-----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, TIokbcPiHJnKfvugF6R4A0znBUGNj/uxFu+/qPpQSHYezpf8RPVXgRn19jgdLC2D CJ6eAaxsTgxw6o7CgUCuBg== 0000890566-97-002317.txt : 19971105 0000890566-97-002317.hdr.sgml : 19971105 ACCESSION NUMBER: 0000890566-97-002317 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971104 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: 97707439 BUSINESS ADDRESS: STREET 1: 1100 LOUISIANA SUITE 1500 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7137575662 MAIL ADDRESS: STREET 1: P O BOX 2511 CITY: HOUSTON STATE: TX ZIP: 77252 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 September 30, 1997 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 1100 Louisiana, Suite 1500 Houston, Texas 77002 (713) 757-5662 (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 November 4, 1997: Common Stock $0.01 par value 14,607,729 DOMAIN ENERGY CORPORATION Table of Contents for Form 10-Q Quarter Ended September 30, 1997
PAGE NUMBER COVER PAGE ....................................................................................................................1 DOCUMENT TABLE OF CONTENTS ....................................................................................................2 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets at September 30, 1997 (unaudited) and December 31, 1996....................................................................................3 Consolidated and Combined Statements of Income for the three and nine months ended September 30, 1997 and 1996 (unaudited) ...........................................4 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1997 (unaudited)..............................................................5 Consolidated and Combined Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited) ....................................................6 Notes to Consolidated and Combined Financial Statements (unaudited)...........................................7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................................................................10 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings .........................................................................................15 ITEM 2. Changes in Securities .....................................................................................15 ITEM 3. Defaults Upon Senior Securities ...........................................................................15 ITEM 4. Submission of Matters to a Vote of Security Holders .......................................................15 ITEM 5. Other Information .........................................................................................15 ITEM 6. Exhibits and Reports on Form 8-K ..........................................................................16 SIGNATURES ...................................................................................................................17 INDEX OF EXHIBITS ............................................................................................................18
2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DOMAIN ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (Note 1) (in thousands, except share data)
Successor ---------------------------------- September 30, December 31, 1997 1996 --------- -------- (unaudited) ASSETS Cash and cash equivalents ............................................................... $ 3,668 $ 36 Restricted certificate of deposit ....................................................... -- 8,000 Accounts receivable ..................................................................... 8,197 19,456 IPF Program notes receivable, current portion ........................................... 9,460 7,874 Other notes receivable .................................................................. 5,400 -- Prepaid and other assets ................................................................ 2,072 1,525 --------- -------- Total current assets ............................................................. 28,797 36,891 IPF Program notes receivable ............................................................ 31,511 13,836 Oil and natural gas properties, full cost method ........................................ 114,884 66,176 Less: Accumulated depreciation, depletion and amortization ............................ (10,196) -- Investments and other assets ............................................................ 3,545 5,526 --------- -------- Total assets .................................................................... $ 168,541 $122,429 --------- -------- LIABILITIES Accounts payable ........................................................................ $ 10,266 $ 14,018 Accrued expenses ........................................................................ 146 42 Current maturities of long-term debt .................................................... -- 24,900 --------- -------- Total current liabilities ....................................................... 10,412 38,960 Long-term debt .......................................................................... 32,944 54,512 Deferred income taxes ................................................................... 