UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K-A AMENDMENT NO. 1 TO CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of Earliest Event Reported): December 17, 2001 COMSTOCK RESOURCES, INC. (Exact name of registrant as specified in its charter) STATE OF NEVADA 000-16741 94-1667468 (State or other (Commission of File Number) (I.R.S. Employer jurisdiction incorporation) Identification Number) 5300 Town And Country Boulevard Suite 500 Frisco, Texas 75034 (Address of principal executive offices) (972) 668-8800 (Registrant's Telephone No.)Item 2. Acquisition or Disposition of Assets Pursuant to the Agreement and Plan of Merger dated November 12, 2001 (the "Merger Agreement"), by and between Comstock Resources, Inc., the Registrant ("Comstock"), Comstock Holdings, Inc. ("Holdings"), a Delaware corporation and wholly owned subsidiary of Comstock, Comstock Acquisition Inc. (the "Purchaser"), a Delaware corporation and a wholly owned subsidiary of Holdings, and DevX Energy, Inc., a Delaware corporation ("DevX"), the Purchaser made an offer to purchase, through a cash tender offer (the "Offer"), all of the outstanding shares of common stock of DevX ("Shares") for $7.32 per Share, net to the seller, without interest. The Offer expired at 12:00 midnight, New York City time, on Thursday, December 13, 2001. Based on information provided by the American Stock Transfer and Trust Company, the Depositary of the Offer, as of the expiration of the Offer, 12,283,728 Shares had been tendered and not withdrawn representing approximately 97% of the issued and outstanding Shares. Purchaser has accepted for purchase and payment all shares validly tendered and not withdrawn pursuant to the Offer. Comstock issued a press release announcing the acceptance of Shares, a copy of which is filed as Exhibit (a)(1) to the Schedule TO/A filed by Comstock, Holdings and Purchaser on December 17, 2001. On December 17, 2001, Comstock completed the acquisition of DevX by effecting a short- form merger under Section 253 of the Delaware General Corporation Law, whereby the Purchaser was merged with and into DevX, and each Share of DevX common stock not previously purchased in the Offer was converted into the right to receive $7.32 per Share in cash, without interest (subject to applicable dissenter's rights). DevX was the entity surviving the merger and is now an indirect wholly owned subsidiary of Comstock. A copy of the Merger Agreement is filed as Exhibit (d)(1) to the Schedule TO filed by Comstock, Holdings and Purchaser on November 15, 2001. The total amount of funds required by Purchaser to consummate the Offer and the Merger was approximately $92.6 million. The funds used by Purchaser to effect these transactions were provided by Comstock to the Purchaser. Comstock obtained these funds from its new $350 million Senior Secured Revolving Credit Facility being provided by TD Securities (USA) Inc. (the "Credit Facility"). Please see the disclosure under Item 5 of this Form 8-K for more information about the Credit Facility. Item 5. Other Events (A) As stated above, Comstock entered into a new $350 million Credit Facility on December 17, 2001. The Credit Facility is a three year revolving credit facility and has an initial borrowing base of $270 million. The Credit Facility was used to, among other purposes, refinance Comstock's existing bank debt and to finance the acquisition of the Shares. A copy of the Credit Agreement by and among Comstock, each lender from time to time party thereto, Toronto Dominion (Texas), Inc., as administrative agent, and Toronto-Dominion Bank, as Issuing Bank, dated as of December 17, 2001, is attached hereto as Exhibit 10.1. 1 Indebtedness under the Credit Facility is secured by substantially all of Comstock's and its subsidiaries' assets. The subsidiaries are guarantors of the indebtedness. The Credit Facility will be subject to borrowing base availability, which will be redetermined semiannually based on the banks' estimates of the future net cash flows of the borrower's oil and gas properties. The borrowing base may be affected by the performance of the borrower's properties and changes in oil and gas prices. The determination of the borrowing base will be at the sole discretion of the administrative agent and the bank group. The revolving credit line under the Credit Facility will bear interest, based on the utilization of the borrowing base, at the option of Comstock at either (i) LIBOR plus 1.5% to 2.375% or (ii) the base rate plus 0.5% to 1.375%. The Credit Facility will mature on January 2, 2005 or such earlier date as Comstock may elect. The Credit Facility contains covenants that, among other things, restrict the payment of cash dividends, limit the amount of consolidated debt and limit the borrower's ability to make certain loans and investments. Financial covenants include the maintenance of a current ratio, maintenance of tangible net worth and maintenance of an interest coverage ratio. (B) On December 19 and 20, 2001, DevX repurchased approximately $49.8 million of the outstanding $50 million of DevX's 12.5% Senior Notes due in 2008 for 110% of the principal amount plus accrued interest. Item 7. Financial Statements and Exhibits (a) Financial Statements of Business Acquired - The audited Consolidated Statements of Operations, audited Consolidated Statements of Cash Flows and audited Consolidated Statements of Changes in Shareholders' Equity of DevX Energy, Inc. for the years ended December 31, 2000, 1999 and 1998; the audited Consolidated Balance Sheets of DevX Energy, Inc. as of December 31, 2000 and 1999; and the accompanying Notes to Consolidated Financial Statements of DevX Energy, Inc. are attached hereto as Exhibit 99.2. The unaudited Consolidated Statements of Operations and unaudited Consolidated Statements of Cash Flows of DevX Energy, Inc. for the nine months ended September 30, 2001 and 2000; the unaudited Balance Sheets of DevX Energy, Inc. as of September 30, 2001 and December 31, 2000; and the accompanying Notes to Consolidated Financial Statements of DevX Energy, Inc. are attached hereto as Exhibit 99.3. (b) Pro Forma Financial Information - The Unaudited Pro Forma Combined Statements of Operations for the year ended December 31, 2000 and for the nine months ended September 30, 2001; the Unaudited Pro Forma Combined Balance Sheet as of September 30, 2001; and the accompanying Notes to the Unaudited Pro Forma Combined Financial Statements are attached hereto as Exhibit 20.2. 2 (c) Exhibit - ------------- Exhibit Description - ------- ----------- 2.1 Agreement and Plan of Merger among Comstock Resources, Inc., Comstock Holdings, Inc., Comstock Acquisition Inc. and DevX Energy, Inc. dated as of November 12, 2001 (incorporated herein by reference to Exhibit (d)(1) to the Tender Offer Statement on Schedule TO filed by the Company on November 15, 2001). 10.1* Credit Agreement, dated as of December 17, 2001, by and among Comstock Resources, Inc., as borrower, each lender from time to time party thereto, Toronto Dominion (Texas), Inc., as administrative agent, and Toronto- Dominion Bank, as Issuing Bank. 20.1** Unaudited Pro Forma Combined Financial Statements of Comstock Resources, Inc. 23.2** Consent of Ernst & Young LLP dated February 4, 2002. 99.1 Press Release issued by Comstock Resources, Inc. on December 17, 2001 (incorporated herein by reference to Exhibit (a)(1) to the Tender Offer Statement on Schedule TO filed by the Company on December 13, 2001). 