DEFM14C
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

SCHEDULE 14C INFORMATION

INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

 

 

Check the appropriate box:
  Preliminary Information Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))
  Definitive Information Statement

COMSTOCK RESOURCES, INC.

(Name of Registrant As Specified In Its Charter)

 

Payment of Filing Fee (Check the appropriate box):
  No fee required
  Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
  (1)  

Title of each class of securities to which transaction applies:

 

 

  (2)  

Aggregate number of securities to which transaction applies:

 

 

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

  (4)  

Proposed maximum aggregate value of transaction:

 

 

  (5)  

Total fee paid:

 

 

  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.
  (1)  

Amount Previously Paid:

 

    

 

  (2)  

Form, Schedule or Registration Statement No.:

 

     

  (3)  

Filing party:

 

     

  (4)  

Date Filed:

 

     

 

 

 


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LOGO

COMSTOCK RESOURCES, INC.

5300 Town and Country Blvd.,

Suite 500

Frisco, Texas 75034

NOTICE OF ACTION BY WRITTEN CONSENT AND INFORMATION STATEMENT

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

June 24, 2019

Dear Stockholder:

This notice of action by written consent and the accompanying information statement (this “Information Statement”) is being furnished by the Board of Directors (the “Board”) of Comstock Resources, Inc., a Nevada corporation (“Comstock”, the “Company”, “we”, “us” or “our”) to the holders of record at the close of business on June 11, 2019 of the outstanding shares of our common stock, $0.50 par value (“Common Stock”), pursuant to Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act”).

The purpose of this Information Statement is to inform the Company’s stockholders that on June 7, 2019, holders of approximately 84% of the outstanding shares of Common Stock acted by written consent (the “Written Consent”) in lieu of a special meeting of stockholders to approve (i) an amendment to the Company’s Second Amended and Restated Articles of Incorporation (the “Charter Amendment”) to increase the number of authorized shares of Common Stock from 155,000,000 to 400,000,000 (the “Share Increase”), (ii) the Agreement and Plan of Merger dated as of June 7, 2019 (the “Merger Agreement”), by and among the Company, Covey Park Energy LLC, a Delaware limited liability company (“Covey Park”), New Covey Park Energy LLC, a Delaware limited liability company (“Holdings”), and, solely for the purposes of Section 5.14 thereof, Covey Park Energy Holdings LLC, a Delaware limited liability company (“Current Holdings”), and subject to the satisfaction or waiver of specified conditions, the merger of Covey Park with and into the Company, with the Company existing as the surviving corporation (the “Merger”), pursuant to which the limited liability company interests in Covey Park will, upon consummation of the Merger, be converted into the right to receive (x) 28,833,000 shares of Common Stock (subject to the terms and conditions of the Merger Agreement) (such shares of Common Stock, the “Common Stock Consideration”), (y) 210,000 shares of Series A Preferred Stock (the “Preferred Stock Consideration” and, together with the Common Stock Consideration, the “Stock Consideration”), and (z) cash in an amount equal to $700.0 million plus the Series A Preferred Balance (as defined in the Merger Agreement) to be used to redeem the preferred units of Holdings (the “Cash Consideration” and together with the Stock Consideration, the “Merger Consideration”), and (iii) in accordance with Section 312.03 of the NYSE Listed Company Manual, the issuance of shares of Common Stock (the “Share Issuances”) (x) as Merger Consideration pursuant to the Merger, (y) pursuant to the Subscription Agreement (the “Subscription Agreement”), by and among the Company, Arkoma Drilling CP, LLC (“Arkoma LLC”) and Williston Drilling CP, LLC (“Williston LLC” and, together with Arkoma LLC, the “Jones LLCs”), under which, upon satisfaction of the terms and conditions therein, the Jones LLCs shall purchase in the aggregate (a) 50,000,000 shares of Common Stock for total consideration of $300.0 million and (b) 175,000 shares of Series B Preferred Stock for total consideration of $175.0 million, and (z) upon conversion of the Series A Preferred Stock and Series B Preferred Stock in accordance with the Certificate of Designations establishing the rights, preferences and privileges thereof (the “Certificate of Designations”). Copies of the Merger Agreement, the Subscription Agreement, and the Certificate of Designations have been included as Annex A, Annex B, and Annex C, respectively. Approval of the Charter


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Amendment, the Merger Agreement and the Merger and the Share Issuances are referred to herein collectively as the “Shareholder Approved Actions.” The transactions contemplated by the Merger Agreement, the Subscription Agreement, the Shareholders Agreement (as described below), the Charter Amendment, the Certificate of Designations and the Registration Rights Agreement (as described below) are referred to herein collectively as the “Transactions.”

Under Nevada law and the Company’s Second Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, adoption of the Charter Amendment and Merger Agreement, and the transactions contemplated thereby, by the Company’s stockholders required the affirmative vote or written consent of the holders of a majority of the voting power of all outstanding shares of Common Stock. In addition, our Common Stock is listed on the New York Stock Exchange (the “NYSE”). Under Section 312.03 of the NYSE Listed Company Manual, stockholder approval is required prior to the issuance of shares of common stock, or of securities convertible into common stock, if:

 

   

such common stock or securities have, or will have upon issuance, voting power equal to 20% or more of the voting power outstanding before the issuance of such stock or securities convertible into common stock;

 

   

the number of shares of common stock to be issued is, or will be upon issuance, equal to 20% or more of the number of shares of common stock outstanding before the issuance of the common stock or securities convertible into common stock; or

 

   

the number of shares of common stock to be issued is, or will be upon issuance, equal to more than 5% of the number of shares of common stock outstanding before the issuance of the common stock or securities convertible into common stock and such issuance is to a substantial security holder of the Company.

Because the maximum number of shares of our Common Stock issuable pursuant to the Share Issuances would represent greater than 20% of the number of shares of our Common Stock outstanding prior to the issuance of the Stock Consideration and the shares of Common Stock and Series B Preferred Stock to the Jones LLCs, stockholder approval of the Share Issuances is required under NYSE rules and regulations. See “The Merger AgreementThe Series A and Series B Preferred Stock” for more detail on the number of shares of Common Stock that may be issuable upon conversion of the Series A Preferred Stock and Series B Preferred Stock. In addition, because the shares of Common Stock to be issued to the Jones LLCs pursuant to the Subscription Agreement and that may be issuable to the Jones LLCs upon conversion of the Series B Preferred Stock represent more than 5% of the issued and outstanding shares of Common Stock prior to the Share Issuances, and the Jones LLCs together with their affiliates disclosed below collectively are substantial security holders of the Company, stockholder approval is required for the issuance of such shares of Common Stock to the Jones LLCs under the NYSE rules and regulations.

On June 7, 2019, Arkoma Drilling, LP (“Arkoma”) and Williston Drilling, LP (“Williston” and, together with Arkoma, the “Principal Stockholders”) delivered to the corporate secretary of the Company an irrevocable written consent approving the Shareholder Approved Actions. As of June 7, 2019, the Principal Stockholders held shares of Common Stock representing approximately 84% of the voting power of all outstanding shares of Common Stock. Accordingly, the adoption of the Shareholder Approved Actions by the Company’s stockholders was effected in accordance with Section 78.390 of the Nevada Revised Statutes as of June 7, 2019 and the NYSE rules and regulations. No further approval of the stockholders of the Company under the Nevada Revised Statutes or NYSE rules and regulations is required to complete the Shareholder Approved Actions. As a result, the Company has not solicited and will not be soliciting your vote for the Shareholder Approved Actions and does not intend to call a meeting of stockholders for purposes of voting on the adoption of either matter.

Pursuant to Rule 14c-2 of the Exchange Act, the actions contemplated by written consent may not be taken until July 14, 2019, which is 20 calendar days following the date we first mail this Information Statement to our stockholders. The Charter Amendment will not become effective until it is filed with the Secretary of State of the State of Nevada, which will occur only if the other conditions under the Merger Agreement are satisfied.


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The Board carefully reviewed and considered the terms and conditions of the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement. The Board (i)(A) determined that the Merger and the other transactions contemplated by the Merger Agreement, on the terms and subject to the conditions set forth in the Merger Agreement, are fair to, and in the best interests of, the Company and its stockholders, (B) approved and declared advisable the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, on the terms and subject to the conditions set forth in the Merger Agreement, and (C) subject to certain provisions of the Merger Agreement described under “The Merger Agreement—No Solicitation” in the Information Statement, recommended that the holders of Common Stock vote in favor of adopting the Merger Agreement and (ii) directed that the Shareholder Approved Actions be submitted to the holders of the Common Stock for their adoption.

This notice of action by written consent and the Information Statement shall constitute notice to you from the Company that the Shareholder Approved Actions have been adopted by the holders of a majority of the voting power of the Common Stock by written consent in lieu of a meeting in accordance with Section 78.390 of the Nevada Revised Statutes and the NYSE regulations.

COMSTOCK IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND COMSTOCK A PROXY.

PLEASE NOTE THAT THE PRINCIPAL STOCKHOLDERS OF COMSTOCK HAVE VOTED TO APPROVE AND ADOPT THE SHAREHOLDER APPROVED ACTIONS. THE NUMBER OF VOTES HELD BY THE PRINCIPAL STOCKHOLDERS IS SUFFICIENT TO SATISFY THE STOCKHOLDER VOTE REQUIREMENT UNDER THE NEVADA REVISED STATUTES AND NYSE RULE 312 FOR THESE ACTIONS AND CONSEQUENTLY, NO ADDITIONAL VOTES WILL BE NEEDED TO APPROVE THESE TRANSACTIONS. THE CORPORATE ACTIONS DESCRIBED IN THIS INFORMATION STATEMENT REQUIRED SHAREHOLDER APPROVAL FROM THE HOLDERS OF OUR OUTSTANDING COMMON STOCK BECAUSE OUR COMMON STOCK IS TRADED ON THE NYSE AND THE REQUIREMENTS OF NEVADA LAW.

The Information Statement accompanying this letter provides you with more specific information concerning the Charter Amendment, the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement. We encourage you to carefully read this Information Statement and the copy of the Merger Agreement included as Annex A to the Information Statement.

By order of the Board of Directors

Very truly yours,

 

LOGO

M. Jay Allison

Chairman of the Board and Chief Executive Officer

The Merger has not been approved or disapproved by the U.S. Securities and Exchange Commission or any state securities or other regulatory agency. Neither the U.S. Securities and Exchange Commission nor any state securities or other regulatory agency has passed upon the merits or fairness of the Merger or upon the adequacy or accuracy of the information contained in this document or the Information Statement. Any representation to the contrary is a criminal offense.

The Information Statement is dated June 24, 2019 and is first being mailed to our stockholders on or about June 24, 2019.


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TABLE OF CONTENTS

 

SUMMARY

     2  

The Parties

     2  

The Merger

     2  

Recommendation of the Board; Reasons for the Merger

     3  

Approval of the Merger; Record Date; Action by Stockholder Consent

     3  

Certain Effects of the Merger

     4  

Governance Matters After the Merger

     4  

Effects on the Company if the Merger is Not Completed

     4  

Conditions to the Merger

     4  

Regulatory Approvals

     6  

Termination

     6  

Amendment to Second Amended and Restated Articles of Incorporation

     7  

Amended and Restated Registration Rights Agreement

     7  

Certificate of Designations

     7  

Material U.S. Federal Income Tax Consequences

     8  

Accounting Treatment of the Merger

     8  

Risk Factors

     8  

Additional Information

     8  

Selected Historical Consolidated Financial Data of Comstock

     9  

Selected Historical Financial Data of Covey Park

     11  

Summary Selected Unaudited Pro Forma Combined Financial Information

     13  

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE CHARTER AMENDMENT

     14  

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     17  

RISK FACTORS

     19  

THE PARTIES

     23  

Comstock Resources, Inc.

     23  

Covey Park Energy LLC

     23  

New Covey Park Energy LLC

     23  

Covey Park Energy Holdings LLC

     23  

THE MERGER

     24  

Overview

     24  

Background of the Merger

     24  

Reasons for the Merger

     28  

Required Approval of the Merger; Record Date; Action by Stockholder Consent

     29  

Recommendation of the Board

     30  

Opinion of BMO Capital Markets Corp.

     30  

Certain Effects of the Merger

     31  

Governance Matters After the Merger

     31  

Effects on the Company if the Merger is not Completed

     32  

Financing of the Merger

     32  

Interests of the Company’s Directors and Executive Officers in the Merger

     35  

Merger Consideration

     36  

Material U.S. Federal Income Tax Consequences of the Merger

     36  

Restructuring

     39  

Regulatory Approvals Required for the Merger

     39  

Accounting Treatment of the Merger

     39  

Dividend Policy

     39  

THE MERGER AGREEMENT

     41  

The Merger

     41  

Closing and Effective Time of the Merger

     41  

Consideration to be Received in the Merger

     42  

 

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Representations and Warranties

     42  

Operating Covenants

     45  

Action by Stockholder Consent

     47  

Reasonable Best Efforts and Certain Pre-Closing Obligations

     47  

Employment Matters

     47  

D&O Indemnification

     48  

Financing Cooperation

     49  

Additional Agreements

     49  

Conditions to the Merger

     49  

Termination

     51  

Effect of Termination

     52  

Financing Termination Fee

     52  

Expenses

     52  

Amendment; Extension; Waiver

     52  

Specific Performance

     52  

Governing Law

     53  

AGREEMENTS RELATED TO THE MERGER

     54  

The Subscription Agreement

     54  

Certificate of Designations

     54  

The Shareholders Agreement

     56  

The Amended and Restated Registration Rights Agreement

     59  

The Support Agreement

     60  

COMSTOCK RESOURCES, INC. UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     62  

AMENDMENT TO THE SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION

     73  

Description of the Proposed Amendment

     73  

Purpose and Reasons for the Share Increase

     73  

Effect of the Share Increase

     74  

DESCRIPTION OF CAPITAL STOCK

     75  

NO DISSENTER’S RIGHTS

     79  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     80  

INFORMATION ABOUT COVEY PARK

     81  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF COVEY PARK

     91  

HOUSEHOLDING

     119  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     120  

INFORMATION INCORPORATED BY REFERENCE

     120  

INDEX TO FINANCIAL STATEMENTS

     F-1  

ANNEX A: AGREEMENT AND PLAN OF MERGER

     A-1  

ANNEX B: SUBSCRIPTION AGREEMENT

     B-1  

ANNEX C: CERTIFICATE OF DESIGNATIONS

     C-1  

ANNEX D: OPINION OF BMO CAPITAL MARKETS CORP.

     D-1  

ANNEX E: AMENDMENT TO THE SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION

     E-1  

ANNEX F: NETHERLAND, SEWELL  & ASSOCIATES, INC. RESERVE REPORT FOR COVEY PARK ENERGY, LLC

     FA-1  

 

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COMSTOCK RESOURCES, INC.

5300 Town and Country Blvd., Suite 500

Frisco, Texas 75034

 

 

INFORMATION STATEMENT

This information statement and notice of action by written consent (collectively, this “Information Statement”) contains information relating to (i) amending the Second Amended and Restated Articles of Incorporation (the “Charter Amendment”) of Comstock Resources, Inc., a Nevada corporation (“Comstock”, the “Company” “we”, “us” or “our”), to increase the number of authorized shares of Company common stock, par value $0.50 (“Common Stock”), from 155,000,000 to 400,000,000 (the “Share Increase”) and (ii) the Agreement and Plan of Merger, dated as of June 7, 2019 (the “Merger Agreement”), entered into by and among the Company, Covey Park Energy LLC, a Delaware limited liability company (“Covey Park”), New Covey Park Energy LLC, a Delaware limited liability company (“Holdings”), and, solely for the purposes of Section 5.14 thereof, Covey Park Energy Holdings LLC, a Delaware limited liability company (“Current Holdings”), and subject to the satisfaction or waiver of specified conditions, the merger of Covey Park with and into the Company, with the Company existing as the surviving corporation (the “Merger”), pursuant to which the limited liability company interests in Covey Park will, upon consummation of the Merger, be converted into the right to receive (x) 28,833,000 shares of Common Stock (subject to the terms and conditions of the Merger Agreement) (such shares of Common Stock, the “Common Stock Consideration”), (y) 210,000 shares of Series A Preferred Stock of the Company (the “Preferred Stock Consideration” and, together with the Common Stock Consideration, the “Stock Consideration”), and (z) cash in an amount equal to $700.0 million plus the Series A Preferred Balance (as defined in the Merger Agreement) to be used to redeem the preferred units of Holdings (the “Cash Consideration” and together with the Stock Consideration, the “Merger Consideration”), (iii) the Subscription Agreement (the “Subscription Agreement”), by and among the Company, Arkoma Drilling CP, LLC (“Arkoma LLC”) and Williston Drilling CP, LLC (“Williston LLC” and, together with Arkoma LLC, the “Jones LLCs”), pursuant to which, upon satisfaction of the terms and conditions therein, the Jones LLCs shall purchase in the aggregate (x) 50,000,000 shares of Common Stock for total consideration of $300.0 million and (y) 175,000 shares of Series B Preferred Stock of the Company for total consideration of $175.0 million, and (iv) in accordance with Section 312.03 of the NYSE Listed Company Manual, the issuance of shares of Common Stock (the “Share Issuances”) (x) as Merger Consideration pursuant to the Merger, (y) to the Jones LLCs, pursuant to the Subscription Agreement and (z) upon conversion of the Series A Preferred Stock and Series B Preferred Stock in accordance with the Certificate of Designations establishing the rights, preferences and privileges thereof (the “Certificate of Designations”). The Charter Amendment, the Merger Agreement and the transactions contemplated thereby and the Share Issuances are referred to herein collectively as the “Shareholder Approved Actions.” The Merger Agreement, the Subscription Agreement, the Shareholders Agreement (as described below), the Charter Amendment, the Certificate of Designations and the Registration Rights Agreement (as described below) are referred to herein collectively as the “Transaction Documents” and, the transactions contemplated thereby, including the Share Issuances, the “Transactions.” We are furnishing this Information Statement to stockholders of the Company pursuant to applicable provisions of Nevada law and certain securities regulations. This Information Statement is dated June 24, 2019 and is first being mailed to our stockholders on or about June 24, 2019.

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED

NOT TO SEND US A PROXY.

 

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SUMMARY

This summary highlights selected information in this Information Statement and may not contain all of the information about the Transactions that is important to you. We have included page references in parentheses to direct you to more complete descriptions of the topics presented in this summary. You should carefully read this Information Statement in its entirety, including the annexes hereto and the other documents to which we have referred you, for a more complete understanding of the Transactions. You may obtain, without charge, copies of documents incorporated by reference into this Information Statement by following the instructions under the section of this Information Statement entitled “Where You Can Find Additional Information” beginning on page 121.

The Parties

Comstock is an independent energy company based in Frisco, Texas and is engaged in oil and gas acquisitions, exploration and development primarily in Texas, Louisiana and North Dakota. The Company’s stock is traded on the New York Stock Exchange (the “NYSE”) under the ticker symbol “CRK.” Its principal executive offices are located at 5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034 and its telephone number is (972) 668-8800.

Covey Park is an independent natural gas company engaged in the acquisition, development, exploitation and exploration of natural gas properties targeting the Haynesville and Bossier shale plays. Its principal executive offices are located at 8401 N. Central Expressway, Suite 700, Dallas, Texas 75225 and its telephone number is (214) 548-6000.

Holdings is a Delaware limited liability company and wholly-owned subsidiary of Covey Park that was formed prior to the execution of the Merger Agreement to hold all of the equity interests in the Company following completion of the Restructuring (as defined below) and the Merger Consideration following completion of the Merger. Its principal executive offices are located at 8401 N. Central Expressway, Suite 700, Dallas, Texas 75225 and its telephone number is (214) 548-6000. Please see The Merger—Restructuring for more details regarding the Restructuring.

Current Holdings is a Delaware limited liability company and currently holds all of the outstanding common equity interests in Covey Park. Following completion of the Restructuring, the Merger and the redemption of the Series A Preferred Units (as defined below), Current Holdings will hold all of the outstanding limited liability company interests in Holdings. Its principal executive offices are located at 8401 N. Central Expressway, Suite 700, Dallas, Texas 75225 and its telephone number is (214) 548-6000.

Please see the section of this Information Statement entitled “The Parties” beginning on page 23.

The Merger

The Company, Covey Park, Holdings, and, solely for the purposes of Section 5.14 thereof, Current Holdings entered into the Merger Agreement on June 7, 2019. A copy of the Merger Agreement is included as Annex A to this Information Statement. Under the terms of the Merger Agreement, subject to the satisfaction or waiver of specified conditions, Covey Park will be merged with and into the Company (the “Merger”) in accordance with the applicable provisions of the Nevada Revised Statutes and the Delaware Limited Liability Company Act. As a result of the Merger, the separate existence of Covey Park shall cease and the Company shall continue its existence under the laws of the State of Nevada as the surviving entity (in such capacity, the Company is sometimes referred to herein as the “surviving corporation”).

At the effective time of the Merger (defined below under “The Merger Agreement—Closing and Effective Time of the Merger”), all of the equity of Covey Park (the “Covey Park Equity”) that is issued and outstanding immediately prior to the effective time of the Merger, will be converted into the right to receive (i) 28,833,000



 

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shares of Common Stock (such shares of Common Stock, the “Common Stock Consideration”), (ii) 210,000 shares of Series A Preferred Stock (the “Preferred Stock Consideration” and, together with the Common Stock Consideration, the “Stock Consideration”), and (iii) cash in an amount equal to $700.0 million plus the Series A Preferred Balance (as defined in the Merger Agreement) to be used to redeem the preferred units of Holdings (the “Cash Consideration” and together with the Stock Consideration, the “Merger Consideration”).

Please see the section of this Information Statement entitled “The Merger” beginning on page 24.

Contemporaneously with the consummation of the Merger and in order to fund certain payments required to be made by the Company in the Transactions, pursuant to the Subscription Agreement, the Jones LLCs shall purchase in the aggregate (i) 50,000,000 shares of Common Stock for total consideration of $300.0 million and (ii) 175,000 shares of Series B Preferred Stock of the Company for total consideration of $175.0 million.

The Series A Preferred Stock and the Series B Preferred Stock will be convertible into shares of Common Stock as more particularly described in the section of this Information Statement entitled “Agreements Related to the Merger—Certificate of Designations” beginning on page 54.

Recommendation of the Board; Reasons for the Merger

After careful consideration, the Company’s Board of Directors (the “Board”) approved the Merger Agreement and recommended the approval of the Shareholder Approved Actions by the Company’s stockholders.

The Board believes that the Merger Agreement and the Merger are advisable and in the best interests of the Company and its stockholders. For a discussion of the material factors that the Board considered in determining to approve the Merger Agreement, please see the section of this Information Statement entitled “The Merger—Reasons for the Merger” beginning on page 28.

Approval of the Merger; Record Date; Action by Stockholder Consent

On June 7, 2019, Arkoma Drilling, LP (“Arkoma”) and Williston Drilling, LP (“Williston” and, together with Arkoma, the “Principal Stockholders”), delivered to the corporate secretary of the Company an irrevocable written consent approving the Shareholder Approved Actions (the “Written Consent”). As of June 7, 2019, the Principal Stockholders held shares of Common Stock representing approximately 84% of the voting power of all outstanding shares of Common Stock. Accordingly, the approval of the Shareholder Approved Actions by the Company’s stockholders was effected in accordance with the Nevada Revised Statutes on June 7, 2019 and the NYSE regulations. No further approval of the stockholders of the Company is required to approve the Shareholder Approved Actions. As a result, the Company has not solicited and will not be soliciting your vote for the approval of the Shareholder Approved Actions and does not intend to call a meeting of stockholders for purposes of voting on the approval of the Shareholder Approved Actions. If the Merger Agreement is terminated in accordance with its terms, the Written Consent will be of no further force and effect.

Federal securities laws state that the Shareholder Approved Actions may not be completed until twenty (20) days after the date of mailing of this Information Statement to the Company’s stockholders. Therefore, notwithstanding the execution and delivery of the Written Consent (which was obtained concurrently with the execution of the Merger Agreement), the Shareholder Approved Actions will not occur until that time has elapsed. We currently expect the Merger to be completed before the end of the third quarter of 2019, subject to certain government regulatory reviews and approvals and the satisfaction of the other conditions to closing in the Merger Agreement. However, there can be no assurance that the Merger will be completed on or prior to that time, or at all.



 

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This Information Statement shall constitute notice to you from the Company that the Shareholder Approved Actions have been adopted by the holders of a majority of the voting power of the Common Stock by written consent in lieu of a meeting in accordance with the Nevada Revised Statutes.

Please see the section of this Information Statement entitled “The Merger Agreement—Action by Stockholder Consent” beginning on page 47.

Certain Effects of the Merger

Upon the consummation of the Merger, Covey Park will be merged with and into the Company, and the Company shall continue its existence under the laws of the State of Nevada as the surviving corporation. At the effective time of the Merger, all of the property, rights, privileges, powers, and franchises of the Company and Covey Park will vest in the Company, as the surviving corporation, and all debts liabilities, obligations, restrictions, disabilities, and duties of the Company and Covey Park shall become the debts, liabilities, obligations, restrictions, disabilities, and duties of the Company, as the surviving corporation.

Please see the section of this Information Statement entitled “The Merger—Certain Effects of the Merger” beginning on page 31.

Governance Matters After the Merger

Following the effective time of the Merger, the parties to the Shareholders Agreement, which was executed in connection with the Merger Agreement but only to be effective upon the closing of the Merger, will take all necessary actions to cause the Board to include one (1) director who shall be designated by Holdings. The Jones Entities (defined as the Principal Stockholders and the Jones LLCs) have agreed to vote their shares of Common Stock in support of any such designee. The initial designated Holdings individual will be Jordan T. Marye. In addition, pursuant to the Shareholders Agreement, the Corporate Governance and Nominating Committee of the Board will consider John D. Jacobi to be appointed to the Board. Upon completion of the Merger, the officers of the Company immediately prior to the Merger shall be the officers of the Company after the effective time of the Merger.

Please see the section of this Information Statement entitled “The Merger—Governance Matters After the Merger” beginning on page 31.

Effects on the Company if the Merger is Not Completed

If the Merger is not completed for any reason, the holder of the Covey Park Equity will not receive any payment in connection with the Merger, but may be entitled to certain payments as a result of the termination of the Merger Agreement. Instead, the Company and Covey Park will remain separate, independent companies and the holder of the Covey Park Equity will continue to own the Covey Park Equity.

Please see the section of this Information Statement entitled “The Merger—Effects on the Company if the Merger is Not Completed” beginning on page 32.

Conditions to the Merger

Mutual Conditions

Pursuant to the Merger Agreement each party’s obligation to effect the Merger is subject to the satisfaction or waiver (if permissible under applicable law), on or prior to the closing date of the Merger, which we refer to as the “Closing Date”, of the following conditions:

 

   

the waiting period (including any extension thereof) applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) will have expired or been terminated;



 

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no governmental authority having jurisdiction over any party shall have issued any order, decree, ruling, injunction or other action that is in effect (whether temporary, preliminary or permanent) restraining, enjoining or otherwise prohibiting the consummation of the Merger and no law shall have been adopted that makes consummation of the Merger illegal or otherwise prohibited; and

 

   

this Information Statement shall have been mailed to the Company’s stockholders at least twenty (20) days prior to the Closing Date and the issuance of the Stock Consideration shall be permitted by Regulation 14C of the Exchange Act (including Rule 14c-2 promulgated under the Exchange Act).