2,597 -- --------- -------- Total liabilities ............................................................... 45,953 93,472 Minority interest ....................................................................... 554 380 STOCKHOLDERS' EQUITY Common Stock $0.01 par value, 15,080,000 shares authorized and 7,177,681 issued and outstanding at December 31, 1996 and 25,000,000 shares authorized, 14,610,121 issued and 14,607,729 outstanding at September 30, 1997 ............................................................ 146 72 Additional paid-in capital .............................................................. 120,456 28,505 Treasury stock .......................................................................... (10) -- Notes receivable - stockholders ......................................................... (546) -- Retained earnings ....................................................................... 1,988 -- --------- -------- Total stockholders' equity ...................................................... 122,034 28,577 --------- -------- Total liabilities and stockholders' equity ...................................... $ 168,541 $122,429 --------- --------
The accompanying notes are an integral part of the consolidated and combined financial statements. 3 DOMAIN ENERGY CORPORATION CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (Note 1) (in thousands, except per share data) (Unaudited)
For the three months For the nine months ----------------------------- ------------------------- Successor Predecessor Successor Predecessor 1997 1996 1997 1996 ------- -------- ------- ------- REVENUE Oil and natural gas .......................................... $11,505 $ 12,575 $33,344 $40,674 IPF Activities ............................................... 1,651 1,052 3,356 3,627 Other ........................................................ 515 (63) 34 59 ------- -------- ------- ------- Total revenues .................................. 13,671 13,564 36,734 44,360 ------- -------- ------- ------- EXPENSES Lease operating .............................................. 4,569 2,591 10,182 6,703 Production and severance taxes ............................... 312 448 1,054 1,009 Depreciation, depletion and amortization ..................... 4,260 6,960 10,688 19,072 General and administrative, net .............................. 934 523 2,571 2,605 Corporate overhead allocation ................................ -- 995 -- 2,702 Stock compensation ........................................... 275 -- 4,485 -- ------- -------- ------- ------- Total operating expenses ........................ 10,350 11,517 28,980 32,091 Income from operations ....................................... 3,321 2,047 7,754 12,269 Interest expense ............................................. 504 39 2,848 39 ------- -------- ------- ------- Income before taxes .......................................... 2,817 2,008 4,906 12,230 Income tax provision ......................................... 1,183 1,026 2,918 4,639 ------- -------- ------- ------- Net income ................................................... $ 1,634 $ 982 $ 1,988 $ 7,591 ------- -------- ------- ------- Net income per common share- primary and fully diluted ........................................... $ 0.11 -- $ 0.18 -- Weighted average common and common equivalent shares outstanding Primary ................................................. 15,311 -- 11,021 -- Fully diluted ........................................... 15,332 -- 11,026 --
The accompanying notes are an integral part of the consolidated and combined financial statements. 4 DOMAIN ENERGY CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Note 1) (in thousands) (Unaudited)
Additional Notes Total Common Paid in Receivable - Treasury Retained Stockholders' Stock Capital Stockholders Stock Earnings Equity ---- -------- ----- ---- ------ --------- Balance at December 31, 1996 ................ $ 72 $ 28,505 -- -- -- $ 28,577 Sale of common stock ........................ 74 87,466 (546) -- -- 86,994 Purchase of common stock .................... -- -- -- (10) -- (10) Stock compensation .......................... -- 4,485 -- -- -- 4,485 Net income .................................. -- -- -- -- 1,988 1,988 ---- -------- ----- ---- ------ --------- Balance at September 30, 1997 ............... $146 $120,456 $(546) $(10) $1,988 $ 122,034 ==== ======== ===== ==== ====== =========
The accompanying notes are an integral part of the consolidated and combined financial statements. 5 DOMAIN ENERGY CORPORATION CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (NOTE 1) (in thousands) (Unaudited)