99.2** Audited Annual Financial Statements of DevX Energy, Inc., excerpted from pages F-1 through F-26 of the DevX Energy, Inc. Annual Report on Form 10- K for the year ended December 31, 2000 and filed with the Commission on March 15, 2001. 99.3** Unaudited Interim Financial Statements of DevX Energy, Inc., excerpted from pages 1 through 6 of the DevX Energy, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and filed with the Commission on November 14, 2001. - ------------ * Previously filed **Filed herewith. 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. COMSTOCK RESOURCES, INC. Dated: February 6, 2002 By:/s/ROLAND O. BURNS --------------------- ROLAND O. BURNS Senior Vice President, Chief Financial Officer, Secretary, and Treasurer (Principal Financial and Accounting Officer) 4 Exhibit Index Exhibit Description ------- ----------- 2.1 Agreement and Plan of Merger among Comstock Resources, Inc., Comstock Holdings, Inc., Comstock Acquisition Inc. and DevX Energy, Inc. dated as of November 12, 2001 (incorporated herein by reference to Exhibit (d)(1) to the Tender Offer Statement on Schedule TO filed by the Company on November 15, 2001). 10.1* Credit Agreement, dated as of December 17, 2001, by and among Comstock Resources, Inc., as borrower, each lender from time to time party thereto, Toronto Dominion (Texas), Inc., as administrative agent, and Toronto-Dominion Bank, as Issuing Bank. 20.1** Unaudited Pro Forma Combined Financial Statements of Comstock Resources, Inc. 23.2** Consent of Ernst & Young LLP dated February 4, 2002. 99.1 Press Release issued by Comstock Resources, Inc. on December 17, 2001 (incorporated herein by reference to Exhibit (a)(1) to the Tender Offer Statement on Schedule TO filed by the Company on December 13, 2001). 99.2** Audited Annual Financial Statements of DevX Energy, Inc., excerpted from pages F-1 through F-26 of the DevX Energy, Inc. Annual Report on Form 10-K for the year ended December 31, 2000 and filed with the Commission on March 15, 2001. 99.3** Unaudited Interim Financial Statements of DevX Energy, Inc., excerpted from pages 1 through 6 of the DevX Energy, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and filed with the Commission on November 14, 2001. - ------------ *Previously filed **Filed herewith. E - 1
EXHIBIT 20.1 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements should be read in conjunction with the historical consolidated financial statements, including the notes thereto, of Comstock Resources, Inc. ("Comstock") and DevX Energy, Inc. ("DevX") which are included as an exhibit to this document. The unaudited pro forma financial statements are presented for illustration purposes only, in accordance with the assumptions set forth below, and are not necessarily indicative of the operating results of financial position that would have occurred if the merger had been completed on the assumed dates. Nor is it necessarily indicative of future operating results or the financial position of the combined enterprise. P-1COMSTOCK RESOURCES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS Year Ended December 31, 2000 Pro Forma Pro Forma Comstock DevX Adjustments Combined -------- -------- --------- --------- (In thousands, except per share amounts) Revenues: Oil and gas sales............................. $169,350 $ 35,991 $ 6,214(a) $ 211,555 Other income.................................. 352 90 -- 442 -------- -------- --------- --------- Total revenues................................ 169,702 36,081 6,214 211,997 -------- -------- --------- --------- Expenses: Oil and gas operating......................... 29,707 1,727 6,214 (a) 37,648 Exploration................................... 3,192 -- 800 (b) 3,992 Depreciation, depletion and amortization...... 44,958 8,637 13,473 (c) 58,431 (8,637)(d) General and administrative, net............... 3,537 4,497 (4,497)(e) 3,537 Interest...................................... 24,611 17,264 (17,264)(f) 35,099 10,488 (g) Change in fair value of derivatives -- 1,945 -- 1,945 --------- -------- --------- --------- Income before income taxes 63,697 2,011 5,637 71,345 Provision for income taxes (22,294) 642 (3,319)(h) (24,971) --------- --------- --------- --------- Income 41,403 2,653 2,318 46,374 Preferred stock dividends (2,471) -- -- (2,471) --------- -------- --------- --------- Net income attributable to common stock $ 38,932 $ 2,653 $ 2,318 $ 43,903 ========= ========= ========= ========= Net income per share: Basic................................. $ 1.48 $ 1.67 ========= ======== Diluted............................... $ 1.21 $ 1.36 ========= ======== Weighted average shares outstanding: Basic................................. 26,290 26,290 ========= ======== Diluted............................... 34,219 34,219 ========= ======== See accompanying notes to unaudited pro forma combined financial statements. P-2 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS Nine Months Ended September 30, 2001 Pro Forma Pro Forma Comstock DevX Adjustments Combined -------- -------- --------- --------- (In thousands, except per share amounts) Revenues: Oil and gas sales.............................. $ 143,521 $ 27,421 $ 5,105 (a) $ 176,047 Other income................................... 381 377 -- 758 --------- -------- --------- --------- Total revenues................................. 143,902 27,798 5,105 176,805 --------- -------- --------- --------- Expenses: Oil and gas operating.......................... 25,064 1,160 5,105 (a) 31,329 Exploration.................................... 3,371 -- 536 (b) 3,907 Depreciation, depletion and amortization....... 36,458 7,087 8,934 (c) 45,392 (7,087)(d) General and administrative, net................ 2,450 4,139 (4,139)(e) 2,450 Interest....................................... 15,479 5,518 (5,518)(f) 22,433 6,954 (g) Change in Fair Value of Derivatives............ -- (3,730) -- (3,730) --------- -------- --------- --------- Income before income taxes.......................... 61,080 13,624 320 75,024 Provision for income taxes.......................... (21,378) (5,040) 160 (h) (26,258) --------- -------- --------- --------- Income.............................................. 39,702 8,584 480 48,766 Preferred stock dividends........................... (1,199) -- -- (1,199) --------- -------- --------- --------- Net income attributable to common stock............. $ 38,503 $ 8,584 $ 480 $ 47,567 ========= ======== ========= ========= Net income per share: Basic................................. $ 1.32 $ 1.63 ========= ========= Diluted............................... $ 1.14 $ 1.40 ========= ========= Weighted average shares outstanding: Basic................................. 29,207 29,207 ========= ========= Diluted............................... 34,851 34,851 ========= ========= See accompanying notes to unaudited pro forma combined financial statements. P-3 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED BALANCE SHEET As of September 30, 2001 ASSETS Pro Forma Pro Forma Comstock DevX Adjustments Combined -------- -------- --------- --------- (In thousands, except per share amounts) Cash and Cash Equivalents........................... $ 3,088 $ 11,168 $ -- $ 14,256 Accounts Receivable: Oil and gas sales.............................. 18,342 5,275 -- 23,617 Joint interest operations...................... 2,569 61 -- 2,630 Other Current Assets................................ 