Additional Conditions of the Obligations of Comstock

 

   

Subject to certain materiality qualifiers, the accuracy of the representations and warranties of Covey Park, the performance in all material respects by Covey Park of its obligations under the Merger Agreement, and Comstock’s receipt of an officer’s certificate from Covey Park to such effect;

 

   

Comstock’s receipt of a certificate of non-foreign status executed by Covey Park satisfying the requirements of Treasury Regulations Section 1.445-2(b) in a form satisfactory to Comstock;

 

   

The outstanding principal balance under Covey Park’s Amended and Restated Credit Agreement, dated as of December 22, 2016, by and among Covey Park, Wells Fargo Bank, N.A., as administrative agent and a syndicate of lenders, as amended (the “Covey Park Credit Facility”) does not exceed $390.0 million and the Company shall have paid off in full all indebtedness outstanding thereunder and secured the release in full of all encumbrances securing any indebtedness thereunder; and

 

   

the Restructuring (as defined in the section “The Merger—Restructuring”) shall have been consummated.

Additional Conditions of the Obligations of Covey Park

 

   

Subject to certain materiality qualifiers, the accuracy of the representations and warranties of the Company, the performance in all material respects by the Company of its obligations under the Merger Agreement, and Covey Park’s receipt of an officer’s certificate from Comstock to such effect;

 

   

the Company shall have executed and filed the Charter Amendment with the Secretary of State of the State of Nevada and the Charter Amendment shall have been accepted by the Secretary of State of the State of Nevada;

 

   

the Company shall have executed and filed the Certificate of Designations with the Secretary of State of the State of Nevada and the Certificate of Designations shall have been accepted by the Secretary of State of the State of Nevada;

 

   

the shares of Company Common Stock issuable as Stock Consideration and 106,250,000 shares of Common Stock to be issued upon any conversion of shares of Preferred Stock shall have been authorized for listing on the New York Stock Exchange;

 

   

the Company shall have assumed the 7.5% Senior Notes due 2025 issued by Covey Park and Covey Park Finance Corp (the “Covey Park Notes”) in accordance with the requirements of the indenture governing the Covey Park Notes (the “Covey Park Notes Indenture”); and

 

   

the Company shall have paid off in full all indebtedness outstanding under the Covey Park Credit Facility.

The Company and Covey Park have agreed that the required regulatory approvals include only the expiration or termination of the applicable waiting period under the HSR Act.

Please see the section of this Information Statement entitled “The Merger Agreement—Conditions to the Merger” beginning on page 49.



 

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As further discussed under the section titled “Risk Factors,” the Company cannot be certain when, or if, the conditions of the Merger will be satisfied or waived, or that the Merger will be completed.

Regulatory Approvals

The consummation of the Merger is subject to review under the HSR Act. As described below in the section entitled “The Merger Agreement—Conditions to the Merger”, the obligations of the Company, Covey Park, Holdings, and Current Holdings to effect the Merger are subject to the expiration or termination of the waiting period (and any extension thereof) applicable to the Merger under the HSR Act.

The Merger Agreement generally requires each party to use reasonable best efforts to resolve objections that may be asserted under any antitrust law with respect to the transactions contemplated by the Merger Agreement, subject to certain exceptions (as described under “The Merger Agreement—Reasonable Best Efforts and Certain Pre-Closing Obligations”).

Please see the section of this Information Statement entitled “The Merger—Regulatory Approvals Required for the Merger” beginning on page 39.

Termination

The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the effective time in the following circumstances:

 

   

by mutual written consent of the Company and Covey Park;

 

   

by either the Company or Covey Park:

 

   

if any governmental authority having jurisdiction over any party shall have issued any order, decree, ruling or injunction or taken any other action permanently restraining, enjoining or otherwise prohibiting the consummation of the Merger and such order, decree, ruling or injunction or other action shall have become final and non-appealable, or if there shall be adopted any law that permanently makes consummation of the Merger illegal or otherwise permanently prohibited; provided that the right to terminate the Merger Agreement will not be available to any party whose failure to fulfill any material covenants or agreement has caused such legal restraint; or

 

   

if the Merger has not been consummated on or before 5:00 p.m. Dallas, Texas time, on November 30, 2019 (such date being the “End Date”); provided that the right to so terminate the Merger Agreement will not be available to a party whose material breach of any provision of the Merger Agreement results in the failure of the Merger to be consummated on or before the End Date; provided, further, that either the Company or Covey Park shall have the unilateral right to extend the End Date by up to 30 additional days in the event that as of the End Date (prior to such extension) all conditions (other than conditions that by their nature are to be satisfied at the Closing) under certain circumstances have been satisfied or waived and the closing shall not have occurred due solely or in part to the failure of the Company to mail the Information Statement to its stockholders at least 20 days prior to the Closing Date.

 

   

by the Company:

 

   

in the event of certain breaches of the Merger Agreement by Covey Park, Holdings, and Current Holdings; provided that the Company is not then in material breach of any representation, warranty or covenant contained in the Merger Agreement; provided, further, that said breach by Covey Park, Holdings, or Current Holdings cannot be or has not been cured pursuant to the terms of the Merger Agreement.



 

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by Covey Park:

 

   

in the event of certain breaches of the Merger Agreement by the Company; provided that Covey Park, Holdings, and Current Holdings are not then in material breach of any representation, warranty or covenant contained in the Merger Agreement; provided, further, that said breach by the Company cannot be or has not been cured pursuant to the terms of the Merger Agreement; or

 

   

upon written notice to the Company stating that all conditions to closing of the transactions contemplated by the Merger Agreement shall have been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing) and that Covey Park is ready willing and able to consummate the transactions contemplated under the Merger Agreement and, following receipt of such written notice, that the Company fails to consummate the transactions contemplated under the Merger Agreement within five (5) business days.

In the event Covey Park terminates the Merger Agreement as a result of the Company’s inability to consummate the Merger solely because of the failure of the Company to secure the necessary debt financing in the amounts set forth in the Debt Financing Term Sheet and of the type described in the Debt Financing Term Sheet (the “Debt Financing”) to consummate the Merger (and at such time the parties to the Subscription Agreement stand ready, willing and able to consummate the transactions contemplated thereby and the Company is not in Willful and Material Breach (as defined in the Merger Agreement)), the Company shall be responsible for a financing termination fee in the amount of $100.0 million, which shall be payable to Covey Park within five (5) business days following the termination of the Merger Agreement (“Financing Termination Fee”). To the extent such fee is paid, it shall be in lieu of any other amounts for which the Company is responsible under the Merger Agreement.

Please see the section of this Information Statement entitled “The Merger Agreement—Termination” beginning on page 51.

Amendment to Second Amended and Restated Articles of Incorporation

Prior to the Closing Date of the Merger, the Company will file the Charter Amendment with the Secretary of State of the State of Nevada to increase the number of authorized shares of Common Stock from 155,000,000 to 400,000,000 in order to ensure there are enough shares of Common Stock to provide for the Share Issuances.

Please see the section of this Information Statement entitled “Amendment to the Second Amended and Restated Articles of Incorporation” beginning on page 73.

Amended and Restated Registration Rights Agreement

In connection with the transactions contemplated by the Merger Agreement, the Company, the Jones Entities and Holdings entered into the Amended and Restated Registration Rights Agreement (the “A&R Registration Agreement”), which among other things amends and restates the Registration Rights Agreement dated August 3, 2018 that was entered into by the Company and the Principal Stockholders. The A&R Registration Agreement will only be effective upon the closing of the Merger and grants certain registration rights to the Jones Entities and Holdings for Common Stock (including Common Stock issuable upon the conversion of Preferred Stock) issued in connection with the Transactions. For a more detailed discussion see “Agreements Related to the MergerThe Amended and Restated Registration Rights Agreement.

Certificate of Designations

In connection with the issuances of the Series A Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) and the Series B Redeemable Convertible Preferred Stock (the “Series B Preferred Stock” and,



 

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together with the Series A Preferred Stock the “Preferred Stock”) the Company will file a Certificate of Designations containing the material rights, preferences and privileges thereof. For a more detailed discussion see “Agreements Related to the MergerThe Certificate of Designations.

Material U.S. Federal Income Tax Consequences

For U.S. federal income tax purposes, the exchange of property for cash, Series A Preferred Stock, and Common Stock effected pursuant to the Merger and the issuance and sale of Common Stock and Series B Preferred Stock by the Company to the Jones LLCs (the Jones LLCs together with the Principal Stockholders, the “Jones Entities”) in exchange for cash pursuant to the Subscription Agreement (collectively, the “Exchanges”) are intended to qualify together as an “exchange” described in Section 351 of the Internal Revenue Code of 1986, as amended (the “Code”). If the Exchanges, taken together, qualify as an “exchange” within the meaning of Code Section 351(a), then holders of Common Stock receiving Common Stock in the Merger, if any, (“Exchangor(s)”) should not recognize any gain or loss for U.S. federal income tax purposes as a result of the Merger.

For all holders of Common Stock that are not Exchangors, the Exchanges should not have U.S. federal income tax consequences for such holders. For a more detailed discussion, see “The MergerMaterial U.S. Federal Income Tax Consequences of the Merger.”

Tax matters can be complicated and the tax consequences of the Merger to any particular holder of Common Stock will depend on such holder’s particular facts and circumstances. Holders of Common Stock should consult their own tax advisors to determine the tax consequences of the Merger to them, including the effects of U.S. federal, state, local and foreign tax laws.

Please see the section of this Information Statement entitled “The MergerMaterial U.S. Federal Income Tax Consequences of the Merger” beginning on page 36 for a more complete discussion of the material U.S. federal income tax consequences of the Merger.

Accounting Treatment of the Merger

The Company prepares its financial statements in accordance with GAAP and its pro forma financial statements as required by the SEC Article 11 of Regulation S-X. The Merger will be accounted for as an acquisition under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, with the Company being considered the acquirer of Covey Park for accounting purposes. This means that the Company will allocate the purchase price to the fair value of Covey Park’s tangible and intangible assets and liabilities at the acquisition date, with the excess purchase price, if any, being recorded as goodwill. Under the acquisition method of accounting, goodwill is not amortized but is tested for impairment at least annually.

Please see the section of this Information Statement entitled “The Merger—Accounting Treatment of the Merger” beginning on page 39.

Risk Factors

An investment in the Company, as the surviving corporation, may include different risks than an investment in the Company on a stand-alone basis. You should carefully review the risks described in the section entitled “Risk Factors” beginning on page 19 together with all of the other information included in this Information Statement.

Additional Information

You can find more information about the Company in the periodic reports and other information we file with the U.S. Securities and Exchange Commission (the “SEC”). The information is available at the website maintained by the SEC at www.sec.gov.

Please see the section of this Information Statement entitled “Where You Can Find Additional Information” beginning on page 121.



 

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Selected Historical Consolidated Financial Data of Comstock

The historical financial data presented in the table below sets forth the Company’s selected historical financial information that has been derived from (i) the Company’s consolidated financial statements as of and for each of the five years ended December 31, 2014, 2015, 2016, 2017 and 2018, and (ii) the Company’s unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2019. The financial results are not necessarily indicative of our future operations or future financial results. The data presented below is only a summary and is not necessarily indicative of our future operations nor does it include the effects of the Merger. You should read this financial information in conjunction with our consolidated financial statements, the notes thereto, and the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, all which are incorporated into this Information Statement by reference.

Statement of Operations Data:

 

    Predecessor                 Successor  
    Year Ended December 31,                                
    2014     2015     2016     2017     For the
Period
from
January 1,
2018
through
August 13,
2018
                For the
Period

from
August 14,
2018

through
December 31,
2018
    For the
Period from
January 1,
2019 through
March 31,
2019
 
    (In thousands, except per share data)                          

Revenues:

                   

Natural gas sales

  $ 165,461     $ 109,753     $ 122,623     $ 208,741     $ 147,897           $ 144,236     $ 90,132  

Oil sales

    389,770       142,669       53,083       46,590       18,733             79,385       36,749  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

   

 

 

 

Total oil and gas sales

    555,231       252,422       175,706       255,331       166,630             223,621       126,881  

Operating expenses:

                   

Production taxes

    23,797       10,286       4,933       5,373       3,659             11,155       5,939  

Gathering and transportation

    12,897       14,298       15,824       17,538       11,841             10,511       7,430  

Lease operating(1)

    60,283       64,502       47,696       37,859       21,139             20,736       14,885  

Exploration

    19,403       70,694       84,144       —         —               —         —    

Depreciation, depletion and amortization

    378,275       321,323       141,487       123,557       68,032             53,944       37,590  

General and administrative

    32,379       23,541       23,963       26,137       15,699             11,399       7,814  

Impairment of oil and gas properties

    60,268       801,347       27,134       43,990       —               —         —    

Loss (gain) on sale of oil and gas properties

    —         112,085       14,315       1,060       35,438             (155     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

   

 

 

 

Total operating expenses

    587,302       1,418,076       359,496       255,514       155,808             107,590       73,657  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

   

 

 

 

Operating income (loss)

    (32,071     (1,165,654     (183,790     (183     10,822             116,031       53,224  

Other income (expenses):

                   

Gain (loss) from derivative financial instruments

    8,175       2,676       (5,356     16,753       881             10,465       (7,657

Gain on extinguishment of debt

    —         78,741       189,052       —         —               —         —    

Transaction costs

    —         —         —         —         (2,866           —         —    

Interest expense

    (58,631     (118,592     (128,743     (146,449     (101,203           (43,603     (27,851

Other income

    727       1,275       872       530       677             173       93  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

   

 

 

 

Total other income (expenses)

    (49,729     (35,900     55,825       (129,166     (102,511           (32,965     (35,415
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

   

 

 

 

Income (loss) before income taxes

    (81,800     (1,201,554     (127,965     (129,349     (91,689           83,066       17,809  

Benefit from (provision for) income taxes

    24,689       154,445       (7,169     17,944       (1,065           (18,944     (4,234
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

   

 

 

 

Net income (loss)

  $ (57,111   $ (1,047,109   $ (135,134   $ (111,405   $ (92,754         $ 64,122     $ 13,575  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

   

 

 

 

Basic and diluted net income (loss) per share

  $ (6.20   $ (113.53   $ (11.52   $ (7.61   $ (6.08         $ 0.61     $ 0.13  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

   

 

 

 

Dividends per common share

  $ 2.50     $ —       $ —       $ —       $ —             $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

   

 

 

 

Weighted average shares outstanding

                   

Basic

    9,309       9,223       11,729       14,644       15,262             105,453       105,457  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

   

 

 

 

Diluted

    9,309       9,223       11,729       14,644       15,262             105,459       105,457  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

(1)

Includes ad valorem taxes.



 

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Balance Sheet Data:

 

    Predecessor                

 

Successor

 
    As of December 31,     As of
December 31,

2018
    As of
March 31,
2019
 
 
    2014     2015     2016     2017              
    (In thousands)                          

Cash and cash equivalents

  $ 2,071     $ 134,006     $ 65,904     $ 61,255           $ 23,193     $ 29,324  

Property and equipment, net

    2,198,169       1,038,420       798,662       607,929             1,667,979       1,722,558  

Total assets

    2,264,546       1,195,850       889,874       930,419             2,187,840       2,221,888  

Total debt

    1,060,654       1,249,330       1,044,506       1,110,529             1,244,363       1,265,847  

Stockholders’ equity (deficit)

    870,272       (171,258     (271,269     (369,272           569,571       583,794  

Cash Flow Data:

 

    Predecessor                 Successor  
    Year Ended December 31,                                
    2014     2015     2016     2017     For the
Period
from
January 1,
2018
through
August 13,
2018
                For the
Period from
August 14,
2018

through
December 31,
2018
    For the
Period
from
January 1,
2019
through
March 31,
2019
 
    (In thousands)                          

Cash flows provided by (used for) operating activities

  $ 400,984     $ 30,086     $ (23,728   $ 174,614     $ 85,735           $ 102,302     $ 74,715  

Cash flows used for investing activities

    (634,787     (161,725     (29,569     (178,953     (50,205           (161,634     (88,494

Cash flows provided by (used for) financing activities

    232,907       263,574       (14,805     (310     797,402             (811,662     19,910  


 

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Selected Historical Financial Data of Covey Park

The selected historical financial data of Covey Park as of December 31, 2018 and 2017 and for each of the years ended December 31, 2016, December 31, 2017 and December 31, 2018 were derived from the audited historical consolidated financial statements of Covey Park Energy LLC included elsewhere in this Information Statement. The selected historical financial data of Covey Park Energy LLC as of and for the three months ended March 31, 2019 and 2018 are derived from the unaudited interim financial statements of Covey Park Energy LLC included elsewhere in this Information Statement.

The information set forth below is only a summary and is not necessarily indicative of the results of future operations nor does it include the effects of the Merger. You should read the following selected data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Covey Park” and Covey Park’s historical financial statements and related notes included elsewhere in this Information Statement.

 

    Historical Year Ended December 31,     Historical Three Months
Ended March 31,
 
    2016     2017     2018           2018                 2019        
    (audited)     (unaudited)  
    (In thousands)  

Statements of operations data:

         

Revenues

         

Natural gas

  $ 146,128     $ 358,682     $ 603,395     $ 106,333     $ 182,455  

Oil

    1,539       2,082       2,350       630       503  

NGL

    3,417       8,594       11,179       2,596       2,024  

Other revenues

    3,221       1,206       1,114       226       461  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    154,305       370,564       618,038       109,785       185,443  

Expenses

         

Lease operating

    23,357       38,784       48,615       10,320       13,893  

Gathering and transportation

    34,010       65,838       69,871       17,128       17,794  

Production and ad valorem

    6,704       12,462       18,434       4,003       6,142  

Exploration and abandonment

    3,021       1,799       6,537       199       3,751  

General and administrative

    15,218       28,911       33,906       6,058       8,037  

Depletion, depreciation and accretion of discount on asset retirement obligations

    65,576       121,436       202,615       33,949       68,154  

Other expense

    3,269       1,409       782       56       414  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

    151,155       270,639       380,760       71,713       118,185  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    3,150       99,925       237,278       38,072       67,258  

Other income (expense)

         

Interest expense

    (18,442     (50,799     (60,968     (14,405     (17,215

Derivative gain (loss)

    (74,112     103,344       (56,688     (4,866     (3,547
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (92,554     52,545       (117,656     (19,271     (20,762
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (89,404     152,470       119,622       18,801       46,496  

Income tax (expense)(1)

    308       (591     (122     (27     (19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (89,096     151,879       119,500       18,774       46,477  

Preferred dividends and accretion, Series A Preferred Units

    —         (27,299     (34,192     (8,284     (4,943
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss) available to member

  $ (89,096   $ 124,580     $ 85,308     $ 10,490     $ 41,534  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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    Historical Year Ended December 31,     Historical Three Months
Ended March 31,
 
    2016     2017     2018           2018                 2019        
    (audited)     (unaudited)  
    (In thousands)  

Statements of cash flows data:

         

Operating activities

  $ 65,543     $ 190,724     $ 340,248     $ 59,869     $ 132,392  

Investing activities

    (668,689     (677,313     (385,146     (99,839     (129,945

Financing activities

    603,146       486,589       44,898       39,970       (2,447

Balance Sheets Data (at period end):

         

Cash and cash equivalents

  $ —       $ —       $ —       $ —       $ —    

Total assets

    1,232,357       1,881,549       2,144,152       1,953,830       2,160,051  

Total liabilities

    662,386       941,364       1,244,306       994,871       1,216,175  

Mezzanine equity, Series A Preferred Units

    —         245,634       146,748       253,918       149,244  

Total member equity

    569,971       694,551       753,098       705,041       794,632  

 

(1)

Covey Park Energy LLC is a limited liability company and not subject to U.S. federal income taxes. However, certain operations in Texas are subject to a Texas margin tax.



 

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Summary Selected Unaudited Pro Forma Combined Financial Information

The following selected unaudited pro forma combined consolidated statements have been prepared to reflect the effects of the Merger on the financial statements of the Company. The unaudited pro forma combined statements of operations for the three months ended March 31, 2019 and for the year ended December 31, 2018, are presented as if the Merger had been completed on January 1, 2018. The unaudited pro forma combined balance sheet is presented as if the Merger had been completed on March 31, 2019.

The following selected unaudited pro forma combined consolidated financial information is not necessarily indicative of the results that might have occurred had the Merger taken place on January 1, 2018 for statement of operations purposes or on March 31, 2019 for balance sheet purposes, and is not intended to be a projection of future results. Future results may vary significantly from the results reflected because of various factors, including those discussed in the section entitled Risk Factors. The following selected unaudited pro forma combined consolidated financial information should be read in conjunction with the section entitled Unaudited Pro Forma Combined Financial Statements” and related notes included in this Information Statement.

 

     Three Months
Ended
March 31,
2019
     Year Ended
December 31,
2018
 
     (in millions, except per share amounts)  

Pro Forma Statement of Operations Data

     

Total oil and gas sales

   $ 315.3      $ 1,168.6  

Net income

   $ 63.3        207.7  

Earnings per share, basic

   $ 0.29        0.92  

Earnings per share, diluted

   $ 0.23        0.74  

 

     As of
March 31,
2019
 
     (in millions)  

Pro Forma Balance Sheet Data

  

Cash and cash equivalents

   $ 29.3  

Total assets

   $ 4,580.7  

Long-term debt

   $ 2,591.4  

Stockholders’ equity

   $ 1,377.0  


 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE CHARTER AMENDMENT

The following questions and answers are intended to briefly address some commonly asked questions regarding the Merger and Charter Amendment. These questions and answers may not address all questions that may be important to you as a stockholder. You should read the more detailed information contained elsewhere in this Information Statement, the annexes to this Information Statement and the documents referred to or incorporated by reference in this Information Statement.

 

Q:

Why am I receiving this Information Statement?

 

A:

On June 7, 2019, the Company entered into the Merger Agreement with Covey Park, Holdings, and Current Holdings, and the Principal Stockholders approved the Shareholder Approved Actions. Prior to the Closing Date, the Company will need to amend its Second Amended and Restated Articles of Incorporation to increase the number of authorized shares of Common Stock in order to provide for the Share Issuances. The filing of the Charter Amendment with the Secretary of State of the State of Nevada is being undertaken solely for the purposes of effecting the Merger Agreement. Applicable provisions of Nevada law and certain securities regulations require us to provide you with information regarding the Shareholder Approved Actions, even though your vote or consent is neither required nor requested to adopt the Charter Amendment or Merger Agreement or to complete the Shareholder Approved Actions.

 

Q:

If the Merger occurs, what happens to my shares of Common Stock in the Company?

 

A:

Your ownership of shares of Common Stock will not change as a result of the Closing. There will be neither any exchange of nor any new consideration received for your shares of Common Stock. All of the preferences, relative rights and other rights you have in your shares of Common Stock will be unaffected.

 

Q:

When is the Merger expected to close?

 

A:

The closing of the Merger cannot occur until 20 days after the Company mails this Information Statement to its stockholders, assuming all of the other closing conditions specified in the Merger Agreement have been satisfied. We currently expect the Transactions to be completed before the end of the third quarter of 2019, subject to certain government regulatory reviews and approvals and the satisfaction of the other conditions to closing in the Transaction Documents. However, there can be no assurance that the Transactions will be completed on or prior to that time, or at all.

 

Q:

What happens if the Merger does not close?

 

A:

If the Merger does not close for any reason, the holder of the Covey Park Equity will not receive any payment in connection with the Merger other than the Financing Termination Fee (see “Merger AgreementFinancing Termination Fee” for more information), but only if applicable, the reimbursement of transaction related expenses in certain circumstances or potentially other payments in connection with certain breaches of the Merger Agreement prior to its termination, if applicable. Instead, the Company and Covey Park will remain separate, independent companies. In addition, if the closing of the Merger does not occur, the Charter Amendment will not be filed with the Secretary of State of the State of Nevada and will not become effective.

 

Q:

Why did the Board approve the Merger and the Merger Agreement?

 

A:

After careful consideration and evaluation of the Merger, our Board approved and declared advisable the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement.

For a discussion of the factors that the Board considered in determining to approve the Merger Agreement, please see the section of this Information Statement entitled “The Merger—Reasons for the Merger.”

 

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Q:

What factors did the Board consider in evaluating the Merger Agreement and the Merger?

 

A:

In evaluating the Merger Agreement and the Merger, the Board consulted with the senior management of the Company, as well as representatives of Wells Fargo Securities (“Wells Fargo”), BMO Capital Markets Corp. (“BMO”) and Locke Lord LLP (“Locke Lord”). In the course of making the determination that the Merger is fair to, and in the best interests of, the Company and its stockholders, approving and declaring advisable the Merger Agreement and the Merger and recommending that the holders of Common Stock vote in favor of adopting the Merger Agreement, the Board considered numerous factors, including the following material factors and benefits of the Merger:

 

   

The Merger complements and expands the Company’s position in the Haynesville shale and accelerates its progress towards its strategic and financial goals of sustainable free cash flow generation and reduced leverage.

 

   

The Merger will make the Company a basin leader in the Haynesville shale play, a premiere natural gas basin with preferential economics.

 

   

The transaction will enhance the Company’s capital efficiency and will provide significant anticipated annual corporate G&A savings.

 

   

The terms of the Merger Agreement and other transaction documents, including the Shareholders Agreement, the Support Agreement and the Subscription Agreement.

The foregoing factors are some of the principal factors considered by the Board. The Board did not assign relative weights to the factors it considered or determine that any factor was of particular importance. For a discussion of the factors that the Board considered in determining to approve the Merger Agreement, please see the section of this Information Statement entitled “The Merger—Reasons for the Merger.”

 

Q:

Is the approval of stockholders necessary to adopt the Merger Agreement and Charter Amendment? Why am I not being asked to vote on the Merger Agreement and Charter Amendment?

 

A:

Under Nevada law, the approval of the Merger Agreement, the Merger and the Charter Amendments requires approval by the Board and a majority of the outstanding shares of the Common Stock voting as a single class. Per the Nevada Revised Statutes, stockholder approval may be had at a stockholders’ meeting or by written consent in lieu of a stockholders’ meeting. The stockholder approval was obtained on June 7, 2019, the date on which the Principal Stockholders delivered to the corporate secretary of the Company the Written Consent adopting the Shareholder Approved Actions. As of June 7, 2019, the Principal Stockholders held approximately 84% of the voting power of all outstanding shares of Common Stock. Accordingly, the approval of the Shareholder Approved Actions by the Company’s stockholders was effected in accordance with the Nevada Revised Statutes.

We are also subject to Rule 312 of the NYSE Listed Company Manual (“Rule 312”), which requires that we obtain stockholder approval in certain circumstances, including before issuing shares of common stock in excess of 20% of our outstanding common stock prior to such issuance and before issuing shares of common stock to related parties in excess of 5% of our outstanding common stock prior to such issuance. The number of votes held by the Principal Stockholders is sufficient to satisfy the stockholder vote requirement under Rule 312 for these actions. Therefore, no additional votes will be needed to approve these transactions.

No further approval of the stockholders of the Company is required to adopt the Shareholder Approved Actions. As a result, the Company has not solicited and will not be soliciting your vote for the approval of the Shareholder Approved Actions and does not intend to call a meeting of stockholders for purposes of voting on the approval of the Shareholder Approved Actions.

 

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Q:

Am I entitled to appraisal rights in connection with the Merger?

 

A:

As no further stockholder approval is required for the Shareholder Approved Actions, dissenter’s appraisal rights or similar rights are inapplicable. Dissenters to the other Shareholder Approved Actions do not have any appraisal rights or similar rights.

 

Q:

What are the U.S. federal income tax consequences?

 

A:

For U.S. federal income tax purposes, the Exchanges are intended to qualify together as an “exchange” described in Section 351 of the Code. If the Exchanges, taken together, qualify as an “exchange” within the meaning of Code Section 351(a), then the Exchangors should not recognize any gain or loss for U.S. federal income tax purposes as a result of the Merger.

For all holders of Common Stock that are not Exchangors, the Merger should not have U.S. federal income tax consequences for such holders.

For a more detailed discussion, see “The Merger—Material U.S. Federal Income Tax Consequences of the Merger.” Tax matters can be complicated and the tax consequences of the Merger to any particular holder of Common Stock will depend on such holder’s particular facts and circumstances. Holders of Common Stock should consult their own tax advisors to determine the tax consequences of the Merger to them, including the effects of U.S. federal, state, local and foreign tax laws.

 

Q:

What is householding and how does it affect me?