Nine months ended September 30, ---------------------- Successor Predecessor 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................. $ 1,988 $ 7,591 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization ............. 10,688 19,072 Stock compensation ................................... 4,485 -- Deferred income taxes ................................ 2,597 1,197 Minority interest .................................... 174 -- Changes in operating assets and liabilities: Decrease (increase) in accounts receivable ........... 4,625 (4,796) Increase in prepaid and other current assets ........................................... (547) (95) Decrease in accounts payable and accrued expenses ......................................... (5,148) (1,111) -------- -------- Net cash provided by operating activities ................... 18,862 21,858 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in oil and natural gas properties ................ (20,811) (27,192) Investment in Funds Acquisition ............................. (28,660) -- Proceeds from sale of oil and natural gas properties ........ 2,978 1,389 Proceeds from sale of equity investments .................... 2,222 -- IPF Program investments of capital (notes receivable) .............................................. (27,527) (11,941) IPF Program return of capital (notes receivable) ............ 8,266 2,515 Proceeds from sale of restricted certificate of deposit 8,000 -- Investment and other assets ................................. (229) (591) -------- -------- Net cash used in investing activities ....................... (55,761) (35,820) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt borrowings ............................... 28,004 4,094 Repayment of debt borrowings ................................ (74,457) (756) Advances from Parent, net ................................... -- 12,722 Issuance of common stock, net ............................... 86,984 -- -------- -------- Net cash provided by financing activities ................... 40,531 16,060 Increase in cash and cash equivalents ....................... 3,632 2,098 Cash and cash equivalents, beginning of period .............. 36 -- -------- -------- Cash and cash equivalents, end of period .................... $ 3,668 $ 2,098 -------- -------- Supplemental non-cash disclosure related to sale of equity investments: Reduction in receivables $ 7,622 Additional note receivable $ 5,400
The accompanying notes are an integral part of the consolidated and combined financial statements. 6 DOMAIN ENERGY CORPORATION NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION, BASIS OF PRESENTATION AND NATURE OF OPERATIONS Through December 11, 1996, Tenneco Ventures Corporation ("Ventures") and Tenneco Gas Production Corporation ("Production" and together with Ventures, the "Tenneco Entities") were indirect subsidiaries of Tenneco, Inc. ("Tenneco"). As a result of a merger between Tenneco and a subsidiary of El Paso Natural Gas Company ("El Paso"), Ventures and Production became wholly owned indirect subsidiaries of El Paso for the period from December 12, 1996 to December 31, 1996. On December 31, 1996, Domain Energy Corporation ("Domain") acquired all of the outstanding common stock of Ventures and Production (the "Acquisition"). Domain was incorporated in Delaware in December 1996 to acquire such common stock and had no operations prior to the Acquisition. Unless otherwise indicated, references to the Company are to Domain and its subsidiaries at and subsequent to December 31, 1996 and to the combined activities of the Tenneco Entities prior to December 31, 1996. References to the Parent are to Tenneco or its affiliates prior to December 11, 1996 and to El Paso from December 12, 1996 to December 31, 1996. The Company was capitalized on December 31, 1996 with the issuance of 7,177,681 shares of common stock for $30.0 million and borrowings of $66.2 million under its credit facilities. The Company completed the Acquisition for a total cash purchase price of approximately $96.2 million and the assumption of liabilities of approximately $16.8 million. The Company did not assume the liability of $124.1 million due to the parent of the Tenneco Entities. The Company has accounted for the Acquisition using the purchase method of accounting. The assets and liabilities of the Tenneco Entities have been recorded in the Company's balance sheet at December 31, 1996 at their estimated fair market values, summarized as follows (in thousands): ASSETS: Accounts receivable - trade ................... $ 19,456 IPF Program notes receivable .................. 21,710 Oil and gas properties ........................ 66,176 Other assets .................................. 5,658 --------- Total assets ............................ $ 113,000 LIABILITIES: Accounts payable .............................. $ (10,624) Long-term debt ................................ (6,212) --------- Total liabilities ....................... $ (16,836) ========= The financial statements of the Tenneco Entities for the three and nine month periods ended September 30, 1996 have been combined to reflect their combined historical results of operations. The following unaudited pro forma summary presents the consolidated results of operations of the Company for the three and nine month periods ended September 30, 1996 as if the Acquisition had occurred at the beginning of 1996 (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1996 SEPTEMBER 30, 1996 ------------------ ------------------- Revenues $ 13,564 $ 44,360 Net income $ 2,193 $ 10,669 The Company is an independent oil and gas company engaged in the exploration, development, production and acquisition of domestic 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. 