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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


|X|              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF
    THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended June 30, 2003

OR

|  |              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)

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 such filing requirements for the past 90 days. Yes |X|     No  |  |


Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X|     No  |  |


     The number of shares outstanding of the registrant’s common stock, par value, $.50, as of August 11, 2003 was 33,460,236.








COMSTOCK RESOURCES, INC.

QUARTERLY REPORT

For The Quarter Ended June 30, 2003

INDEX

PART I. Financial Information Page
 
     Item 1. Financial Statements:        
      Consolidated Balance Sheets -  
             June 30, 2003 and December 31, 2002    4  
      Consolidated Statements of Operations -  
             Three Months and Six Months ended June 30, 2003 and 2002    5  
      Consolidated Statement of Stockholders' Equity -  
             Six Months ended June 30, 2003    6  
      Consolidated Statements of Cash Flows -  
             Six Months ended June 30, 2003 and 2002    7  
      Notes to Consolidated Financial Statements    8  
      Independent Accountants' Review Report    16  
           
     Item 2. Management's Discussion and Analysis of Financial  
               Condition and Results of Operations    17  
 
     Item 3. Quantitative and Qualitative Disclosure About Market Risks    20  
 
     Item 4. Controls and Procedures    21  
 
PART II. Other Information    
 
     Item 4. Submission of Matters to a Vote of Security Holders    22  
 
     Item 6. Exhibits and Reports on Form 8-K    22  

2


PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

















3


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

June 30,
2003

December 31,
2002

(Unaudited)
(In thousands)
 
Cash and Cash Equivalents     $ 738   $ 1,682  
Accounts Receivable:  
      Oil and gas sales    41,385    30,135  
      Joint interest operations    5,546    5,407  
Other Current Assets    3,891    2,678  


                   Total current assets    51,560    39,902  
Property and Equipment:  
      Unevaluated oil and gas properties    17,509    14,880  
      Oil and gas properties, successful efforts method    997,844    961,562  
      Other    3,697    2,570  
      Accumulated depreciation, depletion and amortization    (340,657 )  (314,804 )


                  Net property and equipment    678,393    664,208  
Derivatives    --    3  
Other Assets    6,559    6,940  


    $ 736,512   $ 711,053  


 
                 LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Portion of Long-Term Debt   $ 1,272   $ 270  
Accounts Payable and Accrued Expenses    45,557    49,470  
Derivatives    70    57  


                  Total current liabilities    46,899    49,797  
Long-Term Debt, less current portion    336,002    366,002  
Deferred Taxes Payable    72,974    52,577  
Reserve for Future Abandonment Costs    15,554    16,677  
Convertible Preferred Stock    --    17,573  
Stockholders' Equity:  
      Common stock--$0.50 par, 50,000,000 shares authorized,  
        33,458,236 and 28,919,561 shares outstanding at  
        June 30, 2003 and December 31, 2002, respectively    16,729    14,460  
      Additional paid-in capital    153,307    133,828  
      Retained earnings    96,460    61,663  
      Deferred compensation-restricted stock grants    (1,368 )  (1,487 )
      Accumulated other comprehensive loss    (45 )  (37 )


                  Total stockholders' equity    265,083    208,427  


    $ 736,512   $ 711,053  


The accompanying notes are an integral part of these statements.

4


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2003
2002
2003
2002
(In thousands, except per share amounts)
 
Oil and gas sales     $ 57,161   $ 38,004   $ 125,737   $ 64,494  
Operating expenses:  
     Oil and gas operating    10,531    8,467    21,896    16,582  
     Exploration    505    1,028    2,141    2,981  
     Depreciation, depletion and amortization    15,117    14,057    30,304    27,515  
     General and administrative, net    1,947    1,077    3,475    2,007  




          Total operating expenses    28,100    24,629    57,816    49,085  




Income from operations    29,061    13,375    67,921    15,409  
Other income (expenses):  
     Interest income    23    10    43    19  
     Interest expense    (7,370 )  (7,702 )  (14,678 )  (14,512 )
     Loss from derivatives    --    (204 )  (3 )  (2,168 )
     Other income    44    69    94    180  




     (7,303 )  (7,827 )  (14,544 )  (16,481 )




Income (loss) from continuing operations  
      before income taxes    21,758    5,548    53,377    (1,072 )
Provision for income taxes    (7,615 )  (1,942 )  (18,682 )  375  




Net income (loss) from continuing operations    14,143    3,606    34,695    (697 )




Discontinued operations including loss on  
     disposal, net of income taxes    --    (403 )  --    (1,129 )
Cumulative effect of change in accounting principle    --    --    675    --  




Net income (loss)    14,143    3,203    35,370    (1,826 )
Preferred stock dividends    (178 )  (400 )  (573 )  (795 )




Net income (loss) attributable to common stock   $ 13,965   $ 2,803   $ 34,797   $ (2,621 )




Basic net income (loss) per share:  
          From continuing operations   $ 0.44   $ 0.11   $ 1.13   $ (0.05 )
          Discontinued operations    --    (0.01 )  --    (0.04 )
          Cumulative effect of change in accounting principle    --    --    0.02    --  




    $ 0.44   $ 0.10   $ 1.15   $ (0.09 )




Diluted net income (loss) per share:  
          From continuing operations   $ 0.40   $ 0.11   $ 1.00      
          Discontinued operations    --    (0.02 )  --
          Cumulative effect of change in accounting principle    --    --    0.02      



    $ 0.40   $ 0.09   $ 1.02      



Weighted average common and common stock  
     equivalent shares outstanding:  
          Basic    31,473    28,776    30,205    28,678  




          Diluted    35,010    34,042    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, 2003
(Unaudited)

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Deferred
Compensation-
Restricted
Stock Grants

Accumulated
Other
Comprehensive
Income (Loss)

Total
(In thousands)
 
Balance at December 31, 2002     $ 14,460   $ 133,828   $ 61,663   $ (1,487 ) $ (37 ) $ 208,427  
   Restricted stock grants    --    --    --    119    --    119  
   Value of warrants issued for  
      exploration prospects, net of taxes    --    3,253    --    --    --    3,253  
   Exercise of stock options    72    850    --    --    --    922  
   Conversion of preferred stock    2,197    15,376    --    --    --    17,573  
   Preferred stock dividends    --    --    (573 )  --    --    (573 )
   Net income    --    --    35,370    --    --    35,370  
   Unrealized hedge loss    --    --    --    --    (8 )  (8 )

   Comprehensive income                        35,362  






Balance at June 30, 2003   $ 16,729   $ 153,307   $ 96,460   $ (1,368 ) $ (45 ) $ 265,083  






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,

2003
2002
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:            
    Net income (loss)   $ 35,370   $ (1,826 )
    Adjustments to reconcile net income (loss) to net  
      cash provided by operating activities:  
        Compensation paid in common stock    119    118  
        Dry hole costs    1,526    2,981  
        Depreciation, depletion and amortization    30,304    27,515  
        Deferred income taxes    18,682    (375 )
        Unrealized losses from derivatives    --    2,499  
        Non-cash effect of discontinued operations, net    --    1,467  
        Cumulative effect of change in accounting principle    (675 )  --  


     85,326    32,379  


    (Increase) decrease in accounts receivable    (11,389 )  747  
    Increase in other current assets    (1,213 )  (2,691 )
    Decrease in accounts payable and accrued expenses    (3,913 )  (9,626 )


           Net cash provided by operating activities    68,811    20,809  


CASH FLOWS FROM INVESTING ACTIVITIES:  
    Proceeds from sales of properties    --    300  
    Capital expenditures and acquisitions    (40,712 )  (36,145 )


           Net cash used for operating activities    (40,712 )  (35,845 )


CASH FLOWS FROM FINANCING ACTIVITIES:  
    Borrowings    16,402    20,736  
    Proceeds from issuance of senior notes    --    75,000  
    Debt issuance costs    --    (2,217 )
    Proceeds from issuance of common stock    528    981  
    Principal payments on debt    (45,400 )  (83,524 )
    Dividends paid on preferred stock    (573 )  (795 )


    Net cash provided by (used for) financing activities    (29,043 )  10,181  


           Net decrease in cash and cash equivalents    (944 )  (4,855 )
           Cash and cash equivalents, beginning of period    1,682    6,122  


           Cash and cash equivalents, end of period   $ 738   $ 1,267  


The accompanying notes are an integral part of these statements.

7


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003
(Unaudited)

(1) SIGNIFICANT ACCOUNTING POLICIES —

         Basis of Presentation

        In management’s opinion, the accompanying 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”) as of June 30, 2003 and the related results of operations for the three months and six months ended June 30, 2003 and 2002 and cash flows for the six months ended June 30, 2003 and 2002.

        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 generally accepted accounting principles 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 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, 2002.

        The results of operations for the three months and six months ended June 30, 2003 are not necessarily an indication of the results expected for the full year.

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

For the Six Months
Ended June 30,

2003
2002
(In thousands)
Cash Payments -            
   Interest Payments   $ 14,877   $ 13,436  
   Income tax payments    --    --  
Noncash Investing and Financing Activities -  
   Value of warrants issued  
         under exploration agreement   $ 5,004   $ 327  

         Income Taxes

        Deferred income taxes are provided to reflect the future tax consequences of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates.