 

A:

The SEC permits companies to send a single set of certain disclosure documents to stockholders who share the same address and have the same last name, unless contrary instructions have been received, but only if the applicable company provides advance notice and follows certain procedures. In such cases, each stockholder continues to receive a separate set of disclosure documents. This practice, known as “householding”, is designed to reduce duplicate mailings and save significant printing and postage costs as well as natural resources.

If you received a householded mailing and you would like to have additional copies of this Information Statement mailed to you, or you would like to opt out of this practice for future mailings, please submit your request to the Company by phone at (972) 668-8800 or by mail to Comstock Resources, Inc., 5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034. We will promptly send additional copies of this Information Statement upon receipt of such request.

 

Q:

Who can help answer my questions?

 

A:

If you have questions about the Merger after reading this Information Statement, please contact the Company by phone at (972) 668-8800 or by mail to Comstock Resources, Inc., 5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Any statements in this Information Statement regarding the Charter Amendment, the Merger, the expected timetable for completing the Merger, future financial and operating results, future capital structure and liquidity, benefits and synergies of the Merger, future opportunities for the combined company, general business outlook and any other statements about the future expectations, beliefs, goals, plans or prospects of the Board or management of the Company constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that are not statements of historical fact (including statements containing the words “expects,” “intends,” “anticipates,” “estimates,” “predicts,” “believes,” “should,” “potential,” “may,” “forecast,” “objective,” “plan,” or “targets,” and their variants and other similar expressions) are intended to identify forward-looking statements.

There are a number of factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including:

 

   

risks and uncertainties relating to the Merger, including the possibility that the Merger does not close when expected or at all because conditions to closing are not satisfied on a timely basis or at all;

 

   

potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the Merger;

 

   

timing of the Merger;

 

   

the possibility that the anticipated benefits of the Merger are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies;

 

   

the possibility that the Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

 

   

diversion of management’s attention from ongoing business operations and opportunities;

 

   

oil, natural gas liquids (“NGLs”) and natural gas price volatility, including regional price differentials;

 

   

changes in operational and capital plans;

 

   

costs, availability and timing of build-out of third-party facilities for gathering, processing, refining and transportation; delays or other impediments to drilling and completing wells arising from political or judicial developments at the local, state or federal level, including voter initiatives related to hydraulic fracturing; development drilling and testing results;

 

   

the potential for production decline rates to be greater than expected;

 

   

delays, including seasonal or other wildlife restrictions on federal lands;

 

   

exploration risks such as drilling unsuccessful wells;

 

   

higher than expected costs and expenses, including the availability and cost of services and material and the surviving corporation’s potential inability to achieve expected cost savings;

 

   

unexpected future capital expenditures;

 

   

economic and competitive conditions;

 

   

debt and equity market conditions, including the availability and costs of financing to fund the surviving corporation’s operations;

 

   

the ability to obtain industry partners to jointly explore certain prospects, and the willingness and ability of those partners to meet capital obligations when requested;

 

   

declines in the values of the surviving corporation’s oil and gas properties resulting in impairments;

 

   

changes in estimates of proved reserves;

 

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compliance with environmental and other regulations;

 

   

derivative and hedging activities;

 

   

risks associated with operating in one major geographic area;

 

   

the success of the surviving corporation’s risk management activities;

 

   

title to properties, including those to be acquired in the Merger;

 

   

litigation, including litigation concerning the Merger;

 

   

environmental liabilities; and

 

   

the other factors and financial, operational and legal risks or uncertainties described in the Company’s public filings with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2018 and subsequent reports on Form 10-Q and 8-K filed with the SEC, all of which are or may in the future be incorporated by reference into this Information Statement.

The Company disclaims any intention or obligation to update or revise any forward-looking statements as a result of developments occurring after the date of this document except as required by law.

 

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RISK FACTORS

An investment in the surviving corporation may include different risks than an investment in the Company on a stand-alone basis. Moreover, by reason of the pending Merger, and the potential change in the business of the surviving corporation as compared to the Company’s business as currently conducted, the nature of the investment by each stockholder of the Company will change. In addition to the other information contained in or incorporated by reference in this Information Statement, including the risk factors contained in the Company’s annual report on Form 10-K for the year ended December 31, 2018, as updated by subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which are all incorporated by reference in this Information Statement, you should carefully review the risks described below together with all of the other information included in this Information Statement. Additional risks and uncertainties not presently known to the Company or Covey Park, or that are not currently believed to be important to you, if they materialize, may also adversely affect the Merger and the Company as the surviving corporation. See “Where You Can Find Additional Information” for the location of information incorporated by reference into this Information Statement.

Risks Relating to the Merger

The Company and Covey Park may fail to complete the Merger if certain required conditions, many of which are outside the companies’ control, are not satisfied.

Completion of the Merger is subject to various customary closing conditions, including, but not limited to, (i) the expiration or termination of any applicable waiting period under the HSR Act, (ii) the absence of any order of injunction prohibiting the consummation of the Merger, (iii) no material adverse effect occurring with respect to the Company or Covey Park, (iv) subject to certain exceptions and materiality and material adverse effect standards, the accuracy of the representations and warranties of the parties to the Merger Agreement and (v) performance and compliance by the parties to the Merger Agreement in all material respects with the agreements and covenants contained in the Merger Agreement. Despite the companies’ best efforts, they may not be able to satisfy or receive the various closing conditions and obtain the necessary approvals in a timely fashion or at all.

Failure to complete the Merger could negatively impact the Company’s stock price, future business and financial results.

If the Merger is not completed, the Company will be subject to several risks, including the following:

 

   

payment for certain costs relating to the Merger, whether or not the Merger is completed, such as legal, accounting, financial advisor and printing fees, including the Financing Termination Fee and other potential damages in certain circumstances (see “Merger AgreementFinancing Termination Fee” for more information);

 

   

negative reactions from the financial markets, including declines in the price of the Common Stock due to the fact that current prices may reflect a market assumption that the Merger will be completed;

 

   

diverted attention of Company management to the Merger rather than to the Company’s operations and pursuit of other opportunities that could have been beneficial to it; and

 

   

negative impact on the Company’s future growth plan, including with regard to potential acquisitions, for which the Company is likely to provide a stronger foundation.

The Company will be subject to various uncertainties and contractual restrictions while the Merger is pending that could adversely affect its business and operations.

Uncertainty about the effect of the Merger on customers, suppliers and vendors may have an adverse effect on the Company’s business, financial condition and results of operations. It is possible that some customers,

 

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suppliers and other persons with whom the Company has business relationships may delay or defer certain business decisions, or might decide to seek to terminate, change or renegotiate their relationship with the Company as a result of the Merger, which could negatively affect the Company’s financial results, as well as the market price of the Common Stock, regardless of whether the Merger is completed.

Additionally, under the terms of the Merger Agreement, the Company is subject to certain restrictions on the conduct of its business prior to the consummation of the Merger, which may adversely affect its ability to execute certain aspects of its business strategies. These restrictions may, among other matters, prevent the Company from pursuing otherwise attractive business opportunities, selling assets, incurring indebtedness, engaging in significant capital expenditures in excess of certain limits set forth in the Merger Agreement, entering into other transactions or making other changes to the Company’s business prior to consummation of the Merger or termination of the Merger Agreement. Such limitations could negatively affect the Company’s businesses and operations prior to the completion of the Merger.

The Company may have difficulty attracting, motivating and retaining executives and other employees in light of the Merger.

Uncertainty about the effect of the Merger on the Company’s employees may impair its ability to attract, retain and motivate personnel until the Merger is completed. Employee retention may be particularly challenging during the pendency of the Merger, as employees may feel uncertain about their future roles with the Company. In addition, the Company may have to provide additional compensation in order to retain employees. If employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to become employees of the Company, the Company’s ability to realize the anticipated benefits of the Merger could be adversely affected.

In connection with the Merger, the Company may be required to take write-downs or write-offs, restructuring and impairment or other charges that could negatively affect the business, assets, liabilities, prospects, outlook, financial condition and results of operations of the Company.

Although the Company has conducted extensive due diligence in connection with the Merger, it cannot assure you that this diligence revealed all material issues that may be present, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of the Company’s control will not later arise. Even if the Company’s due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with the Company’s preliminary risk analysis. Further, as a result of the Merger, purchase accounting, and the proposed operation of the Company going forward, the Company may be required to take write-offs or write-downs, restructuring and impairment or other charges. As a result, the Company may be forced to write-down or write-off assets, restructure its operations, or incur impairment or other charges that could negatively affect the business, assets, liabilities, prospects, outlook, financial condition and results of operations of the Company.

In the event the Covey Park Notes are downgraded within 90 days following the consummation of the Transactions, the Company may be obligated to repurchase the Covey Park Notes at 101% of the principal amount of the Covey Park Notes.

Pursuant to the Covey Park Notes Indenture, the Transactions will result in a “Change of Control” if, within 90 days following the consummation of the Transactions, the ratings of the Covey Park Notes are decreased by either Moody’s or S&P by one or more gradations. In such an instance, the Company would be required to make an offer to repurchase the Covey Park Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the Covey Park Notes, plus accrued and unpaid interest, if any, to the date of purchase. As of the date of this Information Statement, the aggregate principal amount of the Covey Park Notes is $625.0 million. If the holders of the Covey Park Notes accept any such offer, such repurchase could significantly affect the liquidity, business, assets, liabilities, prospects, outlook, financial condition and results of operations of the Company.

 

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The market price of the Common Stock may be volatile, and holders of the Common Stock could lose a significant portion of their investment due to drops in the market price of the Common Stock following completion of the Merger.

The market price of the Common Stock may be volatile, including changes in price caused by factors unrelated to the Company’s operating performance or prospects.

Specific factors that may have a significant effect on the market price for the Common Stock include, among others, the following:

 

   

changes in stock market analyst recommendations or earnings estimates regarding the Common Stock, other companies comparable to it or companies in the industries they serve;

 

   

actual or anticipated fluctuations in the Company’s operating results of future prospects;

 

   

reaction to public announcements by the Company;

 

   

strategic actions taken by the Company or its competitors, such as the intended business separations, acquisitions or restructurings;

 

   

failure of the Company to achieve the perceived benefits of the Merger, including financial results and anticipated synergies, as rapidly as or to the extent anticipated by financial or industry analysts;

 

   

adverse conditions in the financial market or general U.S. or international economic conditions, including those resulting from war, incidents of terrorism and responses to such events; and

 

   

sales of Common Stock by the Company, members of its management team or significant stockholders.

Risks Relating to the Business of the Company upon Completion of the Merger

The Company may fail to realize the anticipated benefits of the Merger and may assume unanticipated liabilities.

The success of the Merger will depend on, among other things, the Company’s ability to combine the Company’s and Covey Park’s businesses in a manner that realizes the various benefits, growth opportunities and synergies identified by the companies. Achieving the anticipated benefits of the transaction is subject to a number of risks and uncertainties. It is uncertain whether the Company’s and Covey Park’s existing operations and the acquired properties and assets can be integrated in an efficient and effective manner.

The pro forma financial statements presented for illustrative purposes may not be indicative of the Company’s financial condition or results of operations following the Merger.

The pro forma financial statements contained in this Information Statement are presented for illustrative purposes only and may not be indicative of the Company’s financial condition or results of operations following the Merger for several reasons. The pro forma financial statements have been derived from the Company’s and Covey Park’s historical financial statements, and certain adjustments and assumptions have been made regarding the Company after giving effect to the Merger. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with complete accuracy. Moreover, the pro forma financial statements do not reflect all costs that are expected to be incurred by the Company in connection with the Merger. For example, the impact of any incremental costs incurred in integrating the two companies is not reflected in the pro forma financial statements. As a result, the actual financial condition and results of operations of the Company following the Merger may not be consistent with, or evident from, these pro forma financial statements.

The assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect the Company’s financial condition or results of operations following the Merger. Any potential decline in the Company’s financial condition or results of operations could cause the stock price of the Company to decline.

 

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Combining the businesses of the Company and Covey Park may be more difficult, costly and time-consuming than expected, which may adversely affect the Company’s results and negatively affect the value of the Common Stock following the Merger.

The Company and Covey Park have entered into the Merger Agreement because each believes that combining the businesses of the Company and Covey Park will produce benefits and cost savings. However, the Company and Covey Park have historically operated as independent companies and will continue to do so until the completion of the Merger. Following the completion of the Merger, the Company’s management will need to integrate the Company’s and Covey Park’s respective business. The combination of two independent businesses is a complex, costly and time-consuming process and the Company’s management may face significant challenges in implementing such integration, many of which may be beyond the control of management, including, without limitation:

 

   

difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects;

 

   

the possibility of faulty assumptions underlying expectations regarding the integration process, including with respect to the intended tax efficient transactions;

 

   

unanticipated changes in applicable laws and regulations; and

 

   

unforeseen expenses or delays associated with the Merger.

Some of these factors will be outside of the control of the Company and any one of them could result in increased costs and diversion of management’s time and energy, as well as decreases in the amount of expected revenue that could materially impact the business, financial conditions and results of operations of the Company. The integration process and other disruptions resulting from the Merger may also adversely affect the Company’s relationships with employees, suppliers, customers, distributors, licensors and others with whom the Company and Covey Park have business or other dealings, and difficulties in integrating the businesses of the Company and Covey Park could harm the reputation of the Company.

If the Company is not able to successfully combine the businesses of the Company and Covey Park in an efficient, cost-effective and timely manner, the anticipated benefits and cost savings of the Merger may not be realized fully, or at all, or may take longer to realize than expected, and the value of the Common Stock, the revenues, levels of expenses and results of operations of the Company may be affected adversely. If the Company is not able to adequately address integration challenges, the Company may be unable to successfully integrate the Company’s and Covey Park’s operations or realize the anticipated benefits of the Merger.

The Share Issuances and potentially the preferred stock if converted, will dilute the percentage ownership interests of the Company’s stockholders.

If the Merger is completed, the Company will issue to Holdings 28,833,000 shares of Common Stock, representing approximately 16% of the Company’s outstanding Common Stock. The issuance of Common Stock to Holdings will cause a reduction in the relative percentage interest of the Company’s current stockholders in the Company’s earnings, if any, voting power, and market capitalization. In addition, the Company will issue to Holdings 210,000 shares of the Company’s Series A Preferred Stock. Under certain circumstances, the Series A Preferred Stock is convertible into Common Stock, which could represent up to an additional approximate 22% of the Company’s outstanding Common Stock.

 

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THE PARTIES

Comstock Resources, Inc.

Comstock Resources, Inc. is an independent energy company based in Frisco, Texas and is engaged in oil and gas acquisitions, exploration and development primarily in Texas, Louisiana, and North Dakota. The Company’s Common Stock is traded on the NYSE under the ticker symbol “CRK.” Its principal executive offices are located at 5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034 and its telephone number is (972) 668-8800.

Covey Park Energy LLC

Covey Park is an independent natural gas company engaged in the acquisition, development, exploitation and exploration of natural gas properties targeting the Haynesville and Bossier shale plays in North Louisiana and East Texas. Its principal executive offices are located at 8401 N. Central Expressway, Suite 700, Dallas, Texas 75225 and its telephone number is (214) 548-6000.

New Covey Park Energy LLC

Holdings is a Delaware limited liability Company and wholly-owned subsidiary of Covey Park that was formed prior to the execution of the Merger Agreement to hold all of the equity interests in the Company following completion of the Restructuring and the Merger Consideration following completion of the Merger. Its principal executive offices are located at 8401 N. Central Expressway, Suite 700, Dallas, Texas 75225 and its telephone number is (214) 548-6000. Please see The Merger—Restructuring for more details regarding the Restructuring.

Covey Park Energy Holdings LLC

Current Holdings is a Delaware limited liability company and currently holds all of the outstanding common equity interests in Covey Park. Following completion of the Restructuring, the Merger and the redemption of the Series A Preferred Units, Current Holdings will hold all of the outstanding limited liability company interests in Holdings. Its principal executive offices are located at 8401 N. Central Expressway, Suite 700, Dallas, Texas 75225 and its telephone number is (214) 548-6000.

 

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THE MERGER

Overview

Under the terms of the Merger Agreement, subject to the satisfaction or waiver (if permissible under applicable law) of specified conditions, Covey Park will be merged with and into the Company, with the Company surviving the Merger as the surviving corporation. The Board approved the Merger Agreement on June 5, 2019 and the Principal Stockholders, among other things, approved and adopted the Shareholder Approved Actions on June 7, 2019. This section of the Information Statement describes material aspects of the Merger, including the Merger Agreement and other transactions that are being entered into in connection with the Merger. While the Company believes that the description covers the material terms of the Merger, the Merger Agreement, and the other documents in connection thereto, this summary may not contain all of the information that is important to you. You should read carefully this entire document and the other documents to which the Company refers, including the Merger Agreement attached as Annex A, for a more complete understanding of the Merger and the Merger Agreement.

Background of the Merger

The Board and the Company’s senior management periodically review the Company’s long-term strategic plan and prospects in light of the Company’s business and developments.

On April 24, 2018, Mr. Roland Burns, Comstock President and Chief Financial Officer met with Mr. Richard Burnett, Chief Financial Officer of Covey Park after the announcement of the investment by Dallas businessman Jerry Jones in Comstock. Mr. Burnett suggested that the companies meet after the transaction between Comstock and the principal stockholders closed to look at a potential merger given that the companies’ operations were so similar.

On May 25, 2018, Mr. Jay Allison, Chief Executive Officer of Comstock, discussed the potential acquisition of Covey Park with Messrs. Jerry and Stephen Jones who indicated that they would be interested in evaluting such a transaction.

During the week of June 18, 2018, the Company requested that BMO arrange for Mr. Allison to meet Mr. Alan Levande, Co-CEO of Covey Park. On June 20, 2018, Messrs. Allison and Levande met, where they discussed a potential combination of Comstock and Covey Park.

On September 26, 2018, Mr. Allison and Mr. Burns met with Mr. Levande at an investor conference where they discussed the potential of the companies meeting to consider a combination.

On October 8, 2018, Mr. Allison, Mr. Burns, as well as Mr. Mike McCoy and Mr. Bob Roth of Arkoma and Messrs. Jerry and Stephen Jones met with Messrs. Jacobi, Levande and Burnett to discuss a potential combination of the two companies.

As a result of these communications, on October 10, 2018, the Company and Covey Park entered into a confidentiality agreement enabling confidential negotiations and the conduct by the Company of due diligence on Covey Park.

On October 17, 2018, the management teams of both companies met with representatives of Wells Fargo to discuss the process for exchanging data and high-level deal parameters.

On October 24, 2018, Mr. Allison and Mr. Burns met with Messrs. Jacobi, Levande and Burnett and representatives of Wells Fargo to discuss materials that laid out possible transaction structures and objectives for the transaction, to ultimately be shared with Mr. Jerry Jones and Denham Capital, the principal equityholder of Covey Park.

 

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On October 26, 2018, Messrs. Burns and Burnett along with representatives of Wells Fargo met to discuss the financial model of a combined company.

On October 29, 2018, Messrs. Burns, Jacobi, Levande and Burnett met to discuss the potential merger and potential terms of such merger.

On October 30, 2018, the management teams of Comstock and Covey Park along with representatives of Wells Fargo held a teleconference call to discuss the terms of a potential merger in anticipation of a meeting with Mr. Jerry Jones.

On November 2, 2018, representatives of Wells Fargo along with Messrs. Allison and Burns met with Mr. Jerry Jones to walk through the overview of a possible transaction with Covey Park.

On November 6, 2018, the Covey Park and Comstock management teams met with Messrs. Jerry and Stephen Jones to discuss Covey Park, its assets and a possible transaction. Representatives of Wells Fargo also attended this meeting.

On November 7, 2018, the Covey Park and Comstock management teams and representatives of Wells Fargo met to talk through the various workstreams and prepared a timeline for how to consummate the proposed transaction.

On November 9, 2018, the Covey Park and Comstock management teams, representatives of Wells Fargo, Locke Lord, outside counsel to Comstock, Vinson & Elkins L.L.P. (“V&E”), outside counsel to Covey Park, held a teleconference call to discuss the potential transaction structure in connection with a proposed merger of Comstock and Covey Park.

On November 13, 2018, BMO was verbally retained as a financial advisor to Comstock.

On November 14, 2018, representatives of Wells Fargo and the Comstock management team met to discuss a preliminary term sheet, with Covey Park later joining the discussion.

On November 15, 2018, Mr. Jacobi called Mr. Allison and Mr. Jerry Jones to discuss the terms of a potential merger.

On November 16, 2018, Comstock and Covey Park agreed to exchange technical data of their respective businesses.

On November 20, 2018, Mr. Jacobi continued discussions of the potential merger with Mr. Allison and Mr. Burns and began the initial steps for diligence and set forth the terms of the potential merger.

On November 28, 2018, Messrs. Allison, Burns, Burnett and Levande held an in-person meeting to discuss potential merger terms.

On December 3, 2018, the management teams of both companies and Mr. Carl Tricoli and Mr. Jordan Marye of Denham Capital met with Messrs. Jerry and Stephen Jones to discuss the potential merger plan.

On December 11, 2018, the Board held a meeting where it discussed the potential merger with Covey Park. Mr. Burns reviewed Covey Park’s corporate presentation and discussed the term sheet that was given to Covey Park under which Comstock would complete a merger. Covey Park’s principal equityholder, Denham Capital, was still considering the proposal.

On December 12, 2018, Messrs. Allison and Mr. Burns along with Mr. McCoy and Mr. Roth of Arkoma met with the Covey Park management team. The Covey Park management informed Comstock that a merger

 

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would only be possible if Comstock increased the cash consideration or if Comstock would complete a stock offering in order to set the price of any stock issued in the potential merger. Given market conditions, talks of a merger ceased.

On January 9, 2019, Messrs. Allison and Jacobi met to reassess the potential merger and discuss potential terms of such merger.

On February 6, 2019, during a teleconference Messrs. Allison, Burns, Jacobi, Levande and Burnett and representatives of Wells Fargo discussed a proposal from Denham Capital for an all-cash offer from Comstock to acquire Covey Park.

On February 18, 2019, the Board held a meeting where one of the topics discussed was the potential merger with Covey Park. Management presented a financial analysis supporting a $2.2 billion acquisition price for Covey Park. The analysis included several financing scenarios, including an equity contribution by the Company’s majority stockholder, Mr. Jerry Jones. The Board authorized management to continue to negotiate with Covey Park and Mr. Jerry Jones the terms for a potential merger.

On February 19, 2019, representative of Wells Fargo called Mr. Jacobi to explore avenues to narrow the difference between what Comstock would pay and what Denham Capital would accept in an all-cash offer.

On February 22, 2019, Messrs. Allison, Burns, Jacobi and Burnett met to discuss a possible offer of $800.0 million in cash and Common Stock representing 14% of Comstock. Under the proposal, Covey Park would retain certain of its assets and Comstock would issue preferred stock to a third party to finance a portion of the transaction.

On March 1, 2019, the management teams of Covey Park and Comstock held a meeting to discuss the proposed structure of a merger.

On March 2, 2019, Mr. Jacobi sent an email to Messrs. Allison and Burns to agree to Comstock’s proposal of $800.0 million of cash and $233.0 million Common Stock to be valued based on a volume weighted average market price and exclusion of certain Covey Park assets (the “March 2 Proposal”).

On March 4, 2019, Locke Lord, representatives of Wells Fargo and the Comstock management team held a teleconference call to discuss a potential timeline to complete the transaction.

On March 11, 2019, Locke Lord delivered a draft of the Merger Agreement to V&E.

On March 21, 2019, V&E delivered a revised draft of the Merger Agreement and provided the terms of the Subscription Agreement, Registration Rights Agreement and Support Agreement.

On March 23, 2019, Locke Lord, representatives of Wells Fargo and the Comstock management team held a teleconference call to discuss the various transaction documents, including the draft Merger Agreement.

During the remainder of March, the management teams met on numerous occasions to discuss the Merger, create a combined drilling program and prepare projections for the combined company. Each of Covey Park and Comstock conducted extensive due diligence and prepared material for Comstock’s marketing of a preferred stock issuance to secure additional financing for the transaction.

On March 28 and March 29, 2019, the Comstock management team, Wells Fargo, and Messrs. Jerry Jones and Burnett met with Standard & Poor and Moody’s Investor Service, the rating agencies of the outstanding debt for Comstock and Covey Park, to confirm their respective ratings for the combined company.

 

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On April 9, 2019, Comstock engaged Wells Fargo, Barclays Capital Inc., Bank of America Merrill Lynch, Pierce, Fenner & Smith Incorporated and BMO as placement agents (the “Placement Agents”) for a preferred stock issuance to finance part of the merger consideration.

From April 11, 2019 until May 2, 2019, representatives of the Placement Agents met with various third parties to discuss the potential private placement of preferred stock.

On May 13, 2019, Mr. Allison met with Mr. Jacobi to discuss alternative solutions to preferred stock financing.

On May 23, 2019, representatives from Wells Fargo met with the management of the Company to discuss the submission of a revised proposal to Covey Park and Denham Capital. In addition, Messrs. Allison and Burns, and a representative of Wells Fargo met with Mr. Jerry Jones to discuss the revised proposal.

On May 24, 2019, Comstock submitted a revised proposal under which Denham Capital and Mr. Jerry Jones would provide the preferred stock.

On May 29, 2019, Mr. Jerry Jones had multiple discussions with representatives of Denham Capital and Mr. Jacobi. Mr. Jerry Jones and representatives to Denham Capital agreed to propose to Comstock that Covey Park would receive the Stock Consideration and Cash Consideration. Mr. Jerry Jones would invest $475.0 million, in the form of Common Stock and Series B Preferred Stock. Under the proposal Comstock would agree to increase the purchase price by $50.0 million to adjust the deal value for the inclusion of the assets previously excluded from the March 2 Proposal.

On May 31, 2019, the Board held a meeting attended by all of the directors as well as BMO. BMO presented its work on the potential merger and management provided its analysis on the potential merger. Following this discussion, BMO delivered its oral opinion to the Board that, as of such date and based upon and subject to the factors and assumptions set forth therein, the share consideration and the mixed consideration, taken in the aggregate, to be paid by the Company for the outstanding equity of Covey Park pursuant to the Merger Agreement was fair from a financial point of view to the Company.

Over the course of June 1 through June 5, 2019, the parties, including Locke Lord and V&E, finalized negotiation of the transaction documentation.

On June 4, 2019, the Company executed an engagement letter with Wells Fargo as lead financial advisor. On the same day, representatives from Wells Fargo joined the Board to discuss the merger, preferred stock marketing process, and Series A and Series B Preferred Stock.

On June 5, 2019, the Board held a telephonic meeting attended by all of the directors as well as representatives of Wells Fargo and Locke Lord. A representative of Locke Lord gave an updated presentation summarizing the proposed terms of the Merger Agreement. Comstock management then recommended that the Board approve the Transactions. After considering the proposed terms of the Merger and the terms of the Merger Agreement and transactions contemplated by the Merger Agreement, the Board (i)(A) determined that the Merger and the other transactions contemplated by the Merger Agreement, on the terms and subject to the conditions set forth in the Merger Agreement, are fair to, and in the best interests of, the Company and its stockholders and (B) approved and declared advisable the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, on the terms and subject to the conditions set forth in the Merger Agreement, recommended that the holders of Common Stock vote in favor of adopting the Merger Agreement and (ii) directed that the Merger Agreement be submitted to the holders of the Common Stock for their adoption.

Later in the day of June 7, 2019, Comstock and Covey Park executed and delivered the Merger Agreement and related transaction agreements. On June 10, 2019, Comstock and Covey Park issued a joint press release announcing entry into the Merger Agreement.

