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SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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<S> <C>
[ ] Preliminary Information Statement [ ] Confidential, for Use of
[X] Definitive Information Statement the Commission Only (as
permitted by Rule 14c-5(d)(2))
</TABLE>
Domain Energy Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Information Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(3) Filing Party:
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(4) Date Filed:
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DOMAIN ENERGY CORPORATION
16801 GREENSPOINT PARK DRIVE
SUITE 200
HOUSTON, TEXAS 77060
July 16, 1998
Dear Fellow Stockholder:
Domain Energy Corporation ("Domain") has entered into an Agreement and Plan
of Merger, dated as of May 12, 1998 (as amended, the "Merger Agreement"),
providing for the merger (the "Merger") of a wholly owned subsidiary of Lomak
Petroleum, Inc. ("Lomak") with and into Domain. The Merger Agreement provides
that, upon consummation of the Merger, each issued and outstanding share of the
common stock of Domain ("Domain Common Stock") would be converted into shares of
common stock of Lomak ("Lomak Common Stock") on a one-for-one basis at a price
of $14.50 per share, to be adjusted for changes in Lomak's stock price from
$12.00 to $17.00. To derive the actual exchange ratio, the $14.50 price will be
divided by the average closing sales price of Lomak Common Stock, rounded to
four decimal places, as reported under "NYSE Composite Transaction Reports" in
The Wall Street Journal 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, but if
the average price is below $12.00, or above $17.00, the $14.50 would be divided
by $12.00 or $17.00, respectively. Therefore, the exchange ratio for conversion
of one share of Domain Common Stock into shares of Lomak Common Stock will be
within the range of .8529 (if Lomak's average closing sale price is $17.00 or
above) to 1.2083 (if Lomak's average closing sale price is $12.00 or below). The
Merger Agreement and the Merger are discussed in more detail in the accompanying
Proxy Statement/Prospectus.
Upon consummation of the Merger, subject to the approval of its
stockholders Lomak will change its name to "Range Resources Corporation" and Jon
Linker, Chairman of our Board of Directors, and I will join Range's Board. I
have been asked to continue with Range as its Chief Operating Officer and am
pleased to report that virtually our entire management and technical team will
continue with Range, in charge of its Gulf Coast business unit in Houston.
The accompanying Proxy Statement/Prospectus is being furnished to holders
of Domain Common Stock as of July 10, 1998 as the information statement required
to be delivered pursuant to Section 14(c) of the Securities Exchange Act of
1934, as amended. First Reserve Fund VII, Limited Partnership, Domain's majority
stockholder, has approved and adopted the Merger and the Merger Agreement
pursuant to a written consent delivered to Domain on May 12, 1998. As a result,
under Delaware law no further Domain stockholder action is required to approve
the Merger or the Merger Agreement, and no special meeting of the Domain
stockholders will be held in connection with the Merger. WE ARE NOT ASKING YOU
FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
The issuance of Lomak Common Stock to the Domain stockholders pursuant to
the Merger Agreement is subject to the affirmative vote of a majority of the
outstanding shares of Lomak Common Stock and Lomak $2.03 Convertible Preferred
Stock. Lomak has 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." If the issuance of
Lomak Common Stock in the Merger is approved at the Special Meeting and certain
other conditions to the Merger are satisfied or waived, Lomak will, promptly
thereafter, deliver to each Domain stockholder a letter of transmittal and
instructions for use in effecting the exchange of certificates representing
Domain Common Stock for certificates representing Lomak Common Stock and, if
applicable, cash in lieu of a fractional share.
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We are excited about having the chance to continue our strategy of building
stockholder value through focused Gulf Coast exploration, development and
acquisition activity and growing our independent producer financing business as
a part of Range Resources. Your new Company will have total capitalization of
almost $1 billion, proved reserves of almost 1 Tcfe, daily production of over
200 Mmcfe and 1997 pro forma revenues and EBITDA of $222 million and $155
million, respectively. We believe that the combination of Lomak's long-lived,
geographically diverse reserve base with our high-impact Gulf Coast onshore and
offshore exploration and development portfolio, and the bringing together of two
management teams with a shared commitment to growth, provide a unique
opportunity to enhance the value of your investment in Domain.
We look forward to your continuing support.
If you have any questions or need further assistance, please call Catherine
L. Sliva at (281)618-1800.
Sincerely,
/S/ Michael V. Ronca
Michael V. Ronca
President and Chief Executive Officer
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LOMAK PETROLEUM, INC.
PROXY STATEMENT/PROSPECTUS
---------------------
DOMAIN ENERGY CORPORATION
INFORMATION STATEMENT
---------------------
Special Meeting of Stockholders of Lomak Petroleum, Inc.
To Be Held on August 25, 1998
This Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is being
furnished to stockholders of Lomak Petroleum, Inc., a Delaware corporation
("Lomak"), in connection with the solicitation of proxies by the Board of
Directors of Lomak for use at the Special Meeting of Stockholders of Lomak (the
"Lomak Special Meeting") including any adjournment(s). The Lomak Special Meeting
is scheduled to be held on Tuesday August 25, 1998. This Proxy
Statement/Prospectus relates to the proposed merger (the "Merger") of DEC
Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Lomak
("Merger Sub"), with and into Domain Energy Corporation, a Delaware corporation
("Domain"), pursuant to the Agreement and Plan of Merger, dated as of May 12,
1998, as amended (the "Merger Agreement"), among Lomak, Merger Sub and Domain.
In addition, the Lomak stockholders also will be asked to vote upon a proposal
at the Lomak Special Meeting to amend the Certificate of Incorporation, as
amended, of Lomak (the "Certificate of Incorporation") to change the name of
Lomak to "Range Resources Corporation" (the "Name Change").
This Proxy Statement/Prospectus is being furnished to stockholders of
Domain, as the information statement required to be delivered to the Domain
stockholders pursuant to Section 14(c) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), in connection with the consent of First Reserve
Fund VII, Limited Partnership, a Delaware limited partnership and majority
stockholder of Domain (the "Principal Stockholder" or "FRLP"), to the Merger. As
a result of the Principal Stockholder's approval and adoption of the Merger and
the Merger Agreement by written consent delivered to Domain on May 12, 1998, no
further Domain stockholder action is required to approve the Merger and the
Merger Agreement, and no special meeting of the Domain stockholders will be held
in connection with the Merger.
At the effective time of the Merger (the "Effective Time"), Merger Sub will
be merged with and into Domain, which will be the surviving corporation in the
Merger (the "Surviving Corporation"). As a result of the Merger, Domain will
become a wholly owned subsidiary of Lomak. Each issued and outstanding share of
common stock, par value $.01 per share, of Domain (the "Domain Common Stock")
will be converted into such number of shares of fully paid and nonassessable
voting common stock, par value $.01 per share, of Lomak ("Lomak Common Stock")
equal to the Exchange Ratio. The "Exchange Ratio" shall be equal to the quotient
of (i) $14.50 divided by (ii) the Closing Date Market Price (rounded to four
decimal places); provided, however, that in no event shall the Exchange Ratio be
greater than 1.2083 nor less than 0.8529. The term "Closing Date Market Price"
shall mean the average of the closing sales price of Lomak Common Stock, rounded
to four decimal places, as reported under "NYSE Composite Transaction Reports"
in The Wall Street Journal during 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.
Cash will be paid in lieu of fractional shares of Lomak Common Stock. See "The
Merger Agreement -- Fractional Shares."
This Proxy Statement/Prospectus constitutes a prospectus of Lomak with
respect to up to shares of Lomak Common Stock issuable to
Domain stockholders in the Merger pursuant to the Merger Agreement upon
conversion of shares of Domain Common Stock outstanding on the date hereof and
not owned by Lomak or any subsidiary thereof or upon the exercise of outstanding
stock options of Domain which, if not exercised prior to the Effective Time,
pursuant to the Merger Agreement and the terms of the related stock option
plans, will constitute options to purchase shares of Lomak Common Stock upon the
terms set forth in such stock option plans and the Merger Agreement. See "Merger
Agreement -- Interests of Certain Persons in the Merger -- Domain Option Plans."
The Lomak Common Stock is listed for trading on the New York Stock Exchange
(the "NYSE") under the symbol "LOM," and the Domain Common Stock is listed for
trading on the NYSE under the symbol "DXD." On July 13, 1998, the last sale
prices of the Lomak Common Stock and the Domain Common Stock as reported on the
NYSE Composite Transaction Tape were $10.125 per share and $11.750 per share,
respectively. For a description of the Lomak Common Stock, see "Description of
Lomak Capital Stock" and "Comparison of Rights of Holders of Domain Common Stock
and Lomak Common Stock." If the Name Change is approved by the stockholders at
the Lomak Special Meeting, Lomak's NYSE trading symbol will be changed to "RRC."
SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES
OFFERED HEREBY.
This Proxy Statement/Prospectus, the accompanying form of proxy and the
other enclosed documents are first being mailed to stockholders of Lomak and
Domain on or about July 17, 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JULY 16, 1998.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY LOMAK OR DOMAIN. NEITHER THE DELIVERY
OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES
OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF LOMAK OR DOMAIN SINCE THE DATE HEREOF OR
THAT THE INFORMATION SET FORTH OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN
OFFER OR PROXY SOLICITATION.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS OF LOMAK BY
REFERENCE THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. LOMAK UNDERTAKES
TO PROVIDE COPIES OF SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE), WITHOUT
CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO CORPORATE
SECRETARY, LOMAK PETROLEUM, INC., 500 THROCKMORTON STREET, FORT WORTH, TEXAS
76102. IN ORDER TO ENSURE DELIVERY OF THE DOCUMENTS, SUCH REQUESTS SHOULD BE
RECEIVED BY AUGUST 18, 1998.
AVAILABLE INFORMATION
Lomak and Domain are subject to the informational requirements of the
Exchange Act, and, in accordance therewith, file reports and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by Lomak and Domain can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained by mail from the Public Reference
Section of the Commission at 450 West 5th Street, N.W., Washington, D.C. 20549,
at prescribed rates. In addition, reports, proxy statements and other
information concerning Lomak and Domain may be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005. Certain of such reports, proxy
statements and other information filed by Lomak or Domain are also available on
the Commission's World Wide Web site at http://www.sec.gov.
Lomak has filed with the Commission a Registration Statement on Form S-4
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Lomak Common Stock to be issued pursuant
to the Merger Agreement. The information contained herein with respect to Lomak
and its affiliates, including Merger Sub, has been provided by Lomak, and the
information contained herein with respect to Domain and its affiliates has been
provided by Domain. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which were
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed. Each such statement is qualified in its entirety by
such reference.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission by Lomak
pursuant to the Exchange Act, are incorporated herein by reference:
1. Lomak's Annual Report on Form 10-K for the fiscal year ended December
31, 1997;
2. Lomak's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998;
3. The description of the Lomak Common Stock contained in the Registration
Statement on Form 8-A declared effective by the Commission on October 8,
1990; and
4. The information set forth under the headings "Election of Directors" and
"Executive Compensation" on pages 4 through 11 of the Definitive Proxy
Statement for the Annual Meeting of Stockholders held on May 28, 1998
filed under cover of Schedule 14A with the Commission on April 16, 1998.
All documents filed by Lomak pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Proxy Statement/Prospectus
and prior to the date of the Lomak Special Meeting shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/ Prospectus to the extent that a
statement contained herein or in any other subsequently filed document that also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
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TABLE OF CONTENTS
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SUMMARY..................................................... 6
RISK FACTORS................................................ 22
THE COMPANIES............................................... 29
Lomak Petroleum, Inc...................................... 29
Merger Sub................................................ 30
Domain Energy Corporation................................. 30
POST-MERGER PROFILE AND STRATEGY............................ 33
LOMAK SPECIAL MEETING....................................... 41
Matters To Be Considered at the Lomak Special Meeting..... 41
Voting Proxies............................................ 42
Revocability of Proxies................................... 42
No Dissenters' or Appraisal Rights........................ 42
Solicitation of Proxies................................... 42
THE MERGER.................................................. 43
General................................................... 43
Background of the Merger.................................. 43
Lomak's Reasons for the Merger; Recommendation of Board of
Directors of Lomak..................................... 47
Domain's Reasons for the Merger; Recommendation of Board
of Directors of Domain................................. 49
Opinions of Financial Advisors............................ 51
Interests of Certain Persons in the Merger................ 60
Certain Federal Income Tax Consequences................... 62
Accounting Treatment...................................... 63
Governmental and Regulatory Approvals..................... 63
Restrictions on Resales by Affiliates..................... 64
Factors Affecting Forward-Looking Statements.............. 64
CERTAIN TERMS OF THE MERGER AGREEMENT....................... 65
Effective Time of the Merger.............................. 65
Manner and Basis of Converting Shares..................... 65
Treatment of Domain Stock Options......................... 65
Surrender and Exchange of Certificates.................... 65
Treatment of Fractional Interests......................... 67
No Dissenters' or Appraisal Rights........................ 67
Representations and Warranties............................ 67
Conduct of Business Prior to the Merger................... 67
No Solicitation........................................... 70
Certain Additional Agreements............................. 70
Certain Post-Merger Matters............................... 71
Conditions to the Merger.................................. 71
Termination and Amendment of the Merger Agreement......... 72
Expenses.................................................. 72
Indemnification of Directors and Officers................. 72
VOTING AGREEMENT............................................ 74
General................................................... 74
Pre-Merger Provisions Relating to Domain Common Stock..... 74
Post-Merger Provisions Relating to Lomak Common Stock..... 74
STOCK PURCHASE AGREEMENT.................................... 75
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION.......... 76
BUSINESS OF DOMAIN.......................................... 83
General Development of Business........................... 83
Certain Transactions...................................... 84
Independent Producer Finance Activities................... 85
Producing Properties and Exploitation of Assets........... 85
Production, Prices and Operating Expenses................. 87
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Exploration............................................... 87
Historical Results........................................ 88
Oil and Natural Gas Reserves.............................. 90
Oil and Gas Marketing..................................... 91
Risk Management........................................... 92
Competition............................................... 92
Seasonality............................................... 92
Regulation................................................ 92
Environmental Matters..................................... 95
Employees................................................. 97
Offices................................................... 97
Legal Proceedings......................................... 98
SELECTED HISTORICAL COMBINED AND CONSOLIDATED FINANCIAL DATA
(DOMAIN).................................................. 99
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (DOMAIN)........................ 100
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND
INFORMATION............................................... 111
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 112
Lomak..................................................... 112
Domain.................................................... 114
Pro Forma Beneficial Ownership of Range Resources
Corporation............................................ 115
DESCRIPTION OF LOMAK CAPITAL STOCK.......................... 116
Lomak Common Stock........................................ 116
Options................................................... 116
Preferred Stock........................................... 116
COMPARATIVE RIGHTS OF LOMAK AND DOMAIN STOCKHOLDERS......... 117
Directors................................................. 117
Preferred Stock........................................... 117
Amendment of the Certificate of Incorporation and
By-Laws................................................ 118
Limitation on Liability of Directors...................... 118
Indemnification of Directors and Officers................. 118
Special Meetings.......................................... 119
THE NAME CHANGE............................................. 119
STOCKHOLDER PROPOSALS....................................... 119
LEGAL MATTERS............................................... 119
EXPERTS..................................................... 120
CERTAIN DEFINITIONS......................................... 121
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS..... F-1
ANNEX A -- Agreement and Plan of Merger (as amended)........ A-1
ANNEX B -- Voting and Standstill Agreement.................. B-1
ANNEX C -- Stock Purchase Agreement......................... C-1
ANNEX D -- Opinion of Credit Suisse First Boston
Corporation............................................... D-1
ANNEX E -- Opinion of PaineWebber Incorporated.............. E-1
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained in or
incorporated by reference in this Proxy Statement/Prospectus and the Annexes
hereto. Stockholders are urged to read carefully this Proxy Statement/Prospectus
and the Annexes hereto in their entirety. Stockholders should carefully consider
the information set forth below under the heading "Risk Factors." As used in
this Proxy Statement/Prospectus, unless otherwise required by the context, the
term "Lomak" means Lomak Petroleum, Inc. and its consolidated subsidiaries, and
the term "Domain" means Domain Energy Corporation and its consolidated
subsidiaries. Subject to approval of the Name Change at the Lomak Special
Meeting, the post-Merger corporation will be known as "Range Resources
Corporation" and is sometimes referred to in this Proxy Statement/Prospectus as
"Range." Capitalized terms used herein without definition are, unless otherwise
indicated, defined in the Merger Agreement and used herein with such meanings.
Certain terms relating to the oil and gas industry are defined under "Certain
Definitions" in this Proxy Statement/Prospectus. As used herein, "cash flow" is
defined as net income plus deferred taxes, provision for impairment, depletion,
depreciation and amortization, stock compensation expense, exploration expense,
IPF return of capital and amortization of debt issuance costs.
RANGE RESOURCES CORPORATION: THE POST-MERGER COMPANY
Range Resources Corporation will be formed through the combination of two
of the fastest growing companies in the oil and gas industry. From inception,
Range will be one of the twenty largest publicly traded independent oil and gas
companies in the United States. Range will have a long-lived, high margin asset
base of nearly a trillion cubic feet of natural gas equivalents, a development
inventory of over 1,700 proven projects, a diversified portfolio of domestic
onshore and Gulf of Mexico exploration projects and an emerging international
effort. This blend of long-lived reserves, extensive development inventory and
high potential exploration provides a unique platform on which to build
stockholder value. Range will operate through six distinct business units, led
by experienced technical and operating teams of over 50 petroleum engineers and
geoscientists. Management's substantial ownership of Range stock will align its
interests with those of the stockholders.
STRATEGY AND GROWTH OPPORTUNITIES
Range's objective is to create stockholder value through a balanced
strategy that combines lower risk, steady growth activities with higher risk,
high impact activities. Ongoing development, the Independent Producer Finance
business ("IPF") and transportation, processing and marketing activities are
expected to provide consistent cash flow and growth. Domestic onshore and Gulf
of Mexico exploration and international activities will provide opportunities to
dramatically increase production and reserves at low finding costs.
- - Range will have over 1,700 development projects, consisting of proven drilling
locations and recompletion opportunities. More than 85% of these projects are
concentrated in nine fields covering 587,000 gross acres. Such large acreage
blocks and concentration of projects provide economies of scale, access to
competitively priced oilfield services and focused operating and technological
expertise.
- - Through IPF, Range will provide capital to small producers to fund acquisition
and development projects. In 1997, IPF generated $15 million of cash flow. The
IPF portfolio had a cost basis of $52 million at March 31, 1998, with a
Present Value of $63 million. IPF's goal is to expand its portfolio to over
$200 million in three to five years.
- - Range will generate incremental cash flow by transporting, processing and
marketing production from its properties. Range's transportation assets
include approximately 3,000 miles of gas gathering and pipelines and a 25,000
Mcfd gas processing plant. These activities generated $8 million of cash flow
in 1997.
- - Range will have active domestic onshore exploration projects covering 578,000
gross acres. These projects are well distributed among the Permian, Gulf
Coast, Midcontinent and Appalachia business units. Target depths range from
4,500 to 18,000 feet, and the projects offer the potential to add
substantially to Range's
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<PAGE> 10
reserves and production. Range expects to initiate six 3D seismic surveys and
spud 18 exploration wells on its existing projects by year-end.
- - Range's offshore exploration program will focus on its 3.5 million acres of
contiguous 3D seismic data in the shallow waters of the Gulf of Mexico.
Presently, there are 33 identified prospects on this acreage, and Range will
have leases covering 112,000 gross acres on 24 of these prospects. Range
expects to test four to six of these prospects by year-end.
- - Through a 50%-owned subsidiary, Range will have the opportunity to explore and
develop 1.2 million gross acres in Argentina. This acreage has recently been
awarded, pending a Presidential decree. On this acreage, 25 potential
prospects have already been identified. The concessions entail a commitment
for Range to spend approximately $2.5 million, net to its interest, to shoot
70 square miles of 3D seismic data and drill four exploratory wells by 2001.
RESERVES AND PRODUCTION
- - Range will have pro forma combined proved reserves as of December 31, 1997
totaling 960 Bcfe with a Present Value of approximately $836 million.
- - Range's daily production immediately upon completion of the Merger is expected
to exceed 210 Mmcfe, 77% of which is estimated to be natural gas.
- - Range's reserve life will be 12.8 years. The benefits of long-lived reserves
include minimizing the impact of short-term commodity price volatility and
reducing reinvestment risk.
- - Range will operate over 80% of its proved reserves, providing substantial
control over the timing, expense and manner of the exploitation of its
properties.
FINANCIAL
- - On a pro forma combined basis at March 31, 1998, Range had total assets of
$1.1 billion, total debt of $540 million and a debt to book capitalization
ratio of 56%.
- - For the twelve months ended December 31, 1997 on a pro forma combined basis,
Range generated revenues of $222 million and cash flow of $128 million.
- - The combination of Range's low unit operating costs and the premium prices
received for approximately 35% of its gas production generates relatively high
operating margins. Range has in place fixed price gas sales contracts on
volumes averaging 31,000 Mcfd in the second half of 1998 that will help
mitigate the financial impact on Range of low commodity prices.
- - Range's long-lived reserves and fixed price gas contracts, combined with its
strong credit statistics and large asset base, are expected to provide access
to a variety of attractive sources of capital to fund future activity.
MANAGEMENT AND TECHNICAL EXPERTISE
- - Range will conduct its operations through six independent business units, each
staffed with experienced technical, operating and management personnel. The
six units will be: Permian, Gulf Coast, Midcontinent, Appalachia,
International and IPF. Where Lomak and Domain own assets in overlapping
geographical areas, those assets will be consolidated into a single unit,
improving operational efficiency.
- - Range will have a technical staff of 54 petroleum engineers, geologists and
geophysicists, with an average of 20 years of experience. These personnel will
provide each business unit with the expertise with which to execute the
efficient development of existing assets, as well as the pursuit of additional
opportunities in the form of exploration and acquisitions. Range's technical
staff applies the latest technological innovations, including 3D seismic,
horizontal and directional drilling, advanced completion techniques and
extensive reservoir engineering studies to help reduce finding costs and
maximize ultimate reserve recovery.
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- - Upon completion of the Merger, directors and executive officers of Range are
expected to beneficially own approximately 8% of Range's outstanding common
stock. This substantial ownership position will align the interests of
management with those of the stockholders.
- - Upon completion of the Merger, the stock of Range will be widely held. The
shares of Range stock to be held by First Reserve Fund VII, Limited
Partnership, the principal stockholder of Domain ("FRLP"), will be subject to
restrictions on sale under applicable securities laws. Lomak has agreed to
provide certain registration rights to FRLP; however, no demand registration
rights can be exercised by FRLP prior to the date which is six months after
the Effective Time.
PARTIES TO THE MERGER
Lomak. Lomak is an independent energy company engaged in oil and gas
development, exploration and acquisition primarily in four core areas: the
Permian, Midcontinent, Gulf Coast, and Appalachia regions. Over the past seven
years, Lomak has significantly increased its reserves and production through
acquisitions and the development and exploration of its properties. At December
31, 1997, Lomak had proved reserves of 753 Bcfe with a Present Value of $632
million. On an Mcfe basis, the reserves were 76% natural gas, with a reserve
life index in excess of 15 years. Properties operated by Lomak account for over
98% of its total reserves. Lomak also owns over 3,000 miles of gas gathering
systems and a gas processing plant in proximity to its principal gas properties.
Lomak's objective is to maximize stockholder value through aggressive growth in
its reserves, production, cash flow and earnings through a balanced program of
development and exploratory drilling and strategic acquisitions. Management
believes that the acquisitions completed since 1990 have substantially enhanced
Lomak's ability to increase its production and reserves through the ongoing
development of the acquired properties. Lomak now has over 1,600 proven
recompletion and development drilling projects. With its large development
inventory and expanding exploration effort, Lomak believes that it can achieve
significant growth in reserves, production, cash flow and earnings over the next
several years. Lomak currently anticipates spending approximately $300 million
during the next three years on the development and exploration activities.
Domain. Domain is an independent oil and gas company engaged in the
exploration, development, production and acquisition of oil and natural gas
properties. Domain complements these activities with the IPF Program, pursuant
to which it invests in oil and natural gas reserves through the acquisition of
term overriding royalty interests. Domain's oil and gas operations are
concentrated primarily in the Gulf Coast region (which includes the shallow
waters of the Gulf of Mexico). Domain has grown rapidly from 12.6 Bcfe of proved
reserves at December 31, 1993 to 173 Bcfe of proved reserves at December 31,
1997, with a Present Value of $148.8 million. Domain has an active exploration
program supported primarily by a 3D seismic database of 700 blocks
(approximately 5,500 square miles) in the shallow waters of the Gulf of Mexico
and more than 150,000 gross acres in southern Mississippi with respect to which
3D seismic is currently being acquired. In addition, Domain is the 50% owner of
Domain Argentina, S.A., which, pending a Presidential decree, has been awarded
two Argentine concessions totaling approximately 1.2 million acres. The IPF
Program has expanded rapidly since 1994 and has a cost basis of approximately
$52 million, representing aggregate Present Value of $63 million and proved
reserves of approximately 34 Bcfe. In addition, Domain is currently evaluating
approximately $50 million of new IPF transactions.
Merger Sub. Merger Sub is a wholly owned subsidiary of Lomak incorporated
on May 8, 1998 in the State of Delaware for the sole purpose of effecting the
Merger. Merger Sub presently conducts no business and has no material assets or
liabilities.
LOMAK SPECIAL MEETING
The Lomak Special Meeting will be held on Tuesday, August 25, 1998 at 10:00
a.m., Houston time, at the Four Seasons Hotel, 1300 Lamar Street, Houston,
Texas. At the Lomak Special Meeting, the holders of Lomak Common Stock and Lomak
Preferred Stock (collectively, the "Lomak Voting Stock") will be asked to
consider and vote upon a proposal to approve the issuance of shares of Lomak
Common Stock to holders of Domain Common Stock in the Merger (the "Stock
Issuance") and the change of Lomak's name to "Range Resources Corporation" (the
"Name Change"). See "Lomak Special Meeting."
8
<PAGE> 12
Only holders of record of Lomak Common Stock and Lomak Preferred Stock at
the close of business on June 26, 1998 (the "Record Date") will be entitled to
receive notice of and to vote at the Lomak Special Meeting. On the Record Date,
there were 22,115,953 shares of Lomak Common Stock and 1,149,840 shares of Lomak
Preferred Stock outstanding. The Stock Issuance requires the affirmative vote of
the holders of a majority of the shares of Lomak Common Stock and Lomak
Preferred Stock, voting together as a class, represented in person or by proxy
at the Lomak Special Meeting, provided that a quorum is present. The Name Change
requires the affirmative vote of a majority of the shares of the Lomak Common
Stock and the Lomak Preferred Stock outstanding and entitled to vote as of the
Record Date, voting together as a class.
The Stock Issuance and Name Change are separate proposals and will be voted
on separately by the holders of Lomak Voting Stock. The proposals are not
contingent on each other and the failure to adopt one proposal will not
constitute a failure to adopt the other proposal if the requisite stockholder
vote for the other proposal is otherwise obtained.
As of the Record Date, directors and executive officers of Lomak and their
affiliates were beneficial owners of an aggregate of 2,684,998 outstanding
shares of Lomak Common Stock and no shares of Lomak Preferred Stock,
representing approximately (i) 7.1% of the outstanding shares of Lomak Voting
Stock entitled to vote at the Lomak Special Meeting, (ii) 7.1% of the maximum
and 28.4% of the minimum votes that could be required to approve the Stock
Issuance and (iii) 7.1% of the maximum and 14.2% of the minimum votes that could
be required to approve the Name Change. Each of the directors and executive
officers of Lomak has advised Lomak that he plans to vote or to direct the vote
of all of the outstanding shares of Lomak Common Stock beneficially owned by him
in favor of the Stock Issuance and the Name Change.
DOMAIN STOCKHOLDER CONSENT
First Reserve Fund VII, Limited Partnership (the "Principal Stockholder" or
"FRLP"), which owned an aggregate of 7,820,718 shares, or approximately 51.8%,
of the outstanding shares of Domain Common Stock on May 12, 1998, has voted all
of such stock in favor of the Merger. On May 12, 1998, FRLP approved and adopted
the Merger and the Merger Agreement by written consent delivered to Domain
pursuant to Section 228 of the General Corporation Law of the State of Delaware
(the "DGCL"). As a result of FRLP's approval and adoption of the Merger
Agreement, no further action is required by Domain stockholders to approve and
adopt the Merger and the Merger Agreement, and no meeting of Domain stockholders
will be held.
THE MERGER
General. Lomak, Merger Sub and Domain have entered into the Merger
Agreement, which provides that, subject to the satisfaction or waiver of the
conditions set forth therein, Merger Sub will be merged with and into Domain,
and Domain will be the surviving corporation (the "Surviving Corporation") and a
wholly owned subsidiary of Lomak.
Manner and Basis of Converting Shares. As of the Effective Time of the
Merger, without any action on the part of the holders of Domain Common Stock,
each share of Domain Common Stock issued and outstanding immediately prior to
the Effective Time shall be converted into such number of shares of Lomak Common
Stock as is equal to the "Exchange Ratio," which is the quotient of (i) $14.50
divided by (ii) the Closing Date Market Price; provided, however, that in no
event shall the Exchange Ratio be greater than 1.2083 nor less than 0.8529. The
term "Closing Date Market Price" shall mean the average closing sales price of
Lomak Common Stock, rounded to four decimal places, as reported under "NYSE
Composite Transaction Reports" in The Wall Street Journal for the period of the
15 most recent trading days ending on the third business day prior to the
Closing Date (as defined in the Merger Agreement). No fractional shares of Lomak
Common Stock shall be issued in the Merger, and all holders of fractional shares
of Lomak Common Stock shall be entitled to receive, in lieu thereof, an amount
in cash determined by multiplying the fraction of a share of Lomak Common Stock
to which such holder would otherwise have been entitled by the Closing Date
Market Price.
No Solicitation. The Merger Agreement provides that, from the date thereof
until the termination thereof, Domain and its Subsidiaries (as defined in the
Merger Agreement) will not, and will cause their respective officers, directors,
employees or other agents not to, directly or indirectly, (i) take any action to
9
<PAGE> 13
solicit, initiate or encourage any Domain Acquisition Proposal (as hereinafter
defined), or (ii) engage in negotiations with, or disclose any nonpublic
information relating to Domain or its Subsidiaries, respectively, or afford
access to their respective properties, books or records to any Person that may
be considering making, or has made, a Domain Acquisition Proposal. Nothing
contained in the foregoing provision shall prohibit Domain and the Domain Board
from taking and disclosing a position with respect to a tender offer by a third
party pursuant to Rules 14d-9 and 14e-2(a) promulgated by the Commission under
the Exchange Act. The term "Domain Acquisition Proposal" means any offer or
proposal for, or any indication of interest in, a merger or other business
combination directly or indirectly involving Domain or any of its Subsidiaries
or the acquisition of a substantial equity interest in, or a substantial portion
of the assets of, any such party, other than the transactions contemplated by
the Merger Agreement.
Conditions to the Merger. The respective obligations of each party to
effect the Merger shall be subject to the satisfaction of certain conditions,
including: (i) the approval of the Stock Issuance by the holders of Lomak Common
Stock and Lomak Preferred Stock, voting together as a class; (ii) the absence of
any action, suit or proceeding instituted by any Governmental Authority (as
defined in the Merger Agreement), or any statute, rule or regulation,
injunction, order, decree or judgment of any court or Governmental Authority
that would prohibit, restrain, enjoin or restrict the consummation of the
Merger; (iii) the Registration Statement shall have become effective under the
Securities Act; (iv) all third party permits, authorizations, consents, or
approvals required to be obtained to consummate the transactions contemplated by
the Merger Agreement shall have been obtained; (v) the shares of Lomak Common
Stock to be issued in the Merger shall have been approved for listing on the
NYSE, subject to official notice of issuance; (vi) any applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), relating to the transactions contemplated by the Merger Agreement
shall have expired; (vii) the transactions contemplated by the Stock Purchase
Agreement (as defined below) shall have been consummated on or prior to the
Effective Time in accordance with the terms thereof, and as a result of such
transactions, Lomak shall have acquired from the Principal Stockholder at least
3,250,000 shares of outstanding Domain Common Stock; and (viii) other customary
closing conditions for a transaction of this nature. There can be no assurance
that all of the conditions to the Merger will be satisfied.
Termination and Amendment of the Merger Agreement. The Merger Agreement may
be terminated: (i) by the mutual consent of the parties; (ii) by either Lomak or
Domain if the Effective Time shall not have occurred on or before October 31,
1998; (iii) by Domain if there has been a material breach by Lomak or Merger Sub
of any covenant or agreement set forth in the Merger Agreement, the Voting
Agreement or the Stock Purchase Agreement (each as defined below) or if there
shall be a breach by Lomak of any representation contained in the Merger
Agreement that would result in a failure to satisfy the conditions to the
obligations of Domain set forth in the Merger Agreement; (iv) by Lomak, if there
has been a material breach by Domain or the Principal Stockholder of any
covenant or agreement set forth in the Merger Agreement, the Voting Agreement or
the Stock Purchase Agreement, or if there shall be a breach by Domain of any
representation contained in the Merger Agreement that would result in a failure
to satisfy the conditions to the obligations of Lomak and Merger Sub set forth
in the Merger Agreement or a material breach by the Principal Stockholder of the
Voting Agreement or Stock Purchase Agreement; (v) by either Domain or Lomak, if
there shall be any applicable domestic law, rule or regulation that makes
consummation of the Merger illegal or if any judgment, injunction, order or
decree of a court or other Governmental Authority of competent jurisdiction
shall restrain or prohibit the consummation of the Merger, and such judgment,
injunction, order or decree shall become final and nonappealable; or (vi) by
either Domain or Lomak, if the requisite stockholder approval shall not have
been obtained by reason of the failure to obtain the requisite vote upon a vote
at a duly held meeting of stockholders or at any adjournment or postponement
thereof.
Board of Directors of Range. Immediately after the Effective Time, Jonathan
S. Linker, the Chairman of the Board of Domain, and Michael V. Ronca, the
President and Chief Executive Officer and a director of Domain, will be elected
as directors of Range, and the size of Range's Board of Directors will be
increased accordingly. Lomak has also agreed to nominate these newly appointed
directors for election by Range's stockholders at the Company's 1999 Annual
Meeting of Stockholders.
10
<PAGE> 14
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The respective Boards of Directors of Lomak and Domain have determined that
the terms of the Merger are fair to and in the best interests of their
respective stockholders, and have approved the Merger Agreement, the Merger and
the other transactions contemplated by the Merger Agreement.
The Board of Directors of Lomak unanimously recommends that the holders of
Lomak Common Stock and Lomak Preferred Stock approve the Stock Issuance and the
Name Change.
For additional information with respect to the determinations made by the
Lomak and Domain Boards of Directors, see "The Merger -- Lomak's Reasons for the
Merger; Recommendation of Board of Directors of Lomak" and " -- Domain's Reasons
for the Merger; Recommendation of Board of Directors of Domain."
OPINIONS OF FINANCIAL ADVISORS
Lomak. PaineWebber Incorporated ("PaineWebber") has delivered a written
opinion dated May 12, 1998 to the Board of Directors of Lomak to the effect
that, as of the date of such opinion and based upon and subject to certain
matters stated therein, the Exchange Ratio was fair to Lomak from a financial
point of view. PAINEWEBBER'S OPINION IS ADDRESSED TO THE BOARD OF DIRECTORS OF
LOMAK AND RELATES TO THE FAIRNESS TO LOMAK OF THE CONSIDERATION TO BE PAID IN
THE MERGER FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF
THE PROPOSED MERGER OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER WITH RESPECT TO MATTERS RELATING TO THE
MERGER. The full text of the written opinion dated May 12, 1998 of PaineWebber
is attached hereto as Annex E and should be read carefully in its entirety with
respect to the procedures followed, assumptions made, matters considered and
limitations on the review undertaken by PaineWebber in connection with such
opinion. See "The Merger -- Opinions of Financial Advisors -- PaineWebber
Opinion to the Lomak Board of Directors."
Domain. Credit Suisse First Boston Corporation ("CSFB") has delivered a
written opinion dated May 12, 1998 to the Board of Directors of Domain to the
effect that, as of May 12, 1998 and based upon and subject to certain matters
stated therein, the Exchange Ratio was fair, from a financial point of view, to
the holders of Domain Common Stock. CSFB'S OPINION IS ADDRESSED TO THE BOARD OF
DIRECTORS OF DOMAIN AND RELATES TO THE FAIRNESS TO THE HOLDERS OF DOMAIN COMMON
STOCK OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY
OTHER ASPECT OF THE PROPOSED MERGER OR ANY RELATED TRANSACTION AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER WITH RESPECT TO MATTERS RELATING
TO THE MERGER. The full text of the written opinion dated May 12, 1998 of CSFB
is attached hereto as Annex D and should be read carefully in its entirety with
respect to the procedures followed, assumptions made, matters considered and
limitations on the review undertaken by CSFB in connection with such opinion.
See "The Merger -- Opinions of Financial Advisors -- CSFB Opinion to the Domain
Board of Directors."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Boards of Directors of Lomak and
Domain, stockholders should be aware that certain members of the Board of
Directors of Domain and certain executive officers of Domain have interests in
the transactions contemplated by the Merger Agreement separate from their
interests as stockholders. See "The Merger -- Interests of Certain Persons in
the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger will not constitute a tax-free reorganization for federal income
tax purposes. Accordingly, even though no cash is received in the transaction, a
holder of Domain Common Stock that exchanges such stock for Lomak Common Stock
in the Merger will recognize gain or loss equal to the difference between the
fair market value of the shares of Lomak Common Stock received by such holder in
the Merger and the adjusted basis of the shares of Domain Common Stock
surrendered in the Merger. See "The Merger -- Certain Federal Income Tax
Consequences."
11
<PAGE> 15
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase of Domain by Lomak for
financial accounting purposes. See "The Merger -- Accounting Treatment."
NO DISSENTERS' OR APPRAISAL RIGHTS
Holders of Domain Common Stock, Lomak Common Stock and Lomak Preferred
Stock (including holders of Lomak Common Stock and Lomak Preferred Stock who
vote against the Stock Issuance) will not be entitled to dissenters' or
appraisal rights under the DGCL if the Merger is consummated.
GOVERNMENTAL AND REGULATORY APPROVALS
The acquisition by FRLP of shares of Lomak Common Stock pursuant to the
Merger (and therefore, the Merger itself) is conditioned upon the expiration or
termination of the waiting period under the HSR Act. Lomak and the Principal
Stockholder filed notification reports, together with requests for early
termination of the waiting period with the Department of Justice and the Federal
Trade Commission (the "FTC") under the HSR Act on June 10, 1998. The requests
for early termination of the waiting period were granted on June 19, 1998. Lomak
and Domain are aware of no other governmental or regulatory approvals required
for consummation of the Merger, other than compliance with applicable federal
and state securities laws. See "The Merger -- Governmental and Regulatory
Approvals."
RISK FACTORS
In evaluating the Merger, stockholders should take into account the
following risk factors relating to the Merger, Lomak and Domain, and their
respective businesses, which risk factors are discussed at greater length under
"Risk Factors."
- - The calculation of the Exchange Ratio in the Merger is based upon the Closing
Date Market Price, which could be different from the closing price of Lomak
Common Stock on the date of the Lomak Special Meeting. In addition, the
adjustment provided for in the calculation of the Exchange Ratio is subject to
a minimum and maximum "collar";
- - Growth through business combinations entails risks, including risks with
respect to the successful integration of operations;
- - The majority of Domain's producing properties are operated by other industry
partners;
- - Domain's IPF Program is inherently subject to certain risks, including that
Domain makes an up-front cash payment to purchase term overriding royalty
interests, and the producer's obligations are generally nonrecourse;
- - Because the Merger is not a tax-free reorganization, a Domain stockholder
could recognize federal income tax liability even though no cash is received
in the Merger;
- - It is expected that Lomak will recognize a non-recurring pre-tax impairment
charge of approximately $106 million upon consummation of the Merger;
- - Prices for oil, natural gas and NGL production, and the costs of acquiring,
finding, developing and producing such products, are volatile;
- - Domain's and Lomak's reserve information is based upon estimates of proved
reserves and future net revenues, which may prove not to be accurate;
- - Range's future success depends upon its ability to find or acquire additional
oil and gas reserves that are economically recoverable;
12
<PAGE> 16
- - After the Merger, the stockholders of both Lomak and Domain will own an
investment in a company with a different risk and potential benefit profile as
it relates to exploratory versus development drilling than that of Lomak or
Domain separately;
- - Exploration drilling and development drilling involve a high degree of risk
that no commercial production will be obtained or that the production will not
be sufficient to recover drilling and completion costs;
- - Oil and natural gas operations involve risks that may not be fully insured;
- - Range's gas gathering, processing and marketing operations will depend in
large part on the ability to contract with third party producers;
- - Governmental agencies regulate the oil and natural gas industry extensively;
- - Foreign operations involve additional risks for oil and natural gas companies;
and
- - Oil and natural gas production, development and exploration activities are
competitive.
STOCK PURCHASE AGREEMENT
Simultaneously with the execution of the Merger Agreement, Lomak and FRLP
entered into the Stock Purchase Agreement (the "Stock Purchase Agreement")
pursuant to which on July 2, 1998 Lomak acquired from FRLP 3,250,000 shares of
Domain Common Stock at a cash purchase price of $43,875,000, or $13.50 per
share. See "Stock Purchase Agreement."
VOTING AGREEMENT
Simultaneously with the execution of the Stock Purchase Agreement, Lomak
and FRLP entered into the Voting and Standstill Agreement (the "Voting
Agreement") pursuant to which FRLP has, among other things, agreed to vote all
shares of Domain Common Stock beneficially owned by FRLP (i) in favor of the
Merger Agreement and (ii) against any business combination proposal or other
matter that may interfere or be inconsistent with the Merger (including, without
limitation, a Domain Acquisition Proposal). The Voting Agreement also restricts,
subject to certain exceptions, the ability of FRLP to sell, transfer or pledge
or grant a proxy with respect to any of the shares of Lomak Common Stock to be
owned by it during the term of the Voting Agreement, and prohibits FRLP and
certain of its affiliates from initiating, engaging in or voting the shares of
Lomak Common Stock owned by it in favor of a business combination or other
change in control of Lomak not approved by the Lomak Board of Directors. See
"Voting Agreement."
MARKET PRICES OF LOMAK COMMON STOCK AND DOMAIN COMMON STOCK
Lomak Common Stock is traded on the NYSE under the symbol "LOM," and the
Domain Common Stock is traded on the NYSE under the symbol "DXD." The following
table sets forth the closing sales prices per share of Lomak Common Stock and
Domain Common Stock as reported on the NYSE on May 11, 1998, the last business
day prior to announcement by the parties of the Merger Agreement and on July 13,
1998:
<TABLE>
<CAPTION>
MARKET PRICE PER SHARE
---------------------------
DOMAIN LOMAK
DATE COMMON STOCK COMMON STOCK
---- ------------ ------------
<S> <C> <C>
May 11, 1998............................. $12.5000 $14.0000
July 13, 1998............................ $11.7500 $10.1250
</TABLE>
If the Name Change is approved by the stockholders at the Lomak Special
Meeting, Lomak's NYSE trading symbol will be changed to "RRC."
13
<PAGE> 17
COMPARATIVE PER SHARE DATA
Set forth below are the net earnings (loss) and book value per share data
for Lomak and Domain on a historical basis, a pro forma basis for Lomak and an
equivalent pro forma basis for Domain. See "Unaudited Pro Forma Combined
Financial Information."
The information set forth below should be read in conjunction with the
audited and unaudited consolidated financial statements and related notes of
Lomak, incorporated by reference in this Proxy Statement/Prospectus, the audited
and unaudited consolidated financial statements and related notes of Domain and
the unaudited pro forma condensed financial statements and notes thereto
included elsewhere in this Proxy Statement/Prospectus.
LOMAK
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -------------------------
1998 1997 1996 1995
--------- ------- ------ ------
<S> <C> <C> <C> <C>
Historical Per Common Share Data:
Net earnings (loss)-basic.................................. $ 0.10 $(1.31) $0.71 $0.31
Net earnings (loss)-dilutive............................... $ 0.10 $(1.31) $0.69 $0.31
Book value(a).............................................. $ 8.07 $ 7.99 $6.02 $4.93
Dividends.................................................. $ 0.03 $ 0.10 $0.06 $0.01
Pro Forma Per Common Share Data(b):
Net earnings (loss)-basic.................................. $(0.03) $(0.92)
Net earnings (loss)-dilutive............................... $(0.03) $(0.92)
Book value(a).............................................. $ 7.30
Dividends.................................................. $ 0.03 $ 0.10
</TABLE>
DOMAIN
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -------------------------
1998 1997 1996 1995
--------- ------- ------ ------
<S> <C> <C> <C> <C>
Historical Per Common Share Data:
Net earnings-basic......................................... $ 0.14 $ 0.27 (d) (d)
Net earnings-dilutive...................................... $ 0.14 $ 0.26 (d) (d)
Book value(a).............................................. $ 8.90 $ 8.74 (d) (d)
Dividends.................................................. $ -- $ --
Equivalent Pro Forma Per Common Share Data(c):
Net earnings (loss)-basic.................................. $(0.04) $(1.11)
Net earnings (loss)-dilutive............................... $(0.04) $(1.11)
Book value(a).............................................. $ 8.82
Dividends.................................................. $ 0.04 $ 0.12
</TABLE>
- ---------------
(a) Book value for the purposes of this calculation is defined as stockholders'
equity, less in the case of Lomak the liquidation value of the Lomak
Preferred Stock ($28,746,000) divided by the number of common shares
outstanding at each of the periods.
(b) The Lomak pro forma data was derived by combining historical consolidated
financial information of Lomak and Domain using the purchase method of
accounting for Domain, all on the basis described under "Unaudited Pro Forma
Combined Financial Information."
(c) The equivalent pro forma data for Domain was calculated by multiplying the
Lomak pro forma per common share data by an assumed Exchange Ratio of
1.2083.
(d) Prior to December 31, 1996 the stock of the operating subsidiaries that
combined to create Domain was held by El Paso Natural Gas Company and
Tenneco Inc. Therefore, no per share data is available.
14
<PAGE> 18
- --------------------------------------------------------------------------------
LOMAK
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents certain (i) historical and pro forma
financial data and (ii) historical and pro forma reserve and operating data of
Lomak. The selected consolidated financial data covers the five years ended
December 31, 1997, and the three months ended March 31, 1997 and 1998 and pro
forma financial information for the year ended December 31, 1997 and the three
months ended March 31, 1998. Such financial information has been derived from
the financial statements of Lomak. This data should be read in conjunction
with the consolidated financial statements of Lomak, the related notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in the reports incorporated herein by
reference and the Unaudited Pro Forma Combined Financial Information included
herein. Neither the historical nor the pro forma results are necessarily
indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- --------- -----------
(UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales.................. $ 11,132 $ 24,461 $ 37,417 $ 68,054 $ 130,017 $194,094
Transportation, processing and
marketing........................ 559 2,195 3,284 5,575 11,727 13,154
IPF income(a)...................... -- -- -- -- -- 4,779
Interest and other................. 418 471 1,317 3,386 7,594 9,510
-------- -------- -------- -------- --------- --------
12,109 27,127 42,018 77,015 149,338 221,537
Expenses:
Direct operating................... 3,184 8,130 11,302 20,676 31,481 50,628
Transportation, processing and
marketing........................ 13 490 849 1,674 3,921 4,690
Exploration........................ 86 359 512 1,460 2,527 12,527
General and administrative......... 2,049 2,478 2,736 3,966 5,290 11,378
Stock compensation................. -- -- -- -- -- 4,787
Interest........................... 1,120 2,807 5,584 7,487 27,175 39,611
Depletion, depreciation and
amortization..................... 4,347 10,105 14,863 22,303 55,407 85,180
Provision for impairment........... -- -- -- -- 58,700 58,700
Minority interest.................. -- -- -- -- -- (42)
-------- -------- -------- -------- --------- --------
10,799 24,369 35,846 57,566 184,501 267,459
-------- -------- -------- -------- --------- --------
Income (loss) before taxes........... 1,310 2,758 6,172 19,449 (35,163) (45,922)
Income taxes......................... (81) 139 1,782 6,834 (11,831) (15,369)
-------- -------- -------- -------- --------- --------
Net income (loss).................... $ 1,391 $ 2,619 $ 4,390 $ 12,615 $ (23,332) $(30,553)
======== ======== ======== ======== ========= ========
Earnings (loss) per common share:
Basic.............................. $ 0.19 $ 0.25 $ 0.31 $ 0.71 $ (1.31) $ (0.92)
Dilutive........................... $ 0.18 $ 0.25 $ 0.31 $ 0.69 $ (1.31) $ (0.92)
Cash dividends per common share...... $ 0.00 $ 0.00 $ 0.01 $ 0.06 $ 0.10 $ 0.10
Weighted common shares outstanding-
diluted............................ 5,853 9,051 11,841 14,812 19,641 35,888
OTHER FINANCIAL DATA:
EBITDA(b).......................... $ 6,863 $ 16,029 $ 27,131 $ 50,699 $ 108,646 $154,883
IPF return of capital(c)........... -- -- -- -- -- 12,109
EBITDA plus IPF return of
capital.......................... 6,863 16,029 27,131 50,699 108,646 166,992
Net cash provided by operations.... 4,305 11,241 16,561 38,445 82,446 NA
Net cash used in investing......... (43,459) (29,536) (76,113) (69,666) (506,514) NA
Net cash provided by financing..... 38,912 21,173 57,702 36,799 425,168 NA
Capital expenditures............... 48,240 70,024 88,530 79,390 572,572 NA
SELECTED RATIOS:
EBITDA to interest expense......... 6.1x 5.7x 4.9x 6.8x 4.0x 3.9x
Earnings to fixed charges(d)....... 2.2x 2.0x 2.1x 3.6x (0.3x) (0.2x)
Debt to EBITDA(e).................. 4.5x 3.9x 3.1x 2.3x 3.4x NA
Debt to capitalization............. 49% 59% 46% 50% 54% NA
BALANCE SHEET DATA (END OF PERIOD):
Cash and equivalents............... $ 2,019 $ 4,897 $ 3,047 $ 8,625 $ 9,725 NA
Total assets....................... 76,333 141,768 214,788 282,547 764,213 NA
Long-term debt(f).................. 31,108 62,592 83,088 116,806 367,125 NA
Company-obligated Preferred
Securities of Subsidiary Trust... -- -- -- -- 120,000 NA.......
Stockholders' equity............... 32,263 43,248 99,367 117,529 196,950 NA.......
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
(UNAUDITED) PRO
FORMA
1997 1998 1998
--------- ----------- ----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales.................. $ 34,338 $ 32,540 $ 47,658
Transportation, processing and
marketing........................ 2,774 2,791 2,791
IPF income(a)...................... -- -- 1,958
Interest and other................. 638 1,741 (469)
--------- -------- ----------
37,750 37,072 51,938
Expenses:
Direct operating................... 7,772 8,396 13,086
Transportation, processing and
marketing........................ 869 1,062 1,062
Exploration........................ 1,002 413 2,116
General and administrative......... 1,082 1,840 4,096
Stock compensation................. -- -- 289
Interest........................... 3,959 8,734 11,523
Depletion, depreciation and
amortization..................... 12,651 12,198 20,473
Provision for impairment........... -- -- --
Minority interest.................. -- -- (35)
--------- -------- ----------
27,335 32,643 52,610
--------- -------- ----------
Income (loss) before taxes........... 10,415 4,429 (672)
Income taxes......................... 3,853 1,660 (98)
--------- -------- ----------
Net income (loss).................... $ 6,562 $ 2,769 $ (574)
========= ======== ==========
Earnings (loss) per common share:
Basic.............................. $ 0.35 $ 0.10 $ (0.03)
Dilutive........................... $ 0.34 $ 0.10 $ (0.03)
Cash dividends per common share...... $ 0.02 $ 0.03 $ 0.03
Weighted common shares outstanding-
diluted............................ 17,682 21,591 37,082
OTHER FINANCIAL DATA:
EBITDA(b).......................... $ 28,027 $ 25,774 $ 33,729
IPF return of capital(c)........... -- -- 4,557
EBITDA plus IPF return of
capital.......................... 28,027 25,774 38,286
Net cash provided by operations.... 19,245 11,723 NA
Net cash used in investing......... (353,800) (61,142) NA
Net cash provided by financing..... 334,345 46,951 NA
Capital expenditures............... 393,680 77,636 NA
SELECTED RATIOS:
EBITDA to interest expense......... 7.1x 3.0x 2.9x
Earnings to fixed charges(d)....... 3.6x 1.5x 0.9x
Debt to EBITDA(e).................. 3.5x 4.0x 4.0x
Debt to capitalization............. 64% 57% 56%
BALANCE SHEET DATA (END OF PERIOD):
Cash and equivalents............... $ 8,415 $ 7,257 $ 15,506
Total assets....................... 667,522 800,252 1,060,420
Long-term debt(f).................. 390,254 414,933 539,718
Company-obligated Preferred
Securities of Subsidiary Trust... -- 120,000 120,000
Stockholders' equity............... 218,146 199,058 295,928
</TABLE>
- ---------------
(a) IPF income for 1994, 1995 and 1996 also includes income from Domain's
"GasFund" partnership with a financial advisor. See "Business of
Domain--Independent Producer Finance Activities."
(b) EBITDA represents net income plus stock compensation expense, income
taxes, exploration expense, interest expense and depletion, depreciation,
amortization expense and provision for impairment. EBITDA is not presented
as an indicator of Lomak's operating performance, an indicator of cash
available for discretionary spending or as a measure of liquidity. EBITDA
may not be comparable to other similarly titled measures of other
companies. Lomak's credit agreement requires the maintenance of certain
EBITDA ratios.
(c) To more accurately reflect the actual cash flows generated on a pro forma
basis, IPF return of capital is identified separately to allow such cash
receipts to be combined with EBITDA.
(d) For the purpose of determining the ratio of earnings to fixed charges,
earnings are defined as income before taxes plus fixed charges. Fixed
charges consist of interest expense.
(e) EBITDA for the historical and pro forma three-month periods presented has
been annualized.
(f) Long-term debt includes current portion.
- --------------------------------------------------------------------------------
15
<PAGE> 19
LOMAK
SUMMARY RESERVE AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
PRO FORMA
1995 1996 1997 1997
-------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
PROVED RESERVES(A):
Natural gas (Mmcf)......................... 232,887 295,594 574,418 693,867
Oil and NGLs (Mbbls)....................... 10,863 14,675 29,774 44,315
Natural gas equivalents (Mmcfe)............ 298,065 383,644 753,062 959,750
Percent natural gas........................ 78% 77% 76% 72%
Percent proved developed................... 77% 71% 61% 61%
PRODUCTION VOLUMES:
Natural gas (Mmcf)......................... 12,471 21,231 38,409 59,466
Oil and NGLs (Mbbls)....................... 913 1,068 1,794 2,591
Natural gas equivalents (Mmcfe)............ 17,949 27,641 49,170 75,014
Reserve Life Index (years)(b).............. 16.6 13.9 15.3 12.8
PRODUCT PRICES (AT DECEMBER 31)(A):
Natural gas (per Mcf)...................... $ 2.28 $ 3.54 $ 2.79 $ 2.75
Oil and NGLs (per Bbl)..................... 18.14 23.58 14.54 16.21
FUTURE NET CASH FLOWS(A):
Undiscounted............................... $412,638 $941,393 $1,276,147 $1,570,031
Present Value.............................. 229,238 492,172 632,336 836,452
RESERVE ADDITIONS (MMCFE):
Acquisitions............................... 106,283 109,326 450,693 568,622
Extensions, discoveries and revisions...... 10,943 16,543 (21,073) 1,680
-------- -------- ---------- ----------
Net additions.............................. 117,226 125,869 429,620 570,302
======== ======== ========== ==========
COSTS INCURRED:
Acquisition................................ $ 69,244 $ 63,579 $ 448,822 $ 583,385
Development and exploration................ 10,184 14,561 58,805 94,503
-------- -------- ---------- ----------
Total costs incurred............... $ 79,428 $ 78,140 $ 507,627 $ 677,888
======== ======== ========== ==========
FINDING COSTS (PER MCFE)(C).................. $ .68 $ .62 $ 1.18 $ 1.19
RESERVE REPLACEMENT(D)....................... 653% 455% 874% 1,160%
WELLS DRILLED:
Gross...................................... 62.0 63.0 213.0 252.0
Net........................................ 39.6 51.9 174.3 188.4
Success rate (net)......................... 99% 94% 96% 94%
PER MCFE DATA:
Oil and gas sales.......................... $ 2.08 $ 2.46 $ 2.64 $ 2.59
Direct operating expense................... .63 .75 .64 .67
General and administrative expense......... .15 .14 .11 .15
-------- -------- ---------- ----------
Operating margin(e)........................ $ 1.30 $ 1.57 $ 1.89 $ 1.77
======== ======== ========== ==========
</TABLE>
- ---------------
(a) Proved reserves and future net cash flows were estimated in accordance with
the Commission's guidelines. Prices and costs at December 31 for each of the
years 1995 through 1997 were used in the calculation of proved reserves and
future net cash flows and were held constant through the periods of
estimated production, except as otherwise provided by contract, in
accordance with the Commission's guidelines. Pro forma reserves reflect
Lomak's and Domain's property acquisition and disposition activity that
occurred subsequent to December 31, 1997. Includes amounts related to an
above-market gas contract. See "Risk Factors -- Gas Contract Risk."
(b) The reserve life index is calculated as proved reserves (on an Mcfe basis)
divided by annual production.
(c) Finding costs are calculated by dividing the amount of total capital
expenditure for oil and gas activities including the amounts associated with
unproven properties by the amount of estimated net proved reserves added
(purchase of oil and gas reserves plus extensions and discoveries) during
the same period.
(d) Reserve replacement is calculated as net reserve additions divided by actual
production for the period, both on an Mcfe basis.
(e) Operating margin is calculated as oil and gas sales less direct operating
expense and general and administrative expense.
16
<PAGE> 20
DOMAIN
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
The following table presents certain (i) historical financial data and (ii)
reserve and operating data of Domain. The selected combined and consolidated
financial data covers the five years ended December 31, 1997, and the three
months ended March 31, 1997 and 1998. Such financial information has been
derived from the financial statements of Domain. This data should be read in
conjunction with the combined and consolidated financial statements of Domain,
the related notes thereto, and "Business of Domain -- Management's Discussion
and Analysis of Financial Condition and Results of Operations" included herein.
The historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ----------------------
PREDECESSOR SUCCESSOR
---------------------------------------- --------- (UNAUDITED)
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- --------- -------- -----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales.................... $ 1,922 $ 5,340 $ 34,877 $ 52,274 $ 47,251 $ 12,782 $ 13,312
IPF income(a)........................ 200 1,417 2,356 4,369 4,779 732 1,958
Interest and other................... --..... 283 414 (413) 238 (292) 688
------- -------- -------- -------- -------- -------- --------
2,122 7,040 37,647 56,230 52,268 13,222 15,958
Expenses:
Direct operating..................... 220 1,808 8,690 11,547 16,341 3,473 4,418
General and administrative........... 681 52 2,780 3,361 4,237 792 1,607
Corporate overhead allocation........ 257 944 2,627 4,827 -- -- --
Stock compensation................... -- -- -- -- 4,587 3,150 185
Interest............................. -- -- -- 150 3,774 1,109 655
Depletion, depreciation and
amortization....................... 987 3,101 22,692 24,920 16,072 3,282 5,598
------- -------- -------- -------- -------- -------- --------
2,145 5,905 36,789 44,805 45,011 11,806 12,463
------- -------- -------- -------- -------- -------- --------
Income (loss) before taxes........... (23) 1,135 858 11,425 7,257 1,416 3,495
Income taxes......................... 2 735 351 4,394 4,094 1,735 1,334
------- -------- -------- -------- -------- -------- --------
Net income (loss).................... $ (25) $ 400 $ 507 $ 7,031 $ 3,163 $ (319) $ 2,161
======= ======== ======== ======== ======== ======== ========
Earnings (loss) per common share:
Basic................................ NA NA NA NA...... $ 0.27 $ (0.03) $ 0.14
Dilutive............................. NA NA NA NA...... $ 0.26 $ (0.03) $ 0.14
Cash dividends per common share........ NA NA NA NA NA NA NA
Weighted common shares outstanding --
diluted.............................. NA NA NA NA...... 12,126 9,156 15,822
OTHER FINANCIAL DATA:
EBITDA(b)............................ NA $ 4,236 $ 23,550 $ 36,495 $ 31,690 $ 8,957 $ 9,933
IPF Program return of capital(c)..... NA 3,507 2,638 4,618 12,109 3,426 4,557
EBITDA plus IPF Program return of
capital............................ NA 7,743 26,188 41,113 43,799 12,383 14,490
Net cash provided by operations...... NA 11,487 19,933 34,553 21,014 8,112 16,631
Net cash used in investing........... NA (86,669) (39,728) (47,329) (87,602) (7,577) (30,849)
Net cash provided by financing....... NA 85,014 8,328 12,776 71,283 5,511 17,736
Capital expenditures................. NA 85,205 49,904 28,145 91,070 2,276 25,676
SELECTED RATIOS:
EBITDA to interest expense........... NA NA NA 243.3x 8.4x 8.1x 15.2x
Earnings to fixed charges(d)......... NA NA NA 77.2x 2.9x 2.3x 6.3x
Debt to EBITDA(e).................... NA NA NA 2.2x 2.0x 2.3x 2.0x
Debt to capitalization............... NA NA NA...... 74% 33% 72% 38%
PREDECESSOR SUCCESSOR
----------------------------- ---------------------
BALANCE SHEET DATA (END OF PERIOD):
Cash and equivalents................. $ 1,635 $ 11,467 $ -- $ 36 $ 4,731 $ 6,082 $ 8,249
Total assets......................... 23,493 117,755 137,096 122,429 212,549 125,664 233,448
Long-term debt(f).................... -- -- -- 79,412 63,720 83,838 80,910
Stockholders' equity................. (335) 65 572 28,577 132,034 32,493 134,484
</TABLE>
17
<PAGE> 21
- ---------------
(a) IPF income for 1994, 1995 and 1996 also includes income from Domain's
"GasFund" partnership with a financial investor. See "Business of
Domain -- Independent Producer Finance Activities."
(b) EBITDA represents earnings before stock compensation expense, interest,
income taxes, depreciation, depletion and amortization. Domain believes that
EBITDA may provide additional information about Domain's ability to meet its
future requirements for debt service, capital expenditures and working
capital. 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.
(c) To more accurately reflect the actual cash flows generated by Domain, IPF
Program return of capital is identified separately to allow such cash
receipts to be combined with EBITDA.
(d) Fixed charges consist of interest expense.
(e) EBITDA for the historical three month periods presented has been annualized.
(f) Long-term debt includes current portion.
18
<PAGE> 22
DOMAIN
SUMMARY RESERVE AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
PREDECESSOR SUCCESSOR
------------------------- -----------
1995 1996 1997
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C>
PRODUCTION VOLUMES:
Natural gas (Mmcf)..................................... 18,065 21,192 15,932
Oil and NGLs (Mbbls)................................... 424 564 646
Natural gas equivalents (Mmcfe)........................ 20,609 24,575 19,811
Reserve Life Index (years)(a).......................... 4.7 6.1 8.7
PRODUCT PRICES (AT DECEMBER 31)(B):
Natural gas (per Mmbtu)................................ $ 3.30 $ 3.38 $ 2.55
Oil and NGLs (per Bbl)................................. 18.76 22.50 18.70
FUTURE NET CASH FLOWS(B):
Undiscounted........................................... $128,934 $186,428 $210,252
Present Value.......................................... 103,931 147,837 148,789
RESERVE ADDITIONS (MMCFE):
Acquisitions........................................... 30,178 48,915 49,741
Extensions, discoveries and revisions.................. 15,703 4,640 22,753
-------- -------- --------
Net additions.......................................... 45,881 53,555 72,494
======== ======== ========
COST INCURRED:
Acquisition............................................ $ 18,393 $ 8,513 $ 55,372
Development and exploration............................ 31,511 19,632 35,698
-------- -------- --------
Total costs incurred................................... $ 49,904 $ 28,145 $ 91,070
======== ======== ========
FINDING COSTS (PER MCFE)(C).............................. $ 1.09 $ 0.53 $ 1.26
RESERVE REPLACEMENT(D)................................... 223% 218% 366%
WELLS DRILLED:
Gross.................................................. 55.0 42.0 39.0
Net.................................................... 9.9 6.9 14.1
Success rate (net)..................................... 43% 64% 71%
PER MCFE DATA:
Oil and gas sales...................................... $ 1.69 $ 2.13 $ 2.39
Direct operating expense............................... 0.42 0.47 0.82
General and administrative expense..................... 0.13 0.14 0.21
-------- -------- --------
Operating margin(e).................................... $ 1.14 $ 1.52 $ 1.36
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
PREDECESSOR SUCCESSOR
----------- ---------------------
1995 1996 1997
----------- -------- --------
<S> <C> <C> <C>
PROVED RESERVES(B):
Natural gas (Mmcf)..................................... 82,682 81,338 104,948
Oil and NGLs (Mbbls)................................... 2,197 11,380 11,350
Natural gas equivalents (Mmcfe)........................ 95,865 149,616 173,049
Percent natural gas.................................... 86% 50% 61%
Percent proved developed............................... 79% 88% 69%
</TABLE>
- ---------------
(a) The reserve life index is calculated as proved reserves (on an Mcfe basis)
divided by annual production.
(b) Proved reserves and future net cash flows were estimated in accordance with
the Commission's guidelines. Prices and costs at December 31 for each of the
years 1995 through 1997 were used in the calculation of proved reserves and
future net cash flows and were held constant through the periods of
estimated production, except as otherwise provided by contract, in
accordance with the Commission's guidelines.
(c) Finding costs are calculated by dividing the amount of total capital
expenditure for oil and gas activities including the amounts associated with
unproven properties by the amount of estimated net proved reserves added
(purchase of oil and gas reserves plus extensions and discoveries) during
the same period.
(d) Reserve replacement is calculated as net reserve additions divided by
Domain's actual production for the period, both on an Mcfe basis.
(e) Operating margin is calculated as oil and gas sales less direct operating
expense and general and administrative expense.
19
<PAGE> 23
RANGE
SUMMARY COMBINED RESERVE AND OPERATING DATA
The following table combines certain historical and pro forma reserve and
operating data of Lomak and Domain. Neither the historical nor pro forma data
results are necessarily indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
PRO FORMA
1995 1996 1997 1997(A)
-------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
PROVED RESERVES:
Natural gas (Mmcf).......................... 315,569 376,932 679,366 693,867
Oil and NGLs (Mbbls)........................ 13,060 26,055 41,124 44,315
Natural gas equivalents (Mmcfe)............. 393,930 533,260 926,111 959,750
Percent natural gas......................... 80% 71% 73% 72%
Percent proved developed.................... 77% 76% 62% 61%
PRODUCTION VOLUMES:
Natural gas (Mmcf).......................... 30,536 42,423 54,341 59,466
Oil and NGLs (Mbbls)........................ 1,337 1,632 2,440 2,591
Natural gas equivalents (Mmcfe)............. 38,558 52,216 68,981 75,014
Reserve Life Index (years)(b)................. 10.2 10.2 13.4 12.8
PRODUCT PRICES (AT DECEMBER 31):
Natural gas (per Mcf)....................... $ 2.52 $ 3.48 $ 2.74 $ 2.75
Oil and NGLs (per Bbl)...................... 18.24 23.11 15.69 16.21
FUTURE NET CASH FLOWS:
Undiscounted................................ $541,572 $1,127,821 $1,486,399 $1,570,031
Present Value............................... 333,169 640,009 781,125 836,452
RESERVE ADDITIONS (MMCFE):
Acquisitions................................ 136,461 158,241 500,434 568,622
Extensions, discoveries and revisions....... 26,646 21,183 1,680 1,680
-------- ---------- ---------- ----------
Net additions............................... 163,107 179,424 502,114 570,302
======== ========== ========== ==========
COST INCURRED:
Acquisition................................. $ 87,637 $ 72,092 $ 504,194 $ 583,385
Development and exploration................. 41,695 34,193 94,503 94,503
-------- ---------- ---------- ----------
Total costs incurred................ $129,332 $ 106,285 $ 598,697 $ 677,888
======== ========== ========== ==========
FINDING COSTS (PER MCFE)(C)................... $ .79 $ .59 $ 1.19 $ 1.19
RESERVE REPLACEMENT(D)........................ 423% 344% 728% 827%
WELLS DRILLED:
Gross....................................... 117.0 105.0 252.0 252.0
Net......................................... 49.5 58.8 188.4 188.4
Success rate (net).......................... 88% 90% 94% 94%
PER MCFE DATA:
Oil and gas sales........................... $ 1.87 $ 2.30 $ 2.57 $ 2.59
Direct operating expense.................... .52 .62 .69 .67
General and administrative expense.......... .14 .14 .14 .15
-------- ---------- ---------- ----------
Operating margin(e)......................... $ 1.21 $ 1.54 $ 1.74 $ 1.77
======== ========== ========== ==========
</TABLE>
- ---------------
(a) Proved reserves and future net cash flows were estimated in accordance with
the Commission's guidelines. Prices and costs at December 31 for each of the
years 1995 through 1997 were used in the calculation of proved reserves and
future net cash flows and were held constant through the periods of
estimated production, except as otherwise provided by contract, in
accordance with the Commission's guidelines. Pro forma reserves reflect
Lomak's and Domain's acquisition and disposition activity that occurred
subsequent to December 31, 1997. Includes amounts related to an above-market
gas contract. See "Risk Factors -- Gas Contract Risk."
(b) The reserve life index is calculated as proved reserves (on an Mcfe basis)
divided by annual production.
20
<PAGE> 24
(c) Finding costs are calculated by dividing the amount of total capital
expenditure for oil and gas activities including the amounts associated
with unproven properties by the amount of estimated net proved reserves
added (purchase of oil and gas reserves plus extensions and discoveries)
during the same period.
(d) Reserve replacement is calculated as net reserve additions divided by
actual production for the period, both on an Mcfe basis.
(e) Operating margin is calculated as oil and gas sales less direct operating
expense and general and administrative expense.
21
<PAGE> 25
RISK FACTORS
RISK FACTORS AND OTHER CONSIDERATIONS WITH RESPECT TO THE MERGER
The following factors should be carefully considered by the stockholders of
Lomak and Domain in evaluating the Merger.
MARKET PRICE FLUCTUATIONS OF LOMAK COMMON STOCK
In determining whether to approve the transactions pursuant to the Merger
Agreement, Lomak and Domain stockholders should consider that the price of the
Lomak Common Stock at the Effective Time, as well as the prices at the date of
this Proxy Statement/Prospectus and at the date of the Lomak Special Meeting,
may vary as a result of changes in the business, operations or prospects of
Lomak, market assessments of the likelihood that the Merger will be consummated
and the timing thereof, general market and economic conditions and other
factors. In addition, because the Exchange Ratio is based upon a 15-day average
of the closing prices of Lomak Common Stock, the Exchange Ratio may be
calculated using a price for Lomak Common Stock which is greater than or less
than (in either case, perhaps materially) than the market price for Lomak Common
Stock at the Effective Time. Furthermore, the provisions for calculating the
Exchange Ratio contain minimum and maximum "collars." As a result, if the
Closing Date Market Price for Lomak Common Stock is less than $12.00 per share,
then the Exchange Ratio will be calculated so that a Domain stockholder would
receive less than $14.50 (valued at the Closing Date Market Price) for each
share of Domain Common Stock in the Merger. Conversely, if the Closing Date
Market Price is greater than $17.00 per share, then a Domain stockholder would
receive greater than $14.50 (valued at the Closing Date Market Price) for each
Domain share in the Merger. As of July 13, 1998, the closing price for Lomak
Common Stock on the NYSE was $10.125 per share and the Closing Date Market Price
(i.e., the 15-day average, calculated as if the Merger was consummated on that
date) was $10.400 per share.
Because the Effective Time may occur at a later date than the date of the
Lomak Special Meeting, there can be no assurance that the sales price of Lomak
Common Stock on the date of the Lomak Special Meeting will be indicative of the
sales price of Lomak Common Stock at the Effective Time. The Effective Time will
occur as soon as practicable following the Lomak Special Meeting and the
satisfaction or waiver of the other conditions set forth in the Merger
Agreement. See "Certain Provisions of the Merger Agreement -- Conditions to the
Merger."
RISKS ASSOCIATED WITH INTEGRATING THE COMPANIES
Growth through business combinations such as the Merger entails certain
risks that currently unanticipated difficulties may arise in integrating the
operations of the combining entities and that acquired operations could be
subject to unanticipated business uncertainties or liabilities. Moreover, such
combinations present the risk that the synergies expected from the combined
operations may be realized. The various risks associated with the operational
integration of Lomak and Domain and the subsequent performance of the combined
company may adversely affect the combined company's future results of
operations. For a description of the synergies that the managements of Lomak and
Domain anticipate to be realized from the Merger, see "Post-Merger Profile and
Strategy," "The Merger -- Lomak's Reasons for the Merger; Recommendation of
Board of Directors of Lomak" and "The Merger -- Domain's Reasons for the Merger;
Recommendation of Board of Directors of Domain."
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger will not constitute a tax-free reorganization for federal income
tax purposes. Accordingly, a holder of Domain Common Stock that exchanges such
stock for Lomak Common Stock in the Merger will recognize gain or loss equal to
the difference between the fair market value of the Lomak Common Stock received
by such holder in the Merger and the adjusted basis of the Domain Common Stock
surrendered in the Merger. Thus, the Merger could result in a federal income tax
liability even though no cash (other than
22
<PAGE> 26
cash in lieu of fractional shares) is received in the transaction. See "The
Merger -- Certain Federal Income Tax Consequences."