8


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 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. Due to the net loss for the six months ended June 30, 2002, common stock equivalents and convertible securities are anti-dilutive. Therefore basic and diluted loss per share for the six months ended June 30, 2002 are the same. Basic and diluted earnings per share for the three months and six months ended June 30, 2003 and 2002 were determined as follows:

Three Months Ended June 30,
2003
2002
Income
(loss)

Shares
Per
Share

Income
(loss)

Shares
Per
Share

(In thousands except per share data)
Basic Earnings Per Share:                            
  Income from Continuing Operations   $ 14,143    31,473       $ 3,606    28,776      
    Less Preferred Stock Dividends    (178 )  --        (400 )  --      




  Net Income from Continuing Operations  
      Available to Common Stockholders    13,965    31,473   $ 0.44    3,206    28,776   $ 0.11  


  Loss from Discontinued Operations    --    31,473    --    (403 )  28,776    (0.01 )






  Net Income (Loss) Available to Common  
    Stockholders   $ 13,965    31,473   $ 0.44   $ 2,803    28,776   $ 0.10  






Diluted Earnings Per Share:  
  Income from Continuing Operations   $ 14,143    31,473       $ 3,606    28,776      
  Effect of Dilutive Securities:  
    Stock Options    --    1,591        --    873      
    Convertible Preferred Stock    --    1,946        --    4,393      




  Net Income from Continuing Operations  
      Available to Common Stockholders  
        With Assumed Conversions    14,143    35,010   $ 0.40    3,606    34,042   $ 0.11  


  Loss from Discontinued Operations    --    35,010    --    (403 )  34,042    (0.02 )






Net Income Available to Common  
      Stockholders   $ 14,143    35,010   $ 0.40   $ 3,203    34,042   $ 0.09  






9


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Six Months Ended June 30,
2003
2002
Income
(loss)

Shares
Per
Share

Income
(loss)

Shares
Per
Share

(In thousands except per share data)
Basic Earnings Per Share:                            
  Income from Continuing Operations   $34,695    30,205       $ (697 )  28,678      
    Less Preferred Stock Dividends    (573 )  --        (795 )  --      




  Net Income from Continuing Operations  
      Available to Common Stockholders    34,122    30,205   $1.13    (1,492 )  28,678   $ (0.05 )


  Loss from Discontinued Operations    --    30,205    --    (1,129 )  28,678    (0.04 )


  Cumulative effect of change in accounting principle    675    30,205    0.02    --  28,678    --






  Net Income (Loss) Available to Common  
    Stockholders   $34,797    30,205   $1.15   $ (2,621 )  28,678   $ (0.09 )






Diluted Earnings Per Share:  
  Income from Continuing Operations   $34,695    30,205                    
  Effect of Dilutive Securities:  
    Stock Options    --    1,351                    
    Convertible Preferred Stock    --    3,163                  


  Net Income from Continuing Operations  
      Available to Common Stockholders  
        With Assumed Conversions    34,695    34,719   $1.00            

   Cumulative effect of change in accounting principle    675    34,719    0.02          



Net Income Available to Common  
      Stockholders   $ 35,370    34,719   $1.02              



         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 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.

10


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

        The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding stock options that were granted prior to January 1, 1995 in each period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,

2003
2002
2003
2002
(In thousands)
 
Net income (loss), as reported     $ 13,965   $ 2,803   $ 34,797   $ (2,621 )
Add stock-based employee compensation expense  
       included in reported net income, net of tax    38    38    77    77  
Deduct total stock-based employee compensation  
       expense determined under fair-value-based  
       method for all rewards, net of tax    (450 )  (358 )  (935 )  (645 )




               Pro forma net income   $ 13,553   $ 2,483   $ 33,939   $ (3,189 )




Basic earnings per share: As Reported   $ 0.44   $ 0.10   $ 1.15   $ (0.09 )
               Pro Forma   $ 0.43   $ 0.09   $ 1.12   $ (0.11 )
Diluted earnings per share: As Reported   $0.40   $0.09   $1.02  
               Pro Forma   $0.39   $0.08   $0.99  

         Derivative Instruments 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.

        The following table sets out the derivative financial instruments outstanding at June 30, 2003 which are held for natural gas price risk management:

Period Beginning
Period Ending
Volume
(MMBtu)

Type
of Instrument

Floor
Price

          July 1, 2003                     December 31, 2003                     1,125,000                     Floor                     $2.00          

11


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

        Comstock periodically enters into interest rate swap agreements to hedge the impact of interest rate changes on its floating rate long-term debt. As a result of certain hedging transaction for interest rates, Comstock has realized the following losses which were included in interest expense:

Six Months Ended
June 30,

2003
2002
(In thousands)
 
Realized Losses     $ 36   $ 218  

        As of June 30, 2003, Comstock had an interest rate swap agreement covering $25.0 million of its floating rate debt which fixed the LIBOR rate at 1.7% for the period January 2003 through December 2003. Comstock has designated this position as a hedge. The change in fair value of this instrument resulted in an unrealized after tax loss of $8,000, which was recognized in other comprehensive income.

         New Accounting Standards

        In August 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”) “Accounting for Asset Retirement Obligations,” which Comstock adopted effective January 1, 2003. This statement requires the Company 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. Also, upon initial recognition of the liability, Comstock capitalized additional asset cost equal to the amount of the liability. Thereafter, each quarter, this liability is accreted up to the final 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, and (iii) a $1.5 million decrease in reserve for future abandonment, and (iv) a gain of $0.7 million, net of tax, as a cumulative effect of accounting change. The following table shows pro forma net income and basic and diluted earnings per share as if the Company had adopted SFAS 143 as of January 1, 2002:

Three Months
Ended
June 30,

Six Months
Ended
June 30,

2002
2002
(In thousands, except per share amounts)
As Reported:            
    Net income (loss) attributable to common stock   $2,803  ($2,621 )
    Basic net income (loss) per common share   $0.10    ($0.09 )
    Diluted net income (loss) per common share   $0.09  
Pro Forma:  
    Net income (loss) attributable to common stock   $2,813  ($1,618 )
    Basic net income (loss) per common share   $0.10    ($0.06 )
    Diluted net income (loss) per common share   $0.09  

12


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, 2003, Comstock had $1.4 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 from the amount recorded upon adoption of SFAS 143 on January 1, 2003 through June 30, 2003:

(In thousands)
Future abandonment liability on January 1, 2003     $ 15,201  
    Accretion expense    370  
    Reduction in liability    (17 )

Future abandonment liability on June 30, 2003   $ 15,554  

        In June 2002, the FASB issued Statement of Financial Accounting Standards 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). This statement establishes accounting and reporting standards that are effective for exit or disposal activities beginning after December 31, 2002 which require that a liability be recognized for an exit or disposal activity when that liability is incurred. The adoption of SFAS 146 had no effect on Comstock’s financial statements.

        In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are included in the notes to these consolidated financial statements.

        In January 2003, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirement for Guarantees, including Indirect Guarantees of Indebtedness of Others” (“Fin 45”). FIN 45 requires an entity to recognize a liability for the obligations it has undertaken in issuing a guarantee. This liability would be recorded at the inception of a guarantee and would be measured at fair value. Certain guarantees are excluded from the measurement and disclosure provisions while certain other guarantees are excluded from the measurement provisions of the interpretation. The adoption of the statement on January 1, 2003 had no effect on Comstock’s financial statements.

        In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires an entity to consolidate a variable interest entity if it is designated as the primary beneficiary of that entity even if the entity does not have a majority of voting interests. A variable interest entity is generally defined as an entity where its equity is unable to finance its activities or where the owners of the entity lack the risk and rewards of ownership. The provisions of FIN 46 apply at inception for any entity created after January 31, 2003. For an entity created before February 1, 2003, the provisions of this interpretation must be applied at the beginning of the first interim or annual period beginning after June 15, 2003. Comstock is not the primary beneficiary of any variable interest entities, and accordingly, the adoption of FIN 46 is not expected to have a material effect on the Comtock’s financial statements when adopted.

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

(2) LONG-TERM DEBT —

        As of June 30, 2003, Comstock’s long-term debt was comprised of the following:

(In thousands)
Revolving Bank Credit Facility     $116,000  
11 1/4% Senior Notes due 2007    220,000  
Other    1,274  

     337,274  
Less current portion    1,272  

    $ 336,002  

        Comstock’s bank credit facility 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 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 at June 30, 2003 was $260.0 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. 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 loans and investments. Financial covenants include the maintenance of a current ratio, maintenance of tangible net worth and maintenance of an interest coverage ratio. Comstock was in compliance with all the covenants during the three months ended June 30, 2003.

        Comstock issued $150.0 million in aggregate principal amount of 11¼% 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. Comstock repurchased $5.0 million of the Notes in July 2001. The Notes can be redeemed beginning on May 1, 2004. On March 7, 2002, Comstock closed on a private placement of $75.0 million of the Notes at a net price of 97.25% after placements agents’ discount. As a result of this transaction, $220.0 million of the aggregate principal amount of the Notes are outstanding. The net proceeds of the $75.0 million Note placement were used to reduce amounts outstanding under the bank credit facility.