 

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Reasons for the Merger

In evaluating the Merger, the Board consulted with Comstock’s management, as well as Comstock’s legal and financial advisors, and considered a number of factors, weighing both perceived benefits of the Merger as well as potential risks of the Merger. In the course of its deliberations, the Board considered a variety of factors and information that it believes support its determinations and recommendations, including the following (which are not all-inclusive and not necessarily presented in order of relative importance):

 

   

The Company’s expectation that the Merger will transform its portfolio with an expanded growth platform, by (1) adding approximately 248,830 net acres and 5.4 Tcfe of reserves in the Haynesville shale basin with strategic access to premium Gulf Coast markets, (2) expanding and enhancing natural gas marketing opportunity by adding 500 miles of gas gathering infrastructure and (3) adding an experienced management team.

 

   

The Company’s expectation that the Merger will provide substantial cost savings from the increase scale of the Company including an estimated $25.0 million of annual corporate overhaul savings.

 

   

The Company’s expectation that the Merger will provide significant deleveraging.

 

   

The Company’s expectation that the Merger will provide significant EBITDAX accretion as a result of enhanced capital efficiency and operating margins on a per unit basis.

 

   

The Company’s expectation that the combination will materially enhance the Company’s financial, operational, and credit metrics by improving daily production, provided reserves, lifting costs, and leverage ratios.

 

   

The attractiveness of the Merger to the Company in comparison to other acquisition opportunities reasonably available to the Company, including Covey Park’s desirable asset quality, potential synergies between the companies, accretive cash flow and the immediate actionability of the Covey Park acquisition opportunity.

 

   

The recommendation of the Merger by the Company’s management team.

 

   

The delivery on May 31, 2019, by BMO to the Company’s Board of its oral opinion, subsequently confirmed in writing, that, as of such date and based upon and subject to the factors and assumptions set forth therein, the share consideration and the mixed consideration, taken in the aggregate, to be paid by the Company for the outstanding equity of Covey Park pursuant to the Merger Agreement was fair from a financial point of view to the Company. See the section titled “The Merger — Opinion of BMO Capital Markets Corp.” for additional information.

 

   

That the Company’s Board believes the restrictions imposed on the Company’s business and operations during the pendency of the Merger are reasonable and not unduly burdensome.

 

   

The likelihood of consummation of the Merger and the Board’s evaluation of the likely time period necessary to close the Merger.

 

   

That the Company will continue to be led by the current strong and experienced management team and that the addition of the first and second directors to the Company’s Board in connection with the Merger will add further valuable expertise and experience and in-depth familiarity with Covey Park to the Company’s Board, which will enhance the likelihood of realizing the strategic benefits that the Company expects to derive from the Merger.

In the course of its deliberations, the Company’s Board also considered a variety of risks, uncertainties and other potentially negative factors, including the following (which are not necessarily all-inclusive and not presented in order of relative importance):

 

   

That the Merger may not be completed in a timely manner or at all and the potential consequences of non-completion or delays in completion.

 

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The effect that the length of time from announcement of the Merger until completion of the Merger could have on the market price of the Company’s Common Stock, its operating results and the relationship with the Company’s employees, shareholders, customers, suppliers, regulators and others who do business with the Company.

 

   

That the integration of Covey Park and the Company may not be as successful as expected and that the anticipated benefits of the Merger may not be realized in full or in part, including the risk that synergies and cost-savings may not be achieved or not achieved in the expected time frame.

 

   

That the attention of the Company’s management team may be diverted from other strategic priorities to implement the Merger and make arrangements for the integration of Covey Park’s and the Company’s operations, assets and employees following the Merger.

 

   

The impact of the Merger on the existing debt financing arrangements of the Company and Covey Park and the risk that any refinancing that may be undertaken in connection with the Merger may not ultimately be available at all or on the terms anticipated by the Company.

 

   

The risk that antitrust regulatory authorities may not approve the Merger or may impose terms and conditions on their approvals that adversely affect the business and financial results of the Company following the Merger.

 

   

That if the the Merger Agreement is terminated by Covey Park and all other closing conditions are otherwise satisfied, the Company will be required to pay to Covey Park the Financing Termination Fee.

 

   

The transaction costs to be incurred by the Company in connection with the Merger.

 

   

The risks associated with the occurrence of events that may materially and adversely affect the financial condition, properties, assets, liabilities, business or results of operations of Covey Park and its subsidiaries but that will not entitle the Company to terminate the Merger Agreement.

 

   

The potential impact on the market price of the Company’s Common Stock as a result of the issuance of the Merger Consideration to Covey Park stockholders.

 

   

Various other risks described in the section entitled “Risk Factors” beginning on page 19.

The Company’s Board considered all of these factors as a whole and unanimously concluded that they supported a determination to approve the Merger Agreement and the transactions contemplated thereby, including the issuance of shares of the Company’s Common Stock and Preferred Stock in connection with the Merger. The foregoing discussion of the information and factors considered by the Board is not exhaustive. In view of the wide variety of factors considered by the Board in connection with its evaluation of the Merger and the complexity of these matters, the Board did not consider it practical to, nor did it attempt to, quantify, rank or otherwise assign relative weights to the specific factors that it considered in reaching its decision. In considering the factors described above and any other factors, individual members of the Board may have viewed factors differently or given different weight or merit to different factors.

Required Approval of the Shareholder Approved Actions; Record Date; Action by Stockholder Consent

Under Nevada law and the Company’s Second Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, the Shareholder Approved Actions required the affirmative vote or written consent of the holders of a majority of the voting power of all outstanding shares of Common Stock. On June 11, 2019, the record date, there were 105,953,681 shares of Common Stock outstanding and entitled to vote.

On June 7, 2019, the Principal Stockholders delivered to the corporate secretary of the Company the Written Consent in respect of shares of Common Stock representing approximately 84% of the voting power of all outstanding shares of Common Stock. Such Written Consent constituted approval of the Shareholder Approved Actions by the holders of the requisite number of shares of Common Stock in accordance with the Nevada

 

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Revised Statutes and, accordingly, the approval of the Shareholder Approved Actions by the Company’s stockholders was effected on June 7, 2019. No further approval of the stockholders of the Company is required to approve the Shareholder Approved Actions. As a result, the Company has not solicited and will not be soliciting your vote for the approval of the Shareholder Approved Actions and does not intend to call a meeting of stockholders for purposes of voting on the approval of the Shareholder Approved Actions.

Federal securities laws state that the Shareholder Approved Actions may not be completed until 20 days after the date of mailing of this Information Statement to the Company’s stockholders. Therefore, notwithstanding the execution and delivery of the Written Consent (which was obtained concurrently with the execution of the Merger Agreement), the Merger will not occur until that time has elapsed. We currently expect the Merger to be completed on or around July 31, 2019, subject to certain government regulatory reviews and approvals and the satisfaction of the other conditions to closing in the Merger Agreement. However, there can be no assurance that the Merger will be completed on or prior to that time, or at all.

Recommendation of the Board

At the meeting of the Board on June 5, 2019, after careful consideration, including detailed discussions with the Company’s management and its legal and financial advisors, the Board:

 

   

determined that the Merger and the other transactions contemplated by the Merger Agreement, on the terms and subject to the conditions set forth in the Merger Agreement, are fair to, and in the best interests of, the Company and its stockholders;

 

   

approved, adopted, declared advisable and authorized the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, on the terms and subject to the conditions set forth in the Merger Agreement;

 

   

subject to certain provisions of the Merger Agreement described below under “The Merger Agreement—No Solicitation; Board Recommendation,” recommended that the holders of Common Stock vote in favor of adopting the Merger Agreement; and

 

   

directed that the Merger Agreement be submitted to the holders of the Common Stock for their adoption.

Opinion of BMO Capital Markets Corp.

Introduction

The Board retained BMO as its financial advisor and in connection therewith to provide an opinion to the Board as to the fairness, from a financial point of view, to the Company of the Merger Consideration to be paid by the Company in the Merger pursuant to the Merger Agreement.

On May 31, 2019, at a meeting of the Board held to evaluate the transactions, BMO delivered its opinion to the effect that, as of May 31, 2019 and based upon and subject to the assumptions, limitations and qualifications set forth in the opinion and other matters BMO considered relevant, the Merger Consideration to be paid by the Company in the Merger pursuant to the Merger Agreement was fair, from a financial point of view, to the Company.

The opinion speaks only as of the date and time it was rendered and not as of the time the transactions may be completed or any other time. The opinion does not reflect changes that may occur or may have occurred after its delivery, which could significantly alter the value, facts or elements on which the opinion was based. Neither BMO’s opinion nor the summary of its opinion herein are intended to be, and they do not constitute, advice or a recommendation to the Board, any security holder or any other person or entity as to how to act or vote with respect to any matter relating to the Merger. The full text of BMO’s written opinion, dated May 31, 2019, which

 

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sets forth the assumptions made, general procedures followed, matters considered and limitations on the review undertaken by BMO in rendering its opinion, is attached as Annex D to this Information Statement and is incorporated herein by reference. Stockholders of the Company are urged to read the opinion carefully in its entirety.

In connection with BMO’s services as the financial advisor to the Board, the Company has agreed to pay BMO a fee of $2.0 million. In addition, the Company has agreed to reimburse certain of BMO’s expenses arising, and to indemnify BMO against certain liabilities that may arise, out of BMO’s engagement.

Certain Effects of the Merger

Upon the consummation of the Merger, Covey Park will be merged with and into the Company, and the Company shall continue its existence under the laws of the State of Nevada as the surviving corporation. At the effective time of the Merger, all of the property, rights, privileges, powers, and franchises of the Company and Covey Park will vest in the Company, as the surviving corporation, and all debts, liabilities, obligations, restrictions, disabilities, and duties of the Company and Covey Park shall become the debts, liabilities, obligations, restrictions, disabilities, and duties of the Company, as the surviving corporation.

At the effective time, the organizational documents of the Company in effect immediately prior to the effective time shall continue to be the organizational documents of the Company, as the surviving corporation. Subject to the terms and conditions of the Shareholders Agreement, the directors and officers of the Company immediately prior to the effective time of the Merger shall continue to be the directors and officers of the Company, as the surviving corporation.

Governance Matters After the Merger

Following the closing of the Merger, the parties to the Shareholders Agreement will take all necessary actions to cause the Board to include one director who shall be designated by Holdings. The initial designated Holdings director will be Jordan Marye. In addition, pursuant to the Shareholders Agreement, the Corporate Governance and Nominating Committee of the Board will consider John Jacobi to be appointed to the Board. Therefore, following the consummation of the Merger and the transactions contemplated in connection with the Merger Agreement, the Board will consist of six, or possibly seven, directors, five of whom will have been directors of the Company prior to the consummation of the Merger and one (or two) of whom will be persons appointed to the Board in accordance with the terms of the Shareholders Agreement.

The following is a list of the directors and executive officers of the Company following the Merger.

 

Name

   Age   

Position

M. Jay Allison

   63   

Chairman of the Board and Chief Executive Officer

Roland O. Burns

   59   

Director, President, Chief Financial Officer, and Secretary

Elizabeth B. Davis, PhD

   56   

Director

Morris E. Foster

   76   

Director

Jim L. Turner

   73   

Director

Jordan T. Marye

   38   

Director

John D. Jacobi

   65   

Director Nominee

Directors

Biographical information for the Company’s current directors who will serve on the Board is incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

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Jordan T. Marye. Mr. Marye has been a Managing Partner of Denham Capital Management since 2014, where he leads the firm’s Oil & Gas investment effort. He joined Denham Capital in 2006. Prior to joining Denham, Mr. Marye worked in the Global Energy Group of UBS Investment Bank and the Energy Practice of Huron Consulting Group. He currently serves on the Board of Directors of multiple Denham portfolio companies, including Covey Park Energy, Fairway Resources III, Clear Creek Resource Partners, Spire HoldCo, Atlantic Resources I & II and Rockies Resources. A native of south Louisiana, Mr. Marye received a Bachelor of Science from Louisiana State University.

John D. Jacobi. Mr. Jacobi has served as Co-CEO of Covey Park since June 2013. From 1999 through June 2013, he served as Vice President of Business Development and Marketing at EXCO Resources, Inc., where he led the acquisition efforts on over 100 transactions valued at approximately $8 billion. In 1991, he co-founded Jacobi-Johnson Energy, Inc., an independent oil and natural gas producer, and served as its President focusing on acquisitions in the Ark-La-Tex and Gulf Coast Basins before it was sold to EXCO Resources in 1998. Mr. Jacobi began his full-time employment in the energy business in 1981 working for Woolf & Magee, Inc., a drilling and exploration and production company where he was involved in acquisitions for the exploration and production company and contract negotiations for the drilling company. Mr. Jacobi previously served on the board of directors for three joint ventures between BG Group plc and EXCO Resources Inc.: TGGT Holdings, LLC, an intrastate pipeline company serving the East Texas & North Louisiana area; EXCO Resources (PA), LLC, an operating company that owns and operates wells and natural gas gathering systems throughout Ohio, Pennsylvania, West Virginia, and Kentucky; and Appalachia Midstream Company, LLC, a natural gas gathering and transportation company.

Executive Officers

Biographical information for the Company’s executive officers who will continue to serve as executive officers of the Company is incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Effects on the Company if the Merger is not Completed

If the Merger is not completed for any reason, Holdings will not receive any payment for its Covey Park Equity in connection with the Merger other than, under certain circumstances, the Financing Termination Fee. Instead, the Company and Covey Park will remain separate, independent companies and the Holdings will continue to own the Covey Park Equity.

If the Merger is not completed, there is no assurance as to the effect of these risks and opportunities on the future value of your shares of Common Stock, including the risk that the market price of the Common Stock may decline to the extent that the current market price of the Common Stock reflects a market assumption that the Merger will be completed. If the Merger is not completed, there is no assurance that any other transaction acceptable to the Company will be offered or that the business, operations, financial condition, earnings or prospects of the Company will not be adversely impacted. Pursuant to the Merger Agreement, under certain circumstances the Company and Covey Park are permitted to terminate the Merger Agreement. Please see the section of this Information Statement entitled “The Merger Agreement—Termination.

Financing of the Merger

Subscription Agreement

Concurrent with the execution of the Merger Agreement, the Company executed the Subscription Agreement. Pursuant to the Subscription Agreement, the Company shall issue and sell to the Jones LLCs an aggregate of (i) 175,000 shares of Series B Preferred Stock, par value $10.00 per share of the Company (the “Series B Preferred Stock”), and (ii) 50,000,000 shares of Common Stock. The parties to the Subscription

 

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Agreement, as well as Holdings and the Principal Stockholders, will also enter into an Amended and Restated Registration Rights Agreement, which will govern certain rights and obligations of the parties thereto with respect to the registration of Common Stock issuable to the Jones LLCs pursuant to the Subscription Agreement as well as the Stock Consideration issuable under the Merger Agreement. The issuance of the Series B Preferred Stock and Common Stock will be exempt from registration under U.S. securities laws pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

The Company has also agreed to apply for NYSE listing of the Common Stock issuable pursuant to the Subscription Agreement and to take all appropriate action to increase the authorized number of shares of Common Stock available for issuance by the filing of the Charter Amendment. The closing of the Subscription Agreement is subject to certain conditions including the following: (1) all conditions to closing of the transactions contemplated by the Merger Agreement shall have been satisfied (or waived) and the parties thereto be ready to consummate the transactions contemplated by the Merger Agreement, (2) no order shall have been entered (or be in effect) by a court of competent jurisdiction which enjoins, prohibits or materially restrains the transactions contemplated by the Subscription Agreement, (3) the Charter Amendment shall have been filed with the Secretary of State of the State of Nevada, (4) each of the representations and warranties of the parties to the Subscription Agreement shall be true and correct in all material respects on the closing date and (5) each of the parties to the Subscription Agreement shall have executed the Registration Rights Agreement.

Series A and Series B Preferred Stock

The following is a summary of the material rights, preferences and privileges of the cumulative redeemable convertible perpetual preferred stock, designated the Series A Preferred Stock and the Series B Preferred Stock (together defined as the Preferred Stock), as contained in the Certificate of Designations, which is Exhibit G to the Merger Agreement (the “Certificate of Designations”). This summary is qualified in its entirety by reference to the complete Certificate of Designations included as part of Annex C to this Information Statement and incorporated by reference herein.

Dividends

Holders of Preferred Stock shall be entitled to receive cumulative cash dividends accrued on the liquidation value of $1,000 per share of Preferred Stock (the “Liquidation Value”) in an amount equal to a dividend rate of 10% per annum (the “Dividend Rate”). Dividends will be paid in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on September 30, 2019.

In the event the Company fails to pay in cash in full all or any part of any dividend when due and payable, the Company’s Common Stock ceases to be listed or quoted on any national securities exchange, or the Company fails to cause a shelf registration statement with respect to the Registrable Securities (as defined in the Registration Rights Agreement) to be declared effective 30 days prior to the first anniversary of the initial issue date of the Preferred Stock, the Dividend Rate will be increased by up to 7.0% per annum, in accordance with the terms of the Certificate of Designations.

Dividends will be paid in cash if the Company has funds legally available for payment and the Board declares a cash dividend payable.

Liquidation Preference

In the event of any liquidation, winding up or dissolution of the Company, each holder of Preferred Stock will be entitled to receive out of the Company’s assets legally available for distribution to its stockholders, in accordance with the ranking of the Preferred Stock discussed below, an amount in cash equal to the greater of (i) the Liquidation Value per share of Preferred Stock plus an amount equal to all accrued dividends on such

 

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share of Preferred Stock, and (ii) if a liquidation, winding up or dissolution of the Company occurs following the 12-month anniversary of the initial issue date of the Preferred Stock, the total market value of the Common Stock into which all of a holder’s shares of Preferred Stock are convertible determined as of the trading day immediately prior to such liquidation, winding up or dissolution.

Ranking

The Preferred Stock ranks senior to the Company’s Common Stock and any shares of capital stock of the Company not expressly ranking senior to or pari passu with the Preferred Stock as to the payment of dividends and distributions of assets upon the liquidation, dissolution or winding up of the Company. Between the Series A and Series B Preferred Stock, Series A Preferred Stock ranks senior to all Series B Preferred Stock and the Series B Preferred Stock shall not receive any proceeds on the liquidation, dissolution or winding up of the Company unless and until the Series A Preferred Stock has been paid.

Voting Rights

Holders of Preferred Stock have limited voting rights under Nevada law, the Company’s Articles of Incorporation and the terms of the Certificate of Designations. Under the terms of the Certificate of Designations, in addition to certain other actions, the Company may not, without the affirmative vote of at least a majority of the holders of the Series A Preferred stock voting as a single class and the Series B Preferred Stock voting as a single class: (i) pay any dividends in respect of junior stock, subject to customary exceptions; (ii) issue any capital stock ranking senior or pari passu to the Preferred Stock; (iii) delist its Common Stock from a national securities exchange or enter into certain merger or acquisition transactions; however, the Preferred Stock will not have a right to vote on any material sale of assets, merger, consolidation or Change of Control transaction (discussed below) if the Company agrees to redeem the Preferred Stock in full for cash in the amount determined pursuant to the terms of the Certificate of Designations; (iv) amend the terms of the Company’s Second Amended and Restated Articles of Incorporation or the Certificate of Designations in whole or in part, by merger, consolidation or otherwise, so as to adversely affect the rights, preferences, privileges or powers of the shares of Preferred Stock; (v) voluntarily authorize, declare or initiate any bankruptcy, liquidation or dissolution proceedings, may not issue any equity securities of its subsidiaries other than to another subsidiary or in connection with the contribution of any assets or cash in excess of $10.0 million to any person that is not wholly-owned by the Company; or (vi) enter into any agreement that expressly prohibits the Company from declaring and paying dividends to the holders of the Preferred Stock.

Holder Conversion

The conversion price of each share of Preferred Stock is $4.00 per share, subject to adjustment pursuant to customary anti-dilution provisions as contained in the Certificate of Designations (the “Conversion Price”). At any time following the 12-month anniversary of the initial issue date of the Preferred Stock each holder may convert any or all shares of Preferred Stock into shares of Common Stock at the then prevailing conversion rate, equal to the quotient of (a) the Liquidation Value per share plus an amount equal to all accrued dividends on such share, and (b) the Conversion Price (the “Conversion Rate”). Holders may receive cash in lieu of fractional shares.

Special Rights Upon a Change of Control

In connection with any Change of Control, defined in the Certificate of Designations but generally meaning (i) the consummation of any transaction the result of which is that any person, with certain exceptions, becomes to beneficial owner of more than 50% of the voting stock of the Company, (ii) the direct or indirect sale, lease, transfer, conveyance or other disposition of all or substantially all of the properties or assets of the Company, or (iii) the adoption of a plan relating to the liquidation or dissolution of the Company, holders of Preferred Stock may convert all but not less than all shares of Preferred Stock into Common Stock at the then prevailing

 

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Conversion Rate. Alternatively, holders may elect to require the Company to purchase all but not less than all of its shares of Preferred Stock for cash at a purchase price per share equal to the Liquidation Value per share plus an amount equal to all accrued dividends on such share if such Change of Control occurs during the period prior to the 12-month anniversary of the initial issue date, or at a purchase price equal to the greater of (1) the Liquidation Value per share plus an amount equal to all accrued dividends on such share and (2) an amount equal to (A) the number of shares of Common Stock into which such share of Preferred Stock is convertible at the Conversion Rate then in effect as of immediately prior to such Change of Control multiplied by (B) the closing sale price of the Common Stock on the trading day immediately prior to such Change of Control, if the Change of Control occurs following the 12-month anniversary of the initial issue date (as applicable, the “Change of Control Cash Price”). The Company will only be required to pay the Change of Control Cash Price to the extent permitted by specified contract terms in the Covey Park Notes Indenture and that certain indenture dated as of August 3, 2018, by and between Comstock Escrow Corporation, as issuer, and the American Stock Transfer & Trust Company LLC, as trustee (the “Comstock Indenture”), as such terms relate to the purchase of Preferred Stock in connection with a Change of Control as contemplated by the definition of “Disqualified Stock” under the Covey Park Indenture and “Disqualified Capital Stock” under the Comstock Indenture.

In addition, each holder may convert any or all shares of Preferred Stock into shares of Common Stock at the Conversion Rate in connection with the consummation of a Change of Control or Take-Private Transaction (as defined in the Certificate of Designations) in which all of such holder’s shares are not redeemed in full for the Change of Control Cash Price except that the price paid per share of Common Stock in the applicable Take-Private Transaction shall be substituted for the closing sale price of the Common Stock on the trading day immediately prior to a Change of Control transaction in calculating the cash price per share.

Company Optional Redemption

At any time the Company may elect to cause any and all shares of Preferred Stock to be redeemed for cash at a redemption price equal to the Liquidation Value per share of Preferred Stock plus an amount equal to all accrued dividends on such share. In no event may Series B Preferred Stock be redeemed to the extent any shares of Series A Preferred Stock remain outstanding. Customary notice and redemption procedure provisions apply. The Company may assign the right to exercise its redemption right to a third party, subject to certain conditions, and such third party will be entitled to exercise such right on the same terms as the Company provided that such party will be required to convert any acquired shares of Series A Preferred Stock immediately following the acquisition of such shares.

Debt Financing

The Company has a received a Debt Financing Term Sheet (as such term is defined in the Merger Agreement) from certain lenders (and other lender parties to be identified following the date of the Merger Agreement) in the amounts set forth in the Debt Financing Term Sheet for the purposes of funding a portion of the Cash Consideration, the Company’s other obligations (including the repayment of the Indebtedness under the Company’s revolving credit facility) and related fees and expenses required to be paid by the Company in connection with the transactions contemplated by the Merger Agreement. The Company must use reasonable best efforts under the Merger Agreement to obtain Debt Financing on the terms set forth in the Debt Financing Term Sheet.

Interests of the Company’s Directors and Executive Officers in the Merger

Certain of the Company’s directors and executive officers may have interests in the Merger that may be different from, or in addition to, the interests of the Company’s stockholders generally. These interests may present actual or potential conflicts of interest and you should be aware of these interests. The members of the Board were aware of and considered these interests in reaching the determination to approve the Merger Agreement and deem the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement to be fair to, and in the best interests of, the Company and its stockholders.

 

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Merger Consideration

At the effective time of the Merger, and subject to the terms and conditions of the Merger Agreement, all of the Covey Park Equity that is issued and outstanding immediately prior to the effective time will be converted into the right to receive (i) the Stock Consideration, which shall consist of 28,833,000 shares of Common Stock and 210,000 shares of Series A Preferred Stock, and (ii) the Cash Consideration, which will be in an amount equal to $700.0 million plus the Series A Preferred Balance (as defined in the Merger Agreement) to be used to redeem the preferred units of Holdings. Following the consummation of the Merger it is expected that Holdings will own approximately 16% of the outstanding shares of Common Stock.

Material U.S. Federal Income Tax Consequences of the Merger

The following is a general discussion of the material United States federal income tax consequences of the Merger to holders of Common Stock. This discussion is limited to U.S. holders and non-U.S. holders that hold their shares of the Common Stock as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion is based upon the Code, the Treasury Regulations, judicial authorities and published positions of the Internal Revenue Service (“IRS”) all as currently in effect, and all of which are subject to change or differing interpretations possibly with retroactive effect, and any such change or differing interpretation could affect the accuracy of the statements and conclusions set forth herein.

This discussion is for general information purposes only and does not address all of the U.S. federal income tax consequences and considerations that may be relevant to a particular holder in light of such holder’s particular facts and circumstances and does not apply to holders that are subject to special treatment under U.S. federal income tax laws, such as, for example, banks or other financial institutions; insurance companies, regulated investment companies, real estate investment trusts or mutual funds; holders liable for the alternative minimum tax; certain former citizens or former long-term residents of the United States; U.S. holders having a “functional currency” other than the U.S. dollar; tax-exempt organizations; holders that exercise dissenters’ rights; dealers in securities or currencies; entities or arrangements treated as partnerships for U.S. federal income tax purposes or other flow-through entities (or investors therein); subchapter S corporations, retirement plans, individual retirement accounts or other tax-deferred accounts; traders in securities that elect to use a mark to market method of accounting; holders that hold (or that held, directly or constructively, at any time during the five year period ending on the date of the Merger) 5% or more of the equity exchanged, directly or constructively; holders that hold stock of the Company as part of a straddle, hedge, constructive sale, or conversion transaction or other integrated or risk reduction transaction; “controlled foreign corporations”; “passive foreign investment companies”; and holders that acquired the equity exchanged through the exercise of an employee stock option or otherwise as compensation or through a tax-qualified retirement plan.

This discussion does not address any tax consequences of the Merger under U.S. federal tax laws other than those pertaining to the income tax, nor does it address any considerations under any state, local or foreign tax laws or under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010. This discussion also does not address any withholding considerations under the Foreign Account Tax Compliance Act of 2010 (including the Treasury Regulations issued thereunder and intergovernmental agreements entered into pursuant thereto or in connection therewith). No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences set forth below.

If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes holds shares of the Common Stock, the tax treatment of a person treated as a partner in such partnership for U.S. federal income tax purposes generally will depend upon the status of the partner and the activities of the partnership. Such partnerships and partners in such partnerships should consult their tax advisors about the tax consequences of the Merger to them.

 

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All holders of the Common Stock are urged to consult with their tax advisors as to the specific tax consequences of the Merger to them in light of their particular facts and circumstances, including the applicability and effect of any U.S. federal, state, local, foreign or other tax laws.

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of the Common Stock that for U.S. federal income tax purposes is:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

   

a trust, (1) if a court within the United States is able to exercise primary supervision over the trust’s administration and U.S. persons have the authority to control all substantial decisions of the trust or (2) that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person for U.S. federal income tax purposes.

For purposes of this discussion, the term “non-U.S. holder” means a beneficial owner of the Common Stock that is neither a U.S. holder nor a partnership for U.S. federal income tax purposes.

Tax Consequences of the Merger Generally

For U.S. federal income tax purposes, together with the rest of the Exchanges, the Company is intended to qualify as a transaction described in Section 351 of the Code. The Company has not sought and will not seek any opinion of counsel with respect to the U.S. federal income tax treatment of the Exchanges. The Company has not sought and will not seek any ruling from the IRS as to the U.S. federal income tax consequences of the Exchanges. Consequently, no assurance can be given that the IRS will not assert, or that a court would not sustain, a position contrary to any of the conclusions set forth below.

