PROSPECTUS
COMSTOCK RESOURCES, INC.
146,072 Shares of Common Stock
We are registering a total of 146,072 shares of our common stock, par value
of $.50 per share, for sale by the Selling Security Holders identified in this
prospectus. Please see the section in this prospectus entitled "Selling Security
Holders."
The Selling Security Holders were issued shares of our common stock in lieu
of cash dividends on our Series A 1999 Convertible Preferred Stock. Please see
the Section in this prospectus entitled "Description of Capital Stock -
Preferred Stock."
We will not receive any of the proceeds from the sale of the common stock
by the Selling Security Holders. We have agreed to pay the expenses of the
Selling Security Holders in connection with the registration of these shares of
our common stock. We estimate those expenses to be $8,000.
The Selling Security Holders may offer the shares through public or private
transactions at prevailing market prices, at prices related to such prevailing
market prices or at privately negotiated prices. Our common stock is listed on
the New York Stock Exchange under the symbol "CRK." On June 30, 1999, the last
reported sale price for our common stock was $3.3125 per share.
----------
This investment involves a high degree of
risk. Please see the section in this
prospectus entitled "Risk Factors"
beginning on page 6.
----------
Neither the Securities and Exchange Commission nor any
State Securities Commission has passed upon the
accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal
offense.
----------
The date of this prospectus is June 30, 1999
1
<PAGE>
TABLE OF CONTENTS
PAGE
Forward-Looking Statements................................................2
Where You Can Find More Information.......................................3
Information Incorporated by Reference.....................................3
Prospectus Summary........................................................4
Risk Factors..............................................................5
Description of Capital Stock.............................................11
Selling Security Holders.................................................17
Plan of Distribution.....................................................18
Legal Matters............................................................19
Experts..................................................................19
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included in or incorporated by reference to this prospectus,
including without limitation, statements under "Summary," and "Risk Factors,"
regarding budgeted capital expenditures, increases in oil and natural gas
production, our financial position, oil and natural gas reserve estimates,
business strategy and other plans and objectives for future operations, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to have been correct. There are numerous
uncertainties inherent in estimating quantities of proved oil and natural gas
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond our control. Reserve engineering is
a subjective process of estimating underground accumulations of oil and natural
gas that cannot be precisely measured. Furthermore, the accuracy of any reserve
estimate is a function of the quality of available data and of engineering and
geological interpretation and judgment. As a result, estimates made by different
engineers often vary from one another. In addition, results of drilling, testing
and production subsequent to the date of an estimate may justify revisions of
such estimate and such revision, if significant, would change the schedule of
any further production and development drilling. Accordingly, reserve estimates
are generally different from the quantities of oil and gas that are ultimately
recovered. Additional important factors that could cause actual results to
differ materially from our expectations are discussed in "Risk Factors" and
elsewhere in this prospectus. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove incorrect, our actual results and
plans for 1999 and beyond could differ materially from those expressed in
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by such factors.
2
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act and
therefore we file annual, quarterly and current reports, proxy statements and
other documents with the Securities Exchange Commission ("SEC" or "Commission").
You may read and copy any of the reports, proxy statements and any other
information that we file at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800- SEC-0300. In addition, the SEC maintains a web site at http:
//www.sec.gov that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. Our
common stock is quoted on the New York Stock Exchange under the trading symbol
"CRK." Reports, proxy and information statements and other information about us
may be inspected at the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act, with respect to the shares of common stock offered in this
prospectus. This prospectus is part of that registration statement and, as
permitted by the Commission's rules, does not contain all of the information set
forth in the registration statement. For further information about us and our
common stock, we refer you to those copies of contracts or other documents that
have been filed as exhibits to the registration statement, and statements
relating to such documents are qualified in all respects by such reference. You
can review and copy the registration statement and its exhibits and schedules
from the SEC at the address listed above or from its web site.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" into this prospectus
information we file with the SEC in other documents. This means that we can
disclose important information to you by referring to other documents that we
file with the SEC. The information may include documents filed after the date of
this prospectus which update and supersede the information you read in this
prospectus. We incorporate by reference the documents listed below, except to
the extent information in those documents is different from the information
contained in this prospectus, and all future documents filed by us with the SEC
under Section 13(a), 13(c), 14, or 15(d) of the Exchange Act until the offering
of these shares is terminated: (1) Annual Report on Form 10-K for the year ended
December 31, 1998; (2) Quarterly Report on Form 10-Q for the three months ended
March 31, 1999; (3) Proxy Statement dated April 30, 1999 for the 1999 Annual
Meeting of Stockholders; and (4) Current Report on Form 8-K dated April 29,
1999.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus shall be deemed modified,
superseded or replaced for purposes of this prospectus to the extent that a
statement contained in this prospectus or in any subsequently filed document
that also is or is deemed to be incorporated by reference in this prospectus
modifies, supersedes or replaces such statement. Any statement so modified,
superseded or replaced shall not be deemed, except as so modified, superseded or
replaced, to constitute a part of this prospectus.
We will provide without charge to each person, including any beneficial
owner, to whom a copy of this prospectus is delivered, upon such person's
written or oral request, a copy of any or all of the information incorporated by
reference in this prospectus (other than exhibits to such documents, unless such
exhibits are specifically incorporated by reference into the information that
this prospectus incorporates). Requests should be directed to Comstock
Resources, Inc., 5300 Town and County Blvd., Suite 500, Frisco, Texas 75034,
Attention: Roland O. Burns, Senior Vice President, telephone number (972)
668-8800.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere or incorporated by reference in this prospectus.
Comstock
We are an independent energy company engaged in the acquisition,
development, production and exploration of oil and natural gas properties. Our
oil and natural gas reserve base is entirely concentrated in the Gulf of Mexico,
Southeast Texas and East Texas/North Louisiana regions. Our reserve base is 67%
natural gas and 76% proved developed on a Bcfe basis as of December 31, 1998.