2,146 744 -- 2,890 --------- --------- --------- --------- Total current assets.................. 26,145 17,248 -- 43,393 Property and Equipment: Unevaluated oil and gas properties............. 12,356 -- -- 12,356 Oil and gas properties, successful efforts method 730,730 211,411 (211,411)(i) 88,962 158,232 (j) Other. . ...................................... 2,618 457 (457)(i) 2,618 Accumulated depreciation, depletion and amortization............................... (265,006) (101,593) 101,593 (i) (265,006) --------- --------- --------- --------- Net property and equipment............... 480,698 110,275 47,957 638,930 Deferred Tax Asset.................................. -- 1,221 (1,221)(k) -- Other Assets........................................ 5,056 3,994 (3,994)(l) 5,056 --------- --------- --------- --------- $511,899 $ 132,738 $ 42,742 $ 687,379 ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Portion of Long-Term Debt................... $ 417 $ -- $ -- $ 417 Accounts Payable and Accrued Expenses............... 37,299 10,697 11,113 (m) 59,109 --------- --------- --------- --------- Total current liabilities............. 37,716 10,697 11,113 59,526 Long-Term Debt, less current portion................ 206,000 50,000 (49,776)(n) 353,591 147,367 (o) Derivatives ...................................... -- 1,779 -- 1,779 Deferred Taxes Payable.............................. 39,969 -- 4,300 (k) 44,269 Reserve for Future Abandonment Costs................ 7,557 -- -- 7,557 Stockholders' Equity: Preferred stock............................... 17,573 -- -- 17,573 Common stock................................. 14,439 2,983 (2,983)(p) 14,439 Additional paid-in capital..................... 131,878 60,165 (60,165)(p) 131,878 Retained earnings.............................. 57,832 9,418 (9,418)(p) 57,832 Treasury stock................................. -- (525) 525 (p) -- Deferred compensation-restricted stock grants.. (876) -- (876) Accumulated other comprehensive loss........... (189) (1,779) 1,779 (p) (189) --------- --------- --------- --------- Total stockholders' equity............ 220,657 70,262 (70,262) 220,657 --------- --------- --------- --------- $ 511,899 $ 132,738 $ 42,742 $ 687,379 ========= ========= ========= ========= See accompanying notes to unaudited pro forma combined financial statements. P-4 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (Continued) (1) BASIS OF PRESENTATION - On December 17, 2001, Comstock Resources, Inc. ("Comstock") completed the acquisition of DevX Energy, Inc. ("DevX") by acquiring 100% of the common stock of DevX for $92.6 million. Comstock also repurchased approximately $49.8 million of the outstanding DevX 12.5% Senior Notes due in 2008 for 110% of the principal amount plus accrued interest. The acquisition was funded by borrowings under a new revolving bank credit facility entered into by Comstock on December 17, 2001. The new credit facility is subject to borrowing base availability, which will be redetermined semiannually based on the banks' estimates of the future net cash flows of the borrower's oil and gas properties. The revolving credit line bears interest, based on the utilization of the borrowing base, at the option of Comstock at either (i) LIBOR plus 1.5% to 2.375% or (ii) the base rate plus 0.5% to 1.375%. The facility matures on January 2, 2005. The accompanying Pro Forma Consolidated Balance Sheet at September 30, 2001 and the Pro Forma Consolidated Statements of Operations for the year ended December 31, 2000 and the nine months ended September 30, 2001, have been prepared assuming the acquisition of DevX was consummated by Comstock, immediately prior to each of the periods presented, and was funded by borrowings under Comstock's new bank credit facility. The Pro Forma Combined Statements of Operations are not necessarily indicative of the results of operations had the above described transactions occurred on the assumed dates. (2) PRO FORMA ADJUSTMENTS - Pro forma adjustments necessary to adjust the Combined Balance Sheet and Statements of Operations are as follows: (a) To reclassify certain amounts in DevX historical financial statements to conform to Comstock' s presentation. (b) To record the pro forma reversal of the capitalization of historical DevX exploration expense to conform to the successful efforts method of accounting for oil and gas activities. (c) To record pro forma DevX depreciation, depletion and amortization expenses recorded in accordance with the successful efforts method of accounting for oil and gas activities and based on the allocated purchase price. P-5 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (Continued) (d) To record the reversal of DevX historical depreciation, depletion and amortization expenses in accordance with the full-cost method of accounting for oil and gas activities. (e) To reverse the costs of the closed Dallas and Ottawa corporate offices of DevX. Comstock hired only one former DevX employee and does not intend to add any additional administrative employees to handle the incremental DevX activity. Accordingly, since the DevX offices have been closed and only one former employee has been hired Comstock believes the reduction in general and administrative expenses of DevX is factually supportable for this pro forma presentation. (f) To reverse the historical interest expense related to the DevX 12.5% Senior Notes. (g) To record interest expense related to borrowings under the Company's new bank credit facility. Borrowings to finance the purchase of DevX shares and merger costs and the purchase of the DevX 12.5% Senior Notes were approximately $152 million. The pro forma interest expense was calculated using Comstock's average interest rate on its prior bank credit facility of 6.9% and 6.1% for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. (h) To record income tax expense on the pro forma adjustments based on the applicable statutory tax rates. (i) To reverse historical DevX property and equipment balances and the related accumulated depreciation, depletion and amortization. P-6 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (Continued) (j) To record the estimated pro forma allocation of the purchase price of the acquisition of DevX, including estimated merger costs, to properties and equipment in accordance with the purchase method of accounting. The following is a calculation and allocation of the purchase price to the assets acquired and liabilities assumed based on their relative fair values: CALCULATION OF PURCHASE PRICE - (In thousands except per share amount) Number of shares of common stock acquired 12,649 Share purchase price .................... $ 7.32 --------- $ 92,591 Estimated merger related costs .......... 11,113 --------- Purchase Price .......................... $ 103,704 ========= ALLOCATION OF PURCHASE PRICE - Current assets .......................... $ 17,248 Properties and equipment ................ 