The remainder of this discussion proceeds on the basis that the Exchanges, taken together, will qualify as a transaction described in Section 351 of the Code.

Tax Consequences to U.S. Holders

The U.S. federal income tax consequences of the Merger to U.S. holders that are Exchangors (“U.S. Exchangors”) generally are as follows:

 

   

a U.S. Exchangor will not recognize gain or loss in connection with the Merger if such Exchangor only receives Common Stock pursuant to the Merger;

 

   

the aggregate tax basis of the Common Stock received by such U.S. Exchangor will be equal to the aggregate tax basis of the equity exchanged therefor (decreased by any cash received and increased by any gain recognized in connection with the Merger) plus the amount of any cash contributed; and

 

   

the holding period of the Common Stock received by a U.S. Exchangor pursuant to the Merger will include such U.S. Exchangor’s holding period of the equity surrendered in exchange therefor.

U.S. Exchangors who acquired different blocks of the equity being surrendered at different times or different prices should consult their tax advisors as to the determination of the tax bases and holding periods of the Common Stock received in the Merger.

The Merger should not have U.S. federal income tax consequences for a U.S. Holder that is not an Exchangor.

 

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Non-U.S. Holders

The U.S. federal income tax consequences of the Merger to non-U.S. holders that are Exchangors (“Non-U.S. Exchangors”) generally will be the same as those described above for U.S. Exchangors, except that a Non-U.S. Exchangor generally will not be subject to U.S. federal income tax or withholding tax on any gain realized in connection with the Merger unless:

 

   

such gain is effectively connected with such Non-U.S. Exchangor’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment of such Non-U.S. Exchangor in the United States);

 

   

such Non-U.S. Exchangor is an individual who is present in the United States for 183 days or more in the taxable year in which the gain is realized and certain other conditions are met; or

 

   

the Common Stock constitutes a U.S. real property interest by reason of the Company’s status as a “U.S. real property holding corporation”, as defined in the Code, at any time within the five-year period preceding the Merger or the Non-U.S. Exchangor’s holding period, whichever is shorter. We believe that we currently are, and expect to be for the foreseeable future, a U.S. real property holding corporation. However, so long as the Common Stock is regularly traded on an established securities market, the Common Stock will be treated as a U.S. real property interest for these purposes only if the Non-U.S. Exchangor actually or constructively held more than five percent (5%) of the Common Stock at any time during the five year (or shorter) period that is described above.

Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates in the same manner as if such Non-U.S. Exchangor were a U.S. person. A Non-U.S. Exchangor that is a corporation also may be subject to an additional branch profits tax at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty) on its “effectively connected earnings and profits” for the taxable year, subject to certain adjustments.

Gain described in the second bullet point above will be subject to U.S. federal income tax at a 30% rate (or such lower rate as may be specified by an applicable income tax treaty), but may be offset by U.S.-source capital losses, if any, of the Non-U.S. Exchangor.

The Merger should not have U.S. federal income tax consequences for a non-U.S. holder that is not an Exchangor.

Backup Withholding and Information Reporting

Payments of cash to an Exchangor in connection with the Merger may, under certain circumstances, be subject to information reporting and backup withholding, unless the Exchangor provides proof of an applicable exemption or furnishes its taxpayer identification number, and otherwise complies with all applicable requirements of the backup withholding rules. Certain holders (such as corporations and non-U.S. holders) are exempt from backup withholding.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or credit against a holder’s U.S. federal income tax liability, if any, provided the required information is timely furnished to the IRS. Non-U.S. Exchangors may be required to comply with certification requirements and identification procedures in order to establish an exemption from information reporting and backup withholding.

The preceding discussion is intended only as a general discussion of the material U.S. federal income tax consequences of the Merger. It is not a complete analysis or discussion of all potential tax effects that may be important to particular holders. Holders of Common Stock should consult their own tax advisors as to the particular tax consequences to them of the Merger, including tax return reporting requirements, the applicability and effect of federal, state, local and other tax laws and the effect of any proposed changes in the tax laws.

 

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Restructuring

Covey Park is currently a wholly-owned subsidiary of Current Holdings. In connection with the Merger, Holdings formed CPE Merger Sub LLC, a Delaware limited liability company (“Merger Sub”) as a wholly owned subsidiary of Holdings. Immediately prior to, but conditioned upon, the closing of the transactions contemplated by the Merger Agreement, Merger Sub shall merge with and into Covey Park, with Covey Park surviving as a wholly owned subsidiary of New Holdings (the “Restructuring”). In connection with the Restructuring, all issued and outstanding equity interests in Covey Park shall be converted into an equal number and class of equity interests in Holdings having the same rights, designations, preferences and obligations as such converted equity interests.

Regulatory Approvals Required for the Merger

Under the HSR Act, and the related rules and regulations issued by the FTC, certain transactions, including the Merger, may not be consummated until notification and report forms have been filed by each of the Company and Covey Park with the FTC and the DOJ and the applicable waiting periods have expired or terminated. The Company and Covey Park filed their respective notification and report forms under the HSR Act with the FTC and the DOJ on June 20, 2019.

At any time before or after the effective time of the Merger, the DOJ, the FTC or the U.S. state attorneys general could take action under applicable antitrust laws, including seeking to enjoin the consummation of the Merger, conditionally approving the Merger upon the divestiture of assets of the Company or Covey Park, subjecting the consummation of the Merger to regulatory conditions or seeking other remedies. Private parties may also seek to take legal action under the antitrust laws under certain circumstances.

Under the Merger Agreement, the respective obligations of the Company, Covey Park, Holdings, and Current Holdings to effect the Merger are subject to, among other things, the expiration or termination of the waiting period (or any extension thereof) applicable to the consummation of the Merger under the HSR Act and the receipt of the non-U.S. jurisdiction governmental approvals.

For a description of the Company’s and Covey Park’s respective obligations under the Merger Agreement with respect to regulatory approvals, please see the section of this Information Statement entitled “The Merger Agreement—Reasonable Best Efforts and Certain Pre-Closing Obligations.

We currently expect to obtain all antitrust and other regulatory approvals that are required for the consummation of the Merger on or before July 31, 2019; however, we cannot guarantee when any such approvals will be obtained, or that they will be obtained at all.

Accounting Treatment of the Merger

The Company prepares its financial statements in accordance with GAAP and its pro forma financial statements as required by the SEC Article 11 of Regulation S-X. The Merger will be accounted for as an acquisition under FASB ASC Topic 805, Business Combinations, with the Company being considered the acquirer of Covey Park for accounting purposes. This means that the Company will allocate the purchase price to the fair value of Covey Park’s tangible and intangible assets and liabilities at the acquisition date, with the excess purchase price, if any, being recorded as goodwill. Under the acquisition method of accounting, goodwill is not amortized but is tested for impairment at least annually.

Dividend Policy

Since February 13, 2015, the Company has not paid any cash dividends. Because the Company anticipates that all earnings will be retained for the development of its business, the Company does not expect that any cash dividends will be paid on the Common Stock for the foreseeable future.

 

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Subject to limited exceptions, the Merger Agreement prohibits the Company (unless consented to in writing in advance by Covey Park) from paying dividends to holders of Common Stock until the earlier of the effective time and the termination of the Merger Agreement in accordance with its terms.

For additional information on the Company’s dividend policy, see “Description of Capital Stock.” For additional information on the treatment of dividends under the Merger Agreement, see “The Merger Agreement—Operating Covenants.”

 

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THE MERGER AGREEMENT

The following summary of the material provisions of the Merger Agreement, and such summary and the description of the Merger Agreement elsewhere in this Information Statement are qualified in their entirety by reference to the complete text of the Merger Agreement, a copy of which is included as Annex A to this Information Statement and is incorporated into this Information Statement by reference. This summary does not purport to be complete and may not contain all of the information about the Merger Agreement that is important to you. We urge you to carefully read this entire Information Statement, including the annexes and the other documents to which we have referred you. You should also review the section entitled “Where You Can Find Additional Information.”

The Merger Agreement has been included for your convenience to provide you with information regarding its terms and we recommend that you read it in its entirety. The Merger Agreement is not intended to be a source of factual, business or operational information about the Company, Covey Park, Holdings, or Current Holdings, and the following summary of the Merger Agreement and the copy thereof included as Annex A to this Information Statement are not intended to modify or supplement any factual disclosure about the Company in any documents it publicly files with the SEC. The Merger Agreement is a contractual document that establishes and governs the legal relations between the Company, Covey Park, Holdings, and Current Holdings, and allocates risks between the parties, with respect to the Merger. The Merger Agreement contains representations and warranties made by the Company, on the one hand, and Covey Park, Holdings, and Current Holdings, on the other hand, that are qualified in several important respects, which you should consider as you read them in the Merger Agreement.

The representations and warranties are qualified by certain information of the Company filed with the SEC prior to the date of the Merger Agreement. Certain of the representations and warranties made by the Company, on the one hand, and Covey Park and Holdings, on the other hand, were also made as of a specified date, may be subject to a contractual standard of materiality different from what might be viewed as material to stockholders, and may have been used for the purpose of allocating risk between the parties to the Merger Agreement rather than as establishing matters as facts. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this Information Statement, may have changed since the date of the Merger Agreement, and subsequent developments or new information qualifying a representation or warranty may or may not be fully reflected in this Information Statement or the Company’s public disclosures. Accordingly, you should not rely on the representations and warranties as being accurate or complete or characterizations of the actual state of facts as of any specified date.

The Merger

At the effective time of the Merger, upon the terms and subject to the satisfaction or waiver of the conditions of the Merger Agreement and in accordance with the Delaware General Corporate Law and Nevada Revised Statutes, Covey Park will merge with and into the Company. The separate corporate existence of Covey Park will cease and the Company will be the surviving corporation of the Merger. The Second Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of the Company as in effect immediately prior to the effective time will be the Articles of Incorporation and the Bylaws of the surviving corporation. Subject to the appointment of additional directors at the effective time of the Merger (see “Agreements Related to the MergerThe Shareholders Agreement”), the directors and officers of the Company immediately prior to the effective time of the Merger will, from and after the effective time of the Merger, be the directors and officers of the surviving corporation until their respective successors have been duly elected or appointed and qualified, or until their earlier death, resignation or removal.

Closing and Effective Time of the Merger

The closing of the Merger will take place at 9:00 a.m., Dallas, Texas time, on a date that is two (2) business days following the satisfaction or (to the extent permitted by applicable law) waiver (in accordance with the

 

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Merger Agreement) of all of the conditions described in the section below entitled “The Merger Agreement—Conditions to the Merger” (other than any such conditions that by their nature cannot be satisfied until the closing of the Merger, but subject to satisfaction of any such condition), unless the Company and Covey Park agree to another time in writing.

The Merger will become effective upon the filing and acceptance of the articles of merger with the offices of the Secretaries of State of Nevada and Delaware, or at such later time as shall be agreed upon in writing by the Company and Covey Park and specified in the articles of merger, which is referred to as the “effective time” of the Merger.

Consideration to be Received in the Merger

The Merger Agreement provides that, at the effective time of the Merger, all of the issued and outstanding Covey Park Equity outstanding immediately prior to the effective time of the Merger, shall be converted into the right to receive from the Company (i) 28,833,000 shares of Common Stock, (ii) 210,000 shares of Series A Preferred Stock, and (iii) cash in an amount equal to $700.0 million plus the Series A Preferred Balance. At the time of Closing, the Company will pay the Cash Consideration to Holdings by wire transfer and deliver to Holdings the Stock Consideration, in book entry form, together with an executed certificate of the transfer agent, certifying as to the book entry issuance thereof and any other evidence of issuance reasonably requested by Holdings.

The “Series A Preferred Balance” is defined as the aggregate Series A Preferred Liquidation Preference attributable to Holdings’ outstanding Series A Preferred Units as of the effective time of the Merger. The Company estimates such amount to be approximately $155.0 million.

Representations and Warranties

The Merger Agreement contains a number of representations and warranties made by the Company, including representations and warranties relating to:

 

   

corporate organization, good standing and similar matters;

 

   

corporate power and authority to execute and deliver the Merger Agreement and to consummate the transactions contemplated by the Merger Agreement;

 

   

authorization of the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement and enforceability of the Merger Agreement against the Company;

 

   

required governmental filings and consents, applicable expiration or termination of the HSR Act waiting period, and absence of violation of applicable laws in connection with the execution, delivery and performance of the Merger Agreement and the consummation of the Merger and the other transactions contemplated by the Merger Agreement;

 

   

absence of conflicts with, violation or breach of, defaults under, the Company’s organizational documents and certain contracts and permits in connection with the execution, delivery and performance of the Merger Agreement and the consummation of the Merger and the other transactions contemplated by the Merger Agreement;

 

   

brokers’, finders’ and similar fees or commissions payable in connection with the Merger and the other transactions contemplated by the Merger Agreement;

 

   

the absence of any current or pending bankruptcy, insolvency, or reorganization proceedings;

 

   

legal proceedings;

 

   

the registration of the Common Stock under the Exchange Act, the listing of the Common Stock on the NYSE, and the absence of any order or other proceeding which would suspend or prevent the public trading of the Common Stock;

 

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the accuracy and sufficiency of reports and financial statements filed with the SEC;

 

   

the absence of undisclosed liabilities;

 

   

internal controls over financial reporting;

 

   

ownership of the Common Stock;

 

   

accuracy of the information in this Information Statement;

 

   

taxes;

 

   

environmental matters and compliance with environmental laws;

 

   

oil and gas matters;

 

   

material contracts;

 

   

relationships with related parties and affiliates;

 

   

financing matters;

 

   

exemption from registering as an “investment company” under the Investment Company Act of 1940;

 

   

compliance with applicable laws, court orders and certain regulatory matters; and

 

   

receipt of opinion from the financial advisor to the Board.

The Merger Agreement also contains a number of representations and warranties made by Covey Park and Holdings, including representations and warranties relating to:

 

   

corporate organization, good standing and similar matters;

 

   

corporate power and authority to execute and deliver the Merger Agreement and to consummate the transactions contemplated by the Merger Agreement;

 

   

authorization of the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement and enforceability of the Merger Agreement against Covey Park;

 

   

capital structure and equity securities;

 

   

required governmental filings and consents, applicable expiration or termination of the HSR Act waiting period, and absence of violation of applicable laws in connection with the execution, delivery and performance of the Merger Agreement and the consummation of the Merger and the other transactions contemplated by the Merger Agreement;

 

   

absence of conflicts with, violation or breach of, defaults under, Covey Park’s organizational documents and certain contracts and permits in connection with the execution, delivery and performance of the Merger Agreement and the consummation of the Merger and the other transactions contemplated by the Merger Agreement;

 

   

financial statement matters;

 

   

the absence of undisclosed liabilities;

 

   

absence of certain changes or events and the conduct of business in the ordinary course of business since March 31, 2019;

 

   

the absence of any current or pending bankruptcy, insolvency, or reorganization proceedings;

 

   

legal proceedings;

 

   

taxes;

 

   

compliance with applicable laws, court orders and certain regulatory matters;

 

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permits;

 

   

real property;

 

   

employee compensation and benefits matters and matters relating to the Employee Retirement Income Securities Act of 1974, as amended;

 

   

labor and employment matters;

 

   

material contracts;

 

   

insurance;

 

   

intellectual property;

 

   

environmental matters and compliance with environmental laws;

 

   

oil and gas matters;

 

   

the existence of any preferential rights and consents that will be triggered by the Merger;

 

   

rights-of-way, easements, and other surface or sub-surface use, ingress, or egress right;

 

   

brokers’, finders’ and similar fees or commissions payable in connection with the Merger and the other transactions contemplated by the Merger Agreement;

 

   

maintenance of books and records;

 

   

ownership of the Covey Park Equity;

 

   

accuracy of certain information in this Information Statement;

 

   

the absence of any breach, violation, acceleration of payment, or default arising under the Covey Park Notes Indenture, as a result of the Restructing; and

 

   

Holdings’ status as an accredited investor with no intention to resell the Common Stock after the consummation of the Merger.

Significant portions of the representations and warranties of each of the Company, Covey Park and Holdings are qualified as to “materiality” or “material adverse effect.”

Under the Merger Agreement, a Company material adverse effect means a material adverse effect on (a) the business, assets, condition (financial or otherwise) or results of operations of the Company and its affiliates, taken as a whole, or (b) the Company’s ability to perform its obligations under the Merger Agreement (or the other transaction documents contemplated therein) or to consummate the transactions contemplated by the Merger Agreement (or the other transaction documents contemplated therein); provided, however, that the following shall not be considered when determining whether a Company material adverse effect has occurred or would reasonably be expected to occur:

 

  (i)

general changes in Hydrocarbon (as defined in the Merger Agreement) prices;

 

  (ii)

changes in conditions or developments generally applicable to the oil and gas industry in the United States;

 

  (iii)

general economic, financial, credit, or political conditions and general changes in markets, including changes generally in supply, demand, price levels or interest or exchange rates;

 

  (iv)

political conditions (or changes in such conditions) or acts of war, sabotage or terrorism (including any escalation or general worsening of any such acts of war, sabotage or terrorism);

 

  (v)

changes in laws or GAAP or the interpretation thereof;

 

  (vi)

any effect resulting from any action taken by Covey Park or any of its affiliates;

 

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  (vii)

any effect resulting from any action taken by the Company or any affiliates of the Company that is expressly required hereunder or failure of the Company or any affiliate of the Company to take any action that is prohibited under the Merger Agreement;

 

  (viii)

any failure to meet any projections, budgets, forecasts, estimates, plans predictions, performance metrics or operating statistics or the inputs into such items; or

 

  (ix)

any effects or changes resulting from entering into the Merger Agreement or the announcement of the transactions contemplated thereby, except to the extent and then only to the extent any of the events, changes or circumstances referred to in (i) through (v) above disproportionately affect the Company as compared to other participants in the industries and areas in which the Company operates.

Under the Merger Agreement, a Covey Park material adverse effect means a material adverse effect on (a) the business, assets, condition (financial or otherwise) or results of operations of Covey Park or any of its affiliates, taken as a whole, or (b) Covey Park’s or any of its affiliates’ ability to perform their respective obligations under Merger Agreement or to consummate the transactions contemplated by the Merger Agreement; provided, however, that the following shall not be considered in determining whether a Covey Park material adverse effect has occurred or would be reasonably expected to occur:

 

  (i)

general changes in Hydrocarbon (as defined in the Merger Agreement) prices;

 

  (ii)

changes in condition or developments generally applicable to the oil and gas industry in the United States;

 

  (iii)

general economic, financial, credit, or political conditions and general changes in markets, including changes generally in supply, demand, price levels or interest or exchange rates;

 

  (iv)

political conditions (or changes in such conditions) or acts of war, sabotage or terrorism (including any escalation or general worsening of any such acts of war, sabotage or terrorism);

 

  (v)

changes in laws or GAAP or the interpretation thereof;

 

  (vi)

any effect resulting from any action taken by the Company or any affiliate of the Company;

 

  (vii)

any effect resulting from any action taken by Covey Park or any affiliate of Covey Park that is expressly required under the Merger Agreement or any failure of Covey Park or any affiliate of Covey Park to take any action that is prohibited under the Merger Agreement;

 

  (viii)

any failure to meet any projections, budgets, forecasts, estimates, plans predictions, performance metrics or operating statistics or the inputs into such items; or

 

  (ix)

any effects or changes resulting from entering into the Merger Agreement or the announcement of the transactions contemplated thereby, except to the extent and then only to the extent any of the events, changes or circumstances referred to in (i) through (v) above disproportionately affect Covey Park or any of its affiliates as compared to other participants in the industries and areas in which Covey Park operates.

Operating Covenants

The Company has agreed, with certain exceptions or with the prior written consent of Covey Park, that during the period from the date of the Merger Agreement until the closing of the Merger (or the termination of the Merger Agreement, as applicable):

 

   

the Company and its subsidiaries will conduct its business in the ordinary course consistent with past practice;

 

   

neither the Company nor any of its subsidiaries will (i) declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property) in respect of, the Equity Securities (as

 

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defined in the Merger Agreement) of the Company or any subsidiary, (ii) purchase, redeem or otherwise acquire, or offer to purchase redeem or otherwise acquire, Equity Securities of the Company or any subsidiary or any options, warrants, or rights to acquire any Equity Securities in the Company or any subsidiary or (iii) split, combine, reclassify or otherwise amend the terms of the Equity Securities of the Company or any subsidiary;

 

   

neither the Company nor any of its subsidiaries will, other than pursuant to the Company’s 2019 Long-term Incentive Plan or otherwise issued in connection with the financing of the Merger, issue, deliver, sell, grant, pledge or otherwise encumber any Equity Securities of the Company or subsidiary or any securities convertible into, exchangeable for or exercisable for any Equity Securities in the Company or its subsidiaries, or any rights, warrants or options to acquire, any such Equity Securities, or any stock appreciation rights, “phantom” stock rights, performance units, rights to receive Equity Securities on a deferred basis or other rights linked to the value of equity interests, including pursuant to agreements as in effect on the date of the Merger Agreement;

 

   

neither the Company nor any of its subsidiaries will amend or otherwise change, or authorize or propose to amend or otherwise changes, its organizational documents;

 

   

neither the Company nor any of its subsidiaries will (i) incur, create, assume or otherwise become liable for, or prepay, any indebtedness, or amend, modify or refinance any indebtedness, other than borrowings under the Company’s revolving credit facility in the ordinary course of business or (ii) make any loans, advances or capital contributions to, or investments in, any other person, other than to a subsidiary of the Company;

 

   

neither the Company nor any of its subsidiaries will incur or commit to incur any capital expenditures or authorizations or commitments with respect thereto that in the aggregate are in excess of $25.0 million not provided for in the capital expenditure budget previously provided to Covey Park;

 

   

neither the Company nor any of its subsidiaries will consummate or adopt a plan of complete or partial liquidation, dissolution, recapitalization or other reorganization, or merge, consolidate, combine or amalgamate with any other person or entity;

 

   

neither the Company nor any of its subsidiaries will acquire (including by merging or consolidating with, purchasing any equity interest in or a substantial portion of the assets of, exchanging, licensing, or by another manner), any business or any person or other business organization or division thereof, in each case other than acquisitions for which the purchase price is less than $50.0 million individually and $100.0 million in the aggregate;

 

   

neither the Company nor any of its subsidiaries will enter into any related party contract or other contract or transaction with any related party, in each case involving payments, receipts or liabilities in excess of $2.0 million;

 

   

neither the Company nor any of its subsidiaries will directly or indirectly sell, lease, license, farmout, allow to lapse, sell and leaseback, abandon, mortgage or otherwise subject to any encumbrance (other than Permitted Encumbrances (as defined in the Merger Agreement)) or otherwise dispose in whole or in part of any of its material properties, assets or rights or any interest therein, except sales of inventory or hydrocarbons in the ordinary course of business consistent with past practice;

 

   

neither the Company nor any of its subsidiaries will change its financial or tax accounting methods, principles or practices, except insofar as may have been required by a change in GAAP or applicable law;

 

   

neither the Company nor any of its subsidiaries will take any action that would or would reasonably be expected to prevent or materially delay the closing and the consummation of the transactions contemplated by the Merger Agreement or the other transaction documents contemplated therein; and

 

   

neither the Company nor any of its subsidiaries will authorize any of, or commit, resolve or agree to take any of, the foregoing actions.

 

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The Merger Agreement also contains pre-closing covenants by Covey Park similar to those, and in certain instances, beyond those by which the Company is bound, during the period from the date of the Merger Agreement until the closing of the Merger (or termination of the Merger Agreement, as applicable).

Action by Stockholder Consent

Contemporaneously with the execution of the Merger Agreement and in lieu of calling a meeting of the Company’s stockholders, the Company submitted a form of irrevocable written consent approving and adopting the (i) Charter Amendment in connection with the Share Increase, (ii) Merger Agreement, and (iii) the Share Issuances to the Principal Stockholders, which was executed by the Principal Stockholders on June 7, 2019 and became effective immediately following the execution of the Merger Agreement. No further approval of the stockholders of the Company is required to adopt the Merger Agreement. As a result, the Company has not solicited and will not be soliciting your vote for the adoption of the Merger Agreement and does not intend to call a meeting of stockholders for purposes of voting on the adoption of the Merger Agreement.

Reasonable Best Efforts and Certain Pre-Closing Obligations

The Merger Agreement requires the parties to use reasonable best efforts to take, or cause to be taken, all actions, and do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, as promptly as practicable, the Merger and the other transactions contemplated by the Merger Agreement, including:

 

   

substantially complying with a request for additional documents or information under the HSR Act or any comparable request from any other governmental entity;

 

   

the obtaining of all necessary actions or non-actions, waivers and consents from, the making of all necessary registrations, declarations and filings with and the taking of all reasonable steps as may be necessary to avoid a proceeding by any governmental entity with respect to the Merger Agreement or the transactions contemplated by the Merger Agreement; and

 

   

the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by the Merger Agreement and to fully carry out the purposes of the Merger Agreement.

In addition, the Company and Covey Park have agreed to consult and cooperate with each other in connection with regulatory filings, including furnishing to the other party such necessary information and reasonable assistance as the other parties may request, and to within fifteen business days of the date of the Merger Agreement, file with the FTC and the DOJ the notification and report form, if any, required under the HSR Act for the Merger or any of the other transactions contemplated by the Merger Agreement.

Finally, the Company has agreed to take all action necessary to cause the Common Stock that will be issued as part of the Merger to be approved for listing on the NYSE prior to the effective time of the Merger, subject to official notice of issuance.

Employment Matters

Under the Merger Agreement, the Company has agreed, with respect to each individual who is employed by Covey Park or its subsidiaries immediately prior to the Closing (the “Continuing Employees”), that, for twelve (12) months following the Closing Date, the Company will maintain base salaries at the level in effect immediately prior to the Closing and provide employee benefits that are substantially comparable in aggregate value to those the Continuing Employees were eligible to receive immediately prior to the Closing. With respect to its benefit plans, the Company has also agreed to recognize eligibility, service, vesting, and benefit accruals and to provide credit for costs incurred by the Continuing Employees during the current plan year under the plans maintained by Covey Park to provide as seamless a transition as possible for the Continuing Employees.

 

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In addition, the Company has agreed to provide a severance payment to each Continuing Employee who experiences an involuntary termination from the Company within twelve (12) months following the Closing Date. An involuntary termination is one that does not result from: (A) a resignation by a Continuing Employee without “Good Reason,” (B) “Cause”, or (C) the Continuing Employee’s death or “Disability” (as each term is defined in the Merger Agreement). The severance payment shall be based upon the number of completed years of service with the Company or its affiliates (including service with Covey Park and its subsidiaries or within the industry), with a minimum of 6 months and maximum of 12 months of base salary. Such Continuing Employee who incurs an involuntary termination will also receive up to six (6) months of continued health coverage at the same cost sharing rate as paid by active employees of the Company, but in no event less than 15% of the cost of coverage. This right is in addition to any rights to elect health continuation coverage under COBRA.

With respect to each of the individuals identified as “Employment Agreement Recipient” in the Merger Agreement, the Company agrees to pay a portion of any applicable cash severance payment that becomes payable as a result of an Employment Agreement Recipient’s involuntary termination of employment without “Cause”, “Non-Renewal”, or voluntary termination for “Good Reason,” each as defined in the Employment Agreement Recipient’s applicable employment, severance, or change in control agreement governing the employment of the Employment Agreement Recipient. During the first twelve (12) months following the Closing Date, such obligation of the Company shall be limited to an amount up to twelve (12) months of base salary; any severance payable under the terms of the applicable agreement that is in excess of such amount shall be the obligation of Holdings or one of its affiliates. Following the end of the first twelve (12) months after the Closing Date, in the event an Employment Agreement Recipient’s employment is terminated in a manner that results in the Employment Agreement Recipient becoming entitled to severance under the Employment Agreement Recipient’s applicable employment, severance, or change in control agreement, the Company shall be the sole responsible party for making such payment.

