SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarter Ended March 31, 1998 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) 5005 LBJ Freeway, Suite 1000, Dallas, Texas 75244 (Address of principal executive offices) Telephone No.: (972) 701-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No --- ---- The number of shares outstanding of the registrant's common stock, par value $.50, as of May 14, 1998 was 24,235,863.
COMSTOCK RESOURCES, INC. QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31, 1998 INDEX PART I. Financial Information Page No. Item 1. Financial Statements Consolidated Balance Sheets - March 31, 1998 and December 31, 1997..................................4 Consolidated Statements of Operations - Three Months ended March 31, 1998 and 1997............................5 Consolidated Statement of Stockholders' Equity - Three Months ended March 31, 1998.....................................6 Consolidated Statements of Cash Flows - Three Months ended March 31, 1998 and 1997............................7 Notes to Consolidated Financial Statements.................................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................10 PART II. Other Information Item 4. Submission of Matters to a Vote of Security Holders.................13 Item 6. Exhibits and Reports on Form 8-K....................................14 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3
<TABLE> <CAPTION> COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS March 31, December 31, 1998 1997 --------- ------------ (Unaudited) (In thousands) <S> <C> <C> Cash and Cash Equivalents ......................................$ 3,435 $ 14,504 Accounts Receivable: Oil and gas sales ......................................... 15,550 24,509 Joint interest operations ................................. 3,574 6,732 Other Current Assets ........................................... 1,738 172 --------- --------- Total current assets ........................... 24,297 45,917 Property and Equipment: Unevaluated oil and gas properties ........................ 31,233 30,291 Oil and gas properties, successful efforts method ......... 463,521 456,606 Other ..................................................... 1,581 1,561 Accumulated depreciation, depletion and amortization ...... (90,286) (77,677) --------- --------- Net property and equipment ..................... 406,049 410,781 Other Assets ................................................... 83 102 --------- --------- $ 430,429 $ 456,800 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable and Accrued Expenses ..........................$ 23,806 $ 56,184 --------- --------- Total current liabilities ................................. 23,806 56,184 Long-term Debt, less Current Portion ........................... 265,000 260,000 Deferred Taxes Payable ......................................... 11,514 11,207 Reserve for Future Abandonment Costs ........................... 4,815 4,815 Stockholders' Equity: Common stock--$0.50 par, 50,000,000 shares authorized, 24,218,863 and 24,208,785 shares outstanding at March 31, 1998 and December 31, 1997, respectively ........ 12,109 12,104 Additional paid-in capital .................................. 110,396 110,273 Retained earnings ........................................... 2,804 2,234 Less: Deferred compensation-restricted stock grants ......... (15) (17) --------- --------- Total stockholders' equity ................................ 125,294 124,594 --------- --------- $ 430,429 $ 456,800 ========= ========= </TABLE> The accompanying notes are an integral part of these statements. 4
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, (Unaudited) 1998 1997 -------- -------- (In thousands, except per share amounts) Revenues: Oil and gas sales........................................$ 25,442 $ 23,411 Other income ............................................ 116 268 Gain on sale of properties .............................. -- 48 -------- -------- Total revenues .................................. 25,558 23,727 -------- -------- Expenses: Oil and gas operating ................................... 6,321 4,649 Exploration ............................................. 1,059 -- Depreciation, depletion and amortization ................ 12,622 4,990 General and administrative, net ......................... 422 689 Interest ................................................ 4,257 1,210 -------- -------- Total expenses .................................. 24,681 11,538 -------- -------- Income before income taxes ................................ 877 12,189 Provision for income taxes ................................ (307) (4,266) -------- -------- Net income ................................................ 570 7,923 Preferred stock dividends ................................. -- (159) -------- -------- Net income attributable to common stock ................... 570 7,764 ======== ======== Net income per share: Basic............................................$ .02 $ .32 ======== ======== Diluted..........................................$ .02 $ .30 ======== ======== Weighted average number of common and common stock equivalent shares outstanding: Basic........................................... 24,219 24,149 ========= ========= Diluted......................................... 25,117 26,467 ========= ========= The accompanying notes are an integral part of these statements. 5