7 DOMAIN ENERGY CORPORATION NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (continued) (UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated balance sheet at September 30, 1997 and the consolidated and combined 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 ("SEC"), 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. 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, 1996 is derived from the December 31, 1996 audited balance sheet, but does not include all disclosures required by generally accepted accounting principles. 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 SEC rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company's audited annual financial statements included at pages F-2 through F-21 in the Company's Registration Statement on Form S-1 (#333-24641), effective June 23, 1997. 3. SALE OF NON-CORE ASSETS On April 9, 1997, the Company sold its interest in a natural gas development project located in northwest Michigan (the "Michigan Development Project"). The Company received $2.2 million in cash and expects to receive an additional $5.4 million from the payment of an interest-bearing note receivable. The aggregate sales price approximated the Company's book value. Additionally, during the first nine months of 1997, the Company received $3.0 million from the sale of other non-core assets. 4. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share," (SFAS No. 128) in February 1997. SFAS 128, which is effective for periods ended after December 15, 1997, establishes standards for computing and presenting earnings per share (EPS). SFAS No. 128 replaces the presentation of primary EPS previously prescribed by Accounting Principles Board Opinion No. 15 (APB No. 15) with a presentation of basic EPS which is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. SFAS No. 128 also requires dual presentation of basic and diluted EPS. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB No. 15. Pro forma basic and diluted EPS for the three and nine months ended September 30, 1997, assuming that SFAS No. 128 was effective as of the beginning of the year, are presented below. THREE MONTHS ENDED NINE MONTHS ENDED Earnings per common share: SEPTEMBER 30, 1997 SEPTEMBER 30, 1997 ------------------ ------------------- Basic $ 0.11 $ 0.19 Diluted $ 0.11 $ 0.18 In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," (SFAS No. 130) and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," (SFAS No. 131). SFAS No. 130 and SFAS No. 131 are effective for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and displaying of comprehensive income and its components. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in interim and annual financial statements. These two statements will have no effect on the Company's 1997 financial statements, but management is continuing to evaluate what, if any, additional disclosures may be required when these two statements are adopted in the first quarter of 1998. 8 DOMAIN ENERGY CORPORATION NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (continued) (UNAUDITED) 5. FUNDS ACQUISITION On July 1, 1997, the Company consummated the acquisition (the "Funds Acquisition") of certain property interests from three unaffiliated institutional investors. Such interests are primarily located in the Gulf Coast region and, as of January 1, 1997, had combined proved reserves of approximately 33.0 Bcfe. The interests also include 18,209 net undeveloped leasehold acres. The aggregate purchase price for the interests was approximately $28,660,000, 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 following unaudited pro forma summary presents the consolidated results of operations of the Company for the nine months ended September 30, 1997 and 1996 as if the Funds Acquisition had occurred at the beginning of 1996. The 1996 pro forma amounts also give effect to the Acquisition discussed in Note 1. (in thousands) NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------ ------------------ Revenues $ 42,755 $ 54,679 Net income $ 3,169 $ 13,690 Net income per share $ 0.29 N/A 6. EQUITY On July 9, 1997, Credit Suisse First Boston Corporation exercised a portion of its over-allotment option granted pursuant to the underwriting agreement and purchased an additional 303,400 shares of the Company's common stock. The Company realized net proceeds of $3,809,187 upon consummation of such transaction. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following review of operations for the three and nine months ended September 30, 1997 and 1996 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, 1996 included in the Company's Registration Statement on Form S-1 (#333-24641), effective June 23, 1997. 10 RESULTS OF OPERATIONs The following table summarizes certain financial data, non-GAAP financial data, production volumes, average realized prices and average expenses for the Company's oil and natural gas operations for the periods shown:
