-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EtZJ1a8rbtzAY4vWJPev2iGTVcAxsw448bU8wF9jbriArTyKREuyWPD8Kl8yva+/ oq5W9t3ac6hAuhzlX0o42Q== 0000890566-98-001448.txt : 19980817 0000890566-98-001448.hdr.sgml : 19980817 ACCESSION NUMBER: 0000890566-98-001448 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOMAIN ENERGY CORP CENTRAL INDEX KEY: 0001037192 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760526147 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12999 FILM NUMBER: 98688526 BUSINESS ADDRESS: STREET 1: 16801 GREENSPOINT PARK DRIVE STREET 2: SUITE 200 CITY: HOUSTON STATE: TX ZIP: 77060 BUSINESS PHONE: 2816181900 MAIL ADDRESS: STREET 1: P O BOX 2229 CITY: HOUSTON STATE: TX ZIP: 77252-2229 10-Q 1 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Transition period ______________ to _______________ Commission File Number 1-12999 DOMAIN ENERGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 76-0526147 (State or Other Jurisdiction of (I.R.S Employer Identification No.) Incorporation or Organization) 16801 Greenspoint Park Drive, Suite 200 77060 Houston, Texas (Zip Code) (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (281) 618-1800 Not Applicable (Former Name, Former Address and Former Fiscal Year, if changed since last report) 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 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 the number of shares outstanding of each of the issuer's classes of stock as of August 14, 1998: Common Stock $0.01 par value 15,107,719 DOMAIN ENERGY CORPORATION Table of Contents for Form 10-Q Quarter Ended June 30, 1998 PAGE NUMBER ------- COVER PAGE ............................................................ 1 DOCUMENT TABLE OF CONTENTS ............................................ 2 PART 1. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 1998 (unaudited) and December 31, 1997 ....... 3 Condensed Consolidated Statements of Income for the three and six months ended June 30, 1998 and 1997 (unaudited) .................................. 4 Condensed Consolidated Statement of Shareholders' Equity for the six months ended June 30, 1998 (unaudited) ........................................... 5 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 (unaudited) ........................................... 6 Notes to Condensed Consolidated Financial Statements (unaudited) ........................................... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 11 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ..................................... 16 ITEM 2. Changes in Securities and Use of Proceeds ............. 16 ITEM 3. Defaults Upon Senior Securities ....................... 16 ITEM 4. Submission of Matters to a Vote of Security Holders ... 16 ITEM 5. Other Information ..................................... 16 ITEM 6. Exhibits and Reports on Form 8-K ...................... 17 SIGNATURES ............................................................ 18 INDEX OF EXHIBITS ..................................................... 19 2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DOMAIN ENERGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) June 30, December 31, 1998 1997 ----------- ----------- (unaudited) ASSETS Cash and cash equivalents ............................ $ 4,702 $ 4,731 Accounts receivable .................................. 9,107 12,562 IPF Program notes receivable, current portion ........ 5,815 8,873 Notes receivable - stockholders ..................... -- 546 Prepaid and other assets ............................. 3,161 2,858 --------- --------- Total current assets .......................... 22,785 29,570 IPF Program notes receivable, net .................... 60,582 40,892 Oil and natural gas properties, full cost method Proved properties ............................... 150,461 116,782 Unproved properties ............................. 37,783 36,603 Less: Accumulated depreciation, depletion and amortization ......................................... (26,857) (15,411) --------- --------- Total oil and natural gas properties, net ....... 161,387 137,974 Other assets, net .................................... 3,938 4,113 --------- --------- Total assets ................................. $ 248,692 $ 212,549 ========= ========= LIABILITIES Accounts payable and accrued expenses ................ $ 15,160 $ 15,907 --------- --------- Total current liabilities .................... 15,160 15,907 Long-term debt ....................................... 94,361 63,720 Deferred income taxes ................................ 2,312 -- --------- --------- Total liabilities ............................ 111,833 79,627 Minority interest .................................... -- 888 Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock: $0.01 par value, 5,000,000 shares authorized, none issued .......................................... -- -- Common Stock $0.01 par value, 50,000,000 shares authorized and 15,110,111 issued and 15,107,719 outstanding at June 30, 1998 and 25,000,000 shares authorized and 15,110,111 issued and 15,107,719 outstanding at December 31, 1997............................. 151 151 Additional paid-in capital ........................... 129,178 128,730 Treasury stock ....................................... (10) (10) Retained earnings .................................... 7,540 3,163 --------- --------- Total stockholders' equity ................... 136,859 132,034 --------- --------- Total liabilities and stockholders' equity ... $ 248,692 $ 212,549 ========= ========= The accompanying notes are an integral part of the condensed consolidated financial statements. 3 DOMAIN ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------- ------------------ 1998 1997 1998 1997 ------- ------- ------- -------- REVENUES Oil and natural gas ....................... $14,395 $ 9,057 $27,707 $ 21,839 IPF Activities, net ....................... 