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Three Months Ended March 31, 1998 (Unaudited) <TABLE> <CAPTION> Deferred Additional Compensation- Common Paid-In Retained Restricted Stock Capital Earnings Stock Grants Total -------- -------- -------- -------- -------- (In thousands) <S> <C> <C> <C> <C> <C> Balance at December 31, 1997.........................$ 12,104 $110,273 $ 2,234 $ (17) $124,594 Issuance of common stock ......................... 5 123 -- -- 128 Restricted stock grants .......................... -- -- -- 2 2 Net income ....................................... -- -- 570 -- 570 -------- -------- -------- -------- -------- Balance at March 31, 1998............................$ 12,109 $110,396 $ 2,804 $ (15) $125,294 ======== ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 6
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, (Unaudited) <TABLE> <CAPTION> 1998 1997 -------- -------- (In thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income...........................................................$ 570 $ 7,923 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Compensation paid in common stock .................................. 130 154 Exploration ........................................................ 1,059 -- Depreciation, depletion and amortization ........................... 12,622 4,990 Deferred income taxes .............................................. 307 4,266 Gain on sales of property .......................................... -- (48) -------- -------- Working capital provided by operations ........................... 14,688 17,285 Decrease in accounts receivable .................................... 12,117 2,717 Increase in other current assets ................................... (1,566) (865) Increase (decrease) in accounts payable and accrued expenses ....... (32,378) 1,331 -------- -------- Net cash provided by (used for) operating activities ............. (7,139) 20,468 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of assets ...................................... 6 4,994 Capital expenditures and acquisitions .............................. (8,936) (7,681) Acquisition deposit ................................................ -- (1,051) -------- -------- Net cash used for investing activities ........................... (8,930) (3,738) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings ......................................................... 10,000 -- Proceeds from common stock issuances ............................... -- 342 Stock issuance costs ............................................... -- (29) Principal payments on debt ......................................... (5,000) (20,042) Dividends paid on preferred stock .................................. -- (159) -------- -------- Net cash provided by (used for) financing activities ............. 5,000 (19,888) -------- -------- Net decrease in cash and cash equivalents ...................... (11,069) (3,158) Cash and cash equivalents, beginning of period ................. 14,504 16,162 -------- -------- Cash and cash equivalents, end of period........................$ 3,435 $ 13,004 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 7
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 (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 March 31, 1998 and the related results of operations and cash flow for the three months ended March 31, 1998 and 1997. 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, 1997. The results of operations for the three months ended March 31, 1998 are not necessarily an indication of the results expected for the full year. Supplementary Information with Respect to the Statements of Cash Flows - For the Three Months Ended March 31, 1998 1997 ------- ------- (In thousands) Cash Payments - Interest $ 4,786 $ 1,247 Income taxes 276 300 Noncash Investing and Financing Activities - Common stock issued for director compensation $ 128 $ 143 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. For the three months ended March 31, 1998, the Company made a provision for deferred income taxes based on an expected tax rate for 1998 of 35%. 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 and diluted earnings per share for the three months ended March 31, 1998 and 1997 were determined as follows: <TABLE> <CAPTION> For the Three Months Ended March 31, --------------------------------------------------- 1998 1997 ----------------------- ----------------------- Per Per Income Shares Share Income Shares Share ------ ------ ----- ------ ------ ----- (In thousands, except per share amounts) <S> <C> <C> <C> <C> <C> <C> Basic Earnings Per Share: Net Income $ 570 24,219 $ 7,923 24,149 Less Preferred Stock Dividends -- -- (159) -- -------- ------- -------- ------ Net Income Available to Common Stockholders 570 24,219 $0.02 7,764 24,149 $0.32 ===== ===== Diluted Earnings Per Share: Effect of Dilutive Securities: Stock Options -- 898 -- 973 Convertible Preferred Stock -- -- 159 1,345 -------- ------- -------- ------ Net Income Available to Common Stockholders and Assumed Conversions $ 570 25,117 $0.02 $ 7,923 26,467 $0.30 ======== ======= ===== ======== ====== ===== </TABLE> (2) LONG-TERM DEBT - As of March 31, 1998, the Company had $265.0 million outstanding under its bank revolving credit facility. Borrowings under the bank credit facility cannot exceed a borrowing base determined semiannually by the banks. The borrowing base as of May 14, 1998 was $275.0 million. Amounts outstanding under the bank credit facility bear interest at a floating rate based on The First National Bank of Chicago's base rate (as defined) plus 0% to 0.05% or, at the Company's option, at a fixed rate for up to six months based on the London Interbank