CERTAIN ACCOUNTING CONSEQUENCES OF THE MERGER
The Merger is being accounted for as a purchase for financial reporting
purposes as required by generally accepted accounting principles. The Merger
will result in a significant increase in the recorded value of Domain's oil and
gas properties and is expected to significantly increase the depreciation,
depletion and amortization costs incurred by Lomak after the Merger. This
increase in depreciation, depletion and amortization costs will have a negative
impact on Lomak's reported earnings. On a per share pro forma basis for the year
ended December 31, 1997 and the three months ended March 31, 1998, earnings
(loss) were ($0.92) per share and ($0.03) per share compared to Lomak's
historical earnings (loss) for such periods of ($1.31) and $0.10, respectively.
Such unaudited pro forma earnings per share information has been prepared
pursuant to regulations prescribed by the Commission. The pro forma adjustments
are described in the footnotes to the unaudited pro forma combined financial
statements included elsewhere in this Proxy Statement/Prospectus. Although Lomak
management believes that the potential negative effect to future earnings from
the Merger is outweighed by the benefits of the Merger, the depletion and
amortization costs, viewed in isolation, may have a material adverse effect on
the market value of the Lomak Common Stock after the Merger. Furthermore, it is
expected that Lomak will recognize a non-recurring pre-tax impairment charge of
$106 million upon consummation of the Merger because certain oil and gas
properties will have a carrying value in excess of the estimated undiscounted
future net cash flows. See "Unaudited Pro Forma Combined Financial Statements."
OPERATING RISKS
The following risk factors relating to the current operations of Lomak and
Domain and the future combined operations of the companies should be carefully
considered by the stockholders of Lomak and Domain.
NON-OPERATOR STATUS
The majority of Domain's producing properties are operated by other
industry partners. On those properties that others operate, Domain has a limited
ability to exercise control over operations or the associated costs of such
operations. The success of Domain's investment in a drilling or acquisition
activity on such properties is therefore dependent upon a number of factors that
are outside of Domain's control, including the competence and financial
resources of the operator. Such factors include the availability of future
capital resources of the other participants for the drilling of wells and the
approval of other participants of the drilling of wells on the properties in
which Domain has an interest. Domain's reliance on the operator and other
working interest owners and its limited ability to control certain costs could
have a material adverse effect on the realization of expected rates of return on
Domain's investment in drilling or acquisition activities.
CERTAIN RISKS AFFECTING DOMAIN'S IPF PROGRAM
Domain's IPF Program involves an up-front cash payment for the purchase of
a term overriding royalty interest pursuant to which Domain receives an agreed
upon share of revenues from identified properties. The producer's obligation to
deliver such revenues is nonrecourse to the producer insofar as the producer
generally is not liable to Domain for any failure to meet its payment obligation
except for such failures attributable to the producer's failure to operate
prudently, title failure or certain other causes within the control of the
producer. Consequently, Domain's ability to realize successful investments
through its producer finance business is subject to Domain's ability to estimate
accurately the volumes of recoverable reserves from which the applicable
production payment is to be discharged and the operator's ability to recover
these reserves. Domain's interest is believed to constitute a property interest
and, therefore, in the event of the producer's bankruptcy or similar event would
be outside of the reach of the producer's creditors; however, such creditor (or
the producer as debtor-in-possession or a trustee for the producer in a
bankruptcy proceeding) may argue that the transaction should be characterized as
a loan, in which case Domain may have only a creditor's claim
23
<PAGE> 27
for repayment of the amounts advanced. As non-operating interests, Domain's
ownership of these production payments should not expose Domain to liability
attendant to the ownership of direct working interests, such as environmental
liabilities and liabilities for personal injury or death or damage to the
property of others, although no assurances can be made in this regard. Finally,
as the producer's obligation is only to deliver a specified share of revenues,
subject to the ability of the burdened reserves to produce such revenues, Domain
bears the risk that future revenues delivered will be insufficient to amortize
the purchase price paid by Domain for the interest or to provide any investment
return thereon.
Domain operates the IPF Program through its indirect wholly-owned
subsidiary, Domain Energy Finance Corporation ("IPF Company"). IPF Company has a
$150 million revolving credit facility with two banks (the "IPF Credit
Facility") pursuant to which it finances a portion of IPF Program investments.
The borrowing base under this facility as of May 15, 1998 was $49 million.
VOLATILITY OF OIL AND GAS PRICES
Historically the markets for oil and gas have been volatile and are likely
to continue to be volatile in the future. Prices for oil and gas are subject to
large fluctuations in response to relatively minor changes in the supply of and
demand for oil and gas, market uncertainty and a variety of additional factors
beyond the control of Lomak and Domain. These factors include weather conditions
in the United States and elsewhere, economic conditions in the United States and
elsewhere, the actions of the Organization of Petroleum Exporting Countries
("OPEC"), governmental regulation, political stability in the Middle East and
elsewhere, the supply of and demand for oil and gas, the price of foreign
imports and the availability and prices of alternate fuel sources. Any
substantial and extended decline in the price of oil or gas would have an
adverse effect on Lomak's and Domain's carrying value of their respective proved
reserves, borrowing capacity, the ability to obtain additional capital, and
their financial condition, revenues, profitability and cash flows from
operations.
Volatile oil and gas prices make it difficult to estimate the value of
producing properties for acquisition and often cause disruption in the market
for oil and gas producing properties, as buyers and sellers have difficulty
agreeing on such value. Price volatility also makes it difficult to budget for
and project the return on acquisitions and development and exploitation
projects.
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES
This Proxy Statement/Prospectus contains estimates of Lomak's and Domain's
oil and gas reserves and the future net revenues from those reserves which have
been prepared by Lomak and Domain, respectively, and certain independent
petroleum consultants. Reserve engineering is a subjective process of estimating
the recovery from underground accumulations of oil and gas that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Estimates of economically recoverable oil and gas
reserves and of future net cash flows necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulation by governmental agencies and assumptions concerning future oil and
gas prices, future operating costs, severance and excise taxes, development
costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. Because all reserve estimates are to some
degree speculative, the quantities of oil and gas that are ultimately recovered,
production and operation costs, the amount and timing of future development
expenditures and future oil and gas sales prices may all vary from those assumed
in these estimates and such variances may be material. In addition, different
reserve engineers may make different estimates of reserve quantities and cash
flows based upon the same available data.
In addition, estimates of reserves and of Lomak's and Domain's future net
revenues from such reserves and the present value thereof are based on
assumptions regarding production levels, future oil and natural gas prices,
operating costs and other factors that may not prove to be correct over time.
Any significant variance in these assumptions could materially affect the
estimated quantity and value of reserves set forth in this Proxy
Statement/Prospectus.
24
<PAGE> 28
FINDING AND ACQUIRING ADDITIONAL RESERVES
Range's future success depends upon its ability to find or acquire
additional oil and gas reserves that are economically recoverable. Except to the
extent Lomak or Domain conducts successful exploration or development activities
or acquires properties containing proved reserves, the proved reserves of Lomak
and Domain will generally decline as they are produced. There can be no
assurance that Lomak's or Domain's planned exploration and development projects
and acquisition activities will result in significant additional reserves or
that Lomak or Domain will have success drilling productive wells at economic
returns. If prevailing oil and gas prices were to increase significantly,
Lomak's and Domain's finding costs to add new reserves could increase. The
drilling of oil and gas wells involves a high degree of risk, especially the
risk of dry holes or of wells that are not sufficiently productive to provide an
economic return on the capital expended to drill the wells. The cost of
drilling, completing and operating wells is uncertain, and drilling or
production may be curtailed or delayed as a result of many factors.
Lomak's and Domain's businesses are capital intensive. To maintain their
base of proved oil and gas reserves, a significant amount of cash flow from
operations must be reinvested in property acquisitions, development or
exploration activities. To the extent cash flow from operations is reduced and
external sources of capital become limited or unavailable, Lomak's and Domain's
ability to make the necessary capital investments to maintain or expand Range's
asset base would be impaired. Without such investment, Lomak's and Domain's oil
and gas reserves would decline.
CHANGES IN EXPLORATION AND DEVELOPMENT MIX
Domain's recent business strategy has been to emphasize exploratory
activities, whereas Lomak's recent business strategy has been to emphasize
development drilling. In 1998, Domain has budgeted $12 million or 24% of its
capital budget (excluding IPF Program investments) for exploration activities,
whereas Lomak has budgeted $10 million or 11% of its capital budget for
exploration activities. While the actual future expenditures on exploration
activities may vary, it is expected that, on a proportionate basis, such
expenditures will exceed Lomak's 1998 budgeted percentage but will be less than
Domain's 1998 budgeted percentage. Exploratory drilling involves more risk than
development drilling because it is designed to test formations that have not yet
been assigned proved reserves, but, if successful, results in potentially
greater increases in proved reserves. Consequently, after the Merger, the
stockholders of both Lomak and Domain will own an investment in a company with a
different risk and potential benefit profile as it relates to exploratory versus
development drilling than that of Lomak or Domain separately.
DEVELOPMENT AND EXPLORATION RISKS
Range intends to increase its development and exploration activities.
Exploration drilling, and to a lesser extent development drilling, involve a
high degree of risk that no commercial production will be obtained or that the
production will be insufficient to recover drilling and completion costs. The
cost of drilling, completing and operating wells is uncertain. Range's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, including title problems, weather conditions, compliance with
governmental requirements and shortages or delays in the delivery of equipment.
Furthermore, completion of a well does not assure a profit on the investment or
a recovery of drilling, completion and operating costs.
OPERATING HAZARDS AND UNINSURED RISKS; PRODUCTION CURTAILMENTS
The oil and gas business involves a variety of operating risks, including,
but not limited to, unexpected formations or pressures, uncontrollable flows of
oil, gas, brine or well fluids into the environment (including groundwater
contamination), blowouts, cratering, fires, explosions, pipeline ruptures or
spills, pollution and other risks, any of which could result in personal
injuries, loss of life, damage to properties, environmental pollution,
suspension of operations and substantial losses. Although Lomak and Domain carry
insurance that each believes is reasonable, neither is fully insured against all
risks. Lomak and Domain do not carry business interruption insurance. Losses and
liabilities arising from uninsured or under-insured events could have a material
adverse effect on the financial condition and results of operations of Lomak and
Domain.
25
<PAGE> 29
From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which Lomak or Domain owns an
interest have been subject to production curtailments. The curtailments vary
from a few days to several months. In most cases Lomak or Domain is provided
only limited notice as to when production will be curtailed and the duration of
such curtailments.
Certain of Lomak's and Domain's properties are located offshore in the Gulf
of Mexico and are subject to a variety of operating risks peculiar to the marine
environment, such as hurricanes or other adverse weather conditions, more
extensive governmental regulation, including regulations that may, in certain
circumstances, impose strict liability for pollution damage, and to interruption
or termination of operations by governmental authorities based on environmental
or other considerations. Several of Lomak's offshore properties have encountered
production shortfalls due primarily to mechanical problems. The mechanical
issues are currently being addressed by the operators. However, Lomak cannot
accurately predict when and if production will be returned to the original
levels.
TRANSPORTATION, PROCESSING AND MARKETING
Lomak's transportation, processing and marketing operations depend in large
part on the ability of Lomak to contract with third party producers to produce
their gas, to obtain sufficient volumes of committed natural gas reserves, to
maintain throughput in Lomak's processing plant at optimal levels, to replace
production from declining wells, to assess and respond to changing market
conditions in negotiating gas purchase and sale agreements and to obtain
satisfactory margins between the purchase price of its natural gas supply and
the sales price for such residual gas volumes and the natural gas liquids
processed. In addition, Lomak's operations are subject to changes in regulations
relating to gathering and marketing of oil and gas. The inability of Lomak to
attract new sources of third party natural gas or to promptly respond to
changing market conditions or regulations in connection with its gathering,
processing and marketing operations could materially adversely affect Lomak's
financial condition and results of operations.
LAWS AND REGULATIONS
Lomak's and Domain's operations are affected by extensive regulation
pursuant to various federal, state and local laws and regulations relating to
the exploration for and development, production, gathering, marketing,
transportation and storage of oil and gas. These regulations, among other
things, control the rate of oil and gas production, and control the amount of
oil that may be imported. Lomak's and Domain's operations are subject to
numerous laws and regulations governing plugging and abandonment, the discharge
of materials into the environment or otherwise relating to environmental
protection. These laws and regulations require the acquisition of a permit
before drilling commences, restrict the types, quantities and concentration of
various substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit drilling activities on
certain lands lying within wilderness, wetlands and other protected areas, and
impose substantial liabilities for pollution that might result from Lomak's and
Domain's operations. Lomak and Domain may also be subject to substantial
clean-up costs for any toxic or hazardous substance that may exist under any of
their properties. Moreover, the recent trend toward stricter standards in
environmental legislation and regulation is likely to continue. For instance,
legislation has been proposed in Congress from time to time that would
reclassify certain crude oil and natural gas exploration and production wastes
as "hazardous wastes," which would make the reclassified wastes subject to much
more stringent handling, disposal and clean-up requirements. If such legislation
were to be enacted, it could have a significant impact on the operating costs of
Lomak and Domain, as well as the oil and gas industry in general. Initiatives to
further regulate the disposal of crude oil and natural gas wastes are also
pending in certain states, and these various initiatives could have a similar
impact on Lomak and Domain. Lomak and Domain could incur substantial costs to
comply with environmental laws and regulations.
FOREIGN OPERATIONS
A portion of Domain's activities are conducted in Argentina, and it is
expected that Range will expand its international operations after the Effective
Time. Such activities are subject to the usual risks associated with foreign
operations, including political and economic uncertainties, risks of
cancellation or unilateral modifica-
26
<PAGE> 30
tion of agreements, operating restrictions, currency repatriation restrictions,
expropriation, export restrictions, the imposition of new taxes and the increase
of existing taxes, inflation, foreign exchange fluctuations and other risks
arising out of foreign government sovereignty over areas in which the operations
are conducted. Although Range will endeavor to protect itself against certain
political and commercial risks inherent in the venture, there is no certainty
that the steps taken by Range will provide adequate protection.
COMPETITION
Lomak and Domain encounter substantial competition in acquiring properties,
marketing oil and gas, securing equipment and personnel and operating their
respective properties. The competitors in acquisitions, development, exploration
and production include major oil companies, numerous independent oil and gas
companies, individual proprietors and others. Many of these competitors have
financial and other resources that substantially exceed those of Lomak and
Domain and have been engaged in the energy business for a much longer time than
Lomak and Domain. Therefore, competitors may be able to pay more for desirable
leases and to evaluate, bid for and purchase a greater number of properties or
prospects than the financial or personnel resources of Lomak and Domain will
permit.
GAS CONTRACT RISK
A significant portion of Lomak's production is subject to fixed price
contracts. Approximately 38% of average gas production at December 31, 1997 was
sold subject to fixed price sales contracts. These fixed price contracts are at
prices ranging from $2.10 to $4.34 per Mcf. The fixed price contracts with terms
of less than one year, between one and five years and greater than five years
constitute approximately 51%, 42% and 7%, respectively, of the volumes sold
under fixed price contracts. The fixed price sales contracts limit the benefits
Lomak will realize if actual prices rise above the contract prices.
From time to time, Lomak enters into oil and natural gas price hedges to
reduce its exposure to commodity price fluctuations. At December 31, 1997
approximately 12% of Lomak's existing market sensitive production was fixed
under hedging agreements which expire in 1998. Subsequent to December 31, 1997,
Lomak entered into additional hedging agreements which increased the percentage
of Lomak's existing market sensitive production covered by hedging arrangements
to 28%. In the future, Lomak may hedge a larger percentage of its production,
however, it currently anticipates that such percentage would not exceed 70%.
Although these hedging activities provide Lomak some protection against falling
prices, these activities also reduce the potential benefits to Lomak of price
increases above the levels of the hedges.
As part of the acquisition of oil and gas properties from American Cometra,
Inc. in the first quarter of 1997, Lomak acquired an above-market gas contract
with a major Texas gas utility company, which expires June 30, 2000. The
contract represents 16% of Lomak's 1997 gas production on an Mcf basis. The
price paid pursuant to the contract converts to a price of $3.73 per Mcf ($3.33
per Mmbtu) at December 31, 1997. The gas contract provides for a price
escalation of $0.05 per Mcf on July 1 of each year. No other purchaser of
Lomak's oil or gas during 1997 exceeded 10% of Lomak's total revenues.
In July 1997 the gas utility filed an action in state district court
regarding the gas contract. In the lawsuit, the gas utility asserted a breach of
contract claim arising out of the gas purchase contract. Under the gas utility's
interpretation of the contract it is seeking, as damages, the reimbursement of
the difference between the above-market contract price it paid and market price
on a portion of the gas it has taken beginning in July 1997. As of January 1998,
the utility alleged that it was entitled to receive approximately $2 million
plus attorneys' fees and that this amount will increase by the time the
proceedings are completed. Based on its interpretation of the contract, Lomak
counterclaimed seeking damages for breach of contract and repudiation of the
contract. In May 1998, the court granted a partial summary judgment on the
liability issue in favor of the gas utility's interpretation of the contract.
Lomak anticipates that the case will be scheduled for trial in early November
1998 to determine the amount of damages, if any. Lomak intends to defend the
damage claim and appeal the entire decision when a final judgment is entered.
Accordingly, no damage amounts have been included in Lomak's financial
statements.
27
<PAGE> 31
LOMAK
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents certain historical and pro forma financial
data. The selected consolidated financial data covers the five years ended
December 31, 1997, and the three months ended March 31, 1997 and 1998 and pro
forma financial information for the year ended December 31, 1997 and the three
months ended March 31, 1998. Such financial information has been derived from
the financial statements of Lomak. This data should be read in conjunction with
the consolidated financial statements of Lomak, the related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the reports incorporated herein by reference and the
Unaudited Pro Forma Combined Financial Information included herein. Neither the
historical nor the pro forma results are necessarily indicative of future
results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- --------- -----------
(UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales.................... $ 11,132 $ 24,461 $ 37,417 $ 68,054 $ 130,017 $194,094
Transportation, processing and
marketing.......................... 559 2,195 3,284 5,575 11,727 13,154
IPF income(a)........................ -- -- -- -- -- 4,779
Interest and other................... 418 471 1,317 3,386 7,594 9,510
-------- -------- -------- -------- --------- --------
12,109 27,127 42,018 77,015 149,338 221,537
Expenses:
Direct operating..................... 3,184 8,130 11,302 20,676 31,481 50,628
Transportation, processing and
marketing.......................... 13 490 849 1,674 3,921 4,690
Exploration.......................... 86 359 512 1,460 2,527 12,527
General and administrative........... 2,049 2,478 2,736 3,966 5,290 11,378
Stock compensation................... -- -- -- -- -- 4,787
Interest............................. 1,120 2,807 5,584 7,487 27,175 39,611
Depletion, depreciation and
amortization....................... 4,347 10,105 14,863 22,303 55,407 85,180
Provision for impairment............. -- -- -- -- 58,700 58,700
Minority interest.................... -- -- -- -- -- (42)
-------- -------- -------- -------- --------- --------
10,799 24,369 35,846 57,566 184,501 267,459
-------- -------- -------- -------- --------- --------
Income (loss) before taxes............. 1,310 2,758 6,172 19,449 (35,163) (45,922)
Income taxes........................... (81) 139 1,782 6,834 (11,831) (15,369)
-------- -------- -------- -------- --------- --------
Net income (loss)...................... $ 1,391 $ 2,619 $ 4,390 $ 12,615 $ (23,332) $(30,533)
======== ======== ======== ======== ========= ========
Earnings (loss) per common share:
Basic................................ $ 0.19 $ 0.25 $ 0.31 $ 0.71 $ (1.31) $ (0.92)
Dilutive............................. $ 0.18 $ 0.25 $ 0.31 $ 0.69 $ (1.31) $ (0.92)
Cash dividends per common share........ $ 0.00 $ 0.00 $ 0.01 $ 0.06 $ 0.10 $ 0.10
Weighted common shares outstanding --
diluted.............................. 5,853 9,051 11,841 14,812 19,641 35,888
OTHER FINANCIAL DATA:
EBITDA(b)............................ $ 6,863 $ 16,029 $ 27,131 $ 50,699 $ 108,646 $154,883
IPF return of capital(c)............. -- -- -- -- -- 12,109
EBITDA plus IPF return of capital.... 6,863 16,029 27,131 50,699 108,646 166,992
Net cash provided by operations...... 4,305 11,241 16,561 38,445 82,446 NA
Net cash used in investing........... (43,459) (29,536) (76,113) (69,666) (506,514) NA
Net cash provided by financing....... 38,912 21,173 57,702 36,799 425,168 NA
Capital expenditures................. 48,240 70,024 88,530 79,390 572,572 NA
SELECTED RATIOS:
EBITDA to interest expense........... 6.1x 5.7x 4.9x 6.8x 4.0x 3.9x
Earnings to fixed charges(d)......... 2.2x 2.0x 2.1x 3.6x (0.3x) (0.2x)
Debt to EBITDA(e).................... 4.5x 3.9x 3.1x 2.3x 3.4x NA
Debt to capitalization............... 49% 59% 46% 50% 54% NA
BALANCE SHEET DATA (END OF PERIOD):
Cash and equivalents................. $ 2,019 $ 4,897 $ 3,047 $ 8,625 $ 9,725 NA
Total assets......................... 76,333 141,768 214,788 282,547 764,213 NA
Long-term debt(f).................... 31,108 62,592 83,088 116,806 367,125 NA
Company-obligated Preferred
Securities of Subsidiary Trust..... -- -- -- -- 120,000 NA.......
Stockholders' equity................. 32,263 43,248 99,367 117,529 196,950 NA.......
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
(UNAUDITED) PRO
FORMA
1997 1998 1998
--------- ----------- ----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales.................... $ 34,338 $ 32,540 $ 47,658
Transportation, processing and
marketing.......................... 2,774 2,791 2,791
IPF income(a)........................ -- -- 1,958
Interest and other................... 638 1,741 (469)
--------- -------- ----------
37,750 37,072 51,938
Expenses:
Direct operating..................... 7,772 8,396 13,086
Transportation, processing and
marketing.......................... 869 1,062 1,062
Exploration.......................... 1,002 413 2,116
General and administrative........... 1,082 1,840 4,096
Stock compensation................... -- -- 289
Interest............................. 3,959 8,734 11,523
Depletion, depreciation and
amortization....................... 12,651 12,198 20,473
Provision for impairment............. -- -- --
Minority interest.................... -- -- (35)
--------- -------- ----------
27,335 32,643 52,610
--------- -------- ----------
Income (loss) before taxes............. 10,415 4,429 (672)
Income taxes........................... 3,853 1,660 (98)
--------- -------- ----------
Net income (loss)...................... $ 6,562 $ 2,769 $ (574)
========= ======== ==========
Earnings (loss) per common share:
Basic................................ $ 0.35 $ 0.10 $ (0.03)
Dilutive............................. $ 0.34 $ 0.10 $ (0.03)
Cash dividends per common share........ $ 0.02 $ 0.03 $ 0.03
Weighted common shares outstanding --
diluted.............................. 17,682 21,591 37,082
OTHER FINANCIAL DATA:
EBITDA(b)............................ $ 28,027 $ 25,774 $ 33,729
IPF return of capital(c)............. -- -- 4,557
EBITDA plus IPF return of capital.... 28,027 25,774 38,286
Net cash provided by operations...... 19,245 11,723 NA
Net cash used in investing........... (353,800) (61,142) NA
Net cash provided by financing....... 334,345 46,951 NA
Capital expenditures................. 393,680 77,636 NA
SELECTED RATIOS:
EBITDA to interest expense........... 7.1x 3.0x 2.9x
Earnings to fixed charges(d)......... 3.6x 1.5x 0.9x
Debt to EBITDA(e).................... 3.5x 4.0x 4.0x
Debt to capitalization............... 64% 57% 56%
BALANCE SHEET DATA (END OF PERIOD):
Cash and equivalents................. $ 8,415 $ 7,257 $ 15,506
Total assets......................... 667,522 800,252 1,060,420
Long-term debt(f).................... 390,254 414,933 539,718
Company-obligated Preferred
Securities of Subsidiary Trust..... -- 120,000 120,000
Stockholders' equity................. 218,146 199,058 295,928
</TABLE>
- ---------------
(a) IPF income for 1994, 1995 and 1996 also includes income from Domain's
"GasFund" partnership with a financial advisor. See "Business of
Domain--Independent Producer Finance Activities."
(b) EBITDA represents net income plus stock compensation expense, income taxes,
exploration expense, interest expense and depletion, depreciation,
amortization expense and provision for impairment. EBITDA is not presented
as an indicator of Lomak's operating performance, an indicator of cash
available for discretionary spending or as a measure of liquidity. EBITDA
may not be comparable to other similarly titled measures of other companies.
Lomak's credit agreement requires the maintenance of certain EBITDA ratios.
(c) To more accurately reflect the actual cash flows generated on a pro forma
basis, IPF return of capital is identified separately to allow such cash
receipts to be combined with EBITDA.
(d) For the purpose of determining the ratio of earnings to fixed charges,
earnings are defined as income before taxes plus fixed charges. Fixed
charges consist of interest expense.
(e) EBITDA for the historical and pro forma three-month periods presented has
been annualized.
(f) Long-term debt includes current portion.
28
<PAGE> 32
THE COMPANIES
LOMAK PETROLEUM, INC.
Lomak is an independent energy company engaged in oil and gas development,
exploration and acquisition primarily in four core areas: the Permian,
Midcontinent, Gulf Coast, and Appalachia regions. Over the past seven years,
Lomak has significantly increased its reserves and production through
acquisitions and the development and exploration of its properties. At December
31, 1997, Lomak had proved reserves of 753 Bcfe with a Present Value of $632
million. On an Mcfe basis, the reserves were 76% natural gas, with a reserve
life index in excess of 15 years. Properties operated by Lomak account for 98%
of its total reserves. Lomak's leasehold position contains 1.2 million gross
acres. Lomak also owns over 3,000 miles of gas gathering systems and a gas
processing plant in proximity to its principal gas properties.
BUSINESS STRATEGY
Lomak's objective is to maximize stockholder value through aggressive
growth in its reserves, production, cash flow and earnings through a balanced
program of development and exploratory drilling and strategic acquisitions.
Management believes that the acquisitions completed since 1990 have
substantially enhanced Lomak's ability to increase its production and reserves
through the ongoing development of the acquired properties. Lomak now has over
1,600 proven recompletion and development drilling projects. With its large
development inventory and expanding exploration effort, Lomak believes that it
can continue to grow its reserves, production, cash flow and earnings over the
next several years without the benefit of future acquisitions. Lomak currently
anticipates spending approximately $300 million during the next three years on
the development and exploration activities. Consequently, while acquisitions are
expected to continue to play an important role in its future growth, Lomak will
also focus on exploiting the potential of its larger property base. Lomak's
leasehold now totals approximately 1.2 million gross acres (1.0 million net
acres), providing significant long-term development and exploration potential.
In order to most effectively implement its operating strategy, Lomak has
concentrated its activities in selected geographic areas. In each core area,
Lomak has established separate business units, each with operating, engineering,
geological, land, acquisition and other personnel experienced in their
respective areas. Lomak believes that this geographic focus provides it with a
competitive advantage in sourcing and evaluating new business opportunities
within these areas, as well as providing economies of scale in operating and
developing its properties.
DEVELOPMENT
Lomak's development activities include recompletions of existing wells,
infill drilling and installation of secondary recovery projects. Development
projects are generated within core operating areas where Lomak has significant
operational and technical experience. At December 31, 1997, over 1,600 proven
development projects were in inventory. Over 360 of these projects are
anticipated to be initiated in 1998 at a total cost of $77 million. Based on the
projects currently in inventory, development expenditures are currently
projected to total $250 million for the next three years.
EXPLORATION
Beginning in 1996, Lomak began to conduct exploration activities on or near
existing properties within its core operating areas. Lomak currently has an
inventory of 13 multi-prospect, higher risk, higher reward exploration projects.
Each of the exploration projects includes multiple drilling prospects. Lomak's
exploration program targets deeper horizons within existing Lomak-operated
fields, as well as establishing new fields in exploration trend areas in which
Lomak's technical staff has experience. Lomak's strategy is based upon limiting
its risk by allocating no more than 10% of its cash flow to exploration
activities and by participating in a variety of projects with differing
characteristics. Lomak projects exploratory expenditures to range between $8
million and $10 million in 1998.
29
<PAGE> 33
ACQUISITIONS
Since 1990, 68 acquisitions have been completed for a total consideration
of $808 million. These acquisitions have been made at an average cost of $0.70
per Mcfe. Lomak's acquisition strategy has historically been based on: (i)
Locale: focusing for proved reserves in core areas where Lomak has operating and
technical expertise; (ii) Efficiency: targeting acquisitions in which operating
and cost efficiencies can be obtained; (iii) Reserve Potential: pursuing
properties with the potential for reserve increases through recompletions and
drilling; (iv) Incremental Purchases: seeking acquisitions where opportunities
for purchasing additional interests in the same or adjoining properties exist;
and (v) Complexity: pursuing more complex but less competitive corporate
acquisitions.
MERGER SUB
Merger Sub is a wholly owned subsidiary of Lomak incorporated on May 8,
1998 in the State of Delaware for the sole purpose of effecting the Merger.
Merger Sub presently conducts no business and has no material assets or
liabilities.
DOMAIN ENERGY CORPORATION
GENERAL DEVELOPMENT OF BUSINESS
Domain is an independent oil and gas company engaged in the exploration,
development, production and acquisition of oil and natural gas properties.
Domain complements these activities with the IPF Program, pursuant to which it
invests in oil and natural gas reserves through the acquisition of term
overriding royalty interests. Domain's oil and gas operations are concentrated
primarily in the Gulf Coast region (which includes the shallow waters of the
Gulf of Mexico). Domain has grown rapidly from 12.6 Bcfe of proved reserves at
December 31, 1993 to 173 Bcfe of proved reserves at December 31, 1997, with a
Present Value of $148.8 million. Domain has an active exploration program
supported primarily by a 3D seismic database of 700 blocks (approximately 5,500
square miles) in the shallow waters of the Gulf of Mexico and more than 150,000
gross acres in southern Mississippi with respect to which 3D seismic is
currently being acquired. In addition, Domain is the 50% owner of Domain
Argentina, S.A., which has recently been awarded, pending a Presidential decree,
two Argentine concessions totaling approximately 1.2 million acres. The IPF
Program has expanded rapidly since 1994 and has a cost basis of $52 million,
representing aggregate Present Value of $63 million and proved reserves of
approximately 34 Bcfe. In addition, Domain is currently evaluating approximately
$50 million of new transactions.
Domain was formed in December 1996 and incorporated in the state of
Delaware by the management of Tenneco Ventures Corporation and FRLP to acquire
(the "Acquisition") Tenneco Ventures Corporation and certain of its affiliates
(collectively, "Tenneco Ventures"). Senior management of Domain established
Tenneco Ventures in 1992 as a separate business unit of its former parent,
Tenneco Inc. ("Tenneco"), to engage in exploration and production, oil and gas
program management, producer financing and related activities. The majority of
Domain's executive officers are veterans of the Tenneco organization.
In June 1997 Domain completed an initial public offering of its Common
Stock (the "IPO"), generating net proceeds of $88 million, $29 million of which
were used to fund an acquisition (the "Funds Acquisition") of oil and gas
property interests from the participants in two investment programs formerly
managed by Tenneco Ventures and $56 million of which were used to repay a
substantial portion of the bank debt incurred to finance the Acquisition.
GEOGRAPHIC FOCUS
Domain concentrates its primary oil and gas activities in the Gulf Coast
region, specifically in state and federal waters off the coasts of Texas and
Louisiana. Domain believes this region is attractive for future development,
exploration and acquisition activities due to the availability of seismic data,
significant reserve potential and a well-developed infrastructure. Domain's
relationships with major oil companies and independent producers operating in
the region allow continued access to new opportunities. This geographic focus
has
30
<PAGE> 34
enabled Domain to build and utilize a base of region-specific geological,
geophysical, engineering and production expertise. Domain engages in IPF Program
activities throughout the producing regions of the United States, with a
principal geographic focus in the Gulf Coast region.
ACQUISITION/EXPLOITATION/DEVELOPMENT OF PROPERTIES WITH UNDEREXPLOITED VALUE
Domain employs an acquisition strategy targeted primarily at properties
with underexploited value in its core operating area. Since 1993 Domain has
acquired 216 Bcfe of proved reserves at a cost of approximately $126 million. In
1998, Domain has made three separate acquisitions totaling 26 Bcfe for $15
million. Domain manages its acquired properties by working proactively with its
joint interest owners to accelerate development, identify exploitation
opportunities and implement cost controls on these properties.
Domain has assembled an experienced staff of 15 geologists, geophysicists,
and engineers with an average experience level of 21 years. Domain combines
operation of its eight 3D seismic workstations on its large 3D seismic database
with detailed geology, reservoir engineering and production engineering to
exploit its property base. Based on this work, Domain has assembled a multi-year
inventory of development, exploitation, and exploration opportunities, including
40 in 1998 and 45 in 1999.
EXPLORATION FOCUS
In 1997, Domain acquired Gulfstar Energy, Inc. ("Gulfstar") and Mid Gulf
Drilling Corp., together, the "Gulfstar Acquisition," each of which was an
indirect subsidiary of Enron Corp. This acquisition enabled Domain to expand its
exploration efforts in the shallow waters of the Gulf of Mexico as a result of
the 700 blocks (5,500 square miles) of 3D seismic data owned by Gulfstar and an
industry partner. Domain has identified 93 exploration prospects and expects to
drill four to six exploratory wells in 1998 utilizing this data. Domain also is
a joint venturer in a prospect in southern Mississippi covering more than
150,000 acres of leasehold. A 3D seismic program is currently being planned for
this summer. Domain expects to spud the first well in late 1998 or early 1999.
CONTINUED EXPANSION OF THE IPF PROGRAM
Domain has leveraged its expertise in oil and gas reserve appraisal and
evaluation to develop and grow the IPF Program. Domain believes this program
offers an attractive risk/reward balance and stable earnings. The oil and gas
companies that establish a relationship with Domain through the IPF Program
often come to view Domain as a prospective working interest partner for their
drilling or acquisition projects. Domain's staff of five geologists and
engineers (two with MBAs), with an average experience level of 17 years,
originates and evaluates IPF transactions and manages the IPF portfolio.
Management believes that the investment opportunities, market information and
business relationships generated as a result of the IPF Program provide Domain
with a strategic advantage over other independent oil and gas companies that are
not engaged in this business. As a result of Domain's efficiency in originating
and closing IPF Program transactions in the $0.5 to $5.0 million range, Domain
currently encounters only limited competition from alternate sources of capital
for investment in quality properties and projects of independent oil and gas
companies.
OIL AND GAS ASSETS
As of December 31, 1997, Domain had proved reserves of approximately 173
Bcfe, and its average daily production during 1997 was 54.3 Mmcfe. Approximately
61% of these reserves were natural gas, and approximately 44% of proved reserves
were classified as proved developed producing. As of December 31, 1997, Domain
had a Present Value of $148.8 million, which does not include reserve value
attributable to the IPF Program. As of December 31, 1997, Domain had
transactions outstanding under the IPF Program of $49.8 million representing
aggregate Present Value of $61.8 million and proved reserves of approximately 30
Bcfe. Domain incurred capital expenditures of $131.2 million in 1997, including
$40.2 million for investments in the IPF Program.
31
<PAGE> 35
CERTAIN PROJECTIONS
During the course of the discussions between Lomak and Domain that led to
the execution of the Merger Agreement, Domain provided Lomak with certain
information about Domain and its financial performance that is not publicly
available. The information provided to Lomak and its advisors included financial
forecasts for Domain as an independent company (i.e., without regard to the
impact to Domain of a transaction with Lomak), which included the following:
forecasts of production, revenues and cash flows of approximately 28.6 Bcfe, $74
million and $50 million, respectively, for fiscal 1998. The foregoing
information was prepared by Domain solely for internal use and not for
publication or with a view to complying with the published guidelines of the
Commission regarding projections or with the guidelines established by the
American Institute of Certified Public Accountants and is included in this Proxy
Statement/Prospectus only because it was furnished to Lomak. The foregoing
information is "forward-looking" and inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of Domain.
Although Domain believes that such forward-looking statements are based on
reasonable assumptions, it can give no assurance that the assumptions made in
preparing the foregoing information will be accurate. Important factors that
could cause actual results to differ materially from those in such
forward-looking statements include political and economic developments in the
United States and/or foreign countries, federal and state regulatory
requirements, the timing and extent of changes in commodity prices, the extent
of success in acquiring oil and gas properties and in discovering, developing
and producing reserves, and conditions of the capital markets and equity markets
during the periods covered by the forward-looking statements. The inclusion of
this information should not be regarded as an indication that Lomak, Domain or
anyone who received this information considered it a reliable predictor of
future events, and this information should not be relied on as such. Neither of
Lomak or Domain assumes any responsibility for the validity, reasonableness,
accuracy or completeness of the forecasts, and Domain has made no representation
to Lomak regarding the financial information described above.
32
<PAGE> 36
POST-MERGER PROFILE AND STRATEGY
RANGE RESOURCES CORPORATION
Range Resources Corporation will be formed through the combination of two
of the fastest growing companies in the oil and gas industry. From inception,
Range will be one of the twenty largest publicly traded independent oil and gas
companies in the United States. Range will have a long-lived, high margin asset
base of nearly a trillion cubic feet of natural gas equivalents, a development
inventory of over 1,700 proven projects, a diversified portfolio of domestic
onshore and Gulf of Mexico exploration projects and an emerging international
effort. This blend of long-lived reserves, extensive development inventory and
high potential exploration provides a unique platform on which to build
stockholder value. Range will operate through six distinct business units, led
by experienced technical and operating teams including over 50 petroleum
engineers and geoscientists. Management's substantial ownership of Range stock
will align its interests with those of the stockholders.
STRATEGY AND GROWTH OPPORTUNITIES
Range's objective will be to create stockholder value through a balanced
strategy that combines lower risk, steady growth activities with higher risk,
high impact activities. Ongoing development, the Independent Producer Finance
business ("IPF") and transportation, processing and marketing activities are
expected to provide consistent cash flow and growth. Domestic onshore
exploration, Gulf of Mexico exploration and international activities will
provide opportunities to dramatically increase reserves and production at low
finding costs.
CORE GROWTH AND STABLE CASH FLOW
- - Range will have over 1,700 development projects, consisting of proven drilling
locations and recompletion opportunities. More than 85% of these projects are
concentrated in nine fields covering 587,000 gross acres. Such large acreage
blocks and concentration of projects provide economies of scale, access to
competitively priced oilfield services and focused operating and technological
expertise.
- - Through IPF, Range will provide capital to small producers to fund acquisition
and development projects. In 1997, IPF generated $15 million of cash flow. The
IPF portfolio had a cost basis of $52 million with a Present Value of $63
million at March 31, 1998. IPF's goal is to expand its portfolio to over $200
million in three to five years.
- - Range will generate incremental cash flow by transporting, processing and
marketing production from its properties. Range's transportation assets
include approximately 3,000 miles of gas gathering and pipelines and a 25,000
Mcfd gas processing plant. These activities generated $8 million of cash flow
in 1997.
HIGH IMPACT EXPOSURE
- - Range will have active domestic onshore exploration projects covering 578,000
gross acres. These projects are well distributed among the Permian, Gulf
Coast, Midcontinent and Appalachia business units. Target depths range from
4,500 to 18,000 feet, and the projects offer the potential to add
substantially to proved reserves and production. Range expects to initiate six
3D seismic surveys and to spud 18 exploration wells on its existing projects
by year-end.
- - Range's offshore exploration program will focus on its 3.5 million acres of
contiguous 3D seismic data in the shallow waters of the Gulf of Mexico. There
are 33 identified prospects on this acreage, and Range will have leases
covering 112,000 gross acres on 24 of these prospects. Range expects to test
four to six of these prospects by year-end.
- - Through a 50%-owned subsidiary, Range will have the opportunity to explore and
develop 1.2 million gross acres in Argentina. This acreage has recently been
awarded, pending a Presidential decree. On this acreage, 25 potential
prospects have already been identified. The award entails a commitment for
Range to spend
33
<PAGE> 37
approximately $2.5 million, net to its interest, to shoot 70 square miles of
3D seismic data and drill four exploratory wells by 2001.
RESERVES AND PRODUCTION
- - Range will have pro forma combined proved reserves as of December 31, 1997
totaling 960 Bcfe, including 694 Bcf of gas and 44 Mmbbl of oil and NGL, with
a Present Value of approximately $836 million.
- - Range's daily production immediately upon completion of the Merger is expected
to exceed 210 Mmcfe, comprised of 162 Mmcf of gas and 8,100 Bbl of oil and
NGL. Approximately 77% of daily production is estimated to be natural gas.
- - Range's reserve life will be 12.8 years. The benefits of long-lived reserves
include minimizing the impact of short-term commodity price volatility and
reducing reinvestment risk.
- - Range will operate over 80% of its proved reserves, providing substantial
control over the timing, expense and manner of the exploitation of its
properties.
RANGE
SUMMARY COMBINED RESERVE AND OPERATING DATA
The following table combines certain historical and pro forma information
of Lomak and Domain with respect to production and estimated proved oil and gas
reserves.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
PRO FORMA
1995 1996 1997 1997(A)
-------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
PROVED RESERVES:
Natural gas (Mmcf).......................... 315,569 376,932 679,366 693,867
Oil and NGL (Mbbls)......................... 13,060 26,055 41,124 44,315
Natural gas equivalents (Mmcfe)............. 393,930 533,260 926,111 959,750
Percent natural gas......................... 80% 71% 73% 72%
Percent proved developed.................... 77% 76% 62% 61%
PRODUCTION VOLUMES:
Natural gas (Mmcf).......................... 30,536 42,423 54,341 59,466
Oil and NGL (Mbbls)......................... 1,337 1,632 2,440 2,591
Natural gas equivalents (Mmcfe)............. 38,558 52,216 68,981 75,014
PRODUCT PRICES (AT DECEMBER 31):
Natural gas (per Mcf)....................... $ 2.52 $ 3.48 $ 2.74 $ 2.75
Oil and NGL (per Bbl)....................... 18.24 23.11 15.69 16.21
FUTURE NET CASH FLOWS:
Undiscounted................................ $541,572 $1,127,821 $1,486,399 $1,570,031
Present Value............................... 333,169 640,009 781,125 836,452
</TABLE>
- ---------------
(a) Pro forma data reflect Lomak's and Domain's acquisition and disposition
activity that occurred subsequent to December 31, 1997. Includes amounts
related to an above-market gas contract. See "Risk Factors -- Gas Contract
Risk." Proved reserves and future net cash flows were estimated in
accordance with the Commission's guidelines. Prices and costs at December 31
for each of the years 1995 through 1997 were used in the calculation of
proved reserves and future net cash flows and were held constant through the
periods of estimated production, except as otherwise provided by contract,
in accordance with the Commission's guidelines.
ACREAGE AND PRODUCING WELLS
Range's acreage position will cover 1,679,655 gross (1,105,279 net) acres
in the U.S and 1,188,000 million gross (594,000 net) acres in Argentina. The
recent award of the Argentine acreage is subject to
34
<PAGE> 38
Presidential decree. Of this leasehold, 1,845,132 gross acres are undeveloped,
including 657,132 acres in the U.S. and all of the Argentine acreage. The
majority of Range's production will come from depths of less than 10,000 feet.
Through continued exploration using advanced technology, as well as focusing on
deeper horizons, Range expects to have substantial potential for future
additions to reserves and production on this acreage.
The following tables combine certain historical and pro forma data for
Lomak and Domain, with respect to developed and undeveloped domestic acreage and
producing wells as of December 31, 1997.
DOMESTIC ACREAGE
<TABLE>
<CAPTION>
COMBINED
--------------------------------------------------------
TOTAL ACREAGE
---------------------- DEVELOPED UNDEVELOPED
(GROSS) (NET) ACREAGE (NET) ACREAGE (NET)
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Onshore:
Alabama................................. 1,291 349 349 --
Louisiana............................... 57,653 14,125 6,048 8,077
Michigan................................ 15,090 13,601 60 13,541
Mississippi............................. 3,485 808 581 227
New Mexico.............................. 26,763 10,999 797 10,202
New York................................ 93,600 87,900 78,200 9,700
Ohio.................................... 187,800 169,200 61,400 107,800
Oklahoma................................ 174,500 109,100 55,300 53,800
Pennsylvania............................ 469,000 372,600 266,400 106,200
Texas................................... 324,870 212,837 134,526 78,311
West Virginia........................... 24,700 14,400 5,400 9,000
--------- --------- ------- -------
Total Onshore........................... 1,378,752 1,005,919 609,061 396,858
--------- --------- ------- -------
Offshore:
Alabama................................. 23,040 7,407 7,407 --
Louisiana............................... 164,368 61,012 32,431 28,581
Texas................................... 113,495 30,941 23,961 6,980
--------- --------- ------- -------
Total Offshore.......................... 300,903 99,360 63,799 35,561
--------- --------- ------- -------
Total..................................... 1,679,655 1,105,279 672,860 432,419
========= ========= ======= =======
</TABLE>
PRODUCING WELLS
<TABLE>
<CAPTION>
COMBINED
-------------------------------------------
AVERAGE WORKING
GROSS WELLS NET WELLS INTEREST
----------- --------- ---------------
<S> <C> <C> <C>
Crude oil............................................. 2,580 1,112 43%
Natural gas........................................... 6,790 5,485 81%
----- -----
Total....................................... 9,370 6,597 70%
===== =====
</TABLE>
MANAGEMENT AND TECHNICAL EXPERTISE
- - Range will conduct its operations through six independent business units, each
staffed with experienced technical, operating and management personnel. The
six units will be: Permian, Gulf Coast, Midcontinent, Appalachia,
International and IPF. Where Lomak and Domain own assets in overlapping
geographical areas, those assets will be consolidated into a single unit,
improving operational efficiency.
- - Range will have a technical staff of 54 petroleum engineers, geologists and
geophysicists, with an average of 20 years of experience. These personnel will
provide each business unit with the expertise with which to execute the
efficient development of existing assets, as well as the pursuit of additional
opportunities in the
35
<PAGE> 39
form of exploration and acquisitions. Range's technical staff applies the
latest technological innovations, including 3D seismic, horizontal and
directional drilling, advanced completion techniques and extensive reservoir
engineering studies to reduce finding costs and maximize ultimate reserve
recovery.
- - Upon completion of the Merger, directors and executive officers of Range are
expected to beneficially own approximately 8% of Range's outstanding common
stock. This substantial ownership position will align the interests of
management with those of the stockholders.
DEVELOPMENT
Range will have over 1,700 development projects, consisting of proven
drilling locations and recompletion opportunities. This inventory represents
approximately five years of development activity based on currently anticipated
levels of capital spending. Completion of these development projects is expected
to allow Range to increase its base production volumes during the same time
period.
MAJOR DEVELOPMENT PROJECTS
The following table sets forth Range's major development projects on a pro
forma combined basis at December 31, 1997.
<TABLE>
<CAPTION>
AVERAGE
GROSS WORKING AVERAGE TARGET PROVEN
REGION ACREAGE INTEREST(A) DEPTH FORMATIONS PROJECTS
------------ ------- ----------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Meadville................. Appalachia 390,000 86% 5,500 Medina 582
Sonora.................... Permian 55,000 87% 5,000 Canyon, Cisco 322
Fuhrman-Mascho............ Permian 13,600 89% 4,400 San Andres 205
Sterling.................. Permian 47,000 85% 8,000 Canyon 173
Okeene.................... Midcontinent 45,000 85% 8,000 Red Fork 98
Big Lake.................. Permian 7,700 100% 2,500 San Andres 76
Wasson.................... Permian 1,900 35% 5,500 San Andres 40
Alta Mesa................. Gulf Coast 12,500 100% 6,800 Vicksburg 20
Powell Ranch.............. Permian 14,200 60% 8,000 Wolfcamp 13
</TABLE>
- ---------------
(a) The weighted average working interest for each project, based on total
acreage.
Of the development projects in inventory, over 1,500, or 88% of the total,
are concentrated in nine fields covering 587,000 gross acres in the Permian,
Gulf Coast, Midcontinent and Appalachian regions. Such large acreage blocks and
concentration of projects provide economies of scale and advantages in obtaining
oilfield services at competitive prices. In addition, the repetitive nature of
these large development programs allows Range's employees and service providers
to acquire and maintain geological, drilling, completion, operating and
technological expertise specific to these fields.
INDEPENDENT PRODUCER FINANCE
IPF provides capital to small oil and gas producers to finance specifically
identified acquisition and development projects. IPF advances money to producers
in exchange for a term overriding royalty interest in their properties. The
overrides are dollar-denominated and are calculated to provide IPF with a
contractually specified rate of return. The present IPF portfolio is projected
to generate an average return of 19%. IPF funds its business with a combination
of internally generated cash and borrowings under a bank credit facility. The
portfolio had a cost basis of $52 million with a Present Value of $63 million at
March 31, 1998, and underlying oil and gas reserves of 34 Bcfe. The IPF reserves
and Present Value are not included in Range's consolidated results. In 1997, IPF
generated $15 million of cash flow.
IPF is staffed with six petroleum engineers and geologists who identify and
evaluate each project. These professionals are responsible for defining
transaction risk, establishing reserve coverage and negotiating the contractual
rate of return. The transactions are structured to minimize risk by targeting an
asset coverage ratio
36
<PAGE> 40
of two-to-one on proved reserves and taking direct title to the overriding
royalty interests to mitigate bankruptcy risk. As dollar-denominated overrides,
the transactions leave the majority of the commodity price risk with the
producer.
IPF has established a unique niche in the marketplace, providing capital to
small oil and gas producers who are generally ignored by traditional financial
institutions. IPF is a leader in this niche market, and has doubled its
portfolio each year since 1993 despite its limited geographic scope, transaction
size and marketing effort. Range intends to expand IPF's scope to the Permian,
Midcontinent and Appalachian regions. Range expects demand for IPF funding to
increase, as oil and gas acquisition and divestiture activities continue and
consolidation of the banking industry reduces the supply of traditional bank
financing for small transactions. With an expanded marketing effort and the
pursuit of larger transactions, IPF's goal is to grow its portfolio to over $200
million in three to five years.
TRANSPORTATION, PROCESSING AND MARKETING
Range will generate incremental cash flows through the transportation,
processing and marketing of production from certain of its properties and
through providing these services to third parties. During 1997, these activities
generated $8 million of cash flow.
Range's natural gas transportation and processing assets will include
approximately 2,700 miles of gas gathering and pipelines in Appalachia and
nearly 300 miles of gathering lines in the Sterling area of the Permian Basin.
The Appalachian gas gathering systems will transport a majority of Range's
Appalachian gas production as well as third party gas to major trunklines and
directly to end-users. This system affords Range considerable control and
flexibility in marketing its Appalachian production. Range will charge fees to
third parties that transport their gas through the systems, based on throughput.
The Sterling gas processing plant is a refrigerated turbo-expander cryogenic gas
plant placed in service in 1995. The plant, designed for 25,000 Mcfd throughput,
is currently operating at approximately 75% of capacity. The plant's capacity
can be increased to 35,000 Mcfd with an estimated $4 million of capital
expenditures.
In order to maximize prices and better control credit risk, Lomak has
marketed its own gas production since 1993. After completion of the Merger,
Range initially will market all of the gas produced from properties presently
owned by Lomak, as well as third party gas production. Range will sell its
marketed volumes primarily to utilities and directly to end-users. Range will
manage the impact of potential gas price declines by developing a balanced
portfolio of fixed price and market sensitive contracts and commodity hedging.
GULF OF MEXICO EXPLORATION
Range will have a 3D seismic database covering 700 contiguous blocks in the
shallow waters of the Gulf of Mexico, primarily offshore Louisiana. Domain has
used this data to map geological trends within this 3.5 million acre area,
identifying specific targets for further exploration. To date, 33 prospects have
been identified, four to six of which Range plans to test by year-end 1998.
These wells will be drilled to Miocene targets at depths of 10,000 to 12,000
feet.
DOMESTIC ONSHORE EXPLORATION
Range will have active onshore exploration projects covering 578,000 acres,
including two projects in the Permian Basin, three in the Gulf Coast, one in the
Midcontinent and two in Appalachia. Each project has multiple drilling
prospects, some with multiple targets.
37
<PAGE> 41
ACTIVE DOMESTIC ONSHORE EXPLORATION PROJECTS
The following table sets forth Range's currently active onshore exploration
projects.
<TABLE>
<CAPTION>
AVERAGE
GROSS WORKING TARGET
PROJECT REGION ACREAGE INTEREST(A) DEPTH FORMATIONS
- ------- ------------ ------- ----------- ------ --------------------
<S> <C> <C> <C> <C> <C>
East Fork................... Permian 70,000 50% 10,000 Ellenburger, Strawn
Detrital, Canyon
Northwest Belize............ Permian Leasing 50% 4,500 Canyon Reefs
Jericho..................... Gulf Coast 150,000 13% 18,000 Haynesville
Hartburg.................... Gulf Coast 27,800 46% 12,000 Hartburg Frio
Constitution................ Gulf Coast 4,500 15% 15,000 Yegua
Panhandle................... Midcontinent 29,900 53% 14,500 Hunton, Morrow
Niagara..................... Appalachia 16,000 75% 4,500 Niagaran Reefs
Knox/Oriskany............... Appalachia 280,000 47% 8,000 Knox Trend, Oriskany
</TABLE>
- ---------------
(a) The weighted average working interest for each project, based on total
acreage.
The highest potential of Range's domestic onshore exploration projects,
East Fork consists of 70,000 leasehold acres in the Val Verde Basin of West
Texas, focused on upthrown fault blocks in the Ellenburger formation. Range
expects to use horizontal drilling technology to test the first of these fault
blocks in early 1999. Range intends to recoup its leasing costs and fund the
drilling of an initial well through the sale of approximately 50% of the working
interest in this project. Secondary targets in the Canyon sand and Strawn
detrital formations may also be tested with separate wells to be drilled in the
first half of 1999.
The Northwest Belize joint venture targets Canyon reef oil fields in a 250
mile trend on the Eastern Shelf of the Permian Basin. Range's partner, an
experienced private independent based in Midland, Texas, has identified nine
prospects within this trend. The joint venture will use an extensive library of
well log data to focus 3D data acquisition in discrete prospect areas. This
focused approach aims to cut finding costs by limiting expensive seismic
acquisition to only the most prospective areas. Range expects to shoot 3D
seismic in the third quarter of 1998, with the first two test wells to spud in
the fourth quarter.
In the third quarter of 1998, Range will begin shooting 70 square miles of
3D seismic data on its 150,000 acre Jericho project in southern Mississippi. The
Jericho project targets 90 identified 2D seismic anomalies in the Haynesville
and Cotton Valley formations at approximately 18,000-foot depths. Range plans an
initial test of the Jericho project in early 1999.
On the Gulf Coast of Texas and Louisiana, three distinct prospects comprise
the 27,800 acre Hartburg project. The project targets 10,000 to 12,000 foot deep
Hartburg Frio sands on the shoulders of salt domes, with secondary Yegua
targets. Range will shoot additional 3D data on the Gum Gully prospect in 1998
or early 1999, supplementing the data already purchased. At the Starks prospect,
Range plans to shoot 3D seismic and spud an initial exploratory well by year-end
1998. Range expects to lease additional acreage and shoot 3D seismic at its Pine
Ridge prospect in the second and third quarters of 1998. If successful, these
prospects could likely be replicated in an ongoing Hartburg program.
Venus Exploration, Inc., a 21% owned affiliate of Range, recently drilled
the 15,000 foot Westbury Farms well in the Constitution Field. This
redevelopment of an old Gulf Coast field entails the drilling of new wells to
test Yegua, Wilcox and Frio zones undrained by previous producers. Range has a
15% working interest in the property, along with its equity ownership in Venus,
the operator. The well tested at rates over 4,000 Mcfed, and awaits connection
to a sales line to begin production. Venus plans to shoot 3D seismic and drill
at least one additional well during 1998 on the Constitution acreage.
Range's Panhandle project covers 29,900 acres in the Texas Panhandle and
adjacent areas of Oklahoma. Primary targets are Hunton structures at depths up
to 14,500 feet. At least five analogous nearby fields have produced in excess of
100 Bcfe. This ongoing project utilizes 3D seismic to identify specific Hunton
targets, as
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well as secondary targets in multiple Morrow sands. Range expects to drill two
wells in the Panhandle before year-end.
Range's Niagara project focuses on the Northern Reef producing trend in
western Michigan. In 1997, Domain drilled two Niagara reef wells that tested a
combined 18,000 Mcfed. These wells are awaiting construction of a pipeline
extension, expected to be completed in the third quarter of 1998. After
evaluating initial production from these two wells, Range expects to drill up to
four additional wells on nearby acreage in 1998.
In Appalachia, Range will have over 280,000 gross acres prospective in the
Knox Trend and Oriskany formations at depths of approximately 8,000 feet. In
1998, Range will participate in 17 exploratory wells, including 15 Knox tests
and two Oriskany wells, with an average working interest of 40%. Of the seven
wells drilled so far in 1998, six have been successful. Range will continue to
leverage its extensive acreage position by allowing other independents to earn
working interests in its prospects by shooting seismic on Range acreage.
In addition to the above mentioned projects, several additional projects
are in earlier stages of negotiation or progress. In the Midcontinent region,
Range will have accumulated 2,500 acres of leases and seismic options on its
17,000-acre Thunderbird project. Thunderbird targets Simpson sands at an average
depth of 7,000 feet, with several secondary target formations. Range plans to
begin shooting seismic surveys and test several targets during 1999.
In the Gulf Coast, Range will hold acreage by production on which it has
identified at least five additional prospects or leads. Each of these prospects
is in various stages of early activity, with leasing or seismic planned during
1998 and drilling anticipated in 1999.
Through its equity ownership in Venus Exploration, Inc, Range will
participate in an ongoing exploration effort focused on the Expanded Yegua trend
of Texas and Louisiana and in the Permian Basin of West Texas. The Venus
technical team's accomplishments include discovery of the Vidor-Ames Expanded
Yegua field with cumulative production exceeding 110 Bcfe. Venus expects to
drill nine exploratory wells in 1998. In addition to its equity participation,
Range may have the opportunity to take working interests in certain of Venus's
current and future projects.
In the third quarter, Range hopes to finalize an Appalachian joint venture
to shoot 3D and 2D seismic over 175,000 acres in Ohio and Pennsylvania. Based on
preliminary terms, Range will contribute acreage for a 31% working interest,
while two other large independents will contribute acreage or shoot seismic to
earn the remaining interests. Range expects to analyze the seismic to be shot by
its partners during the remainder of 1998, in anticipation of an active drilling
program in 1999. Range will retain its full interest in approximately 50,000
acres outside but adjacent to the joint venture area.
INTERNATIONAL
Through a 50%-owned subsidiary, Range will have the opportunity to explore
and develop two concessions totaling 1.2 million gross acres in Argentina, on
which 25 potential prospects have been identified. This acreage has recently
been awarded, pending a Presidential decree. The concessions are located in
prolific producing regions and one directly offsets a producing field. The award
entails a commitment by Range to spend approximately $2.5 million, net to its
interest, to reprocess 125 miles of 2D seismic data, shoot 70 square miles of 3D
seismic data and drill four exploratory wells on this acreage by 2001.
Range will have a management and technical team with experience in South
America, as well as in Eastern Europe, Australia, West Africa and Southeast
Asia. Range's partners in its Argentine venture have extensive experience and
contacts throughout South America, and in Argentina in particular. Range will
have an engineering and geological staff in Argentina with an average of 25
years of experience.
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Range targets South America as its platform for international exploration
and production activities. Certain South American and other foreign countries
offer opportunities to gain access to large acreage positions in known producing
basins with substantial exploration upside. Range will pursue a balanced mix of
exploration, development and production activities.
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LOMAK SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE LOMAK SPECIAL MEETING
Record Date; Stock Entitled to Vote; Quorum. Only holders of record of
Lomak Common Stock and Lomak Preferred Stock at the close of business on the
Record Date (June 26, 1998) will be entitled to receive notice of and to vote at
the Lomak Special Meeting. On the Record Date, there were 22,115,953 shares of
Lomak Common Stock and 1,149,840 shares of Lomak Preferred Stock outstanding.
The holders of Lomak Voting Stock are entitled to one vote per share on each
matter submitted to a vote at the Lomak Special Meeting. The holders of a
majority of the outstanding shares of Lomak Voting Stock entitled to vote must
be present in person or by proxy at the Lomak Special Meeting in order for a
quorum to be present. Shares of Lomak Voting Stock represented by proxies that
are marked "abstain" or that are not marked as to any particular matter or
matters and "broker non-votes" will be counted as shares present for purposes of
determining the presence of a quorum on all matters. A "broker non-vote" occurs
if a broker or other nominee does not have discretionary authority and has not
received instructions with respect to a particular item.
In the event a quorum is not present in person or by proxy at the Lomak
Special Meeting, the Lomak Special Meeting is expected to be adjourned.
Matters to be Considered. The Board of Directors of Lomak has unanimously
approved the Merger Agreement, the Merger and the other transactions
contemplated thereby (including the Stock Issuance and the Name Change) and
recommends a vote FOR the approval thereof. See "The Merger -- Lomak's Reasons
for the Merger; Recommendation of the Board of Directors of Lomak" and "The Name
Change."
At the date of this Proxy Statement/Prospectus, the Board of Directors of
Lomak does not know of any business to be presented at the Lomak Special Meeting
other than as set forth in the notice accompanying this Proxy
Statement/Prospectus. If any other matters should properly come before the Lomak
Special Meeting, it is intended that the shares represented by proxies will be
voted with respect to such matters in accordance with the judgment of the
persons voting such proxies.
Vote Required. Under the rules of the NYSE, the Stock Issuance requires the
affirmative vote of the holders of a majority of the shares of Lomak Common
Stock and Lomak Preferred Stock, voting together as a class, represented in
person or by proxy at the Lomak Special Meeting, provided that a quorum is
present. The Name Change requires the affirmative vote of a majority of the
shares of the Lomak Common Stock and the Lomak Preferred Stock outstanding and
entitled to vote as of the Record Date, voting together as a class. Under
Delaware law, an abstention would have the same legal effect as a vote against
this proposal, but a broker non-vote would not be counted for purposes of
determining whether a majority had been achieved.
The Stock Issuance and Name Change are separate proposals and will be voted
on separately by the holders of Lomak Voting Stock. The proposals are not
contingent on each other and the failure to adopt one proposal will not
constitute a failure to adopt the other proposal if the requisite stockholder
vote for the other proposal is otherwise obtained.
Securities Ownership of Management and Certain Affiliates. As of the Record
Date, directors and executive officers of Lomak and their affiliates were
beneficial owners of an aggregate of 2,684,998 outstanding shares of Lomak
Common Stock and no shares of Lomak Preferred Stock, representing approximately
(i) 7.1% of the outstanding shares of Lomak Voting Stock entitled to vote at the
Lomak Special Meeting, (ii) 7.1% of the maximum and 28.4% of the minimum votes
that could be required to approve the Stock Issuance and (iii) 7.1% of the
maximum and 14.2% of the minimum votes that could be required to approve the
Name Change. Each of the directors and executive officers of Lomak has advised
Lomak that he plans to vote or to direct the vote of all of the outstanding
shares of Lomak Common Stock beneficially owned by him in favor of the Stock
Issuance and the Name Change.
Domain Stockholder Consent. FRLP, which owned an aggregate of 7,820,718
shares, or approximately 51.8%, of the outstanding shares of Domain Common Stock
on May 12, 1998, has voted all of such stock in favor of the Merger. On May 12,
1998, FRLP approved and adopted the Merger and the Merger Agreement
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by written consent delivered to Domain pursuant to Section 228 of the DGCL. As a
result of FRLP's approval and adoption of the Merger Agreement, no further
action is required by the Domain stockholders to approve and adopt the Merger
and the Merger Agreement, and no meeting of the Domain stockholders will be
held.
VOTING PROXIES
Shares represented by all properly executed proxies received in time for
the Lomak Special Meeting and which have not been revoked will be voted at such
meeting in the manner specified by the holders thereof. Proxies that do not
contain an instruction to vote for or against or to abstain from voting on a
particular matter described in the proxy will be voted in favor of such matter.
It is not expected that any matter other than those referred to herein will
be brought before the Lomak Special Meeting. If, however, other matters are
properly presented, the persons named as proxies will vote in accordance with
their judgment with respect to such matters, unless authority to do so is
withheld in the proxy.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed Lomak form of proxy does not preclude
a stockholder from voting in person. A stockholder may revoke a proxy at any
time prior to its exercise by submitting a later dated proxy with respect to the
same shares, by filing with the Secretary of Lomak a duly executed revocation,
or by voting in person at the meeting. Attendance at the Lomak Special Meeting
will not in and of itself constitute a revocation of a proxy.
In the event a quorum is not present in person or by proxy at the Lomak
Special Meeting, the Lomak Special Meeting is expected to be adjourned.
NO DISSENTERS' OR APPRAISAL RIGHTS
Holders of Domain Common Stock, Lomak Common Stock and Lomak Preferred
Stock (including holders of Lomak Common Stock and Lomak Preferred Stock who
vote against the Stock Issuance) will not be entitled to dissenters' or
appraisal rights under the DGCL if the Merger is consummated.
SOLICITATION OF PROXIES
Subject to the Merger Agreement, Lomak will bear the cost of the
solicitation of proxies from its own stockholders, except that Lomak and Domain
will share equally the cost of printing and mailing this Proxy
Statement/Prospectus. In addition to solicitation by mail, the directors,
officers and employees of Lomak and its subsidiaries may solicit proxies from
stockholders of Lomak by telephone or telegram or in person. Such directors,
officers and employees will not be additionally compensated for such
solicitation but may be reimbursed for out-of-pocket expenses in connection
therewith. Arrangements also will be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation material
to the beneficial owners of shares held of record by such persons, and Lomak
will reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection therewith. Lomak has engaged the services
of MacKenzie Partners to distribute proxy solicitation materials to brokers,
banks and other nominees and to assist in the solicitation of proxies from Lomak
stockholders for a fee of $5,000 plus reasonable out-of-pocket expenses.
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THE MERGER
The description of the Merger and the Merger Agreement contained in this
Proxy Statement/Prospectus is qualified in its entirety by reference to the
Merger Agreement, a copy of which is included as Annex A to this Proxy
Statement/Prospectus and is incorporated herein by reference.
GENERAL
Lomak, Merger Sub and Domain have entered into the Merger Agreement, which
provides that, subject to the satisfaction or waiver of the conditions set forth
therein (see "-- Conditions to the Consummation of the Merger"), Merger Sub will
be merged with and into Domain, and Domain will be the Surviving Corporation and
a wholly owned subsidiary of Lomak. As soon as practicable after the
satisfaction or waiver (where permissible) of the conditions under the Merger
Agreement, the Certificate of Merger will be filed with the Secretary of State
of the State of Delaware, and the time of such filing will be the Effective Time
unless otherwise provided in the Certificate of Merger.
BACKGROUND OF THE MERGER
In connection with its purchase of properties from American Cometra, Inc.
in February 1997, Lomak acquired interests in several blocks in the Gulf of
Mexico. Shortly after this acquisition, Lomak announced that it intended to sell
these properties. However, because of production difficulties on one of the Gulf
of Mexico properties, Lomak did not actively solicit proposals.
In early 1998, following submission of its 1998 business plan and related
capital budget, Domain's management received authorization from the Domain Board
to proceed with an offering of debt securities in the Rule 144A "high yield"
market to finance potential acquisition and growth opportunities. Concurrently,
and in the ordinary course of its business, Domain was conducting informal
discussions with a number of companies about possible acquisition or combination
transactions, as well as potential asset purchases.
In early January 1998, Michael V. Ronca, Chief Executive Officer of Domain,
was advised by PaineWebber that Lomak continued to be interested in selling its
Gulf of Mexico properties. Mr. Ronca asked Michael L. Harvey, Executive Vice
President of Domain, to contact John H. Pinkerton, Chief Executive Officer of
Lomak, to ask whether Lomak would be interested in selling its Gulf of Mexico
properties to Domain. During the course of these discussions, Domain asked
whether Lomak would consider receiving Domain Common Stock as part of the
consideration for the Gulf of Mexico properties. At the end of January, Lomak
informed Domain that Lomak had decided not to pursue further discussions until
it had completed an updated technical review of the properties.
During the period of February 5 through February 8, 1998, both Mr.
Pinkerton and Mr. Ronca attended CSFB's "Energy Summit" in Vail, Colorado.
During this conference, Mr. Pinkerton and Mr. Ronca discussed their respective
companies, including strategies for growth and their interest in synergistic
combinations, including the possibility of merging their companies. They also
discussed Lomak's offshore Gulf of Mexico properties and Domain's desire to
evaluate such properties.
On February 10, 1998, Messrs. Pinkerton, Ronca and Harvey attended the
PaineWebber Energy Conference in New York. At the same time, Mr. Ronca and other
representatives of Domain were in New York to make presentations to the rating
agencies in connection with Domain's proposed Rule 144A offering of debt
securities. At the PaineWebber conference, Mr. Pinkerton and Mr. Harvey met with
a representative of PaineWebber to discuss further the possibility of Domain's
acquiring Lomak's Gulf of Mexico properties. At this meeting, Mr. Pinkerton and
Mr. Harvey also briefly discussed the possibility of a combination of Lomak and
Domain.
On February 17, 1998, at a regularly scheduled Domain Board meeting, Mr.
Ronca updated the Board on numerous merger and acquisition discussions that he
had undertaken, indicated his belief that certain benefits could be realized
through a combination with Lomak and advised the Board that he intended to
pursue more in-depth discussions. Domain's Board encouraged Mr. Ronca to
continue these efforts. Thereafter, on multiple occasions Jonathan S. Linker,
Chairman of the Board of Domain and a Managing Director of First Reserve
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Corporation ("First Reserve"), separately affirmed First Reserve's support for
Mr. Ronca's initiatives in this regard. First Reserve is the managing general
partner of the general partner of FRLP.
Near the end of February, Domain received preliminary indications from the
rating agencies with respect to the proposed high-yield offering. Based in part
on these preliminary indications, which were not acceptable to Domain, Domain
decided to defer its plans for the high-yield offering and, with the
encouragement of First Reserve, management began to focus more intently on a
business combination as an avenue to pursue the implementation of its growth
strategy.
On March 20, 1998, Mr. Pinkerton, Mr. Ronca, Mr. Harvey and Mr. Linker met
in Fort Worth to discuss a possible merger. At a regular meeting of the Lomak
Board held on March 27, Mr. Pinkerton made a presentation to the Lomak Board
regarding a possible merger with Domain, followed by a discussion of such a
transaction by the Lomak Board.
On March 30, 1998, Mr. Ronca and Mr. Pinkerton met in Houston to discuss a
possible merger. The two parties agreed to proceed with a more in-depth review
of each other's properties and operations. Accordingly, on March 31, Lomak and
Domain entered into a confidentiality agreement, which included a one-year
mutual standstill provision. Pursuant to the standstill provision each party
agreed, among other things, not to acquire, or seek to acquire, any voting
securities of the other party or to propose any business combination with the
other party in each case without the prior consent of the Board of Directors of
the other party. Following the execution of the confidentiality agreement, the
two parties began to share non-public information with each other about their
respective properties and operations.
On April 7, Mr. Pinkerton met with Mr. Ronca in Houston to discuss various
valuation, structural, management and organizational issues that would have to
be addressed if a merger were to take place. On April 8, Domain held a special
meeting of its Board of Directors during which the merits of a combination with
Lomak were discussed in more detail. The Board determined that Mr. Ronca should
proceed with these discussions and continue with the evaluation of Lomak and its
business, properties and prospects. At this meeting, the Board determined that
Domain was not for sale, but recognized the need to grow Domain and expand its
access to capital. The meeting concluded with the Board instructing management
to proceed with a more thorough investigation of a business combination with
Lomak, as well as acquisitions of assets that could support and enhance a
capital markets financing.
On April 13, Mr. Ronca met in New York with Thomas J. Edelman, Chairman of
Lomak, to discuss a possible merger and the potential synergies between the two
companies' assets and personnel, and to profile Domain's IPF Program. On April
21, representatives of the two companies met in New York at PaineWebber's
offices to discuss structural issues, to review the financial impact of the
transaction on the two companies and to consider further the complementary
strengths of the two companies.
On April 22, Mr. Pinkerton and Mr. Edelman met with Mr. Ronca and Mr.
Linker in New York to discuss the possible terms of a transaction. During the
meeting, Lomak raised the issue of acquiring a portion of the Domain Common
Stock held by FRLP for cash. Lomak desired to purchase a portion of the Domain
Common Stock with cash to ensure that the transaction would be taxable and, as a
result, allow Lomak to "step up" the basis of Domain's stock. On April 23, Mr.
Linker and Mr. Edelman discussed a sale to Lomak for cash of a portion of FRLP's
shares of Domain Common Stock in connection with a possible merger. Mr. Linker
stated that FRLP desired to sell $38 million worth of its Domain Common Stock
for cash. Mr. Edelman requested that Lomak be permitted to purchase between $38
million and $50 million worth of Domain Common Stock at the market price, and
Mr. Linker responded he believed that would be acceptable to FRLP. On the date
of this conversation, the closing price of Domain Common Stock on the NYSE was
$13 15/16 per share. Later that day, Mr. Edelman had dinner with John A. Hill,
Chairman of First Reserve, to discuss, among other topics, whether FRLP desired
to retain shares of Lomak Common Stock that would be received by FRLP in a
merger, or whether such shares would be distributed to FRLP's investors.