158,232 Current liabilities ..................... (10,697) Long-term debt .......................... (55,000) Deferred income taxes ................... (4,300) Derivative liabilities .................. (1,779) --------- $ 103,704 ========= The final purchase price allocation may change due to changes in DevX's working capital or the valuation of its derivatives contracts. (k) To record the pro forma deferred income tax effect of the fair value adjustments related to the merger in accordance with the purchase method of accounting. (l) To record the reversal of the capitalized debt issuance costs related to DevX historical long-term debt. (m) To record the liabilities associated with estimated merger related costs, consisting primarily of bankers' and other professional fees, as well as costs associated with severance for DevX employees and closing the DevX offices in Dallas and Ottawa. (n) To reflect repurchase of the DevX 12.5% Senior Notes at the actual purchase price of 110% of principal. (o) To record borrowings under the bank credit facility related to the acquisition of DevX and the repurchase of the DevX 12.5% Senior Notes. P-7 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (Continued) (p) To reflect the acquisition of DevX common stock and common stock equivalents pursuant to the merger agreement. (3) OIL AND GAS RESERVE INFORMATION - The following unaudited table sets forth the combined proved oil and gas reserves of Comstock and DevX at December 31, 2000: Comstock DevX Combined -------------------- -------------------- -------------------- Oil Gas Oil Gas Oil Gas (MBbls) (MMcf) (MBbls) (MMcf) MBbls) (MMcf) -------- -------- -------- -------- -------- -------- Proved Reserves: Beginning of year ............ 19,467 258,121 4,453 139,998 23,920 398,119 Revisions of previous estimates ............... (1,725) 1,205 (2,875) 6,610 (4,600) 7,815 Extensions and discoveries ... 1,599 54,574 -- -- 1,599 54,574 Purchases of minerals in place 416 11,059 -- -- 416 11,059 Sales of minerals in place ... (499) (134) (1) (7,035) (500) (7,169) Production ................... (1,807) (26,990) (216) (9,797) (2,023) (36,787) -------- -------- -------- -------- -------- -------- End of year .................. 17,451 297,835 1,361 129,776 18,812 427,611 ======== ======== ======== ======== ======== ======== Proved Developed Reserves: Beginning of year ............ 14,379 184,123 1,937 86,044 16,316 270,167 ======== ======== ======== ======== ======== ======== End of year .................. 12,290 200,349 1,253 84,669 13,543 285,018 ======== ======== ======== ======== ======== ======== The following table sets forth the combined standardized measure of discounted future net cash flows relating to proved reserves at December 31, 2000 for Comstock and DevX: Comstock DevX Combined ----------- ----------- ---------- (In thousands) Cash Flows Relating to Proved Reserves: Future Cash Flows ................................. $ 3,590,711 $ 1,451,177 $ 5,041,888 Future Costs: Production .................................... (527,939) (223,812) (751,751) Development ................................... (126,904) (21,441) (148,345) ----------- ----------- ---------- Future Net Cash Flows Before Income Taxes ......... 2,935,868 1,205,924 4,141,792 Future Income Taxes ............................... (825,033) (370,200) (1,195,233) ----------- ----------- ----------- Future Net Cash Flows ............................. 2,110,835 835,724 2,946,559 10% Discount Factor ............................... (822,071) (465,502) (1,287,573) ----------- ----------- ------------ Standardized Measure of Discounted Future Net Cash Flows $ 1,288,764 $ 370,222 $ 1,658,986 =========== =========== =========== P-8 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (Continued) The following table sets forth the combined changes in the standardized measure of discounted future net cash flows relating to proved reserves for the years ended December 31, 2000 for Comstock and DevX: Comstock DevX Combined ----------- ---------- ----------- (In thousands) Standardized Measure, Beginning of Year .......... $ 468,713 $ 116,679 $ 585,392 Net Change in Sales Price, Net of Production Costs 1,141,880 501,474 1,643,354 Development Costs Incurred During the Year Which Were Previously Estimated ...................... 17,340 13,043 30,383 Revisions of Quantity Estimates .................. (44,256) (74,940) (119,196) Accretion of Discount ............................ 51,506 11,668 63,174 Changes in Future Development Costs .............. (41,525) -- (41,525) Changes in Timing and Other ...................... (166,410) -- (166,410) Extensions and Discoveries ....................... 375,632 -- 375,632 Purchases of Reserves in Place ................... 62,621 -- 62,621 Sales of Reserves in Place ....................... (3,355) (12,953) (16,308) Sales, Net of Production Costs ................... (139,643) (34,264) (173,907) Net Changes in Income Taxes ...................... (433,739) (150,485) (584,224) ----------- ---------- ----------- Standardized Measure, End of Year ................ $ 1,288,764 $ 370,222 $ 1,658,986 =========== ========== =========== P-9
Exhibit 23.2 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference into Comstock Resources, Inc.'s previously filed registration statements (numbers 333-36808, 333-36854, 333-81483 and 333-45860) of our report dated March 1, 2000, with respect to the consolidated financial statements of DevX Energy, Inc. included in its Annual Report (Form 10K) for the year ended December 31, 2000, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Dallas, Texas, February 4, 2002
DEVX ENERGY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders DevX Energy, Inc. We have audited the accompanying consolidated balance sheets of DevX Energy, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity (net capital deficiency), and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DevX Energy, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Dallas, Texas March 1, 2001 F-2
DEVX ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DEVX ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
DEVX ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
DEVX ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) (NET CAPITAL DEFICIENCY) YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
DEVX ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL DevX Energy, Inc. (DEVX or the Company, formerly Queen Sand Resources, Inc.) was formed on August 9, 1994, under the laws of the State of Delaware. The Company is engaged in one industry segment: the acquisition, exploration, development, production and sale of crude oil and natural gas. The Company's business activities are carried out primarily in Kentucky, Oklahoma and Texas. Effective December 31, 2000, the Company changed its fiscal year end to December 31. The accompanying financial statements have been prepared on a calendar year for each period presented. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. PROPERTY AND EQUIPMENT The Company follows the full cost method of accounting for its oil and gas activities under which all costs, including general and administrative expenses directly associated with property acquisition, exploration and development activities, are capitalized. Capitalized general and administrative expenses directly associated with acquisitions, exploration and development of oil and gas properties were approximately $691,000, $813,000 and $1,287,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Capitalized costs are amortized by the unit-of-production method using estimates of proved oil and gas reserves prepared by independent engineers. The costs of unproved properties are excluded from amortization until the properties are evaluated. Sales of oil and gas properties are accounted for as adjustments to the capitalized cost center unless such sales significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to the cost center, in which case a gain or loss is recognized. The Company limits the capitalized costs of oil and gas properties, net of accumulated amortization, to the estimated future net revenues from proved oil and gas reserves less estimated future development and production expenditures discounted at 10%, plus the lower of cost or estimated fair value of unproved properties, as adjusted for related estimated future tax effects. If capitalized costs exceed this limit (the full cost ceiling), the excess is charged to depreciation and amortization expense. During the year ended December 31, 1998, the Company recorded full cost ceiling write-downs of $63,199,000. Amortization of the capitalized costs of oil and gas properties and limits to capitalized costs are based on estimates of oil and gas reserves which are inherently imprecise and are subject to change based on factors such as crude oil and natural gas prices, drilling results, and the results of production activities, among others. Accordingly, it is reasonably possible that such estimates could differ materially in the near term from amounts currently estimated. Depreciation of other property and equipment is provided principally by the straight-line method over the estimated service lives of the related assets. Equipment under capital lease is recorded at the lower of fair value or the present value of future minimum lease payments and is depreciated over the lease term. Costs incurred to operate, repair and maintain wells and equipment are charged to expense as incurred. F-8
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Certain of the Company's oil and gas activities are conducted jointly with others and, accordingly, the financial statements reflect only the Company's proportionate interest in such activities. The Company does not expect future costs for site restoration, dismantlement and abandonment, postclosure, and other exit costs which may occur in the sale, disposal or abandonment of a property to be material. REVENUE RECOGNITION The Company uses the sales method of accounting for oil and gas revenues. Under the sales method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. ENVIRONMENTAL MATTERS The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is adjusted by a valuation allowance, if necessary, to recognize the extent to which, based on available evidence, the future tax benefits more likely than not will be realized. STATEMENT OF CASH FLOWS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. During 1998, the Company issued an aggregate of 2,219 shares of Common Stock valued at $1,752,000 in connection with the acquisition of certain interests in oil and gas properties. INCOME (LOSS) PER COMMON SHARE Basic income or loss per share is calculated based on the weighted average number of common shares outstanding during the period. If applicable, diluted earnings per share is calculated based on the weighted average number of common shares outstanding during the period plus any dilutive common equivalent shares outstanding. As the Company incurred net losses during each of the years ended December 31, 1999 and 1998, the loss per common F-9
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) share data is based on the weighted average common shares outstanding and excludes the effects of the Company's potentially dilutive securities (Note 6). The following table reconciles basic and diluted weighted average shares outstanding:
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) oil and gas sales. The Company does not believe that the loss of any of these buyers would have a material effect on the Company's business or results of operations as it believes it could readily locate other buyers. The Company's revenues and profitability are highly dependent upon the prevailing prices for oil and natural gas. As the Company produces more natural gas than oil, it faces more risk related to fluctuations in natural gas prices than oil prices. To reduce the exposure to changes in the price of oil and natural gas, the Company has entered into certain derivative contracts (Note 5). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the year ended December 31, 2000, the Company's comprehensive income differed from net income by approximately $12,246,000, due to the recognition in comprehensive income of unrealized losses related to certain of the Company's derivative instruments which have been designated as hedges. For the years ended December 31, 1999 and 1998, there were no differences between the Company's net losses and total comprehensive income. DERIVATIVES The Company utilizes certain derivative financial instruments, primarily swaps, floors and collars, to hedge future oil and gas prices. Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), which requires the Company to recognize all derivatives on the balance sheet at fair value. Prior to adoption of SFAS No. 133, gains and losses arising from the use of derivative instruments were deferred until realized. The Company estimates fair value based on quotes obtained from the counterparties to the derivative contracts. The Company recognizes the fair value of derivative contracts that expire in less than one year as current assets or liabilities. Those that expire in more than one year are recognized as long-term assets or liabilities. Derivatives that are not accounted for as hedges are adjusted to fair value through other income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Upon adoption of SFAS No. 133, the Company had four open derivative contracts. One contract, a natural gas swap, has been designated as a cash flow hedge. For derivatives classified as cash flow hedges, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of any change in the fair value of a derivative designated as a hedge is immediately recognized in earnings. Hedge effectiveness is measured quarterly based on the relative fair value between the derivative contract and the hedged F-11
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) item over time. At adoption, the Company recognized a derivative liability and a reduction in other comprehensive income of approximately $5,515,000 as a cumulative effect of accounting change for this cash flow hedge. During the six months ended December 31, 2000, the Company recognized an increase in the derivative liability and an associated other comprehensive loss totaling approximately $6,731,000. No amounts were recognized in earnings for hedging ineffectiveness during 2000. Additionally upon adoption, the Company recognized a net derivative asset of approximately $651,000 for the remaining three open derivative contracts, and a related gain of approximately $413,000 as a cumulative effect of accounting change in earnings. During the six months ended December 31, 2000, the Company recognized a loss of approximately $1,945,000 related to the net change in the fair value of derivative contracts which have not been designated as hedges. Gains and losses from settlements of hedges of oil and gas prices are reported as oil and gas sales. Gains and losses from settlements of interest rate hedges are reported in interest expense. 