For the three months For the nine months ended September 30, ended September 30, ---------------------------- --------------------------- Successor Predecessor Successor Predecessor 1997 1996 1997 1996 -------- -------- -------- -------- FINANCIAL DATA (IN THOUSANDS): Revenues: Natural Gas ............................................. $ 8,511 $ 9,494 $ 25,362 $ 33,410 Oil and condensate ...................................... 2,994 3,081 7,982 7,264 IPF Activities (1) ...................................... 1,651 1,052 3,356 3,627 Total revenues ............................................. 13,671 13,564 36,734 44,360 Total operating expenses ................................... 10,350 11,517 28,980 32,091 -------- -------- -------- -------- Operating income ........................................... $ 3,321 $ 2,047 $ 7,754 $ 12,269 -------- -------- -------- -------- Net income ................................................. $ 1,634 $ 982 $ 1,988 $ 7,591 Net cash provided by operating activities ............................................ $ 9,811 $ 11,594 $ 18,862 $ 21,858 Net cash used in investing activities ............................................ $(48,969) $(10,062) $(55,761) $(35,820) Net cash provided by financing activities ............................................ $ 10,868 $ 566 $ 40,531 $ 16,060 NON-GAAP FINANCIAL DATA (IN THOUSANDS): Cash flow from operations before changes in working capital .......................................... $ 7,232 $ 7,751 $ 19,932 $ 27,860 EBITDA (2) ............................................ $ 7,856 $ 9,007 $ 22,927 $ 31,341 IPF Program return of capital (3) ..................... $ 2,682 $ 1,294 $ 8,266 $ 2,515 EBITDA plus IPF Program return of capital ......................................... $ 10,538 $ 10,301 $ 31,193 $ 33,856 PRODUCTION VOLUMES: Natural gas (MMcf) .................................. 4,111 5,323 11,166 16,707 Oil and condensate (MBbls) .......................... 180 170 459 409 Total (MMcfe) ....................................... 5,191 6,344 13,920 19,162 AVERAGE REALIZED PRICES: (4) Natural gas (per Mcf) .............................. $ 2.07 $ 1.78 $ 2.27 $ 2.00 Oil and Condensate (per Bbl) ........................ $ 16.63 $ 18.12 $ 17.39 $ 17.76 EXPENSES (PER Mcfe): Lease operating ..................................... $ 0.87 $ 0.41 $ 0.72 $ 0.35 Production and severance taxes ...................... $ 0.06 $ 0.07 $ 0.08 $ 0.05 Depreciation, depletion and amortization ..................................... $ 0.79 $ 1.10 $ 0.73 $ 1.00 General and administrative, net (5) ................. $ 0.15 $ 0.10 $ 0.13 $ 0.12
(1) IPF Activities in fiscal 1996 includes income from the Company's IPF Program and the Company's "GasFund" partnership with a financial investor. 11 (2) 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. (3) 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. (4) Reflects the actual realized prices received by the Company, including the results of the Company's hedging activities. (5) Includes production attributable to properties managed for the Funds for the periods indicated and excludes fees received from investors and overhead allocations from Tenneco. Including Tenneco allocations average net general and administrative expenses per Mcfe for the three and nine month periods ended September 30, 1996 would be $0.23 and $0.24, respectively. THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996 Oil and natural gas revenues decreased from $12.6 million in the third quarter of 1996 to $11.5 million in the third quarter of 1997, a decrease of $1.1 million, or 8.5%. Production volumes for oil and condensate increased from 170 MBbls in the third quarter of 1996 to 180 MBbls in the third quarter of 1997, an increase of 10 MBbls, or 5.9%. Production volumes for natural gas decreased from 5.3 Bcf in the third quarter of 1996 to 4.1 Bcf in the third quarter of 1997, a decrease of 1.2 Bcf, or 22.8%. The decrease in natural gas production was primarily due to natural declines in production from certain fields as well as the sale of the ATP Partnership and the Cage Ranch properties. This was partially offset by an increase in production resulting from the Funds Acquisition. The decrease in total production decreased revenues by $2.0 million. This was partially offset by a 16.3% increase in the average realized price received for the Company's natural gas and a 8.2% decrease in the average realized price received for the Company's oil and condensate. These changes in realized prices increased revenues by $0.9 million. The Company realized an average oil price of $17.45 per Bbl and an average gas price of $2.24 per Mcf for the third quarter of 1997. Net of hedging results, the Company realized average prices of $16.63 per Bbl and $2.07 per Mcf, respectively. For the third quarter of 1996, the Company realized an average oil price of $20.22 per Bbl and an average gas price of $2.22 per Mcf. Net of hedging results, the Company realized average prices of $18.12 per Bbl and $1.78 per Mcf, respectively. Revenues from IPF Activities increased from $1.1 million in the third quarter of 1996 to $1.7 million in the third quarter of 1997, an increase of $0.6 million, or 56.9%. This was the result of increased financing activities. Lease operating expenses increased from $2.6 million in the third quarter of 1996 to $4.6 million in the third quarter of 1997, an increase of $2.0 million, or 76.3%. Lease operating expenses were higher in the third quarter of 1997 compared to the third quarter of 1996 primarily due to an increase in workover expense of $0.8 million and an increase of $0.7 million relating to the Funds Acquisition completed on July 1, 1997. On a per Mcfe basis, lease operating expenses increased from $0.41 in the third quarter of 1996 to $0.88 in the third quarter of 1997, an increase of $0.47, or 121.9%. The increase in lease operating expenses per Mcfe was primarily the result of decreased production volumes ($0.22) and increased workover expense ($0.19). Depreciation, depletion and amortization ("DD&A") expense declined from $7.0 million in the third quarter of 1996 to $4.3 million in the third quarter of 1997, a decrease of $2.7 million, or 38.8%. This was the result of lower oil and gas production volumes and a 28.2% decrease in the DD&A rate resulting from the Acquisition and favorable finding costs in the third quarter, partially offset by an increase in the rate due to the Funds Acquisition. 