On April 27, the Lomak Board held a telephonic special meeting. At the
special meeting, Lomak's management advised the Lomak Board of the status of
discussions between the parties and described the financial impact of the
transaction on Lomak. The Lomak Board also reviewed certain historical
information
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regarding Domain, including its historical stock price information. The Lomak
Board expressed the view that were Lomak to proceed with the transaction, it
would need to obtain assurance that the transaction would be completed. To that
end, the Lomak Board expressed the view that FRLP, the holder of a majority of
the outstanding shares of Domain Common Stock, would need to agree to vote in
favor of the transaction immediately following the execution of a definitive
merger agreement. The Lomak Board also noted the significant stock position that
FRLP would have in Lomak following the Merger and instructed Lomak's management
to obtain customary standstill and voting protections from FRLP as part of the
transaction. Following this discussion, the Lomak Board directed Lomak's
management to continue to pursue the transaction.
Following the April 27 Lomak Board meeting, Mr. Pinkerton and Mr. Ronca
held numerous discussions regarding the terms of the proposed transaction. Under
the terms proposed by Lomak at this time, each share of Domain Common Stock
would have been converted into one share of Lomak Common Stock, provided that
(i) if the Closing Date Market Price was between $12.50 and $14.00, the exchange
ratio would have increased so that holders of Domain Common Stock received Lomak
shares with a value of $14.00 per share and (ii) if the Closing Date Market
Price was between $16.00 and $17.50, the exchange ratio would have decreased so
that the holders of Domain Common Stock received Lomak shares with a value of
$16.00 per share (the "Fixed Exchange Ratio Proposal"). During the same period,
Mr. Edelman and Thomas R. Denison, a Managing Director of First Reserve, held
several discussions regarding the terms upon which Lomak would be willing to
purchase FRLP's shares of Domain Common Stock and FRLP would be willing to agree
to support a merger between Lomak and Domain. Also during this period, Lomak and
Domain conducted due diligence investigations of each other.
On April 28, Mr. Denison informed Mr. Edelman that FRLP remained willing to
sell between $38 million and $50 million worth of Domain Common Stock to Lomak,
but that FRLP desired to receive a fixed price of $13.50 per share and a floor
price above $14.00 for the Fixed Exchange Ratio Proposal before FRLP would agree
to vote in favor of the proposed merger. Mr. Edelman reiterated that the
proposed transaction needed to be taxable, which required the purchase for cash
of a portion of FRLP's shares of Domain Common Stock.
On May 3, Mr. Denison reaffirmed to Mr. Edelman that FRLP desired to
receive a fixed price of $13.50 per share regardless of whether the market price
for Domain Common Stock increased or decreased prior to the execution of a
merger agreement. Mr. Denison again informed Mr. Edelman that FRLP desired a
higher floor price for the Fixed Exchange Ratio Proposal.
On May 4, Domain retained CSFB for the purpose of rendering an opinion with
respect to the fairness, from a financial point of view, of the Exchange Ratio
to the holders of Domain Common Stock.
On May 4, legal counsel for Lomak distributed a draft merger agreement to
Domain and its legal counsel. From May 4 to May 11, Domain, Lomak and their
respective legal counsel negotiated the terms of the merger agreement. During
the same period, First Reserve, Lomak and their legal counsel negotiated the
terms of the Stock Purchase Agreement and the Voting Agreement.
On May 6, 1998, the Domain Board met in Houston to review the status of
negotiations with Lomak and the draft Merger Agreement. The Board discussed the
proposed terms of the transaction, and reached a consensus that the $14.00 floor
included in the Fixed Exchange Ratio Proposal was too low. The Board also
discussed the need for completing a due diligence review of Lomak before formal
action with regard to the proposed merger should be taken. Management was
instructed to attempt to negotiate an improvement of the Fixed Exchange Ratio
Proposal and to complete its due diligence review promptly. The Board also
discussed with counsel the need for approval under Section 203 of the DGCL of
the proposed stock purchase transaction and voting and standstill agreement
between Lomak and FRLP (the "Section 203 Approval") as a condition to the
consummation of any subsequent merger between Domain and Lomak. During this
discussion, Messrs. Linker, Macaulay and Pruett (the "First Reserve Directors")
were advised by counsel to Domain and by counsel to First Reserve that they
should not participate in the vote with regard to the Section 203 Approval when,
and if, such vote was to be taken. On May 7, Mr. Ronca informed Mr. Pinkerton
that the Domain Board was not comfortable with the $14.00 floor included in the
Fixed Exchange Ratio Proposal, and
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Mr. Ronca requested that Lomak consider changing its proposal for the exchange
ratio. On May 7 and May 8, representatives of Domain and Lomak conducted
in-depth due diligence reviews of legal, financial and operational matters,
which included interviews of their respective counterparts, in each other's
offices. On May 8, 1998, at a telephonic meeting of the Domain Board, the Board
received a presentation from Domain's management and counsel concerning due
diligence matters and also received an update from Mr. Ronca with respect to the
status of negotiations of the economic terms of the transaction.
On May 7, Lomak retained PaineWebber for the purpose of rendering an
opinion with respect to the fairness, from a financial point of view, to Lomak
of the consideration to be paid to the holders of Domain Common Stock in the
Merger. On May 8, Mr. Edelman and Mr. Pinkerton proposed to Mr. Linker and Mr.
Ronca two alternative pricing formulas for the proposed transaction. The first
pricing formula was the Fixed Exchange Ratio Proposal. Under the other pricing
formula, the Exchange Ratio would be determined by dividing $14.50 by the
Closing Date Market Price, subject to a minimum of 0.8529 and a maximum of
1.2083 (the "Fixed Value Proposal"). Mr. Ronca and Mr. Linker responded that
they would discuss the two alternatives with the Domain Board at its May 11
meeting.
On May 11, the Lomak Board met in New York at the offices of PaineWebber.
At this meeting, the Lomak Board received a presentation from management with
respect to the current status of the negotiations with Domain and FRLP,
including the two pricing formulas. The Lomak Board then received a presentation
from PaineWebber with respect to the analyses that it performed in connection
with its fairness opinion. PaineWebber confirmed for the Lomak Board that,
assuming that the pricing mechanism for the proposed transaction consisted of
one of the two alternatives discussed with the Lomak Board, PaineWebber would be
prepared to render its opinion that the consideration to be paid to the holders
of Domain Common Stock in the Merger was fair to Lomak from a financial point of
view. The Lomak Board then received a presentation from Vinson & Elkins L.L.P.,
counsel for Lomak, with respect to the material terms of the Merger Agreement,
Stock Purchase Agreement and Voting Agreement, particularly the changes to those
documents that had been negotiated by the parties following the circulation of
drafts of these documents to the Lomak Board. After discussion, the Lomak Board
unanimously approved the Merger, the Merger Agreement, and the transactions
contemplated thereby (including the Stock Issuance), as well as the Stock
Purchase Agreement and the Voting Agreement. It was the consensus of the Lomak
Board that either of the pricing mechanisms discussed at the meeting was
acceptable to the Lomak Board. Mr. Edelman and Mr. Pinkerton indicated that they
would hold a telephonic meeting of the Executive Committee later that evening to
advise the Executive Committee as to which pricing mechanism had been agreed to
by the parties.
Immediately following the Lomak Board meeting, Mr. Edelman and Mr.
Pinkerton flew to Houston to give a presentation to the Domain Board with
respect to Lomak and the Merger.
On May 11, 1998, the Domain Board met in Houston to consider the Merger,
the Merger Agreement and the Section 203 Approval. The Board first received a
presentation from Messrs. Edelman and Pinkerton with regard to the proposed
combination of Domain and Lomak and the benefits thereof as perceived by Lomak.
Following this presentation, after Messrs. Edelman and Pinkerton left the
meeting, the Domain Board considered the effect of the proposed merger on
outstanding stock options, executive and employee compensation, severance and
retention matters and other issues concerning what effect the integration of the
companies would have on Domain's officers and employees, and authorized
management to proceed with the negotiation of such issues. The First Reserve
Directors reaffirmed their potential conflict of interest with respect to the
proposed transaction and, upon advice of counsel, stated that they would be
abstaining from any vote on such matters. The Board then discussed with counsel
the material terms of the draft Merger Agreement, the alternative exchange
ratios proposed by Lomak and the need for the Section 203 Approval. After
discussion, the Board concluded, in meetings of the full Board and meetings
excluding the First Reserve Directors, that the Fixed Value Proposal provided
the greatest benefit to Domain's stockholders. CSFB was then invited to present
the financial analyses performed by CSFB with respect to the Exchange Ratio
based on the Fixed Value Proposal and rendered to the Domain Board its oral
opinion (which opinion was subsequently confirmed by delivery of a written
opinion dated May 12, 1998, the date of execution of the Merger Agreement) as to
the fairness of the Exchange Ratio from a financial point of view to the holders
of Domain Common Stock. See "Opinions of Financial Advisors--CSFB Opinion to the
Domain Board."
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Following this presentation, after discussion the Domain Board (with the
First Reserve Directors abstaining) voted to approve the Merger, the Merger
Agreement, and the transactions contemplated thereby, and recommended the
adoption and approval of the Merger and the Merger Agreement to the stockholders
of Domain. While as advised by counsel, the First Reserve Directors abstained
from this vote, they did participate in certain discussions of the Merger and
the Merger Agreement (except the Section 203 Approval), listened to the CSFB
presentation and voiced their full support for the Merger and the Merger
Agreement. Following approval of the Merger and the Merger Agreement, outside of
the presence of the First Reserve Directors, the remaining members of the Board
discussed the Section 203 Approval and voted to approve the stock purchase
transaction and voting and standstill agreement between FRLP and Lomak for
purposes of Section 203 of the DGCL.
During the Domain Board meeting, Mr. Edelman presided over a brief meeting
of the Lomak Executive Committee, and informed the committee that Lomak had not
yet been informed as to which of the two proposals had been selected by the
Domain Board, but that Mr. Edelman would hold another meeting of the committee
if the Domain Board approved a pricing mechanism that differed materially from
the two proposals. Mr. Linker later called Mr. Edelman during the Domain Board
meeting to inform him that the Domain Board had selected the Fixed Value
Proposal.
Also during the Domain Board meeting, Mr. Edelman called Mr. Macaulay to
inform him that, consistent with their discussions with respect to tax
structure, Lomak would need to purchase for cash at least $43.875 million of
Domain Common Stock at $13.50 per share.
Immediately following the meeting of the Domain Board of Directors, Mr.
Ronca and Mr. Rick G. Lester, Domain's Vice President and Chief Financial
Officer, met with Mr. Edelman and Mr. Pinkerton to finalize the Merger
Agreement. Early in the morning of May 12, Lomak and Domain entered into the
Merger Agreement. Simultaneously, Lomak and FRLP entered into the Stock Purchase
Agreement and the Voting Agreement. Shortly thereafter, FRLP delivered its
written stockholder consent approving the Merger in accordance with the DGCL.
Lomak and Domain then executed an amendment to the Agreement and Plan of Merger
evidencing that no further action by the Domain stockholders was necessary in
connection with the Merger.
On May 12, Lomak and Domain jointly announced the execution of the Merger
Agreement.
LOMAK'S REASONS FOR THE MERGER; RECOMMENDATION OF BOARD OF DIRECTORS OF LOMAK
By the unanimous vote of the Board of Directors of Lomak at a meeting held
on May 11, 1998, the Lomak Board determined the Merger to be fair to and
advisable and in the best interests of Lomak and its stockholders and approved
the Merger and the Merger Agreement. As described above under "-- Background of
the Merger," the Lomak Board's decision to declare the Merger advisable and to
approve the Merger and the Merger Agreement and the transactions contemplated
thereby (including the Stock Issuance) at its May 11 meeting followed an
extensive review of the strategic synergies offered by the Merger.
At its meetings held on March 27, 1998, April 27, 1998, and May 11, 1998,
the Lomak Board received the presentation of management and, in the May 11
meeting, the presentation of its legal advisors and PaineWebber with respect to
the possible transaction, including reviews of, among other things: historical
information relating to the business, financial condition and results of
operations of Lomak and Domain; information provided by Lomak and Domain
management and reviewed and adjusted by Lomak management regarding the reserves
of Lomak and Domain; information regarding the management of Domain; historical
data relating to market prices and trading volumes of Lomak Common Stock and
Domain Common Stock; market prices for Domain Common Stock as compared to those
of other comparable publicly traded companies; and the possible effects of the
Merger on Lomak's financial condition and the possible market effects of the
announcement of the proposed Merger and the consummation thereof on the Lomak
Common Stock and Domain Common Stock.
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During the course of its deliberations, the Lomak Board of Directors, with
the assistance of management and its legal and financial advisors, considered a
number of other factors, including the following:
(i) The overall strategic fit between Lomak and Domain, including
the balance created by adding Lomak's long-lived onshore
reserves with Domain's shorter-lived Gulf of Mexico reserves;
(ii) That by combining Lomak and Domain, Range will have a core
group of activities that will provide predictable cash flow
and lower-risk growth opportunities. The activities will
include development drilling from an inventory of over 1,700
proven projects, the IPF business and the transportation,
processing and marketing activities;
(iii) That by combining Lomak and Domain, Range will have a
diversified inventory of domestic onshore exploration
prospects covering 578,000 gross acres, a significant
exploration inventory in the Gulf of Mexico with 112,000 gross
acres currently under lease and an emerging international
effort in Argentina;
(iv) That Range would be among the 20 largest U.S. independent
energy companies, which Lomak's management believes would
provide greater financial strength and growth opportunities,
greater purchasing power with oil field service providers and
the potential for market valuations comparable to other large
independents;
(v) That by consolidating Lomak's smaller presence in the Gulf
Coast with Domain's larger presence, Range will generate
approximately 35% of its production, as of the Effective Time,
from the Gulf Coast region, where it will have a critical mass
of assets and substantial technical experience allowing it to
more aggressively exploit existing properties, accelerate
exploration and be more competitive with regard to pursuing new
opportunities;
(vi) The belief of Lomak's management that the Merger is expected to
be accretive on a cash flow per share basis but dilutive on an
earnings per share basis to Lomak's stockholders;
(vii) The Merger will diversify and expand Lomak's reserve and
exploration opportunities in the Gulf of Mexico and Argentina;
(viii) That the combination of Lomak's and Domain's reserves provides
an attractive reserve life of 12.8 years;
(ix) The belief of Lomak's management that the larger, more
diversified Range should benefit from better credit ratings,
more flexible financing terms and lower financing costs,
especially with respect to Domain's activities;
(x) Because of Range's expanded cash flow and lower financing
costs, coupled with a much larger organization operating in
numerous basins, the belief of Lomak's management that it can
greatly expand Domain's IPF business from a $52 million
portfolio to over $200 million in three to five years;
(xi) Because of Range's larger asset base, expanded cash flow and
lower financing cost, the belief of Lomak's management that it
can accelerate Domain's international effort as well as retain
larger interests in its international projects;
(xii) That Range would be more widely held, providing stockholders
with a more liquid market for their shares;
(xiii) That Range would have a broader mix of institutional
stockholders and would likely receive greater attention from
financial analysts and institutional investors;
(xiv) The complementary management teams, internal cultures and the
resulting technical depth and experience created by combining
Lomak's and Domain's geological, geophysical and engineering
personnel;
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(xv) The continued involvement of Domain's management in the
management of the combined company providing substantial depth
to the overall management team;
(xvi) The proposed terms and conditions of the combination of Lomak
and Domain;
(xvii) The preliminary pro forma financial condition, results of
operations and other financial information of the combined
entity, including an analysis of the opportunities for costs
savings and economies of scale; and
(xviii) The presentations of PaineWebber delivered to the Lomak Board
of Directors at its meeting on May 11, 1998, including the
opinion of PaineWebber (later confirmed in writing on May 12,
1998) to the effect that, as of such date, the Exchange Ratio
is fair to Lomak from a financial point of view.
PaineWebber has delivered a written opinion to the Lomak Board of Directors
that as of May 12, the Exchange Ratio is fair to Lomak from a financial point of
view. A copy of the written opinion of PaineWebber setting forth the assumptions
made, matters considered and limitations on the review undertaken by PaineWebber
in rendering their opinion is attached to this Proxy Statement/Prospectus as
Annex E (and is incorporated herein by reference), and stockholders of Lomak are
urged to read such opinion carefully in its entirety. See "-- Opinions of
Financial Advisors -- PaineWebber Opinion to the Lomak Board of Directors."
The foregoing discussion of the information and factors considered and
given weight by the Lomak Board of Directors is not intended to be exhaustive.
In view of the variety of factors considered in connection with its evaluation
of the Merger, the Lomak Board of Directors did not find it practicable to and
did not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of the
Lomak Board of Directors may have given different weights to different factors.
Based on the factors described above, the Lomak Board of Directors
unanimously declared the Merger fair to and advisable and in the best interests
of the holders of Lomak Common Stock. THE BOARD OF DIRECTORS OF LOMAK
UNANIMOUSLY RECOMMENDS TO THE HOLDERS OF LOMAK COMMON STOCK AND LOMAK PREFERRED
STOCK THAT THE STOCK ISSUANCE BE APPROVED.
DOMAIN'S REASONS FOR THE MERGER; RECOMMENDATION OF BOARD OF DIRECTORS OF DOMAIN
By the unanimous vote of the Board of Directors of Domain at a meeting held
on May 11, 1998 with Messrs. Linker, Macaulay and Pruett abstaining, the Domain
Board determined the Merger to be advisable and in the best interests of Domain
and its stockholders, approved the Merger and the Merger Agreement and
recommended to the stockholders of Domain that they approve the Merger and the
Merger Agreement. As described above under "-- Background of the Merger," the
Domain Board's decision to declare the Merger advisable and to approve the
Merger and the Merger Agreement and the transactions contemplated thereby
(including the Section 203 Approval) and recommend to the stockholders of Domain
that they approve the Merger and the Merger Agreement at its May 11 Board
meeting followed an extensive review of the relative strengths and weaknesses of
Domain and Lomak, Domain's prospects for accessing the capital necessary to
finance its exploration and development drilling activities on a cost effective
basis, the anticipated benefits of combining Domain with and into a larger
enterprise, the complementary nature of Domain's and Lomak's reserves and
properties and the ability of Domain and Lomak to combine their respective
management and technical teams without disrupting ongoing projects and
activities.
Based upon advice of FRLP's counsel, the members of the Domain Board
affiliated with FRLP abstained from voting on the Merger and the Section 203
Approval, but such members were present at, and actively participated in, the
discussions and review described herein, and at the May 11 Board meeting, and
prior to the vote thereon by the other members of Domain's Board, such
abstaining members expressed full support for the Merger.
At its meetings held on April 8, 1998, May 6, 1998, May 8, 1998, and May
11, 1998, the Domain Board received presentations of management and its legal
advisors, and in the May 11 meeting, the presentation of
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CSFB, with respect to the proposed Merger, including reviews of, among other
things: historical information relating to the business, financial condition and
results of operations of Lomak and Domain; information provided by Lomak and
Domain management and reviewed and adjusted by Domain management regarding the
reserves and operations of Lomak and Domain; information regarding the
management of Lomak; historical data relating to market prices and trading
volumes of Lomak Common Stock and Domain Common Stock; market prices for Lomak
Common Stock as compared to those of other comparable publicly traded companies
and the possible enhancement resulting from the Merger on Domain's ability to
raise capital for its exploration and development drilling activities.
During the course of its deliberations, the Domain Board of Directors,
considered a number of other factors, including the following:
(1) The strategic fit between Lomak and Domain, including the match of
Lomak's long-lived, lower risk onshore reserves with Domain's onshore and
offshore Gulf Coast properties; the complementary management teams and
corporate cultures; and the complementary mix of geological, engineering
and production expertise;
(2) The historical performance and strategic objectives of Domain, as
well as the risks involved in achieving those objectives in the oil and
natural gas industry under current economic and market conditions;
(3) The geographic diversification of Domain's reserves and
exploration opportunities, while adding new core production, development
and exploration areas;
(4) The improved outlook for growing the IPF business by expanding
into Lomak's core operating areas in the Permian, Midcontinent and
Appalachian regions of the United States;
(5) The inherent value of Lomak's oil and gas assets, the relative
predictability of its cash flow and its prospects for future growth,
including through the exploration potential existing in its current
property base;
(6) The fact that Range will be one of the twenty largest independent
oil and gas companies, with total assets of $1.1 billion, and the
associated benefits of larger size for stockholders in the public equity
markets, specifically, (a) the possibility that the combined entity's
Common Stock would trade at higher multiples of traditional valuation
measures than was the case with Domain or Lomak, (b) the enhanced liquidity
of the combined entity's Common Stock compared to the liquidity of Domain
Common Stock and (c) broader research coverage by stock market analysts;
(7) The benefits of larger size for an issuer of debt securities in
the capital markets, resulting in a lower cost of funds for Domain;
(8) The proposed exchange ratio, "collar" and the implied premium over
the then-current market price of Domain Common Stock;
(9) The implied premium of the proposed exchange ratio over the $13.50
per share price to be paid to the Principal Stockholder under the Stock
Purchase Agreement for approximately 41% of its shares of Domain Common
Stock;
(10) The proposed terms and conditions of the combination of Lomak and
Domain;
(11) Lomak's experience in operating oil and gas properties, which
could assist Domain in its efforts to expand operations on a greater
percentage of its properties;
(12) The strategic and financial alternatives available to Domain;
(13) The elimination of the market "overhang" that results from the
Principal Stockholder's ownership of a majority of the shares of the Domain
Common Stock;
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(14) The preliminary pro forma financial condition, results of
operations and other financial information of the combined entity,
including the opportunities for costs savings and economies of scale, and
management's belief that the Merger would be accretive to Range on a cash
flow per share basis; and
(15) The financial presentation of CSFB delivered to the Domain Board
of Directors at its meeting on May 11, 1998, including the oral opinion of
CSFB (which opinion was subsequently confirmed by delivery of a written
opinion dated May 12, 1998, the date of execution of the Merger Agreement)
to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the Exchange Ratio was fair to
the holders of Domain Common Stock from a financial point of view. See
"Opinions of Financial Advisors -- CSFB Opinion to the Domain Board of
Directors."
The foregoing discussion of the information and factors considered and
given weight by the Domain Board of Directors is not intended to be exhaustive.
In view of the variety of factors considered in connection with its evaluation
of the Merger, the Domain Board of Directors did not find it practicable to and
did not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of the
Domain Board of Directors may have given different weights to different factors.
Based on the factors described above, the Domain Board of Directors, with
Messrs. Linker, Macaulay and Pruett abstaining, unanimously declared the Merger
advisable and in the best interests of the holders of Domain Common Stock.
OPINIONS OF FINANCIAL ADVISORS
PaineWebber Opinion to the Lomak Board of Directors. Lomak engaged
PaineWebber to render its opinion as to the fairness, from a financial point of
view, to Lomak of the consideration to be paid by Lomak to the holders of Domain
Common Stock in the Merger. On May 12, 1998, in connection with the Lomak
Board's evaluation of the Merger Agreement and the contemplated transaction,
PaineWebber delivered its opinion that, as of such date and subject to certain
assumptions, factors and limitations as described below, the Exchange Ratio was
fair, from a financial point of view, to Lomak. A COPY OF THE OPINION OF
PAINEWEBBER (THE "PAINEWEBBER OPINION"), WHICH SETS FORTH ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN
BY PAINEWEBBER IN RENDERING THE PAINEWEBBER OPINION, IS ATTACHED AS ANNEX E TO
THIS PROXY STATEMENT/PROSPECTUS. THE SUMMARY OF THE PAINEWEBBER OPINION SET
FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION. STOCKHOLDERS OF LOMAK ARE URGED TO
READ THE PAINEWEBBER OPINION CAREFULLY AND IN ITS ENTIRETY.
No limitations were imposed by Lomak on the scope of the investigation or
the procedures to be followed by PaineWebber in rendering the PaineWebber
Opinion. PaineWebber was not requested to and did not make any recommendation to
the Lomak Board as to the form or amount of the consideration to be paid for the
Domain Common Stock in the Merger, which was determined through arm's-length
negotiations between Lomak and Domain. In arriving at the PaineWebber Opinion,
PaineWebber did not ascribe a specific range of values to Domain, but made a
determination as to the fairness, from a financial point of view, to Lomak of
the Exchange Ratio on the basis of the financial and comparative analyses
summarized below. THE PAINEWEBBER OPINION WAS PREPARED FOR THE INFORMATION OF
THE LOMAK BOARD IN CONNECTION WITH ITS CONSIDERATION OF THE MERGER AND DOES NOT
CONSTITUTE A RECOMMENDATION CONCERNING HOW HOLDERS OF LOMAK VOTING STOCK SHOULD
VOTE WITH RESPECT TO THE STOCK ISSUANCE OR THE NAME CHANGE. THE PAINEWEBBER
OPINION DOES NOT ADDRESS THE RELATIVE MERITS OF THE MERGER OR ANY OTHER
TRANSACTIONS OR BUSINESS STRATEGIES DISCUSSED BY THE LOMAK BOARD AS ALTERNATIVES
TO THE MERGER OR THE DECISION OF THE LOMAK BOARD TO PROCEED WITH THE MERGER.
In arriving at the PaineWebber Opinion, PaineWebber, among other things:
(i) reviewed Domain's Annual Report on Form 10-K and related financial
information for the fiscal year ended December 31, 1997; (ii) reviewed Lomak's
Annual Reports on Form 10-K and related financial information for the five
fiscal years ended December 31, 1997; (iii) reviewed certain information,
including financial forecasts, relating to the business, earnings, cash flow,
assets and prospects of Domain and Lomak, furnished to PaineWebber by
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Domain and Lomak, respectively; (iv) conducted discussions with members of
senior management of Domain and Lomak concerning their respective businesses and
prospects; (v) reviewed the historical market prices and trading activity for
Domain shares and Lomak shares and compared them with that of certain publicly
traded companies which PaineWebber deemed to be relevant; (vi) compared the
results of operations of Domain and Lomak with that of certain companies which
PaineWebber deemed to be relevant; (vii) compared the proposed financial terms
of the transactions contemplated by the Merger Agreement with the financial
terms of certain other mergers and acquisitions which PaineWebber deemed to be
relevant; (viii) considered the pro forma effect of the Merger on Lomak's
capitalization ratios and earnings and cash flow per share; (ix) reviewed a
draft of the Merger Agreement dated May 8, 1998; and (x) reviewed such other
financial studies and analyses and performed such other investigations and took
into account such other matters as PaineWebber deemed necessary.
In preparing the PaineWebber Opinion, PaineWebber relied upon the accuracy
and completeness of information supplied or otherwise made available to
PaineWebber by Domain and Lomak and did not assume any responsibility to
independently verify such information. With respect to the financial forecasts
of Lomak and Domain examined by Paine Webber, PaineWebber assumed that such
forecasts were reasonably prepared and reflect the best currently available
estimates and judgments of the respective managements of Lomak and Domain, as
the case may be, as to their future performance. PaineWebber also relied upon
assurances of Lomak and Domain, respectively, that they were unaware of any
facts that would make the information or financial forecasts provided to
PaineWebber incomplete or misleading. PaineWebber did not make any independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Lomak or Domain, nor was PaineWebber furnished with any such evaluations or
appraisals. PaineWebber also assumed, with Lomak's consent, that (i) the Merger
will be accounted for under the purchase method of accounting and (ii) any
material liabilities are set forth in the consolidated financial statements of
Lomak and Domain, respectively. No opinion was expressed in the PaineWebber
Opinion as to the price at which the securities to be issued in the Merger to
the stockholders of Domain may trade at any time. The PaineWebber Opinion is
based on economic, monetary and market conditions existing on the date thereof.
PaineWebber does not have any obligation to update, revise or reaffirm the
PaineWebber Opinion.
In connection with its presentation to the Lomak Board on May 11, 1998, and
in advising the Lomak Board of the PaineWebber Opinion, PaineWebber performed a
variety of financial and comparative analyses, as summarized below. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances and, therefore, an opinion is not
readily susceptible to summary description. Furthermore, in arriving at the
PaineWebber Opinion, PaineWebber did not attribute any particular weight to any
analysis or factor considered by PaineWebber. Accordingly, PaineWebber believes
that its analyses must be considered as a whole and that considering any portion
of such analyses and of the factors considered, without considering all analyses
and factors, could create a misleading or incomplete view of the process
underlying the PaineWebber Opinion. In its analyses, PaineWebber, with Lomak's
consent, made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond the
control of Lomak and Domain. Any estimates contained in its analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. In addition, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which businesses may
actually be sold. Accordingly, such analyses and estimates are inherently
subject to substantial uncertainty, and neither Lomak nor PaineWebber assumes
responsibility for the accuracy of such analyses or estimates.
Purchase Price Analysis -- PaineWebber noted that the terms of the Merger
indicated a purchase price for each share of Domain Common Stock of $14.50 (the
"Purchase Price"), payable in Lomak Common Stock. Given the closing price of
Lomak Common Stock on May 8, 1998, the Purchase Price of $14.50 implied an
Exchange Ratio of 1.040 times. When conducting its analyses and evaluating the
fairness of the transaction, from a financial point of view, to Lomak,
PaineWebber compared the Purchase Price to recent public trading prices for both
Lomak Common Stock and Domain Common Stock and reviewed the multiples of (i)
Total Market Capitalization (defined as market value of equity plus total debt
at book value and
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minority interests) to EBITDA (defined as earnings before interest, income
taxes, depreciation, depletion and amortization, impairments and exploration
expense) as calculated for the twelve months ended December 31, 1997 ("LTM
EBITDA") (ii) Indicated Reserve Value (defined as Total Market Capitalization,
less working capital, less tangible assets other than oil and gas properties,
less the book value of oil and gas properties not subject to depletion as of
December 31, 1997) to proved reserves and Present Value and (iii) equity market
value to cash flow from operations before changes in working capital ("Cash
Flow"), for the twelve months ended December 31, 1997 ("LTM Cash Flow") and as
estimated for 1998 and 1999, represented by this implied purchase price.
Historical Stock Price Analysis -- PaineWebber reviewed the historical
ratios of the closing stock prices per share of Domain Common Stock and Lomak
Common Stock for the period June 24, 1997 through May 8, 1998. PaineWebber
calculated that the average of the ratios of the closing stock prices per share
of Domain Common Stock and Lomak Common Stock for the following specified
periods ending May 8, 1998 were (i) 0.909 times since June 24, 1997, (ii) 0.895
times over the past 120 days, (iii) 0.854 times over the past 60 days and (iv)
0.889 times over the past 30 days. In addition, the ratio of closing stock
prices per share of Domain Common Stock and Lomak Common Stock on May 8, 1998
was approximately 0.924 times. This is in comparison to the exchange ratio
implied by the Purchase Price of 1.040 times.
Pro Forma Merger Analysis -- PaineWebber analyzed certain pro forma effects
that could result from the Merger. In connection with such analyses, PaineWebber
reviewed projections provided by the management of Lomak and Domain,
respectively with respect to the future financial performance of Lomak and
Domain for the years 1998 and 1999, and after discussing such projections with
the management of Lomak and Domain, made certain adjustments. PaineWebber then
developed its own analysis of the pro forma effects of the Merger, after
considering certain information that PaineWebber deemed to be relevant. This
analysis indicated that the pro forma Cash Flow per share in both 1998 and 1999
would be accretive to Lomak. This analysis also indicated that the pro forma
earnings per share in both 1998 and 1999 would be dilutive to Lomak.
Net Asset Value Analyses -- PaineWebber conducted separate Net Asset Value
analyses for both Lomak and Domain using information provided by the management
of Lomak and Domain, respectively, under two different pricing scenarios
provided by PaineWebber. Net Asset Value is defined as the Present Value of
Reserves (defined as the value of all future revenues generated by existing
proved reserves, less all future production and development costs, discounted at
10%, for the life of the reserves), plus working capital, plus tangible assets
other than oil and gas properties, plus the book value of oil and gas properties
not subject to depletion as of December 31, 1997, less total debt at book value,
less preferred stock at liquidation value, less minority interests. The
management of both Lomak and Domain provided estimates of the Present Value of
Reserves under two different pricing scenarios. The first scenario, known as the
"PaineWebber Price Deck," was calculated using commodity prices as estimated by
PaineWebber. They were as follows: West Texas Intermediate -- Cushing Crude Oil
was estimated to be $16.85 per barrel in 1998 and $19.00 per barrel in 1999,
increasing 3.5% annually afterwards, with a cap of $30.00 per barrel. Henry Hub
Natural Gas price was estimated to be $2.50 per mcf in 1998 and $2.55 per mcf in
1999, increasing 3.5% annually afterwards, with a cap of $5.00 per mcf. The
second scenario, known as the "Strip Price Deck" was generated using the average
annual futures prices listed on the New York Mercantile Exchange on April 29,
1997. West Texas Intermediate -- Cushing Crude Oil was estimated to be $16.29
for 1998, $17.37 for 1999 and $17.58 for 2000, increasing 3.5% annually
thereafter, with a cap of $30.00 per barrel. Henry Hub Natural Gas price was
estimated to be $2.36 per mcf for 1998, $2.36 per mcf for 1999 and $2.32 per mcf
in 2000, increasing 3.5% annually thereafter, with a cap of $5.00 per mcf.
Using Lomak management estimates of the Present Value of Reserves under the
PaineWebber Price Deck and the Strip Price Deck scenarios, PaineWebber estimated
that the Net Asset Value of Lomak Common Stock was between $15.00 and $19.50 per
share. Using Domain management estimates of the Present Value of Reserves under
the PaineWebber Price Deck and the Strip Price Deck, PaineWebber estimated that
the Net Asset Value of Domain Common Stock was between $11.50 and $13.25 per
share.
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Analysis of Selected Publicly Traded Comparable Companies -- Using publicly
available information, PaineWebber also compared selected historical and
projected financial data of Lomak and Domain with similar data of two groups of
selected publicly traded companies engaged in the businesses considered by
PaineWebber to be comparable to those of Lomak and Domain. The first group (the
"Broad Comparable Companies") was determined by including companies with a
similar Total Market Capitalization to both Lomak and Domain. Specifically,
PaineWebber included in its review Barrett Resources Corporation, Basin
Exploration, Inc., Belco Oil & Gas Corp., Cabot Oil & Gas Corporation, Coho
Energy, Inc., Comstock Resources, Inc., Cross Timbers Oil Company, Denbury
Resources Inc., Denbury Management, Inc., Devon Energy Corporation, Forcenergy
Inc., Forest Oil Corporation, The Houston Exploration Company, HS Resources,
Inc., KCS Energy, Inc., Kelley Oil & Gas Corporation, Louis Dreyfus Natural Gas
Corp., The Meridian Resource Corporation, Newfield Exploration Company, Nuevo
Energy Company, Patina Oil & Gas Corporation, Santa Fe Energy Resources Inc.,
Seagull Energy Corporation, Snyder Oil Corporation, St. Mary Land and
Exploration Company, Stone Energy Corporation, Swift Energy Company, Titan
Exploration, Inc., Tom Brown, Inc. and Vintage Petroleum, Inc. The second group
(the "Select Comparable Companies") was determined by including companies from
the Broad Comparable Companies that had similar business strategies to Lomak and
Domain. For Lomak, PaineWebber included in its review companies included in the
Broad Comparable Companies recognized as specializing in acquiring and
exploiting proved reserves. Specifically, PaineWebber included Belco Oil & Gas
Corp., Cabot Oil & Gas Corporation, Coho Energy, Inc., Comstock Resources, Inc.,
Cross Timbers Oil Company, Denbury Resources Inc., HS Resources, Inc., Louis
Dreyfus Natural Gas Corp., Nuevo Energy Company, Patina Oil & Gas Corporation,
Swift Energy Company, Titan Exploration, Inc. and Vintage Petroleum, Inc.
(collectively, the "Lomak Select Comparable Companies"). For Domain, PaineWebber
included in its review companies included in the Broad Comparable Companies
recognized as specializing in Gulf of Mexico exploration. Specifically,
PaineWebber included Basin Exploration, Inc., Forcenergy Inc., Forest Oil
Corporation, The Houston Exploration Company, Newfield Exploration Company and
Stone Energy Corporation (collectively, the "Domain Select Comparable
Companies"). An analysis of the ratio of Total Market Capitalization at May 8,
1998 to LTM EBITDA resulted in a median value of 7.1 times for the Broad
Comparable Companies, 6.5 times for the Lomak Select Comparable Companies, 7.3
times for the Domain Select Comparable Companies, and 8.0 times and 6.3 imes for
Lomak and Domain respectively. An analysis of the ratio of Indicated Reserve
Value at May 8, 1998 to Proved Reserves as of December 31, 1997 resulted in a
median value of $1.24 per Mcfe for the Broad Comparable Companies, $1.00 per
Mcfe for the Lomak Select Comparable Companies, $1.75 for the Domain Select
Comparable Companies, and $0.90 and $0.80 for Lomak and Domain, respectively. An
analysis of the ratio of Indicated Reserve Value at May 8, 1998 to Present Value
at December 31, 1997 resulted in a median value of 142.3% for the Broad
Comparable Companies, 111.2% for the Lomak Select Comparable Companies, 144.5%
for the Domain Select Comparable Companies, and 102.4% and 98.4% for Lomak and
Domain, respectively. An analysis of the ratio of equity market value at May 8,
1998 to LTM Cash Flow resulted in a median value of 5.7 times for the Broad
Comparable Companies, 5.0 times for the Lomak Select Comparable Companies, 5.8
times for the Domain Select Comparable Companies, and 3.7 times and 4.9 times
for Lomak and Domain, respectively. An analysis of the ratio of equity market
value at May 8, 1998 to Cash Flow as estimated for the year ended December 31,
1998 resulted in a median value of 5.9 times for the Broad Comparable Companies,
5.5 times for the Lomak Select Comparable Companies, 5.4 times for the Domain
Select Comparable Companies, and 3.7 times for both Lomak and Domain. An
analysis of the ratio of equity market value at May 8, 1998 to Cash Flow as
estimated for the year ended December 31, 1999 resulted in a median value of 4.6
times for the Broad Comparable Companies, 4.6 times for the Lomak Select
Comparable Companies, 4.4 times for the Domain Select Comparable Companies, and
3.3 times and 3.4 times for Lomak and Domain, respectively. PaineWebber
calculated a range of implied public market equity values per share of Lomak
Common Stock by performing an analysis that applied multiples, selected based on
considerations such as the respective median values for the Lomak Select
Comparable Companies and PaineWebber's knowledge of Lomak and the industry, to
Lomak's LTM EBITDA, Proved Reserves and Present Value at December 31, 1997, LTM
Cash Flow, and estimates of 1998 and 1999 Cash Flow. Using these considerations,
for Lomak, PaineWebber applied ratios ranging from 7.5 times to 8.5 times to LTM
EBITDA, $0.95 per Mcfe to $1.00 per Mcfe to Proved Reserves, 105% to 115% to
Present Value, 4.5 times to 5.0 times for LTM Cash Flow, 4.5 times to 5.0 times
for estimated 1998 Cash Flow and 3.8 times to 4.2 times for estimated 1999 Cash
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Flow and derived an implied public market equity value range for Lomak Common
Stock of $15.50 to $17.50 per share as compared to a trading price of $13.94 per
share of Lomak Common Stock as of May 8, 1998. PaineWebber also calculated a
range of implied public market equity values per share of Domain Common Stock by
performing an analysis that applied multiples, selected based on considerations
such as the respective median values for the Domain Select Comparable Companies
and PaineWebber's knowledge of Domain and the industry, to Domain's LTM EBITDA,
Proved Reserves and Present Value at December 31, 1997, LTM Cash Flow and
estimates of 1998 and 1999 Cash Flow. Using these considerations for Domain,
PaineWebber applied ratios ranging from 7.0 times to 8.0 times to LTM EBITDA,
$1.15 per Mcfe to $1.25 per Mcfe to Proved Reserves, 135% to 145% to Present
Value, 6.0 times to 7.0 times for LTM Cash Flow, 5.0 times to 5.5 times for
estimated 1998 Cash Flow and 4.0 times to 4.5 times for estimated 1999 Cash Flow
and derived an implied public market equity value range for Domain Common Stock
of $15.50 to $17.50 per share as compared to a trading price of $12.88 per share
of Domain Common Stock as of May 8, 1998.
Because of the inherent differences between the businesses, operations and
prospects of Lomak and Domain and the businesses, operations and prospects of
the Broad Comparable Companies, PaineWebber believes that a purely quantitative
comparable company analysis, without considering qualitative judgments
concerning differences between the financial and operating characteristics of
Lomak, Domain and the Broad Comparable Companies that would affect the public
trading values of Lomak, Domain and such other companies, would not be
particularly meaningful in the context of the Merger.
Analysis of Selected Comparable Transactions -- PaineWebber reviewed the
prices paid, to the extent publicly available, in selected acquisition
transactions which involved certain oil and gas companies similar to Domain and
which took place in 1996, 1997 and 1998. PaineWebber included in its review the
following transactions: HS Resources Inc./Tide West Oil Co., Seagull Energy
Corporation/Global Natural Resources Inc., Texas Pacific Group/Belden & Blake
Corp., Mesa Inc./Parker & Parsley Petroleum Co., Columbia Natural Resources
Inc./Alamco Inc., Monterey Resources Inc./McFarland Energy Inc., Louis Dreyfus
Natural Gas Corp./American Exploration Company, Meridian Resource Co./Cairn
Energy USA Inc., Burlington Resources Inc./Louisiana Land & Exploration Co.,
Texaco Inc./Monterey Resources Inc., Titan Exploration Inc./Offshore Energy
Development Corp., Belco Oil & Gas Corp./Coda Energy Inc., Chesapeake Energy
Corp./Hugoton Energy Corp., Sonat Inc./Zilkha Energy Co., Ocean Energy
Inc./United Meridian Corp., Union Pacific Resources Group Inc./Norcen Energy
Resources Ltd. and Atlantic Richfield Co./Union Texas Petroleum Holdings, Inc.
(the "Comparable Transactions"). PaineWebber reviewed the multiples paid in the
Comparable Transactions of the Indicated Reserve Value of the transaction to
proved reserves and Present Value, of Total Market Capitalization of the
transaction to LTM EBITDA, and the total equity market value of the transaction
to LTM Cash Flow.
PaineWebber calculated a range of implied private market equity values per
share of Domain Common Stock by performing an analysis that applied the median
multiples from the Comparable Transactions to Domain's proved reserves, LTM
EBITDA and LTM Cash Flow. Using these considerations, PaineWebber applied the
multiple $1.03 per Mcfe and 87.6% to Domain's proved reserves and Present Value,
respectively, a multiple of 8.1 times to Domain's LTM EBITDA and a multiple of
6.9 times Domain's LTM Cash Flow and derived a private market equity value range
for Domain Common Stock of $15.00 to $17.00 per share.
Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of
Lomak, Domain and the acquired businesses analyzed, PaineWebber believes that it
is inappropriate to rely solely on the quantitative results of the analysis
without also making qualitative judgments concerning differences between the
characteristics of the Comparable Transactions and the Merger that would affect
the acquisition values of Domain, Lomak and such acquired companies.
Premiums Paid Analysis -- PaineWebber reviewed the premiums paid in 714
domestic acquisition transactions disclosing transaction values between $100
million and $1 billion from January 1, 1996 and May 8, 1998 to the price of the
target company one day, one week and four weeks prior to the announcement of the
transaction. Using this information, PaineWebber determined the mean and median
premiums paid one
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day prior to announcement of the transaction to be 25.1% and 19.2%,
respectively, the mean and median premiums paid one week prior to announcement
of the transaction to be 29.8% and 24.1%, respectively and the mean and median
premiums paid four weeks prior to the announcement of the transaction to be
35.8% and 29.6%, respectively. PaineWebber applied these premiums to Domain's
Common Stock price one day, one week and four weeks prior to May 8, 1998.
PaineWebber also reviewed the premiums paid in 33 domestic acquisition
transactions recognized as mergers of equals from January 1, 1996 and May 8,
1998 to the price of the target company one day, one week and four weeks prior
to the announcement of the transaction. Using this information, PaineWebber
determined the mean and median premiums paid one day prior to announcement of
the transaction to be 8.3% and 6.9%, respectively, the mean and median premiums
paid one week prior to announcement of the transaction to be 11.2% and 12.4%,
respectively and the mean and median premiums paid four weeks prior to the
announcement of the transaction to be 11.0% and 12.2%, respectively. PaineWebber
applied these premiums to the Domain Common Stock price one day, one week and
one month prior to May 8, 1998. Through this methodology, PaineWebber calculated
values for Domain Common Stock ranging from $15.00 to $16.50 per share.
Contribution Analysis -- Based on the information available in the 1997
Form 10-K for both Lomak and Domain, PaineWebber compared the contributions of
each of Lomak and Domain to combined Total Market Capitalization, market value
of common stock, revenue, EBITDA, Cash Flow, net income for the year ended
December 31, 1997 and total assets, total proved reserves, and Present Value as
of December 31, 1997. The analysis did not assume the realization of any cost
savings or synergies from the Merger. The analysis indicated a combined company
Total Market Capitalization on May 8, 1998 of $1,144 million with a 75.8% and
24.2% contribution from Lomak and Domain, respectively, and a combined company
common stock market valuation of $490 million on May 8, 1998 with a 60.3% and
39.7% contribution from Lomak and Domain, respectively. Lomak's contribution to
the combined company for the latest twelve month period 1997 would be (i) as to
revenues, 69.9%, (ii) as to EBITDA, 71.3%, (iii) as to Cash Flow, 66.6%, (iv) as
to net income, 83.3%, (v) as to total assets, 77.8%, (vi) as to proved reserves,
79.2%, and (vii) as to Present Value, 80.5%. Based on an Exchange Ratio of 1.040
(which was based upon the closing price of Lomak Common Stock on May 8, 1998),
holders of Lomak Common Stock will own approximately 61.8% of the Common Stock
outstanding of the combined company after giving effect to the Merger.
The Lomak Board selected PaineWebber to be its financial advisor in
connection with the Merger because PaineWebber is a prominent investment banking
and financial advisory firm with experience in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations for corporate purposes.
Pursuant to an engagement letter between Lomak and PaineWebber dated May 7,
1998, PaineWebber will receive a fee for its services in connection with the
delivery of the PaineWebber Opinion. Lomak has also agreed to reimburse
PaineWebber for certain reasonable out-of-pocket expenses incurred in connection
with the Merger (including reasonable fees and expenses of its legal counsel)
and to indemnify its affiliates and each of its directors, officers, agents and
each person controlling PaineWebber or its affiliates against certain
liabilities and expenses in connection with the Merger, including certain
liabilities under the federal securities laws.
PaineWebber has previously rendered certain investment banking and
financial advisory services to both Lomak and Domain. In the ordinary course of
business, PaineWebber may actively trade the securities of Domain and Lomak for
its own account and for the accounts of its customers and, accordingly, may at
any time hold a long or short position in such securities.
CSFB Opinion to the Domain Board of Directors. CSFB was retained by Domain
to render an opinion as to the fairness of the Exchange Ratio from a financial
point of view to the holders of Domain Common Stock. CSFB was selected by Domain
based on CSFB's experience, expertise and familiarity with Domain and its
business. CSFB is an internationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, leveraged buyouts, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. At a meeting
of the Domain Board of Directors
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held on May 11, 1998 to consider the proposed Merger, CSFB rendered to the
Domain Board an oral opinion (subsequently confirmed by delivery of a written
opinion dated May 12, 1998, the date of execution of the Merger Agreement) to
the effect that, as of the date of such opinion and based upon and subject to
certain matters stated therein, the Exchange Ratio was fair to the holders of
Domain Common Stock from a financial point of view.
THE FULL TEXT OF CSFB'S WRITTEN OPINION DATED MAY 12, 1998 TO THE BOARD OF
DIRECTORS OF DOMAIN, WHICH SETS FORTH THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS
ANNEX D TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. HOLDERS OF DOMAIN COMMON STOCK ARE URGED TO READ THIS OPINION
CAREFULLY IN ITS ENTIRETY. CSFB'S OPINION IS ADDRESSED TO THE BOARD OF DIRECTORS
OF DOMAIN AND RELATES ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A
FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE PROPOSED
MERGER OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER WITH RESPECT TO ANY MATTERS RELATING TO THE MERGER. THE SUMMARY
OF THE OPINION OF CSFB SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, CSFB reviewed the Merger Agreement and certain
publicly available business and financial information relating to Domain and
Lomak. CSFB also reviewed certain other information, including financial
forecasts and reserve reports, provided to CSFB by Domain and Lomak, and met
with the managements of Domain and Lomak to discuss the businesses and prospects
of Domain and Lomak. CSFB also considered certain financial and stock market
data of Domain and Lomak and compared those data with similar data for other
publicly held companies in businesses similar to Domain and Lomak and
considered, to the extent publicly available, the financial terms of certain
other business combinations and other transactions recently effected. CSFB also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which CSFB deemed
relevant.
In connection with its review, CSFB did not assume any responsibility for
independent verification of any of the information provided to or otherwise
reviewed by CSFB and relied on such information being complete and accurate in
all material respects. With respect to financial forecasts, CSFB assumed that
such forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of Domain and Lomak as to
the future financial performance of Domain and Lomak and the strategic benefits
anticipated to result from the Merger. CSFB assumed that the reserve reports
reviewed by CSFB were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the preparers of such reports as to the oil
and gas reserves of Domain and Lomak. In addition, CSFB was not requested to
make and did not make an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Domain or Lomak, nor was CSFB furnished
with any such evaluations or appraisals. CSFB's opinion was necessarily based
upon information available to, and financial, economic, market and other
conditions as they existed and could be evaluated by, CSFB on the date of its
opinion. CSFB did not express any opinion as to the actual value of the Lomak
Common Stock when issued pursuant to the Merger or the prices at which the Lomak
Common Stock will trade subsequent to the Merger. In connection with its
engagement, CSFB was not requested to, and did not, participate in the
negotiation and structuring of the Merger, nor was CSFB requested to, and CSFB
did not, solicit third party indications of interest in acquiring all or any
part of Domain. Although CSFB evaluated the Exchange Ratio from a financial
point of view, CSFB was not requested to, and did not, recommend the specific
consideration payable in the Merger, which consideration was determined through
negotiation between Domain and Lomak. No other limitations were imposed on CSFB
with respect to the investigations made or procedures followed by CSFB in
rendering its opinion.
In preparing its opinion to the Board of Directors of Domain, CSFB
performed a variety of financial and comparative analyses, including those
described below. The summary of CSFB's analyses set forth below does not purport
to be a complete description of the analyses underlying CSFB's opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. In arriving at its opinion, CSFB made qualitative judgments
as to the significance and relevance of each analysis and factor considered
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by it. Accordingly, CSFB believes that its analyses must be considered as a
whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and its opinion. In its analyses,
CSFB made numerous assumptions with respect to Domain, Lomak, industry
performance, regulatory, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Domain and
Lomak. No company, transaction or business used in such analyses as a comparison
is identical to Domain or Lomak or the proposed Merger, nor is an evaluation of
the results of such analyses entirely mathematical; rather such analyses involve
complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies, business segments or transactions
being analyzed. The estimates contained in such analyses and the ranges of
valuations resulting from any particular analysis are not necessarily indicative
of actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by such analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. CSFB's opinion and financial
analyses were only one of many factors considered by the Board of Directors of
Domain in its evaluation of the proposed Merger and should not be viewed as
determinative of the views of the Board of Directors or management of Domain
with respect to the Merger or the Exchange Ratio.
The following is a summary of the material analyses performed by CSFB in
connection with its opinion dated May 12, 1998:
Discounted Cash Flow Analysis -- Based on certain financial forecasts
provided by the managements of Domain and Lomak and certain sensitivities to
such forecasts, CSFB estimated the present value of the unlevered free cash
flows for each company on a stand-alone basis using discount rates ranging from
10.0% to 12.0%. The free cash flows were developed based on certain operating
and financial assumptions, estimates and other information and certain
sensitivities to such estimates regarding the respective businesses of Domain
and Lomak, including estimated commodity prices, production, operating costs and
related capital expenditures which were discussed with the managements of Domain
and Lomak. CSFB also analyzed, and added to the resulting free cash flows,
implied enterprise reference ranges for certain non-depletable assets of Domain
and Lomak not included in their respective exploration and production
operations. The discounted cash flow analysis resulted in selected equity
reference ranges for Domain and Lomak of approximately $10.55 to $13.68 per
fully diluted common share and approximately $11.22 to $15.10 per fully diluted
common share, respectively.
Selected Companies Analysis -- CSFB compared certain publicly available
financial, operating and stock market data of Domain and Lomak to corresponding
data of selected publicly traded companies in the oil and gas exploration and
production industry. All multiples were based on closing stock prices as of May
8, 1998. With respect to Domain, the companies reviewed were Bellwether
Exploration Company, The Houston Exploration Company, The Meridian Resource
Corp., Panaco, Inc., St. Mary Land and Exploration Company, and Stone Energy
Corporation (collectively, the "Domain Selected Companies"). Applying selected
multiples for the Domain Selected Companies of (i) enterprise value to estimated
1998 and 1999 earnings before interest, taxes, depreciation, amortization and
exploration expense ("EBITDAX") of 6.0x to 7.0x and 5.0x to 6.0x, respectively,
(ii) equity value to estimated 1998 and 1999 after-tax cash flow (defined as net
income plus depreciation, exploration expense and deferred taxes) of 5.0x to
6.5x and 4.0x to 5.0x, respectively, (iii) enterprise value to 1997 proved
reserves of oil and gas equivalent barrels ("BOE") of $5.50 to $7.00 per BOE,
and (iv) enterprise value to 1997 after-tax Present Value of 1.9x to 2.1x to
corresponding financial data of Domain resulted in an implied equity reference
range for Domain of approximately $11.18 to $14.31 per fully diluted common
share. With respect to Lomak, the companies reviewed were Barrett Resources
Corporation, Cabot Oil & Gas Corporation, Devon Energy Company, Louis Dreyfus
Natural Gas Corp., Swift Energy Company, and Vintage Petroleum, Inc.
(collectively, the "Lomak Selected Companies" and, together with the Domain
Selected Companies, the "Selected Companies"). Applying selected multiples for
the Lomak Selected Companies of (i) enterprise value to estimated 1998 and 1999
EBITDAX of 6.0x to 7.0x and 5.5x to 6.5x, respectively, (ii) equity value to
estimated 1998 and 1999 after-tax cash flow of 5.0x to
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6.5x and 4.5x to 6.0x, respectively, (iii) enterprise value to 1997 proved
reserves of $5.50 to $7.00 per BOE, and (iv) enterprise value to 1997 after-tax
Present Value of 1.9x to 2.1x to corresponding financial data of Lomak resulted
in an implied equity reference range for Lomak of approximately $11.22 to $15.10
per fully diluted common share.
Because of inherent differences between the businesses, operations and
prospects of Domain, Lomak and the Selected Companies, CSFB believes that a
purely quantitative analysis of the Selected Companies without considering
qualitative judgments concerning differences between the financial and operating
characteristics of Domain, Lomak and the Selected Companies that could affect
the public trading values of Domain, Lomak and the Selected Companies, would not
be particularly meaningful in the context of the Merger.
Selected Transactions Analysis -- Using publicly available information,
CSFB analyzed the purchase prices and implied transaction multiples paid in
selected transactions in the oil and gas exploration and production industry.
All multiples were based on financial information available at the time of the
transaction. Included in the transactions reviewed by CSFB with respect to
Domain were the acquisition by Ocean Energy, Inc. of United Meridian
Corporation, the acquisition by Forcenergy Inc. of certain properties of EEX
Corporation, the acquisition by Titan Exploration, Inc. of Offshore Energy
Development Corporation, the acquisition by The Meridian Resource Corp. of Cairn
Energy USA, Inc., the acquisition by Louis Dreyfus Natural Gas Corp. of American
Exploration Company, the acquisition by Panaco, Inc. of Goldking Companies, and
the acquisition by The Meridian Resource Corp. of certain properties of Shell
Oil Company (the "Domain Selected Transactions"). Applying selected multiples
for the Domain Selected Transactions of (i) enterprise value to EBITDAX of 6.0x
to 7.0x and (ii) enterprise value to proved reserves of $5.50 to $7.00 per BOE
to corresponding financial data of Domain resulted in an implied equity
reference range for Domain of approximately $9.61 to $12.74 per fully diluted
common share. With respect to Lomak, CSFB reviewed the Domain Selected
Transactions and 151 additional transactions in the oil and gas exploration and
production industry (collectively, the "Selected Transactions"). Applying
selected multiples for the Selected Transactions of (i) enterprise value to
EBITDAX of 6.0x to 7.0x and (ii) enterprise value to proved reserves of $5.50 to
$7.00 per BOE to corresponding financial data of Lomak resulted in an implied
equity reference range for Lomak of approximately $8.32 to $14.13 per fully
diluted common share.
Because the market conditions, rationale and circumstances surrounding the
Selected Transactions were specific to each transaction and vary between
transactions and because of inherent differences between the businesses,
operations and prospects of Domain, Lomak and the companies involved in the
Selected Transactions, CSFB believes that a purely quantitative analysis of the
Selected Transactions, without considering qualitative judgments concerning
differences between the characteristics of the Selected Transactions and the
Merger that could affect the acquisition values of Domain, Lomak and the
acquired companies involved in the Selected Transactions, would not be
particularly meaningful in the context of the Merger.
Aggregate Reference Ranges -- On the basis of the valuation methodologies
employed in the analyses described above, CSFB derived equity reference ranges
for Domain and Lomak of approximately $10.55 to $13.68 per fully diluted common
share and $11.22 to $15.10 per fully diluted common share, respectively. A
comparison of the midpoints of these equity reference ranges of approximately
$12.12 per fully diluted common share for Domain and approximately $13.16 per
fully diluted common share for Lomak resulted in an implied exchange ratio of
0.9206.
Exchange Ratio Analyses -- CSFB also conducted the following relative
valuation analyses and compared the Exchange Ratio as of May 8, 1998 of 1.0404
with the exchange ratios implied by such analyses:
Historical Stock Trading Exchange Ratio Analysis -- CSFB performed an
exchange ratio analysis comparing the average closing stock prices for
Domain and Lomak during the one day, one week, one month and three month
periods preceding May 8, 1998 and since the initial public offering of
Domain Common Stock on June 24, 1997. This comparison resulted in implied
exchange ratios ranging from 0.8535 to 0.9444.
Contribution Exchange Ratio Analysis -- Using historical and future
estimated operating and financial data for Domain and Lomak provided by the
managements of Domain and Lomak, CSFB
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performed an exchange ratio analysis comparing the relative contributions
of Domain and Lomak on a combined basis with respect to EBITDAX, EBIT, net
income, after-tax cash flow and after-tax Present Value, reserves and
production. This analysis resulted in implied exchange ratios ranging from
0.1588 to 0.9058.
Pro Forma Merger Analysis -- CSFB analyzed the potential pro forma effect
of the Merger on Lomak's estimated 1998 and 1999 earnings per share ("EPS") and
cash flow per share ("CFPS") based upon financial forecasts provided by Domain
and Lomak managements and after giving effect to certain pre-tax cost savings
estimates of such managements. CSFB then compared the EPS and CFPS of Lomak on a
stand-alone basis to the EPS and CFPS attributable to the pro forma combined
entity. This analysis indicated that the proposed Merger would be dilutive to
Lomak's EPS and CFPS in 1998 and 1999 assuming the Merger is accounted for as a
purchase under generally accepted accounting principles. For purposes of this
analysis, IPF return of capital was not included in net income or Domain's cash
flow. CSFB also reviewed certain 1998 estimated pro forma credit statistics of
the combined company resulting from the Merger, including EBITDAX to estimated
interest expense, total debt to EBITDAX and total debt to total book
capitalization. The actual results achieved by the combined company may vary
from projected results and the variations may be material.
Other Factors. In the course of preparing its opinion, CSFB considered
certain other information and data, including, among other things, the trading
characteristics of Domain Common Stock and Lomak Common Stock and equity
research coverage of Domain and Lomak provided by securities analysts.
Miscellaneous. Pursuant to the terms of CSFB's engagement, CSFB will
receive a fee for its services in connection with the delivery of its opinion.
Domain also has agreed to reimburse CSFB for reasonable out-of-pocket expenses
incurred by CSFB in performing its services, including reasonable fees and
expenses for legal counsel and any other advisor retained by CSFB, and to
indemnify CSFB and certain related persons and entities against certain
liabilities under the federal securities laws, arising out of CSFB's engagement.
CSFB has in the past provided financial services to Domain, Lomak and
certain of their respective affiliates unrelated to the proposed Merger, for
which services CSFB has received compensation. In the ordinary course of
business, CSFB and its affiliates may actively trade the debt and equity
securities of both Domain and Lomak for their own accounts and for the accounts
of customers and accordingly, may at any time hold long or short positions in
such securities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of Domain's Board of Directors with
respect to the Merger, Domain's stockholders should be aware that the members of
Domain's Board of Directors and the officers of Domain have certain interests
respecting the Merger separate from their interests as holders of Domain Common
Stock, including those referred to below.
Transactions with FRLP. Each of Jonathan S. Linker, William E. Macaulay and
Steven H. Pruett is a member of Domain's Board of Directors and is affiliated
with First Reserve, the managing general partner of the general partner of FRLP.
FRLP entered into a Stock Purchase Agreement, dated May 12, 1998 (the "Stock
Purchase Agreement"), with Lomak whereby FRLP will sell to Lomak 3,250,000
shares of Domain Common Stock at a price equal to $13.50 per share in cash. FRLP
and Lomak also entered into a Voting and Standstill Agreement, dated May 12,
1998 (the "Voting Agreement"), whereby Lomak granted to FRLP demand and
"piggyback" registration rights with respect to the Lomak Common Stock to be
acquired by FRLP in the Merger and agreed, so long as FRLP owns at least 5% of
the outstanding shares of Lomak's Common Stock, to nominate annually one
individual designated by FRLP for election to Lomak's Board of Directors. FRLP
also agreed in the Voting Agreement (i) to vote its shares of Domain Common
Stock in favor of the Merger; (ii) that it would not take any action to solicit,
initiate or encourage any transaction involving a merger or other business
combination involving Domain other than the Merger; (iii) that, subject to
certain exceptions, it would not sell, transfer or pledge, or grant a proxy with
respect to, any of the shares of Lomak Common Stock beneficially owned by it
other than pursuant to a bona fide public offering or to an entity who
immediately after such transaction would not own more than 1% of the voting
securities of Lomak; (iv) that it would not initiate or submit, or solicit any
stockholders of Lomak with respect to, any stockholder
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proposal; (v) that it would not initiate or engage in any acquisition or
business combination proposal relating to Lomak, or any tender or exchange offer
for Lomak's voting securities, or any proxy contest or other proxy solicitation
or change of control of Lomak; and (vi) that, subject to certain exceptions, it
would not vote the shares of Lomak Common Stock in favor of any matter involving
a business combination or other change in control of Lomak that had not been
approved by the Lomak Board of Directors. See "Voting Agreement" and "Stock
Purchase Agreement."
Loans to Domain Employees. Pursuant to the Merger Agreement, Lomak has
agreed to make available to certain employee stockholders of Domain loans in an
aggregate amount not to exceed approximately $1.4 million. The loans are to be
used to pay federal income taxes owed by the employees as a result of the
exchange of Domain Common Stock for Lomak Common Stock in the Merger. The loans
would be recourse to the employee and secured by the Lomak Common Stock received
by the employee in the Merger.
Retention Plan. Pursuant to the Merger Agreement, Lomak and Domain agreed
that Domain would adopt, and Lomak would assume at the Effective Time, a Key
Employee Retention Plan providing that (i) employees of Domain who remain
employed by Range at May 15, 1999 would receive a retention payment in an amount
agreed to by Domain and Lomak (which in the aggregate shall not exceed $650,000)
and (ii) all employees of Domain other than Michael V. Ronca and Michael L.
Harvey whose employment is terminated prior to May 15, 1999, other than by Range
for "Cause" or by the employee without "Good Reason," would receive a severance
payment equal to six months of their base salary.
Domain Option Plans. Lomak has agreed to assume at the Effective Time the
obligations of Domain under its Second Amended and Restated 1996 Non-Qualified
Stock Purchase and Option Plan and the grant agreements thereunder
(collectively, the "Employee Option Plan") and its 1997 Stock Option Plan for
Nonemployee Directors and the grant agreements thereunder (collectively, the
"Director Option Plan" and, together with the Employee Option Plan, the "Domain
Plans"). Options to purchase 942,517 and 20,010 shares of Domain Common Stock
were outstanding as of May 12, 1998 under the Employee Option Plan and the
Director Option Plan, respectively. Consistent with the terms of the Domain
Plans, if the Merger is approved by Lomak's stockholders, at the Effective Time,
outstanding options under the Domain Plans will become options to acquire a
number of shares of Lomak Common Stock equal to the number of shares of Domain
Common Stock subject to such options multiplied by the Exchange Ratio at an
exercise price per share of Lomak Common Stock equal to the exercise price per
share of Domain Common Stock immediately prior to the Effective Time divided by
the Exchange Ratio.
The Employee Option Plan currently provides that the "Time Options" granted
thereunder shall vest in 20% increments over a five-year period commencing on
the date of grant and shall become immediately exercisable upon a Change of
Control (as defined in the Employee Option Plan). As of the date hereof, 84,251
of the Time Options granted under the Employee Option Plan have vested. The
Director Option Plan currently provides that the options granted thereunder
shall vest in one-third increments over a three-year period and shall become
immediately exercisable upon a Change of Control (as defined in the Director
Option Plan). As of the date hereof, 13,340 of the options granted under the
Director Option Plan have vested. At the Effective Time, all of the 471,259
outstanding Time Options and all of the 20,010 options granted under the
Director Option Plan shall vest and become immediately exercisable. The balance
of the options granted under the Employee Option Plan are "Performance Options,"
which vest two years after the date of grant provided that an Investment Return
Hurdle (as defined in the Employee Option Plan) has been satisfied. The Employee
Option Plan currently provides that if a Performance Option is not exercisable
at the time an optionee's employment is terminated, it shall be immediately
canceled. The Merger Agreement permits Domain to modify the Performance Options
to provide that if an optionee's employment is terminated as a result of the
death or disability of the optionee, or if Domain (prior to the Effective Time)
or Lomak terminates an optionee's employment without Cause (as defined in the
Employee Option Plan), or if an optionee terminates his or her employment for
Good Reason (as defined in the Employee Option Plan), all Performance Options
granted to the optionee shall become immediately exercisable. Since the Merger
Consideration exceeds the Investment Return Hurdle at the time of the Merger,
the Investment Return Hurdle will be satisfied upon consummation of the Merger.
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Officers and Directors of Range. Immediately after the Effective Time,
Jonathan S. Linker, the Chairman of the Board of Domain, and Michael V. Ronca,
the President and Chief Executive Officer and a director of Domain, will be
elected as directors of Range, and the size of Range's Board of Directors will
be increased accordingly. In addition, immediately after the Effective Time, Mr.
Ronca will become the Chief Operating Officer of Range.
Ronca Employment Agreement. The Merger Agreement provides that Lomak and
Michael V. Ronca will negotiate in good faith to enter into an amendment to Mr.
Ronca's existing Employment Agreement with Domain to address the following:
title; job responsibilities; salary; annual performance bonus; stock option
grants; and participation in deferred compensation and stock purchase or other
incentive compensation plans.
Harvey Loan Arrangement. The Merger Agreement provides that the existing
agreement between Domain and Michael L. Harvey, Executive Vice President and a
director of Domain, permitting Mr. Harvey to obtain a loan of $250,000 to
acquire Domain Common Stock through open market purchases will be assumed by
Range and converted into an agreement to obtain a loan in such amount, on the
same terms, to acquire Lomak Common Stock, and such agreement will be extended
to December 31, 1998.
Range Stock Options. At the Effective Time, former Domain employees
continuing as employees of Range will receive new stock options under Range's
existing stock option plan as recommended by Mr. Ronca and Mr. Pinkerton, not to
exceed 175,000 options in the aggregate. Former Domain employees continuing with
Range in 1999 and thereafter will be eligible for participation in regular
annual option grants consistent with Range's policies for similarly situated
employees.
Indemnification. The Merger Agreement provides that, for six years after
the Effective Time, Lomak will indemnify, defend and hold harmless the present
and former officers and directors of Domain and its subsidiaries (each an
"Indemnified Party") against all losses, claims, damages, liabilities, fees and
expenses (including reasonable fees and disbursements of counsel and judgments,
fines, losses, claims, liabilities and amounts paid in settlement (provided that
any such settlement is effected with the prior written consent of Lomak))
arising out of actions or omissions in their capacity as such occurring at or
prior to the Effective Time to the full extent permitted under the DGCL or
Domain's Certificate of Incorporation, Bylaws or written indemnification
agreements in effect at the date of the Merger Agreement. In addition, Lomak
shall maintain Domain's existing officers' and directors' liability insurance
for a period of not less than six years after the Effective Time, but only to
the extent related to actions or omissions prior to the Effective Time; provided
that Lomak may substitute therefor policies of substantially similar coverage
and amounts with a comparably rated underwriter containing terms no less
advantageous in any material respect to such former directors or officers and
provided that Lomak is not obligated to pay more than an aggregate of $600,000
for such insurance during such period. Domain currently estimates that this
insurance will not cost more than $250,000 in the aggregate.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material federal income tax
consequences of the Merger to the holders of Domain Common Stock and is based
upon current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing regulations thereunder, current administrative rulings of the
Internal Revenue Service (the "IRS") and court decisions, all of which are
subject to change. No attempt has been made to comment on all federal income tax
consequences of the Merger that may be relevant to particular holders, including
holders that are subject to special tax rules which may modify or alter the
following discussion, such as dealers in securities, foreign persons, mutual
funds, insurance companies, tax-exempt entities and holders who do not hold
their shares as capital assets. HOLDERS OF DOMAIN COMMON STOCK ARE ADVISED AND
EXPECTED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES AND THE
CONSEQUENCES UNDER STATE, LOCAL AND FOREIGN TAX LAWS.
The Merger will not constitute a tax-free reorganization for federal income
tax purposes. Accordingly, even though no cash is received in the transaction, a
holder of Domain Common Stock that exchanges such stock for Lomak Common Stock
in the Merger will recognize gain or loss equal to the difference between the
fair market value of the Lomak Common Stock received by such holder in the
Merger and the adjusted basis of the Domain Common Stock surrendered in the
Merger. Such gain or loss will be a capital gain or loss if the
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Domain Common Stock surrendered in the Merger is held as a capital asset at the
Effective Time, and will be long-term capital gain or loss if such Domain Common
Stock has been held for more than one year. For individuals, the maximum federal
income tax rate for long-term capital gain generally is 28% (20% for capital
assets held more than 18 months). There are substantial restrictions on the
ability of both individuals and corporations to deduct capital losses. The basis
of a holder's shares of Lomak Common Stock received in the Merger will be equal
to the fair market value of those shares at the Effective Time.
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method of accounting in
accordance with Opinion No. 16 of the Accounting Principles Board. Under this
method of accounting, the purchase price, based on the fair market value of
Lomak Common Stock issued for Domain Common Stock in the Merger and any cash
consideration, will be compared to the value of the net assets acquired and the
difference generally will be recorded as additional investment in oil and gas
properties.
For presentation of certain anticipated effects of the accounting treatment
on the combined financial position and results of operations of Lomak after
giving effect to the purchase of Domain by Lomak, see "Risk Factors -- Certain
Accounting Consequences of the Merger" and "Unaudited Pro Forma Condensed
Financial Information."
GOVERNMENTAL AND REGULATORY APPROVALS
Antitrust. Transactions such as the acquisition by FRLP of shares of Lomak
Common Stock pursuant to the Merger are reviewed by the Department of Justice
and the Federal Trade Commission (the "FTC") to determine whether they comply
with applicable antitrust laws. Under the provisions of the HSR Act, such
acquisition by FRLP pursuant to the Merger (and therefore the Merger itself) may
not be consummated until such time as the specified waiting period requirements
of the HSR Act have been satisfied. Because of the number of shares of Lomak
Common Stock to be received by the Principal Stockholder in the Merger, Lomak
and the Principal Stockholder filed notification reports, together with requests
for early termination of the waiting period, with the Department of Justice and
the FTC under the HSR Act on June 10, 1998. The requests for early termination
of the waiting period were granted on June 19, 1998.
At any time before or after the Effective Time, the Department of Justice,
the FTC, a state Attorney General or a private person or entity could seek under
the antitrust laws, among other things, to enjoin the Merger or to cause Lomak
to divest itself, in whole or in part, of Domain or of other businesses
conducted by Lomak. There can be no assurance that a challenge to the Merger
will not be made or that, if such a challenge is made, Lomak and Domain will
prevail.
Antitakeover. DGCL Section 203, in general, prohibits a "business
combination" between a corporation and an "interested stockholder" within three
years of the time such stockholder became an "interested stockholder" unless (i)
prior to such time the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, exclusive of shares owned by
directors who are also officers and by certain employee stock plans, or (iii)
after such time, the business combination is approved by the board of directors
and authorized by the affirmative vote at a stockholders' meeting of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. The term "business combination" is defined to include, among other
transactions between the interested stockholder and the corporation or any
direct or indirect majority-owned subsidiary thereof, a merger or consolidation,
a sale, pledge, transfer or other disposition (including as part of a
dissolution) of assets having an aggregate market value equal to 10% or more of
either the aggregate market value of all assets of the corporation on a
consolidated basis or the aggregate market value of all the outstanding stock of
the corporation; certain transactions that would increase the interested
stockholder's proportionate share ownership of the stock of any class or series
of the corporation or such subsidiary; and any receipt by the interested
stockholder of the benefit of any loans, advances,
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guarantees, pledges or other financial benefits provided by or through the
corporation or any such subsidiary. In general, and subject to certain
exceptions, an "interested stockholder" is any person who is the owner of 15% or
more of the outstanding voting stock (or, in the case of a corporation with
classes of voting stock with disparate voting power, 15% or more of the voting
power of the outstanding voting stock) of the corporation, and the affiliates
and associates of such person. The term "owner" is broadly defined to include
any person that individually or with or through his or its affiliates or
associates, among other things, beneficially owns such stock, or has the right
to acquire such stock (whether such right is exercisable immediately or only
after the passage of time) pursuant to any agreement or understanding or upon
the exercise of warrants or options or otherwise or has the right to vote such
stock pursuant to any agreement or understanding, or has an agreement or
understanding with the beneficial owner of such stock for the purpose of
acquiring, holding, voting or disposing of such stock and Stock Purchase
Agreement and the Voting Agreement.