(3)     DISCONTINUED OPERATIONS

        In April and July 2002, Comstock sold certain marginal oil and gas properties for cash proceeds of $3.5 million plus forgiveness of certain accounts payable related to the properties. The properties sold include various interests in nonoperated properties in Nueces, Hardeman, Montague and Wharton counties in Texas. The results of operations of these sold properties, including the losses on disposal, have been presented as discontinued operations in the accompanying consolidated statements of operations.

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(4)     CONVERTIBLE PREFERRED STOCK

        On December 31, 2002, Comstock had 1,757,310 shares of convertible preferred stock (the “Series 1999 Preferred Stock”) outstanding. The Series 1999 Preferred Stock accrued dividends at an annual rate of 9% which were payable quarterly in cash or Comstock had the option to issue shares of common stock. Each share of the Series 1999 Preferred Stock was convertible, at the option of the holder, into 2.5 shares of common stock. In April and June of 2003, the holders of the Series A 1999 Preferred Stock converted their preferred shares into 4,393,275 shares of common stock. This conversion reduced Comstock’s annual preferred stock dividend requirement by $1.6 million and increased common stockholders’ equity by $17.6 million.

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INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the Board of Directors of Comstock Resources, Inc:

        We have reviewed the accompanying consolidated balance sheet of Comstock Resources, Inc. and subsidiaries (a Nevada corporation) (the Company) as of June 30, 2003, and the related consolidated statements of operations for the three-month and six-month periods then ended and stockholders’ equity and cash flow for the six-month period then ended. These financial statements are the responsibility of the Company’s management. The consolidated balance sheet of Comstock Resources, Inc. for the year ended December 31, 2003, was audited by other accountants whose report (dated March 19, 2003) stated that the balance sheet was presented fairly, in all material respects, in conformity with accounting principles generally accepted in the United States. The related consolidated statements of operations of Comstock Resources, Inc. as of June 30, 2002, for the three-month and six-month periods then ended were reviewed by other accountants whose report (dated August 6, 2002) stated that they were unaware of any material modifications that should be made to those statements for them to be in conformity with accounting principles generally accepted in the United States.

        We have conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

        Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements at June 30, 2003, and for the three-month and six-month periods then ended for them to be in conformity with accounting principles generally accepted in the United States.

                                                             /s/ Ernst & Young, LLP

Dallas, Texas
August 7, 2003

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
AND RESULTS OF OPERATIONS

        This report contains forward-looking statements that involve risks and uncertainties that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those anticipated in our forward-looking statements due to many factors.

        The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this report and in our annual report filed on Form 10-K for the year ended December 31, 2002.

Results of Operations

        The following table reflects certain summary operating data for the periods presented:

Three Months Ended
June 30,

Six Months Ended
June 30,

2003
2002
2003
2002
Net Production Data:                    
  Oil (Mbbls)    381    335    797    676  
  Natural gas (MMcf)    8,486    8,534    16,832    16,756  
  Natural gas equivalent (Mmcfe)    10,774    10,543    21,611    20,812  
Average Sales Price:  
  Oil (per Bbl)   $ 28.83   $ 24.96   $ 31.39   $ 22.80  
  Natural gas (per Mcf)    5.44    3.47    5.98    2.93  
  Average equivalent price (per Mcfe)    5.31    3.60    5.82    3.10  
Expenses ($ per Mcfe):  
  Oil and gas operating(1)   $ 0.98   $ 0.80   $ 1.01   $ 0.80  
  General and administrative    0.32    0.10    0.23    0.10  
  Depreciation, depletion and amortization(2)    1.35    1.30    1.35    1.29  
Cash Margin ($ per Mcfe)(3)   $ 4.01   $ 2.70   $ 4.58   $ 2.20  
  ________________________
  (1) Includes lease operating costs and production and ad valorem taxes.

  (2) Represents depreciation, depletion and amortization of oil and gas properties only.

  (3) Represents average equivalent price per Mcfe less oil and gas operating expenses per Mcfe and general and administrative expenses per Mcfe. Cash margin per Mcfe is presented because management believes it to be useful to investors in analyzing our operations.

Revenues —

        Our oil and gas sales increased $19.2 million (50%) in the second quarter of 2003 to $57.2 million, from $38.0 million in 2002’s second quarter due significantly higher crude oil and natural gas prices. Our average natural gas price increased by 57% and our average crude oil price increased by 16% in the second quarter of 2003 as compared to 2002. Production in the second quarter of 2003 increased by 2% over production in the second quarter of 2002. For the first half of 2003, our oil and gas sales increased $61.2 million (95%) to $125.7 million from $64.5 million for the six months ended June 30, 2002. The increase is primarily attributable to 104% higher realized natural gas prices and the 38% higher realized crude oil prices in 2003 as compared to 2002. In the first six months of 2003, production on an equivalent basis, increased by 4% from the same period in 2002.