Offered Rate ("LIBOR") plus 0.625% to 1.5%, depending upon the utilization of the available borrowing base. As of March 31, 1998, the Company had placed the outstanding advances under the revolving credit facility under fixed rate loans based on LIBOR at an average rate of approximately 7.1% per annum. In addition, the Company incurs a commitment fee of 0.2% to 0.375%, depending upon the utilization of the available borrowing base, on the unused portion of the borrowing base. (3) SUBSEQUENT EVENT - On May 8, 1998, the Company purchased a 33% working interest in 13,722 acres at South Timbalier Blocks 34 and 50, and South Pelto Block 15 located offshore Louisiana in the Gulf of Mexico in 35 to 55 feet of water for $1.4 million. Current daily production from the properties is 1,500 Mcf and 50 barrels of oil from 7 active wells at depths ranging from 800 feet to 9,500 feet. The Company has identified several exploratory prospects to drill on the acquired acreage. The facilities acquired include four platforms and infrastructure which enable the Company to accelerate production from any successful exploratory wells drilled in the area. 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table reflects certain summary operating data for the periods presented: Three Months Ended March 31, 1998 1997 ---- ---- Net Production Data: Oil (thousand barrels) 683 299 Natural gas (million cubic feet) 6,637 5,520 Average Sales Price: Oil (per barrel) $14.74 $22.30 Natural gas (per thousand cubic feet - Mcf) 2.32 3.03 Expenses ($ per equivalent Mcf): Oil and gas operating(l) $ 0.59 $ 0.64 General and administrative, net 0.04 0.09 Depreciation, depletion and amortization(2) 1.17 0.68 (1) Includes lease operating costs and production and ad valorem taxes. (2) Represents depreciation, depletion and amortization of oil and gas properties only. Revenues - The Company's oil and gas sales increased $2.0 million (9%) in the first quarter of 1998, to $25.4 million from $23.4 million in 1997's first quarter due to a 20% increase in the Company's natural gas production and a 128% increase in the Company's oil production. The production increases were largely offset by a 24% decrease in the Company's average realized natural gas price as well as a 34% decrease in the Company's average realized oil price. The significant increase in production is attributable to a $200.9 million acquisition of offshore properties completed in December 1997. Other income decreased $152,000 (57%) to $116,000 in the first quarter of 1998 from $268,000 in the first quarter of 1997. The decrease is attributable to a lower level of short-term cash deposits outstanding during the quarter as well as a decrease in management fee income received by the Company in 1998. Costs and Expenses - Oil and gas operating expenses, including production taxes, increased $1.7 million (36%) to $6.3 million in the first quarter of 1998 from $4.6 million in the first quarter of 1997. The increase is due to the 47% increase in oil and natural gas production (on an equivalent Mcf basis) in the first quarter of 1998. Oil and gas operating expenses per equivalent Mcf produced decreased 5 cents to 59 cents in the first quarter of 1998 from 64 cents in the first quarter 1997. The decrease is primarily attributable to lower lifting costs associated with the offshore properties acquired in December 1997. Depreciation, depletion and amortization ("DD&A") increased $7.6 million (153%) to $12.6 million in the first quarter of 1998 from $5.0 million in the first quarter of 1997 due to the 47% increase in oil and natural gas production (on an equivalent Mcf basis) and due to higher costs per unit of amortization. DD&A per equivalent Mcf produced increased from 68 cents in 1997's first quarter to $1.17 in 1998's first quarter. The increase related to the higher costs of the offshore properties acquired in December 1997. 10
General and administrative expenses, which is reported net of overhead reimbursements, decreased $267,000 (39%) to $422,000 in the first quarter of 1998 from $689,000 in 1997's first quarter. The decrease relates to an increase in overhead reimbursements received by the Company in 1998 while the Company's overhead costs remained relatively the same. Interest expense increased $3.0 million (252%) to $4.3 million for the three months ended March 31, 1998 from $1.2 million for the three months ended March 31, 1997. The increase is related to a higher level of outstanding advances under the Company's bank credit facility due to the December 1997 $200.9 million acquisition as well as a higher average interest rate on the Company's bank credit facility. The weighted average annual interest rate under the Company's bank credit facility increased to 7.1% in 1998's first quarter as compared to 6.5% in the first quarter of 1997. The increase in the rate was attributable to a higher utilization of the borrowing base under the bank credit facility after the December 1997 acquisition. The Company provided $307,000 and $4.3 million for deferred income taxes for the three months ended March 31, 1998 and 1997, respectively, using an estimated tax rate of 35%. The Company reported net income of $570,000 for the three months ended March 31, 1998, as compared to $7.8 million for the three months ended March 31, 1997. Net income per share for the first quarter was 2 cents on diluted weighted average shares outstanding of 25.1 million as compared to net income per share of 30 cents for the first quarter of 1997 on diluted weighted average shares outstanding of 26.5 million. Capital Expenditures