Our estimated proved oil and natural gas reserves are 371.9 Bcfe with an
estimated present value of proved reserves of $305.3 million as of December 31,
1998 and we operate 83% of the present value of proved reserves of our
properties. For the year ended December 31, 1998, our total revenues and EBITDA
were $93.2 million and $66.9 million, respectively.
Our proved reserves at December 31, 1998 and our 1998 average daily
production are summarized below:
<TABLE>
<CAPTION>
Reserves at December 31, 1998 1998 Daily Production
-------------------------------------------- -----------------------------------------------
% of % of
Oil Gas Total Total Net Oil Net Gas Total Total
--- --- ----- ----- ------- ------- ----- -----
(MMBbls) (Bcf) (Bcfe) (MBbls/d) (Mmcfe/d) (MMcfe/d)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gulf of Mexico...... 16.6 60.1 159.5 43 5.2 17.5 48.9 42
Southeast Texas..... 2.9 78.5 96.3 26 1.5 28.3 37.6 33
East Texas/
North Louisiana... .7 111.3 115.5 31 .3 27.1 28.5 25
Other............... -- .5 .6 -- -- .3 .5 --
------- -------- -------- ------- ------- ------- ------- -------
Total....... 20.2 250.4 371.9 100 7.0 73.2 115.5 100
======= ======== ======== ======= ======= ======= ======= =======
</TABLE>
Corporate Information
We were originally organized as a Delaware corporation in 1919 under the
name Comstock Tunnel and Drainage Company for the primary purpose of conducting
gold and silver mining operations in and around the Comstock lode in Nevada. In
1983, we reincorporated under the laws of Nevada. In November 1987, we changed
our name to Comstock Resources, Inc. References in this prospectus to "Comstock
Resources, Inc.," "we," "our," and "us" refer to Comstock Resources, Inc. and
our subsidiaries. Our executive offices are located at 5300 Town and Country
Blvd., Suite 500, Frisco, Texas 75034 and our telephone number is (972)
668-8800.
The Offering
Common Stock Offered by the Selling Security Holders..........146,072 shares (1)
Common Stock Outstanding at June 30, 1999..................24,771,489 shares (2)
New York Stock Exchange Symbol...............................................CRK
(1) Represents shares issued to the Selling Security Holders in lieu of the
payment of cash dividends on our Series A 1999 Convertible Preferred Stock. (2)
At June 30, 1999, an additional 13,571,030 shares of common stock are reserved
for issuance upon exercise of outstanding stock options and warrants and the
conversion of the Series A 1999 Convertible Preferred Stock.
4
<PAGE>
RISK FACTORS
You should consider carefully the following risk factors together with all
of the other information included in this prospectus. This section includes or
refers to certain forward-looking statements. You should refer to the
explanation of the qualifications and limitations on such forward-looking
statements discussed under the heading "Forward-Looking Statements" in this
prospectus.
Our business is dependent upon the prices for oil and natural gas and these
prices are volatile.
Our business is dependent upon the prices of, and demand for, oil and
natural gas. Historically, the prices for oil and natural gas have been volatile
and are likely to remain volatile in the future. The prices we receive for our
oil and natural gas production and the level of such production are subject to
wide fluctuations and depend on numerous factors beyond our control, including:
o seasonality,
o the condition of the United States economy,
o imports of crude oil and natural gas,
o political conditions in other oil-producing and natural gas-producing
countries,
o the actions of the Organization of Petroleum Exporting
Countries, and
o domestic government regulation, legislation and policies.
Our average price received for crude oil production on December 31, 1997
was $17.24 per barrel. On December 31, 1998, this price had declined to $10.55
per barrel. Our average price received for natural gas production on December
31, 1997 was $2.64 per Mcf. On December 31, 1998, this price had declined to
$2.21 per Mcf. Any continued and extended decline in the price of crude oil or
natural gas will adversely affect our:
o revenues, profitability and cash flow from operations,
o present value of proved reserves,
o borrowing capacity, and
o ability to obtain additional capital.
In order to reduce our exposure to price risks, we may enter into oil and
natural gas price swap arrangements to hedge a portion of our anticipated sales.
Such arrangements may limit our ability to benefit from increases in oil and
natural gas prices. As of June 24, 1999, we have entered into natural gas price
swap agreements covering 9.3 Bcf of our natural gas production from March
through October 1999 at a fixed price of approximately $2.03 per Mcf (including
basis adjustment). Although we are not currently experiencing any significant
involuntary curtailment of our natural gas production, market, economic and
regulatory factors may in the future materially affect our ability to sell our
natural gas production.
We plan to pursue acquisitions as part of our growth strategy and there are
risks in connection with acquisitions.
Our rapid growth in recent years is attributable in significant part to
acquisitions of producing properties. We expect to continue to evaluate and,
5
<PAGE>
where appropriate, pursue acquisition opportunities on terms we consider
favorable. However, we cannot assure you that suitable acquisition candidates
will be identified in the future, or that we will be able to finance such
acquisitions on favorable terms. In addition, we compete against other companies
for acquisitions, and we cannot assure you that we will successfully acquire any
material property interests. Further, we cannot assure you that future
acquisitions by us will be integrated successfully into our operations or will
increase our profits.
The successful acquisition of producing properties requires an assessment
of numerous factors beyond our control, including:
o recoverable reserves,
o exploration potential,
o future oil and natural gas prices,
o operating costs, and
o potential environmental and other liabilities.
In connection with such an assessment, we perform a review of the subject
properties that we believe to be generally consistent with industry practices.
The resulting assessments are inexact and their accuracy uncertain, and such a
review may not reveal all existing or potential problems, nor will it
necessarily permit us to become sufficiently familiar with the properties to
fully assess their merits and deficiencies. Inspections may not always be
performed on every well, and structural and environmental problems are not
necessarily observable even when an inspection is made.
Additionally, significant acquisitions can change the nature of our
operations and business depending upon the character of the acquired properties,
which may be substantially different in operating and geologic characteristics
or geographic location than our existing properties. While our current
operations are focused in the Gulf of Mexico, Southeast Texas, and East
Texas/North Louisiana, we may pursue acquisitions or properties located in other
geographic areas.
We have substantial debt and debt service requirements.
Large Amount of Debt
We have substantial debt and debt service requirements. As of March 31,
1999, assuming that the sale of $150.0 million of our 11 1/4% Senior Notes due
2007 (the "Notes") and 1,948,001 share of Series A 1999 Convertible Preferred
Stock and 1,051,999 shares of Series B 1999 Non-Convertible Preferred Stock had
been completed as of such time, our ratio of total debt to total capitalization
would have been approximately 65%.
Consequences of Debt
Our substantial debt will have important consequences, including:
o a substantial portion of our cash flow from operations will be
required to make debt service payments,
o our ability to borrow additional amounts for working capital,
capital expenditures (including acquisitions) or other purposes
will be limited, and
6
<PAGE>
o our debt could limit our ability to capitalize on significant business
opportunities, our flexibility in planning for or reacting to
market conditions and our ability to withstand competitive
pressures and economic downturns.
In addition, future acquisition or development activities may require us to
alter our capitalization significantly. These changes in capitalization may
significantly increase our debt. Moreover, our ability to meet our debt service
obligations and to reduce our total debt will be dependent upon our future
performance, which will be subject to general economic conditions and financial,
business and other factors affecting our operations, many of which are beyond
our control. If we are unable to generate sufficient cash flow from operations
in the future to service our indebtedness and to meet other commitments, we will
be required to adopt one or more alternatives, such as refinancing or
restructuring our indebtedness, selling material assets or seeking to raise
additional debt or equity capital. We cannot assure you that any of these
actions could be effected on a timely basis or on satisfactory terms or that
these actions would enable us to continue to satisfy our capital requirements.
Restrictive Debt Covenants
Our bank credit facility contains a number of significant covenants. These
covenants will limit our ability to, among other things:
o borrow additional money,
o merge, consolidate or dispose of assets,
o make certain types of investments,
o enter into transactions with our affiliates, and
o pay dividends.
Our failure to comply with these covenants would cause a default under our
bank credit facility. A default, if not waived, could result in acceleration of
our indebtedness, in which case the debt would become immediately due and
payable. If this occurs, we may not be able to repay our debt or borrow
sufficient funds to refinance it. Even if new financing is available, it may not
be on terms that are acceptable to us. Complying with these covenants may cause
us to take actions that we otherwise would not take or not take actions that we
otherwise would take.
We may not have sufficient funds to meet our substantial capital requirements.
We make, and will continue to make, substantial capital expenditures for
the acquisition, development and exploration of oil and natural gas reserves.
Historically, we have financed these expenditures primarily with cash generated
by operations, bank borrowings and the sale of equity securities and
non-strategic assets. We believe that we will have sufficient cash provided by
operating activities to fund anticipated 1999 capital expenditures other than
significant acquisitions. We intend to borrow under our bank credit facility or
to obtain other debt or equity financing as needed to finance future
acquisitions. If revenues or our borrowing base decrease as a result of lower
oil and natural gas prices, operating difficulties or declines in reserves, our
ability to obtain the capital necessary to undertake or complete future
development programs and to pursue acquisition opportunities may be limited. We
cannot assure you that additional debt or equity financing or cash generated by
operations will be available to meet these requirements. If we need additional
funds, our inability to raise them may adversely affect our operations.
7
<PAGE>
Our future success depends on our ability to replace our reserves.
Our future success depends upon our ability to find, develop or acquire
additional oil and natural gas reserves that are economically recoverable. Our
proved reserves will generally decline as reserves are depleted, except to the
extent that we conduct successful exploration or development activities or
acquire properties containing proved reserves, or both. To increase reserves and
production, we must continue our acquisition and drilling activities. We cannot
assure you, however, that our acquisition and drilling activities will result in
significant additional reserves or that we will have continuing success drilling
productive wells at low finding and development costs. Furthermore, while our
revenues may increase if prevailing oil and natural gas prices increase
significantly, our finding costs for additional reserves could also increase.
Drilling activities are subject to many risks.
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. We cannot assure you
that new wells we drill will be productive or that we will recover all or any
portion of our investment. Drilling for oil and natural gas may involve
unprofitable efforts, not only from dry wells, but from wells that are
productive but do not produce sufficient net revenues to return a profit after
drilling, operating and other costs. The cost of drilling, completing and
operating wells is often uncertain. Our drilling operations may be curtailed,
delayed or canceled as a result of numerous factors, many of which are beyond
our control, including:
o title problems,
o adverse weather conditions,
o compliance with governmental requirements, and
o shortages or delays in the delivery of equipment and services.
Our operations are subject to operating hazards and uninsured risks.
Our operations are subject to all of the risks normally associated with the
exploration for and the production of oil and natural gas, including blowouts,
cratering, oil spills and fires, each of which could result in damage to or
destruction of oil and natural gas wells, production facilities or other
property, or injury to persons. In addition, we may from time to time conduct
relatively deep drilling which will involve increased drilling risks of high
pressures and mechanical difficulties, including stuck pipe, collapsed casing
and separated cable. We cannot assure you that our insurance will adequately
cover any losses or liabilities. Furthermore, we cannot predict the continued
availability of insurance, or availability at commercially acceptable prices.
We operate in a highly competitive industry.