2,417 973 4,375 1,705 Other ..................................... -- (189) 688 (481) ------- ------- ------- -------- Total revenues ............... 16,812 9,841 32,770 23,063 ------- ------- ------- -------- EXPENSES Lease operating ........................... 4,124 2,553 8,237 5,613 Production and severance taxes ............ 187 329 492 742 Depreciation, depletion and amortization .. 6,226 3,146 11,824 6,428 General and administrative, net ........... 1,577 845 3,184 1,637 Stock compensation ........................ 184 1,060 369 4,210 ------- ------- ------- -------- Total operating expenses ..... 12,298 7,933 24,106 18,630 Income from operations .................... 4,514 1,908 8,664 4,433 Interest expense, net ..................... 984 1,235 1,639 2,344 ------- ------- ------- -------- Income before taxes ....................... 3,530 673 7,025 2,089 Income tax provision ...................... 1,314 -- 2,648 1,735 ------- ------- ------- -------- Net income ................................ $ 2,216 $ 673 $ 4,377 $ 354 ======= ======= ======= ======== Net income per common share: Basic ................................ $ 0.15 $ 0.09 $ 0.29 $ 0.04 Assuming dilution .................... $ 0.14 $ 0.08 $ 0.28 $ 0.04 Weighted average common shares outstanding: Basic ................................ 15,108 7,880 15,108 8,518 Assuming dilution .................... 15,812 8,595 15,817 8,876
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 DOMAIN ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands) (Unaudited)
Additional Common Paid in Treasury Retained Stock Capital Stock Earnings Total ---- --------- ---- ------ --------- Balance at December 31, 1997 ....................... $151 $ 128,730 $(10) $3,163 $ 132,034 Stock compensation ................................. -- 579 -- -- 579 Stock issuance (costs) ............................. -- (131) -- -- (131) Net income ......................................... -- -- -- 4,377 4,377 ---- --------- ---- ------ --------- Balance at June 30, 1998 ........................... $151 $ 129,178 $(10) $7,540 $ 136,859 ==== ========= ==== ====== =========
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 DOMAIN ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Six Months Ended June 30, -------------------- 1998 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................. $ 4,377 $ 354 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization ........ 11,824 6,428 Stock compensation .............................. 369 4,210 Deferred income taxes ........................... 2,427 1,525 Minority interest ............................... -- 183 Allowance for doubtful IPF investments .......... 271 -- Changes in operating assets and liabilities: Decrease in accounts receivable ................. 3,455 6,132 Increase in prepaid and other current assets .... (303) (163) Increase (decrease) in accounts payable and accrued expenses .............................. 3,789 (9,618) -------- -------- Net cash provided by operating activities .............. 26,209 9,051 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in oil and natural gas properties ........... (30,151) (9,461) Investment in Oakvale Acquisition ...................... (11,575) -- Proceeds from sale of oil and gas properties ........... 1,653 2,978 Proceeds from sale of equity investments ............... -- 2,222 IPF Program investments of capital (notes receivable) .. (22,699) (16,360) IPF Program return of capital (notes receivable) ....... 5,796 5,584 Proceeds from sale of restricted certificate of deposit .............................................. -- 8,000 Other assets ........................................... (318) 245 -------- -------- Net cash used in investing activities .................. (57,294) (6,792) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt borrowings .......................... 36,285 16,090 Repayment of debt borrowing ............................ (5,644) (70,336) Issuance of common stock, net .......................... 415 83,909 -------- -------- Net cash provided by financing activities .............. 31,056 29,663 Increase (decrease) in cash and cash equivalents ....... (29) 31,922 Cash and cash equivalents, beginning of period ......... 4,731 36 -------- -------- Cash and cash equivalents, end of period ............... $ 4,702 $ 31,958 ======== ======== Supplemental non-cash disclosure related to sale of equity investments: Reduction of intercompany receivables and investments ............................. $ 7,622 Additional note receivable .................... $ 5,400 The accompanying notes are an integral part of the condensed consolidated financial statements. 6 DOMAIN ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION, BASIS OF PRESENTATION AND NATURE OF OPERATIONS Domain Energy Corporation (the "Company") is an independent oil and gas company engaged in the exploration, development, production and acquisition of oil and natural gas properties, principally in the Gulf Coast region. The Company complements these activities with its Independent Producer Finance Program (the "IPF Program") pursuant to which it invests in oil and natural gas reserves through the acquisition of term overriding royalty interests. The consolidated balance sheet at June 30, 1998 and the consolidated statements of income, stockholders' equity and cash flows included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have also been omitted from the interim financial statements pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the interim periods are not necessarily indicative of the results to be expected for an entire year. The consolidated balance sheet at December 31, 1997 is derived from the December 31, 1997 audited balance sheet, but does not include all disclosures required by generally accepted accounting principles. These financial statements should be read in conjunction with the Company's audited annual financial statements included at pages 36 through 57 in the Company's Annual Report on Form 10-K, dated March 23, 1998. 