12 General and administrative expense increased from $0.5 million in the third quarter of 1996 to $0.9 million in the third quarter of 1997, an increase of $0.4 million, or 78.6%. This increase was primarily due to a decrease in the percentage of general and administrative expense capitalized and a decrease in management fees received for funds management. The corporate overhead allocation decreased from $1.0 million in the third quarter of 1996 to zero in the third quarter of 1997 due to the Acquisition and elimination of Tenneco's allocated overhead. Stock compensation expense increased from zero in the third quarter of 1996 to $0.3 million in the third quarter of 1997 due to the implementation of 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 from $1.0 million in the third quarter of 1996 to $1.2 million in the third quarter of 1997. This increase was primarily due to an increase in income before taxes from $2.0 million in the third quarter of 1996 to $2.8 million in the third quarter of 1997. Net income was $1.0 million in the third quarter of 1996 compared to $1.6 million in the third quarter of 1997 as a result of the factors described above. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996. Oil and natural gas revenues decreased from $40.7 million for the nine months ended September 30, 1996 to $33.3 million for the nine months ended September 30, 1997, a decrease of $7.4 million or 18.0%. Production volumes for oil and condensate increased from 409 MBbls for the nine months ended September 30, 1996 to 459 MBbls for the nine months ended September 30, 1997, an increase of 50 MBbls, or 12.2%. Production volumes for natural gas decreased from 16.7 Bcf for the nine months ended September 30, 1996 to 11.2 Bcf for the nine months ended September 30, 1997, a decrease of 5.5 Bcf, or 33.2%. The decrease in natural gas production was primarily due to natural declines in production from certain fields as well as the sale of the ATP Partnership and the Cage Ranch properties. This was partially offset by an increase in production relating to the Funds Acquisition. The decrease in total production decreased revenues by $10.2 million. This was partially offset by a 2.1% decrease in realized oil prices and a 13.5% increase in realized natural gas prices. These increases in prices increased revenues by $2.8 million. The Company realized an average oil price of $18.82 per Bbl and an average gas price of $2.34 per Mcf for the nine months ended September 30, 1997. Net of hedging results, the Company realized average prices of $17.39 per Bbl and $2.27 per Mcf, respectively. For the nine months ended September 30, 1996, the Company realized an average oil price of $19.63 per Bbl and an average gas price of $2.39 per Mcf. Net of hedging results, the Company realized average prices of $17.76 per Bbl and $2.00 per Mcf, respectively Revenues from IPF Activities decreased from $3.6 million for the nine months ended September 30, 1996 to $3.4 million for the nine months ended September 30, 1997, a decrease of $0.2 million, or 7.5%. This was the result of $1.5 million recorded in the second quarter of 1996 for fees earned related to prepayments on two GasFund financings. Excluding the effect of these fees, revenues from IPF Activities increased by $1.3 million, or 61.9%, for the nine months ended September 30, 1997 compared to the nine months ended September 30, 1996, primarily due to increased financing activities. Lease operating expenses increased from $6.7 million for the nine months ended September 30, 1996 to $10.2 million for the nine months ended September 30, 1997, an increase of $3.5 million, or 51.9%. Lease operating expenses were higher for the nine months ended September 30, 1997 as compared to the same period in 1996 primarily from an increase of $0.9 million as a result of the Wasson Field acquisition completed in June 1996, an increase of $0.8 million in workover expense, and an increase of $0.7 million relating to the Funds Acquisition completed on July 1, 1997. The Wasson Field, which is in tertiary recovery, had a relatively low purchase price based on reserves, but relatively high lease operating expenses. On a per Mcfe basis, lease operating expenses increased from $0.35 for the nine months ended September 30, 1996 to $0.72 for the nine months ended September 30, 1997, an increase of $0.37, or 105.7%. The increase in lease operating expenses per Mcfe was primarily due to decreased production volumes ($0.17), increased workover expenses ($0.07) and an increase as a result of the Wasson Field acquisition ($0.07). 