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Costs and Expenses —

        Our oil and gas operating expenses, including production taxes, increased $2.1 million (24%) to $10.5 million in the second quarter of 2003 from $8.5 million in the second quarter of 2002. Oil and gas operating expenses per equivalent Mcf produced increased $0.18 to $0.98 in the second quarter of 2003 from $0.80 in the second quarter of 2002. The increase in operating expenses is primarily related to higher production and ad valorem taxes resulting from the significantly higher oil and gas prices in 2003. Oil and gas operating costs for the six months ended June 30, 2003 increased $5.3 million (32%) to $21.9 million from $16.6 million for the six months ended June 30, 2002. Oil and gas operating expenses per equivalent Mcf produced increased $0.21 to $1.01 for six months ended June 30, 2003 from $0.80 for the same period in 2002. The increase is also primarily due to higher production and ad valorem taxes as a result of the significantly higher oil and gas prices in 2003.

        In the second quarter of 2003, we had a $0.5 million provision for exploration expense as compared to a $1.0 million in 2002’s second quarter. The provision in the second quarter of 2003 primarily relates to an exploratory dry hole drilled in North Louisiana. For the six months ended June 30, 2003 we had a provision for exploration expense totaling $2.1 million as compared to $3.0 million in the same period in 2002. The 2003 provision primarily related to two exploratory dry holes combined with expenditures relating to the acquisition of seismic data in 2003.

        Depreciation, depletion and amortization (“DD&A”) increased $1.1 million (8%) to $15.1 million in the second quarter of 2003 from $14.1 million in the second quarter of 2002 due to the 2% increase in our production and a 5% increase in our average amortization rate. DD&A per equivalent Mcf produced increased by $0.05 to $1.35 for the three months ended June 30, 2003 from $1.30 for the quarter ended June 30, 2002. For the six months ended June 30, 2003, DD&A increased $2.8 million (10%) to $30.3 million from $27.5 million for the six months ended June 30, 2002. The increase is due to the 4% increase in production and our higher average amortization rate. DD&A per equivalent Mcf increased by $0.06 to $1.35 for the six months ended June 30, 2003 from $1.29 for the six months ended June 30, 2002.

        General and administrative expenses, which are reported net of overhead reimbursements, of $1.9 million for the second quarter of 2003 were 81% higher than general and administrative expenses of $1.1 million for the second quarter of 2002. For the first six months of 2003, general and administrative expenses increased to $3.5 million from $2.1 million for the six months ended June 30, 2002. The increases are due primarily to the opening of an offshore operations office in Houston, Texas as well as an increase in personnel costs in 2003.

        Interest expense decreased $0.3 million (4%) to $7.4 million for the second quarter of 2003 from $7.7 million in the second quarter of 2002. The decrease is due to a reduction in the average borrowings outstanding under our credit facility from $165.9 million in the first half of 2002 to $131.7 million in the first half of 2003. The average interest rate on the outstanding borrowings under the credit facility also decreased to 3.1% in the second quarter of 2003 as compared to 3.6% in the second quarter of 2002. These reductions were partially offset by the issuance of an additional $75.0 million of our 11¼% Senior Notes on March 7, 2002. Interest expense for the six months ended June 30, 2003 increased $0.2 million (1%) to $14.7 million from $14.5 million for the six months ended June 30, 2002. The increase is attributable to the issuance of the additional 11¼% Senior Notes in March 2002 which was partially offset by a decrease in interest related to our bank credit facility. Our average outstanding borrowings under the bank credit facility decreased to $140.4 million in the first half of 2003 as compared to $182.9 million in the same period in 2002. The average interest rate under the bank credit facilty also decreased to 3.1% in the first half of 2003 as compared to 3.9% in the first half of 2002.

        We reported net income from continuing operations of $14.0 million for the three months ended June 30, 2003, as compared to net income from continuing operations of $3.2 million for the three months ended June 30, 2002. Net income per share for the second quarter of 2003 was $0.40 on weighted average diluted shares outstanding of 35.0 million as compared to $0.11 for the second quarter of 2002 on weighted average diluted shares outstanding of

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34.0 million. Net income for the six months ended June 30, 2003 was $34.8 million, as compared to a net loss of $1.5 million for the six months ended June 30, 2002. Net income per common share for the six months ended June 30, 2003 was $1.02 as compared to a net loss of $0.05 for the six months ended June 30, 2002.

        Net income for the six months ended June 30, 2003 included $0.7 million in income ($0.02 per share) related to the cumulative effect of a change in our accounting for future abandonment cost for our oil and gas properties.

        In 2002, we sold certain marginal oil and gas properties. The operating results of these properties have been reflected as discontinued operations in the consolidated financial statements including the expected loss on disposal.

