Page
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets - September 30, 2006 and December 31, 2005		4
Consolidated Statements of Operations - Three months and nine months ended September 30, 2006 and 2005		5
Consolidated Statement of Stockholders' Equity - Nine months ended September 30, 2006		6
Consolidated Statements of Cash Flows - Nine months ended September 30, 2006 and 2005		7
Notes to Consolidated Financial Statements		8
Independent Accountants' Review Report		20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosure About Market Risks		29
Item 4. Controls and Procedures		29
PART II. Other Information
Item 6. Exhibits		30
Awareness Letter of Ernst & Young LLP
Section 302 Certification of the CEO
Section 302 Certification of the CFO
Section 906 Certification of the CEO
Section 906 Certification of the CFO

 

 

 

 

2

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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

INTRODUCTORY NOTE

    In the third quarter of 2006, Comstock Resources, Inc. ("Comstock" or the "Company") acquired additional interests in Bois d'Arc Energy, Inc. ("Bois d'Arc Energy") and, as a result, began including Bois d'Arc Energy in its financial statements as a consolidated subsidiary. In accordance with generally accepted accounting principles, Comstock has applied consolidation accounting for its ownership in Bois d'Arc Energy retroactively as of January 1, 2006.

    Comstock accounted for its interest in Bois d'Arc Energy using proportionate consolidation from July 16, 2004, the date that Bois d'Arc Energy was formed as a limited liability company, until May 10, 2005 when Bois d'Arc Energy converted to a corporation in connection with its initial public offering. From May 10, 2005 through December 31, 2005, Comstock accounted for its ownership interest in Bois d'Arc Energy using the equity method. Revenues and expenses have been adjusted beginning January 1, 2006 to include Bois d'Arc Energy as a consolidated subsidiary. There was no effect on net income as a result of using the consolidation method. The Company's financial statements for dates and periods prior to January 1, 2006 have not been adjusted. A summary of the impact of consolidating Bois d'Arc Energy is included in Note 1 to the consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

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CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

			September 30,				December 31,
			2006				2005
			(In thousands)
ASSETS
Cash and Cash Equivalents			$	27,084			$	89
Accounts Receivable:
Oil and gas sales				48,051				37,646
Joint interest operations				13,888				5,553
Other Current Assets				16,150				9,482
Total current assets				105,173				52,770
Property and Equipment:
Unevaluated oil and gas properties				17,279				10,723
Oil and gas properties, successful efforts method				2,353,375				1,018,341
Other				8,154				3,342
Accumulated depreciation, depletion and amortization				(702,574	)			(325,478	)
Net property and equipment				1,676,234				706,928
Assets Held for Sale				6,518				—
Investment in Bois d'Arc Energy				—				252,134
Other Assets				4,959				4,831
			$	1,792,884			$	1,016,663
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term Debt			$	6,500			$	—
Accounts Payable				83,623				44,216
Accrued Expenses				32,776				12,659
Unrealized Loss on Derivatives				—				11,242
Total current liabilities				122,899				68,117
Long-term Debt				455,000				243,000
Deferred Income Taxes Payable				305,062				119,481
Reserve for Future Abandonment Costs				44,327				3,206
Minority Interest in Bois d'Arc Energy				212,683				—
Total liabilities				1,139,971				433,804
Commitments and Contingencies
Stockholders' Equity:
Common stock-$0.50 par, 50,000,000 shares authorized, 43,126,262 and 42,969,262 shares outstanding at September 30, 2006 and December 31, 2005, respectively				21,554				21,485
Additional paid-in capital				346,728				338,996
Retained earnings				284,631				222,378
Total stockholders' equity				652,913				582,859
			$	1,792,884			$	1,016,663

 

 

 

The accompanying notes are an integral part of these statements.