The oil and natural gas industry is highly competitive. Our competitors for
the acquisition, development and exploration of oil and natural gas properties,
purchases and marketing of natural gas, transportation and processing of natural
gas, and capital to finance such activities, include companies that have greater
financial and personnel resources than we do. These resources could allow those
competitors to price their products and services more aggressively than we can,
which could hurt our profitability. Moreover, our ability to acquire additional
properties and to discover reserves in the future will be dependent upon our
ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.
8
<PAGE>
There are many uncertainties in estimating reserves and future net cash flows.
There are many uncertainties in estimating quantities and values of proved
reserves, projecting future rates of production and timing of development
expenditures, including many factors beyond our control. Reserve engineering is
a subjective process of estimating the recovery from underground accumulations
of oil and natural gas that cannot be precisely measured. The accuracy of any
reserve estimate depends on the quality of available data, production history
and engineering and geological interpretation and judgment. Because all reserve
estimates are to some degree speculative, the quantities of oil and natural gas
that are ultimately recovered, production and operating costs, the amount and
timing of future development expenditures and future oil and natural gas prices
may all differ materially from those assumed in these estimates. In addition,
different reserve engineers may make different estimates of reserve quantities
and cash flows based upon the same available data. The present value of proved
reserves and the standardized measure of discounted future net cash flows set
forth in this prospectus are estimates only and should not be construed as the
current market value of the estimated oil and natural gas reserves attributable
to our properties. Thus, the information set forth in this prospectus includes
revisions of certain reserve estimates attributable to proved properties
included in the preceding year's estimates. Such revisions reflect additional
information from subsequent activities, production history of the properties
involved and any adjustments in the projected economic life of such properties
resulting from changes in product prices. Any future downward revisions could
adversely affect our financial condition, borrowing base under our bank credit
facility, future prospects and the market value of our securities.
We have not paid dividends recently.
During the last five fiscal years, we have not paid any dividends on our
outstanding common stock, nor do we intend to do so. In addition, we are
restricted from doing so under our bank credit facility and by the terms of our
outstanding preferred stock. We currently intend to retain our cash for the
continued expansion of our business.
Shares eligible for sale in the public market may affect the market price of our
common stock.
Sales of substantial amounts of our common stock in the public market could
adversely affect the market price for our common stock. If our stockholders were
to sell a significant number of shares, the prevailing market price of our
common stock could be adversely affected.
Certain provisions of Nevada law and our corporate governance documents may
affect a third party's ability to acquire Comstock.
Our articles of incorporation, bylaws and stockholders' rights plan and
Nevada law include a number of provisions that may have the effect of delaying
or deterring a change in the control or management of the Company and
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with our board of directors rather than pursue
non-negotiated takeover attempts. Please see the section in this prospectus
called "Description of Capital Stock."
We could be affected by the year 2000 risk.
Failure by us or our third party service providers to be Year 2000
compliant in a timely manner could have a material effect on our operations.
Because many computers and computer applications define dates by the last two
digits of the year, "00" may not be properly recognized as the year 2000. This
error could cause miscalculations or system errors. We outsource our information
technology systems and software, and our vendors have informed us that these
systems and software are Year 2000 compliant. However, we do not have a formal
9
<PAGE>
contingency plan if our vendors experience Year 2000 problems. The Year 2000
issue may also affect third parties with whom we conduct business, which could
lead to an adverse effect on our operations.
We are subject to extensive governmental regulation.
Our business is affected by certain federal, state and local laws and
regulations relating to the development, production, marketing, pricing,
transportation and storage of oil and natural gas. Our business is also subject
to extensive and changing environmental and safety laws and regulations
governing plugging and abandonment of wells, the discharge of materials into the
environment or otherwise relating to environmental protection. Sanctions for
noncompliance with these laws and regulations may include administrative, civil
and criminal penalties, revocation of permits and corrective action orders.
These laws sometimes apply retroactively. In addition, a party can be liable for
environmental damage without regard to that party's negligence or fault.
Therefore, we could have liability for the conduct of others, or for acts that
were in compliance with all applicable laws at the time we performed them.
Environmental laws have become more stringent over the years. In addition, the
modification or interpretation of existing laws or regulations or the adoption
of new laws or regulations curtailing exploratory or development drilling for
oil and gas could limit well servicing opportunities. We cannot assure you that
present or future regulation will not adversely affect our operations.
We depend on our key personnel.
We believe that the success of our business strategy and our ability to
operate profitably depend on the continued employment of M. Jay Allison,
President and Chief Executive Officer, and a limited number of other senior
management personnel. Loss of the services of Mr. Allison or any of those other
individuals could have a material adverse effect on our operations.
10
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock
and 5,000,000 shares of preferred stock, $10.00 par value per share (the
"Preferred Stock"). At June 30, 1999, we had 24,771,489 shares of common stock
and 3,000,000 shares of Preferred Stock issued and outstanding. We also had
options to purchase 6,071,030 shares of common stock outstanding at that date.
In the aggregate, 13,571,030 shares of common stock have been reserved for
issuance pursuant to the exercise of currently outstanding options and the
conversion of the Preferred Stock.
Common Stock
Subject to the prior rights of the outstanding Preferred Stock and any
other shares of Preferred Stock that may be issued from time to time, and except
as otherwise set forth below, the shares of common stock (1) are entitled to
such dividends as may be declared by our board of directors, in its discretion,
out of funds legally available therefor; (2) are entitled to one vote per share
on matters voted upon by the stockholders and have no cumulative voting rights;
(3) have no preemptive or conversion rights; (4) are not subject to, or entitled
to the benefits of, any redemption or sinking fund provision; and (5) are
entitled, upon liquidation, to receive our assets remaining after the payment of
corporate debts and the satisfaction of any liquidation preferences of the
Preferred Stock. Although our Articles of Incorporation do not deny preemptive
rights to stockholders, under Nevada law no stockholders have preemptive rights
with respect to shares that, upon issuance, are registered under Section 12 of
the Exchange Act. The common stock is currently registered under Section 12 of
the Exchange Act.
