UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No.1
(Mark One)
[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 0-16741
COMSTOCK RESOURCES, INC.
(Exact name of registrant as specified in its charter)
| NEVADA | 94-1667468 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
5300 Town and
Country Blvd., Suite 500, Frisco, Texas 75034
(Address of principal executive offices including zip code)
(972) 668-8800
(Registrant's telephone number and area code)
Securities registered pursuant to Section 12(b) of the Act:
| Common Stock, $.50 Par Value | New York Stock Exchange | ||||
| Preferred Stock Purchase Rights | New York Stock Exchange | ||||
| (Title of class) | (Name of exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant ’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ X ]
As of March 25, 2002, there were 28,572,553 shares of common stock outstanding.
As of March 25, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $204,625,000.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for the 2002 annual meeting of stockholders - Part III
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001 is being filed to amend a
footnote to the financial statements of the Registrant included in the Annual
Report on Form 10-K. The footnote which have been amended is footnote number 11.
In accordance with SEC rules, all of the information required by "Item 8.
Financial Statement," including the required financial statements in their
entirety, as amended, is being filed with this Form 10-K/A.
ITEM 8. FINANCIAL STATEMENTS.
Our consolidated financial statements are included on pages F-1 to F-26 of
this report.
We have prepared these financial statements in conformity with generally
accepted accounting principles. We are responsible for the fairness and
reliability of the financial statements and other financial data included in
this report. In the preparation of the financial statements, it is necessary for
us to make informed estimates and judgment based on currently available
information on the effects of certain events and transactions.
We maintain accounting and other controls which we believe provide
reasonable assurances that our financial records are reliable, our assets are
safeguarded, and that transactions are properly recorded in accordance with
management's authorizations. However, limitations exist in any system of
internal controls based upon the recognition that the cost of the system should
not exceed benefits derived.
Our independent public accountants, Arthur Andersen LLP, are engaged to
audit our financial statements and to express an opinion thereon. Their audit is
conducted in accordance with generally accepted auditing standards to enable
them to report whether the financial statements present fairly, in all material
respects, our financial position and results of operations in accordance with
generally accepted accounting principles.
The audit committee of our board of directors is composed of three
directors who are not our employees. This committee meets periodically with our
independent public accountants and management. Our independent public
accountants have full and free access to the audit committee to meet, with and
without management being present, to discuss the results of their audits and the
quality of our financial reporting.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMSTOCK RESOURCES, INC.
By:/s/M. JAY ALLISON
-----------------
M. Jay Allison
President and Chief Executive Officer
Date: April 09, 2002 (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/M. JAY ALLISON President, Chief Executive Officer and April 09, 2002
- ----------------- Chairman of the Board of Directors
M. Jay Allison (Principal Executive Officer)
/s/ROLAND O. BURNS Senior Vice President, Chief April 09, 2002
- ------------------ Financial Officer, Secretary, Treasurer
Roland O. Burns and Director
(Principal Financial and Accounting Officer)
/s/DAVID K. LOCKETT Director April 09, 2002
- -------------------
David K. Lockett
/s/CECIL E. MARTIN, JR. Director April 09, 2002
- ----------------------
Cecil E. Martin, Jr.
/s/DAVID W. SLEDGE Director April 09, 2002
- ------------------
David W. Sledge
CONSOLIDATED FINANCIAL STATEMENTS OF
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
INDEX
Report of Independent Public Accountants.....................................F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001.................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 2000 and 2001.....................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 2000 and 2001.....................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 2000 and 2001.....................................F-6
Notes to Consolidated Financial Statements...................................F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Comstock Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Comstock
Resources, Inc. (a Nevada corporation) and subsidiaries as of December 31, 2000
and 2001, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
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 financial statements referred to above present fairly,
in all material respects, the financial position of Comstock Resources, Inc. and
subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 1 of the financial statements effective January 1,
2001, the Company changed its method of accounting for derivative instruments.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 8, 2002
F-2
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and 2001
ASSETS
December 31,
----------------------
2000 2001
--------- ---------
(In thousands)
Cash and Cash Equivalents ................................ $ 7,105 $ 6,122
Accounts Receivable:
Oil and gas sales .................................... 34,637 20,015
Joint interest operations ............................ 4,574 4,717
Derivatives .............................................. -- 1,342
Other Current Assets ..................................... 2,842 7,418
--------- ---------
Total current assets ......................... 49,158 39,614
Property and Equipment:
Unevaluated oil and gas properties ................... 5,206 13,416
Oil and gas properties, successful efforts method .... 659,505 901,206
Other ................................................ 2,589 2,633
Accumulated depreciation, depletion and amortization . (232,387) (278,679)
--------- ---------
Net property and equipment ................... 434,913 638,576
Derivatives .............................................. -- 254
Other Assets ............................................. 5,859 4,627
--------- ---------
$ 489,930 $ 683,071
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Portion of Long-Term Debt ........................ $ 101 $ 229
Accounts Payable and Accrued Expenses .................... 45,544 37,389
Derivatives .............................................. -- 798
--------- ---------
Total current liabilities .................... 45,645 38,416
Long-Term Debt, less current portion ..................... 234,000 372,235
Deferred Taxes Payable ................................... 22,555 47,911
Derivatives .............................................. -- 1,053
Reserve for Future Abandonment Costs ..................... 7,557 7,794
Stockholders' Equity:
Preferred stock--$10.00 par, 5,000,000 shares
authorized, 1,757,310 shares outstanding
at December 31, 2000 and 2001 ...................... 17,573 17,573
Common stock--$0.50 par, 50,000,000 shares authorized,
28,837,755 and 28,552,553 shares outstanding at
December 31, 2000 and 2001, respectively ........... 14,419 14,276
Additional paid-in capital ........................... 129,896 130,956
Retained earnings .................................... 19,329 54,183
Deferred compensation-restricted stock grants ........ (1,044) (1,187)
Accumulated other comprehensive loss ................. -- (139)
--------- ---------
Total stockholders' equity ................... 180,173 215,662
--------- ---------
$ 489,930 $ 683,071
========= =========
The accompanying notes are an integral part of these statements.
