UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One) |
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þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF | |
| THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For The Quarter Ended June 30, 2004 | ||
| OR | ||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF | |
| THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 0-16741
COMSTOCK RESOURCES, INC.
| NEVADA | 94-1667468 | |
| (State or other jurisdiction of or organization) |
(I.R.S. Employer incorporation Identification Number) |
5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034
(Address of principal executive offices)
Telephone No.: (972) 668-8800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No o
The number of shares outstanding of the registrant’s common stock, par value $.50, as of August 6, 2004 was 34,730,262.
COMSTOCK RESOURCES, INC.
QUARTERLY REPORT
For The Quarter Ended June 30, 2004
INDEX
2
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
| (In thousands) | ||||||||
ASSETS |
||||||||
Cash and Cash Equivalents |
$ | 692 | $ | 5,343 | ||||
Accounts Receivable: |
||||||||
Oil and gas sales |
29,075 | 36,468 | ||||||
Joint interest operations |
12,244 | 9,524 | ||||||
Other Current Assets |
3,963 | 4,802 | ||||||
Total current assets |
45,974 | 56,137 | ||||||
Property and Equipment: |
||||||||
Unevaluated oil and gas properties |
21,009 | 18,075 | ||||||
Oil and gas properties, successful efforts method |
1,122,083 | 1,052,564 | ||||||
Other |
4,058 | 4,047 | ||||||
Accumulated depreciation, depletion and amortization |
(406,910 | ) | (376,000 | ) | ||||
Net property and equipment |
740,240 | 698,686 | ||||||
Other Assets |
7,840 | 6,133 | ||||||
| $ | 794,054 | $ | 760,956 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current Portion of Long-Term Debt |
$ | 1,290 | $ | 623 | ||||
Accounts Payable and Accrued Expenses |
43,278 | 63,874 | ||||||
Total current liabilities |
44,568 | 64,497 | ||||||
Long-Term Debt, less current portion |
324,000 | 306,000 | ||||||
Deferred Taxes Payable |
87,877 | 81,629 | ||||||
Reserve for Future Abandonment Costs |
20,312 | 19,174 | ||||||
Stockholders’ Equity: |
||||||||
Common stock-$0.50 par, 50,000,000 shares authorized,
34,730,262 and 34,308,861 shares outstanding at
June 30, 2004 and December 31, 2003, respectively |
17,365 | 17,154 | ||||||
Additional paid-in capital |
166,209 | 166,242 | ||||||
Retained earnings |
133,723 | 115,032 | ||||||
Deferred compensation-restricted stock grants |
— | (8,772 | ) | |||||
Total stockholders’ equity |
317,297 | 289,656 | ||||||
| $ | 794,054 | $ | 760,956 | |||||
The accompanying notes are an integral part of these statements.
4
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
Oil and gas sales |
$ | 66,508 | $ | 57,161 | $ | 127,269 | $ | 125,737 | ||||||||
Operating expenses: |
||||||||||||||||
Oil and gas operating |
12,456 | 10,531 | 25,106 | 21,896 | ||||||||||||
Exploration |
1,797 | 505 | 5,179 | 2,141 | ||||||||||||
Depreciation, depletion and amortization |
15,728 | 15,117 | 31,537 | 30,304 | ||||||||||||
General and administrative, net |
2,882 | 1,947 | 5,972 | 3,475 | ||||||||||||
Total operating expenses |
32,863 | 28,100 | 67,794 | 57,816 | ||||||||||||
Income from operations |
33,645 | 29,061 | 59,475 | 67,921 | ||||||||||||
Other income (expenses): |
||||||||||||||||
Other income |
47 | 44 | 86 | 91 | ||||||||||||
Interest income |
18 | 23 | 34 | 43 | ||||||||||||
Interest expense |
(4,526 | ) | (7,370 | ) | (10,791 | ) | (14,678 | ) | ||||||||
Loss on early extinguishment of debt |
(18 | ) | — | (19,599 | ) | — | ||||||||||
Total other expenses |
(4,479 | ) | (7,303 | ) | (30,270 | ) | (14,544 | ) | ||||||||
Income before income taxes and cumulative effect of
change in accounting principle |
29,166 | 21,758 | 29,205 | 53,377 | ||||||||||||
Provision for income taxes |
(10,500 | ) | (7,615 | ) | (10,514 | ) | (18,682 | ) | ||||||||
Income before cumulative effect of change in accounting