Because our shares of common stock do not have cumulative voting rights,
the holders of a majority of the shares voting for the election of directors can
elect all members of the class of Comstock's classified Board of Directors that
are to be elected at a meeting of the stockholders, subject to any rights of the
holders of the Preferred Stock. Please see "Preferred Stock" immediately below.
Preferred Stock
The Board of Directors is empowered, without approval of the stockholders,
to cause shares of our authorized Preferred Stock to be issued in one or more
classes or series, from time to time, with the number of shares of each class or
series and the rights, preferences and limitations of each class or series to be
determined by it. Among the specific matters that may be determined by our board
of directors are the rate of dividends, redemption and conversion prices, terms
and amounts payable in the event of liquidation and voting rights. Shares of
Preferred Stock may, in our board of directors' sole determination, be issued
with voting rights greater than one vote per share. Issuance of shares of
Preferred Stock could involve dilution of the equity of the holders of common
stock and further restrict the rights of such stockholders to receive dividends.
On April 27, 1999 the Board of Directors created two new series of
Preferred Stock consisting of 3,000,000 shares designated as the Series A 1999
Convertible Preferred Stock (the "Series A Preferred") and 1,051,999 shares
designated as the Series B 1999 Non-Convertible Preferred Stock (the "Series B
Preferred"). On April 29, 1999, we sold to the Selling Security Holders
1,948,001 shares of our Series A Preferred and 1,051,999 shares of our Series B
Preferred for a total consideration of $30.0 million. The proceeds from the sale
of the Preferred Stock were used to reduce outstanding indebtedness under our
bank credit facility.
On June 30, 1999 we exercised our right to convert the Series B Preferred
into an identical number of shares of Series A Preferred. As a result of such
conversion, there are 3,000,000 shares of Series A Preferred outstanding and no
shares of Series B Preferred.
11
<PAGE>
The shares of Series A Preferred accrue dividends at an annual rate of 9%.
Dividends are payable quarterly in cash or in shares of our common stock, at our
election. If dividends are paid in shares of common stock, the common stock is
valued at 82.5% of the lower of the 5-day or 30-day average closing price of the
common stock.
On May 1, 2005 and on each May 1, thereafter, so long as any shares of the
Series A Preferred are outstanding, we are obligated to redeem 1,000,000 shares
of the Series A Preferred at $10.00 per share plus accrued and unpaid dividends
thereon. The mandatory redemption price may be paid either in cash or in shares
of common stock, or any combination thereof, at our option. If we elect to pay
the mandatory redemption price in shares of common stock, the common stock will
be valued at 82.5% of the lower of the common stock's 5-day or 30-day average
closing price (immediately prior to the date of redemption). The holders of the
Series A Preferred have the right, at their option and at any time, to convert
all or any part of such shares into shares of common stock. The conversion price
of the Series A Preferred as of the date of this prospectus is $4.00 per share
of common stock. If the holders of the Series A Preferred elected to convert all
such shares into common stock at the conversion price, the holders would own
approximately 24% of our issued and outstanding common stock as of June 30,
1999. We have the option to redeem the shares of the Series A Preferred at a
price that would provide the holders with a specified rate of return on their
original investment.
In the event of dissolution, liquidation or winding-up of Comstock, the
holders of the Series A Preferred are entitled, after payments of all amounts
payable to the holders of any Preferred Stock senior to the Series A Preferred,
to receive out of the assets remaining $10.00 per share, together with all
dividends thereon accrued or in arrears, whether or not declared, before any
payment is made or assets set apart for payment to the holders of the common
stock.
The holders of the Series A Preferred are each entitled to vote with the
holders of common stock on all matters submitted for a vote of the holders of
shares of common stock on an "as converted" basis. Upon the occurrence of an
"event of noncompliance" within the meaning of the terms of the Series A
Preferred, the holders of the Series A Preferred have the right (for so long as
such event of noncompliance continues) to elect two additional directors to our
board of directors. An "event of noncompliance" includes (i) the failure to pay
in the aggregate four quarterly dividends on such series, (ii) the failure to
redeem such series in accordance with its terms, (iii) a default by us on
certain indebtedness, (iv) M. Jay Allison ceasing to be our chief executive
officer, and (v) the commencement of a bankruptcy or similar proceeding by or
against the Company or any of its significant subsidiaries. We may not so long
as the Series A Preferred is outstanding alter any of the rights, preferences or
powers of the Series A Preferred or issue any shares of stock ranking on a
parity with or senior to the Series A Preferred unless the requisite number of
holders have consented thereto. Holders of the Series A Preferred also have the
right to approve (1) certain mergers of the Company where we are not the
surviving corporation, (2) the sale or disposition of substantially all of our
assets or (3) payment of any dividend or distribution, on or for the redemption
of common stock in excess of $100,000 a year. The holders of the Series A
Preferred also have the right to elect two directors (up to a maximum of four)
each time we mandatorily redeem the Series A Preferred by issuing shares of
common stock.
12
<PAGE>
Stockholders' Rights Plan
On December 4, 1990, our board of directors adopted the Company's
Stockholders' Rights Plan (the "Rights Plan") and we declared a dividend
distribution of one preferred stock purchase right (a "Right") for each
outstanding share of common stock. Each Right entitles the registered holder to
purchase from us one one-hundredth of a share of Series A Junior Participating
Preferred Stock, $10.00 par value per share, at an exercise price of $15.00 (the
"Purchase Price") per one one-hundredth of a share of preferred stock, subject
to adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between us and American Stock Transfer and
Trust Company, as successor Rights Agent.