2. ACQUISITIONS FUNDS ACQUISITION - On July 1, 1997, the Company consummated the acquisition (the "Funds Acquisition") of certain property interests from three unaffiliated institutional investors. The aggregate purchase price for the interests was approximately $28.4 million, which was paid in cash with a portion of the net proceeds of the initial public offering of the Company's common stock consummated on June 27, 1997. The acquisition was accounted for using the purchase method of accounting. The following unaudited pro forma summary presents the consolidated results of operations of the Company for the three and six months ended June 30, 1997 as if the Funds Acquisition had occurred at the beginning of 1997 (in thousands, except per share data). Three Months Ended Six Months Ended June 30, 1997 June 30, 1997 ------------------ ---------------- Revenues ............................. $13,300 $29,084 Net income ........................... $ 1,469 $ 1,195 Net income per share(1) .............. $ 0.17 $ 0.13 (1) EPS assuming dilution. GULFSTAR ACQUISITION - On December 15, 1997, the Company acquired all of the outstanding capital stock of Gulfstar Energy, Inc. and Mid Gulf Drilling Corp. (the "Gulfstar Acquisition"). The aggregate purchase price of these privately held, independent energy companies was $16.6 million, comprised of $8.6 million in cash and 499,990 shares of the Company's common stock valued at $16.00 per share. The acquisition was accounted for using the purchase method of accounting. The following unaudited pro forma summary presents the consolidated results of operations of the Company for the three and six months ended June 30, 1997 as if the Gulfstar Acquisition had occurred at the beginning of 1997. The 1997 pro forma amounts also give effect to the Funds Acquisition discussed above (in thousands, except per share data). 7 DOMAIN ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Three Months Ended Six Months Ended June 30, 1997 June 30, 1997 ------------------ ---------------- Revenues ............................. $13,640 $29,715 Net income ........................... $ 1,323 $ 865 Net income per share(1) .............. $ 0.15 $ 0.10 (1) EPS assuming dilution. EPS calculation assumes that the 499,990 shares of common stock issued in connection with the Gulfstar Acquisition were outstanding for the entire year. OAKVALE ACQUISITION - On February 26, 1998, the Company acquired the Oakvale Field from Pioneer Natural Resources USA Inc. for an aggregate purchase price of $11.6 million. The acquisition was accounted for using the purchase method of accounting. The acquisition is not material to the Company's financial statements and therefore pro forma information is not provided. 3. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," (SFAS 130). SFAS 130 is effective for periods beginning after December 15, 1997. SFAS 130 establishes standards for reporting and displaying of comprehensive income and its components. The purpose of reporting comprehensive income is to report a measure of all changes in equity of an enterprise that results from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. As of June 30, 1998, there are no adjustments ("Other comprehensive income") to net income in deriving comprehensive income. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", (SFAS 131). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments. SFAS 131 is effective for periods beginning after December 15, 1997, but need not be applied to interim financial statements in the initial year of application. Management of the Company is evaluating what, if any, additional disclosures may be required when this statement is first applied. In June 1998, the Financial Accounting Standards Board issued statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", (SFAS 133). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management of the Company will be analyzing SFAS 133 during 1998 and 1999 to determine what, if any, financial impact will result or additional disclosures will be required thereunder. 4. EARNINGS PER SHARE The Company reports earnings per share ("EPS") in accordance with Financial Accounting Standards Board Statement No. 128, "Earnings Per Share," (SFAS 128). SFAS 128 requires the dual presentation of basic and diluted EPS. The following tables are a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for net income reported for the second quarter and the first six months of 1998 and 1997 (in thousands, except per share data): 8 DOMAIN ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SECOND QUARTER 1998 SECOND QUARTER 1997 ---------------------------------------- -------------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT BASIC EPS Income available to common stockholders ....................... $2,216 15,108 $ 0.15 $673 7,880 $ 0.09 ======= ======= EFFECT OF DILUTIVE SECURITIES Stock options (1) ........................... -- 704 -- 715 ------ ------ ---- ----- DILUTED EPS Income available to common stockholders ..... $2,216 15,812 $ 0.14 $673 8,595 $ 0.08 ====== ====== ======= ==== ===== ======= SIX MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1997 ---------------------------------------- -------------------------------------- INCOME SHARES PER SHARE INCOME SHARES(2) PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT BASIC EPS Income available to common stockholders ......................... $4,377 15,108 $ 0.29 $354 8,518 $ 0.04 ======= ======= EFFECT OF DILUTIVE SECURITIES Stock options (1) ........................... -- 709 -- 358 ------ ------ ---- ----- DILUTED EPS Income available to common stockholders ....................... $4,377 15,817 $ 0.28 $354 8,876 $ 0.04 ====== ====== ======= ==== ===== =======