On May 11, 1998, the Board of Directors of Domain approved Lomak's purchase
of shares of Domain Common Stock pursuant to the Stock Purchase Agreement and
the execution by Lomak and FRLP of the Voting Agreement, as well as the Merger
and the Merger Agreement. As a result, the restrictions of Section 203 of the
DGCL described above will not apply to the Merger or the transactions
contemplated by the Merger Agreement.
Lomak and Domain are aware of no other governmental or regulatory approvals
required for consummation of the Merger, other than compliance with applicable
federal and state securities laws.
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Lomak Common Stock to be received by Domain stockholders in
connection with the Merger have been registered under the Securities Act and,
except as set forth in this paragraph, may be traded without restriction. The
shares of Lomak Common Stock to be issued in connection with the Merger and
received by persons who are deemed to be "affiliates" (as that term is defined
in Rule 144 under the Securities Act) of Domain prior to the Merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 under the Securities Act (or, in case any such person should become an
affiliate of Lomak, Rule 144 under the Securities Act) or as otherwise permitted
under the Securities Act. In addition, the Principal Stockholder is party to the
Voting Agreement with Lomak, which grants FRLP certain demand and piggy-back
registration rights on the shares of Lomak Common Stock acquired in the Merger,
subject to customary limitations.
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
Certain of the information set forth under the captions "The
Companies -- Domain Energy Corporation -- Certain Projections," "Post-Merger
Profile and Strategy," "-- Domain's Reasons for the Merger; Recommendation of
Board of Directors of Domain," "-- Lomak's Reasons for the Merger;
Recommendation of the Board of Directors of Lomak" and "Opinions of Financial
Advisors" contains forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act, including
projections, estimates and expectations. Although Lomak and Domain believe that
such projections, estimates and expectations are based on reasonable
assumptions, they can give no assurance that such projections, estimates and
expectations will be achieved. Important factors that could cause actual results
to differ materially from those in the forward-looking statements herein include
political and economic developments in the United States and/or foreign
countries, federal and state regulatory requirements, the timing and extent of
changes in commodity prices, the extent of success in acquiring oil and gas
properties and in discovering, developing and producing reserves, conditions of
the capital markets and equity markets during the periods covered by the
forward-looking statements, and the ability of the two companies to successfully
integrate their operations in a timely manner. See "Risk Factors" for further
information with respect to certain of such factors. In addition, certain of
such projections and expectations are based on historical results, which may not
be indicative of future performance. See "Unaudited Pro Forma Combined Financial
Information."
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CERTAIN TERMS OF THE MERGER AGREEMENT
The following description does not purport to be complete and is qualified
in its entirety by reference to the Merger Agreement, a copy of which is
attached as Annex A to this Proxy Statement/Prospectus and is incorporated
herein by reference. Capitalized terms used but not defined herein are defined
in the Merger Agreement and used herein with same meaning as ascribed thereto in
the Merger Agreement.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that, as soon as practicable after the
satisfaction or waiver of the conditions to effecting the Merger, the parties
shall cause the Merger to be consummated by filing a Certificate of Merger with
the Secretary of State of the State of Delaware in such form as required by, and
executed in accordance with, the relevant provisions of the DGCL. It is
anticipated that, if the Stock Issuance is approved at the Lomak Special Meeting
and all other conditions to the Merger have been satisfied or waived, the
Effective Time will occur on the date of the Lomak Special Meeting, or as soon
thereafter as practicable.
MANNER AND BASIS OF CONVERTING SHARES
As of the Effective Time of the Merger, without any action on the part of
the holders of Domain Common Stock, each share of Domain Common Stock issued and
outstanding immediately prior to the Effective Time shall be converted into such
number of shares of Lomak Common Stock equal to the Exchange Ratio. The
"Exchange Ratio" shall be equal to the quotient of (i) $14.50 divided by (ii)
the Closing Date Market Price (rounded to four decimal places); provided,
however, that in no event shall the Exchange Ratio be greater than 1.2083 nor
less than 0.8529. The term "Closing Date Market Price" shall mean the average
closing sales price of Lomak Common Stock, rounded to four decimal places, as
reported under "NYSE Composite Transaction Reports" in The Wall Street Journal
for the period of the 15 most recent trading days ending on the third business
day prior to the Closing Date (as defined in the Merger Agreement). All such
Domain Common Stock, when so converted, shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and the holder
of a certificate (a "Certificate") that, immediately prior to the Effective
Time, represented outstanding shares of Domain Common Stock shall cease to have
any rights with respect thereto, except the right to receive, upon the surrender
of such Certificate, the Lomak Common Stock to which such holder is entitled
without interest (the "Merger Consideration"). Until surrendered as contemplated
by the Merger Agreement, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
Merger Consideration as contemplated by the Merger Agreement.
All shares of Lomak Common Stock issued upon the surrender of Certificates
in accordance with the terms of the Merger Agreement shall be deemed to have
been issued in full satisfaction of all rights pertaining to such Certificates
and the Domain Common Stock formerly represented thereby.
Each share of Lomak Common Stock issued and outstanding immediately prior
to the Effective Time shall remain an issued and outstanding share of Lomak
Common Stock and shall not be affected by the Merger.
TREATMENT OF DOMAIN STOCK OPTIONS
For a description of the treatment of stock options under Domain's stock
option plans, see "The Merger -- Interests of Certain Persons in the
Merger -- Domain Option Plans."
SURRENDER AND EXCHANGE OF CERTIFICATES
Prior to the Effective Time, Lomak shall deposit with the Exchange Agent
for the benefit of the holders of Domain Common Stock (other than Lomak, Merger
Sub, any other Subsidiary of Lomak, Domain or any Subsidiary of Domain), for
exchange in accordance with the Merger Agreement through the Exchange Agent, (i)
as of the Effective Time, certificates representing the Merger Consideration to
be issued pursuant to the
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Merger Agreement, and (ii) from time to time as necessary, cash to be paid in
lieu of any fractional share in accordance with the Merger Agreement (such
certificates for the Merger Consideration and such cash being hereinafter
referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to
irrevocable instructions, deliver the Merger Consideration and cash in exchange
for surrendered Certificates pursuant to the Merger Agreement out of the
Exchange Fund.
Promptly after the Effective Time, but in any event not later than five
business days thereafter, Lomak will send, or will cause the Exchange Agent to
send, to each holder of a Certificate (other than Lomak, Merger Sub, any other
Subsidiary of Lomak, Domain or any Subsidiary of Domain) a letter of transmittal
and instructions for use in effecting the exchange of such Certificate for
certificates representing the Merger Consideration and, if applicable, cash in
lieu of any fractional share. Provision also shall be made for holders of
Certificates to procure a letter of transmittal and instructions and deliver
such letter of transmittal and Certificates in exchange for the Merger
Consideration and, if applicable, cash in lieu of any fractional shares in
person immediately after the Effective Time.
After the Effective Time, the stock transfer books of Domain shall be
closed and there shall be no further registration of transfers of Domain Common
Stock outstanding prior to the Effective Time. If, at or after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
canceled and exchanged as provided for, and in accordance with the procedures
set forth, in the Merger Agreement.
Any Merger Consideration and any cash in the Exchange Fund that remain
unclaimed six months after the Effective Time shall be returned to Lomak, upon
demand of Lomak, and any holder of Domain Common Stock who has not exchanged
such holder's Certificates in accordance with the Merger Agreement prior to that
time shall thereafter look only to Lomak, as general creditors thereof, to
exchange such Certificates or to pay amounts to which they are entitled pursuant
to the Merger Agreement. If outstanding Certificates are not surrendered prior
to two years after the Effective Time (or, in any particular case, prior to such
earlier date on which any Merger Consideration issuable in respect of such
Certificates or the dividends and other distributions, if any, described below
would otherwise escheat to or become the property of any governmental unit or
agency), the Merger Consideration issuable in respect of such Certificates, and
the amount of dividends and other distributions, if any, that have become
payable and that thereafter become payable on the Merger Consideration shall, to
the extent permitted by applicable law, become the property of Lomak, free and
clear of all claims or interest of any person previously entitled thereto.
Notwithstanding the foregoing, none of Lomak, the Surviving Corporation or
Domain shall be liable to any holder of Certificates for any amount paid, or
Merger Consideration, cash or dividends delivered, to a public official pursuant
to applicable abandoned property, escheat or similar laws.
No dividends or other distributions declared or made after the Effective
Time shall be paid to the holder of any unsurrendered Certificate with respect
to the Merger Consideration represented thereby until such Certificate is
surrendered as provided in the Merger Agreement. Following such surrender, there
shall be paid, without interest, to the person in whose name the certificates
representing the Merger Consideration issued in exchange therefor are
registered, (i) promptly all dividends and other distributions paid in respect
of such Merger Consideration with a record date on or after the Effective Time
and theretofore paid, and (ii) at the appropriate date, all dividends or other
distributions in respect of such Merger Consideration with a record date after
the Effective Time but prior to surrender and a payment date occurring after
surrender.
If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificate to
be lost, stolen or destroyed and, if required by Lomak, the posting by such
person of a bond in such reasonable amount as Lomak may direct as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration and, if applicable, cash and unpaid
dividends and other distributions on any Merger Consideration deliverable in
respect thereof pursuant to the Merger Agreement.
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TREATMENT OF FRACTIONAL INTERESTS
No fractional shares of Lomak Common Stock shall be issued in the Merger
and fractional share interests shall not entitle the owner thereof to vote or to
any rights of a stockholder of Lomak. All holders of fractional shares of Lomak
Common Stock shall be entitled to receive, in lieu thereof, an amount in cash
determined by multiplying the fraction of a share of Lomak Common Stock to which
such holder would otherwise have been entitled by the Closing Date Market Price.
NO DISSENTERS' OR APPRAISAL RIGHTS
Holders of Domain Common Stock, Lomak Common Stock and Lomak Preferred
Stock (including holders of Lomak Common Stock and Lomak Preferred Stock who
vote against the Stock Issuance) will not be entitled to dissenters' or
appraisal rights under the DGCL if the Merger is consummated.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
Domain, Merger Sub and Lomak relating to, among other things, certain aspects of
the respective businesses and financial statements of the parties and certain
other matters. The representations and warranties expire at the Closing.
CONDUCT OF BUSINESS PRIOR TO THE MERGER
Conduct of Business by Domain Pending the Merger. From the date of the
Merger Agreement until the Effective Time, unless Lomak shall otherwise agree in
writing, or except as set forth in the disclosure letter delivered to Lomak and
Merger Sub contemporaneously with the execution of the Merger Agreement (the
"Domain Disclosure Schedule") or as otherwise contemplated by the Merger
Agreement, Domain and its Subsidiaries (as defined in the Merger Agreement)
shall conduct their business in the ordinary course consistent with past
practice and shall use their reasonable efforts to preserve intact their
business organizations and relationships with third parties and to keep
available the services of their present officers and key employees, subject to
the terms of the Merger Agreement. Except as set forth in the Domain Disclosure
Schedule or as otherwise provided in the Merger Agreement, from the date of the
Merger Agreement until the Effective Time, without the prior written consent of
Lomak, which consent will not be unreasonably withheld: (a) neither Domain nor
its Subsidiaries will adopt or propose any change to its Certificate of
Incorporation or Bylaws; (b) Domain will not, and will not permit any of its
Subsidiaries to (i) declare, set aside or pay any dividend or other distribution
with respect to any shares of capital stock of Domain or its Subsidiaries or
(ii) repurchase, redeem or otherwise acquire any outstanding shares of capital
stock or other securities of, or other ownership interests in, Domain or any of
its Subsidiaries, other than intercompany acquisitions of stock; (c) Domain will
not, and will not permit any of its Subsidiaries to, merge or consolidate with
any other Person (as defined in the Merger Agreement) or acquire assets having
an individual purchase price of more than $2.5 million or aggregate purchase
prices of more than $10 million; (d) Domain will not, and will not permit any of
its Subsidiaries to, sell, lease, license or otherwise surrender, relinquish or
dispose of any assets or properties with an individual fair market value
exceeding $1 million or aggregate fair market value exceeding $5 million; (e)
Domain will not settle any material Audit, make or change any material Tax
election or file any material amended Tax Return (each as defined in the Merger
Agreement); (f) Domain will not issue any securities (except pursuant to
existing obligations disclosed in any form, registration statement, report,
schedule, proxy or information statement and other document (including exhibits
and amendments thereto), including without limitation Domain's Annual Reports to
Stockholders incorporated by reference in certain of such reports, required to
be filed with the Commission since December 31, 1996 under the Securities Act or
the Exchange Act (collectively, the "Domain SEC Reports") or the Domain
Disclosure Schedule), enter into any amendment of any term of any outstanding
security of Domain or of any of its Subsidiaries, incur any indebtedness except
trade debt in the ordinary course of business or pursuant to existing credit
facilities or arrangements, fail to make any required contribution to any
employee benefit plans or arrangements of any type (including but not limited to
plans described in section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")), sponsored, maintained or contributed to by
Domain or any trade or business, whether or not incorporated, which together
with Domain would be deemed a "single
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employer" within the meaning of Section 414(b), (c) or (m) of the Code or
section 4001(b)(1) of ERISA within six years prior to the Effective Time, which
provide benefits to Domain's employees ("Domain Benefit Plans"), increase
compensation, bonus (with certain specified exceptions) or other benefits
payable to any employee or former employee or enter into any settlement or
consent with respect to any pending litigation; (g) Domain will not change any
method of accounting or accounting practice by Domain or any of its
Subsidiaries, except for any such change required by GAAP; (h) Domain will not
take any action that would give rise to a claim under the WARN Act or any
similar state law or regulation because of a "plant closing" or "mass layoff"
(each as defined in the WARN Act); (i) Domain will not amend or otherwise change
the terms of its engagement letter with CSFB, except to the extent that any such
amendment or change would result in terms more favorable to Domain; (j) neither
Domain nor any of its Subsidiaries will become bound or obligated to participate
in any operation, or consent to participate in any operation, with respect to
any Oil and Gas Interests (as defined in the Merger Agreement) that will
individually cost in excess of $2.5 million, unless the operation is a currently
existing obligation of Domain or any of its Subsidiaries or necessary to extend,
preserve or maintain an Oil and Gas Interest; (k) neither Domain nor any of its
Subsidiaries will enter into any futures, hedge, swap, collar, put, call, floor,
cap, option or other contracts that are intended to benefit from or reduce or
eliminate the risk of fluctuations in the price of commodities, including
Hydrocarbons (as defined in the Merger Agreement), or securities other than in
the ordinary course of business in accordance with Domain's current policies;
(l) Domain will not, and will not permit any of its Subsidiaries to (i) take, or
agree or commit to take, any action that would make any representation and
warranty of Domain in the Merger Agreement inaccurate in any material respect
at, or as of any time prior to, the Effective Time or (ii) omit, or agree or
commit to omit, to take any action necessary to prevent any such representation
or warranty from being materially inaccurate in any respect at any such time;
(m) neither Domain nor any of its Subsidiaries shall (i) adopt, amend (other
than amendments that reduce the amounts payable by Domain or any Subsidiary, or
amendments required by law to preserve the qualified status of a Domain Benefit
Plan) or assume an obligation to contribute to any employee benefit plan or
arrangement of any type or collective bargaining agreement or, except as
described in the Merger Agreement, enter into any employment, severance or
similar contract with any Person (including, without limitation, contracts with
management of Domain or any Subsidiaries that might require that payments be
made upon the consummation of the transactions contemplated by the Merger
Agreement) or amend any such existing contracts to increase any amounts payable
thereunder or benefits provided thereunder, (ii) engage in any transactions
(either acting alone or in conjunction with any Domain Benefit Plan or trust
created thereunder) in connection with which Domain or any Subsidiary could be
subjected (directly or indirectly) to either a civil penalty assessed pursuant
to subsections (c), (i) or (l) of section 502 of ERISA or a tax imposed pursuant
to Chapter 43 of Subtitle D of the Code, (iii) terminate any Domain Benefit Plan
in a manner, or take any other action with respect to any Domain Benefit Plan,
that could result in liability of Domain or any Subsidiary to any Person, (iv)
take any action that could adversely affect the qualification of any Domain
Benefit Plan or its compliance with the applicable requirements of ERISA, (v)
fail to make full payment when due of all amounts which, under the provisions of
any Domain Benefit Plan, any agreement relating thereto or applicable law,
Domain or any Subsidiary is required to pay as contributions thereto or (vi)
fail to file, on a timely basis, all reports and forms required by federal
regulations with respect to any Domain Benefit Plan; and (n) Domain will not,
and will not permit any of its Subsidiaries to, agree or commit to do any of the
foregoing.
Conduct of Business by Lomak Pending the Merger. From the date of the
Merger Agreement until the Effective Time, unless Domain shall otherwise agree
in writing, or except as set forth in the Lomak Disclosure Schedule (as defined
in the Merger Agreement) or as otherwise contemplated by the Merger Agreement,
Lomak shall conduct, and shall cause its Subsidiaries to conduct, its business
in the ordinary course consistent with past practice and shall use, and shall
cause its Subsidiaries to use, all reasonable efforts to preserve intact its
business organizations and relationships with third parties and to keep
available the services of its key employees, subject to the terms of the Merger
Agreement. Except as set forth in the Lomak Disclosure Schedule or as otherwise
contemplated by or provided in the Merger Agreement, from the date of the Merger
Agreement until the Effective Time, without the prior written consent of Domain,
which consent will not be unreasonably withheld: (a) neither Lomak nor Merger
Sub will adopt or propose any change to its Certificate of Incorporation or
Bylaws; (b) Lomak will not, and will not permit any of its Subsidiaries to (i)
declare, set
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<PAGE> 72
aside or pay any dividend or other distribution with respect to any shares of
capital stock of Lomak or its Subsidiaries other than regular quarterly
dividends not in excess of 150% of the per share dividends currently paid or
(ii) repurchase, redeem or otherwise acquire any outstanding shares of capital
stock or other securities of, or other ownership interests in, Lomak or any of
its Subsidiaries, other than intercompany acquisitions of stock; (c) neither
Lomak nor Merger Sub will merge or consolidate with any other Person or acquire
assets having an individual purchase price of more than $5 million or aggregate
purchase prices of more than $20 million; (d) Lomak will not, and will not
permit any of its Subsidiaries to, sell, lease, license or otherwise surrender,
relinquish or dispose of any assets or properties with an individual fair market
value exceeding $2 million or an aggregate fair market value exceeding $10
million; (e) Lomak will not settle any material Audit, make or change any
material Tax election or file any material amended Tax Return (each as defined
in the Merger Agreement); (f) Lomak will not issue any securities (except
pursuant to existing obligations disclosed in the Lomak SEC Reports or the Lomak
Disclosure Schedule), enter into any amendment of any term of any outstanding
security of Lomak or of any of its Subsidiaries, incur any indebtedness except
trade debt in the ordinary course of business or pursuant to existing credit
facilities or arrangements, fail to make any required contribution to any Lomak
Benefit Plan (as defined in the Merger Agreement), increase compensation, bonus
(with certain specified exceptions) or other benefits payable to any executive
officer or former employee or enter into any settlement or consent with respect
to any pending litigation; (g) Lomak will not change any method of accounting or
accounting practice by Lomak or any of its Subsidiaries, except for any such
change required by GAAP; (h) Lomak will not amend or otherwise change the terms
of its engagement letter with PaineWebber, except to the extent that any such
amendment or change would result in terms more favorable to Lomak; (i) neither
Lomak nor any of its Subsidiaries will become bound or obligated to participate
in any operation, or consent to participate in any operation, with respect to
any Oil and Gas Interests (as defined in the Merger Agreement) that will
individually cost in excess of $5 million, unless the operation is a currently
existing obligation of Lomak or any of its Subsidiaries or necessary to extend,
preserve or maintain an Oil and Gas Interest; (j) neither Lomak nor any of its
Subsidiaries will enter into any futures, hedge, swap, collar, put, call, floor,
cap, option or other contracts that are intended to benefit from or reduce or
eliminate the risk of fluctuations in the price of commodities, including
Hydrocarbons, or securities other than in the ordinary course of business in
accordance with Lomak's current policies; (k) Lomak will not, and will not
permit any of its Subsidiaries to (i) take, or agree or commit to take, any
action that would make any representation and warranty of Lomak or Merger Sub in
the Merger Agreement inaccurate in any material respect at, or as of any time
prior to, the Effective Time or (ii) omit, or agree or commit to omit, to take
any action necessary to prevent any such representation or warranty from being
materially inaccurate in any respect at any such time; (l) neither Lomak nor any
of its Subsidiaries shall (i) adopt, amend (other than amendments that reduce
the amounts payable by Lomak or any Subsidiary, or amendments required by law to
preserve the qualified status of a Lomak Benefit Plan) or assume an obligation
to contribute to any employee benefit plan or arrangement of any type or
collective bargaining agreement or enter into any employment, severance or
similar contract with any Person (including, without limitation, contracts with
management of Lomak or any Subsidiaries that might require that payments be made
upon consummation of the transactions contemplated by the Merger Agreement) or
amend any such existing contracts to increase any amounts payable thereunder or
benefits provided thereunder, (ii) engage in any transaction (either acting
alone or in conjunction with any Lomak Benefit Plan or trust created thereunder)
in connection with which Lomak or any Subsidiary could be subjected (directly or
indirectly) to either a civil penalty assessed pursuant to subsections (c), (i)
or (l) of section 502 of ERISA or a tax imposed pursuant to Chapter 43 of
Subtitle D of the Code, (iii) terminate any Lomak Benefit Plan in a manner, or
take any other action with respect to any Lomak Benefit Plan, that could result
in the liability of Lomak or any Subsidiary to any Person, (iv) take any action
that could adversely affect the qualification of any Lomak Benefit Plan or its
compliance with the applicable requirements of ERISA, (v) fail to make full
payment when due of all amounts which, under the provisions of any Lomak Benefit
Plan, any agreement relating thereto or applicable law, Lomak or any Subsidiary
is required to pay as contributions thereto or (vi) fail to file, on a timely
basis, all reports and forms required by federal regulations with respect to any
Lomak Benefit Plan; and (m) Lomak will not, and will not permit any of its
Subsidiaries to, agree or commit to do any of the foregoing.
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NO SOLICITATION
The Merger Agreement provides that, from the date thereof until the
termination thereof, Domain and its Subsidiaries will not, and will cause their
respective officers, directors, employees or other agents not to, directly or
indirectly, (i) take any action to solicit, initiate or encourage any Domain
Acquisition Proposal (as hereinafter defined), or (ii) engage in negotiations
with, or disclose any nonpublic information relating to Domain or its
Subsidiaries, respectively, or afford access to their respective properties,
books or records to any Person that may be considering making, or has made, a
Domain Acquisition Proposal. Nothing contained in the foregoing provision shall
prohibit Domain and the Domain Board from taking and disclosing a position with
respect to a tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a)
promulgated by the Commission under the Exchange Act. The term "Domain
Acquisition Proposal" means any offer or proposal for, or any indication of
interest in, a merger or other business combination directly or indirectly
involving Domain or any of its Subsidiaries or the acquisition of a substantial
equity interest in, or a substantial portion of the assets of, any such party,
other than the transactions contemplated by the Merger Agreement.
CERTAIN ADDITIONAL AGREEMENTS
Employee Benefit Matters. After the Effective Time, Lomak will provide to
any employees of Domain who are employed by Domain as of the Effective Time (the
"Retained Employees") the same base salary or wages provided to such employees
prior to the Effective Time. From and after the Effective Time until January 1,
1999, Lomak will provide, or cause to be provided to, the Retained Employees
employee plans that are comparable to the employee plans that Lomak provides to
its similarly situated employees or provide coverage under existing Lomak
benefit plans provided to similarly situated employees. Further, Lomak shall (i)
waive, or cause to be waived, any preexisting condition limitations applicable
to the Retained Employees under any group medical plan to the extent that a
Retained Employee's condition would not have operated as a preexisting condition
limitation under Domain's group medical plan, (ii) cause any employee pension
benefit plan (as such term is defined in Section 3(2) of ERISA) which is
intended to be qualified under Section 401 of the Code to be amended to provide
that the Retained Employees shall receive credit for participation and vesting
purposes under such plan for their period of employment with Domain and its
predecessors to the extent such predecessor employment was recognized by Domain,
and (iii) credit the Retained Employees under each other employee benefit plan
or policy which is not described in clause (ii) above for their period of
employment with Domain or its predecessors to the extent such predecessor
employment was recognized by Domain, but not in excess of the maximum credit
available to Lomak's employees under such plan or policy. At the Effective Time,
Lomak shall assume, and shall, and shall cause the Surviving Corporation to,
honor and perform all obligations of Domain under (i) the employment
arrangements described in the Merger Agreement, (ii) Domain's employment
agreements with each of Michael V. Ronca and Michael L. Harvey, as in effect on
the date of the Merger Agreement and as may be amended in the manner described
in the Merger Agreement, (iii) the Domain Employee Option Plan and all grant
agreements executed thereunder, as same may be amended as contemplated by the
Merger Agreement and (iv) the Domain Director Option Plan and all stock option
grant agreements executed thereunder, as the same may be amended as contemplated
by the Merger Agreement.
Board of Directors of Range. Immediately after the Effective Time, Jonathan
S. Linker, the Chairman of the Board of Domain, and Michael V. Ronca, the
President and Chief Executive Officer and a director of Domain, will be elected
as directors of Range, and the size of Range's Board of Directors will be
increased accordingly. Lomak has also agreed to nominate these newly appointed
directors for election by the Company's stockholders at Range's 1999 Annual
Meeting of Stockholders. For a description of certain rights granted to FRLP
with respect to the nomination of a director to the Lomak Board, see "Voting
Agreement."
Stock Exchange Listing. Lomak shall use all reasonable efforts to cause the
Lomak Common Stock to be issued in the Merger to be approved for listing on the
NYSE prior to the Effective Time, subject to official notice of issuance.
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CERTAIN POST-MERGER MATTERS
Once the Merger is consummated, Merger Sub will cease to exist as a
corporation, and Domain as the surviving corporation will continue in existence
as a subsidiary of Lomak and will succeed to all of the assets, rights and
obligations of Merger Sub. Pursuant to the Merger Agreement, the Certificate of
Incorporation and Bylaws of Domain, as in effect immediately prior to the
Effective Time, will be the Certificate of Incorporation and Bylaws of Domain
until amended as provided therein and pursuant to the DGCL.
CONDITIONS TO THE MERGER
Conditions to the Obligation of Each Party. The respective obligations of
each party to effect the Merger shall be subject to the fulfillment at or prior
to the Effective Time of the following conditions, any or all of which may be
waived in whole or in part by the party being benefitted thereby, to the extent
permitted by applicable law: (a) the Lomak Stockholder Approval (as defined in
the Merger Agreement) shall have been obtained with respect to the Stock
Issuance; (b) no action, suit or proceeding instituted by any Governmental
Authority (as defined in the Merger Agreement) shall be pending and no statute,
rule or regulation and no injunction, order, decree or judgment of any court or
Governmental Authority of competent jurisdiction will be in effect that would
prohibit, restrain, enjoin or restrict the consummation of the Merger; (c) the
Registration Statement shall have become effective in accordance with the
provisions of the Securities Act, and no stop order suspending the effectiveness
of the Registration Statement shall be in effect and no proceeding for such
purpose shall be pending before or threatened by the Commission; (d) each of
Domain and Lomak shall have obtained such permits, authorizations, consents, or
approvals required to be obtained by such party (or its Subsidiaries or
Affiliates) to consummate the transactions contemplated by the Merger Agreement;
(e) the shares of Lomak Common Stock to be issued in the Merger shall have been
approved for listing on the NYSE, subject to official notice of issuance; and
(f) any applicable waiting period under the HSR Act relating to the transactions
contemplated by the Merger Agreement shall have expired.
Conditions to the Obligations of Lomak and Merger Sub. The obligation of
Lomak and Merger Sub to effect the Merger is subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or all of which may
be waived in whole or in part by Lomak and Merger Sub, as the case may be, to
the extent permitted by applicable law: (a) Domain shall have performed in all
material respects its obligations under the Merger Agreement required to be
performed by it at or prior to the Effective Time and the representations and
warranties of Domain contained in the Merger Agreement shall be true and correct
in all respects, in each case except for such failures to be so true and correct
(without giving effect for purposes hereof to the individual materiality
standards otherwise contained in the Merger Agreement) which would not,
individually or in the aggregate, reasonably be expected to have a Domain
Material Adverse Effect (as defined below), in each case as of the date of the
Merger Agreement and at and as of the Effective Time as if made at and as of
such time, except as expressly contemplated by the Merger Agreement, and Lomak
shall have received a certificate of the President and Chief Executive Officer
and Chief Financial Officer of Domain as to the satisfaction of this condition;
and (b) the transactions contemplated by the Stock Purchase Agreement shall have
been consummated on or prior to the Effective Time in accordance with the terms
thereof, and as a result of such transactions, Lomak shall have acquired at
least 3,250,000 shares of outstanding Domain Common Stock. For purposes of the
foregoing, a Domain Material Adverse Effect shall mean any event, circumstance,
condition, development or occurrence (x) causing, resulting in or having (or
with the passage of time likely to cause, result in or have) a material adverse
effect on the financial condition, business, assets, properties, prospects or
results of operations of Domain and its Subsidiaries, taken as a whole, or (y)
preventing or delaying in any material respect the consummation of the
transactions contemplated by the Merger Agreement or any Ancillary Agreement (as
defined in the Merger Agreement) by Domain or any of its Subsidiaries; provided,
that such term shall not include effects that result from market conditions
generally in the oil and gas industry.
Conditions to the Obligations of Domain. The obligation of Domain to effect
the Merger is subject to the satisfaction at or prior to the Effective Time of
the condition (which may be waived in whole or in part by Domain to the extent
permitted by applicable law) that each of Lomak and Merger Sub shall have
performed in all material respects its obligations under the Merger Agreement
required to be performed by it at or prior
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<PAGE> 75
to the Effective Time and the representations and warranties of each of Lomak
and Merger Sub contained in the Merger Agreement shall be true and correct
(without giving effect for purposes hereof to the individual materiality
standards otherwise contained in the Merger Agreement) which would not,
individually or in the aggregate, reasonably be expected to have a Lomak
Material Adverse Effect (as defined in the Merger Agreement), in each case as of
the date of the Merger Agreement and at and as of the Effective Time as if made
at and as of such time, except as expressly contemplated by the Merger
Agreement, and Domain shall have received a certificate of the President and
Chief Executive Officer and Chief Financial Officer of Lomak and an executive
officer and the chief financial officer of Merger Sub as to the satisfaction of
this condition.
There can be no assurance that all of the conditions to the Merger will be
satisfied.
TERMINATION AND AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval by the stockholders of Domain or Lomak:
(a) by the mutual written consent of the Boards of Directors of Lomak and
Domain; (b) by either Lomak or Domain if the Effective Time shall not have
occurred on or before October 31, 1998 (provided that the right to terminate the
Merger Agreement under this clause shall not be available to any party who at
the time of such termination is in material breach of any of its obligations
under the Merger Agreement); (c) by Domain if there has been a material breach
by Lomak or Merger Sub of any covenant or agreement set forth in the Merger
Agreement, the Voting Agreement or the Stock Purchase Agreement or if there
shall be a breach by Lomak of any representation contained in the Merger
Agreement that would result in a failure to satisfy the conditions to the
obligations of Domain set forth in the Merger Agreement in each case which
breach (if susceptible to cure) has not been cured in all material respects
within twenty business days following receipt by Lomak of notice of such breach;
(d) by Lomak, if there has been a material breach by Domain or the Principal
Stockholder of any covenant or agreement set forth in the Merger Agreement, the
Voting Agreement or the Stock Purchase Agreement, or if there shall be a breach
by Domain of any representation contained in the Merger Agreement that would
result in a failure to satisfy the conditions to the obligations of Lomak and
Merger Sub set forth in the Merger Agreement or a material breach by the
Principal Stockholder of the Voting Agreement or Stock Purchase Agreement, in
each case which breach (if susceptible to cure) has not been cured in all
material respects within twenty business days following receipt by Domain or the
Principal Stockholder, as applicable, of notice of such breach; (e) by either
Domain or Lomak, if there shall be any applicable domestic law, rule or
regulation that makes consummation of the Merger illegal or if any judgment,
injunction, order or decree of a court or other Governmental Authority of
competent jurisdiction shall restrain or prohibit the consummation of the
Merger, and such judgment, injunction, order or decree shall become final and
nonappealable; or (f) by either Domain or Lomak, if the requisite stockholder
approval shall not have been obtained by reason of the failure to obtain the
requisite vote upon a vote at a duly held meeting of stockholders or at any
adjournment or postponement thereof.
EXPENSES
The Merger Agreement provides that all expenses incurred by the parties to
the Merger Agreement shall be paid by the party that has incurred such expenses;
provided, however, that both (i) the filing fee in connection with the filing of
the Registration Statement or Proxy Statement/Prospectus with the Commission and
(ii) the expenses incurred in connection with printing and mailing the
Registration Statement and Proxy Statement/Prospectus will be shared equally by
Domain and Lomak.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Merger Agreement provides that, for six years after the Effective Time,
Lomak shall indemnify, defend and hold harmless the present and former officers
and directors of Domain and its Subsidiaries (each an "Indemnified Party")
against all losses, claims, damages, liabilities, fees and expenses (including
reasonable fees and disbursements of counsel and judgments, fines, losses,
claims, liabilities and amounts paid in settlement (provided that any such
settlement is effected with the prior written consent of Lomak, which shall not
be unreasonably withheld)) in connection with any claim, action, suit,
proceeding or investigation
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arising out of actions or omissions in their capacity as such occurring at or
prior to the Effective Time to the full extent permitted under the DGCL or
Domain's Certificate of Incorporation, Bylaws or written indemnification
agreements in effect at the date of the Merger Agreement. In addition, Lomak
shall maintain Domain's existing directors' and officers' insurance for a period
of not less than six years after the Effective Time; provided that Lomak may
substitute therefor policies of substantially similar coverage and amounts with
a comparably rated underwriter containing terms no less advantageous to such
former directors or officers and provided that Lomak is not obligated to pay in
the aggregate more than $600,000 for such insurance during such period. Domain
currently estimates that this insurance will not cost more than $250,000 in the
aggregate.
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VOTING AGREEMENT
GENERAL
Lomak and FRLP entered into the Voting Agreement on May 12, 1998
simultaneously with the execution of the Stock Purchase Agreement. The Voting
Agreement will terminate on the second anniversary of the consummation of the
Merger or by mutual written agreement of the parties.
Because FRLP will receive a significant number of shares of Lomak Common
Stock in the Merger, the Voting Agreement addresses: (i) FRLP's ownership and
voting of Domain Common Stock during the period prior to the Effective Time and
(ii) FRLP's ownership and voting of Lomak Common Stock after the Effective Time.
PRE-MERGER PROVISIONS RELATING TO DOMAIN COMMON STOCK
Pursuant to the Voting Agreement, FRLP has, among other things, agreed to
vote all shares of Domain Common Stock beneficially owned by FRLP (i) in favor
of the Merger Agreement and (ii) against any business combination proposal or
other matter that may interfere or be inconsistent with the Merger (including,
without limitation, a Domain Acquisition Proposal). Accordingly, as described
above under "Lomak Special Meeting -- Domain Stockholder Consent," FRLP executed
a written stockholder consent on May 12, 1998 in favor of the Merger pursuant to
Section 228 of the DGCL.
FRLP also has agreed, if requested by Lomak, not to attend and not to vote
any Domain Common Stock beneficially owned by FRLP at any annual or special
meeting of Domain stockholders and not to execute any written consent of
stockholders, in each case relating directly or indirectly to a Domain
Acquisition Proposal.
The Voting Agreement also provides that neither FRLP nor any other member
of the FRLP Group (as defined in the Voting Agreement) will initiate, solicit or
encourage any offer or proposal for, or any indication of interest in a Domain
Acquisition Proposal or engage in negotiations with, or disclose any nonpublic
information relating to Domain or its subsidiaries, or afford access to Domain's
or its subsidiaries' properties, books or records to, any person that may be
considering making, or has made, a Domain Acquisition Proposal.
FRLP has also agreed that it will not, directly or indirectly, (i) sell,
transfer, pledge or otherwise dispose of any shares of Domain to any person
other than Lomak or its designee or (ii) grant a proxy with respect to any
shares of Domain to any person other than Lomak or its designee, or grant an
option with respect to any of the foregoing, or enter into any other agreement
or arrangement with respect to any of the foregoing. Notwithstanding the
foregoing, FRLP is permitted to sell up to 1% in the aggregate of the number of
outstanding shares of Domain Common Stock under certain circumstances if the
Closing Date Market Price is greater than $17.00 per share.
POST-MERGER PROVISIONS RELATING TO LOMAK COMMON STOCK
FRLP has agreed that, during the term of the Voting Agreement, it will not,
subject to certain exceptions, sell, transfer or pledge, or grant a proxy with
respect to, any of the shares of Lomak Common Stock owned by it other than
pursuant to a bona fide public offering or to an entity who immediately after
such transaction would not own more than 1% of the voting securities of Lomak.
FRLP has also agreed that during the term of the Voting Agreement, neither FRLP
nor any member of the FRLP Group (as defined in the Voting Agreement) will (i)
initiate or submit, or solicit any stockholders of Lomak with respect to, any
stockholder proposal, including without limitation to seek the election or
removal of one or more members of the Lomak Board of Directors; (ii) initiate or
engage in any acquisition or business combination proposal relating to Lomak, or
any tender or exchange offer for Lomak's voting securities, or any proxy contest
or other proxy solicitation or change of control of Lomak; or (iii) subject to
certain exceptions, vote the shares of Lomak Common Stock beneficially owned by
it in favor of any matter involving a business combination or other change in
control of Lomak that has not been approved by the Lomak Board of Directors.
Pursuant to the Voting Agreement, Lomak granted to FRLP demand and
"piggyback" registration rights with respect to the Lomak Common Stock and
agreed, so long as FRLP owns at least 5% of the outstanding
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shares of Lomak's Common Stock, to nominate annually one individual designated
by FRLP for election to Lomak's Board of Directors.
Notwithstanding the foregoing, any shares of Lomak Common Stock acquired by
any member of the FRLP Group pursuant to a business combination or similar
transaction other than the Merger, as well as any shares representing the excess
on May 12, 1998 of 19.9% of the outstanding shares of Lomak Common Stock over
the shares to be received by the FRLP Group in the Merger, are not subject to
the voting and standstill provisions described above, and are not entitled to
the registration rights described in the immediately preceding paragraph.
STOCK PURCHASE AGREEMENT
The Stock Purchase Agreement was entered into by Lomak and FRLP
simultaneously with the execution of the Merger Agreement. Pursuant to the Stock
Purchase Agreement, on July 2, 1998 Lomak acquired from FRLP 3,250,000 shares of
Domain Common Stock for a total consideration of $43,875,000 in cash. This
aggregate consideration represents a per share purchase price of $13.50.
Lomak funded the acquisition of the shares pursuant to the Stock Purchase
Agreement under its existing revolving credit facility. As of July 2, 1998 and
prior to the purchase of the shares of Domain Common Stock under the Stock
Purchase Agreement, Lomak had approximately $91 million of available borrowing
capacity under its revolving credit facility.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The accompanying unaudited pro forma combined financial statements give
effect to the Merger and the Name Change. As described in "Certain Terms of the
Merger Agreement -- Manner and Basis of Converting Shares," the Exchange Ratio
will range from 0.8529 to 1.2083 Lomak shares for each share of Domain Common
Stock, depending upon the Closing Date Market Price. The closing sales price of
Lomak Common Stock on the NYSE has ranged between $9.7500 and $14.1250 per share
since the announcement of the Merger. Accordingly, Lomak's management believes
that it is reasonable to assume that the applicable Exchange Ratio will be
1.2083 shares of Lomak Common Stock for each share of Domain Common Stock.
In addition to the Merger, the accompanying unaudited pro forma combined
statements of operations give effect to the following Lomak transactions which
have occurred: (i) the sale of approximately 4 million shares of Lomak Common
Stock and the application of the net proceeds therefrom (the "Common Offering"),
(ii) the sale of $125 million of Lomak 8.75% Senior Subordinated Notes and the
application of the net proceeds therefrom (the "Notes Offering"), (iii) the sale
of $120 million of Lomak 5 3/4% Trust Convertible Preferred Securities and the
application of the net proceeds therefrom (the "TCP Offering"), (iv) the
purchase by Lomak of the Meadville Properties (the "Meadville Acquisition"), (v)
the purchase by Lomak of the Powell Ranch Properties (the "Powell Ranch
Acquisition"); and the following Domain transactions which have occurred: (i)
the disposition of Domain's interests in certain natural gas properties located
in Michigan (the "Michigan Disposition"), (ii) the sale of approximately 6.3
million shares of Domain Common Stock and the application of the net proceeds
therefrom (the "Domain Stock Offering"), (iii) the sale of 643,037 shares of
Domain Common Stock to FRLP and the application of the net proceeds therefrom
(the "FRLP Stock Sale") and (iv) the purchase of certain net profits overriding
royalty interests owned by three institutional investors (the "NPI Acquisition")
(collectively the "Transactions"). The unaudited pro forma combined statements
of operations for the year ended December 31, 1997 and the three months ended
March 31, 1998 were prepared as if the Transactions and the Merger had occurred
on January 1, 1997. The accompanying unaudited pro forma combined balance sheet
of Range as of March 31, 1998 has been prepared as if the Merger had occurred as
of that date.
This information is not necessarily indicative of future consolidated
results of operations and it should be read in conjunction with the separate
historical statements and related notes of the respective entities appearing
elsewhere in this Proxy Statement/Prospectus or incorporated by reference
herein.
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RANGE RESOURCES CORPORATION AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL MERGER PRO FORMA
------------------- PRO FORMA POST-MERGER
LOMAK DOMAIN ADJUSTMENTS RANGE
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents............................ $ 7,257 $ 8,249 $ 15,506
Accounts receivable............................. 23,103 8,631 31,734
IPF Program notes receivable, current portion... -- 9,175 9,175
Marketable securities........................... 8,393 -- 8,393
Inventory and other............................. 1,975 2,808 4,783
-------- -------- -----------
Total current assets..................... 40,728 28,863 69,591
-------- -------- -----------
IPF Program notes receivable, net................. -- 42,611 42,611
Oil and gas properties............................ 844,542 178,427 113,855(a) 1,136,824
Accumulated depletion and amortization.......... (169,129) (20,822) (84,834)(a,b) (274,785)
-------- -------- -----------
675,413 157,605 862,039
-------- -------- -----------
Gas transportation and field services assets...... 86,199 -- 86,199
Accumulated depreciation........................ (10,917) -- (10,917)
-------- -------- -----------
75,282 -- 75,282
-------- -------- -----------
Other assets...................................... 8,829 4,369 (2,301)(a) 10,897
-------- -------- -----------
$800,252 $233,448 $ 1,060,420
======== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................ $ 19,645 $ 15,215 $ 34,860
Accrued liabilities............................. 15,979 507 10,831(a) 27,317
Accrued payroll and benefit costs............... 3,446 263 3,709
Current portion of debt......................... 28 -- 28
-------- -------- -----------
Total current liabilities................ 39,098 15,985 65,914
-------- -------- -----------
Revolving credit facilities....................... 219,900 80,910 43,875(a) 344,685
8.75% Senior subordinated notes................... 125,000 -- 125,000
6% Convertible subordinated debentures............ 55,000 -- 55,000
Other long-term debt.............................. 15,005 -- 15,005
-------- -------- -----------
414,905 80,910 539,690
-------- -------- -----------
Minority interest................................. -- 888 888
Deferred income taxes............................. 27,191 1,181 9,628(a,b) 38,000
Company-obligated mandatorily redeemable
convertible preferred securities of trust
holding solely 6.0% convertible junior
subordinated debentures of Lomak Petroleum,
Inc............................................. 120,000 -- 120,000
Stockholders' equity
$2.03 Preferred stock, $1 par value............. 1,150 -- 1,150
Common stock, $.01 par value.................... 211 151 4(a) 366
Capital in excess of par value.................. 217,988 129,019 36,372(a) 383,379
Treasury stock.................................. -- (10) 10(a) --
Retained earnings (deficit)..................... (20,857) 5,324 (74,000)(a,b) (89,533)
Unrealized gain on marketable securities.......... 566 -- 566
-------- -------- -----------
Total stockholders' equity............... 199,058 134,484 295,928
-------- -------- -----------
$800,252 $233,448 $ 1,060,420
======== ======== ===========
</TABLE>
See notes to pro forma combined financial statements
77
<PAGE> 81
RANGE RESOURCES CORPORATION AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRE-MERGER MERGER PRO FORMA
------------------ PRO FORMA PRO FORMA POST-MERGER
LOMAK DOMAIN ADJUSTMENTS ADJUSTMENTS RANGE
------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues
Oil and gas sales................ $32,540 $13,312 $1,806(c) $ $47,658
Transportation, marketing and
processing.................... 2,791 -- 2,791
IPF income....................... -- 1,958 1,958
Interest and other............... 1,741 688 (2,898)(e) (469)
------- ------- -------
37,072 15,958 51,938
------- ------- -------
Expenses
Direct operating................. 8,396 4,418 272(c) 13,086
Transportation, marketing and
processing.................... 1,062 -- 1,062
Exploration...................... 413 -- 1,703(e) 2,116
General and administrative....... 1,840 1,607 649(e,g) 4,096
Stock compensation............... -- 185 104(e) 289
Interest......................... 8,734 655 930(c) 1,204(d,e) 11,523
Depletion, depreciation and
amortization.................. 12,198 5,598 1,022(c) 1,655(e,f) 20,473
Minority interest................ -- -- (35)(e) (35)
------- ------- -------
32,643 12,463 52,610
------- ------- -------
Income (loss) before income
taxes......................... 4,429 3,495 (672)
Income taxes
Current.......................... 109 38 (10)(c) 137
Deferred......................... 1,551 1,296 (146)(c) (2,936)(e,h) (235)
------- ------- -------
Income (loss) from continuing
operations....................... $ 2,769 $ 2,161 $ (574)
======= ======= =======
Income (loss) from continuing
operations applicable to common
shares........................... $ 2,185 $ 2,161 $(1,158)
======= ======= =======
Net income (loss) per common share:
Basic............................ $ 0.10 $ 0.14 $ (0.03)
======= ======= =======
Diluted.......................... $ 0.10 $ 0.14 $ (0.03)
======= ======= =======
Weighted average shares
outstanding...................... 21,073 15,108 383 36,564
======= ======= =======
Weighted average shares
outstanding-diluted.............. 21,591 15,822 (331) 37,082
======= ======= =======
</TABLE>
See notes to pro forma combined financial statements
78
<PAGE> 82
RANGE RESOURCES CORPORATION AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRE-MERGER MERGER PRO FORMA
------------------ PRO FORMA PRO FORMA POST-MERGER
LOMAK DOMAIN ADJUSTMENTS ADJUSTMENTS RANGE
-------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues
Oil and gas sales......................... $130,017 $47,251 $ 16,826(i,j) $ $194,094
Transportation, marketing and
processing............................. 11,727 -- 1,427(i) 13,154
IPF income................................ -- 4,779 4,779
Interest and other........................ 7,594 238 796(j) 882(l) 9,510
-------- ------- --------
149,338 52,268 221,537
-------- ------- --------
Expenses
Direct operating.......................... 31,481 16,341 2,806(i,j) 50,628
Transportation, marketing and
processing............................. 3,921 -- 769(i) 4,690
Exploration............................... 2,527 -- 10,000(l) 12,527
General and administrative................ 5,290 4,237 262(j) 1,589(l,n) 11,378
Stock compensation........................ -- 4,587 200(l) 4,787
Interest.................................. 27,175 3,774 6,059(i,j) 2,603(k,l) 39,611
Depletion, depreciation and
amortization........................... 55,407 16,072 5,930(i,j) 7,771(l,m) 85,180
Provision for impairment.................. 58,700 -- 58,700
Minority interest......................... -- -- (42)(l) (42)
-------- ------- --------
184,501 45,011 267,459
-------- ------- --------
Income (loss) before income taxes........... (35,163) 7,257 (45,922)
Income taxes
Current................................... 684 735 77(j) (792)(o) 704
Deferred.................................. (12,515) 3,359 (472)(i,j) (6,445)(l,o) (16,073)
-------- ------- --------
Income (loss) from continuing operations.... $(23,332) $ 3,163 $(30,553)
======== ======= ========
Income (loss) from continuing operations
applicable to common shares............... $(25,666) $ 3,163 $(32,887)
======== ======= ========
Net income (loss) per common share:
Basic..................................... $ (1.31) $ 0.27 $ (0.92)
======== ======= ========
Diluted................................... $ (1.31) $ 0.26 $ (0.92)
======== ======= ========
Weighted average shares outstanding......... 19,641 11,578 756 3,913 35,888
======== ======= ========
Weighted average shares
outstanding-diluted....................... 19,641 12,126 756 3,365 35,888
======== ======= ========
</TABLE>
See notes to pro forma combined financial statements
79
<PAGE> 83
NOTE (1) BASIS OF PRESENTATION
On May 12, 1998, Lomak and Domain entered into the Merger Agreement. The
Merger will be accounted for using the purchase method of accounting. Each share
of Domain Common Stock will be converted into a number of shares of Lomak Common
Stock equal to the Exchange Ratio.
NOTE (2) MERGER PRO FORMA ADJUSTMENTS -- AS OF MARCH 31, 1998
The accompanying unaudited pro forma combined balance sheet as of March 31,
1998 has been prepared as if the Merger had occurred on March 31, 1998 and
reflects the following adjustments:
(a) To adjust assets and liabilities under the purchase method of
accounting based on the purchase price. Such purchase price has been
allocated to the consolidated assets and liabilities of Domain based on
preliminary estimates of fair values, with the remainder allocated between
proved and unproved properties based on their relative fair values. The
purchase price allocated to proved properties was further allocated based
on the relative fair values of individual producing fields. This allocation
was then reviewed for indications of impairment by comparing the allocated
cost to the estimated undiscounted future net cash flows on a
field-by-field basis. Those oil and gas properties having a carrying value
in excess of the estimated undiscounted future net cash flows were deemed
impaired pursuant to SFAS 121; the amount of the impairment was calculated
based on estimated discounted future net cash flows of the properties. The
purchase price allocated to unproved oil and gas properties was adjusted to
the lower of cost (allocated purchase price) or market. The combined
impairment resulted in a non-recurring pretax charge of $105.7 million
($68.7 million after tax). No goodwill will be recorded in connection with
the Merger. The information presented herein may differ from the actual
purchase price allocation. The purchase price is determined as follows (in
thousands):
<TABLE>
<S> <C>
Cash consideration for FRLP shares of Domain Common Stock
(3,250,000 shares)........................................ $ 43,875
Estimated fair value (at $10.9083 per share) of 14,327,682
shares of Lomak Common Stock issued at the exchange rate
of 1.2083 shares of Lomak Common Stock for each share of
Domain Common Stock....................................... 156,291
Estimated fair value of options to purchase 962,527 shares
of Domain Common Stock.................................... 12,686
Estimated proceeds from options to purchase 962,527 shares
of Domain Common Stock.................................... (3,431)
Estimated transaction costs................................. 10,831
--------
$220,252
========
</TABLE>
The preliminary allocation of the purchase price included in the pro forma
balance sheet is summarized as follows (in thousands):
<TABLE>
<S> <C>
Working capital assumed..................................... $ 12,878
IPF notes receivable, noncurrent............................ 42,611
Oil and gas properties:
Proved.................................................... 277,448
Unproved.................................................. 8,500
Other..................................................... 6,334
Other assets................................................ 2,068
Bank debt................................................... (80,910)
Deferred income taxes....................................... (47,789)
Other liabilities........................................... (888)
--------
$220,252
========
</TABLE>
80
<PAGE> 84
(b) To record the estimated impairment charge resulting from the
allocation of the purchase price to proved and unproved oil and gas
properties as described in Note 2(a) above.
NOTE (3) PRE-MERGER PRO FORMA ADJUSTMENTS FOR THE POWELL RANCH
ACQUISITION -- FOR THE THREE MONTHS ENDED MARCH 31, 1998
The accompanying unaudited pro forma combined statement of operations for
the three months ended March 31, 1998 has been prepared as if the Powell Ranch
Acquisition had occurred on January 1, 1997:
(c) To record the Powell Ranch Acquisition. The adjustment reflects
the following activities: (i) estimated adjustment to oil and gas revenues
and direct operating expenses to reflect activity from January 1, 1997 to
date of acquisition, (ii) estimated adjustment to depletion, depreciation
and amortization attributable to the purchase price, (iii) estimated
adjustment to interest expense for the incremental interest for additional
borrowings made to fund the Powell Ranch Acquisition and (iv) adjustment to
the provision for income taxes resulting from the change in taxable income.
NOTE (4) MERGER PRO FORMA ADJUSTMENTS -- FOR THE THREE MONTHS ENDED MARCH 31,
1998
The accompanying unaudited pro forma combined statement of operations for
the three months ended March 31, 1998 has been prepared as if the Merger had
occurred on January 1, 1997 and reflects the following adjustments:
(d) To adjust interest expense for the Merger and the borrowings of
Domain under the existing Lomak credit facility. A 1/8% per annum increase
in the interest rate would decrease Range's income before taxes by $13,000.
(e) To record the adjustment for the change in accounting methods for
the Domain operations from full cost method of accounting to successful
efforts method of accounting.
(f) To record the estimated adjustment to depletion, depreciation and
amortization expense attributable to the allocation of the purchase price
using the successful efforts method of accounting. Such adjustment assumes
the recognition at closing of an estimated impairment charge totaling
$105.7 million ($68.7 million after tax) (see Note 2(a) above). The
non-recurring charge is not reflected in the unaudited pro forma statement
of operations as presented herein.
(g) To adjust general and administrative expenses for certain cost
reductions realized from the combining of operations (i.e., NYSE fees,
duplication of investor relations functions, printing costs, etc.).
(h) To adjust the provision for income taxes for the change in taxable
income resulting from the Merger.
NOTE (5) PRE-MERGER PRO FORMA ADJUSTMENTS FOR THE TRANSACTIONS -- FOR THE YEAR
ENDED DECEMBER 31, 1997
The accompanying unaudited pro forma combined statement of operations for
the year ended December 31, 1997 has been prepared as if the Transactions had
occurred on January 1, 1997 and reflects the following adjustments:
(i) To record the pre-Merger pro forma activities for Lomak.
(j) To record the pre-Merger pro forma adjustments for Domain.
81
<PAGE> 85
NOTE (6) MERGER PRO FORMA ADJUSTMENTS -- FOR THE YEAR ENDED DECEMBER 31, 1997
The accompanying unaudited pro forma combined statement of operations for
the year ended December 31, 1997 has been prepared as if the Merger had occurred
on January 1, 1997 and reflects the following adjustments:
(k) To adjust interest expense for the Merger and the borrowings of
Domain under the existing Lomak credit facility. A 1/8% per annum increase
in the interest rate would decrease Range's income before taxes by
$140,000.
(l) To record the adjustment for the change in accounting methods for
the Domain operations from full cost method of accounting to successful
efforts method of accounting.
(m) To record the estimated adjustment to depletion, depreciation and
amortization expense attributable to the allocation of the purchase price
using the successful efforts method of accounting. Such adjustment assumes
the recognition at closing of an estimated impairment charge totaling
$105.7 million ($68.7 million after tax) (See Note 2(a) above). The
non-recurring charge is not reflected in the unaudited pro forma statement
of income as presented herein.
(n) To adjust general and administrative expenses for certain cost
reductions realized from the combining of operations (i.e., NYSE fees,
duplication of investor relations functions, printing costs, etc.).
(o) To adjust the provision for income taxes for the change in taxable
income resulting from the Merger and the effect on deferred taxes recorded
at January 1, 1997 had the transaction taken place at that time.
82
<PAGE> 86
BUSINESS OF DOMAIN
GENERAL DEVELOPMENT OF BUSINESS
Domain is an independent oil and gas company engaged in the exploration,
development, production and acquisition of oil and natural gas properties.
Domain's operations are concentrated principally in the Gulf of Mexico and Gulf
Coast regions. Domain complements these activities with its IPF Program pursuant
to which it invests in oil and natural gas reserves through the acquisition of
term overriding royalty interests. During 1997, approximately 91% of Domain's
revenue was generated by oil and natural gas sales and approximately 9% of
Domain's revenue was generated by the IPF Program.
Domain was formed in December 1996 and incorporated in the state of
Delaware by the management of Tenneco Ventures Corporation and an affiliate of
First Reserve Corporation to acquire Tenneco Ventures Corporation in the
Acquisition. Senior management of Domain established Tenneco Ventures
Corporation in 1992 as a separate business unit of its former parent, Tenneco
Inc., to engage in exploration and production, oil and gas program management,
producer financing and related activities. The majority of Domain's executive
officers, including Mr. Ronca, are veterans of the Tenneco organization.
In June 1997 Domain completed the IPO, generating net proceeds of $88
million, $29 million of which were used to fund an acquisition (the "Funds
Acquisition") of oil and gas property interests from the participants in two
investment programs formerly managed by Domain and $56 million of which was used
to repay a substantial portion of the bank debt incurred to finance the
Acquisition.
Geographic Focus. Domain concentrates its primary oil and gas activities in
the Gulf Coast region, specifically in state and federal waters off the coasts
of Texas and Louisiana. Domain believes this region is attractive for future
development, exploration and acquisition activities due to the availability of
seismic data, significant reserve potential and a well developed infrastructure.
Domain's relationships with major oil companies and independent producers
operating in the region allow continued access to new opportunities. This
geographic focus has enabled Domain to build and utilize a base of
region-specific geological, geophysical, engineering and production expertise.
Domain engages in IPF Program activities throughout the producing regions of the
United States, with a principal geographic focus in the Gulf Coast region.
Acquisition of Properties with Underexploited Value. Domain employs an
acquisition strategy targeted primarily at purchases of Gulf Coast region
producing properties from major oil companies and large independents. These
properties provide opportunities to increase reserves, production and cash flow
through development and exploitation drilling and lease operating expense
reduction. Domain manages its acquired properties by working proactively with
its joint interest partners to accelerate development, identify exploitation
opportunities and implement cost controls on these properties.
Development, Exploitation and Exploration. Domain's ability to integrate
geophysics with detailed geology, reservoir engineering and production
engineering allows it to identify multiple development and exploratory prospects
in mature producing fields that were not identifiable through earlier
technologies. Domain currently employs 15 geoscientists with an average
experience level of more than 21 years and operates eight geophysical
workstations interpreting 3D seismic data over 13 fields and three exploratory
programs.
Domain has assembled a multiyear inventory of development, exploitation and
exploratory drilling opportunities in the Gulf Coast region and has identified
more than 72 drilling and recompletion opportunities for 1998. Many of the
properties comprising this inventory are located in fields that have
well-established production histories. Domain believes these properties may
yield significant additional recoverable reserves through the application of
advanced exploration and development technologies. Domain participated in the
drilling of 11 development wells and 28 exploratory wells in 1997, of which 91%
and 61%, respectively, were successful.
Continued Expansion of the IPF Program. Domain has leveraged its expertise
in oil and gas reserve appraisal and evaluation to develop and grow the IPF
Program. Domain believes this program offers an attractive risk/reward balance
and stable earnings. The oil and gas companies that establish a relationship
with
83
<PAGE> 87
Domain through the IPF Program often come to view Domain as a prospective
working interest partner for their drilling or acquisition projects. Management
believes that the investment opportunities, market information and business
relationships generated as a result of the IPF Program provide Domain with a
strategic advantage over other independent oil and gas companies that are not
engaged in this business. As a result of Domain's efficiency in originating and
closing IPF Program transactions in the $0.5 to $5.0 million range, Domain
currently encounters only limited competition from alternate sources of capital
for investment in quality properties and projects of independent oil and gas
companies.
Oil and Gas Assets. As of December 31, 1997, Domain had proved reserves of
approximately 173 Bcfe, and its average daily production during 1997 was 54.3
Mmcfe. Approximately 61% of these reserves were natural gas, and approximately
44% of proved reserves were classified as proved developed producing. As of
December 31, 1997, Domain had a Present Value of $148.8 million, which does not
include reserve value attributable to the IPF Program. As of December 31, 1997,
Domain had transactions outstanding under the IPF Program of $49.8 million.
Domain incurred capital expenditures of $131.2 million in 1997, including $40.2
million for investments in the IPF Program.
CERTAIN TRANSACTIONS
Michigan Disposition. On April 9, 1997, Domain sold its interests in a
natural gas development project located in northwestern Michigan (the "Michigan
Development Project"). Domain views this transaction (the "Michigan
Disposition") as a disposition of non-core assets and a further enhancement of
its focus in the Gulf Coast region. Domain received $7.6 million in cash for its
interest in the assets, net of debt repayment.
Domain retained its interests in Oceana Exploration Company, L.C., a
Michigan exploration company. See "-- Producing Properties and Exploitation of
Assets -- Michigan."
Funds Acquisition. On July 1, 1997, Domain consummated the Funds
Acquisition of certain property interests from three unaffiliated institutional
investors ("Funds"). Such interests are primarily located in the Gulf Coast
region and, as of January 1, 1997, had combined proved reserves of approximately
33 Bcfe. The interests also include 18,209 net undeveloped leasehold acres. 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 Domain's common stock consummated on June 27, 1997. Domain is no
longer active in gas program management and has no current plans to participate
in this activity in the future.
Mobile Bay Block 864 Acquisition. On November 13, 1997, Domain paid
approximately $11.8 million to acquire an additional interest in the Mobile Bay
Block 864 Unit, increasing its 11.85% working interest position to 33.59%.
Located in shallow reservoirs off the Alabama coast, the field includes four
natural gas wells and offshore production platforms producing 29 Mmcf of natural
gas per day.
Argentina. In November 1997, Domain formed Domain Argentina, S.A. to
explore for and acquire oil and natural gas reserves in Argentina. Domain owns a
50% interest in Domain Argentina, S.A., which has recently been awarded the
rights to explore and develop 1.2 million gross acres in two Argentine producing
basins, pending a Presidential decree. Furthermore, Domain is currently
evaluating both exploration and producing acreage in Argentina for potential
investment.
The Gulfstar Acquisition. On December 15, 1997, Domain completed the
Gulfstar Acquisition. The aggregate purchase price of the companies was $16.6
million comprised of $8.6 million in cash and 499,990 shares of Domain's common
stock valued at $16.00 per share. The acquisition includes a 3D seismic database
covering approximately 600 federal lease blocks in the shallow waters of the
Gulf of Mexico. In addition, the acquisition added net production of 5 Mmcf of
natural gas per day to Domain's production base.
The Oakvale Acquisition. On February 26, 1998, Domain acquired the Oakvale
Field from Pioneer Natural Resources USA Inc. for an aggregate purchase price of
$11.5 million. The field is comprised of five producing wells with working
interests ranging from 46% to 61% and is located in Jefferson Davis County,
Mississippi, approximately 100 miles north of New Orleans. Production from the
five producing wells is 2.6 Mmcf of natural gas per day, net to Domain's
interest.
84
<PAGE> 88
INDEPENDENT PRODUCER FINANCE ACTIVITIES
Domain complements its exploration and production activities with its IPF
Program through which it invests in oil and natural gas reserves through the
acquisition of term overriding royalty interests. The IPF Program was
established in 1993 and is funded by a combination of equity provided by Domain,
cash flows generated by the IPF investments and funds borrowed under the IPF
Credit Facility. The IPF Program enables independent producers to obtain
nonrecourse financing through the sale to Domain of term overriding royalty
interests. Transaction sizes for the program generally have ranged from $0.5
million to $5.0 million. From inception through December 31, 1997, Domain
completed 60 transactions under the IPF Program. Domain's reserve estimates and
reserve value shown throughout this document do not include that attributable to
the IPF Program. As of December 31, 1997, Domain estimates that the Present
Value attributable to the IPF Program assets was $61.8 million with
approximately 30 Bcfe of oil and gas reserves.
The GasFund. In May 1993, Ventures Corporation and EnCap Ventures 1993
Limited Partnership ("EnCap") finalized a partnership arrangement named the
GasFund ("GasFund"). The GasFund was a financing vehicle that utilized bank debt
supported by limited Domain and EnCap credit enhancements, which provided
production-based financing to independent producers for oil and gas projects
generally exceeding $10 million. IPF income reported elsewhere in this document
for the years 1996 and 1995 includes the GasFund activities.
Currently, there are no existing obligations and no outstanding
transactions associated with the GasFund. As a result of Domain's assessment
that the market to provide financing in amounts greater than $10 million is
competitive to the point of unattractive returns, and the reduced credit
enhancement capabilities of Domain as a result of the Acquisition, Domain does
not anticipate participating in any future GasFund transactions.
PRODUCING PROPERTIES AND EXPLOITATION OF ASSETS
The following table sets forth the net proved reserves and average daily
production attributable to Domain's significant producing properties as of
December 31, 1997. The reserve data set forth below does not include reserves
attributable to the IPF Program.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1997
RESERVES AVERAGE DAILY PRODUCTION
-------------------------------- -----------------------------
GAS LIQUIDS TOTAL GAS LIQUIDS TOTAL
(MMCF) (MBBL) (MMCFE) (MCF/D) (BBL/D) (MCFE/D)
--------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
OFFSHORE FIELDS
West Delta 30................. 10,544.3 2,338.0 24,572.5 1,044.3 578.1 4,512.9
Matagorda Island 519.......... 20,391.0 30.3 20,573.0 7,012.2 12.6 7,087.8
Mobile Bay 864................ 13,604.0 -- 13,604.0 2,147.8 -- 2,147.8
Vermilion 329................. 7,575.1 -- 7,575.1 1,057.2 -- 1,057.2
West Cameron 206.............. 7,157.4 42.9 7,415.0 485.2 3.9 508.6
Other......................... 28,744.0 140.4 29,585.7 17,913.0 324.7 19,861.2
ONSHORE FIELDS
Wasson........................ -- 7,927.4 47,564.4 530.9 533.8 3,733.7
Michigan...................... 6,375.8 511.4 9,444.2 -- -- --
Other......................... 10,556.3 359.8 12,715.3 13,459.9 317.9 15,367.3
--------- -------- --------- -------- ------- --------
Total................. 104,947.9 11,350.2 173,049.2 43,650.5 1,771.0 54,276.5
</TABLE>
West Delta 30. The West Delta 30 Field is located offshore Louisiana,
approximately 65 miles south-southeast of New Orleans, in approximately 50 feet
of water. The field was discovered in 1954 and has had over 200 wells drilled.
Effective January 1, 1995, Domain acquired 70% of Shell's working interests in
this field, which ranged from 50% to 100%. The field currently produces 30.8
Mmcf of natural gas per day and 3,120 Bbls of oil per day (4.7 Mmcf and 990 Bbls
net to Domain's interest). Seneca Resources Corporation and Exxon Company,
U.S.A. are the operators of the field. During 1997, based on Domain's proposal
and technical review, a successful development well and a successful exploration
well were drilled. To date, the first completion in the development well has
produced in excess of 1.5 Bcf of natural gas. The first
85
<PAGE> 89
recompletion of this well is being evaluated and is expected to occur in the
third quarter of 1998. The exploration well was placed on production in February
1998 and is producing at a rate of approximately 19 Mmcfd of natural gas. One
additional development well was drilled in 1998 and completed at a rate of 7
Mmcfd of natural gas and 485 Bbls of condensate per day.
Matagorda Island 519. The Matagorda Island 519 Field is located offshore
Texas, approximately 12 miles southeast of Matagorda County, in approximately 69
feet of water. Domain owns a 15.8% working interest in the unitized acreage and
a 25% working interest in the non-unitized acreage in this field, which is
operated by Amoco Production Company. This field is currently producing 35 Mmcf
of natural gas per day and 46 Bbls of oil per day from two wells (4.5 Mmcf and 6
Bbls net to Domain's interest). One well, the F-1, is currently shut-in for
recompletion operations in an attempt to increase production. Domain and the
operator are evaluating the drilling of a new well and a sidetrack of an idle
well in an effort to access new reserves. Additionally, Domain acquired a 3D
seismic survey of this field in 1997.
Mobile Bay 864. The Mobile Bay 864 Field is located 42 miles southwest of
Mobile, Alabama. The field is in 60 feet of water and produces from two four
pile structures and two free standing conductors. Domain acquired an 11.85%
working interest from British Gas Exploration of America in 1993. On November
13, 1997, Domain acquired an additional interest in the Mobile Bay Block 864
Unit, increasing its working interest position to 33.59%. The field is currently
producing 29.7 Mmcf of natural gas per day (8.3 Mmcf net to Domain's interest).
In 1998, the working interest owners expect to implement modifications to the
compression system to maximize recovery and complete an evaluation for an
acceleration well to boost production rates.
Vermilion 329. The Vermilion 329 Field is located 122 miles southeast of
Cameron, Louisiana. The field is in 220 feet of water and produces from one
four-pile structure. Domain acquired a 48% working interest from Marathon Oil
Company in 1993. The field is currently producing 6.3 Mmcf of natural gas per
day (2.3 Mmcf net to Domain's interest). In 1998, Domain, along with the
operator, Basin Exploration, Inc., installed compression and will be pursuing
one drilling opportunity and possibly one or two recompletions.
West Cameron 206. The West Cameron 206 Field is located 36 miles south of
Cameron, Louisiana and is in 50 feet of water. This field is currently produced
from two wells. The first well began production in 1997 and currently produces
at a rate of approximately 25 Mmcf of natural gas per day and 200 Bbls of oil
per day. In February 1998, the second well began producing at a rate of
approximately 20 Mmcf of natural gas per day and 125 Bbls of oil per day. Net to
Domain's interest, production from these two wells is approximately 6.4 Mmcf of
natural gas per day and 48 Bbls of oil per day.
Wasson. The Wasson Field (discovered in 1937) is located in Gaines and
Yoakum Counties, Texas, approximately 80 miles northwest of Midland, Texas. In
June 1996 Domain acquired from Kerr-McGee Corporation 34.7% and 0.17% working
interests in the Cornell and Denver Units in this field, respectively. This
field was initially waterflooded in 1965, and a CO(2) flood was initiated in
1985 utilizing the water-alternating-gas injection method of enhanced oil
recovery. The Cornell and Denver Units are currently operated by Exxon Company
U.S.A. and Altura Energy, Inc. (a joint venture between Shell Offshore Inc. and
Amoco Producing Company), respectively. These two units are currently producing
43,869 Bbls of oil per day (515 Bbls net to Domain's interest). Domain has
identified numerous infill locations for future development. Additionally,
development of an upper gas-bearing zone has been proposed by Altura in the
offsetting unit and, pending Texas Railroad Commission approval, may occur in
1998.
Michigan. Oceana Exploration Company, L.C. ("Oceana"), a Texas limited
liability company and wholly owned subsidiary of Domain, drilled two successful
wildcat wells, the Nyman 1-18 and the Rood 1-23 in 1997. The wells tested at
combined rates exceeding 15 Mmcf of natural gas per day and 500 Bbls of
condensate per day. Oceana holds an average 69.5% working interest in these two
wells. Production is expected to commence from both wells at an initial rate of
approximately 10 Mmcf of natural gas per day in the third quarter of 1998 when a
regional pipeline extension is completed.
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<PAGE> 90
PRODUCTION, PRICES AND OPERATING EXPENSES
The following table sets forth certain production volumes, the average
realized prices and production expenses attributable to Domain's properties for
1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
PREDECESSOR SUCCESSOR
----------------- ---------
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
PRODUCTION VOLUMES:
Natural gas (Mmcf)........................................ 18,065 21,192 15,932
Oil and condensate (Mbbls)................................ 424 564 646
Total (Mmcfe)............................................. 20,609 24,575 19,811
AVERAGE REALIZED PRICES:(1)
Natural gas (per Mcf)..................................... $ 1.54 $ 1.97 $ 2.26
Oil and condensate (per Bbl).............................. $ 16.76 $ 18.63 $ 17.28
EXPENSES (PER MCFE):
Lease operating expense (2)............................... $ 0.39 $ 0.42 $ 0.74
Production taxes.......................................... $ 0.03 $ 0.05 $ 0.07
</TABLE>
- ---------------
(1) Reflects the actual realized prices received by Domain, including the
results of Domain's hedging activities. See "Business of
Domain -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Other Matters -- Hedging Activities."
(2) Lease operating expense per Mcfe increased to $0.74 in 1997 compared to
$0.42 in 1996, or $0.32. This increase was primarily due to decreased
production volumes ($0.14), increased workover expenses ($0.08) and an
increase due to the Wasson Field acquisition ($0.06).
