity prices and interest rates. The following discussion is intended to identify the nature of these market risks, describe the Company's strategy for managing such risks, and to quantify the potential affect of market volatility on the Company's financial condition and results of operations. Oil and Natural Gas Prices The Company's financial condition, results of operation, and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond the control of the Company. These factors include the level of global demand for petroleum, foreign supply of oil and gas, the establishment of and compliance with production quotas by oil-exporting countries, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic. It is impossible to predict future oil and gas prices with any degree of certainty. Sustained weakness in oil and gas prices may adversely affect the Company's financial condition and results of operations, and may also reduce the amount of net oil and gas reserves that the Company can produce economically. Any reduction in oil and gas reserves, including reductions due to price fluctuations, can have an adverse affect on the Company's ability to obtain capital for its exploration and development activities. Similarly, any improvements in oil and gas prices can have a favorable impact on the Company's financial condition, results of operations and capital resources. Based on the Company's volume of oil and gas production for the nine months ended September 30, 1999, before taking into account any hedging transactions, a $1.00 change in the price per barrel of oil would result in a change in the Company's cash flow for such period of approximately $1.5 million and a $0.10 change in the price per Mcf of natural gas would result in a change in the Company's cash flow of approximately $1.7 million. The Company periodically has utilized hedging transactions with respect to a portion of its oil and gas production to mitigate its exposure to price fluctuations. While the use of these hedging arrangements limits the downside risk of price declines, such use may also limit any benefits which may be derived from price increases. The Company has primarily used price swaps, whereby monthly settlements are based on differences between the prices specified in the instruments and the settlement prices of certain futures contracts quoted on the NYMEX or certain other indices. Generally, when the applicable settlement price is less than the price specified in the contract, the Company receives a settlement from the counterparty based on the difference. Similarly, when the applicable settlement price is higher than the specified price, the Company pays the counterparty based on the difference. In February 1999, the Company entered into natural gas price swaps covering 9.3 Bcf of its natural gas production for March 1999 to October 1999 at 1.2 Bcf per month at a fixed price of $2.03 per Mcf (after basis adjustment). As a result of the 17
natural gas price swaps in place, the Company realized a loss of $4.0 million for the nine months ended September 30, 1999. The fair value of the Company's open gas price swap contracts as of September 30, 1999 was a liability of $912,000. Interest Rates The Company's outstanding long-term debt under its bank credit facility of $104.0 million at September 30, 1999 is subject to floating market rates of interest. Borrowings under the credit facility bear interest at a fluctuating rate that is linked to LIBOR. Any increases in these interest rates can have an adverse impact on the Company's results of operations and cash flow. The Company has entered into interest rate swap agreements to hedge the impact of interest rate changes on a portion of its floating rate debt. As of September 30, 1999, the Company has interest rate swaps with a notional amount of $100.0 million which fixed the LIBOR rate at an average rate of 5.0% through September 2000. As a result of the interest rate swaps in place, the Company realized a gain of $66,000 for the nine months ended September 30, 1999. The fair value of the Company's open interest rate swap contracts as of September 30, 1999 was an asset of $765,000. 18
PART II - OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 10.1* Credit Agreement dated as of September 10, 1999, between the Company, the Banks Party thereto and The First National Bank of Chicago, as Administrative Agent, Toronto Dominion (Texas), Inc., as Syndication Agent, Paribas, as Documentation Agent and Banc One Capital Markets, as Lead Arranger. 27.* Financial Data Schedule for the Nine Months ended September 30, 1999. - ------------- * Filed herewith. b. Reports on Form 8-K There were no current reports on Form 8-K filed during the third quarter of 1999 and to the date of this filing. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMSTOCK RESOURCES, INC. Date November 12, 1999 /s/M. JAY ALLISON ----------------- ------------------ M. Jay Allison, Chairman, President and Chief Executive Officer (Principal Executive Officer) Date November 12, 1999 /s/ROLAND O. BURNS ----------------- -------------------- Roland O. Burns, Senior Vice President, Chief Financial Officer, Secretary, and Treasurer (Principal Financial and Accounting Officer) 19