 

4

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CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2006				2005				2006				2005
		(In thousands, except per share amounts)
Oil and gas sales		$	129,251			$	71,619			$	385,153			$	209,970
Operating expenses:
Oil and gas operating			26,904				10,803				78,220				36,869
Exploration			8,069				2,423				16,662				19,709
Depreciation, depletion and amortization			40,709				14,036				104,457				47,368
Impairment			1,389				3,400				2,235				3,400
Loss on disposal of oil and gas properties			—				—				7,934				—
General and administrative, net			7,370				3,058				22,738				11,015
Total operating expenses			84,441				33,720				232,246				118,361
Income from operations			44,810				37,899				152,907				91,609
Other income (expenses):
Interest income			258				242				724				1,449
Other income			187				37				616				173
Interest expense			(6,733	)			(4,982	)			(18,322	)			(15,499	)
Gain on sale of stock by Bois d'Arc Energy			—				—				—				28,797
Gain (loss) on derivatives			1,180				(17,814	)			10,608				(21,045	)
Total other income (expenses)			(5,108	)			(22,517	)			(6,374	)			(6,125	)
Income before income taxes, minority interest and
equity in earnings of Bois d'Arc Energy			39,702				15,382				146,533				85,484
Provision for income taxes			(16,662	)			(7,602	)			(61,847	)			(11,469	)
Minority interest in earnings of Bois d'Arc Energy			(6,004	)			—				(22,433	)			—
Equity in earnings (loss) of Bois d'Arc Energy			—				6,358				—				(54,867	)
Net income		$	17,036			$	14,138			$	62,253			$	19,148
Net income per share:
Basic		$	0.40			$	0.35			$	1.48			$	0.50
Diluted		$	0.39			$	0.33			$	1.42			$	0.47
Weighted average common and common stock equivalent shares outstanding:
Basic			42,243				40,432				42,128				38,417
Diluted			43,553				42,380				43,505				40,516

 

 

The accompanying notes are an integral part of these statements.

 

5

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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Nine Months Ended September 30, 2006

(Unaudited)

 

 

						Common				Additional
		Common				Stock -				Paid-in				Retained
		Stock				Par Value				Capital				Earnings				Total
		(In thousands)
Balance at December 31, 2005			42,969			$	21,485			$	338,996			$	222,378			$	582,859
Stock-based compensation			19				—				5,123				—				5,123
Exercise of stock options			138				69				1,687				—				1,756
Excess tax benefit from stock-
based compensation			—				—				922				—				922
Net income			—				—				—				62,253				62,253
Balance at September 30, 2006			43,126			$	21,554			$	346,728			$	284,631			$	652,913

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

6

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Nine Months Ended
		September 30,
		2006				2005
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	62,253			$	19,148
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes			55,078				8,435
Depreciation, depletion and amortization			104,457				47,368
Dry hole costs and leasehold impairments			13,246				16,883
Impairments			2,235				3,400
Loss on disposal of oil and gas properties			7,934				—
Debt issuance cost amortization			878				707
Stock-based compensation			9,834				4,195
Excess tax benefit from stock-based compensation			(922	)			—
Minority interest in earnings of Bois d'Arc Energy			22,433				—
Equity in loss of Bois d'Arc Energy			—				54,867
Gain on sale of stock by Bois d'Arc Energy			—				(28,797	)
Gain (loss) from derivatives			(10,608	)			21,045
(Increase) decrease in accounts receivable			10,774				(4,741	)
(Increase) decrease in other current assets			(139	)			1,659
Increase (decrease) in accounts payable and accrued expenses			(3,153	)			7,947
Net cash provided by operating activities			274,300				152,116
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and acquisitions			(404,295	)			(326,091	)
Advances to Bois d'Arc Energy			—				(6,421	)
Repayments from Bois d'Arc Energy			—				158,066
Payments to settle derivatives			(703	)			(140	)
Net cash used for investing activities			(404,998	)			(174,586	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings			182,000				176,000
Principal payments on debt			(39,000	)			(297,000	)
Proceeds from issuance of common stock			1,756				142,706
Excess tax benefit from stock-based compensation			922				—
Other			(28	)			(92	)
Net cash provided by financing activities			145,650				21,614
Net increase (decrease) in cash and cash equivalents			14,952				(856	)
Cash and cash equivalents, beginning of period			89				2,703
Bois d'Arc Energy cash and cash equivalents as of January 1, 2006			12,043				—
Cash and cash equivalents, end of period		$	27,084			$	1,847

The accompanying notes are an integral part of these statements.

 

7

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

(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 September 30, 2006 and the related results of operations and cash flows for the nine months ended September 30, 2006 and 2005.

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 of the Company and of Bois d'Arc Energy, Inc. included in Comstock's Annual Report on Form 10-K for the year ended December 31, 2005.

These unaudited consolidated financial statements include the accounts of Comstock and subsidiaries in which it has a controlling interest. Investments in 50% or less owned entities are accounted for using the equity method of accounting. Intercompany balances and transactions have been eliminated in consolidation.