principle |
18,666 | 14,143 | 18,691 | 34,695 | ||||||||||||
Cumulative effect of change in accounting principle,
net of income taxes |
— | — | — | 675 | ||||||||||||
Net income |
18,666 | 14,143 | 18,691 | 35,370 | ||||||||||||
Preferred stock dividends |
— | (178 | ) | — | (573 | ) | ||||||||||
Net income attributable to common stock |
$ | 18,666 | $ | 13,965 | $ | 18,691 | $ | 34,797 | ||||||||
Net income per share before cumulative effect of
change in accounting principle: |
||||||||||||||||
Basic |
$ | 0.55 | $ | 0.44 | $ | 0.55 | $ | 1.13 | ||||||||
Diluted |
$ | 0.52 | $ | 0.40 | $ | 0.52 | $ | 1.00 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.55 | $ | 0.44 | $ | 0.55 | $ | 1.15 | ||||||||
Diluted |
$ | 0.52 | $ | 0.40 | $ | 0.52 | $ | 1.02 | ||||||||
Weighted average common and common stock
equivalent shares outstanding: |
||||||||||||||||
Basic |
34,111 | 31,473 | 33,977 | 30,205 | ||||||||||||
Diluted |
36,133 | 35,010 | 35,990 | 34,719 | ||||||||||||
The accompanying notes are an integral part of these statements.
5
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2004
(Unaudited)
| Deferred | ||||||||||||||||||||
| Additional | Compensation- | |||||||||||||||||||
| Common | Paid-In | Retained | Restricted | |||||||||||||||||
| Stock |
Capital |
Earnings |
Stock Grants |
Total |
||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Balance at December 31, 2003 |
$ | 17,154 | $ | 166,242 | $ | 115,032 | $ | (8,772 | ) | $ | 289,656 | |||||||||
Adoption of SFAS 123 |
— | (8,772 | ) | — | 8,772 | — | ||||||||||||||
Value of stock options issued for
exploration projects, net of deferred
taxes |
— | 2,624 | — | — | 2,624 | |||||||||||||||
Stock-based compensation |
— | 2,376 | — | — | 2,376 | |||||||||||||||
Exercise of stock options |
211 | 3,739 | — | — | 3,950 | |||||||||||||||
Net income |
— | — | 18,691 | — | 18,691 | |||||||||||||||
Balance at June 30, 2004 |
$ | 17,365 | $ | 166,209 | $ | 133,723 | $ | — | $ | 317,297 | ||||||||||
The accompanying notes are an integral part of these statements.
6
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended | ||||||||
| June 30, |
||||||||
| 2004 |
2003 |
|||||||
| (In thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 18,691 | $ | 35,370 | ||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||
Dry hole costs and lease impairments |
3,116 | 1,526 | ||||||
Depreciation, depletion and amortization |
31,537 | 30,304 | ||||||
Stock-based compensation |
2,376 | 119 | ||||||
Deferred income taxes |
7,200 | 18,682 | ||||||
Debt issuance costs amortization |
384 | — | ||||||
Loss on early extinguishment of debt |
19,599 | — | ||||||
Cumulative effect of change in accounting principle,
net of income taxes |
— | (675 | ) | |||||
| 82,903 | 85,326 | |||||||
(Increase) decrease in accounts receivable |
4,673 | (11,389 | ) | |||||
(Increase) decrease in other current assets |
839 | (1,213 | ) | |||||
Decrease in accounts payable and accrued expenses |
(20,596 | ) | (3,913 | ) | ||||
Net cash provided by operating activities |
67,819 | 68,811 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital expenditures and acquisitions |
(72,327 | ) | (40,712 | ) | ||||
Net cash used for operating activities |
(72,327 | ) | (40,712 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Borrowings |
171,433 | 16,402 | ||||||
Proceeds from issuance of senior notes |
175,000 | — | ||||||
Debt issuance costs |
(5,651 | ) | — | |||||
Principal payments on debt |
(343,639 | ) | (45,400 | ) | ||||
Proceeds from issuance of common stock |
2,714 | 528 | ||||||
Dividends paid on preferred stock |
— | (573 | ) | |||||
Net cash used for financing activities |
(143 | ) | (29,043 | ) | ||||
Net decrease in cash and cash equivalents |
(4,651 | ) | (944 | ) | ||||
Cash and cash equivalents, beginning of period |
5,343 | 1,682 | ||||||
Cash and cash equivalents, end of period |
$ | 692 | $ | 738 | ||||
The accompanying notes are an integral part of these statements.