D&O Indemnification

Under the Merger Agreement, the Company has agreed that, from the Closing Date to the six year anniversary of the Closing Date, it will not, and will cause its subsidiaries and affiliates not to amend, repeal, or modify any obligation relating to indemnification of each present and former director, manager, or officer of Covey Park and its subsidiaries arising under Covey Park’s or its subsidiaries’ governing documents in existence as of the Closing Date in any manner that would adversely affect the rights of any individual and will, and will cause its subsidiaries and affiliates to, indemnify and hold harmless any such Covey Park indemnified parties as provided in the applicable Covey Park entity’s governing documents in existence as of the Closing Date.

In addition, at or prior to the Closing Date, Covey Park has agreed to purchase, at its sole cost and expense, “tail” directors’ and officers’ liability insurance, which the Company will maintain for a period of six years following the effective time of the Merger. The “tail” directors’ and officers’ liability insurance shall provide coverage for acts or omissions occurring prior to the effective time of the Merger and cover each indemnified party and containing terms and conditions that are no less favorable to any indemnified party than those of Covey Park’s directors’ and officers’ liability insurance policies in effect on the date of the Merger Agreement; provided, however, that in no event shall Covey Park expend for such insurance an aggregate amount in excess of 300% of the amount per annum that Covey Park paid in its last full fiscal year for its existing coverage; and provided, further, however, that if the aggregate premium for such insurance coverage exceeds 300% of such annual amount, Covey Park shall obtain as much coverage as reasonably practicable for a cost not exceeding such amount.

From the Closing date to the six year anniversary of the Closing date, if the Company, or any of its successors or assigns, consolidates with or merges into any other person and shall not be the continuing or surviving corporation, then the Company will make proper provision to honor the indemnifications obligations described above.

 

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Financing Cooperation

The Merger Agreement requires Covey Park to, and to cause its subsidiaries and representatives to, use their reasonable best efforts to cooperate reasonably in connection with the Debt Financing (as reasonably requested by the Company), including reasonable best efforts to (A) provide financial and other information regarding the Company and its subsidiaries, including (x) proved reserve reports with respect to the oil and gas properties of Covey Park and its subsidiaries, (y) information with respect to property descriptions of the oil and gas properties of Covey Park and its subsidiaries necessary to execute and record mortgages and (z) information relating to applicable “know your customer” and anti-money laundering rules and regulations and (B) assist the Company in preparing pro forma financial statements.

Notwithstanding the foregoing, (A) such requested cooperation shall not unreasonably interfere with the business or ongoing operations of Covey Park or its subsidiaries, (B) such requested cooperation shall not require Covey Park to waive or amend any terms of the Merger Agreement, (C) neither Covey Park nor its subsidiaries shall be obligated to adopt resolutions or execute consents to approve or authorize the Debt Financing prior to Closing, (D) no obligation of Covey Park or its subsidiaries under any certificate, document or instrument of any financing shall be effective until the Closing, (E) neither Covey Park nor its subsidiaries shall be required to pay any commitment or similar fee or incur any other liability in connection with the arrangement of any Debt Financing prior to the Closing, (F) any information required to be provided pursuant to the Merger Agreement shall be reasonably available to Covey Park and its subsidiaries and (G) such requested cooperation shall not require Covey Park or its subsidiaries to take any action that would conflict with any applicable law, the organizational documents of any of the foregoing or result in the contravention of, or would reasonably be expected to result in the violation or breach of, or default under, any contract to which any of the foregoing is a party.

In addition, the Company will, promptly upon written request by Covey Park, reimburse Covey Park and its subsidiaries for any and all reasonable and customarily documented out-of-pocket costs and expenses incurred, paid or payable by Covey Park and its subsidiaries or their affiliates and representatives in connection with their respective obligations regarding the Debt Financing. The Company will indemnify and hold harmless Covey Park and its subsidiaries and their respective affiliates and representatives from and against any and all claims and losses suffered or incurred by any of them in connection with the Debt Financing and any information used in connection therewith.

Additional Agreements

The Merger Agreement contains additional agreements between the Company and Covey Park relating to, among other things:

 

   

the filing of this Information Statement;

 

   

consultations regarding public announcements;

 

   

stockholder litigation relating to the transactions contemplated by the Merger Agreement;

 

   

non-solicitation; and

 

   

notification of certain matters.

Conditions to the Merger

The obligation of each party to the Merger Agreement to effect the Merger is subject to the satisfaction or waiver (if permissible under applicable law), on or prior to the closing of the Merger, of the following conditions:

 

   

the waiting period (including any extension thereof) applicable to the consummation of the Merger under the HSR Act will have expired or been terminated;

 

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the absence of any judgment issued by any governmental entity or other legal restraint or prohibition (in each case, with respect to any competition, merger control, antitrust or similar law, solely with respect to the required regulatory approvals) preventing or prohibiting the consummation of the Merger; and

 

   

this Information Statement shall have been mailed to the Company’s stockholders at least 20 days prior to the Closing Date in accordance with the terms and conditions of the Merger Agreement, and the issuance of the Stock Consideration shall be permitted by Regulation 14C of the Exchange Act.

The obligation of the Company to effect the Merger is further subject to the satisfaction, or waiver by the Company (if permissible under applicable law), on or prior to the Closing Date of the Merger, of the following conditions:

 

   

subject to certain materiality qualifiers, accuracy as of the date of the Merger Agreement and as of the Closing of the Merger of the representations and warranties made by Covey Park and Holdings to the extent specified in the Merger Agreement;

 

   

performance of or compliance in all material respects with the covenants and agreements contained in the Merger Agreement to be performed or complied with by Covey Park, Holdings, and Current Holdings prior to or on the Closing Date to the extent specified in the Merger Agreement;

 

   

receipt of a certificate, dated as of the Closing Date, executed by an executive officer of Covey Park confirming the satisfaction of certain conditions required to be performed and accuracy of representations and warranties made under the Merger Agreement;

 

   

receipt of a certificate, dated as of the Closing Date, executed by an executive officer of Holdings confirming the satisfaction of certain conditions required to be performed and accuracy of representations and warranties made under the Merger Agreement;

 

   

receipt of a certificate of non-foreign status executed by Holdings satisfying the requirements of Treasury Regulations Section 1.1445-2(b) in a form satisfactory to the Company;

 

   

there shall not have been, since the date of the Merger Agreement, any event, change, effect, or development that, individually or in the aggregate, would reasonably be expected to have a material adverse effect;

 

   

the outstanding principal balance under Covey Park’s existing revolving credit facility does not exceed $390.0 million; and

 

   

the Restructuring shall have been consummated.

The obligation of Covey Park and Holdings to effect the Merger is further subject to the satisfaction, or waiver by Covey Park (if permissible under applicable law), on or prior to the closing date of the Merger, of the following conditions:

 

   

subject to certain materiality qualifiers, accuracy as of the date of the Merger Agreement and as of the closing of the Merger of the representations and warranties made by the Company to the extent specified in the Merger Agreement;

 

   

performance of or compliance in all material respects with the covenants and agreements of the Company contained in the Merger Agreement to be performed or complied with by it prior to or on the closing date to the extent specified in the Merger Agreement;

 

   

receipt of a certificate, dated as of the Closing Date, executed by an executive officer of the Company confirming the satisfaction of certain conditions required to be performed and accuracy of representations and warranties made under the Merger Agreement;

 

   

the Company shall have executed and filed the Charter Amendment with the Secretary of State of the State of Nevada and the Charter Amendment shall have been accepted by the Secretary of State of the State of Nevada;

 

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the Common Stock that shall be issued as the Stock Consideration shall be authorized for listing on the NYSE;

 

   

there shall not have been, since the date of the Merger Agreement, any event, change, effect, or development that, individually or in the aggregate, would reasonably be expected to have a material adverse effect;

 

   

the Company shall have assumed the Covey Park Notes in accordance with the requirements of the Covey Park Indenture; and

 

   

the Company shall have paid off in full all indebtedness outstanding under Covey Park’s revolving credit facility, and secured the full release of all encumbrances securing the indebtedness.

The Company and Covey Park can provide no assurance that all of the conditions precedent to the Merger will be satisfied or waived by the party permitted to do so.

Termination

The Merger Agreement may be terminated at any time prior to the closing of the Merger in the following circumstances:

 

   

by mutual written consent of the Company and Covey Park;

 

   

by either the Company and Covey Park:

 

   

if any governmental authority has issued any order or ruling or taken any other action permanently restraining, enjoining, preventing or otherwise prohibiting the consummation of the Merger and such order, ruling or other action shall have become final and nonappealable, or if there shall be adopted any law that permanently makes consummation of the Merger illegal or otherwise permanently prohibited; or

 

   

if the Merger shall not have been consummated on or before the “End Date”, which shall be 5:00 p.m. Dallas, Texas time, on November 30, 2019; provided, however, that the right to terminate the Merger Agreement shall not be available to any party whose material breach is the cause of or resulted in the failure of the Merger to occur on or before such date; provided, further, that either the Company or Covey Park shall have the unilateral right to extend the End Date by up to thirty 30 additional days in the event that as of the End Date (prior to such extension) all conditions (other than conditions that by their nature are to be satisfied at the Closing) have been satisfied or waived and the Closing shall not have occurred due solely or in part to the failure of the Company to mail the Information Statement to its stockholders at least 20 days prior to the Closing Date.

 

   

by the Company:

 

   

in the event of certain breaches of the Merger Agreement by Covey Park, Holdings, or Current Holdings; provided that the Company is not then in material breach of any representation, warranty or covenant contained in the Merger Agreement; provided, further, that said breach by Covey Park, Holdings, or Current Holdings cannot be or has not been cured pursuant to the terms of the Merger Agreement.

 

   

by Covey Park:

 

   

in the event of certain breaches of the Merger Agreement by the Company; provided that Covey Park, Current Holdings, and Holdings are not then in material breach of any representation, warranty or covenant contained in the Merger Agreement; provided, further, that said breach by the Company cannot be or has not been cured pursuant to the terms of the Merger Agreement; or

 

   

upon written notice to the Company stating that all conditions to closing of the transactions contemplated by the Merger Agreement shall have been satisfied or waived (other than those

 

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conditions that by their nature are to be satisfied at the closing) and that Covey Park is ready willing and able to consummate the transactions contemplated under the Merger Agreement; provided that the Company fails to consummate the transactions contemplated under the Merger Agreement within five (5) business days after Covey Park has delivered the foregoing written notice to the Company.

Effect of Termination

If the Merger Agreement is terminated by the Company or Covey Park in accordance with its terms, the Merger Agreement will become void and of no effect, without any liability or obligation on the part of the Company, on the one hand, or Covey Park and Holdings, on the other hand (except to the extent that such termination results from the willful and material breach by a party or fraud), other than certain specified sections of the Merger Agreement.

Financing Termination Fee

In the event Covey Park terminates the Merger Agreement as a result of the Company’s inability to consummate the Merger solely because of the failure of the Company to secure the necessary Debt Financing to consummate the Merger (and at such time parties to the Subscription Agreement stand ready, willing and able to consummate the transactions contemplated thereby and the Company is not in Willful and Material Breach (as defined in the Merger Agreement)), the Company shall be responsible for the Financing Termination Fee in the amount of $100.0 million, which shall be payable to Covey Park within five (5) business days following the termination of the Merger Agreement. To the extent such fee is paid, it shall be in lieu of any other amounts for which the Company is responsible under the Merger Agreement.

Expenses

Subject to certain exceptions, each party shall pay its own expenses incident to preparing for, entering into and carrying out the Merger Agreement and the transactions contemplated thereby, whether or not the Merger will be consummated. Holdings will be responsible for all third-party expenses incurred in connection with or related to the authorization, preparation, investigation, negotiation, execution and performance of the Merger Agreement and the transactions contemplated thereby of Covey Park that have not been paid prior to Closing.

Notwithstanding the foregoing, in the event the Merger Agreement is terminated (other than by Parent due to a terminable breach by Covey Park or Holdings or under circumstances where the financing Termination Fee is payable), then, the Company shall reimburse Covey Park and Holdings for all of Holdings’ and Covey Park’s reasonable, documented out-of-pocket fees and expenses (including all fees and expenses of counsel, accountants, investment bankers, experts and consultants) incurred by Holdings or Covey Park or on its behalf in connection with or related to the authorization, preparation, investigation, negotiation, execution and performance of the Merger Agreement and the transactions contemplated thereby for all expenses to date of execution of the Merger Agreement as set forth on a schedule to the Merger Agreement plus such additional amounts incurred after such date, but not to exceed $2.5 million in the aggregate without the prior written consent of the Company; subject to certain exceptions as set forth in the Merger Agreement.

Amendment; Extension; Waiver

Subject to the requirements of applicable law, the Merger Agreement may not be amended by the parties except by an instrument in writing signed on behalf of each of the parties to the Merger Agreement. At any time prior to the effective time of the Merger, the Company and Covey Park may (i) extend the time for the performance of any of the obligations or other acts of the other parties to the Merger Agreement, (ii) waive any inaccuracies in the representations and warranties by the other parties contained in the Merger Agreement or in any document delivered pursuant thereto, and (iii) waive compliance with any of the agreements or conditions of the other parties contained in the Merger Agreement.

Specific Performance

In addition to any other remedy that may be available to each party, including monetary damages, each of the parties will be entitled to an injunction or injunctions, or any other appropriate form of specific performance

 

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or equitable relief, to prevent or restrain real or threatened breaches of the Merger Agreement and to enforce specifically its terms and provisions, provided that solely to the extent a Financing Failure exists, Covey Park will not be entitled to specifically enforce the Company’s obligation to consummate the closing of the transactions contemplated by the Merger Agreement.

Governing Law

The Merger Agreement is governed by the laws of the State of Delaware.

 

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AGREEMENTS RELATED TO THE MERGER

The Subscription Agreement

Concurrent with the execution of the Merger Agreement, the Company executed a Subscription Agreement (the “Subscription Agreement”) by and among the Company and the Jones LLCs. Pursuant to the Subscription Agreement, the Company shall issue and sell to the Jones LLCs an aggregate of (i) 175,000 shares of Series B Preferred Stock, and (ii) 50,000,000 shares of Common Stock. The rights, preferences and privileges of the Series B Preferred Stock shall be set forth in the Certificate of Designations. The parties to the Subscription Agreement will also enter into the Registration Rights Agreement, which will govern certain rights and obligations of the parties thereto with respect to the registration of Common Stock issuable to the Jones LLCs pursuant to the Subscription Agreement. The issuance of Series B Preferred Stock and Common Stock will be exempt from registration under U.S. securities laws pursuant to Section 4(a)(2) of the Securities Act.

The Company has also agreed to apply for NYSE listing of the Common Stock issuable pursuant to the Subscription Agreement and to take all appropriate action increase the authorized number of share of Common Stock available for issuance by the filing of the Charter Amendment. The closing of the Subscription Agreement is subject to certain conditions including the following: (1) all conditions to closing of the transactions contemplated by the Merger Agreement shall have been satisfied (or waived) and the parties thereto be ready to consummate the transactions contemplated by the Merger Agreement, (2) no order shall have been entered by a court of competent jurisdiction which enjoins or prohibits the transactions contemplated by the Subscription Agreement, (3) the Charter Amendment shall have been filed with the Secretary of State of Nevada, (4) each of the representations and warranties of the parties to the Subscription Agreement shall be true and correct in all material respects on the closing date and (5)  each of the parties to the Subscription Agreement shall have executed the Registration Rights Agreement.

Certificate of Designations

The following is a summary of the material rights, preferences and privileges of the cumulative redeemable convertible perpetual preferred stock, designated the Series A Redeemable Convertible Preferred Stock and the Series B Redeemable Convertible Preferred Stock, as contained in the Certificate of Designations. This summary is qualified in its entirety by reference to the complete Certificate of Designations included as Annex C to this Information Statement and incorporated by reference herein.

Dividends

Holders of Preferred Stock shall be entitled to receive dividends in an amount equal to a dividend rate of 10% per annum on the Liquidation Value. Dividends will be paid in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on September 30, 2019.

In the event that:

 

   

the Company does not pay a dividend in full on the applicable dividend date,

 

   

the Company’s Common Stock ceases to be listed or quoted on any national securities exchange, or

 

   

the Company fails to cause a shelf registration statement with respect to the Registrable Securities (as defined in the Registration Rights Agreement) to be declared effective 30 days prior to the first anniversary of the initial issue date of the Preferred Stock,

then the Dividend Rate will be increased by up to 6% per annum, in accordance with the terms of the Certificate of Designations.

Dividends will be paid in cash if the Company has funds legally available for payment and the Board declares a cash dividend payable. Unless all accrued dividends are paid, the Company may not declare dividends on shares of the Company’s capital stock ranking junior to the Preferred Stock, subject to customary exceptions.

 

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Liquidation Preference

In the event of any liquidation, winding up or dissolution of the Company, each holder of Preferred Stock will be entitled to receive out of the Company’s assets legally available for distribution to its stockholders, in accordance with the ranking of the Preferred Stock discussed below, an amount in cash per share of Preferred Stock equal to the greater of (i) the Liquidation Value per share of Preferred Stock plus an amount equal to all accrued dividends on such share of Preferred Stock, and (ii) solely in the event that a liquidation, winding up or dissolution of the Company occurs following the 12-month anniversary of the initial issue date of the Preferred Stock, the market value of the number of shares of Common Stock into which a share of Preferred Stock is convertible determined as of the trading day immediately prior to such liquidation, winding up or dissolution.

Ranking

The Preferred Stock ranks senior to the Company’s Common Stock and any shares of capital stock of the Company not expressly ranking senior to or pari passu with the Preferred Stock as to the payment of dividends and distributions of assets upon the liquidation, dissolution or winding up of the Company. Between the Series A and Series B Preferred Stock, Series A Preferred Stock ranks senior to the Series B Preferred Stock.

Voting Rights

Holders of Preferred Stock have limited voting rights under Nevada law, the Company’s Articles of Incorporation and the terms of the Certificate of Designations. Under the terms of the Certificate of Designations, in addition to certain other actions, the Company may not, without the affirmative vote of at least a majority of the holders of the Series A Preferred stock voting as a single class and the Series B Preferred Stock voting as a single class: (i) pay any dividends in respect of junior stock, subject to customary exceptions; (ii) issue any capital stock ranking senior or pari passu to the Preferred Stock; (iii) delist its Common Stock from a national securities exchange or enter into certain merger or acquisition transactions; however, the Preferred Stock will not have a right to vote on any material sale of assets, merger, consolidation or Change of Control transaction (discussed below) if the Company agrees to redeem the Preferred Stock in full for cash in the amount determined pursuant to the terms of the Certificate of Designations; (iv) amend the terms of the Company’s Second Amended and Restated Articles of Incorporation or the Certificate of Designations in whole or in part, by merger, consolidation or otherwise, so as to adversely affect the rights, preferences, privileges or powers of the shares of Preferred Stock; (v) voluntarily authorize, declare or initiate any bankruptcy, liquidation or dissolution proceedings, may not issue any equity securities of its subsidiaries other than to another subsidiary or in connection with the contribution of any assets or cash in excess of $10.0 million to any person that is not wholly-owned by the Company; or (vi) enter into any agreement that expressly prohibits the Company from declaring and paying dividends to the holders of the Preferred Stock.

Holder Conversion

The Conversion Price of the Preferred Stock is $4.00 per share of Common Stock, subject to adjustment pursuant to customary anti-dilution provisions as contained in the Certificate of Designations. At any time following the 12-month anniversary of the initial issue date of the Preferred Stock each holder may convert any or all shares of Preferred Stock into shares of Common Stock at the then prevailing Conversion Rate. Holders may receive cash in lieu of fractional shares.

Special Rights Upon a Change of Control

In connection with any Change of Control, defined in the Certificate of Designations but generally meaning (i) the consummation of any transaction the result of which is that any person, other than any Permitted Holder (as defined in the Certificate of Designations), becomes the beneficial owner of more than 50% of the voting stock of the Company, (ii) the direct or indirect sale, lease, transfer, conveyance or other disposition of all or substantially all of the properties or assets of the Company, or (iii) the adoption of a plan relating to the

 

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liquidation or dissolution of the Company, holders of Preferred Stock may convert all but not less than all shares of Preferred Stock into Common Stock at the then prevailing Conversion Rate. Alternatively, holders may elect to require the Company to purchase all but not less than all of its shares of Preferred Stock for cash at a purchase price per share equal to the Change of Control Cash Price. The Company will only be required to pay the Change of Control Cash Price to the extent permitted by the Covey Park Notes Indenture and the Comstock Notes Indenture.

In addition, each holder may convert any or all shares of Preferred Stock into shares of Common Stock at the Conversion Rate in connection with the consummation of a Change of Control or Take-Private Transaction (as defined in the Certificate of Designations) in which all of such holder’s shares are not redeemed in full for the Change of Control Cash Price or the Take-Private Cash Price, equal to the Change of Control Cash Price except that the price paid per share of Common Stock in the applicable Take-Private Transaction shall be substituted for the closing sale price of the Common Stock on the trading day immediately prior to a Change of Control transaction in calculating the cash price per share.

Company Optional Redemption

At any time, but subject to the right of the holders to convert their shares of Preferred Stock into Common Stock following the 12-month anniversary of closing, the Company may elect to cause any and all shares of Preferred Stock to be redeemed for cash at a redemption price equal to the Liquidation Value per share of Preferred Stock plus an amount equal to all accrued dividends on such share. In no event may Series B Preferred Stock be redeemed to the extent any shares of Series A Preferred Stock remain outstanding. Customary notice and redemption procedure provisions apply. The Company may assign the right to exercise its redemption right to a third party, and such third party will be entitled to exercise such right on the same terms as the Company provided that such party will be required to convert any acquired shares of Series A Preferred Stock immediately following the acquisition of such shares.

The Shareholders Agreement

Concurrent with the execution of the Merger Agreement, the Company, the Jones Entities, Jerry Jones and Holdings entered into a Shareholders Agreement (the “Shareholders Agreement”), which agreement will become effective only upon the closing of the Merger. If the Merger is completed, the Jones Entities will collectively represent approximately 75% of the Common Stock, each of which is controlled by Jerry Jones. The parties to the Shareholders Agreement entered into the Shareholders Agreement to establish various arrangements with respect to the governance of the Company after the closing of the Merger and the other transactions contemplated by the Merger Agreement.

Composition of the Board

Effective immediately following the Closing, the parties to the Shareholders Agreement have agreed to take all necessary action to cause the Board to include one (1) director who has been designated by Holdings, who will initially be Jordan Marye. In addition, the parties have agreed that the Corporate Governance and Nominating Committee of the Board will consider John Jacobi to be appointed to the Board.

So long as Holdings or its affiliates hold at least (i) 10% of the issued and outstanding Common Stock or (ii) 21,000 shares of the Series A Preferred Stock (the “Minimum Governance Percentage”), the Company, Jerry Jones and the other parties to the Shareholders Agreement shall take all action necessary to cause one (1) individual designated by Holdings to serve on the Board.

Size of the Board and Committees

So long as Holdings or its affiliates collectively hold the Minimum Governance Percentage, the Company, Jerry Jones and the other parties to the Shareholders Agreement have agreed to take all necessary action to ensure that the number of directors serving on the Board does not exceed nine (9) directors, subject to the requirements of applicable law or NYSE rules and regulations.

 

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The Board member designated by Holdings shall have the right to be appointed to serve on such number of committees of the Board as is equal to the average number of committees on which all other members of the Board serve (rounded to the nearest whole number) (other than the audit committee) as determined by the Board.

Voting Agreement

The Jones Entities and Jerry Jones have agreed to vote their shares of Common Stock (whether at any annual or special meeting, by written consent or otherwise) to cause the nominee designated pursuant to the Shareholders Agreement to be nominated in accordance with the Shareholders Agreement. The Jones Entities, Jerry Jones and the Company have also agreed not to take any actions that would interfere with the intention of the parties with respect to the composition of the Board as provided by the Shareholders Agreement.

Restrictions on Transfers

Any stockholder of the Company that is a party to the Shareholders Agreement may transfer their shares of any equity securities that are convertible into or exchangeable for shares of Common Stock provided such transfer is in compliance with the Shareholders Agreement and such transferees agree to become parties to the Shareholders Agreement.

Tag-Along Rights

If the Jones Entities or Jerry Jones propose to undertake certain sales of Common Stock or Series B Preferred Stock as described in the Shareholders Agreement: (i) with respect to such sales of Common Stock, for so long as Holdings owns at least 1% of the issued and outstanding Common Stock (including shares of Common Stock issuable upon conversion of the Series A Preferred Stock) and (ii) with respect to such sales of Series B Preferred Stock, for so long as Holdings owns any shares of Series A Preferred Stock; the applicable seller must provide any Holdings stockholders with an opportunity to participate in such transfer. If any Holdings stockholders exercise such right, such Holdings stockholder shall have the right to include its shares in the proposed sale on the same terms and conditions as applicable to the sale of Common Stock or Series B Preferred Stock (as applicable) by the initiating stockholder. In the case of a proposed sale of Common Stock and pursuant to the terms of the Shareholders Agreement, the number of shares that such Holdings stockholder is permitted to include in such sale is equal to the number of such Holdings stockholder’s own shares of Common Stock (including any shares of Common Stock issuable upon conversion of the Series A Preferred Stock) but only up to a maximum of up to 50% of the aggregate number of shares of Common Stock proposed to be sold. In the case of a proposed sale of Series B Preferred Stock and pursuant to the terms of the Shareholders Agreement, the maximum number of shares of Series A Preferred Stock that such Holdings stockholder is permitted to include in such sale is equal to a maximum of up to 50% of the aggregate number of shares of Series A Preferred Stock and Series B Preferred Stock, collectively, that are proposed to be sold. The participating Holdings stockholder will not be required to (A) make any representations or warranties (other than customary representations and warranties concerning itself and the ownership of the Common Stock to be transferred by it and compliance with laws), (B) participate in any indemnification obligations of the Jones Entities, Jerry Jones, and any of their respective affiliates that beneficially owns shares of the Company (collectively, “Comstock Stockholder”) (outside of any obligations arising out the Holdings stockholders’ customary representations and warranties) or (C) agree to any post-closing covenants in connection with such proposed sale.

The applicable Comstock Stockholder shall provide the Holdings stockholders with notice prior to any sale subject to the tag-along rights. In order to exercise the tag-along rights, a Holdings stockholder must send written notice indicating its interest within ten (10) business days of receiving the initial notice of sale or in the event any of the material terms set forth in the initial notice are thereafter amended and a new amended notice is delivered to the Holdings stockholder, within five (5) business days of receiving such amended notice.

 

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Certain Actions of Comstock Stockholder

In the event any Comstock Stockholder proposes to acquire additional shares of Common Stock through an open-market purchase of shares, such Comstock Stockholder must give prior written notice of the proposed acquisition to the Holdings stockholders. Such notice must contain an offer to buy from the Holdings stockholder, on a pro rata basis, an equal number of shares at the same price as the original proposed acquisition. The Holdings stockholders shall have two (2) business days to respond to such offer.

Certain Actions of the Company

So long as the Holdings stockholders beneficially own the Minimum Governance Percentage, the Company may not do the following actions without approval from Holdings:

 

   

adopt or propose any amendment or restatement of the Company’s Second Amended and Restated Articles of Incorporation or Amended and Restated Bylaws that would reasonably be expected to have a disproportionate material and adverse impact on any Holdings stockholder as compared to the Comstock Stockholders (whether by merger, consolidation, sale of equity securities or otherwise);

 

   

at anytime during the twenty-four (24) months following the Closing, directly or indirectly, acquire (a) any Person (as such term is defined in the Shareholders Agreement) by merger, consolidation, or any other manner of investment in such Person or (b) any assets in each case other than acquisitions or series or related acquisitions for which the purchase price is less than $500.0 million;

 

   

at anytime during the twenty-four (24) months following the Closing, authorize any capital expenditure of the type set forth in the Budget (as defined in the Shareholders’ Agreement) (excluding items described in the preceding bullet point) that would cause the Company and its subsidiaries to exceed the Budget by more than $100.0 million taking into account such overage and all prior overages; or

 

   

enter into any agreement or arrangement with respect to any of the foregoing.