EXPLORATION
Exploration Assets
Domain holds approximately 144,000 net acres located primarily in its core
areas. As of December 31, 1997, this land position included 73,000 net
undeveloped acres. This land position plus the seismic licenses owned by
Gulfstar provide the resource base for Domain's exploration prospects. The
following table summarizes Domain's acreage position as of December 31, 1997:
<TABLE>
<CAPTION>
DEVELOPED
-----------------------
TOTAL ACREAGE DEVELOPED UNDEVELOPED
----------------- ACREAGE ACREAGE
AREA (GROSS) (NET) (NET) (NET)
---- ------- ------- --------- -----------
<S> <C> <C> <C> <C>
Onshore:
Alabama........................................... 1,291 349 349 --
Louisiana......................................... 57,653 14,125 6,048 8,077
Michigan.......................................... 15,090 13,601 60 13,541
Mississippi....................................... 3,485 808 581 227
New Mexico........................................ 26,763 10,999 797 10,202
Texas............................................. 80,470 13,837 3,226 10,611
------- ------- ------ ------
Total Onshore....................................... 184,752 53,719 11,061 42,658
------- ------- ------ ------
Offshore:
Alabama........................................... 23,040 7,407 7,407 --
Louisiana......................................... 164,368 61,012 32,431 28,581
Texas............................................. 74,795 22,141 20,461 1,680
------- ------- ------ ------
Total Offshore...................................... 262,203 90,560 60,299 30,261
------- ------- ------ ------
Total............................................... 446,955 144,279 71,360 72,919
======= ======= ====== ======
</TABLE>
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<PAGE> 91
During 1997 Domain participated in 28 exploration wells with 17
completions, for a 61% success rate. In addition to the exploration that Domain
may conduct on its existing properties, Domain intends to continue participation
in exploration activities through various joint venture programs, including
those summarized below.
Shallow Water Gulf of Mexico. Domain, through its wholly owned subsidiary
Gulfstar, operates a joint venture with a third party utilizing 3D seismic data
to explore for natural gas and oil in the shallow waters of the Gulf of Mexico.
The seismic data covers 700 contiguous blocks over 5,500 square miles. Combined
with Gulfstar's multi-disciplined technical approach, a large number of high
quality 3D supported drilling opportunities have been identified. Gulfstar has
used this 3D database to map prospective geologic trends by region across the
Gulf of Mexico from the High Island Area of offshore Texas to the South Pelto
Area of offshore Louisiana, a distance of 200 miles.
Southern Mississippi -- Jericho. Domain owns a 13% working interest in a 3D
seismic program with a privately-held, independent exploration company. The
exploration program will be targeting the Haynesville carbonate section across
the Wiggins Uplift. Additional objectives exist above the main target, in the
Cotton Valley Formation. Domain has more than 150,000 gross acres under lease
and expects to shoot 70 square miles of 3D seismic in 1998. The first
exploration well is scheduled to be drilled in late 1998 or early 1999.
Michigan. Oceana operates an ongoing exploration play in Oceana County,
Michigan. Oceana has 11,000 acres under lease, controlling 25 prospects. The
first two of these prospects were drilled in 1997, resulting in a discovery that
tested a combined gross daily rate of over 15 Mmcf of natural gas and 500 Bbls
of condensate. Two additional wells are planned for 1998. Domain has an average
69.5% working interest in the two discoveries and a 75% working interest in the
ongoing exploration program.
HISTORICAL RESULTS
Domain's exploration and development drilling activity since 1995 is set
forth in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
OFFSHORE DRILLING ACTIVITY:
Development:
Productive....................................... 2.00 0.50 5.00 1.50 6.00 3.12
Non-productive................................... -- -- -- -- 1.00 1.00
----- ---- ----- ---- ----- ----
Total.................................... 2.00 0.50 5.00 1.50 7.00 4.12
Exploratory:
Productive....................................... 4.00 1.30 2.00 0.60 2.00 0.45
Non-productive................................... 4.00 0.90 1.00 0.20 2.00 0.59
----- ---- ----- ---- ----- ----
Total.................................... 8.00 2.20 3.00 0.80 4.00 1.04
ONSHORE DRILLING ACTIVITY:
Development:
Productive....................................... 4.00 0.70 2.00 0.30 4.00 1.27
Non-productive................................... 1.00 0.10 2.00 0.60 -- --
----- ---- ----- ---- ----- ----
Total.................................... 5.00 0.80 4.00 0.90 4.00 1.27
Exploratory:
Productive....................................... 15.00 1.80 18.00 2.00 15.00 5.12
Non-productive................................... 25.00 4.60 12.00 1.70 9.00 2.57
----- ---- ----- ---- ----- ----
Total.................................... 40.00 6.40 30.00 3.70 24.00 7.69
</TABLE>
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<PAGE> 92
During 1997, Domain participated in drilling activities on 39 gross wells.
Of the 39 (14.12 net) wells, 27 (9.96 net) are being completed, or have been
completed, as commercial producers, and 12 (4.16 net) were dry holes. Domain had
no wells drilling at December 31, 1997.
The following table sets forth the number of productive oil and natural gas
wells in which Domain owned an interest as of December 31, 1997:
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
----------------
GROSS NET
------- ------
<S> <C> <C>
OFFSHORE
Natural gas.................................. 81.00 30.00
Oil.......................................... 38.00 17.12
------ -----
Total.............................. 119.00 47.12
ONSHORE
Natural gas.................................. 50.00 11.71
Oil (1)...................................... 807.00 25.44
------ -----
Total.............................. 857.00 37.15
TOTAL OFFSHORE AND ONSHORE
Natural gas.................................. 131.00 41.70
Oil (1)...................................... 845.00 42.56
------ -----
Total.............................. 976.00 84.26
====== =====
</TABLE>
- ---------------
(1) Includes 724 gross wells in the Wasson Field (Denver Unit) in which Domain
holds a 0.17% working interest.
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<PAGE> 93
OIL AND NATURAL GAS RESERVES
The following table summarizes the estimates of Domain's historical net
proved reserves as of December 31, 1995, 1996 and 1997, and the Present Values
attributable to these reserves at such dates. The reserve data and Present
Values as of December 31, 1995 have been estimated by DeGolyer and MacNaughton
("D&M") and Netherland, Sewell & Associates, Inc. ("NSA"). The reserve data and
Present Values as of December 31, 1996 have been estimated by (i) NSA with
respect to the West Delta 30 Field, (ii) other third-party petroleum engineers
with respect to the Michigan Development Project and (iii) D&M with respect to
all of Domain's other oil and natural gas properties. The reserve data and
Present Values as of December 31, 1997 have been estimated by (i) NSA with
respect to the West Delta 30 Field, (ii) other third-party petroleum engineers
with respect to the West Cameron 206 Field and (iii) D&M with respect to all of
Domain's other oil and natural gas properties. See "-- Producing Properties and
Exploitation of Assets." The reserve data set forth below does not include
reserves or reserve value attributable to the IPF Program. At December 31, 1997,
Domain estimates that the Present Value attributable to IPF Program assets was
$61.8 million.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
1995(1) 1996(1)(2) 1997(1)
-------- ---------- --------
<S> <C> <C> <C>
PROVED RESERVES:
Natural gas (Mmcf)........................................ 82,682 81,338 104,948
Oil and condensate (Mbbl)................................. 2,197 11,380 11,350
Total (Mmcfe)..................................... 95,865 149,616 173,049
Present Value (in thousands).............................. $103,931 $184,816 $148,789
Standardized measure of discounted future net cash flows
(in thousands)......................................... $ 98,999 $154,424 $127,671
Reserve life index (in years)(3).......................... 4.7 6.0 8.7
PROVED DEVELOPED PRODUCING RESERVES:
Natural gas (Mmcf)........................................ 45,386 36,293 53,496
Oil and condensate (Mbbl)(4).............................. 1,219 9,248 3,840
Total (Mmcfe)..................................... 52,700 91,781 76,538
RESERVE REPLACEMENT DATA:
Finding costs (per Mcfe)(5)............................... $ 1.02 $ 0.25 $ 0.94
Production replacement ratio(6)........................... 223% 218% 366%
</TABLE>
- ---------------
(1) The Present Values as of December 31, 1997 were prepared using a weighted
average WTI sales price of $18.70 per Bbl of oil and a Henry Hub sales price
of $2.55 per Mmbtu of natural gas and the Present Values as of December 31,
1996 and 1995 were prepared using a weighted average WTI sales price of
$22.50 and $18.76 per Bbl of oil and Henry Hub sales prices of $3.38 and
$3.30 per Mmbtu of natural gas, respectively. In each case, Present Values
reflect the impact of hedges in place at the respective dates.
(2) Includes Domain's proportionate share of reserves attributable to the
Michigan Development Project.
(3) Calculated by dividing year-end proved reserves by annual actual production
for the most recent year.
(4) Proved developed producing reserves for oil and condensate decreased to 3.8
million barrels in 1997 compared to 9.2 million barrels in 1996, a decrease
of 5.4 million barrels. This decrease was primarily the result of a
reclassification of a portion of the reserves attributable to the Wasson
Field from proved developed to proved undeveloped at year-end 1997.
(5) Finding costs are calculated by dividing the amount of total capital
expenditures for oil and gas activities less the amount associated with
unproven properties by the amount of estimated net proved reserves added
(purchase of oil and gas reserves plus extensions and discoveries) during
the same period.
(6) Equals current period reserve additions through acquisitions of reserves,
extensions and discoveries, and revisions to estimates divided by the
production for such period.
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<PAGE> 94
The estimation of reserve data is a subjective process of estimating the
recovery of underground accumulations of oil and natural gas that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of the available data, the assumptions made, and
engineering and geological interpretation and judgment. Estimates of
economically recoverable oil and natural gas reserves and future net cash flows
therefrom necessarily depend upon a number of variable factors and assumptions,
including historical production from the area compared with production from
other producing areas, the assumed effects of regulation by governmental
agencies and assumptions concerning future oil and natural gas prices, future
operating costs, severance and excise taxes, development costs and workover and
remedial costs, all of which may in fact vary considerably from actual results.
Any such estimates are therefore inherently imprecise, and estimates by other
engineers, or by the same engineers at a different time, might differ materially
from those included herein. Actual prices, production, development expenditures,
operating expenses and quantities of recoverable oil and natural gas reserves
will vary from those assumed in the estimates and it is likely that such
variances will be significant. Any significant variance from the assumptions
could result in the actual quantity of Domain's reserves and future net cash
flow therefrom being materially different from the estimates set forth in this
document. In addition, Domain's estimated reserves may be subject to downward or
upward revision, based upon production history, results of future exploration
and development, prevailing oil and natural gas prices, operating and
development costs and other factors.
Estimates with respect to proved undeveloped reserves that may be developed
and produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves.
The present value of future net cash flows shown above should not be
construed as the current market value, or the market value as of December 31,
1997, or any prior date, of the estimated oil and natural gas reserves
attributable to Domain's properties. In accordance with applicable requirements
of the Commission, the estimated discounted future net cash flows from estimated
proved reserves are based on prices and costs as of the date of the estimate
unless such prices or costs are contractually determined at such date. Actual
future prices and costs may be materially higher or lower. Actual future net
cash flows also will be affected by factors such as actual production, supply
and demand for oil and natural gas, curtailments or increases in consumption by
natural gas purchasers, changes in governmental regulations or taxation and the
impact of inflation on costs.
Domain's Present Value as of December 31, 1997 was prepared using a
weighted average WTI sales price of $18.70 per Bbl of oil and a Henry Hub sales
price of $2.55 per Mmbtu of natural gas. These prices were substantially lower
than prices used by Domain to calculate Present Value as of December 31, 1996.
Domain estimates that a substantial decline in prices relative to year-end 1997
would cause a substantial decline in Domain's Present Value. For example, a
$0.10 per Mmbtu decline in natural gas prices, holding all other variables
constant, would decrease Domain's December 31, 1997 Present Value by
approximately $7.8 million, or 5.3%, and a $1.00 per Bbl decline in oil and
condensate prices would decrease Domain's Present Value by approximately $4.0
million, or 2.7%. While the foregoing calculations should assist the reader in
understanding the effect of a decline in oil and natural gas prices on Domain's
Present Value, such calculations assume that quantities of recoverable reserves
are constant and therefore would not be accurate if prices decreased to a level
at which reserves would no longer be economically recoverable.
OIL AND GAS MARKETING
Domain sells all of its natural gas production to third parties based on
short-term index prices. Domain marketed volumes averaging 43.6 Mmcf per day
during 1997. During 1997, natural gas sold to El Paso Energy Marketing Company
("EPMC") accounted for approximately 57% of Domain's natural gas production with
the remainder sold to various other third parties. In December 1997, Domain
terminated its arrangement with EPMC and entered into a marketing arrangement
with Cokinos Energy Corporation to purchase those gas volumes previously bought
by EPMC.
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<PAGE> 95
Natural gas sales averaged 43.6 Mmcf per day in 1997, down from 58.1 Mmcf
per day in 1996. The average sales price for natural gas was $2.51 per Mcf, an
increase of $0.10 per Mcf over 1996, or 4.1%. This does not take into account
any gains or losses from Domain's hedging activities.
Domain also sells all of its crude oil and condensate production to third
parties. Texon was the largest purchaser of Domain's crude oil and condensate
during 1997, purchasing on average 1,272 Mbbls per day, or 76%. Crude oil and
condensate sales averaged 1,676 Bbls per day in 1997. The average prices
realized for crude oil and condensate was $18.52 per Bbl, a decrease of $2.38
per Bbl from 1996, or 11.4%. This does not take into account any gains or losses
from Domain's hedging activities.
With regard to Domain's natural gas liquids ("NGLs"), NGL sales averaged 95
Bbls per day during 1997. In 1997, all of Domain's NGLs were purchased by
various third parties. The average price realized for NGLs was $18.09 per Bbl,
an increase of $1.67 per Bbl over 1996, or 10.2%.
RISK MANAGEMENT
From time to time, Domain uses various hedging arrangements, predominately
financial instruments, such as swaps, futures, options and collars to manage its
commodity price risk. However, to the extent that Domain has an open position,
Domain may be exposed to risk from fluctuating market prices. For additional
information relating to risk management, see "Business of Domain -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Other Matters -- Hedging Activities."
COMPETITION
Domain encounters competition from other companies in all areas of its
operations, including the acquisition of producing properties and its IPF
Program. Domain's competitors include major integrated oil and gas companies and
numerous independent oil and gas companies, individuals and drilling and income
programs and, in the case of its IPF Program, affiliates of investment,
commercial and merchant banking firms and affiliates of large interstate
pipeline companies. Many of its competitors are large, well-established
companies with substantially larger operating staffs and greater capital
resources than Domain's and which, in many instances, have been engaged in the
oil and gas business for a much longer time than Domain. Such companies may be
able to pay more for productive natural gas and oil properties and exploratory
prospects and to define, evaluate, bid for and purchase a greater number of
properties and prospects than Domain's financial or human resources permit.
Domain's ability to acquire additional properties and to discover reserves in
the future, and to grow its IPF Program, will be dependent upon its ability to
evaluate and select suitable properties and to consummate transactions in this
highly competitive environment.
SEASONALITY
Historically, demand for natural gas has been seasonal in nature, with peak
demand and typically higher prices occurring during the colder winter months.
REGULATION
The availability of a ready market for oil and natural gas production
depends upon numerous factors beyond Domain's control. These factors include
regulation of oil and natural gas production, federal, state and local laws and
regulations governing environmental quality and pollution control, state limits
on allowable rates of production by a well or proration unit, the supply of oil
and natural gas available for sale, the availability of adequate pipeline and
other transportation and processing facilities and the marketing of competitive
fuels. For example, a productive natural gas well may be "shut-in" because of an
oversupply of natural gas or the lack of an available natural gas pipeline in
the areas in which Domain conducts its operations. Federal, state and local laws
and regulations generally are intended to prevent waste of oil and natural gas,
protect rights to produce oil and natural gas between owners in a common
reservoir, control the amount of oil and natural gas produced by assigning
allowable rates of production and control contamination of the environment.
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<PAGE> 96
Regulation of Oil and Natural Gas Exploration and Production. Domain's
exploration and production operations are subject to various types of regulation
at the federal, state and local levels. Such regulation includes requiring
permits for the drilling of wells, maintaining bonding requirements in order to
drill or operate wells, and regulating the location of wells, the method of
drilling and casing wells, the surface use and restoration of properties upon
which wells are drilling and the plugging and abandonment of wells. Domain's
operations are also subject to various conservation laws and regulations. These
include the regulation of the size of drilling and spacing units or proration
units and the density of wells that may be drilled and unitization or pooling of
oil and gas properties. In this regard, some states allow the forced pooling or
integration of tracts to facilitate exploration while other states rely on
voluntary pooling of lands and leases. In addition, state conservation laws
establish maximum rates of production from oil and natural gas wells, generally
prohibit the venting or flaring of natural gas and impose certain requirements
regarding the ratability of production. The effect of these regulations is to
limit the amounts of oil and natural gas Domain's operator or Domain can produce
from its wells, and to limit the number of wells Domain can drill or the
locations thereof. In addition, numerous departments and agencies, both federal
and state, are authorized by statute to issue rules and regulations binding on
the oil and gas industry and its individual members, some of which carry
substantial penalties for failure to comply. The regulatory burden on the oil
and gas industry increases Domain's cost of doing business and, consequently,
affects its profitability. Inasmuch as such laws and regulations are frequently
expanded, amended or reinterpreted, Domain is unable to predict the future cost
or impact of complying with such regulations.
Natural Gas Marketing and Transportation. Federal legislation and
regulatory controls in the United States have historically affected the price of
the natural gas produced by Domain and the manner in which such production is
marketed. The transportation and sale or resale of natural gas in interstate
commerce is regulated pursuant to the Natural Gas Act of 1938 (the "NGA"), the
Natural Gas Policy Act of 1978 (the "NGPA"), the Outer Continental Shelf Lands
Act (the "OCSLA") and the Federal Energy Regulatory Commission (the "FERC").
Although maximum selling prices of natural gas were regulated in the past, on
July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 ("Decontrol Act")
was enacted, which amended the NGPA to remove completely by January 1, 1993
price and nonprice controls for all "first sales" of domestic natural gas, which
include all sales by Domain of its production; consequently, sales of Domain's
natural gas production currently may be made at market prices, subject to
applicable contract provisions. The FERC's jurisdiction over natural gas
transportation was unaffected by the Decontrol Act.
The FERC also has jurisdiction over transportation and gathering of oil and
natural gas in the Outer Continental Shelf ("OCS") under the OCSLA. The FERC
also regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of natural gas produced by Domain, as
well as the revenues received by Domain for sales of such natural gas. Since the
latter part of 1985, the FERC has endeavored to make interstate natural gas
transportation more accessible to natural gas buyers and sellers on an open and
nondiscriminatory basis. The FERC's efforts have significantly altered the
marketing and pricing of natural gas. Commencing in April 1992, the FERC issued
Order Nos. 636, 636-A, 636-B and 636-C (collectively, "Order No. 636"), which,
among other things, require interstate pipelines to "restructure" to provide
transportation separate or "unbundled" from the pipelines' sales of natural gas.
Also, Order No. 636 requires pipelines to provide open-access transportation on
a basis that is equal for all natural gas supplies. Order No. 636 has been
implemented through negotiated settlements in individual pipeline service
restructuring proceedings. In many instances, the result of the Order No. 636
and related initiatives has been to reduce substantially or bring to an end the
interstate pipelines' traditional role as wholesalers of natural gas in favor of
providing only storage and transportation services. The FERC has issued final
orders in virtually all pipeline restructuring proceedings, and has now
commenced a series of one year reviews to determine whether refinements are
required regarding individual pipeline implementations of Order No. 636.
Pipeline tariffs are revised from time to time to implement changes in
transportation rates and terms and conditions of sale.
The FERC has issued a statement of policy and a request for comments
concerning alternatives to its traditional cost-of-service rate making
methodology. This policy statement articulates the criteria that the FERC will
use to evaluate proposals to charge market-based rates for the transportation of
natural gas. The policy statement also provides that the FERC will consider
proposals for negotiated rates for individual
93
<PAGE> 97
shippers of natural gas, so long as a cost-of service-based rate is available as
a recourse rate. The FERC also has requested comments on whether it should allow
gas pipelines the flexibility to negotiate the terms and conditions of
transportation service with prospective shippers. Domain cannot predict what
further action the FERC will take on these matters; however, Domain does not
believe that it will be affected by any action taken materially differently than
other natural gas producers and marketers with which it competes.
The FERC has announced its intention to reexamine certain of its
transportation-related policies, including the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
for resale in the secondary market. While any resulting FERC action would affect
Domain only indirectly, the FERC's current rules and policies may have the
effect of enhancing competition in natural gas markets by, among other things,
encouraging non-producer natural gas marketers to engage in certain purchase and
sale transactions. Domain cannot predict what action the FERC will take on these
matters, nor can it accurately predict whether the FERC's actions will achieve
the goal of increasing competition in markets in which Domain's natural gas is
sold. However, Domain does not believe that it will be affected by any action
taken materially differently than other natural gas producers and marketers with
which it competes.
In May 1995, the FERC issued a policy statement on how interstate gas
pipelines can recover the costs of new pipeline facilities. While this policy
statement affects Domain only indirectly, in its present form the new policy
should enhance competition in natural gas markets and facilitate construction of
gas supply laterals. Requests for rehearing of this policy statement were denied
on April 29, 1996. Domain cannot predict what action the FERC will take on
individual proceedings applying its policy.
Commencing in May 1994, the FERC issued a series of orders in individual
cases that delineate a new gathering policy in light of the interstate pipeline
industry's restructuring under Order No. 636. As a general matter, gathering is
exempt from the FERC's jurisdiction; however, the courts have held that where
the gathering is performed by the interstate pipelines in association with the
pipeline's jurisdictional transportation activities, the FERC retains regulatory
control over the associated gathering services to prevent abuses. Among other
matters, the FERC slightly narrowed its statutory tests for establishing
gathering status and reaffirmed that, except in situations in which the gatherer
acts in concert with an interstate pipeline affiliate to frustrate the FERC's
transportation policies, the FERC does not generally have jurisdiction over
natural gas gathering facilities and services. In the FERC's opinion, such
facilities and services are more properly regulated by state authorities. In
addition, the FERC has approved several transfers proposed by interstate
pipelines of gathering facilities to unregulated independent or affiliated
gathering companies. Certain of the FERC's orders delineating its new gathering
policy recently were the subject of an opinion issued by the United States Court
of Appeals for the District of Columbia Circuit. That opinion generally upheld
the FERC's policy of approving the interstate pipeline's proposed "spindown" of
its gathering facilities to an unregulated affiliate company, but remanded to
the FERC that portion of the FERC's orders imposing so-called "default
contracts" by which the unregulated affiliate was obligated to continue existing
gathering services to customers under "default contracts" for up to two years
after spindown. It remains unclear whether the FERC will attempt to reimpose
such conditions or will otherwise act in response to producer requests for
additional protection against perceived monopolistic action by pipeline-related
gatherers. In addition, in February 1996, the FERC issued a policy statement
that, among other matters, reaffirmed, with some clarifications, its
long-standing test for determining whether particular pipeline facilities
perform a jurisdictional transmission function or nonjurisdictional gathering
function. While changes to the FERC's gathering policy affect Domain only
indirectly, such changes could affect the price and availability of capacity on
certain gathering facilities, and thus access to certain interstate pipelines,
which, in turn, could affect the price of gas at the wellhead and in markets in
which Domain competes. However, Domain does not believe that it will be affected
by these changes to the FERC's gathering policy materially differently than
other natural gas producers with which it competes.
Proposals and proceedings that might affect the natural gas industry are
considered from time to time by Congress, the FERC, state regulatory bodies and
the courts. Domain cannot predict when or if any such proposals might become
effective, or their effect, if any, on Domain's operations. The natural gas
industry historically has been very heavily regulated; therefore, there is no
assurance that the less stringent regulatory approach recently pursued by the
FERC and Congress will continue indefinitely into the future.
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<PAGE> 98
Federal Offshore Leasing. Certain of Domain's operations are conducted on
federal oil and gas leases administered by the Minerals Management Service
("MMS"). The MMS issues such leases through competitive bidding. These leases
contain relatively standardized terms and require compliance with detailed MMS
regulations and orders pursuant to the OCSLA (which are subject to change by the
MMS). For offshore operations, lessees must obtain MMS approval for exploration
plans and development and production plans prior to the commencement of such
operations. In addition to permits required from other agencies (such as the
Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency), lessees must obtain a permit from the MMS prior to the commencement of
drilling. The MMS has promulgated regulations requiring offshore production
facilities located on the OCS to meet stringent engineering and construction
specifications. The MMS also has issued regulations restricting the flaring or
venting of natural gas and prohibiting the flaring of liquid hydrocarbons and
oil without prior authorization. Similarly, the MMS has promulgated other
regulations governing the plugging and abandonment of wells located offshore and
the removal of all production facilities. To cover the various obligations of
lessees on the OCS, the MMS generally requires that lessees post substantial
bonds or other acceptable assurances that such obligations will be met. The cost
of such bonds or other security can be substantial and there is no assurance
that Domain can obtain bonds or other security in all cases. See
"-- Environmental Matters."
The MMS issued a notice of proposed rulemaking in which it proposed to
amend its regulations governing the calculation of royalties and the valuation
of crude oil produced from federal leases. The proposed rule would modify the
valuation procedures for both arm's length and non-arm's length crude oil
transactions to decrease reliance on posted prices and assign a value to crude
oil that better reflects market value, establish a new MMS form for collecting
value differential data, and amend the valuation procedure for the sale of
federal royalty oil. Domain cannot predict at this stage of the rulemaking
proceeding how it might be affected by this amendment to the MMS regulations.
In April 1997, after two years of study, the MMS withdrew proposed changes
to the way it values natural gas for royalty payments. These proposed changes
would have established an alternative market-based method to calculate royalties
on certain natural gas sold to affiliates or pursuant to non-arm's length sales
contracts.
The OCSLA requires that all pipelines operating on or across the OCS
provide open-access, non-discriminatory service. Although the FERC has opted not
to impose the regulations of Order No. 509, which implements these requirements
of the OCSLA, on gatherers and other non-jurisdictional entities, the FERC has
retained the authority to exercise jurisdiction over those entities if necessary
to permit non-discriminatory access to services on the OCS. If the FERC were to
apply Order No. 509 to gatherers in the OCS, eliminate the exemption of
gathering lines, and redefine its jurisdiction over gathering lines, the result
would be a reduction in available pipeline space for existing shippers in the
Gulf of Mexico and elsewhere.
Oil Sales and Transportation Rates. Sales of crude oil, condensate and gas
liquids by Domain are not regulated and are made at market prices. The price
Domain receives from the sale of these products is affected by the cost of
transporting the products to market. Effective as of January 1, 1995, the FERC
implemented regulations establishing an indexing system for transportation rates
for oil pipelines, which, subject to certain conditions and limitations, would
generally index such rates to inflation. Domain is not able to predict with
certainty what effect, if any, these regulations will have on it, but other
factors being equal, under certain conditions the regulations may cause
increased transportation costs and may reduce wellhead prices for such
commodities.
ENVIRONMENTAL MATTERS
Domain's operations are subject to federal, state and local laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, require remedial measures to prevent
pollution from former operations, such as pit closure and plugging abandoned
wells, and impose substantial liabilities for pollution resulting from Domain's
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<PAGE> 99
operations. In addition, these laws, rules and regulations may restrict the rate
of oil and natural gas production below the rate that would otherwise exist. The
regulatory burden on the oil and gas industry increases the cost of doing
business and consequently affects its profitability. Changes in environmental
laws and regulations occur frequently, and any changes that result in more
stringent and costly waste handling, disposal and clean-up requirements could
have a significant impact on the operating costs of Domain, as well as the oil
and gas industry in general. Management believes that Domain is in substantial
compliance with current applicable environmental laws and regulations and that
continued compliance with existing requirements will not have a material adverse
effect on Domain.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
who are considered to be responsible for the release of a "hazardous substance"
into the environment. These persons include the owner or operator of the
disposal site or sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances. Under CERCLA, such
persons may be subject to joint and several liability for the costs of cleaning
up the hazardous substances that have been released into the environment
(including pre-remedial investigations and post-remedial monitoring), for
damages to natural resources. In some instances, neighboring landowners and
other third parties file claims based on common law theories of tort liability
for personal injury and property damage allegedly caused by the release of
hazardous substances at a CERCLA site.
Domain generates wastes, including hazardous wastes, that are subject to
the federal Resource Conservation and Recovery Act ("RCRA") and comparable state
statutes. The EPA and various state agencies have limited the disposal options
for certain hazardous and nonhazardous wastes. Furthermore, certain wastes
generated by Domain's oil and natural gas operations that are currently exempt
from treatment as "hazardous wastes" may in the future be designated as
"hazardous wastes," and therefore be subject to more rigorous and costly
operating and disposal requirements.
Domain currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the exploration and
production of oil and gas. Although Domain has utilized operating and disposal
practices that were standard in the industry at the time, hydrocarbons or other
wastes may have been disposed of or released on or under the properties owned or
leased by Domain or on or under other locations where such wastes have been
taken for disposal. In addition, many of these properties have been operated by
third parties whose treatment and disposal or release of hydrocarbons or other
wastes was not under Domain's control. These properties and the wastes disposed
thereon may be subject to CERCLA, RCRA and analogous state laws. Under such
laws, Domain could be required to remove or remediate previously disposed wastes
(including wastes disposed of or released by prior owners or operators) or
property contamination (including groundwater contamination) or to perform
remedial plugging operations to prevent future contamination.
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose
a variety of requirements on "responsible parties" related to the prevention of
oil spills and liability for damages resulting from such spills in "waters of
the United States." A "responsible party" includes the owner or operator of a
facility or vessel, or the lessee or permittee of the area in which an offshore
facility is located. The term "waters of the United States" has been broadly
defined to include not only the waters of the Gulf of Mexico but also inland
waterbodies, including wetlands, playa lakes and intermittent streams. A 1996
amendment to the OPA also requires owners and operators of "offshore facilities"
(including those located in coastal inland waters, such as bays or estuaries) to
establish $35 million in financial responsibility to cover environmental cleanup
and restoration costs likely to be incurred in connection with an oil spill.
Offshore facilities are facilities used for exploring for, drilling for or
producing oil or transporting oil from facilities engaged in oil exploration,
drilling or production. If it is determined that an increase in the amount of
financial responsibility required is warranted, the President has the authority
to raise such to an amount not exceeding $150 million. In any event, the impact
of any adjustment to the annual required financial responsibility is not
expected to be any more burdensome to Domain than it will be to other similarly
situated companies involved in oil and gas exploration and production.
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OPA imposes a variety of additional requirements on responsible parties for
vessels or oil and gas facilities related to the prevention of oil spills and
liability for damages resulting from such spills in waters of the United States.
OPA assigns liability to each responsible party for oil spill removal costs and
a variety of public and private damages from oil spills. OPA establishes a
liability limit for offshore facilities of all removal costs plus $75 million. A
party cannot take advantage of liability limits if the spill is caused by gross
negligence or willful misconduct or resulted from violation of a federal safety,
construction or operating regulation. If a party fails to report a spill or to
cooperate fully in the cleanup, liability limits likewise do not apply. Few
defenses exist to the liability for oil spills imposed by OPA. OPA also imposes
other requirements on facility operators, such as the preparation of an oil
spill contingency plan. Failure to comply with ongoing requirements or
inadequate cooperation in a spill event may subject a responsible party to civil
or criminal enforcement actions. As of the date hereof, Domain is not the
subject of any civil or criminal enforcement actions under the OPA and is in
substantial compliance with the requirements of the OPA.
In addition, the OCSLA authorizes regulations relating to safety and
environmental protection applicable to lessees and permittees operating in the
OCS. Specific design and operational standards may apply to OCS vessels, rigs,
platforms, vehicles and structures. Violations of lease conditions or
regulations issued pursuant to OCSLA can result in substantial civil and
criminal penalties, as well as potential court injunctions curtailing operations
and the cancellation of leases. Such enforcement liabilities can result from
either governmental or private prosecution. As of the date hereof, Domain is not
the subject of any civil or criminal enforcement actions under the OCSLA and is
in substantial compliance with the requirements under the OCSLA.
The Clean Water Act ("CWA") imposes restrictions and strict controls
regarding the discharge of produced waters and other oil and gas wastes into
navigable waters. Permits must be obtained to discharge pollutants into state
and federal waters. The CWA provides for civil, criminal and administrative
penalties for any unauthorized discharges of oil and other hazardous substances
in reportable quantities and, along with the OPA, imposes substantial potential
liability for the costs of removal, remediation and damages. State laws for the
control of water pollution also provide civil, criminal and administrative
penalties and liabilities in the case of a discharge of petroleum or its
derivatives into state waters. The U.S. Environmental Protection Agency ("EPA")
issued general permits prohibiting the discharge of produced water and produced
sand derived from oil and gas point source facilities into coastal waters in
Louisiana and Texas, which became effective as of January 1, 1997. Although the
costs of compliance with zero discharge mandates under federal or state law may
be significant, the entire industry will experience similar costs and Domain
believes that these costs will not have a material adverse effect on Domain's
financial condition and operations. Certain oil and gas exploration and
production facilities are required to obtain permits for their storm water
discharges and costs may be associated with treatment of wastewater, or
developing storm water pollution prevention plans. In addition, the Coastal Zone
Management Act authorizes state implementation and development of management
measures for nonpoint source pollution designed to restore and protect coastal
waters.
EMPLOYEES
On May 15, 1998, Domain employed 50 full-time employees and 10 full-time
contractors. Domain believes that its relationships with its employees are good.
None of Domain's employees are covered by a collective bargaining agreement.
OFFICES
Domain currently leases approximately 33,000 square feet of office space in
Houston, Texas.
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LEGAL PROCEEDINGS
On May 22, 1998, a Domain stockholder filed an action in the Delaware Court
of Chancery, alleging that the terms of the Merger are grossly unfair to a
purported class of Domain 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 believe that this
litigation is without merit and intend to defend this matter vigorously.
Various claims have been filed naming joint working interest owners of
Domain in the ordinary course of business, particularly claims alleging personal
injuries, for which Domain would be responsible for its pro rata share of any
uninsured damages or settlement costs. No pending or threatened claims, actions
or proceedings against Domain are expected to have a material adverse effect on
Domain's financial condition or results of operations.
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DOMAIN
SELECTED HISTORICAL COMBINED AND CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical combined and
consolidated information of Domain for the five years ended and as of December
31, 1997 and for the three months ended March 31, 1997 and March 31, 1998. The
selected historical combined and consolidated financial data should be read in
conjunction with "Business of Domain -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
document.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- ------------------
(UNAUDITED)
PREDECESSOR SUCCESSOR
-------------------------------------- ---------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and natural gas sales(1)............. $1,922 $5,340 $34,877 $52,274 $ 47,251 $12,782 $13,312
IPF income(2)............................ 200 1,417 2,356 4,369 4,779 732 1,958
Other.................................... -- 283 414 (413) 238 (292) 688
------ ------ ------- ------- --------- ------- -------
Total revenues..................... 2,122 7,040 37,647 56,230 52,268 13,222 15,958
------ ------ ------- ------- --------- ------- -------
Expenses:
Lease operating.......................... 218 1,790 7,980 10,207 14,924 3,060 4,113
Production and severance taxes........... 2 18 710 1,340 1,417 413 305
Depreciation, depletion and
amortization........................... 987 3,101 22,692 24,920 16,072 3,282 5,598
General and administrative, net.......... 681 52 2,780 3,361 4,237 792 1,607
Corporate overhead allocation............ 257 944 2,627 4,827 -- -- --
Stock compensation(3).................... -- -- -- -- 4,587 3,150 185
------ ------ ------- ------- --------- ------- -------
Total operating expenses........... 2,145 5,905 36,789 44,655 41,237 10,697 11,808
------ ------ ------- ------- --------- ------- -------
Income (loss) from operations.............. (23) 1,135 858 11,575 11,031 2,525 4,150
Interest expense, net...................... -- -- -- 150 3,774 1,109 655
------ ------ ------- ------- --------- ------- -------
Income (loss) before income taxes.......... (23) 1,135 858 11,425 7,257 1,416 3,495
Income tax provisions...................... 2 735 351 4,394 4,094 1,735 1,334
------ ------ ------- ------- --------- ------- -------
Net income (loss).......................... $ (25) $ 400 $ 507 $ 7,031 $ 3,163 $ (319) $ 2,161
====== ====== ======= ======= ========= ======= =======
Net income per share:
Basic.................................... NA NA NA NA $ 0.27 $ (0.03) $ 0.14
Assuming dilution........................ NA NA NA NA $ 0.26 $ (0.03) $ 0.14
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------- ------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (AT END OF PERIOD)
Cash and cash equivalents......................... $ 1,635 $ 11,467 $ -- $ 36 $ 4,731 $ 8,249
Property, plant and equipment, net................ 11,544 93,823 111,724 66,176 137,974 157,605
IPF Program notes receivable...................... 4,215 4,023 7,991 21,710 49,765 51,786
Total assets...................................... 23,493 117,755 137,096 122,429 212,549 233,448
Long-term debt (including current maturities)..... -- -- -- 79,412 63,720 80,910
Parent advances................................... 19,491 104,504 112,832 -- -- --
Stockholders' equity.............................. (335) 65 572 28,577 132,034 134,484
</TABLE>
- ---------------
(1) Oil and natural gas sales increased from $5.3 million in 1994 to $52.3
million in 1996 primarily as a result of Domain's acquisition of producing
properties in 1994 and 1995, results of drilling activities in 1994, 1995
and 1996, and an increase in the net realized price of gas in 1996 relative
to 1994 and 1995.
(2) IPF income for 1994, 1995 and 1996 also includes income from Domain's
"GasFund" partnership with a financial investor. See "Business of Domain --
General Development of Business -- Continued Expansion of the IPF Program."
(3) Stock compensation for 1997 and 1998 represents non-cash stock compensation
charges.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is intended to assist in understanding Domain's
historical financial position and results of operations as of December 31, 1997
and 1996, and for each year of the three-year period ended December 31, 1997 and
as of March 31, 1998 and for the three months ended March 31, 1998 and March 31,
1997. Domain's historical financial statements and notes thereto included
elsewhere in this document contain detailed information that should be referred
to in conjunction with this discussion.
General. Domain 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. Domain complements these
activities with its Independent Producer Finance Program ("IPF Program")
pursuant to which it invests in oil and natural gas reserves through the
acquisition of term overriding royalty interests accounted for as notes
receivable. As of December 31, 1997, Domain had estimated net proved reserves of
173 Bcfe. Approximately 61% of Domain's net proved reserves at such date were
natural gas and approximately 44% of proved reserves were classified as proved
developed producing. As of December 31, 1997, Domain had a Present Value of
$148.8 million, which does not include reserve value attributable to the IPF
Program. Domain had outstanding IPF Program notes receivable of $49.8 million as
of December 31, 1997. During 1997, approximately 91% of Domain's revenue was
generated by oil and natural gas sales and approximately 9% of Domain's revenue
was generated by the IPF Program.
On December 31, 1996, Domain acquired all of the outstanding capital stock
of its operating subsidiaries, Domain Energy Ventures Corporation ("Ventures
Corporation") and Domain Energy Production Corporation ("Production Corporation"
and, together with Ventures Corporation, the "Predecessor"). Domain accounted
for the acquisition (the "Acquisition") using the purchase method of accounting,
under which the purchase price has been allocated to the assets acquired and
liabilities assumed based upon their fair values at the acquisition date.
On December 15, 1997, Domain acquired all of the outstanding capital stock
of Gulfstar Energy, Inc. and Mid Gulf Drilling Corp. (the "Gulfstar
Acquisition"). Domain accounted for the Gulfstar Acquisition using the purchase
method of accounting, under which the purchase price has been allocated to the
assets acquired and liabilities assumed based upon preliminary fair values at
the acquisition date.
Domain's selected historical consolidated and combined financial data
included elsewhere in this Proxy Statement/Prospectus has been derived from the
audited and unaudited Combined and Consolidated Financial Statements of Domain.
The selected balance sheet data at December 31, 1997 reflects the Acquisition
that occurred on December 31, 1996 and the Gulfstar Acquisition that occurred on
December 15, 1997. The selected balance sheet data at December 31, 1996 reflects
the Acquisition that occurred on that date. The selected balance sheet and
income statement data at other dates and for other periods prior to December 31,
1996 reflects the combined financial position and results of operations of
Ventures Corporation and Production Corporation with intercompany transactions
and account balances eliminated.
Prior to the Acquisition, Ventures Corporation and Production Corporation
were included in the consolidated federal income tax return of Tenneco Inc.
("Tenneco"), as a result of which Tenneco received all benefit for such
entities' historical tax losses. In connection with the Acquisition, Domain
agreed and filed an election under Sections 338(g) and 338(h)(10) of the
Internal Revenue Code of 1986, as amended, pursuant to which Domain allocated
the purchase price paid by Domain among the assets of these companies to
determine the basis of assets acquired in accordance with the principles of
Treasury Regulation 1.338(h)(10)-1(f)(1)(ii).
Domain's revenue, profitability and future rate of growth are substantially
dependent upon prevailing prices for oil and natural gas, which are dependent
upon numerous factors beyond Domain's control, such as economic, political and
regulatory developments and competition from other sources of energy. The energy
markets have historically been highly volatile, and future decreases in oil or
natural gas prices could have a material adverse effect on Domain's financial
position, results of operations, quantities of oil and natural gas reserves that
may be economically produced and access to capital.
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Domain uses the full cost method of accounting for its investments in oil
and natural gas properties. Under such methodology, all costs of exploration,
development and acquisition of oil and natural gas reserves are capitalized into
separate country by country "full cost pools" as incurred and properties in each
pool are depleted and charged to operations using the unit-of-production method
based on a ratio of current production to total proved oil and natural gas
reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion, and amortization) less deferred taxes exceed the
present value (using a 10% discount rate) of estimated future net cash flows
from proved oil and natural gas reserves and the lower of cost or fair value of
unproved properties, such excess costs are charged to operations. If a
write-down were required, it would result in a non-cash charge to earnings but
would not have an impact on cash flows.
Accounting for IPF Program Activity. Through its IPF Program, Domain
acquires term overriding royalty interests in oil and gas properties owned by
independent producers. Because the capital advanced to a producer for these
interests is repaid from an agreed upon share of cash revenues from the sale of
production until the capital advanced plus a contractual return is paid in full,
Domain accounts for the term overriding royalty interests as notes receivable.
Under this accounting method, Domain recognizes only the interest income portion
of payments received from a producer as revenues on its income statement. The
remaining cash receipts are recorded as a reduction in notes receivable on
Domain's balance sheet and as IPF Program return of capital on Domain's
statement of cash flows.
If, instead of acquiring dollar-denominated term overriding royalty
interests, Domain were purchasing term overriding royalty interests requiring
delivery of a specified quantity of oil and gas, IPF Program results would be
accounted for differently. Specifically, in 1997, Domain's EBITDA would increase
by $12.1 million and IPF Program return of capital in the consolidated statement
of cash flows would decrease by the same amount. To more accurately reflect the
actual cash flows generated by Domain, IPF Program return of capital is
identified separately to allow such cash receipts to be combined with EBITDA.
Domain reviews the IPF Program portfolio on a quarterly basis (giving
effect to commodity prices, production levels and reserve estimates) to
determine if any transactions are at risk of loss of principal. Although to
date, Domain has not incurred any losses on notes outstanding under the IPF
Program, as of December 31, 1997 and March 31, 1998, Domain has a non-cash
reserve for potential future losses of $437,000 and $708,000, respectively,
which is netted against IPF Program notes receivable in Domain's consolidated
balance sheet.
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Results of Operations. The following table summarizes certain financial
data, non-GAAP financial data, production volumes, average realized prices and
expenses for Domain's operations for the periods shown:
<TABLE>
<CAPTION>
FOR THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- ------------------
PREDECESSOR SUCCESSOR (UNAUDITED)
------------------- --------- ------------------
1995 1996 1997 1997 1998
-------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA (IN THOUSANDS):
Revenues
Natural gas......................... $ 27,772 $ 41,767 $ 36,082 $10,094 $ 10,470
Oil and condensate.................. 7,105 10,507 11,169 2,688 2,842
IPF income (a)...................... 2,356 4,369 4,779 732 1,958
Total revenues......................... 37,647 56,230 52,268 13,222 15,958
Total operating expenses............... 36,789 44,655 41,237 10,697 11,808
-------- -------- -------- ------- --------
Operating income....................... $ 858 $ 11,575 $ 11,031 $ 2,525 $ 4,150
======== ======== ======== ======= ========
Net income............................. $ 507 $ 7,031 $ 3,163 $ (319) $ 2,161
Net cash provided by operating
activities.......................... 19,933 34,553 21,014 8,112 16,631
Net cash used in investing
activities.......................... (39,728) (47,329) (87,602) (7,577) (30,849)
Net cash provided by financing
activities.......................... 8,328 12,776 71,283 5,511 17,736
NON-GAAP FINANCIAL DATA (IN THOUSANDS):
EBITDA(b).............................. $ 23,550 $ 36,495 $ 31,690 $ 8,957 $ 9,933
IPF Program return of capital(c)....... 2,638 4,618 12,109 3,426 4,557
EBITDA plus IPF Program return of
capital............................. 26,188 41,113 43,799 12,383 14,490
PRODUCTION VOLUMES:
Natural gas (Mmcf)..................... 18,065 21,192 15,932 3,668 4,872
Oil and condensate (Mbbls)............. 424 564 646 141 190
Total (Mmcfe).......................... 20,609 24,575 19,811 4,516 6,013
AVERAGE REALIZED PRICES:(D)
Natural gas (per Mcf).................. $ 1.54 $ 1.97 $ 2.26 $ 2.75 $ 2.15
Oil and condensate (per Bbl)........... 16.76 18.63 17.28 19.06 14.96
EXPENSES (PER MCFE):
Lease operating(e)..................... $ 0.39 $ 0.42 $ 0.74 $ 0.68 $ 0.68
Production taxes....................... 0.03 0.05 0.07 0.09 0.05
Depreciation, depletion and
amortization........................ 1.08 1.01 0.78 0.69 0.90
General and administrative, net(f)..... 0.16 0.12 0.17 0.14 0.21
</TABLE>
- ---------------
(a) IPF income for 1994, 1995 and 1996 also includes income from Domain's
"GasFund" partnership with a financial investor. See "Business of
Domain -- Independent Producer Finance Activities."
(b) EBITDA represents earnings before stock compensation expense, interest,
income taxes, depreciation, depletion and amortization. Domain believes
that EBITDA may provide additional information about Domain's ability to
meet its future requirements for debt service, capital expenditures and
working capital. 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.
(c) To more accurately reflect the actual cash flows generated by Domain, IPF
Program return of capital is identified separately to allow such cash
receipts to be combined with EBITDA.
(d) Reflects the actual realized prices received by Domain, including the
results of Domain's hedging activities. See "-- Other Matters -- Hedging
Activities."
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<PAGE> 106
(e) Lease operating expense per Mcfe increased to $0.74 in 1997 compared to
$0.42 in 1996, or $0.32. This increase was primarily due to decreased
production volumes ($0.14), increased workover expenses ($0.08) and an
increase due to the Wasson Field acquisition ($0.06).
(f) 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 years ended
December 31, 1996 and 1995 would be $0.28 and $0.20, respectively.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997. Oil and natural gas revenues increased to $13.3 million in the first
quarter of 1998 from $12.8 million in the first quarter of 1997, an increase of
$0.5 million, or 4.1%. Production volumes for oil and condensate increased to
190 Mbbls in the first quarter of 1998 from 141 Mbbls in the first quarter of
1997, an increase of 49 Mbbls, or 34.8%. Production volumes for natural gas
increased to 4.9 Bcf in the first quarter of 1998 from 3.7 Bcf in the first
quarter of 1997, an increase of 1.2 Bcf, or 32.8%. The increase in natural gas
production was primarily due to the Funds Acquisition (1.1 Bcf) completed in
July 1997 and the Gulfstar Acquisition (0.4 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 $4.2 million. This
was largely offset by a 21.8% decrease in the average realized price received
for Domain's natural gas and a 21.5% decrease in the average realized price
received for Domain's oil and condensate. These decreases in realized prices
decreased revenues by $3.7 million.
Domain realized an average oil price of $14.21 per Bbl and an average
natural gas price of $2.11 per Mcf for the first quarter of 1998. Net of hedging
results, Domain realized average prices of $14.96 per Bbl and $2.15 per Mcf,
respectively. Hedging activities increased oil and natural gas revenues for the
first quarter 1998 by approximately $0.3 million. For the first quarter of 1997,
Domain realized an average oil price of $21.45 per Bbl and an average natural
gas price of $2.73 per Mcf. Net of hedging results, Domain realized average
prices of $19.06 per Bbl and $2.75 per Mcf, respectively. Hedging activities
decreased oil and natural gas revenues for the first quarter of 1997 by
approximately $0.3 million.
Other revenues increased to $0.7 million in the first quarter of 1998 from
a loss of $0.3 million in the first quarter of 1997, an increase of $1.0
million. This increase was primarily due to a $0.6 million gain realized as the
result of a treasury lock entered into by Domain during the first quarter of
1998 in anticipation of a proposed debt offering and $0.4 million of losses in
the first quarter of 1997 from the Michigan Development Project, which Domain
sold in April 1997.
IPF income increased to $2.2 million, excluding a $0.3 million charge for
doubtful accounts, in the first quarter of 1998 from $0.7 million in the first
quarter of 1997, an increase of $1.5 million, or 204.5%. This increase was
primarily the result of investing more than $40 million in IPF Program
transactions during 1997, which was more than double the total invested in 1996.
Lease operating expenses increased to $4.1 million in the first quarter of
1998 from $3.1 million in the first quarter of 1997, an increase of $1.0
million, or 34.4%. Lease operating expenses were higher in the first quarter of
1998 compared to the same period in 1997 due to the Funds Acquisition ($0.6
million) completed in July 1997 and the Gulfstar Acquisition ($0.4 million)
completed in December 1997. On a per Mcfe basis, lease operating expenses were
$0.68 for both the first quarter of 1998 and the first quarter of 1997.
Depreciation, depletion and amortization ("DD&A") expense increased to $5.6
million in the first quarter of 1998 from $3.3 million in the first quarter of
1997, an increase of $2.3 million, or 70.6%. This was the result of higher oil
and natural gas production volumes ($1.0 million) and an increase in the DD&A
rate ($1.3 million). The DD&A rate increased to $0.90 per Mcfe in the first
quarter of 1998 compared to $0.69 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.
General and administrative expense increased to $1.6 million in the first
quarter of 1998 from $0.8 million in the first quarter of 1997, an increase of
$0.8 million, or 102.9%. This increase was primarily due to an
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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 first
quarter of 1998.
Stock compensation expense decreased to $0.2 million in the first quarter
of 1998 from $3.2 million during the same period in 1997, a decrease of $3.0
million. The $3.0 million decrease is primarily attributable to stock purchased
by the management of Domain in the first quarter of 1997 under the Employee
Option Plan.
Income tax expense decreased to $1.3 million in the first quarter of 1998
from $1.7 million in the first quarter of 1997, a decrease of $0.4 million. This
decrease was primarily due to income before taxes decreasing to $3.5 million for
the first quarter of 1998 compared to $4.5 million (excluding permanent
difference attributable to stock compensation of $3.1 million) for the first
quarter of 1997. The effective tax rates, excluding permanent differences, were
38% and 39% for the first quarters of 1998 and 1997, respectively.
Net income was $2.2 million for the first quarter of 1998 compared to a net
loss of $0.3 million for the first quarter of 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996. Oil
and natural gas revenues decreased from $52.3 million in 1996 to $47.3 million
in 1997, a decrease of $5.0 million, or 9.6%. Production volumes for oil and
condensate increased from 564 Mbbls in 1996 to 646 Mbbls in 1997, an increase of
82 Mbbls, or 14.5%. Production volumes for natural gas decreased from 21.2 Bcf
in 1996 to 15.9 Bcf in 1997, a decrease of 5.3 Bcf, or 24.8%. The decrease in
natural gas production was primarily due to natural declines in production from
certain fields, reduced capital expenditures prior to the Acquisition in 1996 as
well as the sale of certain properties. This was partially offset by an increase
in production resulting from the Funds Acquisition. The decrease in total
production decreased revenues by $8.9 million. This was partially offset by a
14.7% increase in the average realized price received for Domain's natural gas
and a 7.2% decrease in the average realized price received for Domain's oil and
condensate. These changes in realized prices increased revenues by $3.9 million.
Domain realized an average oil, condensate and natural gas liquids price of
$18.50 per Bbl and an average gas price of $2.51 per Mcf for the year ended
December 31, 1997. Net of hedging results, Domain realized average prices of
$17.28 per Bbl and $2.26 per Mcf, respectively. These hedging activities
decreased 1997 oil and natural gas revenues by approximately $4.6 million.
Domain realized an average oil, condensate and natural gas liquids price of
$20.88 per Bbl and an average gas price of $2.41 per Mcf for the year ended
December 31, 1996. Net of hedging results, Domain realized average prices of
$18.63 per Bbl and $1.97 per Mcf, respectively. These hedging activities
decreased 1996 oil and natural gas revenues by approximately $10.5 million.
IPF income increased from $4.4 million in 1996 to $4.8 million in 1997, an
increase of $0.4 million, or 9.4%. The 1996 activities include $1.5 million for
fees earned related to GasFund financings. Excluding the effect of these fees,
revenues from IPF income increased by $1.9 million, or 65.5%, in 1997 compared
to 1996, primarily due to increased financing activities.
Lease operating expenses increased from $10.2 million in 1996 to $14.9
million in 1997, an increase of $4.7 million, or 46.2%. This increase was
primarily due to an increase of $1.1 million as a result of the Wasson Field
acquisition completed in June 1996, an increase of $1.4 million in workover
expense, and an increase of $1.4 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 an Mcfe basis, lease operating expenses increased from
$0.42 in 1996 to $0.74 in 1997, an increase of $0.32, or 76.2%. The increase in
lease operating expenses per Mcfe was primarily due to decreased production
volumes ($0.14), increased workover expenses ($0.08), and an increase as a
result of the Wasson Field acquisition ($0.06).
DD&A expense decreased from $24.9 million in 1996 to $16.1 million in 1997,
a decrease of $8.8 million. This was primarily the result of lower natural gas
production volumes ($4.8 million) and a 22.8% decrease in
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the DD&A rate ($4.0 million) from $1.01 to $0.78 per Mcfe primarily resulting
from the reduced cost basis attributable to Domain's oil and gas properties
purchased in the Acquisition.
General and administrative expense increased from $3.4 million in 1996 to
$4.2 million in 1997, an increase of $0.8 million, or 23.5%. This increase
reflects a decrease in the reimbursement of overhead paid to Domain via its
funds management activities from $0.3 million in 1996 to zero in 1997 and a $0.5
million decrease in the capitalization of general and administrative expense in
1997 as compared to 1996.
The corporate overhead allocation from Tenneco decreased from $4.8 million
in 1996 to zero in 1997 due to the Acquisition and elimination of Tenneco's
allocated overhead.
Stock compensation expense increased from zero in 1996 to $4.6 million in
1997 due to the implementation of the Employee Option Plan.
Net interest expense increased from $0.2 million in 1996 to $3.8 million in
1997. This increase was due to higher borrowings under Domain's revolving credit
facilities due to increased IPF Program investments, the Acquisition and higher
oil and gas capital expenditures in 1997.
Income tax expense decreased from $4.4 million in 1996 to $4.1 million in
1997, a decrease of $0.3 million, or 6.8%. This decrease was primarily due to a
decrease in income before taxes from $11.4 million in 1996 to $7.3 million in
1997. This decrease was partially offset by an increase in the effective tax
rate from 38% in 1996 to 56% in 1997. This increase in the effective tax rate
was due to the tax treatment of certain portions of stock compensation expense.
Net income was $7.0 million in 1996 compared to $3.2 million in 1997, as a
result of the factors described above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995. Oil
and natural gas revenues increased from $34.9 million in 1995 to $52.3 million
in 1996, an increase of $17.4 million, or 49.9%. Production volumes for oil and
condensate increased from 424 Mbbls in 1995 to 564 Mbbls in 1996, an increase of
140 Mbbls, or 33.0%. Production volumes for natural gas increased from 18.1 Bcf
in 1995 to 21.2 Bcf in 1996, an increase of 3.1 Bcf, or 17.3%. The increase in
oil and natural gas production was due to new wells being successfully drilled
and completed during 1996, as well as acquisitions of producing properties. The
increase in total net production increased revenues by $7.2 million. In
addition, Domain experienced an 11.2% increase in average oil and condensate
prices and a 27.9% increase in average natural gas prices. Increases in average
oil and natural gas prices were directly attributable to general improved market
conditions.
Domain realized an average oil, condensate and natural gas liquids price of
$20.88 per Bbl and an average gas price of $2.41 per Mcf for the year ended
December 31, 1996. Net of hedging results, Domain realized average prices of
$18.63 per Bbl and $1.97 per Mcf, respectively. These hedging activities
decreased 1996 oil and natural gas revenues by approximately $10.5 million. This
loss of revenue was the result of hedges made at the direction of Tenneco in
late 1995. For the year ended December 31, 1995, Domain realized an average oil,
condensate and natural gas liquids price of $16.31 per Bbl and an average
natural gas price of $1.54 per Mcf. Net of hedging results, Domain realized an
average oil price of $16.76 per Bbl. These hedging activities increased 1995 oil
revenues by approximately $0.2 million. Domain had no natural gas hedging
activities in 1995.
IPF income increased from $2.4 million in 1995 to $4.4 million in 1996, an
increase of $2.0 million, or 85.4%. This increase was the result of a $1.0
million increase in IPF Program revenues and a $1.0 million increase in GasFund
revenues. The 1996 activities include $1.5 million for fees earned related to
GasFund financings. Excluding the effect of these fees, revenues from IPF income
increased by $0.5 million, or 20.8%, in 1996 compared to 1995. IPF income
increased as the result of a 100% increase in IPF Program customers, and a
corresponding increase in investments, at year-end 1996 compared to year-end
1995.
Lease operating expenses increased from $8.0 million in 1995 to $10.2
million in 1996, an increase of $2.2 million, or 27.9%. On an Mcfe basis, lease
operating expenses increased from $0.39 in 1995 to $0.42 in 1996, an increase of
$0.03, or 7.7%. The increase in lease operating expenses was primarily
attributable to
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increased production volumes. On a per unit basis, the increase was primarily
attributable to the acquisition in June 1996 of an interest in the Wasson Field,
which is undergoing tertiary enhanced recovery and the expenses associated
therewith.
DD&A expense increased from $22.7 million in 1995 to $24.9 million in 1996,
an increase of $2.2 million. This was the result of higher oil and gas
production volumes partially offset by a 6.5% decrease in the DD&A rate from
$1.08 to $1.01 per Mcfe. The reduced DD&A rate was attributable to the
acquisition of low cost reserves in the Wasson Field.
General and administrative expense increased from $2.8 million in 1995 to
$3.4 million in 1996, an increase of $0.6 million, or 20.9%. This increase
reflects a decrease in the reimbursement of overhead paid to Domain via its
funds management activities from $1.1 million in 1995 to zero in 1996 partially
offset by an increase in the capitalization of general and administrative
expense in 1996 of $0.5 million as compared to 1995.
The corporate overhead allocation from Tenneco increased from $2.6 million
in 1995 to $4.8 million in 1996, an increase of $2.2 million, or 83.7%. The
increase was primarily due to approximately $2.0 million in costs related to
severance payments, retention bonuses and other costs associated with the merger
of Tenneco with an affiliate of El Paso Natural Gas Company.
Income tax expense increased from $0.4 million in 1995 to $4.4 million in
1996, an increase of $4.0 million, or 1152%. This was due to an increase in
income before taxes from $0.9 million in 1995 to $11.4 million in 1996 and a
decrease in the effective tax rate from 41% in 1995 to 38% in 1996.
Net income was $0.5 million in 1995 compared to $7.0 million in 1996, as a
result of the factors described above.
Liquidity and Capital Resources. As of March 31, 1998, Domain had cash and
cash equivalents of approximately $8.2 million and working capital of $12.9
million. During the first quarter of 1998, Domain's primary sources of cash were
from its operating activities and its revolving credit facilities.
Net cash provided by operating activities increased to $16.6 million for
the first quarter of 1998 from $8.1 million for the first quarter of 1997. Net
cash flows from operations before changes in operating assets and liabilities
for the first quarter of 1998 was $9.5 million compared to $7.7 million for the
first quarter of 1997, an increase of $1.8 million, or 23.6%. This increase was
primarily due to an increase in IPF Income, before a charge for doubtful
accounts, of $1.5 million. Changes in operating assets and liabilities accounted
for the remaining $6.7 million increase in cash flows from operating activities.
During 1997, cash flow from operations was $21.0 million, compared with
$34.5 million in 1996. Net cash flow from operations before changes in operating
assets and liabilities for 1997 was $27.7 million compared with $39.5 million in
1996, a decrease of $11.8 million. This decrease was primarily the result of
lower revenues ($4.0 million) due to a decline in production, higher lease
operating expenses and production taxes ($4.8 million), higher interest expense
($3.6 million) and lower deferred taxes ($3.3 million), partially offset by
lower corporate overhead allocation ($3.9 million).
Cash flows used in investing activities for the first quarter of 1998 was
$30.8 million compared to $7.6 million for the first quarter of 1997, an
increase of $23.2 million. This increase was primary due to an increase in oil
and natural gas investments of $24.8 million, including $11.6 million for the
Oakvale Acquisition.
Net cash used in investing activities was $87.6 million in 1997, an
increase of $40.3 million or 85.1% over 1996, primarily due to increased oil and
gas property acquisitions and increased investment in the IPF Program. Oil and
gas property acquisitions in 1997 included $28.4 million for the Funds
Acquisition, $7.5 million for the Gulfstar Acquisition and $11.8 million for the
acquisition of an additional working interest in Mobile Bay 864. IPF Program
investments increased by $21.1 million in 1997, or 110.9%, over 1996. These
increases in investing activities were partially offset by an increase in
proceeds from the sale of oil and gas properties and Domain's equity investment
in Michigan ($9.9 million), proceeds from the sale of a restricted
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certificate of deposit ($8.0 million), an increase in IPF Program return of
capital ($7.5 million), lower investments in other assets ($1.7 million) and
lower investment in drilling activities ($1.4 million).
The following table sets forth Domain's capital expenditure and IPF Program
investments for each of the three years ended December 31, 1997 and the three
month period ended March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------- MARCH 31,
1995 1996 1997 1998
------- ------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Acquisition of oil and natural gas
properties................................. $18,393 $ 8,513 $ 55,372 $13,909
Development and exploitation................. 7,834 7,506 18,894 4,490
Exploration.................................. 23,677 12,126 16,804 7,277
IPF Program.................................. 6,606 18,608 40,164 6,849
------- ------- -------- -------
Total.............................. $56,510 $46,753 $131,234 $32,525
======= ======= ======== =======
</TABLE>
Domain's capital expenditure budget for 1998 is approximately $150.0,
including $55.0 million for acquisitions, $45.0 million for exploration and
development, and $50.0 million for IPF Program investments. However, Domain now
expects only to spend approximately $51.4 million in connection with
acquisitions and exploration and development, and $30.0 million for IPF Program
investments during 1998. Domain'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 vary significantly due to a
variety of factors, including drilling results, oil and gas prices, industry
conditions, future acquisitions and IPF Program activity. Domain expects to
selectively pursue acquisition opportunities for proved reserves where it
believes significant operating improvement or exploration and exploitation
potential exists.
Domain 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 required from time to time
to supplement internal cash flows. Based upon Domain's currently level of
operations and anticipated growth, management of Domain believes that available
cash, together with borrowings under the existing revolving credit facilities,
cash provided by operating activities and, if necessary, new financings will be
adequate to meet Domain'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 Domain's business will generate sufficient cash flow from
operations or that future borrowings will be available in an amount sufficient
to enable Domain to service its indebtedness or make necessary capital
expenditures.
Cash flows provided by financing activities increased to $17.7 million in
the first quarter of 1998 compared to $5.5 million in the first quarter of 1997,
an increase of $12.2 million. This increase is primarily due to increased net
borrowings under Domain's revolving credit facilities of $12.8 million during
the first quarter of 1998. Cash flows provided from financing activities was
$71.3 million in 1997, reflecting net proceeds of $87.0 million from the
issuance of common stock, $67.8 million in proceeds from debt borrowings less
$83.5 million in repayments of debt borrowings. In 1996, cash flow from
financing activities was $12.8 million, reflecting $7.0 million from debt
borrowings and $6.6 million in parent advances, less $0.8 million in repayments
of debt borrowings.
Issuance of Common Stock. Domain raised approximately $89.3 million through
the sale of common stock in various transactions in 1997. On February 21, 1997,
Domain issued 390,307 shares of its common stock in a private offering to the
management of Domain. For the sale of such shares Domain received $1,085,328 in
cash and accepted notes payable from certain managers in the amount of $546,026.
On April 3, 1997, Domain issued 95,696 shares of its common stock in a private
offering to the employees of Domain. For the sale of such shares Domain received
$400,000 in cash. In February 1998, payments relating to the management notes
were received for all amounts outstanding, including accrued interest.
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On June 27, 1997, Domain consummated the IPO of its Common Stock pursuant
to which it issued 6,000,000 shares for an aggregate purchase price of $75.3
million. Concurrently therewith, Domain sold 643,037 shares of Common Stock to
FRLP at the public offering price for an aggregate purchase price of $8.7
million (the "Concurrent Sale"). On July 9, 1997, Domain issued an additional
303,400 shares of Common Stock pursuant to the over-allotment option granted to
the underwriters in the IPO for an aggregate purchase price of $3.8 million. The
net proceeds received by Domain from the issuance of these shares was $87.8
million. The following table shows the use of the net proceeds received:
<TABLE>
<CAPTION>
USE OF PROCEEDS (IN MILLIONS)
<S> <C>
Acquisition of oil and gas properties............... $28.7
Repayment of debt................................... 56.1
IPO closing costs................................... 1.3
Working capital..................................... 1.7
</TABLE>
Domain also issued 499,990 shares of common stock at a value of $16.00 per
share as part of the Gulfstar Acquisition.
Domain Credit Facility. In connection with the Acquisition, Domain entered
into a $65.0 million revolving credit facility (the "Domain Credit Facility")
maturing on December 31, 1999 with a group of banks led by The Chase Manhattan
Bank (the "Lenders"). As of May 15, 1998, borrowings outstanding under Domain
Credit Facility totaled $49.1 million. The borrowing base under the facility was
$60.0 million as of May 15, 1998, and is subject to a scheduled redetermination
every six months (and such other redetermination as the Lenders may elect to
perform each year) by the Lenders at the Lenders' sole discretion and in
accordance with their customary practices and standards in effect from time to
time for reserve-based loans to borrowers similar to Domain.
IPF Credit Facility. IPF Company has a $150.0 million revolving credit
facility (the "IPF Credit Facility") with Compass Bank-Houston ("Compass") as
agent pursuant to which it finances a portion of the IPF Program. The IPF Credit
Facility matures June 1, 2000 at which time all amounts owed thereunder are due
and payable. The IPF Credit Facility is secured by substantially all of IPF
Company's oil and gas interests, including the notes receivable generated
therefrom. IPF Company's obligations under such facility are nonrecourse to
Domain. The borrowing base under the facility as of May 15, 1998 was $49.0
million and is subject to a scheduled redetermination by Compass every six
months and such other redetermination as Compass may elect to perform each year.
As of May 15, 1998, approximately $36.0 million was outstanding under the IPF
Credit Facility.
Environmental Matters. Domain is responsible for the payment of abandonment
costs on its oil and natural gas properties pro rata to its working interest.
Domain accrues for its expected future abandonment liabilities as a component of
depletion, depreciation and amortization as the properties are produced. As of
December 31, 1997, total pro forma undiscounted abandonment costs estimated to
be incurred through the year 2007 were approximately $21.4 million for
properties in federal and state waters. Domain does not consider abandonment
costs estimated to be incurred on its onshore properties to be significant at
this time. Estimates of abandonment costs and their timing may change due to
many factors, including actual drilling and production results, changes in the
inflation rate, and changes in environmental laws and regulations.
The MMS requires lessees of OCS properties to post bonds in connection with
the plugging and abandonment of wells located offshore in the federal OCS and
the removal of all production facilities. Operators in the OCS waters of the
Gulf of Mexico are currently required to post an area-wide bond of $3.0 million
or $500,000 per producing lease, which Domain has provided. Under certain
circumstances, the MMS has the authority to suspend or terminate operations on
federal leases for failure to comply with the applicable bonding requirements or
other regulations applicable to plugging and abandonment. Any such suspensions
or terminations of Domain's operations could have a material adverse effect on
Domain's financial condition and results of operations.
During the three month period ended March 31, 1998 and for each year of the
three year period ended December 31, 1997, Domain did not incur any significant
charges to income for environmental remediation
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costs and made no related payments. At March 31, 1998, Domain did not have a
separate environmental remediation reserve for Superfund or similar clean-up
sites.
On the basis of management's best assessment of the ultimate amount and
timing of the contingencies associated with environmental matters, any expenses
or judgments related to such matters are not expected to have a material adverse
effect on Domain's financial condition, results of operations or cash flows.
Accounting Pronouncements. In June 1997, the Financial Accounting Standards
Board issued Statement No. 130, "Reporting Comprehensive Income," (SFAS No.
130). SFAS No. 130 is effective for periods beginning after December 15, 1997.
SFAS No. 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 March 31, 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 No. 131). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments. SFAS No. 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 Domain is evaluating what, if any, additional disclosures may be
required when this statement is first applied.
Year 2000. Domain has initiated a review of its current financial system
and economic modeling system, as well as other purchased computer systems and
software utilized by Domain. Pending completion of this review, Domain is unable
to estimate what expenditures or disruptions of operations relating to year 2000
processing issues may result. The cost to achieve year 2000 compliance will be
charged against earnings as incurred. Such cost may be material. In addition, no
assurance can be given that total year 2000 compliance can be achieved because
of the significant degree of interdependence with third party suppliers, service
providers and customers.
OTHER MATTERS
Natural Gas Balancing. Domain incurs certain gas production volume
imbalances in the ordinary course of business and utilizes the sales method to
account for such imbalances. Under this method, income is recorded based on
Domain's net revenue interest in production taken for delivery. Management does
not believe that Domain had any material gas imbalances as of December 31, 1997
or March 31, 1998.
Operations Outside the United States. In November 1997, Domain formed
Domain Argentina, S.A. to explore for and acquire oil and gas reserves in
Argentina. Domain owns a 50% interest in Domain Argentina, S.A., which, pending
a Presidential decree, has been awarded two Argentine concessions totalling 1.2
million acres. Domain has not previously conducted any operations outside the
United States. Non-U.S. operations are subject to certain political, economic
and other uncertainties not encountered in U.S. operations, including risks of
war and civil disturbances (or other risks that may limit or disrupt markets),
expropriation and the general hazards associated with the assertion of national
sovereignty over certain areas in which operations are conducted. Operations
outside the United States may face the additional risk of fluctuating currency
values, hard currency shortages, controls of currency exchange and repatriation
of income or capital. No prediction can be made as to what governmental
regulations may be enacted in the future that could adversely affect the
international oil and gas industry.
Although Domain does not, as of the date hereof, have any plans or
commitments for non-U.S. operations other than in Argentina, it could in the
future expand its non-U.S. operations, which could result in the expenditure of
a material amount of funds.
Hedging Activities. From time to time, Domain uses certain financial
instruments, such as futures contracts, options and collars to manage its
commodity price risk. Under such financial instrument contracts, Domain may
still be at risk for basis differential, which is the difference in the quoted
financial price for contract settlement and the actual physical point of
delivery price. Domain will from time to time attempt to
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mitigate basis differential risk by entering into basis swap contracts. Domain
limits its open positions under these contracts not to exceed the volume of
production controlled by Domain. Domain has established internal controls to
monitor such positions against established limits. However, to the extent that
Domain has an open position, Domain may be exposed to risk from fluctuating
market prices.
Domain realized $4.6 million and $10.5 million of pre-tax losses in 1997
and 1996, respectively, and a pre-tax gain of approximately $0.2 million in 1995
as a result of various hedging transactions for natural gas and crude oil. Since
these transactions were considered to be hedges on production, these losses are
included in oil and natural gas revenues and are reflected in the average
realized price of the particular products.
As of December 31, 1997, Domain has sold natural gas futures contracts
covering an average of 15 Mmcfd of its expected natural gas production from
January 1, 1998 through October 31, 1998. Under these contracts, Domain will
receive an average price of $2.14 per MMbtu.
As of December 31, 1997, Domain has sold under a swap agreement 532 Bbld,
402 Bbld, and 278 Bbld of its expected crude oil production for 1998, 1999 and
2000, respectively. Under this swap agreement, Domain will receive prices per
barrel of $17.91, $18.48 and $19.07 for 1998, 1999 and 2000, respectively.
Based on forward price quotes from brokers and NYMEX forward prices as of
December 31, 1997, the deferred pre-tax loss to Domain for the hedged
transactions for 1998, 1999 and 2000 would be approximately $0.3 million. The
actual gains or losses realized by Domain from such hedges may vary
significantly from the foregoing amounts due to the fluctuations of prices in
the commodity market.
Subsequent to December 31, 1997, Domain terminated its oil swap agreements
for 1999 and 2000. Domain received $47,673 in settlement of these swap
agreements.
Subsequent to December 31, 1997, Domain sold natural gas futures contracts
covering an average of 30 Mmcfd of its expected natural gas production for March
1998 through June 1998. Under these contracts, Domain received an average price
of $2.20 per MMbtu for March 1998 and $2.28 per MMbtu for April 1998 through
June 1998.