The Rights are initially evidenced by the common stock certificates as no
separate Rights certificates have been distributed. The Rights separate from the
common stock and a "Distribution Date" will occur at the close of business on
the earliest of (i) the tenth business day following a public announcement that
a person or group of affiliated or associated persons (an "Acquiring Person")
has acquired, or obtained the right to acquire, beneficial ownership of 20% or
more of the outstanding shares of our common stock (the "Stock Acquisition
Date"), (ii) the tenth business day (or such later date as may be determined by
action of our board of directors) following the commencement of a tender offer
or exchange offer that would result in a person or group beneficially owning 20%
or more of the outstanding shares of common stock or (iii) the tenth business
day after our board of directors determines that any individual, firm,
corporation, partnership or other entity (each a "Person"), alone or together
with its affiliates and associates, has become the beneficial owner of an amount
of common stock which a majority of the continuing directors who are not
officers of the Company determines to be substantial (which amount shall in no
event be less than 10% of the shares of common stock outstanding) and at least a
majority of the continuing directors who are not officers of the Company, after
reasonable inquiry and investigation, including consultation with such Person as
the directors shall deem appropriate, shall determine that such beneficial
ownership by such Person (an "Adverse Person") is intended to cause us to
repurchase the common stock beneficially owned by such Person or to cause
pressure on us to take action or enter into a transaction intended to provide
such Person with short-term financial gain under circumstances where the
directors determine that the best long-term interests of the Company and our
stockholders would not be served by taking such action or entering into such
transaction or series of transactions at that time, or that such beneficial
ownership is causing or is reasonably likely to cause a material adverse impact
on us. The Rights are not exercisable until the Distribution Date and will
expire at the close of business on December 17, 2000, unless earlier redeemed by
us.
If (i) a Person becomes the beneficial owner of 20% or more of the then
outstanding shares of our common stock (except (a) pursuant to certain offers
for all outstanding shares of common stock approved by at least a majority of
the continuing directors who are not officers of the Company or (b) solely due
to a reduction in the number of shares of our common stock outstanding as a
result of the repurchase of shares of common stock by us) or (ii) the Board of
Directors determines that a Person is an Adverse Person, each holder of a Right
will thereafter have the right to receive, upon exercise, common stock (or, in
certain circumstances, cash, property or other securities of the Company) having
a value equal to two times the exercise price of the Right. Notwithstanding any
of the foregoing, following the occurrence of either of the events set forth in
this paragraph, all Rights that are, or (under certain circumstances specified
in the Rights Agreement) were, beneficially owned by any Acquiring Person or
Adverse Person will be null and void.
If at any time following the Stock Acquisition Date, (i) we are acquired in
a merger or other business combination transaction in which we are not the
surviving corporation, or in which we are the surviving corporation, but our
common stock is changed or exchanged (other than a merger which follows an offer
described in clause (i)(a) of the preceding paragraph), or (ii) more than 50% of
our assets, cash flow or earning power is sold or transferred, each holder of a
13
<PAGE>
Right (except Rights which previously have been voided as set forth above) shall
thereafter have the right to receive upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
At any time after the earlier to occur of (i) an Acquiring Person becoming
such or (ii) the date on which our board of directors declares an Adverse Person
to be such, the board of directors may cause us to exchange the Rights (other
than Rights owned by the Adverse Person or Acquiring Person, as the case may be,
which will have become null and void), in whole or in part, at an exchange ratio
of one share of common stock per Right (subject to adjustment). Notwithstanding
the foregoing, no such exchange may be effected at any time after any Person
becomes the beneficial owner of 50% or more of our outstanding common stock.
The Rights Plan has certain anti-takeover effects including making it
prohibitively expensive for a raider to try to control or take us over
unilaterally and without negotiation with our board of directors. Although
intended to preserve for our stockholders the long term value of the Company,
the Rights Plan may make it more difficult for stockholders to benefit from
certain transactions which are opposed by the incumbent board of directors.
In connection with the issuance of the Series A Preferred, we amended the
Rights Plan to provide that the holders of the Series A Preferred would not be
considered an Acquiring Person under the Rights Plan with respect to the shares
of common stock issued pursuant to the Series A 1999 Preferred.
Anti-Takeover Provisions
In addition to the Rights Plan, our articles of incorporation and bylaws
and Nevada law include certain provisions which may have the effect of delaying
or deterring a change in control or management of the Company or encouraging
persons considering unsolicited tender offers or other unilateral takeover
proposals to negotiate with our board of directors rather than pursue
non-negotiated takeover attempts. These provisions include a classified board of
directors, authorized blank check preferred stock, restrictions on business
combinations and the availability of authorized but unissued common stock.
Please see "Preferred Stock" above.
Our bylaws contain provisions dividing the board of directors into classes
with only one class standing for election each year. A staggered board makes it
more difficult for stockholders to change the majority of the directors and
instead promotes a continuity of existing management.