(1) The Company had options granted for 120,010 shares outstanding at June 30, 1998 which were not included in the EPS computation for the second quarter 1998 and the six months ended June 30, 1998, because the effect of the options are antidilutive. (2) Represents the average of the first and second quarter of 1997. For the first quarter of 1997, the shares outstanding used in the EPS calculation were determined in accordance with the regulations of the Securities and Exchange Commission. Shares outstanding were calculated assuming that the 7,177,681 shares of Common Stock issued in connection with the Company's acquisition in December 1996, the 486,003 shares of Common Stock issued to the Company's employees in February and April 1997, the 849,694 shares of Common Stock reserved for issuance pursuant to outstanding options under the Stock Purchase and Option Plan and the 643,037 shares of Common Stock purchased concurrently with the Company's initial public offering by First Reserve Fund VII, Limited Partnership were outstanding since January 1, 1997. 5. LONG-TERM DEBT At June 30, 1998 and December 31, 1997, notes payable and long-term debt consisted of the following (in thousands): June 30, December 31, 1998 1997 ------- ------- Company Credit Facility .................. $49,852 $34,552 IPF Credit Facility ...................... 44,509 29,168 ------- ------- Long-term debt ........................... 94,361 63,720 less current maturities .................. -- -- ------- ------- $94,361 $63,720 ======= ======= 9 DOMAIN ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. OIL AND GAS PROPERTIES Investments in oil and gas properties are accounted for using the full cost method of accounting. Total capitalized costs of oil and gas properties are subject to a "ceiling test", which limits such costs to the estimated present value, discounted at a 10% interest rate, of future net cash flows from proved reserves, based on current(end of period)economic and operating conditions, plus the lower of cost or fair value of unproved properties. If capitalized costs exceed this limit, the excess is charged to depletion, depreciation, and amortization ("impairment charge"). At June 30, 1998, no impairment charge was required. However, commodity prices are volatile and have generally declined since June 30, 1998. In such a commodity price environment, there can be no assurance that the Company will not be required to report an impairment charge in a subsequent period. 7. MERGER On May 12, 1998, the Company entered into a definitive agreement to merge (the "Merger") with Lomak Petroleum, Inc. ("Lomak"). Pursuant to the merger agreement, the Company's shareholders will receive $14.50 worth of Lomak common stock for each common share subject to an exchange ratio maximum of 1.2083 at a Lomak per share price of $12.00 or lower and a minimum of 0.8529 at $17.00 or higher. The final exchange ratio will be determined based on the average closing sales price of Lomak's shares for the period of the 15 most recent trading days ending on the third business day prior to the date of the closing of the Merger. As a condition to the Merger, the Company's majority shareholder, an affiliate of First Reserve Corporation ("First Reserve"), agreed to sell to Lomak 3.3 million shares of the Company's common stock (22% of the total outstanding) for $43.9 million in cash ($13.50 per share). As contemplated by the merger agreement, First Reserve has voted all of its shares (52% of the total outstanding) in favor of the merger. As a result, no further approval of the Company's shareholders is necessary. Completion of the transaction is subject to approval of Lomak's shareholders. On July 3, 1998, Lomak purchased the 3.3 million shares of the Company's common stock from First Reserve for $43.9 million. This reduces First Reserve's ownership in the Company to 4.5 million shares (30.2%). As of August 6, 1998, Lomak has purchased an additional 532,600 shares of the Company's common stock in the open market, increasing its holdings in the Company to 3.8 million shares (25.0%). On July 16, 1998, Lomak scheduled a Special Meeting of Stockholders to be held on Tuesday, August 25, 1998 (the "Special Meeting") to consider and vote upon proposals to approve (i) the issuance of the shares of Lomak Common Stock in the Merger and (ii) an amendment to the Certificate of Incorporation of Lomak to change the name of Lomak to "Range Resources Corporation". 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following review of operations for the three and six months ended June 30, 1998 and 1997 should be read in conjunction with the financial statements of the Company and Notes thereto included elsewhere in this Form 10-Q and with the Financial Statements, Notes and Management's Discussion and Analysis for the year ended December 31, 1997 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. RECENT DEVELOPMENTS On May 12, 1998, the Company entered into a definitive agreement to merge (the "Merger") with Lomak Petroleum, Inc. ("Lomak"). Pursuant to the merger agreement, the Company's shareholders will receive $14.50 worth of Lomak common stock for each common share subject to an exchange ratio maximum of 1.2083 at a Lomak per share price of $12.00 or lower and a minimum of 0.8529 at $17.00 or higher. The final exchange ratio will be determined based on the average closing sales price of Lomak's shares for the period of the 15 most recent trading days ending on the third business day prior to the date of the closing of the Merger. As a condition to the Merger, the Company's majority shareholder, an affiliate of First Reserve Corporation ("First Reserve"), agreed to sell to Lomak 3.3 million shares of the Company's common stock (22% of the total outstanding) for $43.9 million in cash ($13.50 per share). As contemplated by the merger agreement, First Reserve has voted all of its shares (52% of the total outstanding) in favor of the merger. As a result, no further approval of the Company's shareholders is necessary. Completion of the transaction is subject to approval of Lomak's shareholders. On July 3, 1998, Lomak purchased the 3.3 million shares of the Company's common stock from First Reserve for $43.9 million. This reduces First Reserve's ownership in the Company to 4.5 million shares (30.2%). As of August 6, 1998, Lomak has purchased an additional 532,600 shares of the Company's common stock in the open market, increasing its holdings in the Company to 3.8 million shares (25.0%). On July 16, 1998, Lomak scheduled a Special Meeting of Stockholders to be held on Tuesday, August 25, 1998 (the "Special Meeting") to consider and vote upon proposals to approve (i) the issuance of the shares of Lomak Common Stock in the Merger and (ii) an amendment to the Certificate of Incorporation of Lomak to change the name of Lomak to "Range Resources Corporation". 