7
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
| (1) | SIGNIFICANT ACCOUNTING POLICIES - |
Basis of Presentation
In management’s opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position of Comstock Resources, Inc. and subsidiaries (“Comstock” or the “Company”) as of June 30, 2004 and the related results of operations and cash flows for the six months ended June 30, 2004 and 2003.
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to those rules and regulations, although Comstock believes that the disclosures made are adequate to make the information presented not misleading. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in Comstock’s Annual Report on Form 10-K for the year ended December 31, 2003.
The results of operations for the six months ended June 30, 2004 are not necessarily an indication of the results expected for the full year.
Income Taxes
Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates.
The following is an analysis of the consolidated income tax expense:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (In thousands) | ||||||||||||||||
Current |
$ | 1,314 | $ | — | $ | 3,314 | $ | — | ||||||||
Deferred |
9,186 | 7,615 | 7,200 | 18,682 | ||||||||||||
Provision for
Income Taxes |
$ | 10,500 | $ | 7,615 | $ | 10,514 | $ | 18,682 | ||||||||
Stock-Based Compensation
Prior to January 1, 2004, Comstock accounted for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company’s common stock at the date of the grant over the amount an employee must pay to acquire the common stock. Effective January 1, 2004, the Company changed its method of accounting for employee stock-based compensation to the preferable fair value based method prescribed in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the award vesting period. The fair
8
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
value of each award is estimated as of the date of grant using the Black-Scholes options pricing model. Under the modified prospective transition method selected by Comstock as described in Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” stock-based compensation expense recognized for the three months and six months ended June 30, 2004, is the same as that which would have been recognized had the fair value method of SFAS 123 been applied from its original effective date. During the three months and six months ended June 30, 2004, the Company recorded $1.2 million and $2.4 million, respectively, in stock-based compensation expense in general and administrative expenses.
In accordance with the modified prospective transition method, results for years prior to 2004 have not been restated. For the three months and six months ended June 30, 2003, the Company accounted for stock-based compensation for employees under APB 25 and related interpretations, under which no compensation cost was recognized for employee stock options. If compensation costs had been determined in accordance with SFAS 123, the Company’s net income and earnings per share would approximate the following pro forma amounts:
| For the Three | For the Six | |||||||
| Months Ended | Months Ended | |||||||
| June 30, 2003 |
June 30, 2003 |
|||||||
| (In thousands, except per share amounts) | ||||||||
Net income, as reported |
$ | 13,965 | $ | 34,797 | ||||
Add stock-based employee compensation expense
included in reported net income, net of
income taxes |
38 | 77 | ||||||
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of income taxes |
(450 | ) | (935 | ) | ||||
Pro forma net income |
$ | 13,553 | $ | 33,939 | ||||
Basic earnings per share: As reported |
$ | 0.44 | $ | 1.15 | ||||
Pro forma |
$ | 0.43 | $ | 1.12 | ||||
Diluted earnings per share: As reported |
$ | 0.40 | $ | 1.02 | ||||
Pro forma |
$ | 0.39 | $ | 0.99 | ||||
Asset Retirement Obligations
Comstock adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”), on January 1, 2003. This statement required Comstock to record a liability in the period in which an asset retirement obligation (“ARO”) is incurred, in an amount equal to the discounted estimated fair value of the obligation that is capitalized. Thereafter, each quarter, this liability is accreted up to the final retirement cost. The adoption of SFAS 143 on January 1, 2003 resulted in a cumulative effect adjustment to record (i) a $3.7 million decrease in the carrying value of oil and gas properties, (ii) a $3.3 million decrease in accumulated depletion, depreciation and amortization, (iii) a $1.5 million decrease in reserve for future abandonment, and (iv) a gain of $675,000, net of income taxes, which was reflected as the cumulative effect of a change in accounting principle.