13 DD&A expense declined from $19.1 million for the nine months ended September 30, 1996 to $10.7 million for the nine months ended September 30, 1997, a decrease of $8.4 million, or 44.0%. This was the result of lower oil and gas production volumes and a 27.0% decrease in the DD&A rate. The reduced DD&A rate was the result of reduced cost basis attributable to the Company's oil and gas properties purchased in the Acquisition, partially offset by an increase in the rate due to the Funds Acquisition. General and administrative expense was $2.6 million for both the nine months ended September 30, 1996 and the nine months ended September 30, 1997. General and administrative expense, before capitalization and management fees, decreased by $0.9 million for the nine months ended September 30, 1997 as compared to the same period in 1996. However, this decrease was offset entirely by decreases in the percentage capitalized and management fees received. The corporate overhead allocation decreased from $2.7 million for the nine months ended September 30, 1996 to zero for the nine months ended September 30, 1997 due to the Acquisition and elimination of Tenneco's allocated overhead. Stock compensation expense increased from zero for the nine months ended September 30, 1996 to $4.5 million for the nine months ended September 30, 1997 due to the implementation of the Stock Purchase and Option Plan. Income tax expense decreased from $4.6 million for the nine months ended September 30, 1996 to $2.9 million for the nine months ended September 30, 1997, a decrease of $1.7 million, or 37.1%. This decrease was primarily due to a decrease in income before taxes from $12.2 million for the nine months ended September 30, 1996 to $4.9 million for the nine months ended September 30, 1997. This decrease was partially offset by an increase in the effective tax rate from 38% for the nine months ended September 30, 1996 to 59% for the nine months ended September 30, 1997. This increase in the effective tax rate was due to the tax treatment of certain portions of stock compensation expense. Net income was $7.6 million for the nine months ended September 30, 1996 compared to $2.0 million for the nine months ended September 30, 1997 as a result of the factors described above. LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES As of September 30, 1997, the Company had cash and cash equivalents of approximately $3.7 and working capital of approximately $18.4 million. During the third quarter of 1997, the Company's primary sources of cash were from the completion of its initial public offering on July 9, 1997, proceeds from debt borrowings and cash from operating activities. The primary uses of cash were for the Funds Acquisition, exploration and development capital expenditures, IPF Program investments and repayment of debt. The Company had net cash inflows of $3.6 million for the nine months ended September 30, 1997, which consisted primarily of net cash inflows from the issuance of common stock of $87.0 million, the sale of a restricted certificate of deposit for $8.0 million, debt borrowings of $28.0 million, sale of non-core assets of $5.2 million, IPF Program return of capital of $8.3 million and net cash from operations of $18.9 million. These net cash inflows were offset by debt repayments of $74.5 million, the Funds Acquisition purchase price of $28.6, exploration and development capital expenditures of $20.8 million and IPF Program expenditures of $27.5 million. Net cash provided by operating activities decreased by $3.0 million to $18.9 million for the nine months ended September 30, 1997 from $21.9 million for the nine months ended September 30, 1996, primarily due to lower natural gas production and increased lease operating expense, offset by higher natural gas prices and the elimination of Tenneco's corporate overhead allocation. Cash flows used in investing activities for the nine months ended September 30, 1997 increased by $20.0 million to $55.8 million from $35.8 million for the nine months ended September 30, 1996, primarily due to increased acquisition, exploration and development capital expenditures and increased IPF Program investments, offset by proceeds from the sale of a restricted certificate of deposit, IPF Program return of capital and sales of non-core assets. 14 Total capital expenditures, including the IPF Program, were $77.0 million for the nine months ended September 30, 1997. The Company's capital expenditure budget for 1997 is approximately $125.0 million, and the Company expects to spend the full budget for acquisitions, exploration and development capital expenditures and IPF Program investments during 1997. Actual levels of capital expenditures may 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 selectively pursue acquisition opportunities where it believes significant operating improvement or exploration and exploitation potential exists. The Company expects to fund its activities for the remainder of 1997 through a combination of cash flow from operations and the use of its revolving credit facilities to borrow funds required from time to time to supplement internal cash flows. Effective as of October 16, 1997, the borrowing base under the IPF Program Credit Facility was increased to $30 million. Based upon the Company's current level of operations and anticipated growth, management of the Company believes that available cash, together with borrowings under the revolving credit facilities and cash provided by operating activities, 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. On July 9, 1997, Credit Suisse First Boston Corporation exercised a portion of its over-allotment option granted pursuant to the underwriting agreement and purchased an additional 303,400 shares of the Company's common stock. The Company realized net proceeds of $3,809,187 upon consummation of such transaction. The following table shows the use of the net proceeds received: USE OF PROCEEDS (IN MILLIONS) ----------------------------- Repayment of debt $ 3.7 Working capital 0.1 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 29, 1997, MarkWest Michigan, Inc. ("MarkWest") filed a demand for arbitration with the American Arbitration Association seeking to enforce its alleged preferential purchase right with respect to the Michigan Development Project and claiming that the sale by the Company of its interest in a portion of the Michigan Development Project should be declared void. The Company believes that MarkWest's claim has no merit. On May 13, 1997, the Company filed an action in the District Court of Harris County, Texas (234 Judicial District) against MarkWest seeking to stay the arbitration proceedings initiated by MarkWest on the basis that the Company was never a party to the agreement under which MarkWest alleges it has the right to arbitrate its dispute with the Company. Subsequently, MarkWest filed an amended demand for arbitration, which dismissed the Company and named Michigan Energy Company as sole respondent. Currently, the arbitration proceedings are enjoined by an injunctive order issued by the District Court of Harris County, Texas. ITEM 2. CHANGE IN SECURITIES 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 15 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 filed the following report on Form 8-K during the third quarter of 1997: DATE OF REPORT DESCRIPTION OF EVENT -------------- --------------------- July 1, 1997 Acquisition of significant assets. No financial statements were filed in connection therewith. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DOMAIN ENERGY CORPORATION November 4, 1997 /S/ RICK G. LESTER ------------------------- Rick G. Lester Vice President, Chief Financial Officer and Treasurer 17 INDEX OF EXHIBITS EXHIBIT NO. DESCRIPTION 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997) 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) . 11.1 Statement Re Computation of Per Share Earnings. 27.1 Financial Data Schedule. 18 EX-11.1 2 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER COMMON SHARE (In thousands, except per share amounts) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1997 ------------- ------------- PRIMARY EARNINGS (NOTE A:) Income before extraordinary loss and cumulative effect of accounting changes ........................ $ 1,634 $ 1,988 ------- -------- Subtotal .................................... 1,634 1,988 Net income applicable to common stock .............................. $ 1,634 $ 1,988 ======= ======== SHARES: Weighted average number of common shares outstanding .............. 14,579 10,255 Assuming conversion of dilutive stock options ............................. 732 766 ------- -------- Weighted average number of common shares outstanding as adjusted ............ 15,311 11,021 ======= ======== PRIMARY EARNINGS PER COMMON SHARE: Net income .................................. $ .11 $ .18 ======= ======== FULLY DILUTED EARNINGS (NOTE A:) Net income applicable to common stock ....... $ 1,634 $ 1,988 Interest expense, net of tax, related to dilutive convertible debt ...... -- -- ------- -------- Net income as adjusted ...................... $ 1,634 $ 1,988 ======= ======== SHARES: Weighted average number of common shares outstanding ........................ 14,579 10,255 Assuming conversion of dilutive convertible debt .......................... -- -- Assuming conversion of dilutive stock options ............................. 753 771 ------- -------- Weighted average number of common shares outstanding as adjusted ............ 15,332 11,026 ======= ======== FULLY DILUTED EARNINGS PER COMMON SHARE: Net income .................................. $ .11 $ .18 ======= ======== Note A: This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-27 3
5 1,000 9-MOS 9-MOS 3-MOS 3-MOS DEC-31-1997 DEC-31-1996 DEC-31-1997 DEC-31-1996 SEP-30-1997 SEP-30-1996 SEP-30-1997 SEP-30-1996 3,668 0 0 0 0 0 0 0 8,197 0 0 0 0 0 0 0 0 0 0 0 28,797 0 0 0 114,884 0 0 0 10,196 0 0 0 168,541 0 0 0 10,412 0 0 0 32,944 0 0 0 0 0 0 0 0 0 0 0 146 0 0 0 121,888 0 0 0 168,541 0 0 0 36,734 44,360 13,671 13,564 36,734 44,360 13,671 13,564 0 0 0 0 11,236 7,712 4,881 3,039 17,744 24,379 5,469 8,478 0 0 0 0 2,848 39 504 39 4,906 12,230 2,817 2,008 2,918 4,639 1,183 1,026 1,988 7,591 1,634 982 0 0 0 0 0 0 0 0 0 0 0 0 1,988 7,591 1,634 982 .18 .00 .11 .00 .18 .00 .11 .00
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