11 RESULTS OF OPERATIONS The following table summarizes certain financial data, non-GAAP financial data, production volumes, average realized prices and expenses for the Company's oil and natural gas operations for the periods shown:
For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------- -------------------- 1998 1997 1998 1997 -------- ------- -------- -------- FINANCIAL DATA (IN THOUSANDS): Revenues: Natural Gas ............................ $ 11,572 $ 6,757 $ 22,042 $ 16,851 Oil and condensate ..................... 2,823 2,300 5,665 4,988 IPF Activities ......................... 2,417 973 4,375 1,705 Total revenues ............................ 16,812 9,841 32,770 23,063 Total operating expenses .................. 12,298 7,933 24,106 18,630 -------- ------- -------- -------- Operating income .......................... $ 4,514 $ 1,908 $ 8,664 $ 4,433 ======== ======= ======== ======== Net income ................................ $ 2,216 $ 673 $ 4,377 $ 354 Net cash provided by operating activities . 9,578 939 26,209 9,051 Net cash provided by (used in) investing activities .............................. (26,445) 785 (57,294) (6,792) Net cash provided by financing activities . 13,320 24,152 31,056 29,663 NON-GAAP FINANCIAL DATA (IN THOUSANDS): Cash flow from operations before changes in working capital ......................... $ 9,757 $ 5,005 $ 19,268 $ 12,700 EBITDA (1) ........................... 10,923 6,114 20,857 15,071 IPF Program return of capital (2) .... 1,239 2,158 5,796 5,584 -------- ------- -------- -------- EBITDA plus IPF Program return of capital ........................ $ 12,162 $ 8,272 $ 26,653 $ 20,655 ======== ======= ======== ======== PRODUCTION VOLUMES: Natural gas (MMcf) ................. 5,189 3,387 10,061 7,055 Oil and condensate (MBbls) ......... 205 138 395 279 Total (MMcfe) ...................... 6,420 4,213 12,433 8,729 AVERAGE REALIZED PRICES: (3) Natural gas (per Mcf) ............. $ 2.23 $ 1.99 $ 2.19 $ 2.39 Oil and Condensate (per Bbl) ....... $ 13.77 $ 16.67 $ 14.34 $ 17.88 EXPENSES (PER MCFE): Lease operating .................... $ 0.64 $ 0.59 $ 0.66 $ 0.63 Production and severance taxes ..... $ 0.03 $ 0.08 $ 0.04 $ 0.09 Depreciation, depletion and amortization .................... $ 0.94 $ 0.71 $ 0.92 $ 0.70 General and administrative, net (4) $ 0.19 $ 0.13 $ 0.20 $ 0.12
(1) EBITDA represents earnings before stock compensation expense, interest, income taxes, depreciation, depletion and amortization. EBITDA is a financial measure commonly used in the oil and gas industry and should not be considered in isolation or as a substitute for net income, operating income, net cash provided by operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. Because EBITDA excludes some, but not all, items that affect net income and may vary among companies, the EBITDA calculation presented above may not be comparable to similarly titled measures of other companies. 12 (2) To more accurately reflect the actual cash flows generated by the Company, IPF Program return of capital is identified separately to allow such cash receipts to be combined with EBITDA. (3) Reflects the actual realized prices received by the Company, including the results of the Company's hedging activities. (4) Includes production attributable to properties managed for the Funds for the three and six months ended June 30, 1997 and excludes fees received from investors. THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 Oil and natural gas revenues increased to $14.4 million in the second quarter of 1998 from $9.1 million in the second quarter of 1997, an increase of $5.3 million, or 58.9%. Production volumes for oil and condensate increased to 205 MBbls in the second quarter of 1998 from 138 MBbls in the second quarter of 1997, an increase of 67 MBbls, or 48.6%. Production volumes for natural gas increased to 5.2 Bcf in the second quarter of 1998 from 3.4 Bcf in the second quarter of 1997, an increase of 1.8 Bcf, or 53.2%.The increase in natural gas production was primarily due to the Funds Acquisition (1.0 Bcf) completed in July 1997 and the Gulfstar Acquisition (0.8 Bcf) completed in December 1997. The increase in total oil and natural gas production increased revenues by $4.7 million. Additionally, revenues increased during the second quarter of 1998 by $1.2 million due to a 12.1% increase in the average realized price received by the Company for its natural gas. These increases were partially offset by a 17.4% decrease in the average realized price received for the Company's oil and condensate.This decrease reduced revenues by $0.6 million. The Company realized an average oil price of $12.96 per Bbl and an average natural gas price of $2.25 per Mcf for the second quarter of 1998. Including the results of hedging activities, the Company realized average prices of $13.77 per Bbl and $2.23 per Mcf, respectively. Hedging activities increased oil and natural gas revenues for the second quarter 1998 by approximately $57,000. For the second quarter of 1997, the Company realized an average oil price of $17.85 per Bbl and an average natural