Nevada's "Combinations with Interested Stockholders Statute," Nevada
Revised Statutes ss. 78.411-78.444, which applies to any Nevada corporation,
including us, subject to the reporting requirements of Section 12 of the
Exchange Act, prohibits an "interested stockholder" from entering into a
"combination" with the corporation for three years, unless certain conditions
are met. A "combination" includes (a) any merger with a subsidiary of the
corporation or an "interested stockholder," or any other corporation which is or
after the merger would be, an affiliate or associate of the interested
stockholder, (b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, in one transaction or a series of transactions, to or with an
"interested stockholder," having (i) an aggregate market value equal to 5% or
more of the aggregate market value of the corporation's assets, (ii) an
aggregate market value equal to 5% or more of the aggregate market value of all
outstanding shares of the corporation, or (iii) representing 10% or more of the
earning power or net income of the corporation, (c) any issuance or transfer of
shares of the corporation or its subsidiaries, to the "interested stockholder,"
having an aggregate market value equal to 5% or more of the aggregate market
value of all of the outstanding shares of the corporation, (d) the adoption of
any plan or proposal for the liquidation or dissolution of the corporation
proposed by the "interested stockholder," (e) certain transactions which would
result in increasing the proportionate share of shares of the corporation owned
by the "interested stockholder," (f) a recapitalization of the corporation or
14
<PAGE>
(g) the receipt of benefits by an "interested stockholder," except
proportionately as a stockholder, of any loans, advances or other financial
benefits provided by the corporation. An "interested stockholder" is a person
who (i) directly or indirectly owns 10% or more of the voting power of the
outstanding voting shares of the corporation or (ii) an affiliate or associate
of the corporation which at any time within three years before the date in
question was the beneficial owner, directly or indirectly, of 10% or more of the
voting power of the then outstanding shares of the corporation.
A corporation to which the Combinations with Interested Stockholders
Statute applies may not engage in a "combination" within three years after the
interested stockholder acquired its shares, unless the combination or the
interested stockholder's acquisition of shares was approved by the board of
directors before the interested stockholder acquired the shares. If this
approval is not obtained, the combination may be consummated after the three
year period expires if either (a)(i) the board of directors of the corporation
approved, prior to such person becoming an interested stockholder, the
combination or the purchase of shares by the interested stockholder or (ii) the
combination is approved by the affirmative vote of holders of a majority of
voting power not beneficially owned by the interested stockholder at a meeting
called no earlier than three years after the date the interested stockholder
became such or (b) the aggregate amount of cash and the market value of
consideration other than cash to be received by holders of common shares and
holders of any other class or series of shares meets the minimum requirements
set forth in Section 78.441 through 78.443, inclusive, and prior to the
consummation of the combination, except in limited circumstances, the
"interested stockholder" would not have become the beneficial owner of
additional voting shares of the corporation.
In addition to the foregoing statute, Nevada has an "Acquisition of
Controlling Interest Statute," Nevada Revised Statute ss. 78.378-78.3793, which
prohibits an acquiror, under certain circumstances, from voting shares of a
target corporation's stock after crossing certain threshold ownership
percentages, unless the acquiror obtains the approval of the target
corporation's stockholders. The Control Share Acquisition Statute only applies
to Nevada corporations with at least 200 stockholders, including at least 100
record stockholders who are Nevada residents, and which do business directly or
indirectly in Nevada and whose Articles of Incorporation or Bylaws in effect 10
days following the acquisition of a controlling interest by an acquiror does not
prohibit its application. We do not intend to "do business" in Nevada within the
meaning of the Control Share Acquisition Statute. Therefore, we believe it is
unlikely that the Control Share Acquisition Statute will apply to us. The
statute specifies three thresholds: at least one-fifth but less than one-third,
at least one-third but less than a majority, and a majority or more, of the
outstanding voting power. Once an acquiror crosses one of the above thresholds,
shares which it acquired in the transaction taking it over the threshold or
within ninety days thereof become "Control Shares" which could be deprived of
the right to vote until a majority of the disinterested stockholders restore
that right. A special stockholders' meeting may be called at the request of the
acquiror to consider the voting rights of the acquiror's shares. If the acquiror
requests a special meeting, then the meeting must take place no earlier than 30
days (unless the acquiror makes the meeting be held sooner) and no more than 50
days (unless the acquiror agrees to a later date) after the delivery by the
acquiror to the corporation of an information statement which sets forth the
range of voting power that the acquiror has acquired or proposes to acquire and
certain other information concerning the acquiror and the proposed control share
acquisition. If no such request for a stockholders' meeting is made,
consideration of the voting rights of the acquiror's shares must be taken at the
next special or annual stockholders' meeting. If the stockholders fail to
restore voting rights to the acquiror, or if the acquiror fails to timely
deliver an information statement to the corporation, then the corporation may,
if so provided in its articles or bylaws, call certain of the acquiror's shares
for redemption at the average price paid for the control shares by the acquiror.
Our articles and bylaws do not currently permit us to redeem an acquiror's
shares under these circumstances. The Control Share Acquisition Statute also
provides that in the event the stockholders restore full voting rights to a
holder of Control Shares that owns a majority of the voting stock, then all
other stockholders who do not vote in favor of restoring voting rights to the
15
<PAGE>
Control Shares may demand payment for the "fair value" of their shares (which is
generally equal to the highest price paid by the acquiror in the transaction
subjecting the acquiror to the statute.)
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is American Stock
Transfer & Trust Company.
16
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth information as of June 30, 1999 with respect to
the Common Stock beneficially owned by the Selling Security Holders.