The Company has also agreed not to enter into any Related Party Transactions (as defined in the Shareholders Agreement) with any Comstock Stockholder, Jerry Jones or their respective affiliates unless such transactions are approved in accordance with a conflicts of interest policy approved by the Audit Committee of the Board.

The Company has further agreed that, from and after the twelve (12) month anniversary of the closing of the Merger Agreement and unless and until either Holdings and its affiliates collectively no longer hold the Minimum Governance Percentage, neither the Company nor its subsidiaries will, without the prior written consent of Holdings, incur, create, assume, or guarantee any indebtedness that would cause the Company’s total consolidated indebtedness as of the date immediately prior to the date on which such indebtedness is incurred, created, assumed or guaranteed to exceed the Company’s consolidated LTM EBITDAX multiplied by 2.25 (after giving pro forma effect to such incurrence, creation, assumption or guarantee and that application of the proceeds thereof). Notwithstanding the foregoing, the Company may incur indebtedness of up to $2,975.0 million consisting solely of (i) indebtedness under its current credit facility and (ii) indebtedness similar to indebtedness under the Company’s Notes Indenture and Covey Park’s Notes Indenture and consistent with market terms for high yield issuances by issuers of the type and financial position of the Company.

For so long as the Holdings stockholders own at least 21,000 shares of Series A Preferred Stock, the Company shall not without the prior written consent of Holdings, in one transaction or a series of related transactions, acquire (A) any person by merger, consolidation or investment in, or (B) any assets, in each case other than acquisitions in which the purchase price is less than $50.0 million.

Termination

The Shareholders Agreement shall terminate as to any particular party who is a holder of Common Stock at such time as such person no longer beneficially own in the aggregate at least 5% of the issued and outstanding

 

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Common Stock. The provisions described in “Composition of the Board, Size of Board and Committees,” and “Voting Agreement” shall terminate at such time as the Holdings stockholders no longer beneficially own the Minimum Governance Percentage.

The Amended and Restated Registration Rights Agreement

In connection with the transactions contemplated by the Merger Agreement, the Company, the Jones Entities and Holdings entered into the Amended and Restated Registration Rights Agreement (the “A&R Registration Agreement”), which among other things amends and restates the Registration Rights Agreement dated August 3, 2018 that was entered into by the Company and the Principal Stockholders. The A&R Registration Agreement will only be effective upon the closing of the Merger. The A&R Registration Agreement adds the Jones LLCs and the Covey Holders (as defined in the A&R Registration Agreement) as parties thereto and will, among other things, require the Company to file, not later than 45 days after closing, a shelf registration statement under the Securities Act to permit the public resale of all of the Registrable Securities held by the Jones LLCs and the Covey Holders from time to time as permitted by Rule 415 under the Securities Act (a “Shelf Registration Statement”) and use commercially reasonable efforts to cause such Shelf Registration Statement to be declared effective as promptly as practicable. The Company shall use commercially reasonable efforts to keep such Shelf Registration Statement continuously effective, to be supplemented and amended as necessary to ensure that such Shelf Registration Statement is available, or if not available, that another registration statement is available, for the resale of all the Registrable Securities held by the Covey Holders and other Holders (as defined in the A&R Registration Agreement) and in compliance with the Securities Act and usable for resale of such Registrable Securities for a period from the date of its initial effectiveness until such time as (a) a Registration Statement (as defined in the A&R Registration Agreement) with respect to the sale of such Registrable Securities is declared effective by the Commission under the Securities Act and such Registrable Securities have been disposed of by the Holder in accordance with such effective Registration Statement, (b) such Registrable Securities have been previously sold in accordance with Rule 144, or (c) such Registrable Securities cease to be outstanding.

For the purposes of the A&R Registration Agreement, “Registrable Securities” means (a) the shares of Common Stock held by the Jones Holders or the Covey Holders (each as defined in the A&R Registration Agreement) as of the date of Closing and any shares of Common Stock issued or issuable upon the conversion of the Preferred Stock and (b) any securities issued or then issuable upon any stock split, dividend or other distribution, or in connection with a combination of shares, or any security into which such Common Stock will have been converted or exchanged in connection with a recapitalization, reorganization, reclassification, merger, consolidation, exchange distribution or similar event with respect to the foregoing. Pursuant to the A&R Registration Agreement, if the Company proposes to conduct an Underwritten Offering (including a Secondary Offering, as such terms are defined in the A&R Registration Agreement), each Holder shall have the right to include in such Underwritten Offering all or part of the Registrable Securities held by such Holder (the “Piggyback Rights”). Any Holder wishing to exercise its Piggyback Rights must submit timely and complete notice to participate in such offering. The Company will use its commercially reasonable efforts to effect the registration under the Securities Act of, and to include in the Underwritten Offering, all Registrable Securities which the Company has been so requested to register by the Holders thereof, to the extent requisite to permit the disposition of the Registrable Securities so to be registered and sold, subject to the limitations and requirements of the A&R Registration Agreement.

If, in connection with a Piggyback registration (as defined in the A&R Registration Agreement), the managing underwriters advise the Company that in their reasonable opinion the number of securities requested to be included in such offering exceeds the number that can be sold without adversely affecting the marketability of such offering, the Company will include in such registration or prospectus only such number of securities that in the reasonable opinion of such underwriters can be sold without adversely affecting the marketability of the offering, which securities will be so included in the following order of priority: (i) first, to the Company, (ii) second, among the Selling Holders (as defined in the A&R Registration Agreement), with the maximum that is allocable under this clause (ii) to be allocated 50% to the Jones Holders (pro rata among such Jones Holders) and 50% to the Covey Holders (pro rata among such Covey Holders); provided, that if either the Jones

 

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Holders or the Covey Holders do not elect the entire 50% allocation, the other Party may include their securities for the remaining portion, and (iii) third, pro rata among any other Persons who have been or are granted registration rights after the date of the A&R Registration Agreement based on the number of securities validly requested to be included by such Persons. In the event of a secondary offering proposed by a Holder, the foregoing priorities are adjusted and are determined based on when such an offering was proposed and the identity of the initiating holder.

The terms of the A&R Registration Agreement also permit a Holder to request an Underwritten Offering; provided, however, that in the case of each such Underwritten Offering, such Holder will be entitled to make such demand only if (i) the proceeds from the sale of Registrable Securities in the offering (before the deduction of underwriting discounts) is reasonably expected to exceed, in the aggregate, $50.0 million) or (ii) such Underwritten Offering includes all of the Registrable Securities held by such Holder and the proceeds from the sale of Registrable Securities in the offering (before the deduction of underwriting discounts) is reasonably expected to exceed, in the aggregate, $30.0 million.

In connection with any Underwritten Offering (including any Secondary Offering), any Holder that together with its Affiliates owns 10% or more of the outstanding Common Stock, shall execute a customary “lock-up” agreement with the underwriters of such Underwritten Offering containing a lock-up period equal to 45 days from the date of the execution of the underwriting agreement with respect to such Underwritten Offering. In connection with any Secondary Offering, the Company will, and will use its commercially reasonable efforts to cause the members of the Company’s Board and the officers of the Company that are “executive officers” as defined under Section 16 of the Exchange Act to, execute a customary “lock-up” agreement with the underwriters of such Secondary Offering containing a lock-up period equal to 45 days from the date of the execution of the underwriting agreement with respect to such Secondary Offering.

All fees and expenses incident to the performance of or compliance with the A&R Registration Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a Registration Statement. Such fees and expenses include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses of the Company’s counsel and independent registered public accountants), (ii) printing and delivery expenses, (iii) fees and disbursements of counsel, auditors, independent engineers and accountants for the Company, including any special audits or “cold comfort” letters required by or incident to such performance and compliance, and (iv) all expenses related to marketing the sale of the Registrable Securities, including expenses related to conducting a “road show.” In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by the A&R Agreement, the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. However, the Company will not be responsible for any broker or similar commissions of any Holder or any legal fees or other costs of the Holders.

The Support Agreement

Concurrent with the execution of the Merger Agreement, Holdings and Jerry Jones entered into a Support Agreement. Jerry Jones makes certain covenants relating to the transactions contemplated by the Merger Agreement including the following:

HSR Act

Jerry Jones will cause his controlled affiliates to make the appropriate filings required pursuant to the HSR Act in connection with the transactions contemplated by the Merger Agreement within fifteen (15) business days of the date the Merger Agreement was executed and use reasonable best efforts to (i) provide any additional information or documentary material requested by governmental authorities in connection therewith, (ii) take all other actions necessary to cause the expiration or termination of any applicable waiting periods under the HSR Act, and (iii) to obtain early termination of any applicable waiting periods under the HSR Act.

 

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No Solicitation

During the period prior to the closing of the Merger Agreement or termination of the Support Agreement, Jerry Jones will not, and shall cause his affiliates and representatives to not, directly or indirectly, solicit or respond to any proposals or enter into any negotiations relating to any potential transactions pursuant to which any person, directly or indirectly, would acquire more than 15% of the outstanding equity securities of the Company or gain control of more than 15% of the fair market value of all the assets of the Company.

Lock -Up

During the period between the date the Merger Agreement was signed and one hundred eighty (180) days following the Closing (the “Lock-Up Period”), Jerry Jones shall not and shall cause his affiliates and representatives to not (i) directly or indirectly, offer, pledge (other than required under existing credit facilities and debt instruments), sell (including entry into contracts for the sale), enter into any agreement to sell or purchase any options, grant any rights or warrants to purchase or otherwise transfer or dispose of any shares of Equity Securities (as defined in the Merger Agreement) of the Company owned or acquired by Jerry Jones or its controlled affiliates (such securities the “Lock-Up Securities”), (ii) enter into any swap or any other agreement or transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Lock-Up Securities, or (iii) distribute any Lock-Up Securities to any person, including affiliates, members, managers, partners, or any stockholders of any controlled affiliates. Notwithstanding the foregoing, the Lock-Up Period shall immediately terminate if (i) the Holdings stockholder no longer own any shares of Common Stock or (ii) the Holdings stockholders collectively sell a percentage of the shares of Common Stock or Series A Preferred Stock.

Restriction on Share Purchases

During the Lock-Up Period, except as consented to in writing by Holdings, Jerry Jones shall not, and shall cause his controlled entities not to, acquire any shares of Common Stock other than (i) as a result of any stock split, stock dividend or subdivision of shares of Common Stock, (ii) in connection with the transactions contemplated by the Merger Agreement or pursuant to the Subscription Agreement, or (iii) pursuant to the exercise of the preemptive rights set forth in Section 10.18 of the Contribution Agreement dated May 9, 2018 by and among the Company, Arkoma, and Williston Drilling.

 

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COMSTOCK RESOURCES, INC.

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

Introduction

Following are the unaudited pro forma combined financial statements and accompanying notes as of and for the three months ended March 31, 2019 and for the year ended December 31, 2018, which have been prepared by the Company’s management and are derived from, and should be read in conjunction with, (a) the Company’s audited consolidated financial statements as of and for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K; (b) the Company’s unaudited consolidated financial statements as of and for the three months ended March 31, 2019 included in the Company’s Quarterly Report on Form 10-Q for the period then ended; (c) the audited consolidated financial statements of Covey Park for the year ended December 31, 2018; and (d) the unaudited consolidated financial statements of Covey Park as of and for the three months ended March 31, 2019, which are included herein. Certain of Covey Park’s historical amounts have been reclassified to conform to the Company’s financial statement presentation. The unaudited pro forma balance sheet as of March 31, 2019 gives effect to the Merger and related transactions as if these transactions had been completed on March 31, 2019. The unaudited pro forma combined statements of operations for the year ended December 31, 2018 and the three months ended March 31, 2019 give effect to the Merger and related transactions as if these transactions had been completed on January 1, 2018.

On June 7, 2019, the Company entered into the Merger Agreement under which subject to certain conditions Covey Park will merge with and into the Company with the Company as the surviving entity. The unaudited pro forma combined financial information presented gives effect to the transactions contemplated in the Merger Agreement and the related financing transactions, including the issuance of additional shares of Common Stock, the issuance of Preferred Stock and additional borrowings under an amended and restated bank credit facility.

The pro forma financial statements have been prepared in accordance with SEC Article 11 of Regulation S-X. In addition, the acquisition method of accounting was used per ASC 805, Business Combinations, with the Company treated as the acquirer. The acquisition method of accounting is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measure. Accordingly, the pro forma adjustments are preliminary, have been made solely for the purpose of providing pro forma financial statements, and are subject to revision based on a final determination of fair value as of the date of acquisition. Differences between these preliminary estimates and the final acquisition accounting may have a material impact on the accompanying pro forma financial statements and the combined company’s future results of operations and financial position.

The pro forma financial statements do not purport to represent the financial position or results of operations of Comstock which would have occurred had the Merger been consummated on the dates indicated or the Company’s financial position or results of operations for any future date or period. The pro forma statements of operations are not necessarily indicative of the Company’s operations going forward.

 

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

PRO FORMA COMBINED BALANCE SHEET

(Unaudited)

AS OF MARCH 31, 2019

(In thousands)

 

     Comstock     Covey
Park
    Total
Pro Forma
Adjustments
    As
Adjusted
 
ASSETS

 

Cash and Cash Equivalents

   $ 29,324     $ —       $ —       $ 29,324  

Accounts Receivable:

        

Oil and gas sales

     76,772       90,579       —         167,351  

Joint interest operations

     9,231       27,407       —         36,638  

Derivative Financial Instruments

     2,356       21,144       —         23,500  

Income Taxes Receivable

     10,218       —         —         10,218  

Other Current Assets

     6,222       7,144       —         13,366  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     134,123       146,274       —         280,397  

Property and Equipment:

        

Oil and gas properties, successful efforts method:

        

Proved

     1,777,325       2,459,983       240,000  (a)   
         (511,974 )(a)      3,965,334  

Unproved

     188,801       37,490       (37,490 )(a)      188,801  

Other

     4,449       9,724       (775 )(a)   
         (5,480 )(a)      7,918  

Accumulated depreciation, depletion and amortization

     (248,017     (517,454     517,454  (a)      (248,017
  

 

 

   

 

 

   

 

 

   

 

 

 

Net property and equipment

     1,722,558       1,989,743       201,735       3,914,036  

Goodwill

     350,214       —         —         350,214  

Derivative Financial Instruments

     —         20,989       —         20,989  

Income Taxes Receivable

     10,218       —         —         10,218  

Other Assets

     4,775       76       —         4,851  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,221,888     $ 2,157,082     $ 201,735     $ 4,580,705  
  

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Derivative Financial Instruments

   $ —       $ 15,207     $ —       $ 15,207  

Accounts Payable and Accrued Expenses

     196,079       176,231       (522 )(a)   
         35,340  (c)      407,128  

Operating Leases

     2,007       —         —         2,007  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     198,086       191,438       34,818       424,342  

Long-term Debt

     1,265,847       984,247       (38,122 )(a)   
         379,436  (b)      2,591,408  

Deferred Income Taxes

     166,152       988       (988 )(a)      166,152  

Derivative Financial Instruments

     —         3,681       —         3,681  

Other Non-current Liabilities

     2,766       849       1,097  (a)      4,712  

Reserve for Future Abandonment Costs

     5,243       32,003       (23,876 )(a)      13,370  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     1,638,094       1,213,206       352,365       3,203,665  

Mezzanine Equity:

        

8% Series A Preferred Units, net of issuance costs

     —         149,244       (149,244 )(b)      —    

Member and Stockholders’ Equity (Deficit):

        

10% Convertible Preferred Stock

     —         —         385,000  (b)      385,000  

Member Equity—Covey Park

     —         794,632       (794,632 )(b)      —    

Common stock

     52,934       —         39,417  (b)      92,351  

Additional paid-in capital

     453,163       —         409,361  (a)      862,524  

Accumulated earnings

     77,697       —         (35,340 )(c)   
         (5,192 )(b)      37,165  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total member / stockholders’ equity

     583,794       794,632       (1,386     1,377,040  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,221,888     $ 2,157,082     $ 201,735     $ 4,580,705  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited pro forma

combined financial statements.

 

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

PRO FORMA COMBINED STATEMENT OF OPERATIONS

(Unaudited)

FOR THE YEAR ENDED DECEMBER 31, 2018

(In thousands, except per share data)

 

    Predecessor
Comstock
    Jones
Adjustments
    Successor
Comstock
    Combined
Comstock
    Covey
Park
    Adjustments     As
Adjusted
 

Revenues:

             

Natural gas sales

  $ 147,897     $ 11,087 (d)    $ 144,236     $ 303,220     $ 614,574     $ 10,139  (h)    $ 927,933  

Oil sales

    18,733       140,166 (d)      79,385       238,284       2,350       18  (h)      240,652  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total oil and gas sales

    166,630       151,253       223,621       541,504       616,924       10,157  (h)      1,168,585  

Operating expenses:

             

Production taxes

    3,659       14,327 (d)      11,155       29,141       10,554       552  (h)      40,247  

Gathering and transportation

    11,841       —         10,511       22,352       69,871       2,864  (h)      95,087  

Lease operating

    21,139       14,936 (d)      20,736       56,811       56,495       269  (h)      113,575  

Exploration

    —         —         —         —         6,537       —         6,537  

Depreciation, depletion and amortization

    68,032       46,382 (d)      53,944       168,358       202,615       753  (h)   
              (68,451 )(i)      303,275  

General and administrative

    15,382       —         11,399       26,781       33,906       —         60,687  

Loss (gain) on sale of oil and gas properties

    35,438       —         (155     35,283       —         —         35,283  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    155,491       75,645       107,590       338,726       379,978       (64,013     654,691  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    11,139       75,608       116,031       202,778       236,946       74,170       513,894  

Other income (expenses):

             

Gain (loss) from derivative financial instruments

    881       —         10,465       11,346       (56,688     —         (45,342

Other income

    677       —         173       850       332       —         1,182  

Transaction costs

    (3,183     3,183 (e)      —         —         —         —         —    

Interest expense

    (101,203     35,611 (e)      (43,603     (109,195     (60,968     (422 )(h)   
              (24,447 )(j)      (195,032
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses)

    (102,828     38,794       (32,965     (96,999     (117,324     (24,869     (239,192
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (91,689     114,402 (f)      83,066       105,779       119,622       49,301       274,702  

Provision for income taxes

    (1,065     (5,813     (18,944     (25,822     (122     (41,095 )(k)      (67,039
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (92,754     108,589       64,122       79,957       119,500       8,206       207,663  

Preferred dividends and accretion on Series A Preferred Units

    —         —         —         —         (34,192    

34,192

(38,500

 (j) 

)(j) 

    (38,500
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to member equity / common stockholders

  $ (92,754   $ 108,589     $ 64,122     $ 79,957     $ 85,308     $ 3,898     $ 169,163  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share—

             

Basic

  $ (6.08     $ 0.61     $ 0.76         $ 0.92  
 

 

 

     

 

 

   

 

 

       

 

 

 

Diluted

  $ (6.08     $ 0.61     $ 0.76         $ 0.74  
 

 

 

     

 

 

   

 

 

       

 

 

 

Weighted average common shares outstanding—

             

Basic

    15,262       88,571 (g)      105,453       105,453         78,833  (l)      184,286  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Diluted

    15,262       88,571 (g)      105,459       105,459         175,083  (l)      280,542  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

See accompanying notes to unaudited pro forma

combined financial statements.

 

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

PRO FORMA COMBINED STATEMENT OF OPERATIONS

(Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(In thousands, except per share data)

 

     Comstock     Covey
Park
    Total
Pro Forma
Adjustments
    As
Adjusted
 

Revenues:

        

Natural gas sales

   $ 90,132     $ 184,479     $ 3,437  (h)    $ 278,048  

Oil sales

     36,749       503       3  (h)      37,255  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total oil and gas sales

     126,881       184,982       3,440       315,303  

Operating expenses:

        

Production taxes

     5,939       4,705       219  (h)      10,863  

Gathering and transportation

     7,430       17,794       1,002  (h)      26,226  

Lease operating

     14,885       15,330       142  (h)      30,357  

Exploration

     —         3,751       —         3,751  

Depreciation, depletion and amortization

     37,590       68,154       448  (h)   
         (24,120 )(i)      82,072  

General and administrative

     7,814       8,037       —         15,851  

Gain on sale of oil and gas properties

     (1     —         —         (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     73,657       117,771       (22,309     169,119  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     53,224       67,211       25,749       146,184  

Other income (expenses):

        

Loss from derivative financial instruments

     (7,657     (3,547     —         (11,204

Other income

     93       47       —         140  

Interest expense

     (27,851     (17,215     (282 )(h)   
         (6,181 )(j)      (51,529
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses)

     (35,415     (20,715     (6,463     (62,593
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     17,809       46,496       19,286       83,591  

Provision for income taxes

     (4,234     (19     (16,032 )(k)      (20,285
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     13,575       46,477       3,254       63,306  

Preferred dividends and accretion on Series A Preferred Units

     —         (4,943    

4,943

(9,625

 (j) 

)(j) 

 

 

(9,625

  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to member equity / common stockholders

   $ 13,575     $ 41,534     $ (1,428   $ 53,681  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share—

        

Basic

   $ 0.13         $ 0.29  
  

 

 

       

 

 

 

Diluted

   $ 0.13         $ 0.23  
  

 

 

       

 

 

 

Weighted average common shares outstanding—

        

Basic

     105,457         78,833  (l)      184,290  
  

 

 

     

 

 

   

 

 

 

Diluted

     105,457         175,083  (l)      280,540  
  

 

 

     

 

 

   

 

 

 

See accompanying notes to unaudited pro forma

combined financial statements

 

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

(1) Introduction and Basis of Presentation

On June 7, 2019, the Company entered into the Merger Agreement with Covey Park and the other parties listed therein. The effective date of the Merger will be the date of closing of the transactions contemplated under the Merger Agreement.

The Company, as the accounting acquirer, will record the transactions as the acquisition of Covey Park. Covey Park’s historical capital accounts and retained earnings will be recognized at the fair value of its assets and liabilities upon closing of the Merger Agreement.

The unaudited pro forma combined balance sheet was prepared assuming that the Merger had occurred on March 31, 2019. The unaudited pro forma combined statements of operations for the year ended December 31, 2018 and for the three months ended March 31, 2019 were prepared assuming the Merger had occurred on January 1, 2018.

Transaction-related costs (i.e., advisory, legal, accounting, valuation, other professional or consulting fees) and certain transaction related restructuring charges are not included as a component of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred and the services received. Accordingly, none of the costs are reflected in the accompanying pro forma unaudited combined financial statements. Costs incurred associated with the issuance of Common Stock and Preferred Stock as partial consideration in the Merger are expected to be immaterial and will be accounted for as a reduction of additional paid in capital.

On August 14, 2018, the Principal Stockholders contributed certain oil and gas properties in North Dakota and Montana (the “Bakken Shale Properties”) in exchange for 88,571,429 newly issued shares of Common Stock representing approximately 84% of the Company’s outstanding Common Stock (the “Jones Contribution”). The Principal Stockholders are wholly owned and controlled by Dallas businessman Jerry Jones and his children (collectively, the “Jones Group”).

The Company assessed the Bakken Shale Properties to determine whether they met the definition of a business under US generally accepted accounting principles, determining that they did not meet the definition of a business. As a result, the Jones Contribution was not accounted for as a business combination. Upon the issuance of the shares of Comstock Common Stock, the Jones Group obtained control over Comstock through their ownership of the Jones Partnerships. Through the Jones Partnerships, the Jones Group owns a majority of the voting common stock as well as the ability to control the composition of the majority of the Board of Comstock. As a result of the change of control that occurred upon the issuance of the common stock, the Jones Group controls Comstock and, thereby, continues to control the Bakken Shale Properties. Accordingly, the basis of the Bakken Shale Properties recognized by Comstock is the historical basis of the Jones Group. The change in control of Comstock results in a new basis for Comstock as the Company has elected to apply pushdown accounting pursuant to ASC 805, Business Combinations. The new basis is pushed down to Comstock for financial reporting purposes, resulting in Comstock’s assets, liabilities and equity accounts being recognized at fair value upon the closing of the Jones Contribution.

References to “Successor” or “Successor Company” relate to the financial position and results of operations of the Company subsequent to August 13, 2018. Reference to “Predecessor” or “Predecessor Company” relate to the results of operations of the Company prior to August 14, 2018. The Consolidated Statement of Operations for the year ended December 31, 2018 is presented on a combined basis to include the operating results of the Predecessor, the results of the Bakken Shale Properties for the period January 1, 2018 through August 13, 2018, pro forma adjustments related to the Jones Contribution, and the operating results of the Successor which when

 

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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

combined represent the pro forma presentation full year of combined results for the Company. The results of Covey Park and the pro forma adjustments related to the transactions pursuant to the Merger Agreement are further included in arriving at the fully combined pro forma statement of operations results for the year ended December 31, 2018.

Certain reclassifications have been made to conform the presentation of Covey Park’s results with the historical financial statement classifications of the Company.

(2) Unaudited Pro Forma Balance Sheet

In preparing these pro forma financial statements, the fair value of Covey Park is being estimated based upon the estimated fair market value of the shares of Common Stock that are being issued, the estimated fair value of the Preferred Stock that is being issued, and the additional cash borrowings anticipated from the Company’s amended bank credit agreement. Estimates of fair value are based on management’s preliminary valuation estimates. These valuations will be finalized at closing, and as a result the final fair values may differ, possibly materially, from those being presented in the accompanying unaudited pro forma financial statements. The final value of Covey Park will be determined based upon the then fair value of the Common Stock, the Preferred Stock and the cash borrowings on the closing date of the transaction. As a result, the final fair value of Covey Park will differ, possibly materially, from the current estimates. A change in the price of Common Stock of $1.00 per share would affect the purchase consideration by approximately $28.8 million.

The fair value of the purchase consideration and of Covey Park’s assets and liabilities as of March 31, 2019 is estimated as follows:

 

     (In
thousands)
 

Consideration:

  

Fair Value of Comstock common stock to be issued

   $ 148,778  

Fair Value of Comstock convertible preferred stock to be issued

     210,000  

Cash

     700,000  
  

 

 

 

Total Fair Value of Consideration

   $ 1,058,778  
  

 

 

 

Fair Value of Liabilities Assumed—

  

Current Liabilities

   $ 190,916  

Long-Term Debt

     946,125  

Other Non-current Liabilities

     5,627  

Reserve for Future Abandonment Costs

     8,127  
  

 

 

 

Net Liabilities Assumed

     1,150,795  

Convertible Preferred Units Assumed(1)

     149,244  

Fair Value of Assets Acquired—

  

Current Assets

     146,274  

Oil and Gas Properties

     2,188,009  

Other Property & Equipment

     3,469  

Derivative Financial Instruments

     20,989  

Other Assets

     76  
  

 

 

 

Total Assets

     2,358,817  
  

 

 

 

Net Assets Acquired

   $ 1,058,778  
  

 

 

 

 

(1)

Upon completion of the Merger,these units will be redeemed for cash.

 

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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

Covey Park is organized as a limited liability company and has been treated as a flow-through entity for federal and state income tax purposes other than in Texas, where Covey Park has provided for the Texas margin tax which is an entity-level tax. As a result, the net taxable income of the Covey Park operating results and any related tax credits were passed through to its members and were included in their tax returns even though such net taxable income or tax credits may not have actually been distributed. Accordingly, no federal tax provision has been recorded in the financial statements of Covey Park.

These unaudited pro forma combined financial statements have been prepared in anticipation of a proposed transaction where Covey Park would be merged into the Company in exchange for cash and common and preferred stock of the Company. The Company is a corporation, which is treated as a taxable C corporation and thus is subject to federal and state income taxes. Accordingly, a pro forma income tax provision has been disclosed as if Covey Park was organized as a taxable corporation for the most recent period presented. For Covey Park, pro forma tax expense was computed using a 24.4% blended corporate level federal and state tax rate. If Covey Park had effected a change in tax status on March 31, 2019, no adjustment would have been recognized related to the tax basis of its long-lived assets being different from its book basis in those assets due to the amount of cash and other property treated as proceeds, or boot, in the transaction.

(3) Pro Forma Adjustments

Adjustments to the unaudited pro forma combined financial statements are as follows:

The accompanying unaudited pro forma balance sheet as of March 31, 2019 reflects the following adjustments:

 

  (a)

To record the adjustment to fair value of the Covey Park assets and liabilities based upon the consideration to be paid.

 

  (b)

To record the Merger and related financing transactions, including the issuance of 78,833,000 shares of common stock, the issuance of $210.0 million of Series A convertible preferred stock, the issuance of $175.0 million of Series B convertible preferred stock, the redemption of the Covey Park preferred units and cash borrowings related thereto. Also includes the capitalization of the debt offering costs associated with the Company’s bank credit facility and the write-off of the unamortized deferred costs associated with its bank credit facility. The value of Common Stock was estimated based upon a value of $5.16 per share as of June 7, 2019. Minimal out-of-pocket costs expected to be incurred associated with the issuance of Common Stock and the new convertible Preferred Stock.

 

  (c)

To record estimated costs attributable to the Merger. Such costs are reflected in the pro forma balance sheet only as an increase in accrued expenses and will be expensed as incurred.

The accompanying unaudited pro forma statements of operations for the year ended December 31, 2018 reflect the following adjustments for the Comstock combined results:

 

  (d)

To record revenues and operating costs, including depletion, depreciation, and amortization expense for the Bakken Shale Properties for the period January 1, 2018 through August 13, 2018. These properties were owned by the Principal Stockholders prior to their contribution to the Company on August 14, 2018 in exchange for 88,571,429 newly issued shares of Common Stock.

 

  (e)

Reflects reversal of transaction costs incurred during the Predecessor period and recognition of the change in interest expense for the Predecessor period due to the debt refinancing that occurred as a part of the Jones Contribution.

 

  (f)

To record income taxes for the combined operations of Comstock and the Bakken Shale Properties during the Predecessor period.

 

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  (g)

To adjust basic and diluted shares outstanding to give effect to the share issuance pursuant to the Jones Contribution.

The accompanying unaudited pro forma statements of operations for the year ended December 31, 2018 and for the three months ended March 31, 2019 reflect the following adjustments:

 

  (h)

To record revenues, operating costs including depletion, depreciation, and amortization expense, and interest expense for the oil and gas properties acquired by Covey Park in its Thunderbird acquisition that closed on March 5, 2019. The production volumes added through this pro forma adjustment were 1,023 MMcf and 2,883 MMcf of natural gas for the three months ended March 31, 2019 and the year ended December 31, 2018, respectively.

 

  (i)

Reflects the elimination of Covey Park’s historical depreciation, depletion and amortization (“DD&A”) expense offset by the impact of DD&A expense calculated using Comstock’s depletion rate as adjusted for the Merger, which was calculated in accordance with the successful efforts method of accounting.

 

  (j)

Reflects the change in interest expense and dividends on preferred stock associated with the Merger.

 

  (k)

To record income taxes for the combined operations of Comstock and Covey Park.

 

  (l)

To adjust basic and diluted shares outstanding to give effect to the Share Issuance pursuant to the Merger. Diluted shares include the dilutive effect of the convertible preferred stock using the if-converted method.

(4) Pro Forma Oil and Natural Gas Information

The following combined reserve information is not necessarily indicative of the results that might have occurred had the Merger taken place on January 1, 2018 and is not intended to be a projection of future results. Future results may vary significantly from the results reflected because of various factors, including those discussed in the section entitled “Risk Factors.”

Presentation of the changes in quantities of oil and natural gas reserves, and the standardized measure of oil and gas reserves include the results of the Predecessor period January 1, 2018 through August 13, 2018 separate from the results of the Successor period August 14, 2018 through December 31, 2018. The Successor period includes the reserves of the Bakken Shale Properties as if they had been contributed to the Company on August 14, 2018. Where presented, the Comstock combined results reflect changes in reserves and the standardized measure of oil and gas reserves for the period January 1, 2018 through December 31, 2018 for combined Predecessor and Successor periods. Pro Forma Combined reserves and changes in the standardized measure of oil and gas reserves include the Comstock Combined reserves and the reserves of Covey Park for the period January 1, 2018 through December 31, 2018.

 

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The following unaudited pro forma oil and natural gas reserve information reflects how the oil and natural gas reserves and the standardized measure information of the combined entities may have appeared had the Merger closed as of January 1, 2018, including the impact of Covey Park’s Thunderbird transaction in 2019:

 

     Crude Oil—MBbls  
     Comstock
Predecessor(1)
                 Comstock
Successor(2)
    Comstock
Combined
    Covey
Park(3)
    Pro
Forma
Combined
 

Proved Reserves:

                 

Beginning of period/year

     7,552              6,050       7,552       253       7,805  

Bakken Shale Property Contribution

     —                22,944       22,944       —         22,944  

Revisions of previous estimates

     4              5       9       (6     3  

Extensions and discoveries

     5,651              —         5,651       3       5,654  

Sale of mineral in place

     (6,870            (4,002     (10,872     —         (10,872

Production

     (287            (1,385     (1,672     (37     (1,709
  

 

 

          

 

 

   

 

 

   

 

 

   

 

 

 

End of year

     6,050              23,612       23,612       213       23,825  
  

 

 

          

 

 

   

 

 

   

 

 

   

 

 

 

Proved Developed Reserves:

                 

Beginning of year

     7,552              6,050       7,552       253       7,805  
  

 

 

          

 

 

   

 

 

   

 

 

   

 

 

 

End of year

     403              21,466       21,466       213       21,679  
  

 

 

          

 

 

   

 

 

   

 

 

   

 

 

 

Proved Undeveloped Reserves:

                 

Beginning of year

     —                —         —         —         —    
  

 

 

          

 

 

   

 

 

   

 

 

   

 

 

 

End of year

     5,647              2,146       2,146       —         2,146  
  

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Period January 1, 2018 through August 13, 2018.

(2)

Period beginning August 14, 2018 through December 31, 2018.

(3)

Includes reserves acquired during the three months ended March 31, 2019 as part of the Thunderbird acquisition which are attributable to wells owned as of December 31, 2018.

 

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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

     Natural Gas—MMcf  
                                             
     Comstock
Predecessor(1)
                 Comstock
(Successor)(2)
    Comstock
Combined
    Covey
Park(3)
    Pro Forma
Combined
 

Proved Reserves:

                 

Beginning of period/year

     1,116,956              2,195,273       1,116,956       3,613,025       4,729,981  

Bakken Shale Property Contribution

     —                51,228       51,228       —         51,228  

Revisions of previous estimates

     17,778              23,949       41,727       (1,068,527     (1,026,800

Extensions and discoveries

     950,032              30,126       980,158       545,295       1,525,453  

Acquisitions of minerals in place

     220,088              33,612       253,700       52,723       306,423  

Sale of mineral in place

     (54,341            (6,399     (60,740     —         (60,740

Production

     (55,240            (45,031     (100,271     (203,902     (304,173
  

 

 

          

 

 

   

 

 

   

 

 

   

 

 

 

End of year

     2,195,273              2,282,758       2,282,758       2,938,614       5,221,372  
  

 

 

          

 

 

   

 

 

   

 

 

   

 

 

 

Proved Developed Reserves:

                 

Beginning of year

     436,114              550,198       436,114       887,418       1,323,532  
  

 

 

          

 

 

   

 

 

   

 

 

   

 

 

 

End of year

     500,031              583,107       583,107       1,038,387       1,621,494  
  

 

 

          

 

 

   

 

 

   

 

 

   

 

 

 

Proved Undeveloped Reserves:

                 

Beginning of year

     680,842              1,645,075       680,842       2,725,607       3,406,449  
  

 

 

          

 

 

   

 

 

   

 

 

   

 

 

 

End of year

     1,695,242              1,699,651       1,699,651       1,900,227       3,599,878  
  

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Period January 1, 2018 through August 13, 2018.

(2)

Period beginning August 14, 2018 through December 31, 2018.

(3)

Includes reserves acquired during the three months ended March 31, 2019 as part of the Thunderbird acquisition which are attributable to wells owned as of December 31, 2018.

 

     As of December 31, 2018  
     Comstock
(Successor)
    Covey
Park(1)
    Pro Forma
Adjustments
    Pro Forma
Combined
 
     (in thousands)  

Cash Flows Relating to Proved Reserves:

        

Future Cash Flows

   $ 8,054,092     $ 8,630,663     $ —       $ 16,684,755  

Future Costs:

         —      

Production

     (2,160,912     (2,426,446     —         (4,587,358

Development and Abandonment

     (1,800,335     (1,876,396     —         (3,676,731

Future Income Taxes

     (622,241     (11,135     (897,707 )(2)      (1,531,083
  

 

 

   

 

 

   

 

 

   

 

 

 

Future Net Cash Flows

     3,470,604       4,316,686       (897,707     6,889,583  

10% Discount Factor

     (1,996,764     (1,965,481     418,507 (2)      (3,543,738
  

 

 

   

 

 

   

 

 

   

 

 

 

Standardized Measure of Discounted Future Net Cash Flows

   $ 1,473,840     $ 2,351,205     $ (479,200 )(2)    $ 3,345,845  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes reserves acquired during the three months ended March 31, 2019 as part of the Thunderbird acquisition which are attributable to wells owned as of December 31, 2018.

(2)

Adjustment for the assumed impact of the Merger including the adjustment of Covey Park’s cash flows to reflect its operations as being subject to corporate federal and state income taxes.

 

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

    Comstock
Predecessor(1)
                Comstock
(Successor)(2)
    Comstock
Combined
    Covey
Park(3)
    Pro Forma
Adjustments
    Pro Forma
Combined
 
    (in thousands)  

Standardized Measure, Beginning of Period/Year

  $ 881,544           $ 877,987     $ 881,544     $ 2,329,568     $ —       $ 3,211,112  

Bakken Shale Property Contribution

    —               439,396       439,396       —         —         439,396  

Net change in sales price, net of production costs

    (61,662           223,731       162,069       188,231       —         350,300  

Development costs incurred during the year which were previously estimated

    86,086             112,073       198,159       158,974       —         357,133  

Revisions of quantity estimates

    19,815             27,090       46,905       (518,135     —         (471,230

Accretion of discount

    53,413             55,692       109,105       233,682       —         342,787  

Changes in future development and abandonment costs

    (27,489           23,139       (4,350     (62,334     —         (66,684

Changes in timing and other

    (17,723           9,434       (8,289     85,084       —         76,795  

Extensions and discoveries

    167,986             15,263       183,249       366,101       —         549,350  

Acquisitions of minerals in place

    72,738             54,143       126,881       48,488       —         175,369  

Sales of minerals in place

    (124,083           (42,870     (166,953     —         —         (166,953

Sales, net of production costs

    (129,991           (181,218     (311,209     (480,004     —         (791,213

Net changes in income taxes

    (42,647           (140,020     (182,667     1,550       (479,200 )(4)      (660,317
 

 

 

         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Standardized Measure, End of Period/Year

  $ 877,987           $ 1,473,840     $ 1,473,840     $ 2,351,205     $ (479,200 )(4)    $ 3,345,845  
 

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Period January 1, 2018 through August 13, 2018.

(2)

Period beginning August 14, 2018 through December 31, 2018.

(3)

Period January 1, 2018 through December 31, 2018 and also including reserves acquired during the three months ended March 31, 2019 as part of the Thunderbird acquisition which are attributable to wells owned as of December 31, 2018.

(4)

Adjustment for the assumed impact of the Merger including the adjustment of Covey Park’s cash flows to reflect its operations as being subject to corporate federal and state income taxes.

 

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AMENDMENT TO THE SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION

Description of the Proposed Amendment

On June 7, 2019, the Company’s Board unanimously approved the Merger Agreement, the Subscription Agreement, the Merger, and the transactions contemplated therein, including the amendment to the Company’s Second Amended and Restated Articles of Incorporation, subject to required stockholder approval and the requirements of Regulation 14C, to increase the number of authorized shares of Common Stock from 155,000,000 to 400,000,000. The Charter Amendment will be effected upon a filing with the Secretary of State of the State of Nevada. The full text of the proposed Charter Amendment is set out in Annex E to this Information Statement. The text of the proposed Charter Amendment is subject to modification to include such changes as may be required by the office of the Secretary of State of the State of Nevada or as the Company’s Board deems necessary and advisable to effect the Share Increase.

Following approval of the Charter Amendment by the Company’s Board, action was taken without a meeting of the stockholders on June 7, 2019 to approve the Charter Amendment by written consent signed by a majority of the voting power of the stockholders as required by Nevada law. As of the record date of June 11, 2019, there were 105,953,681 shares of Common Stock issued and outstanding of which each share of Common Stock was entitled to one vote. On June 7, 2019, the Principal Stockholders, who collectively own shares of Common Stock representing approximately 84% of the voting power of all the outstanding shares of Common Stock, delivered to the corporate secretary of the Company an irrevocable written consent adopting the Charter Amendment

Therefore, the Charter Amendment has been approved by the Company’s Board of Directors and a majority of the stockholders but will not become effective until the Charter Amendment is filed with the Secretary of State of the State of Nevada. No filing of the Charter Amendment can be made with the Secretary of State of the State of Nevada until at least twenty (20) calendar days following the filing of this Information Statement with the SEC and the transmission of this Information Statement to all holders of record of the Company’s Common Stock as of the record date of June 11, 2019.

Purpose and Reasons for the Share Increase

The Board determined to increase the number of authorized shares of Common Stock because the current number of authorized shares of Common Stock is insufficient to issue the Common Stock Consideration to the Covey Park Equity holder, to issue the shares contemplated under the Subscription Agreement and to reserve the appropriate number of shares upon conversion of Series A Preferred Stock and Series B Preferred Stock contemplated under the Certificate of Designations as well as have shares available for future issuances. Currently there are 155,000,000 shares of Common Stock authorized, and 105,953,681 shares of Common Stock issued and outstanding. On the Closing Date of the Merger, the Covey Park Equity holder will receive 28,833,000 shares of Common Stock and 210,000 shares of Series A Preferred Stock (which is potentially convertible into shares of Common Stock), which shall represent the Stock Consideration under the Merger Agreement. Furthermore, the Company Board believes that the current number is insufficient for existing and future corporate purposes, and that the increase is needed to provide flexibility for issuances of Common Stock to raise additional capital, to support strategic business opportunities that may be presented from time to time, and to reserve and make available shares of Common Stock for issuance under any equity incentive plan that the Company Board may approve and adopt.

Therefore, the Company Board has determined that it is in the best interests of the Company and its stockholders to increase the number of authorized shares of Common Stock from 155,000,000 to 400,000,000. The increase would become effective upon filing the proposed Charter Amendment with the Secretary of State of the State of Nevada.

 

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Effect of the Share Increase

The Share Increase will not change the number of outstanding shares of Common Stock but will provide the Company Board with the ability to issue additional shares of Common Stock as the Board determines to be for proper corporate purposes and in the best interests of the Company.

With the exception of the number of authorized shares of Common Stock, the rights and preferences of the shares of Common Stock prior and subsequent to the Share Increase will remain the same. After the effectiveness of the Share Increase, it is not anticipated that the financial condition of the Company, the percentage ownership of management, the number of the Company’s stockholders or any aspect of the Company’s business would materially change solely as a result of the Share Increase.

The Common Stock is currently registered under Section 12(g) of the Exchange Act, and as a result, the Company is subject to the periodic reporting and other requirements of the Exchange Act. The Share Increase will not affect the registration of the Common Stock under the Exchange Act. If the proposed Amendments are implemented, the Company’s Common Stock will continue to be reported on the NYSE under the symbol “CRK.”

 

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DESCRIPTION OF CAPITAL STOCK

The following description of our Common Stock is intended as a summary only and therefore is not complete. This description is based upon, and is qualified by reference to, our Second Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, each as amended from time to time, and by applicable provisions of the common law of the State of Nevada. For the complete terms of the Common Stock, please refer to our Second Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, which are incorporated by reference into this Information Statement.

General

We are a company incorporated under the laws of the State of Nevada and our affairs are governed by our Second Amended and Restated Articles of Incorporation (which includes all amendments thereto), our Amended and Restated Bylaws, and the common law of the State of Nevada. Our authorized capital stock consists of 155,000,000 shares of Common Stock, par value $0.50 per share as well as 5,000,000 shares of preferred stock, par value $10.00 per share. As of June 11, 2019, there were 105,953,681 shares of Common Stock issued and outstanding. No shares of preferred stock were outstanding. The following description summarizes certain terms of our shares as set out more particularly in our Second Amended and Restated Articles of Incorporation and Amended and Restated Bylaws. Because it is only a summary, it may not contain all the information that is important to you.

Common Stock

Each holder of Common Stock is entitled to one vote per share. Subject to the rights, if any, of the holders of any series of preferred stock pursuant to applicable law or the provision of the certificate of designation creating that series, all voting rights are vested in the holders of shares of Common Stock. Holders of shares of Common Stock have no right to cumulate votes in the election of directors, thus, the holders of a majority of the shares of Common Stock can elect all of the members of the board of directors standing for election. All outstanding shares of Common Stock are fully paid and non-assessable.

Dividends may be paid to the holders of Common Stock when, as, and if declared by the Board out of funds legally available for their payment, subject to the rights of the holders of preferred stock, if any. On February 13, 2015, we announced that the dividend was being suspended until oil and natural gas prices improve. Any future determination as to the payment of dividends will depend upon the results of our operations, capital requirements, our financial condition and such other factors as our Board may deem relevant.

In the event of our voluntary or involuntary liquidation, dissolution, or winding up, the holders of Common Stock will be entitled to share equally, in proportion to the number of shares of Common Stock held by them, in any of our assets available for distribution after the payment in full of all debts and distributions and after the holders of all series of outstanding preferred stock, if any, have received their liquidation preferences in full. Holders of Common Stock are not entitled to preemptive purchase rights in future offerings of our Common Stock. Although our Second Amended and Restated Articles of Incorporation do not specifically deny preemptive rights, pursuant to Nevada law, our stockholders do not have preemptive rights with respect to shares that are registered under Section 12 of the Exchange Act and our Common Stock is so registered.

Anti-Takeover Provisions

Our Second Amended and Restated Articles of Incorporation, our Amended and Restated Bylaws, and Nevada common law include certain provisions which may have the effect of delaying or deterring a change in control or in our management or encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include authorized blank check preferred stock, restrictions on business combinations, and the availability of authorized but unissued Common Stock.

 

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Combination with Interested Stockholders Statute

Sections 78.411 to 78.444 of the Nevada Revised Statutes, which apply to any Nevada corporation subject to the reporting requirements of Section 12 of the Exchange Act, including us, prohibits an “interested stockholder” from entering into a “combination” with the corporation for two years, unless certain conditions are met. A “combination” includes:

 

   

any merger of the corporation or any subsidiary of the corporation with an “interested stockholder,” or any other entity, whether or not itself an “interested stockholder,” which is, or after and as a result of the merger would be, an affiliate or associate of an “interested stockholder;”

 

   

any sale, lease, exchange, mortgage, pledge, transfer, or other disposition in one transaction, or a series of transactions, to or with an “interested stockholder” or any affiliate or associate of an “interested stockholder,” of assets of the corporation or any subsidiary:

 

   

having an aggregate market value equal to more than 5% of the aggregate market value of the corporation’s assets, determined on a consolidated basis;

 

   

having an aggregate market value equal to more than 5% of the aggregate market value of all outstanding voting shares of the corporation; or

 

   

representing more than 10% of the earning power or net income, determined on a consolidated basis, of the corporation;

 

   

the issuance or transfer by the corporation or any subsidiary, of any shares of the corporation or any subsidiary to an “interested stockholder” or any affiliate or associate of an “interested stockholder,” having an aggregate market value equal to 5% or more of the aggregate market value of all of the outstanding voting shares of the corporation, except under the exercise of warrants or rights to purchase shares offered, or a dividend or distribution paid or made, pro rata to all stockholders of the resident domestic corporation;

 

   

the adoption of any plan, or proposal for the liquidation or dissolution of the corporation, under any agreement, arrangement or understanding, with the “interested stockholder,” or any affiliate or associate of the “interested stockholder;”

 

   

if any of the following actions occurs:

 

   

a reclassification of the corporation’s securities, including, without limitation, any splitting of shares, share dividend, or other distribution of shares with respect to other shares, or any issuance of new shares in exchange for a proportionately greater number of old shares;

 

   

recapitalization of the corporation;

 

   

merger or consolidation of the corporation with any subsidiary;

 

   

or any other transaction, whether or not with or into or otherwise involving the interested stockholder,

under any agreement, arrangement or understanding, whether or not in writing, with the interested stockholder or any affiliate or associate of the interested stockholder, which has the immediate and proximate effect of increasing the proportionate share of the outstanding shares of any class or series of voting shares or securities convertible into voting shares of the corporation or any subsidiary of the corporation which is beneficially owned by the interested stockholder or any affiliate or associate of the interested stockholder, except as a result of immaterial changes because of adjustments of fractional shares.

 

   

any receipt by an “interested stockholder” or any affiliate or associate of an “interested stockholder,” except proportionately as a stockholder of the corporation, of the benefit of any loan, advance, guarantee, pledge or other financial assistance or any tax credit or other tax advantage provided by or through the corporation.

 

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An “interested stockholder” is a person who is:

 

   

directly or indirectly, the beneficial owner of 10% or more of the voting power of the outstanding voting shares of the corporation; or

 

   

an affiliate or associate of the corporation, which at any time within two years immediately before the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding shares of the corporation.

A corporation to which the Combinations with Interested Stockholders Statute applies may not engage in a “combination” within two years after the interested stockholder first became an interested stockholder, unless the combination meets all of the requirements of the corporation’s articles of incorporation and (i) the combination or the transaction by which the person first became an interested stockholder is approved by the board of directors before the person first became an interested stockholder, or (ii)(a) the combination is approved by the board of directors and (b) at or after that time, the combination is approved at an annual or special meeting of the stockholders, and not by written consent, by the affirmative vote of the stockholders representing at least sixty percent (60%) of the outstanding voting power of the corporation not beneficially owned by the interested stockholder or the affiliates or associates of the interested stockholder. If this approval is not obtained, the combination may be consummated after the two year period expires if either (a) the combination or transaction by which the person first became an interested stockholder is approved by the board of directors before such person first became an interested stockholder, (b) the combination is approved by a majority of the outstanding voting power of the corporation not beneficially owned by the interested stockholder or any affiliate or associate of the interested stockholder, or (c) the combination otherwise meets the requirements of the Combination with Interested Stockholders statute. Alternatively, a combination with an interested stockholder engaged in more than 2 years after the date the person first became an interested stockholder may be permissible if the aggregate amount of cash and the market value of consideration other than cash to be received by holders of shares of Common Stock and holders of any other class or series of shares meets the minimum requirements set forth in the statue, and prior to the completion of the combination, except in limited circumstances, the interested stockholder has not become the beneficial owner of additional voting shares of the corporation.

Acquisition of Controlling Interest Statute

In addition, Nevada’s “Acquisition of Controlling Interest Statute,” prohibits an acquiror, under certain circumstances, from voting shares of a target corporation’s stock after crossing certain threshold ownership percentages, unless the acquiror obtains the approval of the target corporation’s stockholders. Sections 78.378 to 78.3793 of the Nevada Revised Statutes only apply to Nevada corporations with at least 200 stockholders, including at least 100 record stockholders who are Nevada residents, that do business directly or indirectly in Nevada and whose articles of incorporation or bylaws in effect ten (10) days following the acquisition of a controlling interest by an acquiror do not prohibit its application.

We do not intend to “do business” in Nevada within the meaning of the Acquisition of Controlling Interest Statute. Therefore, we believe it is unlikely that this statute will apply to us. The statute specifies three thresholds that constitute a controlling interest:

 

   

at least one-fifth but less than one-third;

 

   

at least one-third but less than a majority; and

 

   

a majority or more, of the outstanding voting power.

Once an acquiror crosses one of these thresholds, shares which it acquired in the transaction taking it over the threshold (or within ninety days preceding the date thereof) become “control shares” which could be deprived of the right to vote until a majority of the disinterested stockholders restore that right.

A special stockholders’ meeting may be called at the request of the acquiror to consider the voting rights of the acquiror’s shares. If the acquiror requests a special meeting and gives an undertaking to pay the expenses of

 

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said meeting, then the meeting must take place no earlier than 30 days (unless the acquiror requests that the meeting be held sooner) and no more than 50 days (unless the acquiror agrees to a later date) after the delivery by the acquiror to the corporation of an information statement which sets forth the range of voting power that the acquiror has acquired or proposes to acquire and certain other information concerning the acquiror and the proposed control share acquisition.

If no such request for a stockholders’ meeting is made, consideration of the voting rights of the acquiror’s shares must be taken at the next special or annual stockholders’ meeting. If the stockholders fail to restore voting rights to the acquiror, or if the acquiror fails to timely deliver an information statement to the corporation, then the corporation may, if so provided in its articles of incorporation or bylaws, call certain of the acquiror’s shares for redemption at the average price paid for the control shares by the acquiror.

Our Second Amended and Restated Articles of Incorporation and Amended and Restated Bylaws do not currently permit us to redeem an acquiror’s shares under these circumstances. The Acquisition of Controlling Interest Statute also provides that in the event the stockholders restore full voting rights to a holder of control shares that owns a majority of the voting stock, then all other stockholders who do not vote in favor of restoring voting rights to the control shares may demand payment for the “fair value” of their shares as determined by a court in dissenters rights proceeding pursuant to Chapter 92A of the Nevada Revised Statutes.

Our Transfer Agent

American Stock Transfer & Trust Company, LLC is transfer agent and registrar for our Common Stock.

Listing of Common Stock

Our Common Stock trades on the NYSE under the symbol “CRK.”

 

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NO DISSENTER’S RIGHTS

Under the Nevada Revised Statutes, as well as the Second Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of the Company, the stockholders of the Company are not entitled to dissenters’ rights in connection with the Charter Amendment, the Merger and the other transactions contemplated under the Merger Agreement.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table, which was prepared on the basis of information furnished by the persons described, shows ownership of Common Stock issued and outstanding as of June 11, 2019, by the Chief Executive Officer, by the Chief Financial Officer, by each of the other named executive officers, by each director, and by the directors and executive officers of the Company as a group. The following table also lists the stockholders (other than our directors and executive officers) known to have been the beneficial owners of more than 5% of our common stock.

The percentage of beneficial ownership of Common Stock indicated in the following table is based on 105,953,681 shares outstanding. Except as indicated in footnotes to this table, each of the individuals named in this table are known to the Company to have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such person, subject to community property laws where applicable. Shares shown as beneficially owned by any person have been determined in accordance with the requirements of Rule 13d-3 promulgated under the Exchange Act.

Unless otherwise indicated, the address for each of the Company’s directors and named executive officers and each beneficial owner of more than five percent of Common Stock listed in the tables below is 5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034.

 

     Shares Beneficially Owned  

Name of Beneficial Owner

       Number             Percent      

Arkoma Drilling, L.P.

One Cowboy Way, Frisco, Texas 75034

     66,806,077 (1)      63.1

Williston Drilling, L.P.

One Cowboy Way, Frisco, Texas 75034

     21,765,352 (1)      20.5

M. Jay Allison

Chairman of the Board of Directors and Chief Executive Officer

     1,075,357 (2)      1.0

Roland O. Burns

Director, President, Chief Financial Officer and Secretary

     617,826 (2)     *  

Elizabeth B. Davis, PhD

Director

     70,198 (2)      *  

Morris E. Foster

Director

     64,749 (2)      *  

Daniel S. Harrison

Vice President of Operations

     124,713 (2)      *  

Michael D. McBurney

Vice President of Marketing