2. QUASI-REORGANIZATION On October 31, 2000, the Company completed a public offering of 10,000,000 shares of its common stock at a price per share to the public of $7.00. An additional 1,500,000 shares were sold during November 2000 upon the underwriter's exercise of its over-allotment option. The aggregate net proceeds to the Company (after deducting underwriter discount and expenses, and costs to repurchase fractional shares aggregating 1,122 shares of common stock) were approximately $73,112,000. Simultaneously with the closing of the October 31, 2000 offering, the Company completed a recapitalization transaction which included: (a) a reverse stock split of every 156 outstanding shares of common stock into one share; (b) the exchange of all preferred stock, all warrants exercisable for shares of common stock and all unexercised common stock repricing rights (Note 6) for 732,500 shares of post reverse-split common stock; (c) the repurchase of $75 million face value of 12.5% senior notes (Note 4) for $52,504,000; and (d) the Company used proceeds from the offering to pay down the balance on its revolving credit facility by $14 million ($11 million at closing and $3 million from the exercise of the over-allotment option) (the Recapitalization). The Company's board of directors decided to effect a quasi-reorganization given the infusion of new equity capital, the reduction in debt, changes in management and changes in the Company's operations. Accordingly, the Company's accumulated deficit as of the date of the Recapitalization, $68,130,000, was eliminated against additional paid-in capital. The historical carrying values of the Company's assets and liabilities were not adjusted in connection with the quasi-reorganization. Information presented for shares of common stock for all periods prior to the Recapitalization has been restated to retroactively reflect the effects of the reverse stock split. 3. NET PROFITS AND ROYALTY INTERESTS During 1998, the Company acquired certain nonoperated net profits interests and royalty interests (collectively, the Morgan Properties) from pension funds managed by J.P. Morgan Investments. The Company's interest in the Morgan Properties primarily takes the form of nonoperated net profits overriding royalty interests, whereby the Company is entitled to a percentage of the net profits from the operations of the properties. The oil and gas properties burdened by the Morgan Properties are primarily located in East Texas, South Texas and the mid-continent region of the United States. F-12
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. NET PROFITS AND ROYALTY INTERESTS (CONTINUED) Presented below are the oil and gas sales and associated production expenses associated with the Company's net profits and royalty interests, which are presented in the accompanying consolidated statements of operations for the years ended December 31, 2000, 1999 and 1998, respectively, as net profits and royalty interests revenues.
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. CURRENT AND LONG-TERM DEBT under the Credit Agreement. At December 31, 2000, the Company had a letter of credit outstanding in the amount of $8.5 million to secure a swap exposure (Note 5). Effective January 31, 2001, the Credit Agreement was amended to extend the maturity date to April 22, 2003, increase the capital spending limitation and modify the interest rate. Borrowings under the amended Credit Agreement bear interest as follows: when the borrowings are less than $30 million or borrowings are less than 67% of the borrowing base as defined in the agreement, bank prime plus 2%; when the borrowings are $30 million or greater and borrowings exceed 67% of the borrowing base as defined in the agreement, bank prime plus 3.5%; and on amounts securing letters of credit issued on our behalf, 3%. On July 8, 1998, the Company completed a private placement of $125,000,000 principal amount of 12.5% senior notes (the Notes) due July 1, 2008. Interest on the Notes is payable semiannually on January 1 and July 1 of each year, commencing January 1, 1999, at the rate of 12.5% per annum. The Notes are senior unsecured obligations of the Company and rank pari passu with any existing and future unsubordinated indebtedness of the Company. The Notes rank senior to all unsecured subordinated indebtedness of the Company. The Notes contain customary covenants that limit the Company's ability to incur additional debt, pay dividends and sell assets of the Company. Substantially all of the proceeds from the issuance of the Notes were used to retire indebtedness incurred in connection with the acquisition of the Morgan Properties. In connection with the Recapitalization, the Company retired $75,000,000 face amount of the Notes, recognizing an extraordinary gain of $21,144,000 (Note 2). The Company's payment obligations under the Notes are jointly, severally and unconditionally guaranteed by the Company's subsidiaries. The Company has no significant assets and no operations other than those conducted by its subsidiaries. No restrictions exist on the ability of the subsidiaries to make loans or pay dividends to the Company. Beginning in July 1995, the Company initiated private debt offerings whereby it could issue up to a maximum of 5,000,000 Deutschmark (DEM) denominated 12% notes due on July 15, 2000, of which DEM 1,600,000 were outstanding at December 31, 1999. During 2000, the Company retired all remaining outstanding notes for approximately $791,000. During the years ended December 31, 2000, 1999 and 1998, the Company made cash payments of interest totaling approximately $15,800,000, $16,402,000 and $3,953,000, respectively. 5. DERIVATIVES AND HEDGING ACTIVITIES The Company uses swaps, floors and collars to hedge oil and natural gas prices. Swaps are settled monthly based on differences between the prices specified in the instruments and the settlement prices of futures contracts quoted on the New York Mercantile Exchange (NYMEX). Generally, when the applicable settlement price is less than the price specified in the contract, the Company receives a settlement from the counterparty based on the difference multiplied by the volume hedged. Similarly, when the applicable settlement price exceeds the price specified in the contract, the Company pays the counterparty based on the difference. The Company generally receives a settlement from the counterparty for floors when the applicable settlement price is less than the price specified in the contract, which is based on the difference multiplied by the volumes hedged. For collars, generally the Company receives a settlement from the counterparty when the settlement price is below the floor and pays a settlement to the counterparty when the settlement price exceeds the cap. No settlement occurs when the settlement price falls between the floor and cap. F-14
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED) The Company had a collar with an affiliate of Enron Corp. (Enron), a stockholder of the Company, to hedge 50,000 MMBtu of natural gas production and 10,000 barrels of oil production monthly. The agreements, effective September 1, 1997, and terminating August 31, 1998, called for a natural gas and oil ceiling and floor price of $2.66 and $1.90 per MMBtu and $20.40 and $18.00 per barrel, respectively. During the year ended December 31, 1998, the Company recognized net hedging gains of approximately $233,000 relating to these agreements, which are included in oil and gas sales. The table below sets out volumes of natural gas hedged with a floor price of $1.90 per MMBtu with Enron, which received a fee of $478,000 during the year ended December 31, 1998 for entering into this agreement. The volumes presented in this table are divided equally over the months during the period.