F-3
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 2000 and 2001
1999 2000 2001
--------- --------- ---------
(In thousands, except per share amounts)
Revenues:
Oil and gas sales ....................... $ 90,103 $ 169,350 $ 167,689
Gain on sales of property ............... 130 33 12
Other income ............................ 1,911 319 699
--------- --------- ---------
Total revenues ................. 92,144 169,702 168,400
--------- --------- ---------
Expenses:
Oil and gas operating ................... 23,714 29,707 32,417
Exploration ............................. 1,832 3,192 4,215
Depreciation, depletion and amortization 45,171 44,958 49,191
General and administrative, net ......... 2,399 3,537 4,351
Interest ................................ 23,361 24,611 20,737
Impairment of oil and gas properties .... -- -- 1,400
--------- --------- ---------
Total expenses ................. 96,477 106,005 112,311
--------- --------- ---------
Income (loss) before income taxes ............ (4,333) 63,697 56,089
Income tax benefit (expense) ................. 1,517 (22,294) (19,631)
--------- --------- ---------
Net income (loss) ............................ (2,816) 41,403 36,458
Preferred stock dividends .................... (1,853) (2,471) (1,604)
--------- --------- ---------
Net income (loss) attributable to common stock $ (4,669) $ 38,932 $ 34,854
========= ========= =========
Net income (loss) per share:
Basic........................... $ (0.19) $ 1.48 $ 1.20
========= ========= =========
Diluted......................... $ 1.21 $ 1.06
========= =========
Weighted average shares outstanding:
Basic........................... 24,601 26,290 29,030
========= ========= =========
Diluted........................ 34,219 34,552
========= =========
The accompanying notes are an integral part of these statements.
F-4
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 2000 and 2001
Deferred Accumulated
Additional Retained Compensation Other
Preferred Common Paid-In Earnings Restricted Comprehensive
Stock Stock Capital (Deficit) Stock Grants Loss Total
--------- --------- --------- --------- --------- --------- ---------
(In thousands)
Balance at December 31, 1998... $ -- $ 12,175 $ 112,432 $ (14,934) $ (10) $ -- $ 109,663
Issuance of preferred stock.. 30,000 -- -- -- -- -- 30,000
Issuance of common stock..... -- 400 1,166 -- -- -- 1,566
Value of stock options issued
for exploration prospects -- 498 -- -- -- 498
Restricted stock grants...... -- 113 759 -- (756) -- 116
Net loss attributable to
common stock.............. -- -- -- (4,669) -- -- (4,669)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1999... 30,000 12,688 114,855 (19,603) (766) -- 137,174
--------- --------- --------- --------- --------- --------- ---------
Conversion of preferred stock (12,427) 1,553 10,874 -- -- -- --
Issuance of common stock .... -- 150 706 -- -- -- 856
Value of stock options issued
for exploration prospects -- -- 2,990 -- -- -- 2,990
Restricted stock grants...... -- 28 471 -- (278) -- 221
Net income attributable to
common stock.............. -- -- -- 38,932 -- -- 38,932
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 2000... 17,573 14,419 129,896 19,329 (1,044) -- 180,173
--------- --------- --------- --------- --------- --------- ---------
Issuance of common stock .... -- 283 3,538 -- -- -- 3,821
Value of stock options issued
for exploration prospects -- -- 1,968 -- -- -- 1,968
Restricted stock grants ..... -- 28 333 -- (143) 218
Repurchases of common stock.. -- (454) (4,779) -- -- -- (5,233)
Net income attributable to
common stock ............. -- -- -- 34,854 -- -- 34,854
Unrealized hedge losses...... -- -- -- -- -- (139) (139)
---------
Comprehensive income....... -- -- -- -- -- -- 34,715
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 2001... $ 17,573 $ 14,276 $ 130,956 $ 54,183 $ (1,187) $ (139) $ 215,662
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements.
F-5
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 2000 and 2001
1999 2000 2001
--------- --------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................... $ (2,816) $ 41,403 $ 36,458
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Compensation paid in common stock ............. 247 314 244
Depreciation, depletion and amortization ...... 45,171 44,958 49,191
Impairment of oil and gas properties .......... -- -- 1,400
Deferred income taxes ......................... (1,517) 22,294 18,851
Exploration ................................... 1,832 3,192 4,215
Gain on sales of property ..................... (130) (33) (12)
Gain on Derivatives ........................... -- -- (254)
--------- --------- ---------
Working capital provided by operations ...... 42,787 112,128 110,093
Decrease (increase) in accounts receivable ...... (5,754) (15,596) 18,371
Decrease (increase) in other current assets ..... 548 (1,933) (1,229)
Increase (decrease) in accounts payable and
accrued expenses .............................. 935 9,957 (17,145)
--------- --------- ---------
Net cash provided by operating activities ... 38,516 104,556 110,090
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of properties ............... 778 33 45
Capital expenditures and acquisitions ........... (35,981) (83,394) (189,646)
--------- --------- ---------
Net cash provided by operating activities ... (35,203) (83,361) (189,601)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ...................................... 10,378 18,408 261,730
Proceeds from senior notes offering ............. 149,221 -- --
Debt issuance costs ............................. (5,671) -- --
Principal payments on debt ...................... (184,351) (38,438) (178,355)
Proceeds from preferred stock offering .......... 30,000 -- --
Proceeds from common stock issuances ............ 296 763 1,989
Stock issuance costs ............................ (714) -- --
Repurchases of common stock ..................... -- -- (5,232)
Dividends paid on preferred stock ............... -- (2,471) (1,604)
--------- --------- ---------
Net cash provided by financing activities ....... (841) (21,738) 78,528
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ............................... 2,472 (543) (983)
Cash and cash equivalents, beginning of year 5,176 7,648 7,105
--------- --------- ---------
Cash and cash equivalents, end of year ...... $ 7,648 $ 7,105 $ 6,122
========= ========= =========
The accompanying notes are an integral part of these statements.
F-6
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Accounting policies used by Comstock Resources, Inc. ("Comstock") reflect
oil and natural gas industry practices and conform to accounting principles
generally accepted in the United States of America.
Basis of Presentation and Principles of Consolidation
Comstock is engaged in oil and natural gas exploration, development and
production, and the acquisition of producing oil and natural gas properties. The
consolidated financial statements include the accounts of Comstock and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
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 revenues and expenses during the
reporting period. Actual amounts could differ from those estimates. Changes in
the future estimated oil and natural gas reserves or the estimated future cash
flows attributable to the reserves that are utilized for impairment analysis
could have a significant impact on the future results of operations.