         Critical Accounting Policies

        The information included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our annual report filed on Form 10-K for the year ended December 31, 2002 is incorporated herein by reference. There have been no material changes to our accounting policies during the six months ended June 30, 2003 with the exception of the adoption of SFAS 143 as discussed in Note 1 to the accompanying financial statements.

         Liquidity and Capital Resources

        Funding for our activities has historically been provided by our operating cash flow, debt or equity financings or asset dispositions. For the six months ended June 30, 2003, our net cash flow provided by operating activities totaled $68.8 million and our working capital accounts increased by $16.5 million.

        Our primary needs for capital, in addition to funding our ongoing operations, relate to the acquisition, development and exploration of our oil and gas properties and the repayment of our debt. In the first half of 2003, we incurred capital expenditures of $40.7 million for development and exploration activities. We also reduced the amount outstanding under our bank credit facility by $30.0 million.

        The following table summarizes our capital expenditure activity for the six months ended June 30, 2003 and 2002:

Six Months Ended
June 30,
2003
2002
(In thousands)
 
Leasehold costs     $ 3,739   $ 3,968  
Development drilling    8,364    11,504  
Exploratory drilling    21,151    15,510  
Offshore production facilities    1,990    2,323  
Workovers and recompletions    3,941    2,745  
Other    1,527    95  


    $ 40,712   $ 36,145  


        The timing of most of our capital expenditures is discretionary because we have no material long-term capital expenditure commitments. Consequently, we have a significant degree of flexibility to adjust the level of our capital expenditures as circumstances warrant. We spent $39.2 million and $36.1 million on development and exploration activities in the six months ended June 30, 2003 and 2002, respectively. We have budgeted approximately $100.0 million for development and exploration projects in 2003. We expect to use internally generated cash flow to fund development and exploration activity.

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        We do not have a specific acquisition budget for 2003 since the timing and size of acquisitions are not predictable. We intend to use borrowings under our bank credit facility, or other debt or equity financings to the extent available, to finance significant acquisitions. The availability and attractiveness of these sources of financing will depend upon a number of factors, some of which will relate to our financial condition and performance and some of which will be beyond our control, such as prevailing interest rates, oil and natural gas prices and other market conditions.

        On December 17, 2001, we entered into a new three year $350.0 million revolving credit facility with Toronto Dominion (Texas), Inc. as administrative agent. Indebtedness under the new bank credit facility is secured by substantially all of our assets. The revolving credit line is subject to borrowing base availability, which will be redetermined semiannually based on the banks’ estimates of the future net cash flows of our oil and gas properties. The current borrowing base is $260.0 million. The borrowing base may be affected by the performance of our properties and changes in oil and gas prices. The determination of the borrowing base is at the sole discretion of the administrative agent and the bank group. The revolving credit line bears interest, based on the utilization of the borrowing base, at our option at either (i) LIBOR plus 1.5% to 2.375% or (ii) the base rate plus 0.5% to 1.375%. The bank credit facility matures on January 2, 2005 and contains covenants that, among other things, restrict our ability to pay cash dividends, limit the amount of our consolidated debt and limit our ability to make certain loans and investments. Financial covenants include the maintenance of a current ratio, maintenance of tangible net worth and maintenance of an interest coverage ratio.

        On March 7, 2002, we closed the sale in a private placement of $75.0 million of our 11¼% Senior Notes due 2007 (the “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 are outstanding. The net proceeds of the $75.0 million placement were used to reduce amounts outstanding under our bank credit facility.

        In April and June 2003, our holders of the Series A 1999 Preferred Stock converted their preferred shares into 4,393,275 shares of our common stock. This conversion reduced our annual preferred stock dividend requirement by $1.6 million and increased our common stockholders’ equity by $17.6 million.

        We believe that our cash flow from operations and our available borrowings under the new bank credit facility will be sufficient to fund our operations and future growth as contemplated under our current business plan. However, if our plans or assumptions change or if our assumptions prove to be inaccurate, we may be required to seek additional capital. We cannot provide any assurance that we will be able to obtain such capital, or if such capital is available, that we will be able to obtain it on terms acceptable to us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

         Oil and Natural Gas Prices

        Our financial condition, results of operations and capital resources are highly dependent upon the prevailing market prices of oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond our control. Factors influencing oil and natural gas prices include the level of global demand for crude oil, the foreign supply of oil and natural gas, the establishment of and compliance with production quotas by oil exporting countries, weather conditions that determine the demand for natural gas, the price and availability of alternative fuels and overall economic conditions. It is impossible to predict future oil and natural gas prices with any degree of certainty. Sustained weakness in oil and natural gas prices may adversely affect our financial condition and results of operations, and may also reduce the amount of oil and natural gas reserves that we can produce economically. Any reduction in our oil and natural gas reserves, including reductions due to price fluctuations, can have an adverse effect on our ability to obtain capital for our exploration and development activities. Similarly, any improvements in oil and natural gas prices can have a favorable impact on our

20


financial condition, results of operations and capital resources. Based on our oil and natural gas production in the six months ended June 30, 2003, a $1.00 change in the price per barrel of oil would have resulted in a change in our cash flow for such period by approximately $0.8 million and a $1.00 change in the price per Mcf of natural gas would have changed our cash flow by approximately $16.2 million.

        We periodically use hedging transactions with respect to a portion of our oil and natural gas production to mitigate our exposure to price changes. While the use of these hedging arrangements limits the downside risk of price declines, such use may also limit any benefits that may be derived from price increases. We use 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, we receive 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, we pay the counterparty based on the difference. We generally receive 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, we generally receive a settlement from the counterparty when the settlement price is below the floor and pay 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.

        The following table sets out the derivative financial instruments outstanding at June 30, 2003 which are held for natural gas price risk management:

Period Beginning
Period Ending
Volume
(MMBtu)

Type
of Instrument

Floor
Price

          July 1, 2003                     December 31, 2003                     1,125,000                     Floor                     $2.00          

         Interest Rates

        At June 30, 2003, we had long-term debt of $336.0 million. Of this amount, $220.0 million bears interest at a fixed rate of 11¼%. We had $116.0 million outstanding under our revolving bank credit facility, which is subject to floating market rates of interest. Borrowings under the bank credit facility bear interest at a fluctuating rate that is linked to LIBOR or the corporate base rate, at our option. Any increases in these interest rates can have an adverse impact on our results of operations and cash flow. In December 2002, we entered into an interest rate swap agreement to hedge the impact of interest rate changes on $25.0 million of our floating rate debt beginning on January 2003 and expiring in December 2003. As a result of this interest rate swap, we realized a loss of $36,000 in the first six months of 2003. The fair value of this interest rate derivative financial instrument was a liability of $70,000 at June 30, 2003.

ITEM 4. CONTROLS AND PROCEDURES

        As of June 30, 2003, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2003 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by it under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information realized to be disclosed by us is accumulated and communicated to our management, including our chief executive officer and chief financial officer as appropriate to allow timely decisions regarding required disclosure.

        There were no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended June 30, 2003, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II — OTHER INFORMATION

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)   The Company’s annual meeting of stockholders was held in Frisco, Texas at 10:00 a.m., local time, on May 19, 2003.

(b)   Proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to the nominees listed in the proxy statement for election as Class C directors and such nominees were elected.

(c)   Out of a total 33,387,836 shares of the Company’s common stock and preferred stock outstanding and entitled to vote, 31,633,336 shares were present at the meeting in person or by proxy, representing approximately 95%. Matters voted upon at the meeting were as follows:

    (i)   Two Class C Directors were reelected to Company’s board of directors. The vote tabulation was as follows:

Nominee
For
Withheld
Roland O. Burns      31,169,575    463,761  
David K. Lockett    31,169,575    463,761  

       Other directors of the Company whose term of office as a director continued after the meeting are as follows:

Class A Director
Class B Directors
            Cecil E. Martin                   M. Jay Allison
David W. Sledge

    (ii)   The appointment of Ernst & Young LLP as the Company’s certified public accountants for 2003 was ratified by a vote of 31,633,336 shares for, no shares against and no shares abstaining. This ratification was not listed in the proxy statement but was voted on by the named proxies.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

  a. Exhibits
 
15.1* Awareness Letter of Ernst & Young LLP.
 
31.1* Section 302 Certification of the Chief Executive Officer.
 
31.2* Section 302 Certification of the Chief Financial Officer.
 
32.1* Certification for the Chief Executive Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2* Certification for the Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
____ ____
* Filed herewith


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  b. Reports on Form 8-K
 

        

                                         Form 8-K Reports filed subsequent to March 31, 2003 are as follows:

Date
Item
Description
May 7, 2003   7 and 9     Earnings release for the quarter ended March 31, 2003.
 
May 13, 2003   5 (11)     Notice of change in trading blackout period pursuant to Regulation BTR  
August 7, 2003   5 (12)     Earnings release for the quarter ended June 30, 2003.  

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

COMSTOCK RESOURCES, INC.
 
/s/M. JAY ALLISON
 
Date August 11, 2003 M. Jay Allison, Chairman, President and Chief
Executive Officer (Principle Executive Officer)
 
/s/ROLAND O. BURNS
 
Date August 11, 2003 Roland O, Burns,
Senior Vice President
Chief Financial Officer, Secretary, and Treasurer
(Principal Financial and Accounting Officer)

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