<TABLE>
<CAPTION>
Number of Shares Before Offering After Offering
Name and Address of Beneficially Number of Shares Percentage of Percentage of
Selling Security Holder(1) Owned(2) Offered Common Stock Common Stock
- ----------------------------------------- ----------------- ------------------ -------------- --------------
<S> <C> <C> <C>
AQUILA ENERGY CAPITAL CORPORATION
900 Fannin Street, Suite 1850
Houston, Texas 77010 1,274,345 24,345 4.9% 4.8%
PACIFIC LIFE INSURANCE COMPANY
700 Newport Center Drive
Newport Beach, California 92660 1,274,345 24,345 4.9% 4.8%
TCW DEBT AND ROYALTY FUND VI, L.P., a
California limited partnership 1,312,451 25,074 5.0% 4.9%
TCW DEBT AND ROYALTY FUND VIB, L.P., a
California limited partnership 399,312 7,629 1.6% 1.6%
TRUST COMPANY OF THE WEST, a California
trust company, as Custodian for Eugenia III
Investment Holdings Limited 618,541 11,817 2.4% 2.4%
TRUST COMPANY OF THE WEST, a California
trust company, as Custodian for Allmerica Asset
Management, Inc. as agent for First Allmerica
Financial Life Insurance Company 395,320 7,552 1.6% 1.5%
TRUST COMPANY OF THE WEST, a California
trust company, as Custodian pursuant to the
Investment Management and Custody Agreement
dated as of October 27, 1997 between University of
Chicago, TCW Asset Management Company and
Trust Company of the West 158,126 3,021 0.6% 0.6%
TRUST COMPANY OF THE WEST, a California
trust company, as Custodian pursuant to the
Investment Management and Custody Agreement
dated as of October 27, 1997 between University of
Notre Dame du Lac, TCW Asset Management
Company and Trust Company of the West 129,866 2,481 0.5% 0.5%
TRUST COMPANY OF THE WEST, a California
trust company, as Custodian pursuant to the
Investment Management and Custody Agreement
dated as of October 24, 1997 between William N
Pennington Separate Property Trust dated
January 1, 1991, TCW Asset Management
Company and Trust Company of the West 592,976 11,328 2.3% 2.3%
TRUST COMPANY OF THE WEST, a California
trust company, as Sub-Custodian for the Delta
Master Trust dated May 27, 1982, as amended,
under the sub-custody agreement and power of
attorney dated October 30, 1997 among Trust
Company of the West, Citibank F.S.B., as Trustee
and TCW Asset Management Company 216,445 4,135 0.9% 0.8%
TRUST COMPANY OF THE WEST, a California
trust company, in its capacities as Investment
Manager pursuant to the Investment Management
Agreement dated as of June 6, 1988 with General
Mills, Inc. and as Custodian pursuant to the
Custody Agreement dated as of February 6, 1989 with
General Mills, Inc. and State Street Bank and
Trust Company, as trustee 1,274,345 24,345 4.9% 4.8%
--------- -------
Total: 7,646,072 146,072 23.7% 23.2%
========= =======
- --------
</TABLE>
(1) Unless otherwise, the address of each Selling Security Holder is 865 South
Figueroa, Suite 1800, Los Angeles, California 90017.
(2) Includes shares issuable upon conversion of the Series A 1999 Convertible
Preferred Stock.
17
<PAGE>
PLAN OF DISTRIBUTION
We will receive no proceeds from this offering. We are registering the
shares on behalf of the Selling Security Holders. The shares may be sold by the
Selling Security Holders or by pledgees, donees, transferees or other successors
in interest. We are paying all costs, expenses and fees in connection with the
registration of the shares offered hereby. Brokerage commissions, if any,
attributable to the sale of shares will be borne by the Selling Security Holders
(or their pledgees, donees, transferees or other successors in interest).
Sales of shares may be effected from time to time in transactions (which
may include block transactions) on the New York Stock Exchange, in negotiated
transactions, or a combination of such methods of sale, at fixed prices which
may be changed, at market prices prevailing at the time of sale, or at
negotiated prices. The Selling Security Holders may effect such transactions by
selling common stock directly to purchasers or to or through broker-dealers
which may act as agents or principals. Such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Security Holders and/or the purchasers of common stock for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). To the extent required under the Securities Act, the
aggregate amount of Selling Security Holders' shares being offered and the terms
of the offering, the names of any such agents, brokers, dealers or underwriters
and any applicable commission with respect to a particular offer will be set
forth in an accompanying prospectus supplement. Sales of Selling Security
Holders' shares may also be made pursuant to Rule 144 under the Securities Act,
where applicable.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
The Selling Security Holders and any broker-dealers that act in connection
with the sale of the shares might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the shares of common stock as principal
might be deemed to be underwriting discounts and commissions under the
Securities Act. The Selling Security Holders may agree to indemnify any agent,
dealer or broker-dealer that participates in transactions involving sales of the
shares against certain liabilities, including liabilities arising under the
Securities Act. Liabilities under the federal securities laws cannot be waived.
Because the Selling Security Holders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the Selling Security
Holders will be subject to prospectus delivery requirements under the Securities
Act. Furthermore, in the event of a "distribution" of the shares, such Selling
Security Holder, any selling broker or dealer and any "affiliated purchasers"
may be subject to Regulation M under the Exchange Act, which Regulation would
prohibit, with certain exceptions, any such person from bidding for or
purchasing any security which is the subject of such distribution until his
participation in that distribution is completed. In addition, Regulation M under
the Exchange Act prohibits, with certain exceptions, any "stabilizing bid" or
"stabilizing purchase" for the purpose of pegging, fixing or stabilizing the
price of common stock in connection with this offering.
The Selling Security Holders may be entitled under agreements entered into
with us to indemnification against liabilities under the Securities Act.
18
<PAGE>
LEGAL MATTERS
The validity of the issuance of the common stock offered by this prospectus
will be passed upon by Locke Liddell & Sapp LLP, Dallas, Texas.
EXPERTS
The estimates as of December 31, 1996, 1997 and 1998 relating to the
Company's proved oil and natural gas reserves, future net revenues of oil and
natural gas reserves and present value of future net revenues of oil and natural
gas reserves included or incorporated by reference herein are based upon reports
prepared by Lee Keeling and Associates, Inc. and are included or incorporated by
reference herein in reliance upon such reports and upon the authority of such
firm as experts in petroleum engineering.
The financial statements as of December 31, 1998 and for the three years in
the period then ended, included in the Company's 1998 Form 10-K incorporated by
reference in this Registration Statement, have been audited by Arthur Andersen
LLP, independent public accountants, as stated in their report appearing herein.
Such financial statements are incorporated herein by reference in reliance on
such report given upon the authority of such firm as experts in accounting and
auditing.
19