Property and Equipment
Comstock follows the successful efforts method of accounting for its oil
and natural gas properties. Acquisition costs for proved oil and natural gas
properties, costs of drilling and equipping productive wells, and costs of
unsuccessful development wells are capitalized and amortized on an equivalent
unit-of- production basis over the life of the remaining related oil and gas
reserves. Equivalent units are determined by converting oil to natural gas at
the ratio of six barrels of oil for one thousand cubic feet of natural gas. Cost
centers for amortization purposes are determined on a field area basis. The
estimated future costs of dismantlement, restoration and abandonment are
included on the balance sheet in the reserve for future abandonment and accrued
as part of depreciation, depletion and amortization expense. Costs incurred to
acquire oil and gas leasehold are capitalized. Unproved oil and gas properties
are periodically assessed and any impairment in value is charged to exploration
expense. The costs of unproved properties which are determined to be productive
are transferred to proved oil and gas properties and amortized on an equivalent
unit of production basis. Exploratory expenses, including geological and
geophysical expenses and delay rentals for unevaluated oil and gas properties,
are charged to expense as incurred. Exploratory drilling costs are initially
capitalized as unproved property but charged to expense if and when the well is
determined not to have found proved oil and gas reserves.
F-7
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In accordance with the Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of,"("SFAS 121")Comstock assesses the need for an impairment of the
costs capitalized of its oil and gas properties on a property or cost center
basis. If an impairment is indicated based on undiscounted expected future cash
flows, then an impairment is recognized to the extent that net capitalized costs
exceed discounted expected future cash flows. No impairment was required in 1999
or 2000. In 2001 Comstock provided an impairment of $1.4 million for certain of
its oil and gas properties.
Other property and equipment consists primarily of work boats, gas
gathering systems, computer equipment and furniture and fixtures which are
depreciated over estimated useful lives on a straight-line basis.
Other Assets
Other assets primarily consists of deferred costs associated with issuance
of Comstock's 11 1/4% senior notes. These costs are amortized over the eight
year life of the senior notes on a straight-line basis.
Stock Options
Comstock applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") and related interpretations, in accounting for its
incentive plan stock options. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS 123") established
accounting and disclosure requirements using a fair value-based method of
accounting for stock- based employee compensation plans. As allowed by SFAS 123,
Comstock has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS
123 which are included in Note 6.
Segment Reporting
Comstock presently operates in one business segment.
Derivative Instruments and Hedging Activities
On January 1, 2001, Comstock adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") which requires that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Since Comstock had no outstanding derivatives on January 1, 2001 there was
no effect on the financial statements as a result of such adoption.
F-8
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Major Purchasers
In 2001, Comstock had four purchasers of its oil and natural gas production
which individually accounted for more than 10% of total oil and gas sales. Such
purchasers accounted for 24%, 19%, 16% and 12% of total 2001 oil and gas sales.
In 2000, Comstock had three purchasers which accounted for 29%, 21% and 11% of
total 2000 oil and gas sales. In 1999, Comstock had two purchasers which
accounted for 33% and 20% of total 1999 oil and gas sales.
General and Administrative Expenses
General and administrative expenses are reported net of reimbursements of
overhead costs that are allocated to working interest owners of the oil and gas
properties operated by Comstock.
Income Taxes
Comstock accounts for income taxes using the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases, as
well as the future tax consequences attributable to the future utilization of
existing tax net operating loss and other types of carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences and
carryforwards are expected to be recovered or settled. 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.
Earnings Per Share
Basic and diluted earnings per share for 1999, 2000 and 2001 were
determined as follows:
Year Ended December 31,
----------------------------------------------------------------------------------------------
1999 2000 2001
----------------------------- ----------------------------- -----------------------------
Income Per Income Per Income Per
(Loss) Shares Share (Loss) Shares Share (Loss) Shares Share
-------- ------- ------- -------- ------- ------- -------- -------- -------
Basic Earnings Per Share:
Income (Loss) ............. $ (2,816) 24,601 $ 41,403 26,290 $ 36,458 29,030
Less Preferred Stock
Dividends ................ (1,853) -- (2,471) -- (1,604) --
-------- ------- -------- ------- -------- --------
Net Income (Loss) Available
to Common Stockholders ... $ (4,669) 24,601 $ (0.19) 38,932 26,290 $ 1.48 34,854 29,030 $ 1.20
======== ====== ======= ======== ======
Diluted Earning Per Share:
Effect of Dilutive Securities:
Stock Options............ -- 1,184 -- 1,129
Convertible Preferred Stock 2,471 6,745 1,604 4,393
-------- ------- -------- --------
Net Income Available to
Common Stockholders and
Assumed Conversions.... $ 41,403 34,219 $ 1.21 $ 36,458 34,552 $ 1.06
======== ======= ======== ======== ======= ======
F-9
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, 2001, Comstock's
comprehensive income differed from net income by approximately $139,000, due to
the recognition in comprehensive income of unrealized losses related to certain
of Comstock's derivative instruments which have been designated as hedges. For
the years ended December 31, 1999 and 2000, there were no differences between
Comstock's net income or net loss and comprehensive income.
Statements of Cash Flows
For the purpose of the consolidated statements of cash flows, Comstock
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
The following is a summary of all significant noncash investing and
financing activities and cash payments made for interest and income taxes:
Year Ended December 31,
-------------------------------
1999 2000 2001
--------- --------- ---------
(in thousands)
Noncash activities -
Common stock issued for compensation ...... $ 131 $ 93 $ 26
Value of vested stock options under
exploration venture ................... 498 2,990 3,028
Common stock issued in payment
of preferred stock dividends .......... 1,853 -- --
Cash payments -
Interest payments ......................... 20,840 24,731 20,607
Income tax payments ....................... -- -- 243
F-10
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations."
SFAS 141 requires the purchase method of accounting for all business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142") "Goodwill and Other
Intangible Assets." SFAS 142 requires the discontinuance of goodwill
amortization. In addition, the SFAS 142 includes provisions regarding the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. SFAS 142
is required to be applied for fiscal years beginning after December 15, 2001,
with certain early adoption permitted. Comstock does not expect the adoption of
SFAS 142 to have a material effect on its financial condition or results of
operations.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 ("SFAS 143") "Accounting for Asset
Retirement Obligations," which Comstock will be required to adopt as of January
1, 2003. This statement requires Comstock to record a liability in the period in
which an asset retirement obligation ("ARO") is incurred. Upon recognition of an
ARO liability, additional asset cost would be capitalized to equal the amount of
the liability. Upon initial adoption of SFAS 143, Comstock will recognize
(1) a liability for any existing AROs not already provided for in Comstock's
reserve for future abandonment costs (2) capitalized cost related to the
additional liability and (3) accumulated depreciation on the additional
capitalized cost. Comstock has not determined the effect, if any, the adoption
of SFAS 143 will have on its financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS 121. SFAS
144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. However, SFAS 144
retains the fundamental provisions of SFAS No. 121 for recognition and
measurement of the impairment of long-lived assets to be held and used, and
measurement of long-lived assets to be disposed of by sale. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. Comstock is in the
process of assessing the effect of adopting SFAS 144, which will be effective
for its first quarter of 2002.
F-11
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(2) Acquisitions
Acquisition of DevX Energy, Inc.
On December 17, 2001, Comstock completed the acquisition of DevX Energy,
Inc. ("DevX") by acquiring 100% of the common stock of DevX for $92.6 million
through a cash tender offer and subsequent merger into a wholly owned
subsidiary. As a result of the acquisition, DevX became a wholly owned
subsidiary of Comstock. DevX is an independent energy company engaged in the
exploration, development and acquisition of oil and gas properties. DevX owns
interests in 600 producing oil and gas wells located onshore primarily in East
and South Texas, Kentucky, Oklahoma and Kansas. One of the primary reasons
Comstock acquired DevX was to add to its existing producing property base in the
East Texas and South Texas regions. Comstock is currently evaluating whether to
divest of the DevX properties in the Illinois Basin and Mid Continent regions,
which are not part of its core operating areas. The DevX acquisition added
approximately 163.4 billion cubic feet equivalent of natural gas reserves to
Comstock's reserve base. Subsequent to the acquisition, Comstock repurchased
approximately $49.8 million of DevX's publically held 12 1/2% senior notes which
were due in 2008 for 110% of the principal amount plus accrued interest.
DevX's operations have been included in the consolidated financial
statements since December 17, 2001.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of the acquisition.
December 17, 2001
-----------------
(in thousands)
Current assets .......... $ 8,317
Oil &gas properties.. 160,794
Derivatives ............. 1,577
--------
Total assets acquired ... 170,688
--------
Current liabilities ..... 8,990
Long-term debt .......... 54,988
Deferred tax liability .. 7,324
Derivatives ............. 1,873
--------
Total liabilities assumed 73,175
--------
Net assets acquired ..... $ 97,513
========
F-12
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Pro Forma Information (Unaudited)
Set forth in the following table is certain unaudited pro forma financial
information for the years ended December 31, 2000 and 2001. This information has
been prepared assuming the DevX acquisition was consummated on January 1, 2000
and is based on estimates and assumptions deemed appropriate by Comstock. The
pro forma information is presented for illustrative purposes only. If the
transactions had occurred in the past, Comstock's operating results might have
been different from those presented in the following table. The pro forma
information should not be relied upon as an indication of the operating results
that Comstock would have achieved if the transactions had occurred on January 1,
2000. The pro forma information also should not be used as an indication of the
future results that Comstock will achieve after the acquisition. Adjustments
were made to adjust the historical operating results of DevX (i) to conform DevX
to the successful efforts method of accounting for oil and gas activities; (ii)
to reverse the costs of the closed Dallas and Ottawa corporate offices of DevX;
and (iii) to record the pro forma interest expense based on Comstock's average
interest rate under its bank credit facility.
Year Ended December 31,
2000 2001
--------- ---------
(In thousands,
except per share amounts)
Revenues:
Oil and gas sales ...................... $ 211,555 $ 206,288
Change in fair value of derivatives .... 442 2,870
Other income ........................... -- 1,164
--------- ---------
Total revenues ......................... 211,997 210,322
--------- ---------
Expenses:
Oil and gas operating .................. 37,648 40,534
Exploration ............................ 3,992 4,751
Depreciation, depletion and amortization 58,431 60,880
Impairment ............................. -- 1,400
General and administrative, net ........ 3,537 4,351
Interest ............................... 35,099 28,981
Change in fair value of derivatives .... 1,945 --
--------- ---------
Income before income taxes .................. 71,345 69,425
Provision for income taxes .................. (24,971) (24,299)
--------- ---------
Income ...................................... 46,374 45,126
Preferred stock dividends ................... (2,471) (1,604)
--------- ---------
Net income attributable to common stock ..... $ 43,903 $ 43,522
========= =========
Net income per share:
Basic................................. $ 1.67 $ 1.49
========= =========
Diluted............................... $ 1.36 $ 1.29
========= =========
F-13
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(3) Oil and Gas Producing Activities
Set forth below is certain information regarding the aggregate capitalized
costs of oil and gas properties and costs incurred by Comstock for its oil and
gas property acquisition, development and exploration activities:
Capitalized Costs
As of December 31,
-----------------------
2000 2001
--------- ---------
(In thousands)
Proved properties .............. $ 659,505 $ 901,206
Unproved properties ............ 5,206 13,416
Accumulated depreciation,
depletion and amortization (231,667) (277,670)
--------- ---------
$ 433,044 $ 636,952
========= =========
Costs Incurred
For the Year Ended December 31,
--------------------------------
1999 2000 2001
-------- -------- --------
(In thousands)
Property acquisitions
Proved properties..... $ 4,458 $ 11,302 $160,794
Unproved properties... 2,258 5,346 8,210
Development costs ....... 20,455 46,928 51,447
Exploration costs ....... 8,126 19,202 33,382
-------- -------- --------
$ 35,297 $ 82,778 $253,833
======== ======== ========
Due to the tax-free nature of the merger between Comstock and DevX in
December 2001, additional deferred tax liabilities of $7.3 million were
allocated to proved oil and gas properties and are included in the proved
property acquisition costs in 2001.
In 2001, Comstock capitalized interest expense of $0.2 million on its
unproved properties which is included in the unproved property acquisition costs
in 2001.
F-14
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Results of Operations for Oil and Gas Producing Activities
The following table includes revenues and expenses associated directly with
Comstock's oil and natural gas producing activities. The amounts presented do
not include any allocation of Comstock's interest costs or general corporate
overhead and, therefore, are not necessarily indicative of the contribution to
net earnings of Comstock's oil and gas operations. Income tax expense has been
calculated by applying statutory income tax rates to oil and gas sales after
deducting costs, including depreciation, depletion and amortization and after
giving effect to permanent differences.
For the Year Ended December 31,
-----------------------------------
1999 2000 2001
--------- --------- ---------
(In thousands)
Oil and gas sales ........................ $ 90,103 $ 169,350 $ 167,689
Production costs ......................... (23,714) (29,707) (32,417)
Exploration .............................. (1,832) (3,192) (4,215)
Depreciation, depletion and amortization . (44,118) (43,478) (47,541)
Impairment of oil and gas properties ..... -- -- (1,400)
--------- --------- ---------
Operating income ................... 20,439 92,973 82,116
Income tax expense ....................... (7,154) (32,541) (28,741)
--------- --------- ---------
Results of operations of oil and gas
producing activities ......... $ 13,285 $ 60,432 $ 53,375
========= ========= =========
(4) Long-Term Debt
Long-term debt is comprised of the following:
As of December 31,
----------------------
2000 2001
--------- ---------
(In thousands)
Revolving Bank Credit Facility... $ 84,000 $ 227,000
11 1/4% Senior Notes due 2007.... 150,000 145,000
Other ........................... 101 464
--------- ---------
234,101 372,464
Less current portion ............ (101) (229)
--------- ---------
$ 234,000 $ 372,235
========= =========
On December 17, 2001, Comstock entered into a new bank credit facility
which consists of a $350.0 million three year revolving credit commitment
provided by a syndicate of banks for which Toronto Dominion (Texas), Inc. serves
as administrative agent. The acquisition of DevX and the repurchase of the DevX
's senior notes were funded by borrowings under the new bank credit facility.
The bank credit facility was also used to refinance Comstock's existing bank
debt. The new bank credit facility is subject to borrowing base availability,
which is redetermined semiannually based on the banks' estimates of the future
net cash flows of Comstock's oil and natural gas properties. The borrowing base
F-15
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
at December 31, 2001 was $270.0 million. 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. Indebtedness under the bank
credit facility is secured by substantially all of Comstock's assets and
Comstock's corporate subsidiaries are guarantors of the bank credit facility.
The bank credit facility contains covenants that, among other things, restrict
the payment of cash dividends, limit the amount of consolidated debt and limit
Comstock's ability to make certain loan and investments. Financial covenants
include the maintenance of a current ratio, maintenance of tangible net worth
and maintenance of an interest coverage ratio.
Comstock issued $150.0 million in aggregate principal amount of 11 1/4%
Senior Notes due in 2007 (the "Notes") on April 29, 1999. Interest on the Notes
is payable semiannually on May 1 and November 1, commencing on November 1, 1999.
The Notes are unsecured obligations of Comstock and are guaranteed by all of its
principal operating subsidiaries. Comstock repurchased $5.0 million of the Notes
in July 2001. The Notes can be redeemed beginning on May 1, 2004. The fair
market value of the Notes as of December 31, 2001 was $142.1 million based on
the market price of 98% of the face amount as of December 31, 2001.
On March 7, 2002, Comstock closed the sale in a private placement of $75.0
million of Notes at a net price of 97.25% after the placements agents' discount.
As a result of this transaction, $220.0 million of aggregate principal amount of
the Notes were outstanding. The net proceeds were used to reduce amounts
outstanding under the bank credit facility. The borrowing base under the bank
credit facility was reduced to $240.0 million in connection with the issuance of
the additional Notes.
(5) Lease Commitments
Comstock rents office space under noncancellable leases. Minimum future
payments under the leases are as follows:
(In thousands)
2002............ $ 661
2003............ 656
2004............ 452
2005............ 477
2006............ 198
------
$2,444
======
(6) Stockholders' Equity
The authorized capital stock of Comstock consists of 10 million shares of
common stock, par value $.50 per share (the "Common Stock"), and 5 million
shares of preferred stock, par value $10.00 per share. The preferred stock may
be issued in one or more series, and the terms and rights of such stock will be
determined by the Board of Directors.
On April 29, 1999, Comstock issued 3,000,000 shares of convertible
preferred stock in a private placement and received proceeds of $30.0 million.
F-16
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The preferred stock accrues dividends at an annual rate of 9% which are payable
quarterly in cash or Comstock has the option to issue shares of Common Stock.
Each share of the preferred stock is convertible, at the option of the holder,
into 2.5 shares of Common Stock. On May 1, 2005 and on each May 1, thereafter,
so long as any shares of the preferred stock are outstanding, Comstock is
obligated to redeem an amount of shares of preferred stock equal to one-third of
the shares of the preferred stock outstanding on May 1, 2005 at $10.00 per share
plus accrued and unpaid dividends. The mandatory redemption price may be paid
either in cash or in shares of Common Stock. Comstock has the option to redeem
the shares of preferred stock upon payment to the holders of the preferred stock
at a specified rate of return on the initial purchase. Upon a change of control
of Comstock, the holders of the preferred stock have the right to require
Comstock to purchase all or a portion of the preferred stock.
In September and October 2000, holders of 1,242,690 shares of the
convertible preferred stock converted their shares into 3,106,725 shares of
Common Stock. As a result of these conversions, $12.4 million of preferred
stockholders' equity was transferred to common stockholders' equity.
Comstock's Board of Directors has designated 500,000 shares of the
preferred stock as Series B Junior Participating Preferred Stock (the "Series B
Junior Preferred Stock") in connection with the adoption of a shareholder rights
plan. At December 31, 2001 there were no shares of Series B Junior Preferred
Stock issued or outstanding. The Series B Junior Preferred Stock is entitled to
receive cumulative quarterly dividends per share equal to the greater of $1.00
of 100 times the aggregate per share amount of all dividends (other than stock
dividends) declared on Common Stock since the immediately preceding quarterly
dividend payment date or, with respect to the first payment date, since the
first issuance of Series B Junior Preferred Stock. Holders of the Series B
Junior Preferred Stock are entitled to 100 votes per share (subject to
adjustment to prevent dilution) on all matters submitted to a vote of the
stockholders. The Series B Junior Preferred Stock is neither redeemable nor
convertible. The Series B Junior Preferred Stock ranks prior to the Common Stock
but junior to all other classes of Preferred Stock.
Under a plan adopted by the Board of Directors, non-employee directors can
elect to receive shares of Common Stock valued at the then current market price
in payment of annual director and consulting fees. Under this plan, Comstock
issued 44,255, 8,182 and 5,342 shares of Common Stock in 1999, 2000 and 2001
respectively, in payment of fees aggregating $130,000, $93,000 and $26,000 for
1999, 2000 and 2001 respectively.
The outstanding preferred stock series provides that Comstock can issue
Common Stock in lieu of cash for payment of quarterly dividends. In 1999,
Comstock issued 640,525 shares of Common Stock in payment of dividends on its
preferred stock of $1.9 million. Comstock paid the preferred stock dividends in
cash in 2000 and 2001.
F-17
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Options and warrants to purchase Common Stock were exercised to purchase
115,000 shares, 291,400 shares and 560,606 shares in 1999, 2000 and 2001,
respectively. Such exercises yielded net proceeds of approximately $295,000,
$763,000 and $2.0 million in 1999, 2000 and 2001, respectively.
During 2001, Comstock repurchased 907,400 shares of Common Stock in open
market purchases totaling $5.2 million. Such shares were retired upon
repurchase.
Stock Options
On June 23, 1999, the stockholders approved the 1999 Long-term Incentive
Plan for the management including officers, directors and managerial employees
which replaced the 1991 Long-term Incentive Plan. The 1999 Long-term Incentive
Plan together with the 1991 Long-term Incentive Plan (the "Incentive Plans")
authorize the grant of non-qualified stock options and incentive stock options
and the grant of restricted stock to key executives of Comstock. As of December
31, 2001, the Incentive Plans provide for future awards of stock options or
restricted stock grants of up to 264,260 shares of Common Stock plus 1% of the
outstanding shares of Common Stock each year beginning on January 1, 2002.
The following table summarizes stock option activity during 1999, 2000 and
2001 under the Incentive Plans:
Weighted
Number Average
of Shares Exercise Price Exercise Price
---------- --------------- --------------
Outstanding at December 31, 1998 3,890,500 $2.00 to $12.38 $ 7.81
Granted ................ 1,010,000 $3.88 3.88
Exercised .............. (115,000) $2.00 to $3.00 2.57
Forfeited .............. (155,500) $3.00 to $12.38 7.81
----------
Outstanding at December 31, 1999 4,630,000 $2.00 to $12.38 7.08
Granted ................ 351,250 $6.69 to $8.88 8.24
Exercised............... (291,400) $2.00 to $4.81 2.62
----------
Outstanding at December 31, 2000 4,689,850 $2.00 to $12.38 7.45
Granted ................ 493,250 $6.42 to $11.12 6.80
Exercised .............. (580,450) $2.00 to $11.94 3.86
Forfeited .............. (213,000) $6.56 to $11.12 6.61
----------
Outstanding at December 31, 2001 4,389,650 $2.50 to $12.38 7.89
==========
Exercisable at December 31, 2001 2,995,400 $2.50 to $12.38 8.26
==========
F-18
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes information about the Incentive Plans stock
options outstanding at December 31, 2001:
Number of Number of
Shares Weighted Average Shares
Exercise Price Outstanding Remaining Life Exercisable
-------------- ------------ ---------------- -------------
(Years)
$2.50 20,000 0.5 20,000
3.44 481,625 5.8 413,875
3.88 975,525 6.3 498,025
6.42 437,750 7.1 175,000
6.69 84,000 5.6 43,500
6.94 150,000 2.0 150,000
7.40 20,000 4.6 20,000
8.88 249,250 7.5 --
9.63 80,000 0.5 80,000
11.00 1,269,000 3.7 1,269,000
11.12 33,500 6.0 20,000
11.94 30,000 1.3 30,000
12.38 559,000 3.5 276,000
---------- ------ -------------
4,389,650 4.9 2,995,400
========== ====== =============
Comstock accounts for the stock options issued under the Incentive Plans
under APB 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with SFAS 123, net
income attributable to common stock and earnings per share would have been
reduced to the following pro forma amounts:
1999 2000 2001
--------- -------- --------
(In thousands, except per share amounts)
Net income (loss): As Reported $ (4,669) $ 38,932 $ 34,854
Pro Forma (6,644) 36,958 33,168
Basic earnings per share: As Reported (0.19) 1.48 1.20
Pro Forma (0.27) 1.41 1.14
Diluted earnings per share: As Reported 1.21 1.06
Pro Forma 1.15 1.01
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999, 2000 and 2001, respectively: average
risk-free interest rates of 5.7, 6.2 and 4.9 percent; average expected lives of
8.8, 7.8 and 7.4 years; average expected volatility factors of 64.2, 66.4 and
67.2; and no dividend yield. The estimated weighted average fair value of
options to purchase one share of common stock issued under the Company's
Incentive Plans was $2.86 in 1999, $5.98 in 2000 and $6.80 in 2001.
F-19
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Restricted Stock Grants
Under the Incentive Plans, officers and managerial employees may be granted
a right to receive shares of Common Stock without cost to the employee. The
shares vest over a specified period with credit given for past service rendered
to Comstock. Restricted stock grants for 667,500 shares have been awarded under
the Incentive Plans. As of December 31, 2001, 470,625 shares of such awards are
vested. A provision for the restricted stock grants is made ratably over the
vesting period. Compensation expense recognized for restricted stock grants for
the years ended December 31, 1999, 2000 and 2001 was $116,000, $221,000 and
$218,000, respectively.
Exploration Venture Warrants
On July 31, 2001 Comstock entered into a new exploration agreement with
Bois d'Arc Offshore, Ltd. and its principals ("Bois d'Arc") which replaces an
exploration agreement entered into on December 8, 1997. The 2001 Exploration
Agreement establishes a joint exploration venture between Comstock and Bois
d'Arc covering the state coastal waters of Louisiana and Texas and corresponding
federal offshore waters in the Gulf of Mexico. The new venture was effective
April 1, 2001 and will end on December 31, 2006. Under the joint venture, Bois
d'Arc generates exploration prospects in the Gulf of Mexico utilizing 3-D
seismic data and their extensive geological expertise in this region. Comstock
advances funds for the acquisition of 3-D seismic data and leases as needed.
After a prospect is identified, Comstock is reimbursed for the costs that were
advanced and is entitled to a 40% non-promoted working interest in each
prospect. Bois d'Arc has the opportunity to earn warrants to purchase up to
1,620,000 shares of Common Stock. Warrants to purchase 60,000 shares are earned
by Bois d'Arc for each prospect which results in a successful discovery. The
exercise price on the new warrants is determined based on the current market
price for the Common Stock on a semiannual basis each year that the venture is
in operation. The agreement requires that Comstock must fund a minimum of $5.0
million for the acquisition of seismic data over the term of the agreement or
Bois d'Arc has the right to terminate the agreement.