The results of operations for the nine months ended September 30, 2006 are not necessarily an indication of the results expected for the full year.

On July 16, 2004, Comstock contributed its offshore oil and gas properties to a new entity, Bois d'Arc Energy, LLC, a limited liability company that conducted exploration, development and production operations in state and federal waters in the Gulf of Mexico. Comstock accounted for its 60% interest in Bois d'Arc Energy, LLC based on its proportionate ownership in such entity until May 10, 2005 when Bois d'Arc Energy, LLC was converted to a corporation and changed its name to Bois d'Arc Energy, Inc. ("Bois d'Arc Energy"). On May 11, 2005 Bois d'Arc Energy completed an initial public offering of 13.5 million shares of common stock at $13.00 per share to the public. Bois d'Arc Energy sold 12.0 million shares of common stock and received net proceeds of $145.1 million and a selling stockholder sold 1.5 million shares. On May 11, 2005, Bois d'Arc Energy used the proceeds from its initial public offering together with borrowings under a new bank credit facility to repay $158.1 million in outstanding advances from Comstock. As a result of Bois d'Arc Energy's conversion to a corporation and the initial public offering, Comstock's ownership in Bois d'Arc Energy decreased to 48% and Comstock discontinued accounting for its interest in Bois d'Arc Energy using the proportionate consolidation method and began using the equity method to account for its investment in Bois d'Arc Energy.

 

 

 

 

8

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

During the three months ended September 30, 2006, Comstock acquired 2,285,000 additional shares of Bois d'Arc Energy for $36.4 million increasing its ownership of Bois d'Arc Energy's common stock to 32,220,761 shares. As a result, as of September 30, 2006, the Company has voting control of Bois d'Arc Energy through the combined share ownership of the Company and the members of its Board of Directors. Upon obtaining voting control of Bois d'Arc Energy, Comstock began including Bois d'Arc Energy in its financial statements as a consolidated subsidiary. As permitted by generally accepted accounting principles, consolidated revenues, expenses and cash flows for 2006 have been retroactively adjusted to reflect Bois d'Arc Energy as a consolidated subsidiary as of January 1, 2006. The Company's financial statements for dates and periods prior to January 1, 2006, have not been adjusted. The inclusion of Bois d'Arc Energy as a consolidated subsidiary in the Company's financial statements had no impact on the Company's net income.

The following summarizes the impact of retroactively consolidating the results of Bois d'Arc Energy as of January 1, 2006:

 

		Six Months Ended June 30, 2006
		As Previously				Consolidating				As
		Reported				Adjustments				Consolidated
		(In thousands)
Statement of Operations
Revenues		$	134,462			$	121,440			$	255,902
Income from operations		$	56,783			$	51,314			$	108,097
Income before income taxes, minority interest in
earnings and equity in earnings of Bois d'Arc
Energy		$	57,710			$	49,121			$	106,831
Provision for income taxes			(27,628	)			(17,557	)			(45,185	)
Minority interest in earnings of Bois d'Arc Energy			—				(16,429	)			(16,429	)
Equity earnings in earnings of Bois d'Arc Energy			15,135				(15,135	)			—
Net income		$	45,217			$	—			$	45,217
Balance Sheet
Current assets		$	40,723			$	51,450			$	92,173
Property and equipment, net			752,181				741,164				1,493,345
Investment in Bois d'Arc Energy			267,269				(267,269	)			—
Other assets			10,858				703				11,561
Total assets		$	1,071,031			$	526,048			$	1,597,079
Current liabilities		$	51,086			$	73,196			$	124,282
Long-term debt			243,000				90,000				333,000
Deferred income taxes payable			139,383				138,344				277,727
Reserve for future abandonment costs			3,349				37,988				41,337
Minority interest in Bois d'Arc Energy			—				186,520				186,520
Stockholders' equity			634,213				—				634,213
Total liabilities and stockholders' equity		$	1,071,031			$	526,048			$	1,597,079

 

In connection with the $36.4 million acquisition of additional common shares of Bois d'Arc Energy, Comstock has allocated the purchase price paid for the shares in excess of its underlying net book value in Bois d'Arc Energy of $18.9 million together with the related deferred income tax liability of $10.1 million to oil and gas properties in the accompanying consolidated balance sheet. This additional amount is being amortized over the productive lives of Bois d'Arc Energy's oil and gas properties using the unit-of-production method. The pro forma impact of the acquisition of these shares was not material to the Company's historical results of operations.

9

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Reclassifications

Certain reclassifications have been made to prior periods' financial statements to conform to the current presentation.

 

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 difference between the Company's customary rate of 35% and the effective tax rate on income before income taxes, minority interest and equity in earnings (loss) of Bois d'Arc Energy, is due to the following:

			Nine Months Ended
			September 30,
			2006				2005
Tax at statutory rate				35.0%				35.0%
Tax effect of:
Undistributed earnings of Bois d'Arc Energy, not consolidated for federal income tax purposes				5.0%				—
Nondeductible stock-based compensation				1.7%				0.5%
State income taxes, net of federal benefit				—				1.0%
Deferred taxes provided due to change in state tax laws				0.7%				—
Other				(0.2%	)			1.0%
Effective tax rate				42.2%				37.5%

The following is an analysis of consolidated income tax expense:

 

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
		(In thousands)
			2006				2005						2006					2005
Current provision			$	1,599			$	930					$		6,769			$	3,034
Deferred provision				15,063				6,672							55,078				8,435
Provision for Income Taxes			$	16,662			$	7,602					$		61,847			$	11,469

 

Stock-Based Compensation

Effective January 1, 2006 Comstock adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R") in accounting for employee stock-based compensation, including the supplemental guidance provided in Staff Accounting Bulletin No. 107. The Company adopted SFAS 123R utilizing the modified prospective transition method and accordingly the financial results for periods prior to January 1, 2006 have not been adjusted. Prior to adopting SFAS 123R the Company followed the fair value based method prescribed in Statement of Financial Accountings Standards No. 123, "Accounting for Stock Based Compensation" for all periods beginning January 1, 2004. 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. Because the Company previously recorded stock-based compensation using the fair value method, adoption of SFAS 123R did not have a significant impact on the Company's net income or earnings per share for the three months and nine months ended September 30, 2006. The Company recognized $3.3 million and $1.0 million, for the three months ended September 30, 2006 and 2005, respectively, and $9.8 million and $4.2 million for the nine months ended September 30, 2006 and 2005, respectively, in stock-based compensation expense within general and administrative expenses.

 

10

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The excess income tax benefit realized from tax deductions associated with stock-based compensation totaled $0.9 million and $12.6 million for the nine months ended September 30, 2006 and 2005, respectively. Prior to adopting SFAS 123R, the Company presented all tax benefits of the deductions that resulted from stock-based compensation as cash flows from operating activities. SFAS 123R requires that excess tax benefits on stock-based compensation be recognized as a part of cash flows from financing activities. Upon adoption of SFAS 123R effective January 1, 2006, $0.9 million of tax benefits have been included in cash flows from financing activities for the nine months ended September 30, 2006.

 

Comstock and Bois d'Arc Energy maintain separate incentive compensation plans under which they grant common stock and stock options to key employees and directors. Additional information regarding the outstanding awards under these incentive compensation plans is presented below.

Comstock stock options. Comstock amortizes the fair value of stock options granted over the vesting period using the straight-line method. The fair value of each award is estimated as of the date of grant using the Black-Scholes options pricing model. Options to purchase 40,000 shares at an exercise price of $32.44 per share were granted during the nine months ended September 30, 2006. The fair value of the options awarded was $15.03 per option share. Total compensation expense recognized by Comstock for all outstanding Comstock stock options was $0.2 million and $0.1 million for the three months ended September 30, 2006 and 2005, respectively, and $0.6 million and $0.4 million for the nine months ended September 30, 2006 and 2005, respectively. During the nine months ended September 30, 2006, options to purchase 138,000 Comstock shares were exercised with an intrinsic value of $2.4 million. Total unrecognized compensation cost related to non-vested Comstock stock options of $1.7 million is expected to be recognized over a period of 3.2 years. A summary of outstanding and exercisable options for Comstock as of September 30, 2006 is presented below:

Weighted

Weighted

Average

Average

Remaining

Exercise

Contractual

Intrinsic

Shares

Price

Term

Value

(In thousands)

Options outstanding

1,625,970

$10.00

2.62

$28,581

Options exercisable

1,494,470

$8.03

2.14

$28,581

Comstock restricted stock. The fair value of restricted stock grants is amortized over the vesting period using the straight-line method. The fair value of each restricted share on the date of grant is equal to its fair market price. Restricted stock grants for 40,000 shares were made during the nine months ended September 30, 2006. The value of the grants awarded was $29.60 per share. Total compensation expense recognized by Comstock for restricted stock grants was $1.4 million and $0.8 million for the three months ended September 30, 2006 and 2005, respectively, and $4.5 million and $2.6 million for the nine months ended September 30, 2006 and 2005, respectively. Total unrecognized compensation cost related to non-vested Comstock restricted stock of $15.1 million as of September 30, 2006 is expected to be recognized over a period of 3.3 years. As of September 30, 2006 the Company had 882,250 shares of Comstock unvested restricted stock outstanding at a weighted average grant date fair value of $24.63 per share.

 

 

 

 

 

11

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Bois d'Arc Energy stock options. Bois d'Arc Energy amortizes the fair value of stock options granted over the vesting period using the straight-line method. The fair value of each award is estimated as of the date of grant using the Black-Scholes options pricing model. Options to purchase 324,000 shares at exercise prices ranging from $14.23 to $16.75 per share were granted during the nine months ended September 30, 2006. The fair value of the options awarded was $9.66 per option share. The consolidated statements of operations include compensation expense recognized for all outstanding Bois d'Arc Energy stock options of $0.9 million for the three months ended September 30, 2006 and $2.5 million for the nine months ended September 30, 2006. Total unrecognized compensation cost related to non-vested Bois d'Arc Energy stock options of $11.5 million is expected to be recognized over a period of 4.9 years. A summary of outstanding and exercisable options for Bois d'Arc Energy as of September 30, 2006 is presented below:

Weighted

Weighted

Average

Average

Remaining

Exercise

Contractual

Intrinsic

Shares

Price

Term

Value

(In thousands)

Options outstanding

3,352,000

$7.64

8.0

$26,027

Options exercisable

1,130,000

$6.17

7.7

$10,321

Bois d'Arc Energy restricted stock. Bois d'Arc Energy amortizes the fair value of restricted stock grants over the vesting period using the straight-line method. The fair value of each restricted share on the date of grant is equal to its fair market price. Bois d'Arc Energy issued restricted stock grants for 25,000 shares during the nine months ended September 30, 2006. The value of the grants awarded was $15.48 per share. The consolidated statements of operations include compensation expense recognized by Bois d'Arc Energy for restricted stock grants of $0.8 million for the three months ended September 30, 2006 and $2.2 million for the nine months ended September 30, 2006. Total unrecognized compensation cost related to non-vested Bois d'Arc Energy restricted stock of $8.5 million as of September 30, 2006, is expected to be recognized over a period of 4.5 years. As of September 30, 2006 Bois d'Arc Energy had 1,312,000 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $6.97 per share.

Asset Retirement Obligations

Comstock's primary asset retirement obligations relate to future plugging and abandonment expenses on its oil and gas properties and related facilities disposal. The following table summarizes the changes in Comstock's total estimated liability during the nine months ended September 30, 2006 and 2005:

		Nine Months Ended
		September 30,
		2006				2005
		(In thousands)
Future abandonment liability — beginning of period		$	3,206			$	19,248
Bois d'Arc Energy abandonment liability(1)			35,034				(16,915	)
Accretion expense			1,849				109
Acquisition liabilities assumed			3,345				266
New wells placed on production			923				61
Liabilities settled			(30	)			—
Future abandonment liability — end of period		$	44,327			$	2,769

(1) Comstock's share of the asset retirement obligations of Bois d'Arc Energy was reclassified to the investment in Bois d'Arc Energy upon the change to the equity accounting method in 2005.  Concurrent with including Bois d'Arc Energy as a consolidated subsidiary as of January 1, 2006, the asset retirement obligations of Bois d'Arc Energy are included in the Company's consolidated financial statements.