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COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
The Lomak Common Stock and the Domain Common Stock are listed on the NYSE
under the symbols "LOM" and "DXD," respectively. If the Name Change is approved
by the stockholders at the Lomak Special Meeting, Lomak's NYSE trading symbol
will be changed to "RRC." Prior to listing on the NYSE in October 1996, the
Lomak Common Stock was listed on the Nasdaq National Market. The Domain Common
Stock began trading on June 24, 1997. As of July 10, 1998, there were 3,399 and
81 holders of record of Lomak Common Stock and Domain Common Stock,
respectively. The table below sets forth, for the calendar quarters indicated,
the reported high and low sales prices of Lomak Common Stock and Domain Common
Stock as reported on the NYSE Composite transaction tape or the Nasdaq National
Market, as applicable.
<TABLE>
<CAPTION>
DOMAIN
LOMAK LOMAK COMMON
COMMON STOCK COMMON STOCK
--------------- --------- ---------------
HIGH LOW DIVIDENDS HIGH LOW
---- --- --------- ---- ---
<S> <C> <C> <C> <C> <C>
1996
First Quarter........................................ $12 1/8 $ 9 1/2 $.01
Second Quarter....................................... 14 3/4 11 5/8 .01
Third Quarter........................................ 15 12 .02
Fourth Quarter....................................... 17 1/2 13 1/8 .02
1997
First Quarter........................................ 23 5/8 16 .02
Second Quarter....................................... 19 3/8 16 .02 $13 1/2 $13 1/2
Third Quarter........................................ 20 1/8 14 3/4 .03 19 1/4 13 9/16
Fourth Quarter....................................... 20 3/16 15 1/2 .03 20 14 3/4
1998
First Quarter........................................ 17 1/2 13 1/4 .03 15 5/8 12 3/8
Second Quarter....................................... 16 11/16 9 3/4 .03 14 1/8 11 1/2
Third Quarter (through July 13, 1998)................ 10 3/4 10 1/16 (a) 12 3/16 11 5/8
</TABLE>
- ---------------
(a) Since the fourth quarter of 1995, dividends have been declared at the
beginning of the last month of each calendar quarter and have been paid at
the end of such calendar quarter.
On May 11, 1998, the last full trading day prior to the public announcement
of the proposed Merger, the closing price on the NYSE was $14.00 per share of
Lomak Common Stock and $12.50 per share of Domain Common Stock. On July 13,
1998, the most recent practicable date prior to the effectiveness of the
registration statement of which this Proxy Statement/Prospectus is a part, the
closing price on the NYSE was $10.125 per share of Lomak Common Stock and
$11.750 per share of Domain Common Stock. Holders of Lomak Common Stock are
urged to obtain current market quotations prior to making any decision with
respect to the Merger.
Domain has never paid dividends on the Domain Common Stock. Dividends on
the Lomak Common Stock were initiated in late 1995 and have been paid in each
quarter since that time. The Lomak Preferred Stock is entitled to receive
cumulative quarterly dividends at the annual rate of $2.03 per share. If there
is any arrearage in dividends on preferred stock, Lomak may not pay dividends on
the Lomak Common Stock. Lomak has never been in arrears in the payment of
preferred dividends. The payment of future dividends on Lomak Common Stock is
subject to declaration by the Board of Directors of Lomak and may depend on
earnings, capital expenditures and market factors existing from time to time.
Lomak's bank credit facility and the indenture for the 6% Convertible
Subordinated Debentures and 8.75% Senior Subordinated Notes contain restrictions
on Lomak's ability to pay dividends on capital stock.
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<PAGE> 115
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
LOMAK
The following table sets forth information regarding the beneficial
ownership of the Lomak Common Stock and Lomak Preferred Stock as of July 10,
1998 by (i) each person known to Lomak to own beneficially more than 5% of the
Lomak Common Stock or Lomak Preferred Stock, (ii) each of Lomak's directors,
(iii) each named executive officer of Lomak and (iv) all current directors and
executive officers of Lomak as a group. The business address of each officer and
Director listed below is: c/o Lomak Petroleum, Inc., 500 Throckmorton Street,
Fort Worth, Texas 76102.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
--------------------------- -------------------------
NUMBER OF NUMBER OF
SHARES SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER OWNED OF CLASS OWNED OF CLASS
------------------------ ---------------- -------- ------------ --------
<S> <C> <C> <C> <C>
Thomas J. Edelman.............................. 1,058,066(1) 4.74% 0 0%
John H. Pinkerton.............................. 502,423(2) 2.25% 0 0%
C. Rand Michaels............................... 335,162(3) 1.51% 0 0%
Robert E. Aikman............................... 103,776(4) * 0 0%
Anthony V. Dub................................. 80,200(5) * 0 0%
Allen Finkelson................................ 28,753(6) * 0 0%
Ben A. Guill................................... 82,753(7) * 0 0%
Steven L. Grose................................ 106,728(8) * 0 0%
Chad L. Stephens............................... 140,984(9) * 0 0%
Thomas W. Stoelk............................... 39,250(10) * 0 0%
All directors and executive officers as a group
(16 persons)................................. 2,691,186(11) 11.69% 0 0%
Public Employees Retirement System of Ohio..... 1,250,000(12) 5.65% 0 0%
Franklin Resources Inc......................... 1,531,490(13) 6.92% 0 0%
Cincinnati Financial Corporation............... 0 0% 86,957(14) 7.56%
Guardian Life Insurance Company of America..... 0 0% 191,304(15) 16.64%
Highbridge Capital Corporation................. 0 0% 83,000(16) 7.22%
Palisade Capital............................... 0 0% 121,739(17) 10.59%
Merrill Lynch Asset Management................. 0 0% 91,304(18) 7.94%
Pecks Management............................... 0 0% 86,957(19) 7.56%
Putman Investments............................. 0 0% 52,174(20) 4.54%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes 195,000 shares which may be purchased under currently exercisable
stock options or options that are exercisable within 60 days; 113,333
shares held under IRA, KEOGH and pension plan accounts; 37,916 shares owned
by Mr. Edelman's spouse and 92,850 shares owned by Mr. Edelman's minor
children, to which Mr. Edelman disclaims beneficial ownership.
(2) Includes 215,000 shares which may be purchased under currently exercisable
stock options or options that are exercisable within 60 days; 115,899
shares held under IRA and pension plan accounts; 4,772 shares owned by Mr.
Pinkerton's minor children and 3,499 shares owned by Mr. Pinkerton's
spouse, to which Mr. Pinkerton disclaims beneficial ownership.
(3) Includes 72,500 shares which may be purchased under currently exercisable
stock options or options that are exercisable within 60 days; 1,804 shares
held under an IRA account; 107,011 shares owned by Mr. Michaels' spouse and
19,460 shares owned by Mr. Michaels' children, to which Mr. Michaels
disclaims beneficial ownership.
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<PAGE> 116
(4) Includes 36,200 shares which may be purchased under currently exercisable
stock options or options that are exercisable within 60 days; 9,366 shares
owned by Mr. Aikman's spouse and 10,010 shares owned by Mr. Aikman's minor
children, to which Mr. Aikman disclaims beneficial ownership.
(5) Includes 15,200 shares which may be purchased under currently exercisable
stock options or options that are exercisable within 60 days.
(6) Includes 21,200 shares which may be purchased under currently exercisable
stock options or options are exercisable within 60 days.
(7) Includes 15,200 shares which may be purchased under currently exercisable
stock options or options that are exercisable within 60 days.
(8) Includes 72,500 shares which may be purchased under currently exercisable
stock options or options that are exercisable within 60 days.
(9) Includes 72,500 shares which may be purchased under currently exercisable
stock options or options that are exercisable within 60 days; 15,000 shares
owned by Mr. Stephens' spouse; and 3,879 shares owned by Mr. Stephens'
minor children, to which Mr. Stephens disclaims beneficial ownership.
(10) Includes 38,250 shares which may be purchased under currently exercisable
stock options or options that are exercisable within 60 days.
(11) Includes 898,650 shares which may be purchased under currently exercisable
stock options or options that are exercisable within 60 days.
(12) Such stockholder's address is 227 East Town Street, Columbus, Ohio 43215.
(13) Such stockholder's address is 777 Mariners Island Blvd., 6th Floor, San
Mateo, California 94404.
(14) Such stockholder's address is 6200 South Gilmore Road, Fairfield, Ohio
45014-5141.
(15) Such stockholder's address is 201 Park Avenue, New York, New York 10003.
(16) Such stockholder's address is P.O. Box 30554, Seven Miles Beach, Grand
Cayman Islands.
(17) Such stockholder's address is One Bridge Plaza, Suite 695, Fort Lee, New
Jersey 07024.
(18) Such stockholder's address is 800 Scuddersmill Road, Plainsboro, New Jersey
08536.
(19) Such stockholder's address is 1 Rockefeller Place, Suite 320, New York, New
York 10020.
(20) Such stockholder's address is One Post Office Square, Boston, Massachusetts
02109.
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<PAGE> 117
DOMAIN
The following table sets forth certain information as of July 10, 1998
concerning the persons known by Domain to be beneficial owners of more than five
percent of the outstanding Domain Common Stock, the members of the Board of
Directors of Domain, the named executive officers of Domain and all directors
and executive officers of Domain as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT
------------------------ --------- -------
<S> <C> <C>
First Reserve Fund VII, Limited Partnership(1).............. 4,570,718 30.3%
First Reserve GP VII, L.P.(1)............................... 4,570,718 30.3%
First Reserve Corporation(1)................................ 4,570,718 30.3%
William E. Macaulay(1)...................................... 4,573,386(2) 30.3%
John A. Hill(1)............................................. 4,570,718 30.3%
Lomak Petroleum, Inc........................................ 3,707,900 24.5%
Michael V. Ronca............................................ 218,947(3) 1.4%
Michael L. Harvey........................................... 9,532 *
Herbert A. Newhouse......................................... 71,123(3) *
Catherine L. Sliva.......................................... 51,565(3) *
Rick G. Lester.............................................. 35,440(3) *
Jonathan S. Linker.......................................... 2,668(2) *
William P. Nicoletti........................................ 6,668(2) *
Steven H. Pruett............................................ 3,168(2) *
Gary K. Wright.............................................. 2,668(2) *
All directors and executive officers as a group (10
persons).................................................. 4,975,165(1) 32.9%
</TABLE>
- ---------------
* Less than 1%
(1) First Reserve Corporation, First Reserve GP VII, L.P. and Messrs. Macaulay
and Hill do not directly own any Domain Common Stock, although Mr. Macaulay
holds options to acquire 2,668 shares of Domain Common Stock. The number of
shares shown as beneficially owned by First Reserve Corporation, First
Reserve GP VII, L.P. and Messrs. Macaulay and Hill includes all the shares
owned by FRLP. First Reserve Corporation and First Reserve GP VII, L.P. may
be deemed to have beneficial ownership of the shares of voting stock held by
FRLP because First Reserve GP VII, L.P. is the general partner of FRLP and
First Reserve Corporation is the managing general partner of First Reserve
GP VII, L.P. and each has voting and dispositive power over the shares owned
by FRLP. Messrs. Macaulay and Hill may be deemed to have beneficial
ownership over the shares held by FRLP because of their ownership of a
controlling interest in the common stock of First Reserve Corporation and
their positions as managing directors of First Reserve Corporation. Messrs.
Macaulay and Hill disclaim beneficial ownership of such shares. Mr. Macaulay
is a director of Domain. The addresses of FRLP, First Reserve Corporation,
First Reserve GP VII, L.P. and Messrs. Macaulay and Hill (c/o First Reserve
Corporation) is 475 Steamboat Rd., Greenwich, Connecticut 06830.
(2) Includes 2,668 shares issuable upon exercise of options held by each of
Messrs. Macaulay, Linker, Pruett, Nicoletti and Wright, all of which are
currently exercisable at $13.50 per share.
(3) Includes 33,930, 11,310, 11,310 and 5,027 shares issuable upon exercise of
options held by Mr. Ronca, Mr. Newhouse, Ms. Sliva and Mr. Lester,
respectively, which are currently exercisable at $4.18 per share.
114
<PAGE> 118
PRO FORMA BENEFICIAL OWNERSHIP OF RANGE RESOURCES CORPORATION
The following table sets forth information regarding the beneficial
ownership of the Lomak Common Stock and Lomak Preferred Stock on a pro forma
basis after giving effect to the Merger (assuming an Exchange Ratio of 1.2083)
as of July 10, 1998 by (i) each person known to Lomak to own beneficially more
than 5% of the Lomak Common Stock or Lomak Preferred Stock, (ii) each of Lomak's
current directors (together with Mr. Ronca and Mr. Linker, who will become
directors of Range immediately following the Merger), (iii) each named executive
officer of Lomak and (iv) all current directors and executive officers of Lomak
as a group (together with Mr. Ronca and Mr. Linker). The following table should
be read in conjunction with the beneficial ownership tables (and related
footnotes) set forth above for Lomak and Domain.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------ -----------------------
NUMBER OF NUMBER OF
SHARES SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER OWNED OF CLASS OWNED OF CLASS
------------------------ ------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Thomas J. Edelman..................................... 1,058,066 2.84% 0 0%
John H. Pinkerton..................................... 502,423 1.35% 0 0%
Michael V. Ronca...................................... 428,544(1) 1.16% 0 0%
C. Rand Michaels...................................... 335,162 * 0 0%
Robert E. Aikman...................................... 103,776 * 0 0%
Anthony V. Dub........................................ 80,200 * 0 0%
Allen Finkelson....................................... 28,753 * 0 0%
Ben A. Guill.......................................... 82,753 * 0 0%
Jonathan S. Linker.................................... 4,836(2) * 0 0%
Steven L. Grose....................................... 106,728 * 0 0%
Chad L. Stephens...................................... 140,984 * 0 0%
Thomas W. Stoelk...................................... 39,250 * 0 0%
All directors and executive officers as a group (18
persons)............................................ 3,124,566 8.23% 0 0%
First Reserve Fund VII, Limited Partnership........... 5,522,799 14.90% 0 0%
First Reserve GP VII, L.P.(3)......................... 5,522,799 14.90% 0 0%
First Reserve Corporation(3).......................... 5,522,799 14.90% 0 0%
William E. Macaulay(3)................................ 5,527,634 14.92% 0 0%
John A. Hill(3)....................................... 5,522,799 14.90% 0 0%
Cincinnati Financial Corporation...................... 0 0% 86,957 7.56%
Guardian Life Insurance Company of America............ 0 0% 191,304 16.64%
Highbridge Capital Corporation........................ 0 0% 83,000 7.22%
Palisade Capital...................................... 0 0% 121,739 10.59%
Merrill Lynch Asset Management........................ 0 0% 91,304 7.94%
Pecks Management...................................... 0 0% 86,957 7.56%
Putman Investments.................................... 0 0% 52,174 4.54%
</TABLE>
- ---------------
* Less than 1%
(1) Includes options to acquire 169,650 shares of Domain Common Stock, which
will become exercisable for 204,988 shares of Lomak Common Stock upon
consummation of the Merger.
(2) Includes options to acquire 4,002 shares of Domain Common Stock, which will
become exercisable for 4,836 shares of Lomak Common Stock upon consummation
of the Merger.
(3) First Reserve Corporation, First Reserve GP VII, L.P. and Messrs. Macaulay
and Hill do not directly own any Lomak Common Stock, although Mr. Macaulay
holds options to acquire 4,002 shares of Domain Common Stock, which will
become exercisable for 4,836 shares of Lomak Common Stock upon consummation
of the Merger.
115
<PAGE> 119
DESCRIPTION OF LOMAK CAPITAL STOCK
Lomak's authorized capital stock consists of (i) 10,000,000 shares of
serial preferred stock, $1.00 par value, of which 1,150,000 shares has been
designated as $2.03 Convertible Preferred Stock and (ii) 50,000,000 shares of
Lomak Common Stock, $.01 par value, each of which is described below. The
summary description of the capital stock of Lomak contained herein is
necessarily general and reference should be made in each case to Lomak's
Certificate of Incorporation and Bylaws, which are exhibits to the Registration
Statement of which this Proxy Statement/Prospectus is a part.
LOMAK COMMON STOCK
Holders of Lomak Common Stock are entitled to receive dividends if, when
and as declared by the Board of Directors of Lomak out of funds legally
available therefor (however, the indenture for the 6% Convertible Debentures,
the indenture for the 8.75% Senior Subordinated Notes and Lomak's bank credit
agreement contain certain restrictions on the payment of cash dividends). If
there is any arrearage in the payment of dividends on any preferred stock, Lomak
may not pay dividends upon, repurchase or redeem shares of its Lomak Common
Stock. All shares of Lomak Common Stock have equal voting rights on the basis of
one vote per share on all matters to be voted upon by stockholders. Cumulative
voting for the election of directors is not permitted. Shares of Lomak Common
Stock have no preemptive, conversion, sinking fund or redemption provisions and
are not liable for further call or assessment. Each share of Lomak Common Stock
is entitled to share on a pro rata basis in any assets available for
distribution to the holders of the Lomak Common Stock upon liquidation of Lomak
after satisfaction of any liquidation preference on any series of Lomak's
preferred stock. All outstanding shares of Lomak Common Stock are validly
issued, fully paid and nonassessable.
OPTIONS
Lomak's stock option plans, which are administered by the Compensation
Committee, provide for the granting of options to purchase shares of Lomak
Common Stock to key employees, directors and certain other persons who are not
employees for advice or other assistance or services to Lomak. The plan permits
the granting of options to acquire up to 3,200,000 shares of Lomak Common Stock
subject to a limitation of 10% of the outstanding Lomak Common Stock on a fully
diluted basis. At July 10, 1998, a total of 2.1 million options were outstanding
under the plan of which options to purchase 1 million shares were exercisable at
that date. The options outstanding at July 10, 1998 were granted at an exercise
price of $3.38 to $18.00 per share. The exercise price of all such options was
equal to the fair market value of the Lomak Common Stock on the date of grant.
All options were granted for a term of five years, with 30% of the options
becoming exercisable after one year, an additional 30% becoming exercisable
after two years and the remaining options becoming exercisable after three
years.
PREFERRED STOCK
The Board of Directors of Lomak, without action by stockholders, is
authorized to issue shares of serial preferred stock in one or more series and,
within certain limitations, to determine the voting rights (including the right
to vote as a series on particular matters), preferences as to dividends and the
liquidation, conversion, redemption and other rights of each such series. The
Board of Directors could issue a series with rights more favorable with respect
to dividends, liquidation and voting than those held by the holders of its Lomak
Common Stock. At July 10, 1998, 1,149,840 shares of Preferred Stock were
outstanding, designated as $2.03 Convertible Preferred Stock.
The $2.03 Convertible Preferred Stock bears an annual dividend rate of
$2.03 payable quarterly. If dividends have not been paid on the $2.03
Convertible Preferred Stock, Lomak cannot redeem or pay dividends on shares of
stock ranking junior to the $2.03 Convertible Preferred Stock. No new serial
preferred stock can be created with rights superior to those of the $2.03
Convertible Preferred Stock, as to dividends and liquidation rights, without the
approval of the holders of a majority of the $2.03 Convertible Preferred Stock.
In addition, the holders of the $2.03 Convertible Preferred Stock are entitled
to one vote for each share owned. Additionally, if dividends remain unpaid for
six full quarterly periods, or if any future class of preferred
116
<PAGE> 120
stockholders is entitled to elect members of the Board of Directors based on
actual missed and unpaid dividends, the number of members of the Board of
Directors will be increased to such number as may be necessary to entitle the
holders of the $2.03 Convertible Preferred Stock and such other future preferred
stockholders, voting as a single class, to elect one-third of the members of the
Board of Directors. The $2.03 Convertible Preferred Stock has liquidation rights
of $25 per share. Lomak may exchange the $2.03 Convertible Preferred Stock for
an aggregate of $28,750,000 principal amount of its 8.125% Convertible
Subordinated Notes due December 31, 2005. Each share of $2.03 Convertible
Preferred Stock is convertible into Lomak Common Stock at a conversion price of
$9.50 per share, subject to adjustment under certain circumstances. The
conversion price will be reduced for a limited period (but to not less than
$5.21) if a change in control or fundamental change in Lomak occurs at a time
that the market price of the Lomak Common Stock is less than the conversion
price. Lomak may redeem the $2.03 Convertible Preferred Stock at any time after
November 1, 1998, at redemption prices declining from $26.50 to $25.00 per
share, plus cumulative unpaid dividends.
COMPARATIVE RIGHTS OF LOMAK AND DOMAIN STOCKHOLDERS
The following is a summary of material differences between the rights of
holders of Lomak Common Stock and the rights of holders of Domain Common Stock.
As each of Lomak and Domain is organized under the laws of Delaware, these
differences arise principally from provisions of the charter and by-laws of each
of Lomak and Domain.
The following summaries do not purport to be complete statements of the
rights of Lomak stockholders under the Lomak Restated Certificate of
Incorporation (the "Lomak Charter") and the Lomak Amended and Restated By-Laws
(the "Lomak By-Laws") as compared with the rights of Domain stockholders under
the Domain Second Amended and Restated Certificate of Incorporation (the "Domain
Charter") and the Domain Second Amended and Restated By-Laws (the "Domain
By-Laws") or a complete description of the specific provisions referred to
herein. The identification of specific differences is not meant to indicate that
other equal or more significant differences do not exist. These summaries are
qualified in their entirety by reference to the DGCL and governing corporate
instruments of Lomak and Domain, to which stockholders are referred.
DIRECTORS
Neither the Lomak Charter and By-Laws nor the Domain Charter and By-Laws
contain provisions regarding the removal of directors by stockholders. Both are
governed by the DGCL, which allows stockholders to remove directors, with or
without cause, by a vote of the holders of a majority of the shares entitled to
vote.
Both the Lomak By-Laws and the Domain By-Laws provide that newly created
directorships resulting from any increase in the number of directors and any
vacancies on the board of directors resulting from death, resignation,
disqualification, removal or other reason may be filled by the affirmative vote
of a majority of the remaining directors then in office, even though less than a
quorum of each such board of directors.
PREFERRED STOCK
Pursuant to the Lomak Charter, the Lomak Board is authorized, subject to
the limitations prescribed by law, to provide for the issuance of up to
10,000,000 shares of serial preferred stock, par value $1.00 per share, in one
or more series (of which 1,150,000 shares have been designated as $2.03
Convertible Preferred Stock), to establish the number of shares of each such
series, and to fix the designations, powers, preferences and rights of the
shares of each such series, and any qualifications, limitations or restrictions
thereof. The ability of the Lomak Board to issue a series of Lomak preferred
stock could have the effect of impeding the completion of a merger or
discouraging a third party from making a tender or exchange offer for Lomak
Common Stock.
The Domain Charter contains substantially similar provisions authorizing,
subject to the limitations prescribed by law, up to 5,000,000 shares of
preferred stock, par value $1.00 per share, in one or more series.
117
<PAGE> 121
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
Neither the Lomak Charter nor the Domain Charter contain provisions
regarding the amendment of each respective company's charter. The DGCL provides
that a corporation may amend its certificate of incorporation with the approval
of a majority of the outstanding stock entitled to vote thereon.
The Lomak Charter authorizes the Board of Directors to amend the Lomak
By-Laws. The Lomak By-Laws provide that such By-Laws may be amended by the
affirmative vote of a majority of the directors present at any regular or
special Lomak Board meeting.
The Domain Charter provides that the Domain Board has the power to adopt,
amend and repeal the Domain By-Laws. The Domain By-Laws provide that the Domain
By-Laws may be altered, amended or repealed by the Domain stockholders or the
Domain Board. The stockholders may prescribe that any amendment to the By-Laws
adopted by the stockholders may not be amended by the Domain Board.
LIMITATION ON LIABILITY OF DIRECTORS
The DGCL permits a corporation to include a provision in its certificate of
incorporation eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for a breach of the
director's fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the corporation or its stockholders, for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (ii) under Section 174 of the DGCL, which concerns
unlawful payments of dividends, stock purchases or redemptions or (iii) for any
transaction from which the director derived an improper personal benefit. Both
the Lomak Charter and the Domain Charter contain provisions limiting the
liability of their respective directors, to the full extent permitted by the
DGCL for monetary damages for breach of their fiduciary duty as directors.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation, and
with respect to any criminal action, which they had no reasonable cause to
believe was unlawful. The DGCL provides that a corporation may pay expenses
(including attorneys' fees) incurred by an officer or director in defending any
civil, criminal, administrative or investigative action (upon receipt of a
written undertaking to reimburse the corporation if indemnification is not
appropriate), and must reimburse a successful defendant for expenses, including
attorney's fees, actually and reasonably incurred, and permits a corporation to
purchase and maintain liability insurance for its directors and officers. The
DGCL provides that indemnification may be made for any claim, issue or matter as
to which a person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to the corporation, unless and
only to the extent a court determines that the person is entitled to indemnity
for such expenses as the court deems proper.
The Lomak Charter provides that Lomak will indemnify each officer and
director of Lomak against reasonable costs and fees associated with any action,
suit or proceeding by reason of such person being an officer or director. The
Lomak By-Laws provide that each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she is or was a director or officer of Lomak, or is or
was serving at the request of Lomak as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan, will be
indemnified by the corporation to the fullest extent permitted by the DGCL.
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<PAGE> 122
The indemnification rights conferred by the Lomak Charter are not exclusive
of any other right to which persons seeking indemnification may be entitled
under any law, by-law, agreement, vote of stockholders or disinterested
directors or otherwise. Lomak is authorized to purchase and maintain insurance
on behalf of its directors and officers.
The Domain Charter provides that Domain will indemnify each officer and
director of Domain to the fullest extent permitted by applicable law. Domain
maintains liability insurance on behalf of its directors and officers.
SPECIAL MEETINGS
Lomak's By-Laws provide that a special meeting of its stockholders may be
called by the Chairman of the Board, the President, the Board of Directors or by
holders of a majority of the capital stock of Lomak outstanding and entitled to
vote.
Domain's By-Laws provide that a special meeting of its stockholders may be
called by the Board of Directors or by holders of a majority of the shares of
capital stock entitled to vote.
THE NAME CHANGE
The Board of Directors of Lomak has determined that it is advisable to
change the name of Lomak to "Range Resources Corporation" in connection with the
Merger and has voted to recommend that the stockholders of Lomak approve and
adopt the Name Change. Adoption of the Name Change is not necessary to complete,
and is not a condition of completion of, the Merger.
APPROVAL BY THE LOMAK STOCKHOLDERS OF THE NAME CHANGE WILL CONSTITUTE
ADOPTION OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF LOMAK.
As described above, the Merger is not conditioned upon the approval of the
Name Change. Nevertheless, Lomak's Board of Directors and management believe
that the Name Change is an important element of the implementation of the
post-Merger strategy. As described under "Post-Merger Profile and Strategy," the
post-merger company will have a more balanced strategy following the Merger, and
will be less reliant on acquisitions for growth than Lomak has traditionally
been. In addition, Lomak believes that its current name may continue to be
identified with its historical roots in the Appalachia region, even though Lomak
has significantly expanded its geographic scope to include the Permian,
Midcontinent and Gulf Coast regions. Finally, the new name will help to
underscore to the investing public that the Merger represents a true combination
of the management teams, assets and other strengths of Lomak and Domain, as
opposed to being merely another Lomak acquisition.
The affirmative vote of a majority of the Lomak Common Stock and Lomak
Preferred Stock outstanding and entitled to vote as of the Record Date, voting
together as a class, is required to approve the Name Change. The Lomak Board of
Directors considers this amendment to be advisable and in the best interests of
its stockholders and recommends that such stockholders vote FOR approval and
adoption of the Name Change.
STOCKHOLDER PROPOSALS
If the Merger is consummated, holders of Domain Common Stock will become
stockholders of Lomak. Any stockholder of Lomak desiring to present to
stockholders a stockholder proposal at Lomak's 1999 Annual Meeting must transmit
such proposal to Lomak so that it is received by Lomak on or before November 28,
1998. All such proposals should be in compliance with applicable regulations of
the Commission.
LEGAL MATTERS
The validity of the Lomak Common Stock to be issued in the Merger has been
passed upon for Lomak by Vinson & Elkins L.L.P., Houston, Texas. Certain tax
consequences of the Merger have been passed upon for
119
<PAGE> 123
Lomak by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters have been
passed upon for Domain by Weil, Gotshal & Manges LLP, Houston, Texas.
EXPERTS
The consolidated financial statements of Lomak Petroleum, Inc. and
subsidiaries as of December 31, 1996 and 1997, and for each of the three years
in the period ended December 31, 1997, incorporated by reference herein and
elsewhere in this Proxy Statement/Prospectus have been incorporated herein and
in the Registration Statement in reliance upon the reports of Arthur Andersen
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
Certain information with respect to the gas and oil reserves owned by Lomak
derived from the reports of NSA, Wright & Company, Inc., H.J. Gruy and
Associates, Inc., Huddleston & Co., Inc. and Clay, Holt & Klammer, independent
petroleum engineers, has been incorporated by reference herein in reliance upon
such firm as experts with respect to the matters contained therein.
The consolidated financial statements of Domain as of December 31, 1996 and
1997, and for the period from December 30, 1996 (date of incorporation) to
December 31, 1996 and for the year ended December 31, 1997 and the combined
financial statements of the Predecessor for each of the years in the two-year
period ended December 31, 1996 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
Certain information with respect to the oil and gas reserves owned by
Domain and its subsidiaries derived from the reports of NSA and D&M, independent
petroleum engineers, has been included herein in reliance upon such firms as
experts with respect to the matters contained therein.
120
<PAGE> 124
CERTAIN DEFINITIONS
The terms defined below are used throughout this Proxy
Statement/Prospectus.
Bbl. One barrel of crude oil, condensate or other liquids equal to 42 U.S.
gallons.
Bbld. One barrel of crude oil (Bbl) per day.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet of natural gas equivalent.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 degrees Fahrenheit to 59.5
degrees Fahrenheit under specific conditions.
Development Well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive in an
attempt to recover proved undeveloped reserves.
Dry hole. A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion as an oil or gas well.
Gross acres or gross wells. The total acres or wells, as the case may be,
in which a working interest is owned.
Lease operating expense. Costs incurred to operate and maintain wells and
related equipment and facilities, including applicable operating costs of
support equipment and facilities and other costs of operating and maintaining
those wells and related equipment and facilities.
Mbbl. One thousand barrels.
Mcf. One thousand cubic feet.
Mcfd. One thousand cubic feet per day.
Mcfe. One thousand cubic feet of natural gas equivalent.
Mcfed. One thousand cubic feet of natural gas equivalent per day.
MMbbl. One million barrels.
Mmbtu. One million Btus.
Mmcf. One million cubic feet.
Mmcfd. One million cubic feet per day.
Mmcfe. One million cubic feet of natural gas equivalent.
Natural gas equivalent. Cubic feet of natural gas equivalent, determined
using the ratio of one Bbl of crude oil, condensate or natural gas liquids to
six Mcf of natural gas.
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells.
Net oil and gas sales. Oil and natural gas sales less oil and natural gas
production expenses.
Overriding royalty interest. A royalty interest that is carved out of a
lessee's working interest under an oil and gas lease.
Present Value. The pre-tax present value, discounted at 10% per annum, of
future net cash flows from estimated proved reserves (including the estimated
cost of abandonment and future development), calculated holding prices and costs
constant at amounts in effect on the date of the estimate (unless such prices or
costs are subject to change pursuant to contractual provisions) and in all
instances in accordance with the Commission's rules for inclusion of oil and gas
reserve information in financial statements filed with the Commission. The
difference between the Present Value and the standardized measure of discounted
future net cash flows is the present value of income taxes applicable to such
future net cash flows.
Productive well. A well that is producing oil and gas or that is capable of
production.
121
<PAGE> 125
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from currently producing zones under the continuation
of present operating methods through existing wells with existing equipment and
operating methods.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reserve life index. Calculated by dividing year-end proved reserves by
annual production for the most recent year.
Royalty interest. An interest in an oil and gas property entitling the
owner to a share of oil or gas production free of costs of production.
Spud. To start (or restart) the drilling of a new well.
Standardized measure of discounted future net cash flows. The present
value, discounted at 10% per annum, of future net cash flows from estimated
proved reserves after income taxes, calculated holding prices and costs constant
at amounts in effect on the date of the estimate (unless such prices or costs
are subject to change pursuant to contractual provisions) and in all instances
in accordance with the Commission's rules for inclusion of oil and gas reserve
information in financial statements filed with the Commission.
Term overriding royalty interest. An overriding royalty interest with a
fixed duration.
Undeveloped acreage. Lease acreage on which wells have not been
participated in or completed to a point that would permit the production of
commercial quantities of oil and gas regardless of whether such acreage contains
proved reserves.
Waterflood. The injection of water into a reservoir to fill pores vacated
by produced fluids, thus maintaining reservoir pressure and assisting
production.
Working interest. A cost bearing interest which gives the owner the right
to drill, produce and conduct oil and gas operations on the property, as well as
a right to a share of production therefrom.
Workover. Operations on a producing well to restore or increase production.
WTI. West Texas Intermediate.
122
<PAGE> 126
DOMAIN ENERGY CORPORATION
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1997 and
March 31, 1998............................................ F-2
Consolidated Statements of Operations for the Three Months
Ended March 31, 1997 and 1998............................. F-3
Consolidated Statement of Stockholders' Equity for the Three
Months Ended March 31, 1998............................... F-4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1998............................. F-5
Notes to Consolidated Financial Statements.................. F-6
Independent Auditors' Report................................ F-10
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-11
Combined and Consolidated Statements of Income for the years
ended December 31, 1995, 1996, and 1997................... F-12
Combined and Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1995, 1996 and 1997 and
for the period from December 30, 1996 (date of
incorporation) to December 31, 1996, respectively......... F-13
Combined and Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1996 and 1997 and for the
period from December 30, 1996 (date of incorporation) to
December 31, 1996, respectively........................... F-14
Notes to Combined and Consolidated Financial Statements..... F-15
</TABLE>
F-1
<PAGE> 127
DOMAIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(NOTE 1)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 4,731 $ 8,249
Accounts receivable......................................... 12,562 8,631
IPF Program notes receivable, current portion............... 8,873 9,175
Notes receivable -- stockholders............................ 546 --
Prepaid and other assets.................................... 2,858 2,808
-------- --------
Total current assets.............................. 29,570 28,863
IPF Program notes receivable, net........................... 40,892 42,611
Oil and natural gas properties, full cost method
Proved properties......................................... 116,782 139,252
Unproved properties....................................... 36,603 39,175
Less: Accumulated depreciation, depletion and
amortization.............................................. (15,411) (20,822)
-------- --------
Total oil and natural gas properties, net......... 137,974 157,605
Other assets, net........................................... 4,113 4,369
-------- --------
Total assets...................................... $212,549 $233,448
======== ========
LIABILITIES
Accounts payable and accrued expenses....................... $ 15,907 $ 15,985
-------- --------
Total current liabilities......................... 15,907 15,985
Long-term debt.............................................. 63,720 80,910
Deferred income taxes....................................... -- 1,181
-------- --------
Total liabilities................................. 79,627 98,076
Minority interest........................................... 888 888
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock:
$0.01 par value, 5,000,000 shares authorized, none
issued................................................. -- --
Common Stock
$0.01 par value, 25,000,000 shares authorized and
15,110,111 issued and 15,107,719 outstanding at
December 31, 1997 and March 31, 1998................... 151 151
Additional paid-in capital.................................. 128,730 129,019
Treasury stock.............................................. (10) (10)
Retained earnings........................................... 3,163 5,324
-------- --------
Total stockholders' equity........................ 132,034 134,484
-------- --------
Total liabilities and stockholders' equity........ $212,549 $233,448
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 128
DOMAIN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(NOTE 1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
REVENUES
Oil and natural gas......................................... $12,782 $13,312
IPF Income, net............................................. 732 1,958
Other....................................................... (292) 688
------- -------
Total revenues.................................... 13,222 15,958
------- -------
EXPENSES
Lease operating............................................. 3,060 4,113
Production and severance taxes.............................. 413 305
Depreciation, depletion and amortization.................... 3,282 5,598
General and administrative, net............................. 792 1,607
Stock compensation.......................................... 3,150 185
------- -------
Total operating expenses.......................... 10,697 11,808
Income from operations...................................... 2,525 4,150
Interest expense, net....................................... 1,109 655
------- -------
Income before taxes......................................... 1,416 3,495
Income tax provision........................................ 1,735 1,334
------- -------
Net income (loss)........................................... $ (319) $ 2,161
======= =======
Net income (loss) per common share:
Basic..................................................... $ (0.03) $ 0.14
Assuming dilution......................................... $ (0.03) $ 0.14
Weighted average common shares outstanding:
Basic..................................................... 9,156 15,108
Assuming dilution......................................... 9,156 15,822
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 129
DOMAIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(NOTE 1)
(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........................... -- 289 -- -- 289
Net income................................... -- -- -- 2,161 2,161
---- -------- ---- ------ --------
Balance at March 31, 1998.................... $151 $129,019 $(10) $5,324 $134,484
==== ======== ==== ====== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 130
DOMAIN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 1)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1998
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (319) $ 2,161
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization.................. 3,282 5,598
Stock compensation........................................ 3,150 185
Deferred income taxes..................................... 1,550 1,296
Minority interest......................................... 32 --
Allowance for doubtful IPF investments.................... -- 271
Changes in operating assets and liabilities:
Decrease in accounts receivable........................... 5,467 3,931
Decrease in prepaid and other current assets.............. 57 50
Increase (decrease) in accounts payable and accrued
expenses............................................... (5,107) 3,139
-------- -------
Net cash provided by operating activities................... 8,112 16,631
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in oil and natural gas properties................ (3,858) (17,052)
Investment in Oakvale Acquisition........................... -- (11,575)
Proceeds from sale of oil and gas properties................ 1,700 628
IPF Program investments of capital (notes receivable)....... (9,246) (6,849)
IPF Program return of capital (notes receivable)............ 3,426 4,557
Other assets................................................ 401 (558)
-------- -------
Net cash used in investing activities....................... (7,577) (30,849)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt borrowings............................... 9,379 20,445
Repayment of debt borrowing................................. (4,953) (3,255)
Issuance of common stock, net............................... 1,085 546
-------- -------
Net cash provided by financing activities................... 5,511 17,736
Increase in cash and cash equivalents....................... 6,046 3,518
Cash and cash equivalents, beginning of period.............. 36 4,731
-------- -------
Cash and cash equivalents, end of period.................... $ 6,082 $ 8,249
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 131
DOMAIN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Domain Energy Corporation ("Domain Energy") 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. Domain
Energy 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 March 31, 1998 and the consolidated
statements of operations, stockholders' equity and cash flows included herein
have been prepared by Domain Energy, 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
Domain Energy 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 Domain Energy's audited annual financial statements
included at pages 36 through 57 in Domain Energy's Annual Report on Form 10-K,
dated March 23, 1998.
2. ACQUISITIONS
Funds Acquisition -- On July 1, 1997, Domain Energy 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 Domain Energy'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 Domain Energy for the three months ended March 31, 1997 as if
the Funds Acquisition had occurred at the beginning of 1997 (in thousands,
except per share data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
------------------
<S> <C>
Revenues........................................... $15,784
Net loss........................................... $ (274)
Net loss per share(1).............................. $ (0.03)
</TABLE>
- ---------------
(1) EPS assuming dilution.
Gulfstar Acquisition -- On December 15, 1997, Domain Energy 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 Domain Energy'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 Domain Energy for the three months ended March 31, 1997 as if
the Gulfstar Acquisition had occurred at the
F-6
<PAGE> 132
DOMAIN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beginning of 1997. The 1997 pro forma amounts also give effect to the Funds
Acquisition discussed above (in thousands, except per share data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
------------------
<S> <C>
Revenues........................................... $16,074
Net loss........................................... $ (459)
Net loss per share(1).............................. $ (0.05)
</TABLE>
- ---------------
(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, Domain Energy 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 Domain Energy'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 No. 130). SFAS No. 130 is effective
for periods beginning after December 15, 1997. SFAS No. 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 March 31, 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 No. 131). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments. SFAS No. 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 Domain Energy is evaluating what, if any, additional disclosures
may be required when this statement is first applied.
4. EARNINGS PER SHARE
Domain Energy reports earnings per share ("EPS") in accordance with
Financial Accounting Standards Board Statement No. 128, "Earnings Per Share,"
(SFAS No. 128). SFAS No. 128 requires the dual presentation of basic and diluted
EPS.
F-7
<PAGE> 133
DOMAIN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for net income reported
for the first quarter of 1998 and 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
FIRST QUARTER 1997 FIRST QUARTER 1998
--------------------------------------- -----------------------------------------
INCOME SHARES(2) PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (NUMERATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common
stockholders............... $(319) 9,156 $(0.03) $2,161 15,108 $0.14
====== =====
EFFECT OF DILUTIVE SECURITIES
Stock options(1)............. -- -- -- 714
----- ----- ------ ------
DILUTED EPS
Income available to common
stockholders............... $(319) 9,156 $(0.03) $2,161 15,822 $0.14
===== ===== ====== ====== ====== =====
</TABLE>
- ---------------
(1) Domain Energy had options granted for 100,000 shares outstanding at March
31, 1998 which were not included in the EPS computation, because the effect
of the options are antidilutive.
(2) 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
Domain Energy's acquisition in December 1996, the 486,003 shares of Common
Stock issued to Domain Energy'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 Domain Energy's initial public
offering by First Reserve Fund VII, Limited Partnership were outstanding
since January 1, 1997.
5. LONG-TERM DEBT
At March 31, 1998 and December 31, 1997, notes payable and long-term debt
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Domain Energy Credit Facility............................... $34,552 $49,052
IPF Credit Facility......................................... 29,168 31,858
------- -------
Long-term debt.............................................. 63,720 80,910
less current maturities..................................... -- --
------- -------
$63,720 $80,910
======= =======
</TABLE>
6. SUBSEQUENT EVENTS
On May 12, 1998, Domain Energy entered into a definitive agreement to merge
with Lomak Petroleum, Inc. ("Lomak"). Pursuant to the merger agreement, Domain
Energy's stockholders will receive $14.50 worth of Lomak common stock for each
common share. The final exchange ratio will be determined based on the average
closing price of Lomak's shares during the 15-day period prior to the third
business day prior to completion of the merger. The exchange ratio is subject to
a maximum and minimum of 1.2083 and 0.8529 Lomak shares, respectively. As a
condition to the merger, Domain Energy's majority stockholder, an affiliate of
First Reserve Corporation ("First Reserve"), has agreed to sell to Lomak 3.25
million shares of Domain
F-8
<PAGE> 134
DOMAIN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Energy (22% of the total outstanding) for $43.875 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 Domain Energy's stockholders is necessary. Completion of
the transaction is subject to approval of Lomak's stockholders and to customary
regulatory approvals.
F-9
<PAGE> 135
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Domain Energy Corporation
We have audited the accompanying consolidated balance sheets of Domain
Energy Corporation and subsidiaries ("Domain Energy"), the Successor, as of
December 31, 1996 and 1997 and the related statements of income, stockholders'
equity and cash flows for the period from December 30, 1996 (date of
incorporation) to December 31, 1996 and for the year ended December 31, 1997. We
have also audited the accompanying combined statements of income, stockholder's
equity and cash flows of Tenneco Ventures Corporation and Tenneco Gas Production
Corporation (the "Tenneco Entities"), the Predecessor, for each of the two years
in the period ended December 31, 1996. These financial statements are the
responsibility of Domain Energy's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Domain Energy as of December
31, 1996 and 1997 and the results of operations and cash flows for the Successor
and the Predecessor for the applicable periods indicated above in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 17, 1998
F-10
<PAGE> 136
DOMAIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(NOTE 1)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SUCCESSOR
-------------------
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Cash and cash equivalents................................... $ 36 $ 4,731
Restricted certificate of deposit........................... 8,000 --
Accounts receivable......................................... 19,456 12,562
IPF Program notes receivable, current portion............... 7,874 8,873
Notes receivable -- stockholders............................ -- 546
Prepaid and other assets.................................... 1,968 2,858
-------- --------
Total current assets.............................. 37,334 29,570
IPF Program notes receivable, net........................... 13,836 40,892
Oil and natural gas properties, full cost method
Proved properties......................................... 53,514 116,782
Unproved properties....................................... 12,662 36,603
Less: Accumulated depreciation, depletion and
amortization.............................................. -- (15,411)
-------- --------
Total oil and natural gas properties, net......... 66,176 137,974
Other assets, net........................................... 5,083 4,113
-------- --------
Total assets...................................... $122,429 $212,549
======== ========
LIABILITIES
Accounts payable and accrued expenses....................... $ 14,060 $ 15,907
Current maturities of long-term debt...................... 24,900 --
-------- --------
Total current liabilities......................... 38,960 15,907
Long-term debt.............................................. 54,512 63,720
Total liabilities................................. 93,472 79,627
Minority interest........................................... 380 888
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock:
$0.01 par value, 5,000,000 shares authorized, none
issued................................................. -- --
Common stock:
$0.01 par value, 15,080,000 shares authorized and
7,177,681 issued and outstanding at December 31, 1996
and 25,000,000 shares authorized, 15,110,111 issued and
15,107,719 outstanding at December 31, 1997............ 72 151
Additional paid-in capital.................................. 28,505 128,730
Treasury stock.............................................. -- (10)
Retained earnings........................................... -- 3,163
-------- --------
Total stockholders' equity........................ 28,577 132,034
-------- --------
Total liabilities and stockholders' equity........ $122,429 $212,549
======== ========
</TABLE>
The accompanying notes are an integral part of the combined and consolidated
financial statements.
F-11
<PAGE> 137
DOMAIN ENERGY CORPORATION
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
(NOTE 1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
PREDECESSOR SUCCESSOR
-------------------- ---------
1995 1996 1997
--------- ------- ---------
<S> <C> <C> <C>
REVENUE
Oil and natural gas......................................... $34,877 $52,274 $47,251
IPF Income.................................................. 2,356 4,369 4,779
Other....................................................... 414 (413) 238
------- ------- -------
Total revenues.................................... 37,647 56,230 52,268
------- ------- -------
EXPENSES
Lease operating............................................. 7,980 10,207 14,924
Production and severance taxes.............................. 710 1,340 1,417
Depreciation, depletion and amortization.................... 22,692 24,920 16,072
General and administrative, net............................. 2,780 3,361 4,237
Corporate overhead allocation............................... 2,627 4,827 --
Stock compensation.......................................... -- -- 4,587
------- ------- -------
Total operating expenses.......................... 36,789 44,655 41,237
Income from operations...................................... 858 11,575 11,031
Interest expense............................................ -- 150 3,774
------- ------- -------
Income before taxes......................................... 858 11,425 7,257
Income tax provision........................................ 351 4,394 4,094
------- ------- -------
Net income.................................................. $ 507 $ 7,031 $ 3,163
======= ======= =======
Net income per common share:
Basic............................................. $ 0.27
Assuming dilution................................. $ 0.26
</TABLE>
The accompanying notes are an integral part of the combined and consolidated
financial statements.
F-12
<PAGE> 138
DOMAIN ENERGY CORPORATION
COMBINED AND CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------------------------------------------------
ADDITIONAL NOTES TOTAL
COMMON PAID IN RECEIVABLE -- TREASURY RETAINED STOCKHOLDERS'
STOCK CAPITAL STOCKHOLDERS STOCK EARNINGS EQUITY
------ ---------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995....... $ 2 $ -- $ -- $ -- $ 63 $ 65
Net income..................... -- -- -- -- 507 507
---- -------- ----- ---- ------ --------
Balance at December 31, 1995..... 2 -- -- -- 570 572
Net income..................... -- -- -- -- 7,031 7,031
---- -------- ----- ---- ------ --------
Balance at December 31, 1996
(prior to the
Acquisition).............. $ 2 $ -- $ -- $ -- $7,601 $ 7,603
==== ======== ===== ==== ====== ========
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR
-------------------------------------------------------------------------
ADDITIONAL NOTES TOTAL
COMMON PAID IN RECEIVABLE -- TREASURY RETAINED STOCKHOLDERS'
STOCK CAPITAL STOCKHOLDERS STOCK EARNINGS EQUITY
------ ---------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1996
(date of incorporation)........ $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock,
net......................... 72 27,505 -- -- -- 27,577
Issuance of detachable stock
options..................... 1,000 -- -- -- 1,000
---- -------- ----- ---- ------ --------
Balance at December 31, 1996..... 72 28,505 -- -- -- 28,577
Issuance of common stock,
net......................... 79 95,438 (546) -- -- 94,971
Repayment of notes (February
1998)....................... -- -- 546 -- -- 546
Purchase of common stock....... -- -- -- (10) -- (10)
Stock compensation............. -- 4,787 -- -- -- 4,787
Net income..................... -- -- -- -- 3,163 3,163
---- -------- ----- ---- ------ --------
Balance at December 31, 1997..... $151 $128,730 $ -- $(10) $3,163 $132,034
==== ======== ===== ==== ====== ========
</TABLE>
The accompanying notes are an integral part of the combined and consolidated
financial statements.
F-13
<PAGE> 139
DOMAIN ENERGY CORPORATION
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
PREDECESSOR SUCCESSOR
-------------------- ----------------------------------
FOR THE PERIOD FROM
DECEMBER 30, 1996
(DATE OF INCORPORATION)
1995 1996 TO DECEMBER 31, 1996 1997
-------- -------- ----------------------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 507 $ 7,031 $ -- $ 3,163
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization.......... 22,692 24,920 -- 16,072
Stock compensation................................ -- -- -- 4,587
Deferred income taxes............................. 883 6,702 -- 3,359
Minority interest................................. -- 380 -- 508
Allowance for doubtful IPF investments............ -- 437 -- --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable........ (6,731) (7,584) -- 998
Decrease (increase) in prepaids and other current
assets......................................... (956) 83 -- (705)
Increase (decrease) in accounts payable and
accrued expenses............................... 3,538 2,584 -- (6,968)
-------- -------- --------- --------
Net cash provided by operating activities........... 19,933 34,553 -- 21,014
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of the Tenneco Entities................. -- -- (96,164) --
Purchase of restricted certificate of deposit....... -- -- (8,000) --
Investment in oil and natural gas properties........ (44,118) (32,023) -- (42,439)
Investment in Funds Acquisition..................... -- -- -- (28,419)
Investment in Gulfstar Acquisition, net of cash
acquired.......................................... -- -- -- (7,464)
Proceeds from sale of oil and natural gas
properties........................................ 8,275 1,546 -- 3,862
Proceeds from sale of equity investments............ -- -- -- 7,622
IPF Program investments of capital (notes
receivable)....................................... (6,606) (19,045) -- (40,164)
IPF Program return of capital (notes receivable).... 2,638 4,618 -- 12,109
Proceeds from sale of restricted certificate of
deposit........................................... -- -- -- 8,000
Investments and other assets........................ 83 (2,425) -- (709)
-------- -------- --------- --------
Net cash used in investing activities............... (39,728) (47,329) (104,164) (87,602)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt borrowings....................... -- 6,968 73,200 67,830
Repayments of debt borrowings....................... -- (756) -- (83,508)
Advances from Parent, net........................... 8,328 6,564 -- --
Issuance of common stock, net....................... -- -- 31,000 86,961
-------- -------- --------- --------
Net cash provided by financing activities........... 8,328 12,776 104,200 71,283
Increase in cash and cash equivalents............... (11,467) -- 36 4,695
Cash and cash equivalents, beginning of period...... 11,467 -- -- 36
-------- -------- --------- --------
Cash and cash equivalents, end of period............ $ -- $ -- $ 36 $ 4,731
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of the combined and consolidated
financial statements.
F-14
<PAGE> 140
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
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 Energy") acquired
all of the outstanding common stock of Ventures and Production (the
"Acquisition"). Domain Energy 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 Domain are to Domain Energy 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.
Domain 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. Domain completed the Acquisition for a total cash
purchase price of approximately $96.2 million and the assumption of liabilities
of approximately $16.8 million. Domain did not assume the liability of $124.1
million due to the parent of the Tenneco Entities. Domain has accounted for the
Acquisition using the purchase method of accounting. The assets and liabilities
of the Tenneco Entities have been recorded in Domain's balance sheet at December
31, 1996 at their estimated fair market values, summarized as follows (in
thousands):
<TABLE>
<S> <C>
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)
========
</TABLE>
The financial statements of the Tenneco Entities for each of the years
ended December 31, 1996 and 1995 have been combined to reflect their combined
historical results of operations.
The following unaudited pro forma summary presents the consolidated results
of operations of Domain for the years ended December 31, 1995 and 1996 as if the
Acquisition had occurred at the beginning of each fiscal year (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Revenues......................................... $37,647 $56,230
Net income....................................... $ 3,024 $ 9,714
</TABLE>
Domain 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. Domain complements these activities with
its Independent Producer Finance Program ("IPF Program") pursuant to which it
invests in oil and natural gas reserves through the acquisition of term
overriding royalty interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Combination -- The consolidated balance
sheets at December 31, 1997 and 1996 include the accounts of Domain and its
majority-owned subsidiaries. Prior to July 1, 1997, Domain sponsored and managed
two oil and gas investment programs for unaffiliated institutional investors
(the
F-15
<PAGE> 141
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Funds"). Domain had a 10% interest in one program and a 30% interest in the
other. Domain and the investors each owned direct undivided interests in oil and
gas properties. Domain accounted for its interests in the Funds using the pro
rata method of consolidation. On July 1, 1997, Domain acquired the direct
undivided interests of the Funds. See Note 6.
Until April 9, 1997, Domain owned 35% of the voting capital stock of
Michigan Production Company L.L.C. ("MPC") and 28% of the voting capital stock
of Michigan Energy Company, L.L.C. ("MEC"). Both were accounted for using the
equity method of accounting. On April 9, 1997, Domain sold its MPC and MEC
equity investments. See Note 5.
The following presents combined summary information for MPC and MEC (in
thousands):
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1996
------------
<S> <C>
Current assets............. $ 1,654
Non-current assets......... 35,601
Current liabilities........ 6,640
Non-current liabilities.... 27,587
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Revenues................... $ 690
Operating expenses......... 953
Net income................. (520)
</TABLE>
The combined financial statements of the Tenneco Entities include their
combined accounts and the combined accounts of their majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Oil and Gas Properties -- Investments in oil and gas properties are
accounted for using the full cost method of accounting. All costs associated
with the acquisition, exploration, exploitation and development of oil and gas
properties are capitalized. General and administrative costs of $2.3 million,
$2.6 million and $2.1 million were included in capitalized costs for the years
ended December 31, 1997, 1996 and 1995, respectively. Such capitalized costs
include payroll and other related costs attributable to Domain's acquisition and
exploration activities. Interest cost of $0.8 million was included in the
capitalized costs for the year ended December 31, 1997 representing the cost of
borrowings relating to Domain's unproven properties. Costs related to
production, development, and the IPF Program activities are expensed within the
presented year and not capitalized.
Oil and gas properties are amortized using the unit-of-production method
using estimates of proved reserve quantities. Investments in unproved properties
are not amortized until proved reserves associated with the projects can be
determined or until impairment occurs. If the results of the assessment indicate
that the properties are impaired, the amount of impairment is added to the
proved oil and gas property costs to be amortized. The amortizable base includes
future development costs and, where significant, dismantlement, restoration, and
abandonments costs, net of estimated salvage values. The depletion rate per Mcfe
for the years ended December 31, 1997, 1996 and 1995 was $0.78, $1.01 and $1.08,
respectively.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves. Abandonments of properties are accounted for as adjustments of
capitalized costs with no loss recognized.
In addition, the 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 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 depreciation, depletion and amortization.
F-16
<PAGE> 142
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets -- Other capital cost, including computer equipment, 3D
workstations, furniture and fixtures, debt issuance costs and organizational
costs are amortized over a three to five year period using the straight-line
method.
Independent Producer Finance Program -- Through its IPF Program, Domain
acquires term overriding royalty interests in oil and gas properties owned by
independent producers. Because the funds advanced to a producer for these
interests are repaid from an agreed upon share of cash proceeds from the sale of
production until the amount advanced plus interest is paid in full, Domain
accounts for the term overriding royalty interests as notes receivable. Under
this accounting method, Domain recognizes only the interest income portion of
payments received from a producer as revenues from IPF Income on its income
statement. The remaining cash receipts are recorded as a reduction in notes
receivable on Domain's balance sheet and as IPF Program return of capital on
Domain's statement of cash flows. Domain records an impairment for its
investments on a case-by-case basis when it determines repayment to be doubtful.
Parent Advances -- Prior to the Acquisition, Parent advances to Domain for
net working capital and capital expenditure requirements were recorded as
non-current liabilities on the combined balance sheet. The Parent did not charge
Domain any interest expense on the funds utilized by Domain.
Income Taxes -- Through December 31, 1996, Domain's taxable income is
included in a consolidated United States income tax return with the Parent. The
intercompany tax allocation policy between Domain and the Parent provided that
each member of the consolidated group compute a provision for income taxes on a
separate return basis.
Domain follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109). This statement requires deferred
tax assets and liabilities to be determined by applying tax regulations existing
at the end of a reporting period to the cumulative temporary differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements. See Note 11.
Oil and Gas Hedging Activities -- Domain periodically uses derivative
financial instruments to manage price risks related to oil and natural gas sales
and not for speculative purposes. For book purposes, gains and losses related to
the hedging of anticipated transactions are recognized as income when the hedged
transaction occurs.
Domain primarily utilizes price swap agreements with major energy companies
to accomplish its hedging objectives. The price swap agreements generally
provide for Domain to receive or make counter-party payments on the differential
between a fixed price and a variable indexed price. Total oil and natural gas
sales hedged during the years ended December 31, 1997, 1996 and 1995 were
244,540 Bbls and 12,010 MMbtus, 258,710 Bbls and 16,025 MMbtus and 65,840 Bbls
and zero MMbtus, respectively. Gains (losses) realized by Domain under such
hedging arrangements, and reported as an increase (reduction) of revenues, were
($4.6 million), ($10.5 million) and $0.2 million for the years ended December
31, 1997, 1996 and 1995, respectively. The following table sets forth Domain's
open hedging contracts for oil and natural gas under various price swap
agreements with major energy companies as of December 31, 1997:
<TABLE>
<CAPTION>
CRUDE OIL NATURAL GAS
--------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE FIXED AVERAGE FIXED
BBLS SALES PRICE MMBTU SALES PRICE
------- ----------------- ----- -----------------
<S> <C> <C> <C> <C>
Jan 1998 -- Dec 1998............... 194,210 $17.91 4,560 $2.14
Jan 1999 -- Dec 2000............... 248,340 $18.72 -- --
</TABLE>
Subsequent to December 31, 1997, Domain terminated its oil swap agreements
for 1999 and 2000. Domain received $47,673 in settlement of these swap
agreements.
F-17
<PAGE> 143
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to December 31, 1997, Domain sold natural gas futures contracts
covering an average of 30 MMcfd of its expected natural gas production for March
1998 through June 1998. Under these contracts, Domain will receive an average
price of $2.20 per MMbtu for March 1998 and $2.28 per MMbtu for April 1998
through June 1998.
Revenue Recognition -- Domain recognizes oil and gas revenue from its
interests in producing wells as oil and gas is sold from those wells. Oil and
gas sold in production operations is not significantly different from Domain's
share of production. Domain recognizes financing revenues from its IPF
activities using the effective interest rate method.
Domain utilizes the sales method to account for gas production volume
imbalances. Under this method, income is recorded based on Domain's net revenue
interest in production taken for delivery. Management does not believe that
Domain had any material natural gas imbalances at December 31, 1997 or 1996.
Financial Instruments -- Domain's financial instruments consist of cash,
accounts and notes receivable, payables, long-term debt and oil and natural gas
commodity hedges. The carrying amount of cash, accounts receivable and payables
approximates fair value because of the short-term nature of these items. Based
on current industry and other conditions, management believes that the carrying
value of its IPF Program notes receivable approximates, at a minimum, their fair
value. The carrying value of long-term debt approximates fair value because the
individual borrowings bear interest at floating market rates. Assuming a market
price based on the twelve-month strip as of December 31, 1997, Domain's
projected losses from open hedge contracts were approximately $0.3 million as of
December 31, 1997. Considerable judgment is required in developing these
estimates and, accordingly, no assurance can be given that the estimated values
presented herein are indicative of amounts that would be realized in a full
market exchange.
Use Of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these estimates.
Significant estimates include depreciation, depletion and amortization of proved
producing oil and natural gas properties; estimates of proved oil and natural
gas reserve volumes; and discounted future net cash flows.
Concentration of Risk -- Substantially all of Domain's accounts and notes
receivable result from oil and natural gas sales, joint interest billings and
lending activities to third parties in the oil and natural gas industry. This
concentration of customers, joint interest owners and borrowers may impact
Domain's overall credit risk in that these entities may be similarly affected by
changes in economic and other conditions.
Change in Presentation -- Certain 1996 and 1995 amounts have been
reclassified to conform to the 1997 presentation.
Major Customers -- Domain has sold to certain major customers oil and gas
production representing 57%, 57% and 56% of its oil and gas revenues for the
years 1997, 1996 and 1995, respectively. Based upon the current demand for oil
and gas, Domain believes that the loss of any of these purchasers would not have
a material adverse effect on Domain.
Statements of Cash Flows -- The statements of cash flows are presented
using the indirect method and consider all highly liquid investments with
maturities at the time of purchase of three months or less to be cash
equivalents.
F-18
<PAGE> 144
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental cash flow information may be summarized as follows (in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ------------------
1995 1996 1996 1997
---- ---- -------- -------
<S> <C> <C> <C> <C>
Interest expense paid.............................. $ -- $307 $ -- $ 4,401
Income taxes paid.................................. -- -- -- 445
Acquisitions:
Total cash consideration:
The Acquisition............................... $ -- $ -- $ 96,164 $ --
Funds Acquisition............................. -- -- -- 28,419
Gulfstar Acquisition.......................... -- -- -- 8,000
Fair value of assets acquired:
The Acquisition............................... $ -- $ -- $113,000 $ --
Funds Acquisition............................. -- -- -- 28,419
Gulfstar Acquisition.......................... -- -- -- 17,802
Liabilities assumed:
The Acquisition............................... $ -- $ -- $ 16,836 $ --
Gulfstar Acquisition.......................... -- -- -- 1,802
Non-Cash Items:
Stock issued in connection with Gulfstar
Acquisition................................. $ -- $ -- $ -- $ 8,000
</TABLE>
Earning per Share -- 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 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 15 and assumes the
exercise of dilutive stock options less the number of treasury shares assumed to
be purchased from the proceeds using the average market price of Domain's Common
Stock. For the year ended December 31, 1997, Domain has adopted this statement.
The following table is a reconciliation of the numerators and denominators
of the basic and diluted earning per share computations for net income (in
thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders.......... $3,163 11,578 $0.27
=====
EFFECT OF DILUTIVE SECURITIES
Stock options.................................... -- 548
------ ------
DILUTED EPS
Income available to common stockholders.......... $3,163 12,126 $0.26
====== ====== =====
</TABLE>
Domain had no options outstanding at December 31, 1997 which have not been
included in the EPS computation.
Employee Stock-Based Compensation -- In October 1995, Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock Based Compensation"
(SFAS No. 123) was issued. Under SFAS No. 123, Domain is permitted to either
record expenses for stock options and other stock-based employee
F-19
<PAGE> 145
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation plans based on their fair value at the date of grant or to apply
the existing standard, Accounting Principles Board Opinion No. 25 (APB 25) and
recognize compensation expense, if any, based on the intrinsic value of the
equity instrument at the measurement date. Domain has elected to continue to
follow APB 25. See Note 10.
3. NOTES RECEIVABLE -- INDEPENDENT PRODUCER FINANCING
At December 31, 1997 and 1996, Domain had total outstanding notes
receivable related to its IPF Program of $49.8 million and $21.7 million,
respectively. The notes receivable result from Domain's purchase of production
payments in the form of term overriding royalty interests in exchange for an
agreed upon share of revenues from identified properties until the amount
invested and a specified rate of return on investment is paid in full. During
1997 and 1996, Domain realized returns from the IPF Program of 14.5% and 17.7%,
respectively. The weighted average returns expected by Domain on the notes
receivable outstanding at December 31, 1997 and December 31, 1996 were 19.0% and
20.9%, respectively. While the independent producer's obligation to deliver such
revenues is nonrecourse to the producer, management believes that Domain's
overriding royalty interest constitutes a property interest and therefore, such
property interest and the underlying oil and gas reserves effectively serve as
security for the notes receivable. Based on reserve data available, Domain has
estimated that $8.9 million and $7.9 million of notes receivable at December 31,
1997 and 1996 will be repaid in the next twelve months and has classified such
amounts as current assets.
In fiscal 1996, Domain established an allowance for doubtful accounts of
approximately $0.4 million related to its IPF Program, which is the balance of
such account at December 31, 1997 and 1996. No other allowance activity occurred
during the three years ended December 31, 1997. The allowance for doubtful
accounts was zero for the year ended December 31, 1995. Based on the December
31, 1997 notes receivable balance, expected principal payments in each of the
next five years are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................ $8,873
1999................................................ $8,857
2000................................................ $7,721
2001................................................ $7,063
2002................................................ $5,691
</TABLE>
4. UNEVALUATED PROPERTY
Oil and natural gas properties not subject to amortization consist of the
cost of undeveloped leaseholds, and exploratory and developmental wells in
progress. These costs are reviewed periodically by management for impairment,
with the impairment provision included in the cost of oil and natural gas
properties subject to amortization. Factors considered by management in its
impairment assessment include drilling results by Domain and other operators,
the terms of oil and gas leases not held by production and available funds for
exploration and development. The following table summarizes the cost of the
properties not subject to amortization for the year cost was incurred (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Year cost incurred:
1996...................................................... $12,662 $10,385
1997...................................................... -- 26,218
------- -------
$12,662 $36,603
======= =======
</TABLE>
F-20
<PAGE> 146
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SALE OF NON-CORE ASSETS
On April 9, 1997, Domain sold its interest in a natural gas development
project located in northwest Michigan, previously accounted for under the equity
method, (the "Michigan Development Project"). Domain received $7.6 million in
cash for its interest, net of debt repayment. The aggregate sales price
approximated Domain's book value. Additionally, in 1997 Domain received $3.9
million from the sale of other non-core assets.
6. ACQUISITIONS
On July 1, 1997, Domain 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 $28.4 million,
which was paid in cash with a portion of the net proceeds of the initial public
offering of Domain's Common Stock consummated on June 27, 1997.
The following unaudited pro forma summary presents the consolidated results
of operations of Domain for the years ended December 31, 1997 and 1996 as if the
Funds Acquisition had occurred at the beginning of each fiscal year. The 1996
pro forma amounts also give effect to the Acquisition discussed in Note 1.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues.............................................. $70,409 $58,289
Net income............................................ $14,272 $ 4,443
Net income per share(1)............................... N/A $ 0.37
</TABLE>
- ---------------
(1) EPS assuming dilution.
On December 15, 1997, Domain 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 Domain's Common Stock valued at $16.00 per share.
The following unaudited pro forma summary presents the consolidated results
of operations of Domain for the years ended December 31, 1997 and 1996 as if the
Gulfstar Acquisition had occurred at the beginning of each fiscal year. The 1997
and 1996 pro forma amounts also give effect to the Acquisition and to the Funds
Acquisition discussed above.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues.............................................. $71,685 $61,946
Net income............................................ $13,537 $ 4,699
Net income per share(1)............................... N/A $ 0.37
</TABLE>
- ---------------
(1) EPS assuming dilution. EPS calculation assumes that 499,990 share of common
stock issued in connection with the Gulfstar Acquisition was outstanding for
the entire year.
F-21
<PAGE> 147
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
At December 31, 1997 and 1996, notes payable and long-term debt consisted
of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
<S> <C> <C>
Domain Credit Facility...................................... $61,200 $ 34,552
Indebtedness to FRLP........................................ 7,000 --
IPF Credit Facility......................................... 11,212 29,168
------- --------
Long-term debt.............................................. $79,412 $ 63,720
Less current maturities..................................... (24,900) --
------- --------
$54,512 $ 63,720
======= ========
</TABLE>
Domain Credit Facility -- In connection with the Acquisition, Domain
entered into a $65.0 million revolving credit facility maturing on December 31,
1999 (the "Domain Credit Facility") with a group of banks led by The Chase
Manhattan Bank (the "Lenders"). The Domain Credit Facility is secured by
approximately 80% of the aggregate value of Domain's oil and gas properties and
substantially all of Domain's other property (other than IPF Program related
properties), including the capital stock of Ventures and Production and is also
guaranteed by Ventures and Production. Amounts available under the Domain Credit
Facility are subject to a borrowing base with scheduled redeterminations every
six months (and such other redeterminations as the Lenders may elect to perform)
by the Lenders at the Lenders' sole discretion and in accordance with their
customary practices and standards in effect from time to time for reserve-based
loans to borrowers similar to Domain. The borrowing base under the Domain Credit
Facility at December 31, 1997 was $50.0 million.
Absent a default or an event of default, borrowings under the Domain Credit
Facility accrue interest at LIBOR plus a margin of 1.50% to 2.50% per annum
depending on the total amount outstanding or, at the option of Domain, at the
greater of (i) the prime rate and (ii) the federal funds effective rate plus
0.50%, plus a margin of 0.50% to 1.50% depending on the total amount
outstanding. Domain also incurs a quarterly commitment fee ranging from 0.375%
to 0.50% per annum on the average unused portion of the Lenders' aggregate
commitment depending on the total amount outstanding and an administrative fee
of $25,000 payable annually in advance. The interest rate on the amounts
outstanding at December 31, 1997 was 7.97%.
The Domain Credit Facility contains a number of covenants that, among other
things, restrict the ability of Domain to dispose of assets, incur additional
indebtedness, pay dividends, enter into certain investments or acquisitions,
repurchase or redeem capital stock, engage in mergers or consolidations, or
engage in certain transactions with subsidiaries and affiliates and that will
otherwise restrict corporate activities. In addition, such facility requires
Domain to maintain a specified minimum tangible net worth and to comply with
certain prescribed financial ratios. Further, under such facility, an event of
default is deemed to occur if any person, other than Domain's officers, FRLP (as
defined below) or any other investment fund, the managing general partner of
which is First Reserve Corporation ("First Reserve"), becomes the beneficial
owner, directly or indirectly, of more than 40% of the outstanding shares of
Common Stock.
IPF Credit Facility -- Domain Energy Finance Corporation ("IPF Company"),
an indirect wholly-owned subsidiary of Domain, has a $150.0 million revolving
credit facility (the "IPF Credit Facility") agented by Compass Bank -- Houston
("Compass") through which it finances a portion of the IPF Program. The IPF
Credit Facility matures June 1, 1999 at which time all amounts owed thereunder
are due and payable. The IPF Credit Facility is secured by substantially all of
IPF Company's oil and gas term overriding royalty interests, including the notes
receivable generated therefrom. The borrowing base under the facility as of
December 31, 1997 was $40.0 million and is subject to a scheduled
redetermination by Compass every six
F-22
<PAGE> 148
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months and such other redeterminations as Compass may elect to perform each
year. Absent a default or an event of default (as defined therein), borrowings
under the IPF Credit Facility accrue interest at LIBOR plus a margin of 1.75% to
2.25% per annum depending on the total amount outstanding or, at the option of
the IPF Company, the prime rate published in The Wall Street Journal. Domain
also incurs a quarterly commitment fee ranging from 0.375% to 0.50% per annum on
the average unused portion of the aggregate commitment depending on the total
amount outstanding and an administrative fee of $15,000 payable annually in
advance. The interest rate on the amounts outstanding as of December 31, 1997
was 8.21%.
The IPF Credit Facility contains a number of covenants that, among other
things, restrict the ability of IPF Company to incur additional indebtedness or
grant liens on its properties, guarantee indebtedness of any other person,
dispose of assets, make loans in excess of $100,000 other than in the ordinary
course of its business, issue additional shares of capital stock, engage in
certain transactions with affiliates, enter into any new line of business or
amend certain of its material contracts. In addition, such facility requires IPF
Company to maintain a specified minimum tangible net worth.
The IPF Credit Facility restricts the ability of the IPF Company to
dividend cash to its parent, Ventures, or otherwise advance cash to Domain. At
December 31, 1997, IPF Company net assets of approximately $10.4 million were
restricted.
Indebtedness to FRLP -- Prior to the Acquisition, Tennessee Gas Pipeline
Company ("TGPL"), the former wholly-owning parent of Ventures, was a guarantor
with respect to certain indebtedness (the "Michigan Senior Debt") of a
partnership formed to participate in a development project in Michigan in which
Ventures was at the time a general partner. In connection with the Acquisition,
Domain formed Domain Energy Guarantor Corporation ("Guarantor Corporation"), for
the sole purpose of assuming the obligations of TGPL under such guaranty. As
security for its obligations under the guaranty, Guarantor Corporation purchased
an $8.0 million certificate of deposit issued by the lender in respect of the
Michigan Senior Debt and assigned and pledged such certificate to the lender.
To enable Guarantor Corporation to purchase the $8.0 million certificate
pledged as collateral for its guaranty of the Michigan Senior Debt, First
Reserve Fund VII, Limited Partnership ("FRLP"), Domain's sole stockholder at
December 31, 1996, loaned Guarantor Corporation $8.0 million evidenced by a
Subordinated Promissory Note dated December 31, 1996 (the "Note"). The full
principal amount of the Note was scheduled to mature on December 31, 1999.
Interest accrued on the Note at a rate per annum equal to the interest rate per
annum earned by Guarantor Corporation on the $8.0 million certificate and was
payable quarterly. The obligations of Guarantor Corporation under the Note were
expressly made subordinated and subject in right of payment to the prior payment
in full of the Michigan Senior Debt. Pursuant to the terms of the Note, FRLP had
the right to convert the Note into common stock. In accordance with APB 14, $1.0
million of the Note was reclassified from notes payable to additional paid-in
capital on Domain's financial statements. As a result of the reclassification
the effective interest rate on the Note increased from 4.60% to 5.26%. The
remaining $7.0 million of the Note was classified as current maturities of
long-term debt at December 31, 1996 in keeping with FRLP's intent to exercise
its option to acquire common stock concurrent with consummation of Domain's
initial public offering (the "Offering"). Upon consummation of the Offering, in
June 1997, the Note was repaid.