During 2001, Bois d' Arc earned warrants to purchase 360,000 shares at
$7.32 per share under the exploration agreement. The value of the warrants based
on the Black-Scholes option pricing model was $5.64 per option share or an
aggregate of $2.0 million. Such cost was capitalized as a cost of oil and gas
properties in 2001. Bois d' Arc had also earned warrants to purchase 600,000
shares of Common Stock at $14.00 per share under the prior exploration agreement
during the period from January 1998 to April 2001. The value of these warrants
based on the Black-Scholes option pricing model was $9.97 per option share. The
estimated value for the warrants earned under the prior exploraton agreement
which was capitalized to oil and gas properties was $1.5 million in 1998, $0.5
million in 1999, $3.0 million in 2000 and $1.0 million in 2001.
F-20
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) Retirement Plan
Comstock has a 401(k) Profit Sharing Plan which covers all of its
employees. At its discretion, Comstock may match a certain percentage of the
employees' contributions to the plan. The matching percentage is determined
annually by the Board of Directors. Comstock's matching contributions to the
plan were $79,000, $84,000 and $96,000 for the years ended December 31, 1999,
2000 and 2001, respectively.
(8) Income Taxes
The tax effects of significant temporary differences representing the net
deferred tax liability at December 31, 2000 and 2001 were as follows:
2000 2001
-------- --------
(In thousands)
Net deferred tax assets (liabilities):
Property and equipment .................. $(36,562) $(75,269)
Net operating loss carryforwards ........ 13,457 34,504
Valuation allowance on net operating
loss carryforwar.................... -- (8,043)
Other carryforwards ..................... 550 897
-------- --------
$(22,555) $(47,911)
======== ========
The following is an analysis of the consolidated income tax expense:
2000 2001
-------- --------
(In thousands)
Current................................ $ -- $ --
Deferred............................... 22,294 19,631
-------- --------
$ 22,294 $ 19,631
======== ========
There were no significant differences between income taxes computed using
the statutory rate of 35% and Comstock's effective tax rate in 2000 and 2001 of
35%.
F-21
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 2001, Comstock had the following carryforwards available to
reduce future income taxes:
Years of
Types of Carryforward Carryforward Amounts
----------------------------------- ------------ ---------
($ in thousands)
Net operations loss -U.S. federal 2018 - 2021 $ 98,583
Alternative Minimum tax credits Unlimited 792
Charitable contribution carryforward 2003 - 2006 324
The utilization of $42.9 million of the net operating loss carryforwards of
DevX are limited to approximately $1.1 million per year pursuant to a prior
change of control. Accordingly, a valuation allowance of $23.0 million has been
established for Comstock's estimate of the DevX's net operating loss
carryforwards that it will not be able to utilize. Realization of Comstock's and
DevX's net operating carryforwards requires Comstock to generate taxable income
within the carryforward period.
(9) Derivatives and Hedging Activities
Comstock 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. Generally, when the applicable
settlement price is less than the price specified in the contract, Comstock
receives a settlement from the counterparty based on the difference multiplied
by the volume hedge. Similarly, when the applicable settlement price exceeds the
price specified in the contract, Comstock pays the counterparty based on the
difference. Comstock 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 Comstock 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-22
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In connection with the DevX acquisition, Comstock assumed certain
derivative financial instruments entered into by DevX to manage natural gas
price risk. The following table sets out the derivative financial instruments
outstanding at December 31, 2001 which are held for natural gas price risk
management:
Volume Type Floor Ceiling Swap
Period Beginning Period Ending (MMBtu) of Instrument Price Price Price
- ---------------- ----------------- ----------- ------------- --------- ---------- --------
January 1, 2002 December 31, 2002 640,000 Floor $1.90 -- --
January 1, 2002 December 31, 2002 2,550,000 Floor $2.00 -- --
January 1, 2002 December 31, 2002 1,600,000 Swap -- -- $2.40
January 1, 2002 December 31, 2002 900,000 Collar $4.00 $6.75 --
-----------
5,690,000
-----------
January 1, 2003 December 31, 2003 560,000 Floor $1.90 -- --
January 1, 2003 December 31, 2003 2,250,000 Floor $2.00 -- --
January 1, 2003 December 31, 2003 1,400,000 Swap -- -- $2.40
------------
4,210,000
------------
9,900,000
============
The counterparty for the $1.90 floor position and $2.40 swap price position
is a subsidiary of Enron Corporation who has filed for bankruptcy protection.
The net liability owed to Enron as of December 31, 2001, was $1.6 million.
Comstock intends to monitor this position and will assess the credit exposure to
the extent this position becomes a net asset.
As a result of certain hedging transactions for natural gas price risk,
Comstock has realized the following gains and losses which were included in oil
and gas sales:
1999 2000 2001
-------- -------- --------
(In thousands)
Realized Gains $ 248 $ -- $ --
Realized Losses (5,178) -- --
Comstock periodically enters into interest rate swap agreements to hedge
the impact of interest rate changes on its floating rate long-term debt. As of
December 31, 2001, Comstock had an interest rate swap agreement covering $25.0
million of its floating rate debt which fixed the LIBOR rate at 4.5% for the
period April 2001 through April 2002. Comstock has designated this position as a
hedge. As a result of certain hedging transaction for interest rates, Comstock
has realized the following gains or losses which were included in interest
expense:
1999 2000 2001
-------- -------- --------
(In thousands)
Realized Gains $ 169 $ 988 $ --
Realized Losses -- -- (199)
F-23
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Effective January 1, 2001, Comstock adopted SFAS 133 which required that
all derivative financial instruments are to be included on the balance sheet at
the fair value. Comstock estimates fair value based on quotes obtained from the
counterparties to the derivative contract. The fair value of derivative
contracts that expire in less than one year are recognized as current assets or
liabilities. Those that expire in more than one year are recognized as long-term
assets or liabilities. Derivative financial instruments that are not accounted
for as hedges are adjusted to fair value through income. If the derivative is
designated as a cash flow hedge, changes in fair value are recognized in other
comprehensive income until the hedged item is recognized in earnings.