 

12

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Earnings Per Share

Basic earnings per share is determined without the effect of any outstanding potentially dilutive stock options, unvested restricted stock or other convertible securities and diluted earnings per share is determined with the effect of outstanding stock options, unvested restricted stock and other convertible securities that are potentially dilutive. Basic and diluted earnings per share for the three months and nine months ended September 30, 2006 and 2005, respectively, were determined as follows:

 

		Three Months Ended September 30,
		2006												2005
										Per												Per
		Income				Shares				Share				Income				Shares				Share
		(In thousands, except per share amounts)
Basic Earnings Per Share:
Net Income		$	17,036				42,243			$	0.40			$	14,138				40,432			$	0.35
Diluted Earnings Per Share:
Net Income		$	17,036				42,243							$	14,138				40,432
Effect of Dilutive Securities:
Stock Grants and Options			(88	)			1,310								—				1,948
Net Income Available to Common Stockholders
With Assumed Conversions		$	16,948				43,553			$	0.39			$	14,138				42,380			$	0.33
		Nine Months Ended September 30,
		2006												2005
										Per												Per
		Income				Shares				Share				Income				Shares				Share
Basic Earnings Per Share:
Net Income		$	62,253				42,128			$	1.48			$	19,148				38,417			$	0.50
Diluted Earnings Per Share:
Net Income		$	62,253				42,128							$	19,148				38,417
Effect of Dilutive Securities:
Stock Grants and Options			(394	)			1,377								—				2,099
Net Income Available to Common Stockholders
With Assumed Conversions		$	61,859				43,505			$	1.42			$	19,148				40,516			$	0.47

 

 

 

 

13

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Derivative Instruments and Hedging Activities

Comstock periodically uses swaps, floors and collars to hedge oil and natural gas prices and interest rates. Swaps are settled monthly based on differences between the prices specified in the instruments and the settlement prices of futures contracts. Generally, when the applicable settlement price is less than the price specified in the contract, Comstock receives a settlement from the counter party based on the difference multiplied by the volume or amounts hedged. Similarly, when the applicable settlement price exceeds the price specified in the contract, Comstock pays the counter party based on the difference. Comstock generally receives a settlement from the counter party 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 volume amounts hedged. For collars, generally Comstock receives a settlement from the counter party when the settlement price is below the floor and pays a settlement to the counter party when the settlement price exceeds the cap. No settlement occurs when the settlement price falls between the floor and cap.

The following table sets forth the derivative financial instruments outstanding at September 30, 2006 which relate to Comstock's natural gas production:

 

Period Beginning

Period Ending

Volume MMBtu

Delivery Location

Type of Instrument

Floor Price

Ceiling Price

October 1, 2006

December 31, 2006

768,000

Henry Hub

Collar

$4.50

$9.02

October 1, 2006

December 31, 2006

600,000

Houston Ship Channel

Collar

$4.50

$8.25

The fair value of the Company's derivative contracts held for price risk management at September 30, 2006 was an asset of $68,000. Comstock did not designate these instruments as cash flow hedges and accordingly, unrealized gains on derivatives of $1.2 million and $11.3 million was recorded for the three months and nine months ended September 30, 2006, respectively, and unrealized losses of $17.7 million and $20.9 million was recorded for the three and nine months ended September 30, 2005, respectively, to reflect the change in this liability. The Company realized losses of $0.7 million and $0.2 million for the nine months ended September 30, 2006 and 2005, respectively, to settle derivative positions.

Supplementary Information With Respect to the Consolidated Statements of Cash Flows -

		For the Nine Months
		Ended September 30,
		2006				2005
		(In thousands)
Cash Payments -
Interest payments		$	21,017			$	18,193
Income tax payments		$	7,105			$	2,546

(2) ACQUISITION -

In September 2006 the Company acquired oil and gas properties in South Texas from Denali Oil & Gas Partners LP and other working interest owners for $67.2 million in cash. The transaction was funded with borrowings under Comstock's bank credit facility. The pro forma impact of this acquisition was not material to the Company's historical results of operations.

 

14

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

(3) LONG-TERM DEBT -

 

At September 30, 2006, long-term debt was comprised of the following:

		(In thousands)
Comstock Revolving Bank Credit Facility		$	175,000
Bois d'Arc Energy Revolving Bank Credit Facility			105,000
Comstock 6⅞% Senior Notes due 2012			175,000
		$	455,000

 