8. RELATED PARTY TRANSACTIONS
Prior to the Acquisition, Domain paid an affiliate of the Parent for
various administrative support services, including treasury, legal, tax, human
resources and administration. Allocations were based on Domain's percentage of
total assets as compared to the Parent's total assets. Included in the 1996
allocation was approximately $2.0 million of costs that were directly related to
severance payments, retention bonuses and other costs associated with the merger
of Tenneco with an affiliate of El Paso. Management of Domain
F-23
<PAGE> 149
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
believes that the allocations were reasonable and approximate those costs which
would have been incurred from unrelated parties.
Prior to the Acquisition, the Parent also advanced various amounts to
Domain for working capital and capital expenditure requirements. The Parent did
not charge Domain any interest expense on the funds utilized by Domain. The
average amounts of advances outstanding from the Parent were approximately
$118.5 million and $107.7 million for the years ended December 31, 1996 and
1995, respectively. A summary of the activity in the advances from Parent
account follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Beginning balance, January 1,............................... $104,504 $ 112,832
Cash advances, net.......................................... 5,545 1,737
Corporate overhead allocation............................... 2,627 4,827
Other allocations (accrued taxes)........................... 156 4,734
Liability to Parent at Acquisition date not assumed by
Domain.................................................... -- (124,130)
-------- ---------
Ending balance, December 31................................. $112,832 $ --
======== =========
</TABLE>
In 1997, Domain paid First Reserve, the managing partner of FRLP, a fee of
$500,000 for financial advisory services rendered in connection with the
Acquisition.
9. STOCKHOLDERS' EQUITY
Common Stock -- As of June 20, 1997, Domain was authorized to issue up to
25,000,000 shares of Common Stock, $.01 par value per share ("Domain Common
Stock"). All share amounts in the financial statements have been retroactively
restated to present a 754-for-one stock split effected on June 20, 1997. As of
December 31, 1997, there were 15,110,111 shares of Domain Common Stock issued
and 15,107,719 outstanding with 2,392 shares held in treasury. As of December
31, 1996, there were 7,177,681 shares of Domain Common Stock issued and
outstanding. Holders of Domain Common Stock are entitled to one vote for each
share held and are not entitled to cumulative voting for the purpose of electing
directors and have no preemptive or similar right to subscribe for, or to
purchase, any shares of Domain Common Stock or other securities to be issued by
Domain in the future. Accordingly, the holders of more than 50% in voting power
of the shares of Domain Common Stock voting generally for the election of
directors will be able to elect all of Domain's directors.
Option to Acquire Common Stock -- Pursuant to the Subscription Agreement,
dated December 31, 1996 (the "First Reserve Subscription Agreement"), between
Domain and FRLP, Domain granted to FRLP an option (the "First Reserve Option")
to acquire 1,914,048 shares of Domain Common Stock for an aggregate purchase
price of $8.0 million plus any accrued interest on the Note (the "Option Price")
(see Note 7). The Option Price could be paid by FRLP (i) prior to the date on
which the Note has been paid in full, by delivery to Domain of the Note together
with the payment in cash of any principal or interest payments on the Note
previously received by FRLP and (ii) after the date on which the Note has been
paid in full, by payment of the Option Price in cash. In connection with the
Offering, Domain and FRLP agreed to restructure the terms of the First Reserve
Option as set forth below.
Domain and FRLP agreed that concurrently with consummation of the Offering,
FRLP would purchase a number of shares of Domain Common Stock at the Offering
price such that the aggregate purchase price paid by FRLP for such shares equals
$8,681,000. The amount of $8,681,000 represents the sum of (i) the outstanding
principal balance of the Note plus estimated accrued interest thereon through
June 15, 1997 and (ii) $500,000 in cash to be paid by FRLP. This transaction was
completed on June 24, 1997.
F-24
<PAGE> 150
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with APB 14, $1.0 million of the Note, representing the
estimated fair value of the First Reserve Option, has been reclassified from
notes payable to additional paid-in capital. See Note 7.
Preferred Stock -- The Board of Directors is authorized, without action by
the holders of Domain Common Stock, to issue up to 5,000,000 shares of preferred
stock, $.01 par value per share (the "Preferred Stock"), in one or more series,
to establish the number of shares to be included in each such series and to fix
the designations, preferences, relative, participating, optional and other
special rights of the shares of each such series and the qualifications,
limitations and restrictions thereof. Such matters may include, among others,
voting rights, conversion and exchange privileges, dividend rates, redemption
rights, sinking fund provisions and liquidation rights that could be superior
and prior to the Domain Common Stock. As of December 31, 1997 and 1996, no
shares of preferred stock were issued and outstanding.
10. STOCK-BASED COMPENSATION
Domain maintains two stock-based compensation plans, which are described
below. Domain applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. In October 1995, the FASB
issued Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), which encourages, but does not
require, all entities to record compensation expense on all stock-based
compensation plans based upon fair value. However, pro forma disclosures as if
Domain adopted the cost recognition provisions of SFAS No. 123 in 1997 are
presented below.
Stock Purchase and Option Plan -- In 1996, Domain adopted the Amended and
Restated 1996 Stock Purchase and Option Plan for Key Employees of Domain Energy
Corporation and Affiliates (the "Stock Purchase and Option Plan"). The Stock
Purchase and Option Plan authorizes the issuance of options to acquire up to
867,091 shares of Domain Common Stock and Domain has reserved 867,091 shares of
Domain Common Stock for issuance in connection therewith. The Stock Purchase and
Option Plan is administered by the Compensation Committee of the Board of
Directors. Pursuant to the Stock Purchase and Option Plan, Domain may grant to
employees, directors or other persons having a unique relationship with Domain
or its affiliates, singly or in combination, Incentive Stock Options, Other
Stock Options, Stock Appreciation Rights, Restricted Stock, Purchase Stock,
Dividend Equivalent Rights, Performance Units, Performance Shares or Other
Stock-Based Grants, in each case as such terms are defined therein. The terms of
any such grant will be determined by the Compensation Committee and set forth in
a separate grant agreement. The exercise price will be at least equal to 100% of
fair market value of the Domain Common Stock on the date of grant in the case of
Incentive Stock Options and the exercise price of Other Stock Options will be at
least equal to 50% of fair market value of the Domain Common Stock on the date
of grant, provided that options to purchase up to 433,546 shares of Domain
Common Stock may be granted with an exercise price equal to $.01 per share,
which is the par value of the Domain Common Stock. Non-Qualified Stock Options
and Other Stock Options may be exercisable for up to ten years.
On February 21, 1997 (the "Grant Date"), Domain granted to the officers of
Domain pursuant to separate Non-Qualified Stock Option Agreements (collectively,
as amended, the "Stock Option Agreements") between Domain and each of such
persons, options to purchase a total of 753,998 shares of Domain Common Stock
under the Stock Purchase and Option Plan. In addition, Domain has granted
options to purchase an aggregate of 95,696 shares of Domain Common Stock to
other employees of Domain. Under the terms of the Stock Option Agreements, 50%
of the options granted to each such person are designated as time options
(collectively, the "Time Options"), with an exercise price equal to $4.18 per
share, and 50% are designated as performance options (collectively, the
"Performance Options"), with an exercise price equal to $.01 per share. The Time
Options become exercisable as to 20% of the shares of Domain Common Stock
subject thereto on the first anniversary of the Grant Date and are exercisable
as to an additional 20% of such shares upon each anniversary of the Grant Date
thereafter. The Performance Options become exercisable at
F-25
<PAGE> 151
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any time following the second anniversary of the Grant Date, when the Investment
Return Hurdle (as such term is defined) is met; provided that the Performance
Options become exercisable as to 100% of the shares of Domain Common Stock
subject thereto on the ninth anniversary of the Grant Date.
At December 31, 1997, Domain had an additional 24,574 options available to
grant. The following is a summary of all stock option activity for 1997:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF SHARES OF AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICES
------------ --------
<S> <C> <C>
Outstanding at December 31, 1996............................ -- --
Granted..................................................... 869,704 $ 2.36
Exercised................................................... -- --
Forfeited................................................... (7,177) $ 2.10
Expired..................................................... -- --
------- ------
Outstanding at December 31, 1997............................ 862,527 $ 2.36
======= ======
Exercisable at December 31, 1997............................ 6,670 $13.50
</TABLE>
The weighted average per share fair value of options granted during 1997
was $3.28.
The fair value of each option granted during 1997 was estimated as of the
date of grant using the Black-Sholes option-pricing model with the following
weighted-average assumptions for grants in 1997: no dividend yield; expected
volatility of zero for options granted prior to the Offering and an expected
volatility of 44.6% for options granted on or after the Offering; risk-free
interest rates ranging from 5.44% to 6.70% ; and an expected option life of 2.50
years.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.01 to $4.18 842,517 9.25 $ 2.10 -- --
$13.50 20,010 9.50 $13.50 6,670 $13.50
- --------------------- ------- ---- ------ ----- ------
$0.01 to $13.50 862,527 9.26 $ 2.36 6,670 $13.50
</TABLE>
Management Investor Subscription Agreements and Related Transactions -- On
February 21, 1997, each of Domain's officers and other managers of Domain (the
"Management Investors") entered into a Management Investor Subscription
Agreement with Domain pursuant to which the Management Investors purchased an
aggregate of 390,307 shares of Common Stock at $4.18 per share. To facilitate
such purchases, Domain loaned the Management Investors an aggregate of
approximately $546,000. All such indebtedness of such persons accrues interest
at the rate of 8% per annum, payable semiannually; provided that each Management
Investor may elect to satisfy his or her semiannual interest payment obligation
by increasing the principal amount of the indebtedness owed to Domain by the
amount of interest otherwise payable. As security for such loans made by Domain,
each Management Investor pledged to Domain, and granted a first priority
security interest in, the shares of Domain Common Stock purchased by such
Management Investor pursuant to its respective Management Investor Subscription
Agreement and is required to pledge, and grant a first priority security
interest in, all other shares of Domain Common Stock that each such person may
subsequently acquire, including, without limitation, upon exercise of options to
purchase shares of Domain Common Stock. Such loans were repaid in full in
February 1998. In addition, in April 1997, other employees of Domain purchased
95,696 shares of Domain Common Stock at an average price of $4.18 per share.
F-26
<PAGE> 152
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plan For Nonemployee Directors -- Domain has adopted the
Domain Energy Corporation 1997 Stock Option Plan for Nonemployee Directors (the
"Nonemployee Director Plan"). The objective of the Nonemployee Director Plan is
to enable Domain to attract and retain the services of outstanding nonemployee
directors by affording them an opportunity to acquire a proprietary interest in
Domain through automatic, non-discretionary awards of options exercisable to
purchase shares of Common Stock.
Each member of the Board of Directors who is not an employee of Domain or
its subsidiaries is eligible to receive options under the Nonemployee Director
Plan. On the effective date of the Nonemployee Director Plan, each such of the
five eligible directors were automatically granted an option to purchase 4,002
shares of Domain Common Stock. Future eligible directors will also be granted an
option to purchase an identical number of shares of Domain Common Stock upon
their initial appointment or election to the Board of Directors. The exercise
price of the options will be equal to the fair market value of the Domain Common
Stock on the date of grant. The options may be exercised for a period of ten
years commencing on the date of grant as follows: (i) up to one-third of the
total number of shares of Domain Common Stock subject to an option may be
purchased as of the date of grant; (ii) up to an additional one-third of the
total number of shares of Domain Common Stock subject to an option may be
purchased as of the date of the annual meeting of stockholders of Domain in the
year following the year in which the option was granted ("Second Vesting Date"),
provided that the holder of the option is an eligible director immediately
following such meeting; and (iii) the balance of the total number of shares of
Domain Common Stock subject to an option may be purchased as of the date of the
annual meeting of stockholders next following the Second Vesting Date ("Final
Vesting Date"), provided that the holder of the option is an eligible director
immediately following such meeting.
Compensation Expense -- For purposes of determining compensation expense
pursuant to APB 25, the measurement date for the stock options granted to
officers of Domain is December 31, 1996 as on that date each officer knew the
number of options (both Time Options and Performance Options) that they would be
granted, the number of shares that they would be entitled to receive upon
exercise of the options and the option exercise price. The measurement date for
other options granted and stock sold is the date of the grant or sale.
Compensation expense is calculated based on the difference in the proceeds that
Domain receives upon issuance of the stock and the estimated fair value of the
stock at the measurement date. Domain recognized stock compensation expense of
$4,587,000 in 1997 and anticipates recognizing stock compensation expense based
on actual stock acquired and in accordance with the vesting schedule of options
granted as follows:
<TABLE>
<S> <C>
1998............................................ $1,158,000
1999............................................ 227,000
2000............................................ 37,000
2001............................................ 18,000
2002............................................ 3,000
</TABLE>
Pursuant to APB 25, Domain recognized a charge of $4.6 million as
compensation expense for equity-based compensation awarded in 1997. If the fair
value based method of accounting in SFAS No. 123 had been applied, Domain would
have recognized $4.8 million in 1997 as compensation expense. Domain's pro forma
net income and earnings per common share for 1997 is presented below (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997
------
<S> <C>
Net income -- as reported.................................. $3,163
Net income -- pro forma.................................... $2,995
Diluted earnings per common share -- as reported........... $ 0.26
Diluted earnings per common share -- pro forma............. $ 0.25
</TABLE>
F-27
<PAGE> 153
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because it is likely that additional options will be granted in future
years and will vest ratably, the reported pro forma results are not necessarily
representative of the effects on reported pro forma results for future years.
11. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
PREDECESSOR SUCCESSOR
--------------- ---------
1995 1996 1997
----- ------- ---------
<S> <C> <C> <C>
Federal:
Current(1)............................................. $(518) $(2,965) $ 445
Deferred............................................... 791 6,511 3,359
State:
Current................................................ (14) 657 290
Deferred............................................... 92 191 --
----- ------- ------
Income tax expense....................................... $ 351 $ 4,394 $4,094
===== ======= ======
</TABLE>
- ---------------
(1) In 1997, $445,000 of current federal income taxes represents alternative
minimum taxes paid.
The following table sets forth a reconciliation of the statutory federal
income tax with Domain's effective tax rate (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------- ---------
1995 1996 1997
---- ------- ---------
<S> <C> <C> <C>
Income before income taxes................................ $858 $11,425 $7,257
---- ------- ------
Income tax computed at statutory rates.................... $300 $ 3,999 $2,540
State taxes, net of federal benefit....................... 54 551 189
Other(1).................................................. (3) (156) 1,365
---- ------- ------
Income tax expense........................................ $351 $ 4,394 $4,094
==== ======= ======
</TABLE>
- ---------------
(1) In 1997, Domain recorded $3.9 million of stock compensation expense for
which it will receive no tax deduction.
F-28
<PAGE> 154
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts calculated for income tax purposes. The components of
deferred tax assets and liabilities pursuant to SFAS No. 109 are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax liability:
Oil and gas properties.................................... $ -- $13,081
---- -------
Deferred tax asset:
Alternative minimum tax................................... -- 445
Net operating loss carryforwards.......................... -- 12,441
Other, net................................................ -- 310
---- -------
-- 13,196
Valuation Allowance......................................... -- --
---- -------
Net deferred tax asset.................................... $ -- $ 115
==== =======
</TABLE>
As of December 31, 1996, Domain had no deferred tax liability. As a result
of the Acquisition and the corresponding election made by El Paso and Domain to
step-up the tax basis in the assets acquired, there are no temporary differences
in the carrying amounts of assets and liabilities for financial reporting and
income tax purposes.
As of December 31, 1997, Domain has a net operating loss ("NOL")
carryforward for federal income tax purposes of approximately $35.5 million that
may be used in future years to offset taxable income. Utilization of Domain's
NOL carryforward is subject to annual limitations due to certain stock ownership
changes that have occurred. To the extent not utilized, the NOL carryforward
will begin to expire in 2006. Domain does not believe a deferred tax asset
valuation is required because all tax carryovers are expected to be fully
utilized.
12. COMMITMENTS AND CONTINGENCIES
From time to time, Domain is a party to certain lawsuits and claims arising
in the ordinary course of business. While the outcome of lawsuits and claims
cannot be predicted with certainty, management does not expect these matters
will have a materially adverse effect on Domain's financial condition, results
of operations or cash flows.
401(k) Plan -- Effective December 31, 1996, Domain has offered its
employees an employee 401(k) savings plan (the "401(k) Plan"). The 401(k) Plan
covers all full-time employees and entitles each to contribute up to 15% of his
or her annual compensation subject to maximum limitations imposed by the
Internal Revenue Code. The 401(k) Plan allows for employer matching of up to 8%
of the employee's contributions based on years of participation in the plan,
including years of participation in the 401(k) plan previously offered by
Tenneco. Domain's contributions to the 401(k) Plan during 1997 were $146,000.
Domain has entered into operating lease agreements for office space in
Houston, Texas with the lease term expiring on September 30, 2002.
F-29
<PAGE> 155
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments required as of December 31, 1997 related to
these and other normal operating leases are as follows:
<TABLE>
<S> <C>
Year ended December 31,
1998................................................ $ 490,000
1999................................................ 440,000
2000................................................ 428,000
2001................................................ 420,000
2002................................................ 315,000
----------
Total minimum lease payments................... $2,093,000
==========
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$253,000, $604,000 and $545,000, respectively.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
PREDECESSOR (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1996 1996 1996
- ------------------------------------------------- --------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues........................................ $16,143 $14,686 $13,531 $11,870
Operating income (loss)(1)...................... 4,096 6,126 2,047 (694)
Net income (loss)............................... 2,754 3,855 982 (560)
Net income per share............................ -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
SUCCESSOR (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1997 1997 1997
----------------------------------------------- --------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues......................................... $13,222 $9,841 $13,671 $15,534
Operating income................................. 2,525 1,908 3,321 3,277
Net income (loss)(3)............................. (319) 673 1,634 1,175
Net income (loss) per share(2)................... $ (0.03) $ 0.08 $ 0.11 $ 0.08
</TABLE>
- ---------------
(1) The fourth quarter 1996 includes $2.1 million of corporate overhead which is
$1.2 million greater than the average of the first three quarters. This
amount includes costs related to the merger between Tenneco and an affiliate
of El Paso.
(2) Assuming dilution.
(3) The first quarter of 1997 includes $3.2 million of stock compensation
expense which is $2.7 million greater than the average of the last three
quarters. This amount includes cost related to stock purchases made by
Domain's management.
F-30
<PAGE> 156
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND NATURAL GAS
EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides unaudited information required by SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities".
Capitalized Costs -- Capitalized costs and accumulated depreciation,
depletion and amortization relating to Domain's oil and gas producing
activities, all of which are conducted within the continental United States, are
summarized below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
SUCCESSOR
-----------------------
1996 1997
---------- ---------
<S> <C> <C>
Proved producing oil and natural gas properties............. $53,514 $116,782
Unevaluated properties...................................... 12,662 36,603
------- --------
66,176 153,385
Less: Accumulated depreciation, depletion and
amortization.............................................. -- (15,411)
------- --------
Net capitalized costs....................................... $66,176 $137,974
======= ========
Domain's share of equity method investee's net capitalized
cost (sold in 1997)....................................... $17,815 $ --
</TABLE>
Costs Incurred -- Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
PREDECESSOR SUCCESSOR
---------------------- ---------
1995 1996 1997
----------- ------- ---------
<S> <C> <C> <C>
Property acquisition costs:
Proved............................................ $15,186 $ 7,781 $39,762
Unproved.......................................... 3,207 732 15,610
Exploration costs................................... 23,677 12,126 16,804
Development costs................................... 7,834 7,506 18,894
------- ------- -------
Total costs incurred................................ $49,904 $28,145 $91,070
======= ======= =======
Domain's share of equity method investee's cost
incurred (sold in 1997)........................... $ -- $17,978 $ --
</TABLE>
F-31
<PAGE> 157
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Results of Operations -- Results of operations for oil and gas producing
activities (including operating overhead) were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
PREDECESSOR SUCCESSOR
------------------ ---------
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
REVENUES
Sales............................................... $34,877 $52,274 $47,251
Other revenues...................................... 414 (413) 238
------- ------- -------
Total revenues.............................. 35,291 51,861 47,489
------- ------- -------
EXPENSES
Production costs.................................... 8,690 11,547 16,341
Depreciation, depletion and amortization............ 22,339 24,919 15,411
------- ------- -------
Income before taxes................................. 4,262 15,395 15,737
Provision for income taxes.......................... 1,743 5,921 5,744
------- ------- -------
Results of operations for oil and gas producing
activities....................................... $ 2,519 $ 9,474 $ 9,993
======= ======= =======
</TABLE>
The difference between the above results of operations and the amounts
reported in the Combined and Consolidated Statements of Income is primarily
attributable to excluding IPF Program related activities, general and
administrative expense, stock compensation expense, corporate overhead
allocation, amortization of other assets and interest expense.
Reserves -- Proved reserves are estimated quantities of oil and natural gas
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves that can
reasonably be expected to be recovered through existing wells with existing
equipment and operating methods.
Proved oil and natural gas reserve quantities and the related discounted
future net cash flows before income taxes for the periods presented are based on
estimates prepared by DeGolyer and MacNaughton, Netherland, Sewell & Associates,
Inc., and other third-party independent petroleum engineers. Such estimates have
been prepared in accordance with guidelines established by the Securities and
Exchange Commission.
F-32
<PAGE> 158
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Domain's net ownership interests in estimated quantities of proved oil and
natural gas reserves and changes in net proved reserves, all of which are
located in the continental United States, are summarized below.
<TABLE>
<CAPTION>
OIL CONDENSATE AND NATURAL GAS LIQUIDS (BBLS)
-----------------------------------------------
PREDECESSOR SUCCESSOR
------------- -----------------------------
1995 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year......................... 4,109,442 2,197,181 10,128,061
Revisions of previous estimates........... (704,308) 289,216 (232,597)
Purchase of oil and gas properties........ 1,713,328 8,152,514 1,546,024
Extensions and discoveries................ 179,224 180,286 570,129
Sale of oil and gas properties............ (2,676,505) (127,305) (15,005)
Production................................ (424,000) (563,831) (646,394)
----------- ---------- ----------
End of year............................... 2,197,181 10,128,061 11,350,218
=========== ========== ==========
Proved developed reserves at end of
year(1)................................... 1,701,656 9,775,753 5,708,044
Equity in proved reserves of equity investee
(sold in 1997)............................ -- 1,251,592 --
</TABLE>
<TABLE>
<CAPTION>
NATURAL GAS (MCF)
-----------------------------------------
PREDECESSOR SUCCESSOR
----------- --------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year......................... 73,398,877 82,682,380 60,094,539
Revisions of previous estimates........... 5,769,806 (2,920,927) 103,428
Purchase of oil and gas properties........ 19,898,227 -- 40,465,190
Extensions and discoveries................ 13,083,241 4,743,646 20,624,856
Sale of oil and gas properties............ (11,402,771) (3,218,665) (407,603)
Production................................ (18,065,000) (21,191,895) (15,932,493)
----------- ----------- -----------
End of year............................... 82,682,380 60,094,539 104,947,917
=========== =========== ===========
Proved developed reserves at end of year.... 65,178,731 47,495,614 84,444,975
Equity in proved reserves of equity investee
(sold in 1997)............................ -- 21,243,379 --
</TABLE>
<TABLE>
<CAPTION>
TOTAL (MCFE)
-----------------------------------------
PREDECESSOR SUCCESSOR
----------- --------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year......................... 98,055,529 95,865,466 120,862,905
Revisions of previous estimates........... 1,543,958 (1,185,631) (1,292,154)
Purchase of oil and gas properties........ 30,178,195 48,915,084 49,741,334
Extensions and discoveries................ 14,158,585 5,825,362 24,045,630
Sale of oil and gas properties............ (27,461,801) (3,982,495) (497,633)
Production................................ (20,609,000) (24,574,881) (19,810,857)
----------- ----------- -----------
End of year............................... 95,865,466 120,862,905 173,049,225
=========== =========== ===========
Proved developed reserves at end of year.... 75,388,667 106,150,132 118,693,238
Equity in proved reserves of equity investee
(sold in 1997)............................ -- 28,752,931 --
</TABLE>
F-33
<PAGE> 159
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) Proved developed oil, condensate and natural gas liquids reserves decreased
by 4.1 million barrels in 1997 as compared to 1996. This decrease was the
result of the reclassification of a portion of the reserves attributable to
the Wasson Field from proved developed to proved undeveloped at year end
1997.
Standardized Measure -- The table of the Standardized Measure of Discounted
Future Net Cash Flows relating to Domain's ownership interests in proved oil and
gas reserves as of year end is shown below (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
PREDECESSOR SUCCESSOR
----------- ----------------------
1995 1996 1997
----------- --------- ---------
<S> <C> <C> <C>
Future cash inflows............................. $210,818 $ 422,377 $ 434,977
Future oil and gas operating expenses........... (43,204) (204,741) (172,347)
Future development costs........................ (38,680) (31,208) (52,378)
-------- --------- ---------
Future net cash flows before income taxes....... 128,934 186,428 210,252
10% annual discount of future net cash flows
before income taxes........................... (25,003) (38,591) (61,463)
-------- --------- ---------
Discounted future net cash flows before income
taxes......................................... 103,931 147,837 148,789
Future income tax expenses, net of 10% annual
discount...................................... (4,932) (22,491) (21,118)
-------- --------- ---------
Standardized measure of discounted future net
cash flows.................................... $ 98,999 $ 125,346 $ 127,671
======== ========= =========
Domain's share of equity method investee's
standardized measure of discounted future net
cash flows (sold in 1997)..................... $ -- $ 29,078 $ --
</TABLE>
Future cash flows are computed by applying year-end prices of oil and
natural gas to year-end quantities of proved oil and natural gas reserves.
Year-end prices utilized for oil and natural gas were $18.70/Bbl and $2.55/MMbtu
in 1997, $22.50/Bbl and $3.38/MMbtu in 1996 and $18.76/Bbl and $3.30/MMbtu in
1995. Domain estimates that a substantial decline in prices relative to year-end
1997 would cause a substantial decline in Domain's Present Value. For example, a
$0.10 per MMbtu decline in natural gas prices, holding all other variables
constant, would decrease Domain's December 31, 1997 Present Value by
approximately $7.8 million, or 5.3%, and a $1.00 per Bbl decline in oil and
condensate prices would decrease Domain's Present Value by approximately $4.0
million, or 2.7%. While the foregoing calculations should assist the reader in
understanding the effect of a decline in oil and natural gas prices on Domain's
Present Value, such calculations assume that quantities of recoverable reserves
are constant and therefore would not be accurate if prices decreased to a level
at which reserves would no longer be economically recoverable.
Future operating expenses and development costs are computed primarily by
Domain's petroleum engineers by estimating the expenditures to be incurred in
developing and producing Domain's proved oil and natural gas reserves at the end
of the year, based on year end costs and assuming continuation of existing
economic conditions.
Future income taxes are based on year end statutory rates, adjusted for
operating loss carryforwards and tax credits. A discount factor of 10% was used
to reflect the timing of future net cash flows. The standardized measure of
discounted future net cash flows is not intended to represent the replacement
cost or fair market value of Domain's oil and gas properties.
F-34
<PAGE> 160
DOMAIN ENERGY CORPORATION
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of Domain's oil
and natural gas reserves. An estimate of fair value would also take into
account, among other things, the recovery of reserves not presently classified
as proved, anticipated future changes in prices and costs, and a discount factor
more representative of the time value of money, and the risks inherent in
reserve estimates.
Change in Standardized Measure -- Changes in standardized measure of future
net cash flows relating to proved oil and gas reserves are summarized below (in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------- ---------
1995 1996 1997
--------- -------- ---------
<S> <C> <C> <C>
Changes due to current operations:
Sales of oil and gas, net of production costs... $ (26,200) $(40,727) $(30,910)
Sales of reserves in place...................... (20,027) (4,639) (478)
Extensions and discoveries...................... 18,595 7,941 34,617
Purchase of reserves in place................... 21,143 12,601 57,398
Future development costs incurred............... 7,834 7,270 4,385
Changes due to revisions in standardized
variables:
Price and production costs...................... 23,926 52,020 (77,123)
Revisions of previous quantity estimates........ (950) (1,857) (3,571)
Estimated future development costs.............. (8,825) (1,187) 962
Income taxes.................................... (11,613) (17,560) 1,373
Accretion of discount........................... 6,181 10,393 14,784
Production rates (timing) and other............. 20,443 2,092 888
--------- -------- --------
Net increase...................................... 30,507 26,347 2,325
Beginning of year................................. 68,492 98,999 125,346
--------- -------- --------
End of year....................................... $ 98,999 $125,346 $127,671
========= ======== ========
</TABLE>
Sales of oil and natural gas, net of oil and natural gas operating expenses
and future development costs are based on historical pre-tax results. Sales of
reserves in place, extensions and discoveries, purchases of reserves in place
and the changes due to revisions in standardized variables are reported on a
pre-tax discounted basis.
F-35
<PAGE> 161
ANNEX A
FIRST AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated May 12, 1998 (this
"Amendment"), to the Agreement and Plan of Merger, dated as of May 12, 1998, by
and among Lomak Petroleum, Inc., a Delaware corporation ("Lomak"), Domain Energy
Corporation, a Delaware corporation (the "Company"), and DEC Acquisition, Inc.,
a Delaware corporation ("Merger Sub").
WITNESSETH:
WHEREAS, Lomak, the Company and Merger Sub are parties to an Agreement and
Plan of Merger, dated as of May 12, 1998 (the "Original Merger Agreement"),
providing for the merger of Merger Sub with and into the Company on the terms
and conditions set forth therein; and
WHEREAS, Lomak, the Company and Merger Sub desire to amend the Original
Merger Agreement.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained and other valuable
consideration, the receipt and adequacy whereof are hereby acknowledged, the
parties hereto hereby, intending to be legally bound, represent, warrant,
covenant and agree as follows:
1. Capitalized terms used and not defined herein shall have the meaning
given to such terms in the Original Merger Agreement.
2. The Company hereby represents and warrants to Lomak and Merger Sub as
follows, which representations and warranties shall be deemed to form part of
the representations and warranties of the Company included in Article IV of the
Original Merger Agreement for all purposes of the Original Merger Agreement:
(a) First Reserve Fund VII, Limited Partnership (the "Principal
Stockholder") is the record owner of 7,820,718 shares of Company Common
Stock;
(b) on the date hereof, 7,553,860 votes constituted a majority of the
outstanding voting power of Company Common Stock; and
(c) on the date hereof, the Principal Stockholder has delivered a
written consent to the Company approving and adopting the Original Merger
Agreement in accordance with applicable law, including without limitation
the DGCL, and such consent will, upon mailing by the Company of the notice
as described in Section 3 below, constitute the Company Stockholder
Approval and no other approvals of the stockholders of the Company other
than such consent are required to effect the Merger.
3. The Company will, promptly after the execution of this Amendment, mail,
in accordance with Section 228(d) of the DGCL, notice of the corporation action
without a meeting taken by the Principal Stockholder to those Company
stockholders who have not consented to such action in writing and who, if the
action had been taken at a meeting of Company stockholders, would have been
entitled to notice of the meeting if the record date for such meeting had been
the date that written consents signed by a sufficient number of holders to take
such action were delivered to the Company in accordance with Section 228(c) of
the DGCL. The covenant of the Company in this Section 3 shall be deemed to form
part of the covenants of the Company included in Article VII of the Original
Merger Agreement for all purposes of the Original Merger Agreement.
4. All references to "Proxy Statement/Prospectus" in the Original Merger
Agreement shall be deemed in all cases in the Original Merger Agreement to
include the information statement required to be sent to the
A-1
<PAGE> 162
Company's stockholders pursuant to Section 14(c) of the Exchange Act in
connection with the Principal Stockholder's consent described in this Amendment.
5. Notwithstanding anything contained in the Original Merger Agreement to
the contrary, including without limitation Section 7.13 thereof, the Company
shall not be required to hold the Company Special Meeting.
6. This Amendment shall constitute an Ancillary Agreement for all purposes
of the Original Merger Agreement.
7. The validity, interpretation, construction and performance of this
Amendment shall be governed by, and construed in accordance with, the laws of
Delaware without reference to rules relating to conflicts of laws.
8. This Amendment may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to each party.
9. Except as expressly modified and amended by this Amendment, the
Original Merger Agreement shall continue in full force and effect and is hereby
ratified and confirmed in all respects.
[Remainder of page intentionally left blank.]
A-2
<PAGE> 163
IN WITNESS WHEREOF, Lomak, the Company and Merger Sub have duly executed
this Amendment on the date first above written.
LOMAK PETROLEUM, INC.
By: /s/ JOHN H. PINKERTON
----------------------------------
John H. Pinkerton
President and Chief Executive
Officer
DEC ACQUISITION, INC.
By: /s/ JOHN H. PINKERTON
----------------------------------
John H. Pinkerton
President
DOMAIN ENERGY CORPORATION
By: /s/ MICHAEL V. RONCA
----------------------------------
Michael V. Ronca
President and Chief Executive
Officer
A-3
<PAGE> 164
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
LOMAK PETROLEUM, INC.,
DEC ACQUISITION, INC.
AND
DOMAIN ENERGY CORPORATION
DATED MAY 12, 1998
A-4
<PAGE> 165
TABLE OF CONTENTS
ARTICLE I
THE MERGER
<TABLE>
<S> <C> <C>
Section 1.1 The Merger.................................................. A-10
Section 1.2 Effective Time of the Merger................................ A-10
Section 1.3 Tax Treatment............................................... A-10
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation................................ A-10
Section 2.2 Bylaws...................................................... A-10
Section 2.3 Directors and Officers...................................... A-10
ARTICLE III
CONVERSION OF SHARES
Section 3.1 Conversion of Capital Stock................................. A-11
Section 3.2 Surrender and Payment....................................... A-12
Section 3.3 Company Stock Options....................................... A-13
Section 3.4 No Fractional Shares........................................ A-14
Section 3.5 Closing..................................................... A-14
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 4.1 Organization and Qualification.............................. A-15
Section 4.2 Capitalization.............................................. A-16
Section 4.3 Authority................................................... A-16
Section 4.4 Consents and Approvals; No Violation........................ A-17
Section 4.5 Company SEC Reports......................................... A-17
Section 4.6 Financial Statements........................................ A-18
Section 4.7 Absence of Undisclosed Liabilities.......................... A-18
Section 4.8 Absence of Certain Changes.................................. A-18
Section 4.9 Taxes....................................................... A-18
Section 4.10 Litigation.................................................. A-19
Section 4.11 Employee Benefit Plans; ERISA............................... A-19
Section 4.12 Environmental Liability..................................... A-20
Section 4.13 Compliance with Applicable Laws............................. A-21
Section 4.14 Insurance................................................... A-21
Section 4.15 Labor Matters; Employees.................................... A-21
Section 4.16 Reserve Reports............................................. A-22
Section 4.17 Oil and Gas Reserves; Equipment............................. A-23
Section 4.18 Title to Oil and Gas Interests.............................. A-24
Section 4.19 Title to Other Properties................................... A-25
Section 4.20 Permits..................................................... A-25
Section 4.21 Material Contracts.......................................... A-25
Section 4.22 Required Stockholder Vote or Consent........................ A-26
Section 4.23 Proxy Statement/Prospectus; Registration Statement.......... A-26
</TABLE>
A-5
<PAGE> 166
<TABLE>
<S> <C> <C>
Section 4.24 Intellectual Property....................................... A-26
Section 4.25 Hedging..................................................... A-27
Section 4.26 Brokers..................................................... A-27
Section 4.27 Opinion of Financial Advisor................................ A-27
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF LOMAK AND MERGER SUB
Section 5.1 Organization and Qualification.............................. A-27
Section 5.2 Capitalization.............................................. A-28
Section 5.3 Authority................................................... A-28
Section 5.4 Consents and Approvals; No Violation........................ A-29
Section 5.5 Lomak Financial Statements.................................. A-29
Section 5.6 Absence of Undisclosed Liabilities.......................... A-30
Section 5.7 Absence of Certain Changes.................................. A-30
Section 5.8 Lomak SEC Reports........................................... A-30
Section 5.9 Taxes....................................................... A-30
Section 5.10 Litigation.................................................. A-31
Section 5.11 Employee Benefit Plans; ERISA............................... A-31
Section 5.12 Environmental Liability..................................... A-32
Section 5.13 Compliance with Applicable Laws............................. A-33
Section 5.14 Insurance................................................... A-33
Section 5.15 Labor Matters............................................... A-33
Section 5.16 Reserve Reports............................................. A-34
Section 5.17 Oil and Gas Reserves; Equipment............................. A-34
Section 5.18 Title to Oil and Gas Interests.............................. A-35
Section 5.19 Title to Other Properties................................... A-36
Section 5.20 Material Contracts.......................................... A-36
Section 5.21 Permits..................................................... A-37
Section 5.22 Required Stockholder Vote or Consent........................ A-37
Section 5.23 Proxy Statement/Prospectus; Registration Statement.......... A-37
Section 5.24 Intellectual Property....................................... A-38
Section 5.25 Hedging..................................................... A-38
Section 5.26 Brokers..................................................... A-38
Section 5.27 Merger Sub's Operations..................................... A-38
Section 5.28 Opinion of Financial Advisor................................ A-38
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business by the Company Pending the Merger....... A-39
Section 6.2 Conduct of Business by Lomak Pending the Merger............. A-40
Section 6.3 Conduct of Business of Merger Sub........................... A-42
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access and Information...................................... A-42
Section 7.2 Acquisition Proposals....................................... A-42
Section 7.3 Directors' and Officers' Indemnification.................... A-42
Section 7.4 Further Assurances.......................................... A-43
Section 7.5 Expenses.................................................... A-44
Section 7.6 Cooperation................................................. A-44
Section 7.7 Publicity................................................... A-44
Section 7.8 Additional Actions.......................................... A-44
</TABLE>
A-6
<PAGE> 167
<TABLE>
<S> <C> <C>
Section 7.9 Filings..................................................... A-44
Section 7.10 Consents.................................................... A-44
Section 7.11 Employee Matters; Benefit Plans............................. A-44
Section 7.12 Lomak Board................................................. A-45
Section 7.13 Stockholders Meetings....................................... A-45
Section Preparation of the Proxy Statement/Prospectus and A-46
7.14....... Registration Statement......................................
Section 7.15 Stock Exchange Listing...................................... A-47
Section 7.16 Notice of Certain Events.................................... A-47
Section 7.17 Site Inspections............................................ A-47
Section 7.18 Chief Operating Officer..................................... A-47
Section 7.19 Charter Amendments; Name.................................... A-47
Section 7.20 Voting Agreement............................................ A-47
ARTICLE VIII
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 8.1 Conditions to the Obligation of Each Party.................. A-48
Section 8.2 Conditions to the Obligations of Lomak and Merger Sub....... A-48
Section 8.3 Conditions to the Obligations of the Company................ A-49
ARTICLE IX
SURVIVAL
Section 9.1 Survival of Representations and Warranties.................. A-49
Section 9.2 Survival of Covenants and Agreements........................ A-49
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
Section 10.1 Termination................................................. A-49
Section 10.2 Effect of Termination....................................... A-50
ARTICLE XI
MISCELLANEOUS
Section 11.1 Notices..................................................... A-50
Section 11.2 Separability................................................ A-51
Section 11.3 Assignment.................................................. A-51
Section 11.4 Interpretation.............................................. A-51
Section 11.5 Counterparts................................................ A-51
Section 11.6 Entire Agreement............................................ A-51
Section 11.7 Governing Law............................................... A-51
Section 11.8 Attorneys' Fees............................................. A-51
Section 11.9 No Third Party Beneficiaries................................ A-51
Section 11.10 Disclosure Schedules........................................ A-51
Section 11.11 Amendments, Waivers, Etc.................................... A-51
Section 11.12 No Waiver................................................... A-51
</TABLE>
Schedule 6.1(m) -- Company Employee Benefit Plan Amendments
A-7
<PAGE> 168
DEFINITIONS
DEFINED TERMS
<TABLE>
<S> <C>
Action...................................................... Section 7.3(a)
Affiliate................................................... Section 3.3(a)
Ancillary Agreements........................................ Section 4.3
Assessment.................................................. Section 7.17
Audit....................................................... Section 4.9(f)
Closing..................................................... Section 3.5
Closing Date................................................ Section 3.5
Closing Date Market Price................................... Section 3.1(a)
Code........................................................ Section 1.3
Common Stock Certificate.................................... Section 3.1(a)
Company..................................................... Preamble
Company Acquisition Proposal................................ Section 7.2(b)
Company Benefit Plans....................................... Section 4.11(a)
Company Breach.............................................. Section 10.1(d)
Company Classified Property................................. Section 4.18(a)
Company Common Stock........................................ Section 3.1
Company Designees........................................... Section 7.12
Company Disclosure Schedule................................. Section 4.1(a)
Company Engagement Letters.................................. Section 4.26
Company ERISA Affiliate..................................... Section 4.11(a)
Company Financial Statements................................ Section 4.6
Company Material Adverse Effect............................. Section 4.1(c)
Company Material Contracts.................................. Section 4.21(a)
Company Permitted Encumbrances.............................. Section 4.18(a)
Company Reserve Report...................................... Section 4.16(a)
Company SEC Reports......................................... Section 4.5
Company Special Meeting..................................... Section 7.13(a)
Company Stock Options....................................... Section 3.3(a)
Company Stockholder Approval................................ Section 4.22
Customary Post-Closing Consents............................. Section 4.18(a)
DGCL........................................................ Section 1.1
D&O Insurance............................................... Section 7.3(b)
Effective Time.............................................. Section 1.2
Enforceability Exception.................................... Section 4.3
Environmental Laws.......................................... Section 4.12(a)
ERISA....................................................... Section 4.11(a)
Exchange Act................................................ Section 3.3(f)
Exchange Agent.............................................. Section 3.2(a)
Exchange Fund............................................... Section 3.2(a)
Exchange Ratio.............................................. Section 3.1(a)
GAAP........................................................ Section 4.6
Governmental Authority...................................... Section 4.4(b)
Hazardous Substances........................................ Section 4.12(b)
Hydrocarbons................................................ Section 4.16(a)
Inspected Party............................................. Section 7.17
Inspecting Party............................................ Section 7.17
Intellectual Property....................................... Section 4.24
Liens....................................................... Section 4.18(a)
Lomak....................................................... Preamble
</TABLE>
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<TABLE>
<S> <C>
Lomak Benefit Plans......................................... Section 5.11(a)
Lomak Classified Property................................... Section 5.18(a)
Lomak Common Stock.......................................... Section 3.1(a)
Lomak Disclosure Schedule................................... Section 5.1(a)
Lomak ERISA Affiliate....................................... Section 5.11(a)
Lomak Engagement Letters.................................... Section 5.26
Lomak Financial Statements.................................. Section 5.5
Lomak Material Adverse Effect............................... Section 5.1(d)
Lomak Material Contracts.................................... Section 5.20(a)
Lomak Permitted Encumbrances................................ Section 5.18(a)
Lomak Preferred Stock....................................... Section 5.2(a)
Lomak Reserve Report........................................ Section 5.16(a)
Lomak SEC Reports........................................... Section 5.8
Lomak Special Meeting....................................... Section 7.13(b)
Lomak Stockholder Approval.................................. Section 5.22
Merger...................................................... Preamble
Merger Consideration........................................ Section 3.1(a)
Merger Sub.................................................. Preamble
NYSE........................................................ Section 3.1(a)
Oil and Gas Interests....................................... Section 4.16(a)
PBGC........................................................ Section 4.11(b)
PCBs........................................................ Section 4.12(e)
Permits..................................................... Section 4.20
Person...................................................... Section 3.2(d)
Principal Stockholder....................................... Section 4.3
Proxy Statement/Prospectus.................................. Section 4.23
Registration Statement...................................... Section 4.23
SEC......................................................... Section 3.1(a)
Securities Act.............................................. Section 4.4(b)
Stockholders................................................ Section 10.1(c)
Stock Issuance.............................................. Section 5.3
Stock Purchase Agreement.................................... Section 4.3
Subsidiary.................................................. Section 4.1(c)
Surviving Corporation....................................... Section 1.1
Tax Authority............................................... Section 4.9(f)
Tax Returns................................................. Section 4.9(f)
Taxes....................................................... Section 4.9(b)
Termination Fee............................................. Section 7.5
Trading Day................................................. Section 3.1(a)
Voting Agreement............................................ Section 4.3
WARN Act.................................................... Section 4.15(b)
</TABLE>
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") dated May 12, 1998, by
and among Lomak Petroleum, Inc., a Delaware corporation ("Lomak"), DEC
Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Lomak
("Merger Sub"), and Domain Energy Corporation, a Delaware corporation (the
"Company").
WHEREAS, the respective Boards of Directors of Lomak, Merger Sub and the
Company deem it advisable and in the best interests of their respective
stockholders that Merger Sub merge (the "Merger") with and into the Company upon
the terms and subject to the conditions set forth herein, and such Boards of
Directors have approved the Merger; and
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements contained herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
hereof, at the Effective Time (as defined in Section 1.2 hereof), Merger Sub
shall be merged with and into the Company in accordance with the applicable
provisions of the General Corporation Law of the State of Delaware (the "DGCL")
and the separate corporate existence of Merger Sub shall thereupon cease, and
the Company shall be the surviving corporation in the Merger (sometimes referred
to herein as the "Surviving Corporation"). The Merger shall have the effects set
forth in Section 259 of the DGCL, including without limitation, the Surviving
Corporation's succession to and assumption of all rights and obligations of the
Company.
Section 1.2 Effective Time of the Merger. The Merger shall become
effective (the "Effective Time") when a properly executed Certificate of Merger
is duly filed with the Secretary of State of the State of Delaware, which filing
shall be made as soon as practicable after the satisfaction or waiver of the
conditions set forth in Article VIII hereof.
Section 1.3 Tax Treatment. The parties acknowledge that the transactions
contemplated by this Agreement, taken together with the transactions
contemplated by the Stock Purchase Agreement (as defined below), are not
intended to be treated as a tax-free reorganization within the meaning of the
Internal Revenue Code of 1986, as amended (the "Code").
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation. The Certificate of Incorporation
of the Company as in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation at and after the
Effective Time.
Section 2.2 Bylaws. The Bylaws of the Company as in effect immediately
prior to the Effective Time shall be the Bylaws of the Surviving Corporation at
and after the Effective Time, and thereafter may be amended in accordance with
their terms and as provided by the Certificate of Incorporation of the Surviving
Corporation and the DGCL.
Section 2.3 Directors and Officers. At and after the Effective Time, (a)
the Board of Directors of Merger Sub immediately prior to the Effective Time
shall be the Board of Directors of the Surviving Corporation and (b) the
officers of the Company immediately prior to the Effective Time shall be the
officers of the Surviving Corporation, in the case of both clause (a) and (b)
until their respective successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Certificate of Incorporation and Bylaws and the
DGCL.
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ARTICLE III
CONVERSION OF SHARES
Section 3.1 Conversion of Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holders of the
Company's common stock, par value $.01 per share (the "Company Common Stock"):
(a) Each share of Company Common Stock issued and outstanding immediately
prior to the Effective Time (other than shares of Company Common Stock, if any,
held by Lomak, Merger Sub or any Subsidiary of Lomak) shall be converted into a
number of shares of common stock, par value $.01 per share, of Lomak ("Lomak
Common Stock") equal to the Exchange Ratio. The Exchange Ratio shall be equal to
the quotient of (i) $14.50 divided by (ii) the Closing Date Market Price
(rounded to four decimal places); provided, however, that in no event shall the
Exchange Ratio be greater than 1.2083 nor less than 0.8529. The term "Closing
Date Market Price" shall mean the average of the closing sales price of Lomak
Common Stock, rounded to four decimal places, as reported under "NYSE Composite
Transaction Reports" in The Wall Street Journal during the period of the 15 most
recent Trading Days ending on the third Business Day prior to the Closing Date.
For purposes of this Agreement, (1) "Trading Day" shall mean a day on which the
New York Stock Exchange (the "NYSE") is open for trading and (2) "Business Day"
shall mean a day on which the principal offices of the Securities and Exchange
Commission ("SEC") in Washington, D.C. are open to accept filings, or in the
case of determining a date on which any payment is due, a day other than
Saturday, Sunday or any day on which banks located in New York City are
authorized or obligated by law to close. All such Company Common Stock, when so
converted, shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist, and the holder of a certificate ("Common
Stock Certificate") that, immediately prior to the Effective Time, represented
outstanding shares of Company Common Stock shall cease to have any rights with
respect thereto, except the right to receive, upon the surrender of such Common
Stock Certificate, the number of shares of Lomak Common Stock determined
pursuant to this Section 3.1(a) (the "Merger Consideration") and, if applicable,
the right to receive cash pursuant to Section 3.4 of this Agreement. Until
surrendered as contemplated by this Section 3.1, each Common Stock Certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive upon such surrender the Merger Consideration as contemplated by this
Section 3.1. Notwithstanding the foregoing, if between the date of this
Agreement and the Effective Time the outstanding shares of Lomak Common Stock or
Company Common Stock shall have been changed into a different number of shares
or a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares,
the Exchange Ratio shall be correspondingly adjusted to reflect such stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares.
(b) Each share of common stock, par value $.01 per share, of Merger Sub
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one share of common stock of the Surviving
Corporation.
(c) Each share of Lomak Common Stock, issued and outstanding immediately
prior to the Effective Time shall remain an issued and outstanding share of
Lomak Common Stock, and shall not be affected by the Merger.
(d) Each share of Company Common Stock, if any, held by Lomak, Merger Sub
or any other Subsidiary of Lomak and each share of Company Common Stock held by
the Company or any Subsidiary of the Company as treasury stock immediately prior
to the Effective Time shall cease to be outstanding, shall be canceled and
retired without payment of any consideration therefor, and shall cease to exist.
(e) All Lomak Common Stock issued upon the surrender of Common Stock
Certificates in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such Common Stock
Certificates and the Company Common Stock formerly represented thereby.
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Section 3.2 Surrender and Payment.
(a) Prior to the Effective Time, Lomak shall appoint an agent reasonably
acceptable to the Company (the "Exchange Agent") for the purpose of exchanging
Common Stock Certificates formerly representing Company Common Stock. At or
prior to the Effective Time, Lomak shall deposit with the Exchange Agent for the
benefit of the holders of Company Common Stock (other than Lomak, Merger Sub,
any other Subsidiary of Lomak, the Company or any Subsidiary of the Company),
for exchange in accordance with this Section 3.2 through the Exchange Agent, (i)
as of the Effective Time, certificates representing the Merger Consideration to
be issued pursuant to Section 3.1(a) and (ii) from time to time as necessary,
cash to be paid in lieu of fractional shares pursuant to Section 3.4 (such
certificates for the Merger Consideration and such cash being hereinafter
referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to
irrevocable instructions, deliver the Merger Consideration and any cash in
exchange for surrendered Common Stock Certificates formerly representing Company
Common Stock pursuant to Section 3.1 out of the Exchange Fund. Except as
contemplated by Section 3.2(f), the Exchange Fund shall not be used for any
other purpose.
(b) Promptly after the Effective Time, but in any event not later than five
Business Days thereafter, Lomak will send, or will cause the Exchange Agent to
send, to each holder of a Common Stock Certificate or Certificates that
immediately prior to the Effective Time represented outstanding Company Common
Stock (other than Lomak, Merger Sub, any other Subsidiary of Lomak or the
Company or any Subsidiary of the Company) a letter of transmittal and
instructions for use in effecting the exchange of such Common Stock Certificates
for certificates representing the Merger Consideration and, if applicable, cash
in lieu of a fractional share. Provision also shall be made for holders of
Common Stock Certificates to procure in person immediately after the Effective
Time a letter of transmittal and instructions and to deliver in person
immediately after the Effective Time such letter of transmittal and Common Stock
Certificates in exchange for the Merger Consideration and, if applicable, cash.
(c) After the Effective Time, Common Stock Certificates shall represent the
right, upon surrender thereof to the Exchange Agent, together with a duly
executed and properly completed letter of transmittal relating thereto, to
receive in exchange therefor that number of whole shares of Lomak Common Stock,
and, if applicable, cash that such holder has the right to receive pursuant to
Sections 3.1 and 3.4 after giving effect to any required tax withholding, and
the Common Stock Certificate or Certificates so surrendered shall be canceled.
No interest will be paid or will accrue on any cash amount payable upon the
surrender of any such Common Stock Certificates. Until so surrendered, each such
Common Stock Certificate shall, after the Effective Time, represent for all
purposes only the right to receive, upon such surrender, the Merger
Consolidation and, if applicable, cash as contemplated by this Article III.
(d) If any shares of Lomak Common Stock are to be issued and/or cash to be
paid to a Person other than the registered holder of the Common Stock
Certificate or Certificates surrendered in exchange therefor, it shall be a
condition to such issuance that the Common Stock Certificate or Certificates so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the Person requesting such issuance shall pay to the Exchange
Agent any transfer or other taxes required as a result of such issuance to a
Person other than the registered holder or establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not applicable. For purposes of
this Agreement, "Person" means an individual, a corporation, a limited liability
company, a partnership, an association, a trust or any other entity or
organization, including a governmental or political subdivision or any agency or
instrumentality thereof.
(e) After the Effective Time, the stock transfer books of the Company shall
be closed and there shall be no further registration of transfers of Company
Common Stock outstanding prior to the Effective Time. If, at or after the
Effective Time, Common Stock Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged as provided for, and in
accordance with the procedures set forth, in this Article III.
(f) Any Merger Consideration and any cash in the Exchange Fund that remain
unclaimed by the holders of Company Common Stock six months after the Effective
Time shall be returned to Lomak, upon demand of Lomak, and any such holder who
has not exchanged such holder's Common Stock Certificates in accordance with
this Section 3.2 prior to that time shall thereafter look only to Lomak, as
general creditors thereof, to
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exchange such Common Stock Certificates or to pay amounts to which they are
entitled pursuant to Section 3.1 or 3.4. If outstanding Common Stock
Certificates are not surrendered prior to two years after the Effective Time
(or, in any particular case, prior to such earlier date on which any Merger
Consideration issuable in respect of such Common Stock Certificates or the
dividends and other distributions, if any, described below would otherwise
escheat to or become the property of any governmental unit or agency), the
Merger Consideration issuable in respect of such Common Stock Certificates, and
the amount of dividends and other distributions, if any, which have become
payable and which thereafter become payable on the Merger Consideration
evidenced by such Common Stock Certificates as provided herein shall, to the
extent permitted by applicable law, become the property of Lomak, free and clear
of all claims or interest of any Person previously entitled thereto.
Notwithstanding the foregoing, none of Lomak, the Company or the Surviving
Corporation shall be liable to any holder of Common Stock Certificates for any
amount paid, or Merger Consideration, cash or dividends delivered, to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(g) No dividends or other distributions declared or made after the
Effective Time shall be paid to the holder of any unsurrendered Common Stock
Certificates with respect to the Merger Consideration represented thereby until
such Common Stock Certificates are surrendered as provided in this Section 3.2.
Subject to the effect of applicable laws (including, without limitation, escheat
and abandoned property laws), following surrender of any such Common Stock
Certificate, there shall be paid, without interest, to the Person in whose name
the certificates representing the Merger Consideration issued in exchange
therefor are registered, (i) promptly all dividends and other distributions paid
in respect of such Merger Consideration with a record date on or after the
Effective Time and theretofore paid, and (ii) at the appropriate date, all
dividends or other distributions in respect of such Merger Consideration with a
record date after the Effective Time but prior to surrender and a payment date
occurring after surrender.
(h) If any Common Stock Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such Common Stock Certificate to be lost, stolen or destroyed and, if required
by the Surviving Corporation, the posting by such Person of a bond in such
reasonable amount as Lomak may direct as indemnity against any claim that may be
made against it with respect to such Common Stock Certificate, the Exchange
Agent will issue in exchange for such lost, stolen or destroyed Common Stock
Certificate the Merger Consideration and, if applicable, cash and unpaid
dividends and other distributions on any Merger Consideration deliverable in
respect thereof pursuant to this Agreement.
Section 3.3 Company Stock Options.
(a) At the Effective Time, automatically and without any action on the part
of the holder thereof, each outstanding stock option of the Company outstanding
at the Effective Time (the "Company Stock Options") under the Second Amended and
Restated 1996 Stock Purchase and Option Plan for Domain Energy Corporation and
its affiliates, as defined in Rule 12b-2 of the Exchange Act ("Affiliates") (as
proposed to be adopted by the stockholders of the Company at their 1998 Annual
Meeting (the "Company Employee Plan") and the Domain Energy Corporation 1997
Stock Option Plan for Nonemployee Directors (the "Company Director Plan") shall
be assumed by Lomak and become an option to purchase that number of shares of
Lomak Common Stock obtained by multiplying the number of shares of Company
Common Stock issuable upon the exercise of such option by the Exchange Ratio at
an exercise price per share equal to the per share exercise price of such option
divided by the Exchange Ratio and otherwise upon the same terms and conditions
as such outstanding options to purchase Company Common Stock; provided, however,
that in the case of any option to which Section 421 of the Code applies by
reason of the qualifications under Section 422 or 423 of such Code, the exercise
price, the number of shares purchasable pursuant to such option and the terms
and conditions of exercise of such option shall comply with Section 424(a) of
the Code.
(b) At the Effective Time, automatically and without any action by any
Person, (i) each outstanding Company Stock Option that constitutes a "Time
Option" (as defined in the Company Employee Plan) then held by an employee of
the Company or any of its Subsidiaries and (ii) each outstanding Company Stock
Option issued under the Company Director Plan shall become immediately
exercisable. Further, at the Effective Time and giving effect to consummation of
the Merger, automatically and without any action by any
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Person, Lomak acknowledges and agrees that the Investment Return Hurdle (as
defined in certain of the Amended and Restated Non-Qualified Stock Option
Agreements granted and executed pursuant to the Company Employee Plan) will be
satisfied. Prior to the Effective Time, the Company may amend all Amended and
Restated Non-Qualified Stock Option Agreements granted and executed pursuant to
the Company Employee Plan to provide that after the date hereof, if an
optionee's employment is terminated as a result of death or disability, or if
the Company or Lomak (as successor to the Company's obligations under such
agreements, as contemplated elsewhere herein) terminates the optionee's
employment without Cause (as defined in such agreements), or if the optionee
terminates his or her employment for Good Reason (as defined in such
agreements), all "Performance Options" granted thereunder, if not then
exercisable, shall, upon such termination of employment, automatically and
without any action by any Person, become immediately exercisable. Prior to the
Effective Time, the Company may also amend the Company Director Plan or take
such other action in each case to the extent necessary so that all stock options
granted pursuant thereto shall become fully exercisable.
(c) Lomak shall take all corporate actions necessary to reserve for
issuance a sufficient number of shares of Lomak Common Stock for delivery upon
exercise of Company Stock Options assumed by Lomak pursuant to Section 3.3(a)
above.
(d) As promptly as practicable after the Effective Time, Lomak shall file a
Registration Statement on Form S-8 (or any successor or other appropriate forms)
with respect to the shares of Lomak Common Stock subject to Company Stock
Options and shall use all reasonable efforts to maintain the effectiveness of
such registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as such
options remain outstanding.
(e) Except as provided herein or as otherwise agreed to by the parties,
each of the Company Employee Plan and the Company Director Plan and related
stock option grant agreements providing for the issuance or grant of options in
respect to the stock of the Company shall be assumed as of the Effective Time by
Lomak with such amendments thereto as are permitted hereunder or as otherwise
may be required (i) to give effect to the provisions of this Agreement and (ii)
to reflect the Merger.
(f) In connection with the submission of the Proxy Statement/Prospectus to
its stockholders, Lomak shall seek such stockholder approval as may be necessary
so that grants of options and issuances of securities pursuant to the exercise
of such options under the Company stock option plans assumed by it hereunder, as
amended, and all other Company stock option plans as in effect on the date
hereof shall qualify for the exemption for such issuances provided by Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Section 3.4 No Fractional Shares. No fractional shares of Lomak Common
Stock shall be issued in the Merger and fractional share interests shall not
entitle the owner thereof to vote or to any rights of a stockholder of Lomak.
All holders of fractional shares of Lomak Common Stock shall be entitled to
receive, in lieu thereof, an amount in cash determined by multiplying the
fraction of a share of Lomak Common Stock to which such holder would otherwise
have been entitled by the Closing Date Market Price of Lomak Common Stock on the
NYSE.
Section 3.5 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Vinson & Elkins
L.L.P., 2300 First City Tower, Houston, Texas, or at such other location as
shall be mutually acceptable to Lomak and the Company, at 10:00 a.m., local
time, on the first day (the "Closing Date") on which all of the conditions set
forth in Article VIII hereof are satisfied or waived, or at such other date and
time as Lomak and the Company shall agree in writing.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Lomak and Merger Sub as follows:
Section 4.1 Organization and Qualification.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, is duly qualified to do
business as a foreign corporation and is in good standing in the jurisdictions
set forth in Section 4.1(a) of the disclosure letter delivered to Lomak and
Merger Sub contemporaneously with the execution hereof (the "Company Disclosure
Schedule"), which include each jurisdiction in which the character of the
Company's properties or the nature of its business makes such qualification
necessary, except in jurisdictions, if any, where the failure to be so qualified
would not result in a Company Material Adverse Effect (as defined below). The
Company has all requisite corporate power and authority to own, use or lease its
properties and to carry on its business as it is now being conducted and as it
is now proposed to be conducted. The Company has made available to Lomak and
Merger Sub a complete and correct copy of its certificate of incorporation and
bylaws, each as amended to date, and the Company's certificate of incorporation
and bylaws as so delivered are in full force and effect. The Company is not in
default in any respect in the performance, observation or fulfillment of any
provision of its certificate of incorporation or bylaws.
(b) Section 4.1(b) of the Company Disclosure Schedule lists the name and
jurisdiction of organization of each Subsidiary of the Company and the
jurisdictions in which each such Subsidiary (as defined below) is qualified or
holds licenses to do business as a foreign corporation or other organization as
of the date hereof. Each of the Company's Subsidiaries is a corporation or other
legal entity duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization, is duly qualified to do business as a
foreign corporation or other legal entity and is in good standing in the
jurisdictions listed in Section 4.1(b) of the Company Disclosure Schedule, which
includes each jurisdiction in which the character of such Subsidiary's
properties or the nature of its business makes such qualification necessary,
except in jurisdictions, if any, where the failure to be so qualified would not
result in a Company Material Adverse Effect. Each of the Company's Subsidiaries
has the requisite corporate or other power and authority to own, use or lease
its properties and to carry on its business as it is now being conducted and as
it is now proposed to be conducted. The Company has made available to Lomak and
Merger Sub a complete and correct copy of the certificate of incorporation and
bylaws (or similar organizational documents) of each of the Company's
Subsidiaries, each as amended to date, and the certificate of incorporation and
bylaws (or similar organizational documents) as so delivered are in full force
and effect. No Subsidiary of the Company is in default in any respect in the
performance, observation or fulfillment of any provision of its certificate of
incorporation or bylaws (or similar organizational documents). Other than the
Company's Subsidiaries, the Company does not own (beneficially or otherwise) or
control, directly or indirectly, 5% or more of any class of equity or similar
securities of any corporation or other organization, whether incorporated or
unincorporated.
(c) For purposes of this Agreement, (i) a "Company Material Adverse Effect"
shall mean any event, circumstance, condition, development or occurrence (x)
causing, resulting in or having (or with the passage of time likely to cause,
result in or have) a material adverse effect on the financial condition,
business, assets, properties, prospects or results of operations of the Company
and its Subsidiaries, taken as a whole, or (y) preventing or delaying in any
material respect the consummation of the transactions contemplated by this
Agreement or any Ancillary Agreement by the Company or any of its Subsidiaries;
provided, that such term shall not include effects that result from market
conditions generally in the oil and gas industry; and (ii) "Subsidiary" shall
mean, with respect to any party, any corporation or other organization, whether
incorporated or unincorporated, of which (x) at least a majority of the
securities or other interests having by their terms voting power to elect a
majority of the Board of Directors or others performing similar functions with
respect to such corporation or other organization is directly or indirectly
beneficially owned or controlled by such party or by any one or more of its
subsidiaries, or by such party and one or more of its subsidiaries, or (y) such
party or any Subsidiary of such party is a general partner of a partnership or a
manager of a limited liability company.
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Section 4.2 Capitalization.
(a) The authorized capital stock of the Company consists of 25,000,000
shares of Company Common Stock. As of the date of this Agreement, (i) 15,107,719
shares of Company Common Stock were issued and outstanding and (ii) stock
options to acquire 962,527 shares of Company Common Stock were outstanding under
all stock option plans and agreements of the Company. All of the outstanding
shares of Company Common Stock are validly issued, fully paid and nonassessable,
and free of preemptive rights. Section 4.2(a) of the Company Disclosure Schedule
sets forth each optionee under the Company Stock Options and the numbers of
shares of Company Common Stock issuable upon exercise of such Company Stock
Options. Except as set forth in Section 4.2(a) of the Company Disclosure
Schedule, there are no outstanding subscriptions, options, rights, warrants,
convertible securities, stock appreciation rights, phantom equity, or other
agreements or commitments obligating the Company to issue, transfer, sell,
redeem, repurchase or otherwise acquire any shares of its capital stock of any
class.
(b) Except as set forth in Section 4.2(b) of the Company Disclosure
Schedule and except as expressly contemplated by this Agreement, the Company is,
directly or indirectly, the record and beneficial owner of all of the
outstanding shares of capital stock of each Company Subsidiary, there are no
irrevocable proxies with respect to any such shares, and no equity securities of
any Company Subsidiary are or may become required to be issued by reason of any
options, warrants, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
or exercisable for, shares of any capital stock of any Company Subsidiary, and
there are no contracts, commitments, understandings or arrangements by which the
Company or any Company Subsidiary is or may be bound to issue additional shares
of capital stock of any Company Subsidiary or securities convertible into or
exchangeable or exercisable for any such shares. All of such shares so owned by
the Company are validly issued, fully paid and nonassessable and, except as set
forth in Section 4.2(b) of the Company Disclosure Schedule, are owned by it free
and clear of all Liens.
Section 4.3 Authority. The Company has full corporate power and authority
to execute and deliver this Agreement and the other agreements contemplated
hereby (the "Ancillary Agreements") to which the Company is or will be a party
and to consummate the transactions contemplated hereby and thereby. The
execution, delivery and performance of this Agreement and the Ancillary
Agreements to which the Company is or will be a party and the consummation of
the transactions contemplated hereby and thereby have been duly and validly
authorized by the Company's Board of Directors, and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
and the Ancillary Agreements to which the Company is or will be a party or to
consummate the transactions contemplated hereby or thereby, other than the
approval of this Agreement and the Merger by its stockholders as contemplated by
Section 7.13 hereof. This Agreement has been, and the Ancillary Agreements to
which the Company is or will be a party are, or upon execution will be, duly and
validly executed and delivered by the Company and, assuming the due
authorization, execution and delivery hereof and thereof by the other parties
hereto and thereto, constitute, or upon execution will constitute, valid and
binding obligations of the Company enforceable against the Company in accordance
with their respective terms, except as such enforceability may be subject to the
effects of bankruptcy, insolvency, reorganization, moratorium and other laws
relating to or affecting the rights of creditors and of general principles of
equity (the "Enforceability Exception"). The Company has taken all actions
necessary to satisfy or render inapplicable the restrictions on business
combinations contained in Section 203 of the DGCL with respect to the
transactions contemplated hereby, including the Merger, as well as the execution
and delivery by Lomak and First Reserve Fund VII, Limited Partnership, a
Delaware limited partnership (the "Principal Stockholder"), of each of that
certain Stock Purchase Agreement dated of even date herewith (the "Stock
Purchase Agreement") and that certain Voting and Standstill Agreement dated of
even date herewith (the "Voting Agreement"), as well as the consummation of the
transactions contemplated by each such agreement. No other state takeover
statute or similar statute or regulation of the State of Delaware (and, to the
knowledge of the Company, of any other domestic state or jurisdiction) applies
or purports to apply to the Company or any of its Subsidiaries, or to this
Agreement, the Merger, the Stock Purchase Agreement, the Voting Agreement or any
of the other transactions contemplated hereby or thereby.
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Section 4.4 Consents and Approvals; No Violation. The execution and
delivery of this Agreement, the consummation of the transactions contemplated
hereby and the performance by the Company of its obligations hereunder will not:
(a) subject to the obtaining of any requisite approvals of the Company's
stockholders as contemplated by Section 7.13 hereof, conflict with any provision
of the Company's certificate of incorporation or bylaws or the certificates of
incorporation or bylaws (or other similar organizational documents) of any of
its Subsidiaries;
(b) require on the part of the Company or any of its Subsidiaries or
Affiliates any consent, waiver, approval, order, authorization or permit of, or
registration, filing with or notification to, (i) any governmental or regulatory
authority or agency (a "Governmental Authority"), except for applicable
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
the Exchange Act, state laws relating to takeovers, if applicable, state
securities or blue sky laws and Customary Post-Closing Consents (as defined
below), (ii) filings by the Principal Stockholder under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") or (iii) except
as set forth in Section 4.4(b) of the Company Disclosure Schedule, any third
party other than a Governmental Authority, other than such non-Governmental
Authority third party consents, waivers, approvals, orders, authorizations and
permits that would not (A) result in a Company Material Adverse Effect or (B)
materially impair the ability of the Company or any of its Subsidiaries, as the
case may be, to perform its obligations under this Agreement or any Ancillary
Agreement;
(c) except as set forth in Section 4.4(c) of the Company Disclosure
Schedule, result in any violation of or the breach of or constitute a default
(with notice or lapse of time or both) under, or give rise to any right of
termination, cancellation or acceleration or guaranteed payments or a loss of a
material benefit under, any of the terms, conditions or provisions of any note,
lease, mortgage, indenture, license, agreement or other instrument or obligation
to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries or any of their respective properties or
assets may be bound, except for such violations, breaches, defaults, or rights
of termination, cancellation or acceleration, or losses as to which requisite
waivers or consents have been obtained or which, individually or in the
aggregate, would not (i) result in a Company Material Adverse Effect or (ii)
materially impair the ability of the Company or any of its Subsidiaries to
perform its obligations under this Agreement or any Ancillary Agreement;
(d) violate the provisions of any order, writ, injunction, judgment,
decree, statute, rule or regulation applicable to the Company or any Subsidiary
of the Company;
(e) result in the creation of any Lien upon any shares of capital stock,
properties or assets of the Company or any of its Subsidiaries under any
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries or any of their
respective properties or assets may be bound; or
(f) result in any holder of any securities of the Company being entitled to
appraisal, dissenters' or similar rights.
Section 4.5 Company SEC Reports. The Company has filed with the SEC, and
has heretofore made available to Lomak and Merger Sub true and complete copies
of, each form, registration statement, report, schedule, proxy or information
statement and other document (including exhibits and amendments thereto),
including without limitation its Annual Reports to Stockholders incorporated by
reference in certain of such reports, required to be filed with the SEC since
December 31, 1996 under the Securities Act or the Exchange Act (collectively,
the "Company SEC Reports"). As of the respective dates such Company SEC Reports
were filed or, if any such Company SEC Reports were amended, as of the date such
amendment was filed, each of the Company SEC Reports, including without
limitation any financial statements or schedules included therein, (a) complied
in all material respects with all applicable requirements of the Securities Act
and the Exchange Act, as the case may be, and the applicable rules and
regulations promulgated thereunder, and (b) did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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Section 4.6 Financial Statements. Each of the audited consolidated
financial statements and unaudited consolidated interim financial statements of
the Company (including any related notes and schedules) included (or
incorporated by reference) in its Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (collectively, the "Company Financial Statements") have
been prepared from, and are in accordance with, the books and records of the
Company and its consolidated Subsidiaries, comply in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with United
States generally accepted accounting principles ("GAAP") applied on a consistent
basis (except as may be indicated in the notes thereto and subject, in the case
of quarterly financial statements, to normal and recurring year-end adjustments
that are not material individually or in the aggregate) and fairly present, in
conformity with GAAP applied on a consistent basis (except as may be indicated
in the notes thereto), the consolidated financial position of the Company and
its Subsidiaries as of the date thereof and the consolidated results of
operations and cash flows (and changes in financial position, if any) of the
Company and its Subsidiaries for the periods presented therein (subject to
normal year-end adjustments that are not material individually or in the
aggregate and the absence of financial footnotes in the case of any unaudited
interim financial statements).
Section 4.7 Absence of Undisclosed Liabilities. Except (a) as specifically
disclosed in the Company SEC Reports and (b) for liabilities and obligations
incurred in the ordinary course of business and consistent with past practice
since December 31, 1997, neither the Company nor any of its Subsidiaries has
incurred any liabilities or obligations of any nature (contingent or otherwise)
that would have a Company Material Adverse Effect or would be required by GAAP
to be reflected on a consolidated balance sheet of the Company and its
Subsidiaries or the notes thereto which is not so reflected.
Section 4.8 Absence of Certain Changes. Except as disclosed in the Company
SEC Reports or as expressly contemplated by this Agreement, since December 31,
1997 (a) the Company and its Subsidiaries have conducted their business in all
material respects in the ordinary course consistent with past practices, (b)
there has not been any change or development, or combination of any of the
foregoing that, individually or in the aggregate, would have a Company Material
Adverse Effect, (c) there has not been any declaration, setting aside or payment
of any dividend or other distribution with respect to any shares of capital
stock of the Company, or any repurchase, redemption or other acquisition by the
Company or any of its Subsidiaries of any outstanding shares of capital stock or
other securities of, or other ownership interests in, the Company or any of its
Subsidiaries, (d) there has not been any amendment of any term of any
outstanding security of the Company or any of its Subsidiaries, and (e) there
has not been any change in any method of accounting or accounting practice by
the Company or any of its Subsidiaries, except for any such change required by
reason of a concurrent change in GAAP or to conform a Subsidiary's accounting
policies and practices to those of the Company.