gas price of $2.03 per Mcf. Net of hedging results, the Company realized average prices of $16.67 per Bbl and $1.99 per Mcf, respectively Hedging activities decreased oil and natural gas revenues for the second quarter of 1997 by approximately $0.3 million. Revenues from IPF Activities increased to $2.4 million in the second quarter of 1998 from $1.0 million in the second quarter of 1997, an increase of $1.4 million, or 148.4%. This increase was primarily the result of the continuing growth in the Company's IPF Program investment activities during 1997 and the first half of 1998. Lease operating expenses increased to $4.1 million in the second quarter of 1998 from $2.6 million in the second quarter of 1997, an increase of $1.5 million, or 61.5%. Lease operating expenses were higher in the second quarter of 1998 compared to the same period in 1997 due to the Funds Acquisition ($0.6 million) completed in July 1997, the Gulfstar Acquisition ($0.4 million) completed in December 1997 and increased workover expense ($0.5 million). On a per Mcfe basis, lease operating expenses were $0.64 for the second quarter of 1998 and $0.59 for the second quarter of 1997. Depreciation, depletion and amortization ("DD&A") expense increased to $6.2 million in the second quarter of 1998 from $3.1 million in the second quarter of 1997, an increase of $3.1 million, or 97.9%. This was primarily the result of higher oil and natural gas production volumes ($1.6 million) and an increase in the DD&A rate ($1.5 million). The DD&A rate increased to $0.94 per Mcfe in the second quarter of 1998 compared to $0.71 per Mcfe for the same period in 1997. The increase in the DD&A rate was primarily due to the addition of oil and natural gas properties acquired in 1997 and the first half of 1998. General and administrative expense increased to $1.6 million in the second quarter of 1998 from $0.8 million in the second quarter of 1997, an increase of $0.8 million, or 86.6%. This increase was primarily due to an increase in the number of employees in 1998, partially due to the Gulfstar Acquisition completed in December 1997, and the expense of a proportional amount of anticipated 1998 year-end compensation awards ($0.3 million) in the second quarter of 1998. Stock compensation expense decreased to $0.2 million in the second quarter of 1998 from $1.1 million during the same period in 1997, a decrease of $0.9 million. The $0.9 million decrease is primarily attributable to stock purchased by certain employees of the Company in the second quarter of 1997 under the 1996 Stock Purchase and Option Plan for Key Employees of Domain Energy Corporation and Affiliates (the "Stock Purchase and Option Plan"). 13 Income tax expense increased to $1.3 million in the second quarter of 1998 from zero in the second quarter of 1997, an increase of $1.3 million. This increase was primarily due to income before taxes increasing to $3.5 million for the second quarter of 1998 compared to $0.7 million for the second quarter of 1997. Net income was $2.2 million for the second quarter of 1998 compared to $0.7 million for the second quarter of 1997 as a result of the factors described above. SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 Oil and natural gas revenues increased to $27.7 million for the six months ended June 30, 1998 from $21.8 million for the same period in 1997, an increase of $5.9 million, or 26.9%. Production volumes for oil and condensate increased to 395 MBbls for the six months ended June 30, 1998 from 279 MBbls for the same period in 1997, an increase of 116 MBbls, or 41.6%. Production volumes for natural gas increased to 10.1 Bcf for the six months ended June 30, 1998 from 7.1 Bcf for the same period in 1997, an increase of 3.0 Bcf, or 42.6%. The increase in natural gas production was primarily due to the Funds Acquisition (2.1 Bcf) completed in July 1997 and the Gulfstar Acquisition (1.2 Bcf) completed in December 1997, offset by natural declines in production from certain fields. The increase in total oil and natural gas production increased revenues by $9.3 million. This was partially offset by a 8.4% decrease in the average realized price received for the Company's natural gas and a 19.8% decrease in the average realized price received for the Company's oil and condensate. These decreases in realized prices decreased revenues by $3.4 million. The Company realized an average oil price of $13.56 per Bbl and an average natural gas price of $2.18 per Mcf for the six months ended June 30, 1998. Including the results of hedging activities, the Company realized average prices of $14.34 per Bbl and $2.19 per Mcf, respectively. Hedging activities increased oil and natural gas revenues for the six months ended June 30, 1998 by approximately $0.4 million. For the same period in 1997, the Company realized an average oil price of $19.70 per Bbl and an average natural gas price of $2.40 per Mcf. Net of hedging results, the Company realized average prices of $17.88 per Bbl and $2.39 per Mcf, respectively Hedging activities decreased oil and natural gas revenues for the six months ended June 30, 1997 by approximately $0.5 million. Other revenues increased to $0.7 million for the six months ended June 30, 1988 from a loss of $0.5 million for the same period in 1997, an increase of $1.2 million. This increase was primarily due to a $0.6 million gain realized as the result of an interest rate hedge entered into by the Company during the first quarter of 1998 in anticipation of a proposed debt offering and $0.5 million of losses in the first half of 1997 from the Michigan Development Project which the Company sold in April 1997. Revenues from IPF Activities increased to $4.4 million for the six months ended June 30, 1998 from $1.7 million for the same period in 1997, an increase of $2.7 million, or 156.6%. This increase was primarily the result of the continuing growth in the Company's IPF Program investment activities during 1997 and the first half of 1998. Lease operating expenses increased to $8.2 million for the six months ended June 30, 1998 from $5.6 million for the same period in 1997, an increase of $2.6 million, or 46.7%. Lease operating expenses were higher for the six months ended June 30, 1998 compared to the same period in 1997 primarily due to the Funds Acquisition ($1.2 million) completed in July 1997, the Gulfstar Acquisition ($0.8 million) completed in December 1997 and increased workover expense ($0.6 million). On a per Mcfe basis, lease operating expenses were $0.66 for the six months ended June 30, 1998 and $0.63 for the same period in 1997. Depreciation, depletion and amortization ("DD&A") expense increased to $11.8 million for the six months ended June 30, 1998 from $6.4 million for the same period in 1997, an increase of $5.4 million, or 83.9%. This was primarily the result of higher oil and natural gas production volumes ($2.6 million) and an increase in the DD&A rate ($2.7 million). The DD&A rate increased to $0.92 per Mcfe for the six months ended June 30, 1998 compared to $0.70 per Mcfe for the same period in 1997. The increase in the DD&A rate was primarily due to the addition of oil and natural gas properties acquired in 1997 and the first half of 1998. General and administrative expense increased to $3.2 million for the six months ended June 30, 1998 from $1.6 million in the same period in 1997, an increase of $1.6 million, or 94.5%. This increase was primarily due to an increase in the number of employees in 1998, partially due to the Gulfstar Acquisition completed in December 1997, and the expense of a proportional amount of anticipated 1998 year-end compensation awards ($0.6 million) in the first quarter of 1998. 14 Stock compensation expense decreased to $0.4 million for the six months ended June 30, 1998 from $4.2 million during the same period in 1997, a decrease of $3.8 million. The $3.8 million decrease is primarily attributable to stock purchased by certain employees and management of the Company during the first six months of 1997 under the 1996 Stock Purchase and Option Plan for Key Employees of Domain Energy Corporation and Affiliates (the "Stock Purchase and Option Plan"). Income tax expense increased to $2.6 million for the six months ended June 30, 1998 from $1.7 million for the same period of 1997, an increase of $0.9 million, or 52.6%. This increase was primarily due to income before taxes increasing to $7.0 million for the six months ended June 30, 1998 compared to $5.9 million (including permanent difference attributable to stock compensation of $3.8 million) for the same period in 1997. The effective tax rates, excluding permanent differences, were 38% and 30% for the six months ended June 30, 1998 and 1997, respectively. Net income was $4.4 million for the six months ended June 30, 1998 compared to $0.4 million for the same period in 1997 as a result of the factors described above. LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES As of June 30, 1998, the Company had cash and cash equivalents of approximately $4.7 million and working capital of $7.6 million. For the six months ended June 30, 1998, the Company's primary sources of cash were from its operating activities and its revolving credit facilities. Net cash provided by operating activities increased to $26.2 million for the six months ended June 30, 1998 from $9.1 million for the same period in 1997, an increase of $17.1 million, or 189.6%. Net cash flows from operations before changes in operating assets and liabilities for the six months ended June 30, 1998 was $19.3 million compared to $12.7 million for the same period in 1997, an increase of $6.6 million, or 51.7%. This increase was primarily due to increases in operating revenues ($9.7 million), deferred taxes ($1.0 million) and allowance for doubtful accounts ($0.3 million), partially offset by an increase in lease operating expenses ($2.6 million) and an increase in general and administrative expense ($1.6 million). Changes in operating assets and liabilities accounted for the remaining $10.5 million increase in cash flows from operating activities. Cash flows used in investing activities for the six months ended June 30, 1998 was $57.3 million compared to $6.8 million for the same period in 1997, an increase of $50.5 million. This increase was primary due to an increase in oil and natural gas investments ($35.8 million), an increase in IPF investment activities ($6.1 million), an increase in investments in other assets ($0.6 million), and a decrease in proceeds from sale of restricted certificate of deposit ($8.0 million). Total capital expenditures, including the IPF Program, were $64.4 million for the six months ended June 30, 1998. The Company's capital expenditure budget for 1998 was approximately $150 million, including $55 million for acquisitions, $45 million for exploration and development, and $50 million for IPF Program investments. However, the Company now expects to spend only approximately $52 million in connection with acquisitions and exploration and development, and $40 to $50 million for IPF Program investments during 1998. The Company's expected capital expenditures and investments reflect changes due to current oil prices which impact acquisition and exploration and development activities as well as investments made by the IPF Program. Actual levels of capital expenditures may still vary significantly due to a variety of factors, including drilling results, oil and gas prices, industry conditions, future acquisitions and IPF Program activity. The Company expects to fund its activities for the remainder of 1998 through a combination of cash flow from operations and the use of its existing revolving credit facilities and, if necessary, new financings to borrow funds required from time to time to supplement internal cash flows. Based upon the Company's current level of operations and anticipated growth, management of the Company believes that these sources will be adequate to meet the Company's anticipated future requirements for working capital, capital expenditures and payments of principal and interest on its indebtedness. However, there can be no assurance that such anticipated growth will be realized, that the Company's business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable the Company to service its indebtedness or make necessary capital expenditures. Cash flows provided by financing activities increased to $31.1 million for the six months ended June 30, 1998 compared to $29.7 million for the same period in 1997, an increase of $1.4 million. This increase was due to increased net borrowings under the Company's revolving credit facilities of $84.9 million for the six months ended June 30, 1998, largely offset by a reduction in net proceeds from the issuance of stock of $83.5 million. Net proceeds from the Company's initial 15 public offering ("IPO") are included in the cash flows provided by financing activities for the six months ended June 30, 1997. The borrowing base under the Company's revolving credit facility with Chase Manhattan Bank, as agent, (the "Company Credit Facility") was increased to $60.0 million on April 12, 1998, giving the Company $10.1 million available under this credit facility at June 30, 1998. As of June 30, 1998, the borrowing base under the Company's revolving credit facility with Compass Bank, as agent, (the "IPF Credit Facility") was $49.0 million, giving the Company $4.5 million available under this credit facility at June 30, 1998. Effective July 14, 1998, the borrowing base was increased to $64.0 million. Notwithstanding the above, assuming the Lomak Merger discussed under "Recent Developments" is consummated, the Company's Credit Facility will be terminated and funding for the Company's exploration and production activities will be provided through Lomak's corporate facility as needed. Management believes that availability under this facility combined with cash provided by operating activities will be adequate to fund planned 1998 capital expenditures. It is currently contemplated that the IPF Credit Facility will remain in place for the immediate future. OTHER MATTERS Investments in oil and gas properties are accounted for using the full cost method of accounting. Total capitalized costs of oil and gas properties are subject to a "ceiling test", which limits such costs to the estimated present value, discounted at a 10% interest rate, of future net cash flows from proved reserves, based on current(end of period)economic and operating conditions, plus the lower of cost or fair value of unproved properties. If capitalized costs exceed this limit, the excess is charged to depletion, depreciation, and amortization ("impairment charge"). At June 30, 1998, no impairment charge was required. However, commodity prices are volatile and have generally declined since June 30, 1998. In such a commodity price environment, there can be no assurance that the Company will not be required to report an impairment charge in a subsequent period. If a impairment charge were required, it would result in a non-cash charge to earnings, but would not have an impact on cash flows. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 22, 1998, a stockholder of the Company filed an action in the Delaware Court of Chancery, alleging that the terms of the Merger are grossly unfair to a purported class of the Company's stockholders and that the defendants (except Lomak) violated their legal duties to the class in connection with the Merger. Lomak is alleged to have aided and abetted the breaches of fiduciary duty allegedly committed by the other defendants. The action seeks an injunction enjoining the Merger as well as a claim for money damages. The defendants have filed a motion to dismiss the action. The defendants believe that this litigation is without merit and intend to defend this matter vigorously. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION None 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Index of Exhibits for a list of those exhibits filed herewith, which index only includes those contracts executed or becoming effective during the most recent period reflected in this Report as allowed pursuant to Instruction 2 to Item 601(b)(10) of Regulation S-K. (b) The Company did not file any reports on Form 8-K during the second quarter of 1998. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused threport to be signed on its behalf by the undersigned thereunto duly authorized. DOMAIN ENERGY CORPORATION August 14, 1998 /s/ RICK G. LESTER Rick G. Lester Vice President, Chief Financial Officer and Treasurer 18 INDEX OF EXHIBITS EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 Second Amended and Restated Certificate of Incorporation of the Company filed with the State of Delaware on May 14, 1998 (incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 3.2 Second Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.1 Agreement and Plan of Merger by and among Lomak Petroleum, Inc., DEC Acquisition, Inc. and Domain Energy Corporation, dated May 12, 1998 (incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.2 First Amendment to Agreement and Plan of Merger by and among Lomak Petroleum, Inc., DEC Acquisition, Inc. and Domain Energy Corporation, dated May 12, 1998 (incorporated by reference to Exhibit 10.6 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 27.1 Financial Data Schedule. 19 EX-27 2
5 1,000 6-MOS 3-MOS DEC-31-1998 DEC-31-1998 JUN-30-1998 JUN-30-1998 4,702 0 0 0 9,107 0 0 0 0 0 22,785 0 188,244 0 26,857 0 248,692 0 15,160 0 94,361 0 0 0 0 0 151 0 136,708 0 248,692 0 32,082 16,812 32,770 16,812 0 0 8,729 4,311 15,377 7,987 0 0 1,639 984 7,025 3,530 2,648 1,314 4,377 2,216 0 0 0 0 0 0 4,377 2,216 0.29 0.15 0.28 0.14
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