The following table summarizes the Company's capital expenditure activity for the three months ended March 31, 1998 and 1997: Three Months Ended March 31, ---------------------------- 1998 1997 ---- ---- (In thousands) Acquisitions $ 703 $ -- Other leasehold costs 994 778 Development drilling 4,286 5,081 Exploratory costs 1,643 1,113 Workovers and recompletions 1,291 697 Other 19 12 --------- --------- Total $ 8,936 $ 7,681 ========= ========= Capital Resources and Liquidity During the three months ended March 31, 1998, the primary sources of funds for the Company were cash generated from operations of $14.7 million, before working capital changes, and borrowings under the bank credit facility of $10.0 million. Primary uses of funds for the three months ended March 31, 1998 were capital expenditures for development and exploratory activities of $8.9 million and the repayment of debt of $5.0 million. 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 three months ended March 31, 1998 and 1997, the Company spent $7.2 million and $6.9 million, respectively, on development and exploration activities. The Company currently anticipates spending an additional $49.0 million on development and exploration projects during the remainder of 1998. The Company does not have a specific acquisition budget, as a result of the unpredictability of the timing and size of forthcoming acquisition activities. 11
The Company intends to primarily use internally generated cash flow to fund capital expenditures other than significant acquisitions. The Company anticipates that such sources will be sufficient to fund the expected 1998 development and exploration expenditures. The Company primarily intends to use borrowings under its bank credit facility to finance significant acquisitions. In addition, the Company may seek to obtain other debt or equity financing. 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 natural gas prices and other market conditions. The Company's bank credit facility consists of a $290.0 million revolving credit commitment provided by a syndicate of ten banks for which The First National Bank of Chicago serves as agent. Indebtedness under the credit facility is secured by substantially all of the Company's assets. The Company's bank credit facility 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. As of May 14, 1998, the borrowing base was $275.0 million. Such borrowing base may be affected from time to time by the performance of the Company's oil and natural gas properties and changes in oil and natural gas prices. The revolving credit line bears interest at the option of the Company at either (i) LIBOR plus 0.625% to 1.5% or (ii) the "corporate base rate" plus 0% to 0.5%, depending in each case on the utilization of the available borrowing base. The Company incurs a commitment fee of up to 0.2% to 0.375% per annum, depending on the utilization of the available borrowing base, on the unused portion of the borrowing base. The average annual interest rate as of March 31, 1998, of all outstanding indebtedness under the Company's bank credit facility was approximately 7.1%. The revolving credit line matures on December 9, 2002 or such earlier date as the Company may elect. The 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. 12
PART II - OTHER INFORMATION ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's annual meeting of stockholders was held in Dallas, Texas at 4:00 p.m., local time, on May 11, 1998. (b) Proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to the nominees for election as director as listed in the proxy statement and such nominees were elected. (c) Out of a total 24,196,067 shares of the Company's common stock outstanding and entitled to vote, 20,631,361 shares were present at the meeting in person or by proxy, representing approximately 85%. Matters voted upon at the meeting were as follows: (i) The election of two Class A Directors to serve on the Company's board of directors until the 2001 annual meeting of stockholders. The vote tabulation with respect to each nominee was as follows: Nominee For Against ------- --- ------- Franklin B. Leonard 20,599,961 31,400 Cecil E. Martin, Jr. 20,603,761 27,600 Other Directors of the Company whose term of office as a Director continued after the meeting are as follows: Class B Directors Class C Director ----------------- ---------------- M. Jay Allison Richard S. Hickok David W. Sledge (ii) The appointment of Arthur Andersen LLP as the Company's certified public accountants for 1998 was approved by a vote of 20,570,284 shares for, 33,511 shares against and 27,566 shares abstaining. 13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 10.1*# Employment Agreement dated May 11, 1998 by and between the Company and M. Jay Allison. 10.2*# Employment Agreement dated May 11, 1998 by and between the Company and Roland O. Burns. 27. * Financial Data Schedule for the Three Months ended March 31,1998. - --------------- * Filed herewith. # Management contract or compensatory plan documents. b. Reports on Form 8-K Current reports on Form 8-K filed during the first quarter of 1998 and to the date of this filing are as follows: None 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 May 14, 1998 /s/M. JAY ALLISON ------------ ----------------- M. Jay Allison, President and Chief Executive Officer (Principal Executive Officer) Date May 14, 1998 /s/ROLAND O. BURNS ------------ ------------------ Roland O. Burns, Senior Vice President, Chief Financial Officer, Secretary, and Treasurer (Principal Financial and Accounting Officer) 14