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED) During the years ended December 31, 2000, 1999 and 1998, the Company recognized hedging gains (losses) of approximately $(3,324,000), $644,000 and $803,000, respectively, relating to cash settlements under these agreements, which are included in net profits and royalty interests revenues. During the year ended December 31, 1998, the Company entered into a swap agreement with Enron to hedge 12,000 barrels of oil production monthly at $17.00 per barrel, for the months of October, November and December 1998. The Company recognized hedging gains of approximately $147,000 relating to this agreement, which are included in net profits and royalty interests revenues. During the year ended December 31, 1999, the Company entered into a swap agreement with Enron to hedge 10,000 barrels of oil production monthly at $13.50 per barrel for the six months March through August 1999, and for 5,000 barrels of oil production monthly at $14.35 per barrel, and for 5,000 barrels of oil production monthly at $14.82 per barrel for the six months April through September 1999. During the year ended December 31, 1999, the Company recognized hedging losses of approximately $589,000 relating to this agreement, which are included in net profits and royalty interests revenues. The table below sets out volumes of oil hedged with a collar with Enron involving floor and ceiling prices as set out in the table below. The volumes presented in this table are divided equally over the months during the period.
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED) Company terminated the agreement at a cost of $3,549,000. The cost of termination has been reflected as an extraordinary loss in the accompanying consolidated statement of operations for the year ended December 31, 1998. 6. STOCKHOLDERS' EQUITY GENERAL The Company's Certificate of Incorporation authorizes the issuance of: (a) 50,000,000 shares of preferred stock of the Company, par value $.01 per share (the Preferred Stock), of which 9,600,000 shares have been designated as Series A Preferred Stock, 9,600,000 shares have been designated as Series B Preferred Stock and 10,400 shares have been designated as Series C Preferred Stock and (b) 100,000,000 shares of Common Stock, par value $0.234. Any authorized but unissued or unreserved Common Stock and undesignated Preferred Stock is available for issuance at any time, on such terms and for such purposes as the Board of Directors may deem advisable in the future without further action by stockholders of the Company, except as may be required by law or the Series A or Series C Certificate of Designation. The Board of Directors of the Company has the authority to fix the rights, powers, designations and preferences of the undesignated Preferred Stock and to provide for one or more series of undesignated Preferred Stock. The authority will include, but will not be limited to: determination of the number of shares to be included in the series; dividend rates and rights; voting rights, if any; conversion privileges and terms; redemption conditions; redemption values; sinking funds; and rights upon involuntary or voluntary liquidation. In connection with the Recapitalization, the Company implemented a 156-to-1 reverse split of its common stock which reduced the total number of shares of common stock outstanding from 80,688,538 pre-split shares (par value $0.0015) to 517,234 post-split shares (par value $0.234). In connection with the Recapitalization, the holders of the Series A Preferred Stock and the Series C Preferred Stock and common stock repricing rights exchanged all their remaining shares of the Series A Preferred Stock, Series C Preferred Stock and common stock repricing rights, together with all their respective warrants and non-dilution rights for an aggregate of 732,500 shares of post reverse-split common stock. As of December 31, 2000, there were no shares of Preferred Stock, no common stock repricing rights, no stock purchase warrants and 12,748,612 shares of common stock outstanding. SERIES A PREFERRED STOCK In March 1997, the Company entered into a Securities Purchase Agreement with Joint Energy Development Limited Partnership II, an affiliate of Enron (respectively the "JEDI Purchase Agreement and "JEDI") under which JEDI acquired 9,600,000 shares of Series A Preferred Stock, certain warrants to purchase common stock and nondilution rights in regards to future stock issuances by the Company. The aggregate consideration received by the Company consisted of $5,000,000. In connection with the Recapitalization, JEDI accepted 212,500 shares of post reverse-split common stock in exchange for all 9,600,000 shares of Series A Preferred Stock and stock warrants that it then held, and the surrender of all its remaining nondilution and other rights under the JEDI Purchase Agreement. As a result of that transaction, the JEDI Purchase Agreement was terminated. As of December 31, 2000, there were no shares of Series A Preferred Stock outstanding. F-17
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) SERIES B PREFERRED STOCK No shares of Series B Preferred Stock have been issued. SERIES C PREFERRED STOCK In December 1997, the Company sold 10,000 shares of Series C Preferred Stock to various investors in a private placement for gross proceeds of $10,000,000. The investors also received warrants to purchase 2,180 shares of common stock in the transaction. The Company issued an additional 400 shares of Series C Preferred Stock in consideration of placement agent fees incurred with respect to the transaction. During the year ended December 31, 1998, the Company repurchased for cash a total of 2,152 shares of Series C Preferred Stock. In addition, an aggregate of 2,290 shares of Series C Preferred Stock was converted into 2,534 shares of common stock and 111 shares of common stock were issued in payment of dividends that had accrued in respect of the 2,290 shares of Series C Preferred Stock that were converted during the year. During the year ended December 31, 1999, an aggregate of 1,710 shares of Series C Preferred Stock was converted into 12,642 shares of common stock. In addition, 957 shares of common stock were issued in payment of dividends that had accrued in respect of the 1,710 shares of Series C Preferred Stock that were converted during the year. During the year ended December 31, 2000, an aggregate of 2,075 shares of Series C Preferred Stock was converted into 46,019 shares of common stock. In addition, 5,293 shares of common stock were issued in payment of dividends that had accrued in respect of the 2,075 shares of Series C Preferred Stock that were converted during the year. In connection with the Recapitalization, the Company issued 120,000 shares of common stock in exchange for the 2,173 shares of Series C Preferred Stock that remained outstanding at the time plus the warrants. As of December 31, 2000, there were no shares of Series C Preferred Stock or related stock purchase warrants outstanding. COMMON STOCK During 1998, the Company completed the private placement of an aggregate of 34,013 shares of the Company's Common Stock for aggregate net proceeds of approximately $26,980,000 (the Equity Offerings). In connection with the sale of 24,841 shares in the Equity Offerings, the Company granted certain common stock reset rights (the Repricing Rights) for each share sold. Each Repricing Right granted the holder the right to receive, in certain circumstances, additional shares of common stock for no consideration. Additionally, warrants to purchase an aggregate of 8,278 shares of the Company's common stock were granted to purchasers of common stock. During 1998, 15,860 shares of common stock were issued upon the exercise of certain stock purchase warrants. The Company received aggregate net proceeds of $7,000,000 from these exercises. During 1998, the Company issued a total of 4,984 shares of common stock pursuant to the exercise of 6,939 Repricing Rights. During 1999, the Company issued a total of 19,245 shares of common stock pursuant to the exercise of 1,294 Repricing Rights. In 2000, the Company issued a total of 228,962 shares of common stock pursuant to the exercise of 6,199 Repricing Rights. F-18