Comstock has $175.0 million of 6⅞% senior notes which are due March 1, 2012, with interest payable semiannually on each March 1 and September 1. These notes are unsecured obligations of the Company and are guaranteed by the Company's wholly owned subsidiaries. Comstock also has a $400.0 million bank credit facility with Bank of Montreal, as the administrative agent. The credit facility is a four-year revolving credit commitment that matures on February 25, 2008. Indebtedness under the credit facility is secured by Comstock's wholly-owned subsidiaries' oil and gas properties and is guaranteed by all of its wholly-owned subsidiaries. The 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 may be affected by the performance of Comstock's properties and changes in oil and natural gas prices. The determination of the borrowing base is at the sole discretion of the administrative agent and the bank group. The borrowing base was $350.0 million at September 30, 2006. Borrowings under the credit facility bear interest, based on the utilization of the borrowing base, at Comstock's option at either LIBOR plus 1.25% to 1.75% or the base rate (which is the higher of the prime rate or the federal funds rate) plus 0% to 0.5%. A commitment fee of 0.375% is payable on the unused borrowing base. The credit facility contains covenants that, among other things, restrict the payment of cash dividends in excess of $10.0 million, limit the amount of consolidated debt that Comstock may incur and limit its ability to make certain loans and investments. The only financial covenants are the maintenance of a current ratio and maintenance of a minimum tangible net worth. Comstock was in compliance with these covenants as of September 30, 2006.

 

Bois d'Arc Energy has a bank credit facility with The Bank of Nova Scotia and several other banks. Borrowings under the credit facility are limited to a borrowing base that was $150.0 million at September 30, 2006 and was increased to $200.0 million as of October 31, 2006. The borrowing base is re-determined semi-annually based on the banks' estimates of the future net cash flows of Bois d'Arc Energy's oil and natural gas properties. The determination of the borrowing base is at the sole discretion of the administrative agent and the bank group. The credit facility matures on May 11, 2009. Borrowings under the credit facility bear interest at the Bois d'Arc Energy's option of either (1) LIBOR plus a margin that varies from 1.25% to 2.0% depending upon the ratio of the amounts outstanding to the borrowing base or (2) the base rate (which is the higher of the prime rate or the federal funds rate) plus a margin that varies from 0% to 0.75% depending upon the ratio of the amounts outstanding to the borrowing base. A commitment fee ranging from 0.375% to 0.50% (depending upon the ratio of the amounts outstanding to the borrowing base) is payable on the unused borrowing base. Indebtedness under the credit facility is secured by substantially all of Bois d'Arc Energy and its subsidiaries' assets, and all of the Bois d'Arc Energy's subsidiaries are guarantors of the indebtedness. The credit facility contains covenants that restrict the payment of cash dividends in excess of $5.0 million, borrowings, sales of assets, loans to others, capital expenditures, investments, merger activity, hedging contracts, liens and certain other transactions without the prior consent of the lenders and requires Bois d'Arc Energy to maintain a ratio of current assets, including the availability under the bank credit facility, to current liabilities of at least one-to-one and a ratio of indebtedness to earnings before interest, taxes, depreciation, depletion, and amortization, exploration and impairment expense of no more than 2.5-to-one. Bois d'Arc Energy was in compliance with these covenants as of September 30, 2006.

(4) COMMITMENTS AND CONTINGENCIES -

From time to time, Comstock is involved in certain litigation that arises in the normal course of its operations. The Company records a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company does not believe the resolution of these matters will have a material effect on the Company's financial position or results of operations. In connection with its exploration and development activities, the Company contracts for drilling rigs and for the acquisition of seismic data under terms of up to three years.

 

15

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

(5) ASSETS HELD FOR SALE -

 

The Company has entered into an agreement to sell its oil and gas properties in Kentucky to a third party for $7.0 million. The Company has recorded a $7.9 million loss on this pending sale. The Company's investment in these properties of $6.5 million is presented as Assets Held for Sale in the accompanying consolidated balance sheet as of September 30, 2006 at its expected realizable value.

 

(6) CONSOLIDATING FINANCIAL STATEMENTS -

 

Comstock Resources, Inc. (the parent company) has $175.0 million of 6⅞% senior notes outstanding which are guaranteed by all of the parent company's 100% owned consolidated subsidiaries. There are no restrictions on the parent company's ability to obtain funds from any of the guarantor subsidiaries or on a guarantor subsidiary's ability to obtain funds from the parent company or their direct or indirect subsidiaries. The 6⅞% senior notes are not guaranteed by Bois d'Arc Energy, Inc. and its subsidiaries (the Non-Guarantor Subsidiaries).  The following condensed consolidating balance sheet, statements of operations and statement of cash flows are provided for the parent company, all guarantor subsidiaries and all non-guarantor subsidiaries. The information has been presented as if the parent company accounted for its ownership of the guarantor and non-guarantor subsidiaries using the equity method of accounting.

 

Balance Sheet:
		As of September 30, 2006
		Comstock Resources, Inc.				Guarantor Subsidiaries				Non-Guarantor   Subsidiaries				Eliminating Entries				Consolidated
		(In thousands)
Assets:
Cash and cash equivalents		$	—			$	1,253			$	25,831			$	—			$	27,084
Accounts receivable			—				34,031				27,908				—				61,939
Other current assets			378				1,852				13,920				—				16,150
Total current assets			378				37,136				67,659				—				105,173
Net property and equipment			30,863				851,535				793,836				—				1,676,234
Assets held for resale			—				6,518				—				—				6,518
Investment in subsidiaries			621,632				—				—				(621,632	)			—
Intercompany receivables			375,474				—				—				(375,474	)			—
Other assets			4,099				1				859				—				4,959
Total assets		$	1,032,446			$	895,190			$	862,354			$	(997,106	)		$	1,792,884
Liabilities and Stockholders' Equity:
Short-term debt		$	—			$	—			$	6,500			$	—			$	6,500
Accounts payable			—				37,593				46,030				—				83,623
Accrued expenses			3,877				14,668				14,231				—				32,776
Total current liabilities			3,877				52,261				66,761				—				122,899
Long-term debt			350,000				—				105,000				—				455,000
Intercompany payables			—				375,474				—				(375,474	)			—
Deferred income taxes payable			25,656				132,744				146,662				—				305,062
Reserve for future abandonment costs			—				3,465				40,862				—				44,327
Minority interest			—				—				—				212,683				212,683
Total liabilities			379,533				563,944				359,285				(162,791	)			1,139,971
Stockholders' equity			652,913				331,246				503,069				(834,315	)			652,913
Total liabilities and stockholders' equity		$	1,032,446			$	895,190			$	862,354			$	(997,106	)		$	1,792,884

 

16

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Statement of Operations:
		Three Months Ended September 30, 2006
		Comstock Resources, Inc.				Guarantor Subsidiaries				Non-Guarantor   Subsidiaries				Eliminating Entries				Consolidated
		(In thousands)
Oil and gas sales		$	—			$	62,255			$	66,996			$	—			$	129,251
Operating expenses:
Oil and gas operating			—				13,366				13,538				—				26,904
Exploration			—				—				8,069				—				8,069
Depreciation, depletion and amortization			329				18,648				21,732				—				40,709
Impairment			—				803				586				—				1,389
Loss on disposal of oil and gas properties			—				—				—				—				—
General and administrative, net			6,138				(1,798	)			3,030				—				7,370
Total operating expenses			6,467				31,019				46,955				—				84,441
Income from operations			(6,467	)			31,236				20,041				—				44,810
Other income (expenses):
Interest income			5,299				143				115				(5,299	)			258
Other income			—				45				142				—				187
Interest expense			(4,851	)			(5,299	)			(1,882	)			5,299				(6,733	)
Gain on derivatives			—				1,180				—				—				1,180
Total other income (expenses)			448				(3,931	)			(1,625	)			—				(5,108	)
Income (loss) before income taxes and minority interest in earnings of Bois d'Arc Energy			(6,019	)			27,305				18,416				—				39,702
Provision for income taxes			(508	)			(9,322	)			(6,832	)			—				(16,662	)
Minority interest in earnings of Bois d'Arc Energy			—				—				—				(6,004	)			(6,004	)
Equity in earnings of subsidiaries			23,563				—				—				(23,563	)			—
Net income		$	17,036			$	17,983			$	11,584			$	(29,567	)		$	17,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

		Nine Months Ended September 30, 2006
		Comstock Resources, Inc.				Guarantor Subsidiaries				Non-Guarantor   Subsidiaries				Eliminating Entries				Consolidated
		(In thousands)
Oil and gas sales		$	—			$	196,717			$	188,436			$	—			$	385,153
Operating expenses:
Oil and gas operating			—				40,421				37,799				—				78,220
Exploration			—				344				16,318				—				16,662
Depreciation, depletion and amortization			444				51,393				52,620				—				104,457
Impairment			—				803				1,432				—				2,235
Loss on disposal of oil and gas properties			—				7,934				—				—				7,934
General and administrative, net			18,704				(4,878	)