Comstock has not designated any of the natural gas price derivative
financial instruments acquired in the DevX acquisition as hedges. The change in
fair value of these derivative contracts resulted in a gain of $254,000 which is
included in other income in 2001. The interest rate swap has been designated
swap as a cash flow hedge. As a result the change in fair value of this
instrument of an unrealized after tax loss of $139,000 was recognized in other
comprehensive income.
(10) Supplementary Quarterly Financial Data (Unaudited)
First Second Third Fourth Total
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
2000 -
Total revenues ........ $ 33,143 $ 38,634 $ 44,987 $ 52,938 $169,702
======== ======== ======== ======== ========
Net income attributable
to common stock .... $ 4,085 $ 7,934 $ 12,135 $ 14,778 $ 38,932
======== ======== ======== ======== ========
Net income per share:
Basic .............. $ 0.16 $ 0.31 $ 0.47 $ 0.52 $ 1.48
======== ======== ======== ======== ========
Diluted ............ $ 0.14 $ 0.25 $ 0.37 $ 0.44 $ 1.21
======== ======== ======== ======== ========
2001 -
Total revenues ........ $ 67,546 $ 46,575 $ 29,781 $ 24,498 $168,400
======== ======== ======== ======== ========
Net income attributable
to common stock .... $ 23,578 $ 12,439 $ 2,486 $ (3,649) $ 34,854
======== ======== ======== ======== ========
Net income per share:
Basic .............. $ 0.81 $ 0.43 $ 0.09 ($ 0.13) $ 1.20
======== ======== ======== ======== ========
Diluted ............ $ 0.68 $ 0.37 $ 0.09 $ 1.06
======== ======== ======== ========
F-24
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(11) Oil and Gas Reserves Information (Unaudited)
Set forth below is a summary of the changes in Comstock's net quantities of
crude oil and natural gas reserves for each of the three years ended December
31, 2001.
1999 2000 2001
-------------------- -------------------- --------------------
Oil Gas Oil Gas Oil Gas
(MBbls) (MMcf) (MBbls) (MMcf) (MBbls) (MMcf)
-------- -------- -------- -------- -------- --------
Proved Reserves:
Beginning of year ............ 20,245 250,402 19,467 258,121 17,451 297,835
Revisions of previous
estimates ............... (1,695) (14,272) (1,725) 1,205 (1,177) (10,959)
Extensions and discoveries ... 3,029 39,534 1,599 54,574 1,395 46,777
Purchases of minerals in place 16 6,329 416 11,059 1,213 156,515
Sales of minerals in place ... -- -- (499) (134) -- --
Production ................... (2,128) (23,872) (1,807) (26,990) (1,534) (28,083)
-------- -------- -------- -------- -------- --------
End of year .................. 19,467 258,121 17,451 297,835 17,348 462,085
======== ======== ======== ======== ======== ========
Proved Developed Reserves:
Beginning of year ............ 16,585 182,955 14,379 184,123 12,290 200,349
======== ======== ======== ======== ======== ========
End of year .................. 14,379 184,123 12,290 200,349 12,212 315,779
======== ======== ======== ======== ======== ========
The following table sets forth the standardized measure of discounted
future net cash flows relating to proved reserves at December 31, 2000 and 2001:
2000 2001
----------- -----------
(In thousands)
Cash Flows Relating to Proved Reserves:
Future Cash Flows ................................. $ 3,590,711 $ 1,566,780
Future Costs:
Production .................................... (527,939) (453,416)
Development ................................... (126,904) (156,906)
----------- -----------
Future Net Cash Flows Before Income Taxes ......... 2,935,868 956,458
Future Income Taxes ............................... (825,033) (177,551)
----------- -----------
Future Net Cash Flows ............................. 2,110,835 778,907
10% Discount Factor ............................... (822,071) (331,634)
----------- -----------
Standardized Measure of Discounted Future Net Cash Flows $ 1,288,764 $ 447,273
=========== ===========
F-25
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table sets forth the changes in the standardized measure of
discounted future net cash flows relating to proved reserves for the years ended
December 31, 1999, 2000 and 2001:
1999 2000 2001
----------- ----------- -----------
(In thousands)
Standardized Measure, Beginning of Year ............ $ 304,993 $ 468,713 $ 1,288,764
Net Change in Sales Price, Net of Production Costs.. 179,042 1,141,880 (1,298,306)
Development Costs Incurred During the Year Which
Were Previously Estimated ........................ 5,303 17,340 26,627
Revisions of Quantity Estimates .................... (35,727) (44,256) (21,342)
Accretion of Discount .............................. 30,531 51,506 173,747
Changes in Future Development Costs ................ (437) (41,525) (6,571)
Changes in Timing and Other ........................ (2,271) (166,410) (141,844)
Extensions and Discoveries ......................... 91,911 375,632 86,026
Purchases of Reserves in Place ..................... 7,787 62,621 120,147
Sales of Reserves in Place ......................... -- (3,355) --
Sales, Net of Production Costs ..................... (66,389) (139,643) (135,272)
Net Changes in Income Taxes ........................ (46,030) (433,739) 355,297
----------- ----------- -----------
Standardized Measure, End of Year .................. $ 468,713 $ 1,288,764 $ 447,273
=========== =========== ===========
The estimates of proved oil and gas reserves utilized in the preparation of
the financial statements were estimated by independent petroleum consultants of
Lee Keeling and Associates in accordance with guidelines established by the
Securities and Exchange Commission and the Financial Accounting Standards Board,
which require that reserve reports be prepared under existing economic and
operating conditions with no provision for price and cost escalation except by
contractual agreement. All of Comstock's reserves are located onshore in or
offshore to the continental United States of America.
Future cash inflows are calculated by applying year-end prices adjusted for
transportation and other charges to the year-end quantities of proved reserves,
except in those instances where fixed and determinable price changes are
provided by contractual arrangements in existence at year-end.
Comstock's average yearend prices used in the reserve estimates were as
follows:
1999 2000 2001
------- ------- -------
Crude Oil (Per Barrel)........ $ 24.56 $ 26.34 $ 18.73
======= ======= =======
Natural Gas (Per Mcf) ........ $ 2.51 $ 10.51 $ 2.69
======= ======= =======
Future development and production costs are computed by estimating the
expenditures to be incurred in developing and producing proved oil and gas
reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions. Future income tax expenses are
computed by applying the appropriate statutory tax rates to the future pre-tax
net cash flows relating to proved reserves, net of the tax basis of the
properties involved. The future income tax expenses give effect to permanent
differences and tax credits, but do not reflect the impact of future operations.
F-26