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) In connection with the Recapitalization, the holders of all remaining Repricing Rights exchanged all their remaining Repricing Rights, together with all outstanding warrants that had been issued as part of the Equity Offerings, for an aggregate of 400,000 shares of common stock. As of December 31, 2000, there were no Repricing Rights or stock purchase warrants outstanding. STOCK OPTIONS
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES The provision (benefit) for income taxes attributable to continuing operations is as follows:
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) During 2000, NOLs of approximately $21,144,000 were used to offset taxable income associated with the extraordinary gain recognized upon the retirement of $75,000,000 of Notes (Note 4). 10. COMMITMENTS AND CONTINGENCIES The Company is involved in certain disputes and other matters arising in the normal course of business. Although the ultimate resolution of these matters cannot be reasonably estimated at this time, management does not believe that they will have a material adverse effect on the financial condition or results of operations of the Company. 11. OIL AND GAS PRODUCING ACTIVITIES The following tables set forth supplementary disclosures for oil and gas producing activities in accordance with Statement of Financial Accounting Standards No. 69. RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES The following sets forth certain information with respect to results of operations from oil and gas producing activities for the years ended December 31, 2000, 1999 and 1998:
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) COSTS INCURRED The following sets forth certain information with respect to costs incurred, whether expensed or capitalized, in oil and gas activities for the years ended December 31, 2000, 1999 and 1998:
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED) (CONTINUED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (Standardized Measure) is a disclosure requirement under Statement of Financial Accounting Standards No. 69. The Standardized Measure of discounted future net cash flows does not purport to be, nor should it be interpreted to present, the fair value of the Company's oil and gas reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, the value of unproved properties and consideration of expected future economic and operating conditions. Under the Standardized Measure, future cash flows are estimated by applying year-end prices, adjusted for fixed and determinable escalations, to the estimated future production of year-end proved reserves. Future cash inflows are reduced by estimated future production and development costs based on period-end costs to determine pretax cash inflows. Future income taxes are computed by applying the statutory tax rate to the excess of pretax cash inflows over the Company's tax basis in the associated properties. Tax credits, net operating loss carryforwards and permanent differences are also considered in the future tax calculation. Future net cash inflows after income taxes are discounted using a 10% annual discount rate to arrive at the Standardized Measure. The Standardized Measure of discounted future net cash flows relating to proved oil and gas reserves as of December 31, 2000 and 1999, is as follows:
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED) (CONTINUED) Changes in the Standardized Measure of discounted future net cash flows relating to proved oil and gas reserves for the years ended December 31, 2000, 1999 and 1998 are as follows:
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS DEVX ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
DEVX ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
DEVX ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
DEVX ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of DevX Energy, Inc. and its wholly owned subsidiaries (collectively, the "Company") after elimination of all significant intercompany balances and transactions. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While management has based their assumptions and estimates on the facts and circumstances currently known, final amounts may differ from such estimates. The interim financial statements contained herein are unaudited but, in the opinion of management, include all adjustments (consisting only of normal recurring entries) necessary for a fair presentation of the financial position and results of operations of the Company for the periods presented. The results of operations for the three months and the nine months ended September 30, 2001 are not necessarily indicative of the operating results for the year ending December 31, 2001. Moreover, these financial statements do not purport to contain complete disclosure in conformity with generally accepted accounting principles and should be read in conjunction with the Company's Annual Report on Form 10-K for the transition period ended December 31, 2000. 2. DERIVATIVES The Company utilizes certain derivative financial instruments -- primarily swaps, floors and collars -- to reduce the risk of adverse changes in future oil and natural gas prices. Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), which requires the Company to recognize all derivatives on the balance sheet at fair value. The Company estimates fair value based on quotes obtained from the counter-parties to the derivative contracts. The Company recognizes the fair value of derivative contracts that expire in less than one year as current assets or liabilities. Those that expire in more than one year are recognized as long-term assets or liabilities. Derivatives that are not accounted for as hedges are adjusted to fair value through income. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in fair value are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. 4
The Company has designated a natural gas swap as a cash flow hedge. For derivatives classified as cash flow hedges, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of any change in the fair value of a derivative designated as a hedge is immediately recognized in earnings. Hedge effectiveness is measured quarterly based on the relative fair value between the derivative contract and the hedged item over time. During the three months ended September 30, 2001, the Company recognized a decrease in the derivative liability and an associated decrease in other comprehensive loss totaling approximately $2,405,000. During the nine months ended September 30, 2001, the Company recognized a decrease in the derivative liability and an associated decrease in other comprehensive loss totaling approximately $10,467,000. As of September 30, 2001, other current assets included $738,000 and other assets include $1,699,000 related to the fair value of derivative contracts. During the three and nine months ended September 30, 2001, the Company recognized non-cash gains of $535,000 and $3,730,000, respectively, in earnings related to the net change in fair value of derivative contracts which have not been designated as hedges. During the three months ended September 30, 2001, the Company received $464,000 and for the nine months ended September 30, 2001, the Company paid $3,428,000 in cash settlements on its natural gas hedges, which are included in net profits and royalty interests. 3. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the three months ended September 30, 2001, the Company's comprehensive income differed from net income by approximately $2,405,000 related to the change in fair value of a natural gas swap contract designated as a hedge. For the three months ended September 30, 2000, the Company's comprehensive income differed from net income by $8,866,000. For the nine-month period ending September 30, 2001, the Company's comprehensive income differed from net income by approximately $10,467,000 related to the change in fair market value of a natural gas swap contract designated as a hedge. For the nine months ended September 30, 2000, the Company's comprehensive income differed from net income by $8,866,000. 5
4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per common share: