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
<PAGE>
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
<PAGE>
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
<PAGE>
DOMAIN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ------------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE>
DOMAIN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Paid in Treasury Retained
Stock Capital Stock Earnings Total
---- --------- ---- ------ ---------
<S> <C> <C> <C> <C> <C>
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
==== ========= ==== ====== =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
DOMAIN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
SECOND QUARTER 1998 SECOND QUARTER 1997
---------------------------------------- --------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
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
====== ====== ======= ==== ===== =======
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------- --------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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