9
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Comstock’s primary asset retirement obligations relate to future plugging and abandonment expenses on its oil and gas properties and related facilities disposal. As of June 30, 2004, Comstock had $1.7 million held in an escrow account from which funds are released only for reimbursement of plugging and abandonment expenses on certain offshore oil and gas properties. This amount is included in Other Assets in the consolidated balance sheet. The following table summarizes the changes in Comstock’s total estimated liability during the six months ended June 30, 2004 and 2003:
| For the Six Months | ||||||||
| Ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| (In thousands) | ||||||||
Future abandonment liability — beginning of
period |
$ | 19,174 | $ | 16,677 | ||||
Cumulative effect adjustment |
— | (1,476 | ) | |||||
Accretion expense |
599 | 370 | ||||||
New wells placed on production |
572 | 199 | ||||||
Liabilities settled |
(33 | ) | (216 | ) | ||||
Future abandonment liability — end of period |
$ | 20,312 | $ | 15,554 | ||||
Earnings Per Share
Basic earnings per share is determined without the effect of any outstanding potentially dilutive stock options or other convertible securities and diluted earnings per share is determined with the effect of outstanding stock options and other convertible securities that are potentially dilutive. Basic and diluted earnings per share for the three and six months ended June 30, 2004 and 2003, were determined as follows:
| Three Months Ended June 30, |
||||||||||||||||||||||||
| 2004 |
2003 |
|||||||||||||||||||||||
| Per | Per | |||||||||||||||||||||||
| Income |
Shares |
Share |
Income |
Shares |
Share |
|||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||
Basic Earnings Per Share: |
||||||||||||||||||||||||
Net Income |
$ | 18,666 | 34,111 | $ | 14,143 | 31,473 | ||||||||||||||||||
Less Preferred Stock Dividends |
— | — | (178 | ) | — | |||||||||||||||||||
Net Income Available to Common
Stockholders |
$ | 18,666 | 34,111 | $ | 0.55 | $ | 13,965 | 31,473 | $ | 0.44 | ||||||||||||||
Diluted Earnings Per Share: |
||||||||||||||||||||||||
Net Income |
$ | 18,666 | 34,111 | $ | 14,143 | 31,473 | ||||||||||||||||||
Effect of Dilutive Securities: |
||||||||||||||||||||||||
Stock Grants and Options |
— | 2,022 | — | 1,591 | ||||||||||||||||||||
Convertible Preferred Stock |
— | — | — | 1,946 | ||||||||||||||||||||
Net Income Available to Common
Stockholders
With Assumed Conversions |
$ | 18,666 | 36,133 | $ | 0.52 | $ | 14,143 | 35,010 | $ | 0.40 | ||||||||||||||
10
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
| Six Months Ended June 30, |
||||||||||||||||||||||||
| 2004 |
2003 |
|||||||||||||||||||||||
| Per | Per | |||||||||||||||||||||||
| Income |
Shares |
Share |
Income |
Shares |
Share |
|||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||
Basic Earnings Per Share: |
||||||||||||||||||||||||
Net Income Before Cumulative
Effect of Change in Accounting
Principle |
$ | 18,691 | 33,977 | $ | 34,695 | 30,205 | ||||||||||||||||||
Less Preferred Stock Dividends |
— | — | (573 | ) | — | |||||||||||||||||||
Net Income Available to Common
Stockholders Before Cumulative Effect
of Change in Accounting Principle |
18,691 | 33,977 | $ | 0.55 | 34,122 | 30,205 | $ | 1.13 | ||||||||||||||||
Cumulative Effect of Change in
Accounting Principle, net of
Income Taxes |
— | 33,977 | — | 675 | 30,205 | 0.02 | ||||||||||||||||||
Net Income Available to Common
Stockholders |
$ | 18,691 | 33,977 | $ | 0.55 | $ | 34,797 | 30,205 | $ | 1.15 | ||||||||||||||
Diluted Earnings Per Share: |
||||||||||||||||||||||||
Net Income Before Cumulative Effect
of Change in Accounting Principle |
$ | 18,691 | 33,977 | $ | 34,695 | 30,205 | ||||||||||||||||||
Effect of Dilutive Securities: |
||||||||||||||||||||||||