Section 4.9 Taxes. Except as otherwise disclosed in Section 4.9 of the
Company Disclosure Schedule (and for matters that would have no adverse effect
on the Company):
(a) The Company and each of its Subsidiaries have timely filed (or have had
timely filed on their behalf) or will file or cause to be timely filed, all
material Tax Returns (as defined below) required by applicable law to be filed
by any of them prior to or as of the Closing Date. All such Tax Returns and
amendments thereto are or will be true, complete and correct in all material
respects.
(b) The Company and each of its Subsidiaries have paid (or have had paid on
their behalf), or where payment is not yet due, have established (or have had
established on their behalf and for their sole benefit and recourse), or will
establish or cause to be established on or before the Closing Date, an adequate
accrual for the payment of all material Taxes due with respect to any period
ending prior to or as of the Closing Date.
(c) No Audit by a Tax Authority is pending or threatened with respect to
any Tax Returns filed by, or Taxes due from, the Company or any Subsidiary of
the Company. No issue has been raised by any Tax Authority in any Audit of the
Company or any of its Subsidiaries that if raised with respect to any other
period not so audited could be expected to result in a material proposed
deficiency for any period not so audited. No material deficiency or adjustment
for any Taxes has been threatened, proposed, asserted or assessed against
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the Company or any of its Subsidiaries. There are no liens for Taxes upon the
assets of the Company or any of its Subsidiaries, except liens for current Taxes
not yet delinquent.
(d) Neither the Company nor any of its Subsidiaries has given or been
requested to give any waiver of statutes of limitations relating to the payment
of Taxes or has executed powers of attorney with respect to Tax matters that
will be outstanding as of the Closing Date.
(e) Prior to the date hereof, the Company and its Subsidiaries have
disclosed, and provided or made available true and complete copies to Lomak of,
all material Tax sharing, Tax indemnity, or similar agreements to which the
Company or any of its Subsidiaries is a party to, is bound by, or has any
obligation or liability for Taxes.
(f) As used in this Agreement, (i) "Audit" shall mean any audit, assessment
of Taxes, other examination by any Tax Authority, proceeding or appeal of such
proceeding relating to Taxes; (ii) "Taxes" shall mean all Federal, state, local
and foreign taxes, and other assessments of a similar nature (whether imposed
directly or through withholding), including any interest, additions to tax, or
penalties applicable thereto; (iii) "Tax Authority" shall mean the Internal
Revenue Service and any other domestic or foreign Governmental Authority
responsible for the administration of any Taxes; and (iv) "Tax Returns" shall
mean all Federal, state, local and foreign tax returns, declarations,
statements, reports, schedules, forms and information returns and any amended
Tax Return relating to Taxes.
Section 4.10 Litigation. Except as disclosed in the Company SEC Reports or
Section 4.10 of the Company Disclosure Schedule, there is no suit, claim,
action, proceeding or investigation pending or, to the Company's knowledge,
threatened against or directly affecting the Company, any Subsidiary of the
Company or any of the directors or officers of the Company or any of its
Subsidiaries in their capacity as such, nor is there any reasonable basis
therefor that could reasonably be expected to have a Company Material Adverse
Effect, if adversely determined. Neither the Company nor any of its
Subsidiaries, nor any officer, director or employee of the Company or any of its
Subsidiaries, has been permanently or temporarily enjoined by any order,
judgment or decree of any court or any other Governmental Authority from
engaging in or continuing any conduct or practice in connection with the
business, assets or properties of the Company or such Subsidiary nor, to the
knowledge of the Company, is the Company, any Subsidiary of the Company or any
officer, director or employee of the Company or its Subsidiaries under
investigation by any Governmental Authority. Except as disclosed in the Company
SEC Reports or Section 4.10 of the Company Disclosure Schedule, there is not in
existence any order, judgment or decree of any court or other tribunal or other
agency enjoining or requiring the Company or any of its Subsidiaries to take any
action of any kind with respect to its business, assets or properties.
Notwithstanding the foregoing, no representation or warranty in this Section
4.10 is made with respect to Environmental Laws, which are covered exclusively
by the provisions set forth in Section 4.12.
Section 4.11 Employee Benefit Plans; ERISA.
(a) Section 4.11(a) of the Company Disclosure Schedule contains a true and
complete list of the employee benefit plans or arrangements of any type
(including but not limited to plans described in section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), sponsored,
maintained or contributed to by the Company or any trade or business, whether or
not incorporated, which together with the Company would be deemed a "single
employer" within the meaning of Section 414(b), (c) or (m) of the Code or
section 4001(b)(1) of ERISA (a "Company ERISA Affiliate") within six years prior
to the Effective Time, which provide benefits to the Company's employees
("Company Benefit Plans").
(b) With respect to each Company Benefit Plan: (i) if intended to qualify
under Section 401(a) or 401(k) of the Code, such plan satisfies the requirements
of such sections, has received a favorable determination letter from the
Internal Revenue Service with respect to its qualification, and its related
trust has been determined to be exempt from tax under Section 501(a) of the Code
and, to the knowledge of the Company, nothing has occurred since the date of
such letter to adversely affect such qualification or exemption; (ii) each such
plan has been administered in substantial compliance with its terms and
applicable law; (iii) neither the Company nor any Company ERISA Affiliate has
engaged in, and the Company and each
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Company ERISA Affiliate does not have any knowledge of any Person that has
engaged in, any transaction or acted or failed to act in any manner that would
subject the Company or any Company ERISA Affiliate to any liability for a breach
of fiduciary duty under ERISA that could reasonably be expected to result in a
Company Material Adverse Effect; (iv) no disputes are pending or, to the
knowledge of the Company or any Company ERISA Affiliate, threatened; (v) neither
the Company nor any Company ERISA Affiliate has engaged in, and the Company and
each Company ERISA Affiliate do not have any knowledge of any Person that has
engaged in, any transaction in violation of section 406(a) or (b) of ERISA for
which no exemption exists under Section 4975(c)(1) of the Code or Section
4975(d) of the Code that could reasonably be expected to result in a Company
Material Adverse Effect; (vi) there have been no "reportable events" within the
meaning of section 4043 of ERISA for which the 30 day notice requirement of
ERISA has not been waived by the Pension Benefit Guaranty Corporation (the
"PBGC"); (vii) all contributions due have been made on a timely basis (within,
where applicable, the time limit established under section 302 of ERISA or Code
Section 412); (viii) no notice of intent to terminate such plan has been given
under section 4041 of ERISA and no proceeding has been instituted under section
4042 of ERISA to terminate such plan; and (ix) except for defined benefit plans,
such plan may be terminated on a prospective basis without any continuing
liability for benefits other than benefits accrued to the date of such
termination. All contributions made or required to be made under any Company
Benefit Plan meet the requirements for deductibility under the Code, and all
contributions which are required and which have not been made have been properly
recorded on the books of the Company or a Company ERISA Affiliate.
(c) No Company Benefit Plan is a "multiemployer plan" (as defined in
section 4001(a)(3) of ERISA) or a "multiple employer plan" (within the meaning
of Section 413(c) of the Code). No event has occurred with respect to the
Company or a Company ERISA Affiliate in connection with which the Company could
be subject to any liability, lien or encumbrance with respect to any Company
Benefit Plan or any employee benefit plan described in section 3(3) of ERISA
maintained, sponsored or contributed to by a Company ERISA Affiliate under ERISA
or the Code.
(d) Except as set forth in Section 4.11(d) of the Company Disclosure
Schedule, no employees of the Company or any of its Subsidiaries are covered by
any severance plan or similar arrangement.
Section 4.12 Environmental Liability. Except as set forth in Section 4.12
of the Company Disclosure Schedule:
(a) The businesses of the Company and its Subsidiaries have been and are
operated in material compliance with all federal, state and local environmental
protection, health and safety or similar laws, statutes, ordinances,
restrictions, licenses, rules, regulations, permit conditions and legal
requirements, including without limitation the Federal Clean Water Act, Safe
Drinking Water Act, Resource Conservation & Recovery Act, Clean Air Act,
Comprehensive Environmental Response, Compensation and Liability Act, and
Emergency Planning and Community Right to Know, each as amended and currently in
effect (together, "Environmental Laws").
(b) Neither the Company nor any of its Subsidiaries has caused or allowed
the generation, treatment, manufacture, processing, distribution, use, storage,
discharge, release, disposal, transport or handling of any chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum, petroleum products or any substance regulated under any Environmental
Law ("Hazardous Substances") at any of its properties or facilities, except in
material compliance with all Environmental Laws, and, to the Company's
knowledge, no generation, manufacture, processing, distribution, use, treatment,
handling, storage, discharge, release, disposal, transport or handling of any
Hazardous Substances has occurred at any property or facility owned, leased or
operated by the Company or any of its Subsidiaries except in material compliance
with all Environmental Laws.
(c) Neither the Company nor any of its Subsidiaries has received any
written notice from any Governmental Authority or, to the knowledge of the
Company, any other communication alleging or concerning any material violation
by the Company or any of its Subsidiaries of, or responsibility or liability of
the Company or any of its Subsidiaries under, any Environmental Law. There are
no pending, or to the knowledge of the Company, threatened, claims, suits,
actions, proceedings or investigations with respect to the
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businesses or operations of the Company or any of its Subsidiaries alleging or
concerning any material violation of or responsibility or liability under any
Environmental Law that, if adversely determined, could reasonably be expected to
have a Company Material Adverse Effect, nor does the Company have any knowledge
of any fact or condition that could give rise to such a claim, suit, action,
proceeding or investigation.
(d) The Company and its Subsidiaries are in possession of all material
approvals, permits, licenses, registrations and similar type authorizations from
all Governmental Authorities under all Environmental Laws with respect to the
operation of the businesses of the Company and its Subsidiaries; there are no
pending or, to the knowledge of the Company, threatened, actions, proceedings or
investigations seeking to modify, revoke or deny renewal of any of such
approvals, permits, licenses, registrations and authorizations; and the Company
does not have knowledge of any fact or condition that is reasonably likely to
give rise to any action, proceeding or investigation to modify, revoke or deny
renewal of any of such approvals, permits, licenses, registrations and
authorizations.
(e) Without in any way limiting the generality of the foregoing, (i) all
off-site locations where the Company or any of its Subsidiaries has transported,
released, discharged, stored, disposed or arranged for the disposal of
pollutants, contaminants, hazardous wastes or toxic substances required by law
to be disposed at a licensed disposal site are identified in Section 4.12 of the
Company Disclosure Schedule, (ii) to the Company's knowledge, all underground
storage tanks, and the operating status, capacity and contents of such tanks,
located on any property owned, leased or operated by the Company or any of its
Subsidiaries are identified in Section 4.12 of the Company Disclosure Schedule,
(iii) to the knowledge of the Company, there is no asbestos contained in or
forming part of any building, building component, structure or office space
owned or leased by the Company, and (iv) no polychlorinated biphenyls ("PCBs")
or PCB-containing items are used or stored at any property owned, leased or
operated by the Company or any of its Subsidiaries.
Section 4.13 Compliance with Applicable Laws. The Company and each of its
Subsidiaries holds all material approvals, licenses, permits, registrations and
similar type authorizations necessary for the lawful conduct of its respective
businesses, as now conducted, and such businesses are not being, and neither the
Company nor any of its Subsidiaries has received any notice from any
Governmental Authority or Person that any such business has been or is being
conducted in violation of any law, ordinance or regulation, including without
limitation any law, ordinance or regulation relating to occupational health and
safety, except for possible violations which either individually or in the
aggregate have not resulted and would not result in a Company Material Adverse
Effect; provided, however, notwithstanding the foregoing, no representation or
warranty in this Section 4.13 is made with respect to Environmental Laws, which
are covered exclusively by the provisions set forth in Section 4.12.
Section 4.14 Insurance. Except as disclosed in Section 4.14 of the Company
Disclosure Schedule, the Company and each of its Subsidiaries is, and has been
continuously since January 1, 1997, insured in such amounts and against such
risks and losses as are customary for companies conducting the respective
businesses conducted by the Company and its Subsidiaries during such time
period. Except as disclosed in Section 4.14 of the Company Disclosure Schedule,
neither the Company nor any of its Subsidiaries has received any notice of
cancellation or termination with respect to any material insurance policy
thereof. All material insurance policies of the Company and its Subsidiaries are
valid and enforceable policies.
Section 4.15 Labor Matters; Employees.
(a) Except as set forth in Section 4.15 of the Company Disclosure Schedule,
(i) there is no labor strike, dispute, slowdown, work stoppage or lockout
actually pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries and, during the past five
years, there has not been any such action, (ii) none of the Company or any of
its Subsidiaries is a party to or bound by any collective bargaining or similar
agreement with any labor organization, or work rules or practices agreed to with
any labor organization or employee association applicable to employees of the
Company or any of its Subsidiaries, (iii) none of the employees of the Company
or any of its Subsidiaries are represented by any labor organization and none of
the Company or any of its Subsidiaries have any knowledge of any current union
organizing activities among the employees of the Company or any of its
Subsidiaries nor does any question concerning representation exist concerning
such employees, (iv) the Company and its Subsidiaries
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have each at all times been in material compliance with all applicable laws
respecting employment and employment practices, terms and conditions of
employment, wages, hours of work and occupational safety and health, and are not
engaged in any unfair labor practices as defined in the National Labor Relations
Act or other applicable law, ordinance or regulation, (v) there is no unfair
labor practice charge or complaint against any of the Company or any of its
Subsidiaries pending or, to the knowledge of the Company, threatened before the
National Labor Relations Board or any similar state or foreign agency, (vi)
there is no grievance or arbitration proceeding arising out of any collective
bargaining agreement or other grievance procedure relating to the Company or any
of its Subsidiaries, and (vii) neither the Occupational Safety and Health
Administration nor any corresponding state agency has threatened to file any
citation, and there are no pending citations, relating to the Company or any of
its Subsidiaries.
(b) Since the enactment of the Worker Adjustment and Retraining
Notification Act of 1988 ("WARN Act"), none of the Company or any of its
Subsidiaries has effectuated (i) a "plant closing" (as defined in the WARN Act)
affecting any site of employment or one or more facilities or operating units
within any site of employment or facility of any of the Company or any of its
Subsidiaries, or (ii) a "mass layoff" (as defined in the WARN Act) affecting any
site of employment or facility of the Company or any of its Subsidiaries, nor
has the Company or any of its Subsidiaries been affected by any transaction or
engaged in layoffs or employment terminations sufficient in number to trigger
application of any similar state or local law, in each case that could
reasonably be expected to have a Company Material Adverse Effect.
Section 4.16 Reserve Reports.
(a) Except as set forth in Section 4.16(a) of the Company Disclosure
Schedule, all information supplied to Netherland, Sewell & Associates, Inc. and
DeGolyer & MacNaughton by or on behalf of the Company and its Subsidiaries that
was material to each such firm's estimates of proved oil and gas reserves
attributable to the Oil and Gas Interests of the Company and its Subsidiaries in
connection with the preparation of the proved oil and gas reserve reports
concerning the Oil and Gas Interests of the Company and its Subsidiaries as of
December 31, 1997 and prepared by Netherland, Sewell & Associates, Inc. and
DeGolyer & MacNaughton, respectively (such reserve reports, the "Company Reserve
Report"), was (at the time supplied or as modified or amended prior to the
issuance of the Company Reserve Report) true and correct in all material
respects and the Company has no knowledge of any material errors in such
information that existed at the time of such issuance. For purposes of this
Agreement, "Oil and Gas Interests" means direct and indirect interests in and
rights with respect to oil, gas, mineral, and related properties and assets of
any kind and nature, direct or indirect, including working, leasehold and
mineral interests and operating rights and royalties, overriding royalties,
production payments, net profit interests and other nonworking interests and
nonoperating interests; all interests in rights with respect to oil, condensate,
gas, casinghead gas and other liquid or gaseous hydrocarbons (collectively,
"Hydrocarbons") and other minerals or revenues therefrom, all contracts in
connection therewith and claims and rights thereto (including all oil and gas
leases, operating agreements, unitization and pooling agreements and orders,
division orders, transfer orders, mineral deeds, royalty deeds, oil and gas
sales, exchange and processing contracts and agreements, and in each case,
interests thereunder), surface interests, fee interests, reversionary interests,
reservations, and concessions; all easements, rights of way, licenses, permits,
leases, and other interests associated with, appurtenant to, or necessary for
the operation of any of the foregoing; and all interests in equipment and
machinery (including wells, well equipment and machinery), oil and gas
production, gathering, transmission, treating, processing, and storage
facilities (including tanks, tank batteries, pipelines, and gathering systems),
pumps, water plants, electric plants, gasoline and gas processing plants,
refineries, and other tangible personal property and fixtures associated with,
appurtenant to, or necessary for the operation of any of the foregoing. Except
for changes (including changes in commodity prices) generally affecting the oil
and gas industry, there has been no change in respect of the matters addressed
in the Company Reserve Report that would have a Company Material Adverse Effect.
(b) Set forth in Section 4.16(b) of the Company Disclosure Schedule is a
list of all material Oil and Gas Interests that were included in the Company
Reserve Report that have been disposed of prior to the date of this Agreement.
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Section 4.17 Oil and Gas Reserves; Equipment. Except as otherwise set
forth in Section 4.17 of the Company Disclosure Schedule:
(a) None of the wells included in the Oil and Gas Interests of the Company
and its Subsidiaries has been overproduced, except where such overproduction
individually, or in the aggregate with all other such overproduction, would not
have a Company Material Adverse Effect;
(b) There have been no material changes proposed in the production
allowables for any wells included in the Oil and Gas Interests of the Company
and its Subsidiaries;
(c) All wells included in the Oil and Gas Interests of the Company and its
Subsidiaries have been drilled and (if completed) completed, operated, and
produced in accordance with good oil and gas field practices and in compliance
in all respects with applicable oil and gas leases and applicable laws, rules,
and regulations, except where any failure or violation would not have a Company
Material Adverse Effect;
(d) Except as set forth in Section 4.17(d) of the Company Disclosure
Schedule, there are no wells included in the Oil and Gas Interests of the
Company and its Subsidiaries that:
(i) the Company or any of its Subsidiaries is currently obligated by
law or contract to plug and abandon or will be obligated by law or contract
to plug and abandon with the lapse of time or notice or both because the
well is not currently capable of producing in commercial quantities, except
for such wells that will not individually, or in the aggregate with all
other such wells, result in the Company and its Subsidiaries incurring
plugging and abandonment costs (net of salvage value) in an amount in
excess of $2,000,000;
(ii) are subject to exceptions to a requirement to plug and abandon
issued by a Governmental Authority having jurisdiction over the wells; or
(iii) have been plugged and abandoned but have not been plugged or
reclaimed in accordance with all applicable requirements of each
Governmental Authority having jurisdiction over such wells;
(e) Proceeds from the sale of Hydrocarbons produced from the Oil and Gas
Interests of the Company and its Subsidiaries are being received by the Company
and its Subsidiaries in a timely manner and are not being held by third parties
in suspense for any reason (except for amounts, individually or in the
aggregate, not in excess of $250,000 and held in suspense in the ordinary course
of business);
(f) No Person has any call on, option to purchase, or similar rights with
respect to the production of Hydrocarbons attributable to the Oil and Gas
Interests of the Company and its Subsidiaries, except where any call, option or
similar right would not have a Company Material Adverse Effect and except for
any such call, option or similar right at market prices, and upon consummation
of the transactions contemplated by this Agreement, the Company or its
Subsidiaries will have the right to market production from the Oil and Gas
Interests of the Company and its Subsidiaries on terms no less favorable than
the terms upon which such production is currently being marketed;
(g) Except for gas imbalances between the Company or any of its
Subsidiaries and any third party working interest owners or pipelines relative
to the Oil and Gas Interests of the Company or any of its Subsidiaries, which
gas imbalances (to the extent constituting overproduction or underproduction
from the wells in which the Company or any of its Subsidiaries has an interest)
are described in Section 4.17(g) of the Company Disclosure Schedule, neither the
Company nor any of its Subsidiaries is obligated by any gas prepayment
arrangement or by any "take-or-pay" requirement to deliver any gas at a future
time without then or thereafter receiving payment therefor;
(h) To the knowledge of the Company, all equipment and machinery currently
in use and material to the operation of the Oil and Gas Interests of the Company
or any of its Subsidiaries as conducted prior to the date hereof are in
reasonable working condition, ordinary wear and tear excepted; and
(i) With respect to Oil and Gas Interests of the Company and its
Subsidiaries that are not operated by the Company or any of its Subsidiaries,
the Company makes the foregoing representations and warranties set
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forth in paragraphs (b), (c) and (d)(iii) of this Section 4.17 and those set
forth in Sections 4.12, 4.13 and 4.20 only to its knowledge.
Section 4.18 Title to Oil and Gas Interests.
(a) Except as set forth in Section 4.18 of the Company Disclosure Schedule,
the Company or its Subsidiaries has defensible title to all of the Oil and Gas
Interests classified as proved developed producing, proved developed
nonproducing and proved undeveloped in the Company Reserve Report (each, a
"Company Classified Property") except to the extent that such interests have
thereafter been disposed of in the ordinary course of business consistent with
past practice. For the purposes of this Agreement, "defensible title" means,
with respect to any Company Classified Property, such record and beneficial
title that (x) entitles the party named to receive, from its ownership of such
interest, a percentage of all Hydrocarbons produced, saved, and marketed from
each well or property included in the Company Classified Properties not less
than the net revenue interest set forth in the Company Reserve Report for such
well or property, without reduction, suspension, or termination for the
productive life of such well or property, except as a result of elections not to
participate in an operation under an applicable operating, unit or other
agreement, or readjustments of interest provided for under the terms of the
applicable operating, unit or other agreement, in each case, after the date
hereof; (y) obligates the party named to bear a percentage of the costs and
expenses relating to operations on, and the maintenance and production of, such
well or property, not greater than the working or operating interest set forth
in the Company Reserve Report without increase for the productive life of such
well or property, except as a result of an election of other parties not to
participate in an operation under an applicable operating, unit or other
agreement, contribution requirements with respect to defaulting co-owners, or
readjustments of interest provided for under the terms of the applicable
operating or unit agreement, in each case, after the date hereof; and (z) is
free and clear of any liens, mortgages, pledges, security interests,
encumbrances, claims or charges of any kind (collectively, "Liens") except the
Company Permitted Encumbrances. For the purposes of this Agreement, "Company
Permitted Encumbrances" means (i) royalties, overriding royalties, reversionary
interests and similar burdens if the cumulative effect of such burdens does not
and will not reduce the net revenue interest with respect to a well or property
below the net revenue interest shown therefor in the Company Reserve Report or
increase the working interest with respect to such well or property above the
working interest shown therefor in the Company Reserve Report; (ii) the terms
and conditions of all leases, servitudes, production sales contracts, division
orders, contracts for sale, purchase, exchange, refining or processing of
Hydrocarbons, unitization and pooling designations, declarations, orders and
agreements, operating agreements, agreements of development, area of mutual
interest agreements, farmout agreements, gas balancing or deferred production
agreements, processing agreements, plant agreements, pipeline, gathering and
transportation agreements, injection, repressuring and recycling agreements,
salt water or other disposal agreements, seismic or geophysical permits or
agreements, and other agreements including, without limitation, the terms and
conditions of any and all contracts and agreements set forth in the Company
Reserve Report covering production sales contracts and all other contracts and
agreements disclosed in such Company Disclosure Schedule, to the extent that
such contracts and agreements do not and will not reduce the net revenue
interest of any well or property included in the Company Classified Properties
below the net revenue interest shown therefor in the Company Reserve Report or
increase the working interest with respect to such well or property above the
working interest shown therefor in the Company Reserve Report without a
proportionate increase in the net revenue interest with respect to such well or
property; (iii) easements, rights of way, servitudes, permits, surface leases
and other rights with respect to surface obligations, pipelines, grazing,
canals, ditches, reservoirs, or the like, conditions, covenants or other
restrictions, and easements of streets, alleys, highways, pipelines, telephone
lines, power lines, railways and other easements and rights of way on, over or
in respect of any of the Company Classified Properties, so long as they are not
such that would have a Company Material Adverse Effect; (iv) any preferential
purchase rights, required third party consents to assignment and similar
agreements and obligations not applicable to the transactions contemplated
hereby, or if applicable to the transactions contemplated hereby, with respect
to which prior to the Effective Time (A) waivers or consents have been obtained
from the appropriate Person, or (B) the applicable period of time for asserting
such rights has expired without any exercise of such rights; (v) liens for Taxes
or assessments not yet delinquent; (vi) materialmen's, mechanic's, repairman's,
employee's, contractor's, operator's, and other similar liens or charges arising
in the ordinary course of
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business (A) if they have not been filed pursuant to law, (B) if filed, they
have not yet become due and payable or payment is being withheld as provided by
law or (C) if their validity is being contested in good faith in the ordinary
course of business by appropriate action; (vii) approvals that are ministerial
in nature and are customarily obtained from Governmental Authorities after the
Effective Time in connection with transactions of the same nature as are
contemplated hereby ("Customary Post-Closing Consents"); (viii) conventional
rights of reassignment arising in respect of abandonment, cessation of
production or expiration of leases; (ix) all rights reserved to or vested in any
Governmental Authority to control or regulate any of the Company Classified
Properties in any manner, and all applicable laws, rules and orders of
Governmental Authorities; and (x) any other liens, charges, encumbrances,
contracts, agreements, instruments, obligations, defects or irregularities of
any kind whatsoever that would not have a Company Material Adverse Effect or
that are set forth in Section 4.18(a) of the Company Disclosure Schedule.
Notwithstanding the foregoing, title to the Company Classified Properties is of
a type and nature customarily acceptable to the reasonably prudent oil and gas
operator of oil and gas interests.
(b) Except as set forth in Section 4.18(b) of the Company Disclosure
Schedule, (i) each oil and gas lease included in the Oil and Gas Interests of
the Company and its Subsidiaries is valid, binding and enforceable in accordance
with its terms, except for the Enforceability Exception, and (ii) neither the
Company nor the Company Subsidiary that is party to each such lease, nor, to the
knowledge of the Company, any other party to any such lease, is in breach or
default thereunder in any material respect, no notice of default or termination
thereunder has been given or received by the Company or any of its Subsidiaries,
and no event has occurred which would, with the giving of notice or passage of
time or both, constitute a breach or default thereunder or permit termination,
modification or acceleration thereunder that could reasonably be expected to
result in a Company Material Adverse Effect.
Section 4.19 Title to Other Properties. Except as set forth in Section
4.19 of the Company Disclosure Schedule, the Company or its Subsidiaries owns,
of record (to the extent applicable) and beneficially, all material personal
property and all real property (other than oil and gas leasehold interests
included in the Company Classified Properties) in each case, as reflected on the
consolidated financial statements of the Company included in the Company SEC
Documents as being owned by it or any of its Subsidiaries and all such property
thereafter acquired by it or any of its Subsidiaries (except to the extent that
such properties have thereafter been disposed of in the ordinary course of
business consistent with past practice or after the date hereof in compliance
with Section 6.1(d)), free and clear of any Liens except the Company Permitted
Encumbrances.
Section 4.20 Permits. The Company holds all of the permits, licenses,
certificates, consents, approvals, entitlements, plans, surveys, relocation
plans, environmental impact reports and other authorizations of Governmental
Authorities ("Permits") required or necessary to construct, own, operate, use
and/or maintain its properties and conduct its operations as presently
conducted, except for such Permits, the lack of which, individually or in the
aggregate, would not have a Company Material Adverse Effect; provided, however,
that notwithstanding the foregoing, no representation or warranty in this
Section 4.20 is made with respect to Permits issued pursuant to Environmental
Laws, which are covered exclusively by the provisions set forth in Section 4.12.
Section 4.21 Material Contracts.
(a) Set forth in Section 4.21(a) of the Company Disclosure Schedule is a
list of each contract, lease, indenture, agreement, arrangement or understanding
to which the Company or any of its Subsidiaries is a party or to which any of
the assets or operations of the Company or any of its Subsidiaries is subject
that is of a type that would be required to be included as an exhibit to a Form
S-1 Registration Statement pursuant to the rules and regulations of the SEC if
such a registration statement was filed by the Company or is otherwise, in the
judgment of the Company, deemed material to the business of the Company and its
Subsidiaries, taken as a whole (collectively, the "Company Material Contracts").
(b) Except as set forth in Section 4.21(a) or 4.21(b) of the Company
Disclosure Schedule, the Company Oil and Gas Interests are not subject to (i)
any instrument or agreement evidencing or related to indebtedness for borrowed
money, whether directly or indirectly, or (ii) any agreement not entered into in
the
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ordinary course of business in which the amount involved is in excess of
$250,000. With respect to the Company Oil and Gas Interests, (A) all Company
Material Contracts are in full force and effect and are the valid and legally
binding obligations of the parties thereto and are enforceable in accordance
with their respective terms; (B) the Company is not in material breach or
default with respect to its obligations under any Company Material Contract and,
to the knowledge of the Company, no other party to any Company Material Contract
is in material breach or default with respect to its obligations thereunder,
including with respect to payments or otherwise; (C) no party to any Company
Material Contract has given notice of any action to terminate, cancel, rescind
or procure a judicial reformation thereof; and (D) no Company Material Contract
contains any provision that prevents the Company or any of its Subsidiaries from
owning, managing and operating the Company Oil and Gas Interests substantially
in accordance with historical practices.
(c) As of the date of this Agreement, except as set forth in Section
4.21(c) of the Company Disclosure Schedule, with respect to authorizations for
expenditure executed on or after January 1, 1998, (i) there are no material
outstanding calls for payments that are due or that the Company or its
Subsidiaries are committed to make that have not been made; (ii) there are no
material operations with respect to which the Company or its Subsidiaries have
become a nonconsenting party; and (iii) there are no commitments for the
material expenditure of funds for drilling or other capital projects other than
projects with respect to which the operator is not required under the applicable
operating agreement to seek consent.
(d) Except as set forth in Section 4.21(d) of the Company Disclosure
Schedule, (i) there are no express contractual obligations to engage in
continuous development operations in order to maintain any producing Company Oil
and Gas Interest in force and effect; (ii) there are no provisions applicable to
the Company Oil and Gas Interests that increase the royalty percentage of the
lessor thereunder; and (iii) none of the Company Oil and Gas Interests are
limited by terms fixed by a certain number of years (other than primary terms
under oil and gas leases).
Section 4.22 Required Stockholder Vote or Consent. The only vote of the
holders of any class or series of the Company's capital stock that will be
necessary to consummate the Merger and the other transactions contemplated by
this Agreement is the approval of the Merger by the holders of a majority of the
votes cast by holders of Company Common Stock entitled to vote (the "Company
Stockholder Approval").
Section 4.23 Proxy Statement/Prospectus; Registration Statement. None of
the information to be supplied by the Company for inclusion in (a) the proxy
statement relating to the Company Special Meeting and the Lomak Special Meeting
(also constituting the prospectus in respect of Lomak Common Stock into which
shares of Company Common Stock will be converted) (the "Proxy
Statement/Prospectus"), to be filed by the Company and Lomak with the SEC, and
any amendments or supplements thereto, or (b) the Registration Statement on Form
S-4 (the "Registration Statement") to be filed by Lomak with the SEC in
connection with the Merger, and any amendments or supplements thereto, will, (i)
in the case of the Registration Statement, at the time it becomes effective,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading or (ii) in the case of the Proxy Statement/Prospectus, at
the time of the mailing of the Proxy Statement/Prospectus and at the time of the
Company Special Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading. If at any time prior to the Effective Time any event
with respect to the Company, its officers and directors or any of its
Subsidiaries should occur which is required to be described in an amendment of,
or a supplement to, the Proxy Statement/Prospectus or the Registration
Statement, the Company shall notify Lomak thereof by reference to this Section
4.23 and such event shall be so described to Lomak.
Section 4.24 Intellectual Property. The Company and its Subsidiaries own,
or are licensed or otherwise have the right to use, all patents, patent rights,
trademarks, rights, trade names, trade name rights, service marks, service mark
rights, copyrights, technology, know-how, processes and other proprietary
intellectual property rights and computer programs ("Intellectual Property")
currently used in the conduct of the business and operations of the Company and
its Subsidiaries, except where the failure to so own or otherwise have the right
to use such intellectual property would not, individually or in the aggregate,
have a Company Material
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Adverse Effect. No Person has notified either the Company or any of its
Subsidiaries that their use of the Intellectual Property infringes on the rights
of any Person, subject to such claims and infringements as do not, individually
or in the aggregate, give rise to any liability on the part of the Company and
its Subsidiaries that could have a Company Material Adverse Effect, and, to the
Company's knowledge, no Person is infringing on any right of the Company or any
of its Subsidiaries with respect to any such Intellectual Property. No claims
are pending or, to the Company's knowledge, threatened that the Company or any
of its Subsidiaries is infringing or otherwise adversely affecting the rights of
any Person with regard to any Intellectual Property.
Section 4.25 Hedging. Section 4.25 of the Company Disclosure Schedule sets
forth for the periods shown obligations of the Company and each of its
Subsidiaries for the delivery of Hydrocarbons attributable to any of the
properties of the Company or any of its Subsidiaries in the future on account of
prepayment, advance payment, take-or-pay or similar obligations without then or
thereafter being entitled to receive full value therefor. Except as set forth in
Section 4.25 of the Company Disclosure Schedule and except for fixed price gas
contracts entered into by the Company in the ordinary course of business, as of
the date of this Agreement, neither the Company nor any of its Subsidiaries is
bound by futures, hedge, swap, collar, put, call, floor, cap, option or other
contracts that are intended to benefit from or reduce or eliminate the risk of
fluctuations in the price of commodities, including Hydrocarbons, or securities.
Section 4.26 Brokers. No broker, finder or investment banker (other than
Credit Suisse First Boston Corporation, the fees and expenses of which will be
paid by the Company and will not exceed the fee currently set forth in the
Company Engagement Letter described below, plus reimbursement of reasonable out
of pocket expenses) is entitled to any brokerage, finder's fee or other fee or
commission payable by the Company or any of its Subsidiaries in connection with
the transactions contemplated by this Agreement based upon arrangements made by
and on behalf of the Company or any of its Subsidiaries. True and correct copies
of all agreements and engagement letters currently in effect with Credit Suisse
First Boston Corporation (the "Company Engagement Letters") have been provided
to Lomak.
Section 4.27 Opinion of Financial Advisor. Credit Suisse First Boston
Corporation has delivered to the Board of Directors of the Company its oral
opinion, to be confirmed in writing, to the effect that, as of the date of this
Agreement, the Exchange Ratio was fair, from a financial point of view, to the
holders of the Company Common Stock.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF LOMAK AND MERGER SUB
Lomak and Merger Sub jointly and severally represent and warrant to the
Company as follows:
Section 5.1 Organization and Qualification.
(a) Lomak is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, is duly qualified to do
business as a foreign corporation and is in good standing in the jurisdictions
set forth in Section 5.1(a) of the disclosure letter delivered to the Company
contemporaneously with the execution hereof (the "Lomak Disclosure Schedule"),
which include each jurisdiction in which the character of Lomak's properties or
the nature of its business makes such qualification necessary, except in
jurisdictions, if any, where the failure to be so qualified would not result in
a Lomak Material Adverse Effect. Lomak has all requisite corporate power and
authority to own, use or lease its properties and to carry on its business as it
is now being conducted. Lomak has made available to the Company a complete and
correct copy of its certificate of incorporation and bylaws, each as amended to
date, and Lomak's certificate of incorporation and bylaws as so delivered are in
full force and effect. Lomak is not in default in any respect in the
performance, observation or fulfillment of any provision of its certificate of
incorporation or bylaws.
(b) Section 5.1(b) of the Lomak Disclosure Schedule lists the name and
jurisdiction of organization of each Subsidiary of Lomak and the jurisdictions
in which each such Subsidiary is qualified or holds licenses to do business as a
foreign corporation or other organization as of the date hereof. Each of Lomak's
Subsidiaries
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is a corporation or other legal entity duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization, is duly
qualified to do business as a foreign corporation or other legal entity and is
in good standing in the jurisdictions set forth in Section 5.1(b) of the Lomak
Disclosure Schedule, which includes each jurisdiction in which the character of
such Subsidiary's properties or the nature of its business makes such
qualification necessary, except in jurisdictions, if any, where the failure to
be so qualified would not result in a Lomak Material Adverse Effect. Each of
Lomak's Subsidiaries has all requisite corporate or other power and authority to
own, use or lease its properties and to carry on its business as it is now being
conducted and as it is now proposed to be conducted. Lomak has made available to
the Company a complete and correct copy of the certificate of incorporation and
bylaws (or similar organizational documents) of each of Lomak's Subsidiaries,
each as amended to date, and the certificate of incorporation and bylaws (or
similar organizational documents) as so delivered are in full force and effect.
No Subsidiary of Lomak is in default in any respect in the performance,
observation or fulfillment of any provision of its certificate of incorporation
or bylaws (or similar organizational documents). Other than Lomak's
Subsidiaries, Lomak does not own (beneficially or otherwise) or control,
directly or indirectly, 5% or more of any class of equity or similar securities
of any corporation or other organization, whether incorporated or
unincorporated.
(c) Merger Sub has no Subsidiaries.
(d) For purposes of this Agreement, a "Lomak Material Adverse Effect" shall
mean any event, circumstance, condition, development or occurrence (i) causing,
resulting in or having (or with the passage of time likely to cause, result in
or have) a material adverse effect on the financial condition, business, assets,
properties, prospects or results of operations of Lomak and its Subsidiaries,
taken as a whole or (ii) preventing or delaying in any material respect the
consummation of the transactions contemplated by this Agreement or any Ancillary
Agreement by Lomak or any of its Subsidiaries; provided, that such term shall
not include effects that result from market conditions generally in the oil and
gas industry.
Section 5.2 Capitalization.
(a) The authorized capital stock of Lomak consists of 50,000,000 shares of
Lomak Common Stock, and 10,000,000 shares of preferred stock of Lomak, par value
$1.00 per share, of which 1,150,000 shares have been designated as $2.03
Convertible Preferred Stock. As of the date of this Agreement, Lomak has (i)
21,193,742 shares of Lomak Common Stock issued and outstanding, (ii) 1,149,840
shares of preferred stock outstanding (all of which is designated $2.03
Convertible Preferred Stock) and (iii) outstanding stock options to acquire
2,076,092 shares of Lomak Common Stock under all stock option plans and
agreements of Lomak. All such shares have been validly issued, are fully paid
and nonassessable, and are free of preemptive rights. Except as set forth in
Section 5.2(a) of the Lomak Disclosure Schedule, and other than this Agreement,
there are no outstanding subscriptions, options, rights, warrants, convertible
securities, stock appreciation rights, phantom equity, or other agreements or
commitments obligating Lomak to issue, transfer, sell, redeem, repurchase or
otherwise acquire any shares of its capital stock of any class.
(b) Except as set forth in Section 5.2(b) of the Lomak Disclosure Schedule,
Lomak is, directly or indirectly, the record and beneficial owner of all of the
outstanding shares of capital stock of each Lomak Subsidiary, there are no
irrevocable proxies with respect to any such shares, and no equity securities of
any Lomak Subsidiary are or may become required to be issued by reason of any
options, warrants, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
or exercisable for, shares of any capital stock of any Lomak Subsidiary, and
there are no contracts, commitments, understandings or arrangements by which
Lomak or any Lomak Subsidiary is or may be bound to issue additional shares of
capital stock of any Lomak Subsidiary or securities convertible into or
exchangeable or exercisable for any such shares. All of such shares so owned by
Lomak are validly issued, fully paid and nonassessable and are owned by it free
and clear of all Liens.
Section 5.3 Authority. Each of Lomak and Merger Sub has full corporate
power and authority to execute and deliver this Agreement and the Ancillary
Agreements to which it is or will be a party and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance of this
Agreement and the Ancillary Agreements to which it is or will be a party and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by the Board of Directors
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of each of Lomak and Merger Sub, and no other corporate proceedings on the part
of Lomak or Merger Sub are necessary to authorize this Agreement or the
Ancillary Agreements to which any of them are or will be a party or to
consummate the transactions contemplated hereby or thereby, other than the
approval of the issuance of such number of shares required to effect the Merger
in accordance with the rules of the New York Stock Exchange, Inc. (the "Stock
Issuance") by Lomak's stockholders as contemplated by Section 7.13 hereof. This
Agreement has been, and the Ancillary Agreements to which Lomak or Merger Sub
are or will be a party are, or upon execution will be, duly and validly executed
and delivered by each of Lomak and Merger Sub and, assuming the due
authorization, execution and delivery hereof and thereof by the other parties
hereto and thereto, constitute or upon execution will constitute, valid and
binding obligations of each of Lomak and Merger Sub enforceable against each of
Lomak and Merger Sub in accordance with their respective terms, except for the
Enforceability Exception.
Section 5.4 Consents and Approvals; No Violation. The execution and
delivery of this Agreement, the consummation of the transactions contemplated
hereby and the performance by each of Lomak and Merger Sub of its obligations
hereunder will not:
(a) conflict with any provision of the certificate of incorporation or
bylaws of either Lomak or Merger Sub; provided, however, that it is acknowledged
that the Name Change (as defined below) would require approval of the holders of
at least a majority of the outstanding shares of Lomak Common Stock;
(b) subject to obtaining of the approval of Lomak's stockholders of the
Stock Issuance as contemplated by Section 7.13 hereof, require on the part of
Lomak or any of its Subsidiaries or Affiliates, any consent, waiver, approval,
order, authorization or permit of, or registration, filing with or notification
to, (i) any Governmental Authority, except for applicable requirements of the
Securities Act, the Exchange Act, state laws relating to takeovers, if
applicable, state securities or blue sky laws and Customary Post-Closing
Consents, (ii) filings by Lomak under the HSR Act in connection with the
acquisition of shares of Lomak Common Stock pursuant to the Merger or (iii)
except as set forth in Section 5.4(b) of the Lomak Disclosure Schedule, any
third party other than a Governmental Authority, other than such
non-Governmental Authority third party consents, waivers, approvals, orders,
authorizations and permits that would not (A) result in a Lomak Material Adverse
Effect or (B) materially impair the ability of Lomak or Merger Sub or any other
Subsidiaries of Lomak to perform its obligations under this Agreement or any
Ancillary Agreement; provided, however, that it is acknowledged that the Name
Change (as defined below) would require approval of the holders of at least a
majority of the outstanding shares of Lomak Common Stock;
(c) except as set forth in Section 5.4(c) of the Lomak Disclosure Schedule,
result in any violation of or the breach of or constitute a default (with notice
or lapse of time or both) under, or give rise to any right of termination,
cancellation or acceleration or guaranteed payments or a loss of a material
benefit under, any of the terms, conditions or provisions of any note, lease,
mortgage, indenture, license, agreement or other instrument or obligation to
which Lomak or any of its Subsidiaries is a party or by which Lomak or any of
its Subsidiaries or any of their respective properties or assets may be bound,
except for such violations, breaches, defaults, or rights of termination,
cancellation or acceleration, or losses as to which requisite waivers or
consents have been obtained or which, individually or in the aggregate, would
not (i) result in a Lomak Material Adverse Effect or (ii) materially impair the
ability of Lomak or Merger Sub or any other Subsidiaries to perform its
obligations under this Agreement or any Ancillary Agreement;
(d) violate the provisions of any order, writ, injunction, judgment,
decree, statute, rule or regulation applicable to Lomak or any Subsidiary of
Lomak; or
(e) result in the creation of any Lien upon any material assets or on any
shares of capital stock, properties or assets of Lomak or its Subsidiaries under
any agreement or instrument to which Lomak or any of its Subsidiaries is a party
or by which Lomak or any of its Subsidiaries or any of their properties or
assets is bound.
Section 5.5 Lomak Financial Statements. Each of the audited consolidated
financial statements and unaudited consolidated interim financial statements of
Lomak (including any related notes and schedules) included (or incorporated by
reference) in its Annual Reports on Form 10-K for each of the three fiscal years
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ended December 31, 1995, 1996 and 1997 (collectively, the "Lomak Financial
Statements") have been prepared from, and are in accordance with, the books and
records of Lomak and its consolidated Subsidiaries, comply in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP applied on a consistent basis (except as may be indicated
in the notes thereto and subject, in the case of quarterly financial statements,
to normal and recurring year-end adjustments that are not material individually
or in the aggregate) and fairly present, in conformity with GAAP applied on a
consistent basis (except as may be indicated in the notes thereto), the
consolidated financial position of Lomak and its Subsidiaries as of the date
thereof and the consolidated results of operations and cash flows (and changes
in financial position, if any) of Lomak and its Subsidiaries for the periods
presented therein (subject to normal year-end adjustments that are not material
individually or in the aggregate and the absence of financial footnotes in the
case of any unaudited interim financial statements).
Section 5.6 Absence of Undisclosed Liabilities. Except (a) as specifically
disclosed in the Lomak SEC Reports (as defined below) and (b) for liabilities
and obligations incurred in the ordinary course of business and consistent with
past practice, since December 31, 1997, neither Lomak nor any of its
Subsidiaries has incurred any liabilities or obligations of any nature
(contingent or otherwise) that would have a Lomak Material Adverse Effect or
would be required by GAAP to be reflected on a consolidated balance sheet of
Lomak and its Subsidiaries or the notes thereto which is not so reflected.
Section 5.7 Absence of Certain Changes. Except as expressly contemplated
by this Agreement or disclosed in the Lomak SEC Reports, since December 31, 1997
(a) Lomak and its Subsidiaries have conducted their business in all material
respects in the ordinary course consistent with past practices, (b) there has
not been any change or development, or combination of any of the foregoing that,
individually or in the aggregate, would have a Lomak Material Adverse Effect,
(c) there has not been any declaration, setting aside or payment of any dividend
or other distribution with respect to any shares of capital stock of Lomak or
Merger Sub or any repurchase, redemption or other acquisition by Lomak or any of
its Subsidiaries of any outstanding shares of capital stock or other securities
of, or other ownership interests in, Lomak or Merger Sub, (d) there has not been
any amendment of any term of any outstanding security of Lomak or Merger Sub,
and (e) there has not been any change in any method of accounting or accounting
practice by Lomak or Merger Sub, except for any such change required by reason
of a concurrent change in GAAP or to conform Merger Sub's accounting policies
and practices to those of Lomak.
Section 5.8 Lomak SEC Reports. Lomak has filed with the SEC, and has
heretofore made available to the Company true and complete copies of, each form,
registration statement, report, schedule, proxy or information statement and
other document (including exhibits and amendments thereto), including without
limitation its Annual Reports to Stockholders incorporated by reference in
certain of such reports, required to be filed with the SEC since December 31,
1995 under the Securities Act or the Exchange Act (collectively, the "Lomak SEC
Reports"). As of the respective dates such Lomak SEC Reports were filed or, if
any such Lomak SEC Reports were amended, as of the date such amendment was
filed, each of the Lomak SEC Reports, including without limitation any financial
statements or schedules included therein, (a) complied in all material respects
with all applicable requirements of the Securities Act and the Exchange Act, as
the case may be, and the applicable rules and regulations promulgated
thereunder, and (b) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
Section 5.9 Taxes. Except as otherwise disclosed in Section 5.9 of the
Lomak Disclosure Schedule and for matters that would have no adverse effect on
Lomak or Merger Sub:
(a) Lomak and each of its Subsidiaries have timely filed (or have had
timely filed on their behalf) or will file or cause to be timely filed, all
material Tax Returns required by applicable law to be filed by any of them prior
to or as of the Closing Date. All such Tax Returns and amendments thereto are or
will be true, complete and correct in all material respects.
(b) Lomak and each of its Subsidiaries have paid (or have had paid on their
behalf), or where payment is not yet due, have established (or have had
established on their behalf and for their sole benefit and
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recourse), or will establish or cause to be established on or before the Closing
Date, an adequate accrual for the payment of all material Taxes due with respect
to any period ending prior to or as of the Closing Date.
(c) No Audit by a Tax Authority is pending or threatened with respect to
any Tax Returns filed by, or Taxes due from, Lomak or any Subsidiary of Lomak.
No issue has been raised by any Tax Authority in any Audit of Lomak or any of
its Subsidiaries that if raised with respect to any other period not so audited
could be expected to result in a material proposed deficiency for any period not
so audited. No material deficiency or adjustment for any Taxes has been
threatened, proposed, asserted or assessed against Lomak or any of its
Subsidiaries. There are no liens for Taxes upon the assets of Lomak or any of
its Subsidiaries, except liens for current Taxes not yet delinquent.
(d) Neither Lomak nor any of its Subsidiaries has given or been requested
to give any waiver of statutes of limitations relating to the payment of Taxes
or has executed powers of attorney with respect to Tax matters that will be
outstanding as of the Closing Date.
(e) Prior to the date hereof, Lomak and its Subsidiaries have disclosed,
and provided or made available true and complete copies to the Company of, all
material Tax sharing, Tax indemnity, or similar agreements to which Lomak or any
of its Subsidiaries is a party to, is bound by, or has any obligation or
liability for Taxes.
Section 5.10 Litigation. Except as disclosed in the Lomak SEC Reports or
Section 5.10 of the Lomak Disclosure Schedule and for matters that would not
have a Lomak Material Adverse Effect, there is no suit, claim, action,
proceeding or investigation pending or, to Lomak's knowledge, threatened against
or directly affecting Lomak, any Subsidiary of Lomak or any of the directors or
officers of Lomak or any of its Subsidiaries in their capacity as such, nor is
there any reasonable basis therefor that could reasonably be expected to have a
Lomak Material Adverse Effect, if adversely determined. Neither Lomak nor any of
its Subsidiaries, nor any officer, director or employee of Lomak or any of its
Subsidiaries, has been permanently or temporarily enjoined by any order,
judgment or decree of any court or any other Governmental Authority from
engaging in or continuing any conduct or practice in connection with the
business, assets or properties of Lomak or such Subsidiary, nor, to the
knowledge of Lomak, is Lomak, any Subsidiary of Lomak or any officer, director
or employee of Lomak or its Subsidiaries under investigation by any Governmental
Authority. Except as disclosed in the Lomak SEC Reports or Section 5.10 of the
Lomak Disclosure Schedule, there is not in existence any order, judgment or
decree of any court or other tribunal or other agency enjoining or requiring
Lomak or any of its Subsidiaries to take any action of any kind with respect to
its business, assets or properties. Notwithstanding the foregoing, no
representation or warranty in this Section 5.10 is made with respect to
Environmental Laws, which are covered exclusively by the provisions set forth in
Section 5.12.
Section 5.11 Employee Benefit Plans; ERISA.
(a) Section 5.11 of the Lomak Disclosure Schedule contains a true and
complete list of the employee benefit plans or arrangements of any type
(including but not limited to plans described in section 3(3) of ERISA),
sponsored, maintained or contributed to by Lomak or any trade or business,
whether or not incorporated, which together with Lomak would be deemed a "single
employer" within the meaning of Section 414(b), (c) or (m) of the Code or
section 4001(b)(1) of ERISA (a "Lomak ERISA Affiliate") within six years prior
to the Effective Time, which provide benefits to Lomak's employees ("Lomak
Benefit Plans").
(b) With respect to each Lomak Benefit Plan: (i) if intended to qualify
under Section 401(a) or 401(k) of the Code, such plan satisfies the requirements
of such sections, has received a favorable determination letter from the
Internal Revenue Service with respect to its qualification, and its related
trust has been determined to be exempt from tax under Section 501(a) of the Code
and, to the knowledge of Lomak, nothing has occurred since the date of such
letter to adversely affect such qualification or exemption; (ii) each such plan
has been administered in substantial compliance with its terms and applicable
law; (iii) neither Lomak nor any Lomak ERISA Affiliate has engaged in, and Lomak
and each Lomak ERISA Affiliate do not have any knowledge of any Person that has
engaged in, any transaction or acted or failed to act in any manner that would
subject Lomak or any Lomak ERISA Affiliate to any liability for a breach of
fiduciary duty under ERISA that could reasonably be expected to result in a
Lomak Material Adverse Effect; (iv) no disputes are pending, or, to the
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knowledge of Lomak or any Lomak ERISA Affiliate, threatened; (v) neither Lomak
nor any Lomak ERISA Affiliate has engaged in, and Lomak and each Lomak ERISA
Affiliate do not have any knowledge of any Person that has engaged in, any
transaction in violation of Section 406(a) or (b) of ERISA for which no
exemption exists under Section 4975(c)(1) of the Code or Section 4975(d) of the
Code that could reasonably be expected to result in a Lomak Material Adverse
Effect; (vi) there have been no "reportable events" within the meaning of
section 4043 of ERISA for which the 30 day notice requirement of ERISA has not
been waived by the PBGC; (vii) all contributions due have been made on a timely
basis (within, where applicable, the time limit established under section 302 of
ERISA or Code Section 412); (viii) no notice of intent to terminate such plan
has been given under section 4041 of ERISA and no proceeding has been instituted
under section 4042 of ERISA to terminate such plan; and (ix) such plan may be
terminated on a prospective basis without any continuing liability for benefits
other than benefits accrued to the date of such termination. All contributions
made or required to be made under any Lomak Benefit Plan meet the requirements
for deductibility under the Code, and all contributions which are required and
which have not been made have been properly recorded on the books of Lomak or a
Lomak ERISA Affiliate.
(c) No Lomak Benefit Plan is a "multiemployer plan" (as defined in section
4001(a)(3) of ERISA) or a "multiple employer plan" (within the meaning of
Section 413(c) of the Code). No event has occurred with respect to Lomak or a
Lomak ERISA Affiliate in connection with which Lomak could be subject to any
liability, lien or encumbrance with respect to any Lomak Benefit Plan or any
employee benefit plan described in section 3(3) of ERISA maintained, sponsored
or contributed to by a Lomak ERISA Affiliate under ERISA or the Code.
Section 5.12 Environmental Liability. Except as set forth in Section 5.12
of the Lomak Disclosure Schedule:
(a) The businesses of Lomak and its Subsidiaries have been and are operated
in material compliance with all Environmental Laws.
(b) Neither Lomak nor any of its Subsidiaries has caused or allowed the
generation, treatment, manufacture, processing, distribution, use, storage,
discharge, release, disposal, transport or handling of any Hazardous Substances
at any of its properties or facilities except in material compliance with all
Environmental Laws, and, to Lomak's knowledge, no generation, manufacture,
processing, distribution, use, treatment, handling, storage, discharge, release,
disposal, transport or handling of any Hazardous Substances has occurred at any
property or facility owned, leased or operated by Lomak or any of its
Subsidiaries except in material compliance with all Environmental Laws.
(c) Neither Lomak nor any of its Subsidiaries has received any written
notice from any Governmental Authority or, to the knowledge of Lomak, any other
communication alleging or concerning any material violation by Lomak or any of
its Subsidiaries of, or responsibility or liability of Lomak or any of its
Subsidiaries under, any Environmental Law. There are no pending, or to the
knowledge of Lomak, threatened, claims, suits, actions, proceedings or
investigations with respect to the businesses or operations of Lomak or any of
its Subsidiaries alleging or concerning any material violation of or
responsibility or liability under any Environmental Law that, if adversely
determined, could reasonably be expected to have a Lomak Material Adverse
Effect, nor does Lomak have any knowledge of any fact or condition that could
give rise to such a claim, suit, action, proceeding or investigation.
(d) Lomak and its Subsidiaries are in possession of all material approvals,
permits, licenses, registrations and similar type authorizations from all
Governmental Authorities under all Environmental Laws with respect to the
operation of the businesses of Lomak and its Subsidiaries; there are no pending
or, to the knowledge of Lomak, threatened, actions, proceedings or
investigations seeking to modify, revoke or deny renewal of any of such
approvals, permits, licenses, registrations and authorizations; and Lomak does
not have knowledge of any fact or condition that is reasonably likely to give
rise to any action, proceeding or investigation to modify, revoke or deny
renewal of any of such approvals, permits, licenses, registrations and
authorizations.
(e) Without in any way limiting the generality of the foregoing, (i) all
off-site locations where Lomak or any of its Subsidiaries has transported,
released, discharged, stored, disposed or arranged for the disposal of
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pollutants, contaminants, hazardous wastes or toxic substances required by law
to be disposed at a licensed disposal site are identified in Section 5.12 of
Lomak Disclosure Schedule, (ii) to Lomak's knowledge, all underground storage
tanks, and the operating status, capacity and contents of such tanks, located on
any property owned, leased or operated by Lomak or any of its Subsidiaries are
identified in Section 5.12 of the Lomak Disclosure Schedule, (iii) to the
knowledge of Lomak, there is no asbestos contained in or forming part of any
building, building component, structure or office space owned or leased by Lomak
and (iv) no PCBs or PCB-containing items are used or stored at any property
owned, leased or operated by Lomak or any of its Subsidiaries.
Section 5.13 Compliance with Applicable Laws. Lomak and each of its
Subsidiaries holds all material approvals, licenses, permits, registrations and
similar type authorizations necessary for the lawful conduct of its respective
businesses, as now conducted, and such businesses are not being, and neither
Lomak nor any of its Subsidiaries has received any notice from any Governmental
Authority or Person that any such business has been or is being conducted in
violation of any law, ordinance or regulation, including without limitation any
law, ordinance or regulation relating to occupational health and safety, except
for possible violations which either individually or in the aggregate have not
resulted and would not result in a Lomak Material Adverse Effect; provided,
however, notwithstanding the foregoing, no representation or warranty in this
Section 5.13 is made with respect to Environmental Laws, which are covered
exclusively by the provisions set forth in Section 5.12.
Section 5.14 Insurance. Except as disclosed in Section 5.14 of the Lomak
Disclosure Schedule, Lomak and each of its Subsidiaries is, and has been
continuously since January 1, 1997, insured in such amounts and against such
risks and losses as are customary for companies conducting the respective
businesses conducted by Lomak and its Subsidiaries during such time period.
Except as disclosed in Section 5.14 of the Lomak Disclosure Schedule, neither
Lomak nor any of its Subsidiaries has received any notice of cancellation or
termination with respect to any material insurance policy thereof. All material
insurance policies of Lomak and its Subsidiaries are valid and enforceable
policies.
Section 5.15 Labor Matters; Employees.
(a) Except as set forth in Section 5.15 of the Lomak Disclosure Schedule,
(i) there is no labor strike, dispute, slowdown, work stoppage or lockout
actually pending or, to the knowledge of Lomak, threatened against or affecting
Lomak or any of its Subsidiaries and, during the past five years, there has not
been any such action, (ii) none of Lomak or any of its Subsidiaries is a party
to or bound by any collective bargaining or similar agreement with any labor
organization, or work rules or practices agreed to with any labor organization
or employee association applicable to employees of Lomak or any of its
Subsidiaries, (iii) none of the employees of Lomak or any of its Subsidiaries
are represented by any labor organization and none of Lomak or any of its
Subsidiaries has any knowledge of any current union organizing activities among
the employees of Lomak or any of its Subsidiaries nor does any question
concerning representation exist concerning such employees, (iv) Lomak and its
Subsidiaries have each at all times been in material compliance with all
applicable laws respecting employment and employment practices, terms and
conditions of employment, wages, hours of work and occupational safety and
health, and are not engaged in any unfair labor practices as defined in the
National Labor Relations Act or other applicable law, ordinance or regulation,
(v) there is no unfair labor practice charge or complaint against any of Lomak
or any of its Subsidiaries pending or, to the knowledge of Lomak, threatened
before the National Labor Relations Board or any similar state or foreign
agency, (vi) there is no grievance or arbitration proceeding arising out of any
collective bargaining agreement or other grievance procedure relating to Lomak
or any of its Subsidiaries, and (vii) neither the Occupational Safety and Health
Administration nor any corresponding state agency has threatened to file any
citation, and there are no pending citations, relating to Lomak or any of its
Subsidiaries.
(b) Since the enactment of the WARN Act, none of Lomak or any of its
Subsidiaries has effectuated (i) a "plant closing" (as defined in the WARN Act)
affecting any site of employment or one or more facilities or operating units
within any site of employment or facility of any of Lomak or any of its
Subsidiaries, or (ii) a "mass layoff" (as defined in the WARN Act) affecting any
site of employment or facility of Lomak or any of its Subsidiaries, nor has
Lomak or any of its Subsidiaries been affected by any transaction or engaged in
layoffs
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or employment terminations sufficient in number to trigger application of any
similar state or local law, in each case that could reasonably be expected to
have a Lomak Material Adverse Effect.
Section 5.16 Reserve Reports.
(a) All information supplied to Netherland, Sewell & Associates, Inc.,
Wright & Company, Inc., H.J. Gruy and Associates, Inc., Huddleston & Co., Inc.
and Clay, Holt & Klammer by or on behalf of Lomak and its Subsidiaries that was
material to each such firm's estimates of proved oil and gas reserves
attributable to the Oil and Gas Interests of Lomak and its Subsidiaries in
connection with the preparation of the proved oil and gas reserve report
concerning the Oil and Gas Interests of Lomak and its Subsidiaries as of
December 31, 1997 by such firms (the "Lomak Reserve Report") was (at the time
supplied or as modified or amended prior to the issuance of the Lomak Reserve
Report) true and correct in all material respects and Lomak has no knowledge of
any material errors in such information that existed at the time of such
issuance. Except for changes (including changes in commodity prices) generally
affecting the oil and gas industry, there has been no change in respect of the
matters addressed in the Lomak Reserve Report that would have a Lomak Material
Adverse Effect.
(b) Set forth in Section 5.16(b) of the Lomak Disclosure Schedule is a list
of all material Oil and Gas Interests that were included in the Lomak Reserve
Report that have been disposed of prior to the date of this Agreement.
Section 5.17 Oil and Gas Reserves; Equipment. Except as otherwise set
forth in Section 5.17 of the Lomak Disclosure Schedule:
(a) None of the wells included in the Oil and Gas Interests of Lomak and
its Subsidiaries has been overproduced, except where such overproduction
individually, or in the aggregate with all other such overproduction, would not
have a Lomak Material Adverse Effect;
(b) There have been no material changes proposed in the production
allowables for any wells included in the Oil and Gas Interests of Lomak and its
Subsidiaries;
(c) All wells included in the Oil and Gas Interests of Lomak and its
Subsidiaries have been drilled and (if completed) completed, operated, and
produced in accordance with good oil and gas field practices and in compliance
in all respects with applicable oil and gas leases and applicable laws, rules,
and regulations, except where any failure or violation would not have a Lomak
Material Adverse Effect;
(d) Except as set forth in Section 5.17(d) of the Lomak Disclosure
Schedule, there are no wells included in the Oil and Gas Interests of Lomak and
its Subsidiaries that:
(i) Lomak or any of its Subsidiaries is currently obligated by law or
contract to plug and abandon or will be obligated by law or contract to
plug and abandon with the lapse of time or notice or both because the well
is not currently capable of producing in commercial quantities, except for
such wells that will not individually, or in the aggregate with all other
such wells, result in Lomak and its Subsidiaries incurring plugging and
abandonment costs (net of salvage value) in an amount in excess of
$2,000,000 in addition to any plugging and abandonment costs that have been
provided for in the Lomak Financial Statements;
(ii) are subject to exceptions to a requirement to plug and abandon
issued by a Governmental Authority having jurisdiction over the wells; or
(iii) have been plugged and abandoned but have not been plugged or
reclaimed in accordance with all applicable requirements of each
Governmental Authority having jurisdiction over such wells;
(e) Proceeds from the sale of Hydrocarbons produced from the Oil and Gas
Interests of Lomak and its Subsidiaries are being received by Lomak and its
Subsidiaries in a timely manner and are not being held by third parties in
suspense for any reason (except for amounts, individually or in the aggregate,
not in excess of $250,000 and held in suspense in the ordinary course of
business);
(f) No Person has any call on, option to purchase, or similar rights with
respect to the production of Hydrocarbons attributable to the Oil and Gas
Interests of Lomak and its Subsidiaries, except where any call,
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option or similar right would not have a Lomak Material Adverse Effect and
except for any such call, option or similar right at market prices, and upon
consummation of the transactions contemplated by this Agreement, Lomak or its
Subsidiaries will have the right to market production from the Oil and Gas
Interests of Lomak and its Subsidiaries on terms no less favorable than the
terms upon which such production is currently being marketed;
(g) Except for gas imbalances between Lomak or any of its Subsidiaries and
any third party working interest owners or pipelines relative to the Oil and Gas
Interests of Lomak or any of its Subsidiaries, which gas imbalances (to the
extent constituting overproduction or underproduction from the wells in which
Lomak or any of its Subsidiaries has an interest) are described in Section
5.17(g) of the Lomak Disclosure Schedule, neither Lomak nor any of its
Subsidiaries is obligated by any gas prepayment arrangement or by any "take-or-
pay" requirement to deliver any gas at a future time without then or thereafter
receiving payment therefor;
(h) To the knowledge of Lomak, all equipment and machinery currently in use
and material to the operation of the Oil and Gas Interests of Lomak or any of
its Subsidiaries as conducted prior to the date hereof are in reasonable working
condition, ordinary wear and tear excepted; and
(i) With respect to wells in which the only Oil and Gas Interests of Lomak
and its Subsidiaries that are not operated by Lomak or any of its Subsidiaries,
Lomak makes the foregoing representations and warranties set forth in paragraphs
(b), (c) and (d)(iii) of this Section 5.17 and those set forth in Sections 5.12,
5.13 and 5.20 only to its knowledge.
Section 5.18 Title to Oil and Gas Interests.
(a) Except as set forth in Section 5.18(a) of the Lomak Disclosure
Schedule, Lomak or its Subsidiaries has defensible title to all of the real
property included in the Oil and Gas Interests classified as proved developed
producing, proved developed nonproducing and proved undeveloped in the Lomak
Reserve Report (each, a "Lomak Classified Property") except to the extent that
such interests have thereafter been disposed of in the ordinary course of
business consistent with past practice. For the purposes of this Agreement,
"defensible title" means, with respect to any Lomak Classified Property, such
record and beneficial title that (x) entitles the party named to receive, from
its ownership of such interest, a percentage of all Hydrocarbons produced,
saved, and marketed from each well or property included in the Lomak Classified
Properties, not less than the net revenue interest set forth in the Lomak
Reserve Report for such well or property, without reduction, suspension, or
termination for the productive life of such well or property, except as a result
of elections not to participate in an operation under an applicable operating,
unit or other agreement, or readjustments of interest provided for under the
terms of the applicable operating, unit or other agreement, in each case, after
the date hereof; (y) obligates the party named to bear a percentage of the costs
and expenses relating to operations on, and the maintenance and production of,
such well or property, not greater than the working or operating interest set
forth in the Lomak Reserve Report without increase for the productive life of
such well or property, except as a result of an election of other parties not to
participate in an operation under an applicable operating, unit or other
agreement, contribution requirements with respect to defaulting co-owners, or
readjustments of interest provided for under the terms of the applicable
operating or unit agreement, in each case, after the date hereof; and (z) is
free and clear of any Liens except the Lomak Permitted Encumbrances. For the
purposes of this Agreement, "Lomak Permitted Encumbrances" means (i) royalties,
overriding royalties, reversionary interests and similar burdens if the
cumulative effect of such burdens does not and will not reduce the net revenue
interest with respect to a well or property below the net revenue interest shown
therefor in the Lomak Reserve Report or increase the working interest with
respect to such well or property above the working interest shown therefor in
the Lomak Reserve Report; (ii) the terms and conditions of all leases,
servitudes, production sales contracts, division orders, contracts for sale,
purchase, exchange, refining or processing of Hydrocarbons, unitization and
pooling designations, declarations, orders and agreements, operating agreements,
agreements of development, area of mutual interest agreements, farmout
agreements, gas balancing or deferred production agreements, processing
agreements, plant agreements, pipeline, gathering and transportation agreements,
injection, repressuring and recycling agreements, salt water or other disposal
agreements, seismic or geophysical permits or agreements, and other agreements
including, without limitation, the terms and conditions of any and all contracts
and agreements set forth in the
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Lomak Reserve Report covering production sales contracts and all other contracts
and agreements disclosed in such Lomak Disclosure Schedule, to the extent that
such contracts and agreements do not and will not reduce the net revenue
interest of any well or property included in the Lomak Classified Properties
below the net revenue interest shown therefor in the Lomak Reserve Report or
increase the working interest of such well above the working interest shown
therefor in the Lomak Reserve Report without a proportionate increase in the net
revenue interest of such well or property; (iii) easements, rights of way,
servitudes, permits, surface leases and other rights with respect to surface
obligations, pipelines, grazing, canals, ditches, reservoirs, or the like,
conditions, covenants or other restrictions, and easements of streets, alleys,
highways, pipelines, telephone lines, power lines, railways and other easements
and rights of way on, over or in respect of any of the Lomak Classified
Properties, so long as they are not such that would have a Lomak Material
Adverse Effect; (iv) any preferential purchase rights, required third party
consents to assignment and similar agreements and obligations not applicable to
the transactions contemplated hereby, or if applicable to the transactions
contemplated hereby, with respect to which prior to the Effective Time (A)
waivers or consents have been obtained from the appropriate Person, or (B) the
applicable period of time for asserting such rights has expired without any
exercise of such rights; (v) liens for Taxes or assessments not yet delinquent;
(vi) materialmen's, mechanic's, repairman's, employee's, contractor's,
operator's, and other similar liens or charges arising in the ordinary course of
business (A) if they have not been filed pursuant to law, (B) if filed, they
have not yet become due and payable or payment is being withheld as provided by
law or (C) if their validity is being contested in good faith in the ordinary
course of business by appropriate action; (vii) Customary Post-Closing Consents;
(viii) conventional rights of reassignment arising in respect of abandonment,
cessation of production or expiration of leases; (ix) all rights reserved to or
vested in any Governmental Authority to control or regulate any of the Lomak
Classified Properties in any manner, and all applicable laws, rules and orders
of Governmental Authorities; (x) any other liens, charges, encumbrances,
contracts, agreements, instruments, obligations, defects or irregularities of
any kind whatsoever that would not have a Lomak Material Adverse Effect or that
are set forth in Section 5.18(a) of the Lomak Disclosure Schedule.
Notwithstanding the foregoing, title to the Lomak Classified Properties is of a
type and nature customarily acceptable to the reasonably prudent oil and gas
operator of oil and gas interests.
(b) Except as set forth in Section 5.18(b) of the Lomak Disclosure
Schedule, (i) each oil and gas lease included in the Lomak Classified Properties
is valid, binding and enforceable in accordance with its terms, except for the
Enforceability Exception (to the extent applicable), and (ii) neither Lomak nor
the Lomak Subsidiary that is party to each such lease, nor, to the knowledge of
Lomak, any other party to any such lease, is in breach or default thereunder in
any material respect, no notice of default or termination thereunder has been
given or received by Lomak or any of its Subsidiaries, and no event has occurred
which would, with the giving of notice or passage of time or both, constitute a
breach or default thereunder or permit termination, modification or acceleration
thereunder that could reasonably be expected to result in a Lomak Material
Adverse Effect.
Section 5.19 Title to Other Properties. Except as set forth in Section
5.19 of the Lomak Disclosure Schedule, Lomak or its Subsidiaries owns, of record
(to the extent applicable) and beneficially, all material personal property and
all real property (other than oil and gas leasehold interests included in the
Lomak Classified Properties), purported to be owned by Lomak or its Subsidiaries
(except to the extent that such properties have thereafter been disposed of in
the ordinary course of business consistent with past practice or after the date
hereof in compliance with Section 6.2(d)), free and clear of any Liens except
Lomak Permitted Encumbrances.
Section 5.20 Material Contracts.
(a) Set forth in Section 5.20(a) of the Lomak Disclosure Schedule is a list
of each contract, lease, indenture, agreement, arrangement or understanding to
which Lomak or any of its Subsidiaries is subject that is of a type that would
be required to be included as an exhibit to a Form S-1 Registration Statement
pursuant to the rules and regulations of the SEC if such a registration was
filed by Lomak or is otherwise, in the judgment of Lomak, deemed material to the
business of Lomak and its Subsidiaries, taken as a whole (the "Lomak Material
Contracts").
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(b) Except as set forth in Section 5.20(a) or 5.20(b) of the Lomak
Disclosure Schedule, the Oil and Gas Interests of Lomak and its Subsidiaries are
not subject to (i) any instrument or agreement evidencing or related to
indebtedness for borrowed money, whether directly or indirectly, or (ii) any
agreement not entered into in the ordinary course of business in which the
amount involved is in excess of $250,000. With respect to the Oil and Gas
Interests of Lomak and its Subsidiaries, (A) all Lomak Material Contracts are in
full force and effect and are the valid and legally binding obligations of the
parties thereto and are enforceable in accordance with their respective terms;
(B) Lomak is not in material breach or default with respect to the obligations
under any Lomak Material Contract and, to the knowledge of Lomak, no party to
any Lomak Material Contract is in material breach or default with respect to its
obligations thereunder, including with respect to payments or otherwise; (C) no
party to any Lomak Material Contract has given notice of any action to
terminate, cancel, rescind or procure a judicial reformation thereof; and (D) no
Lomak Material Contract contains any provision that prevents Lomak or any of its
Subsidiaries from owning, managing and operating the Oil and Gas Interests of
Lomak and its Subsidiaries substantially in accordance with historical
practices.
(c) As of the date of this Agreement, except as set forth in Section
5.20(c) of the Lomak Disclosure Schedule, with respect to authorizations for
expenditure executed on or after January 1, 1998, (i) there are no material
outstanding calls for payments that are due or which Lomak or its Subsidiaries
are committed to make that have not been made; (ii) there are no material
operations with respect to which Lomak or its Subsidiaries have become a
non-consenting party; and (iii) there are no commitments for the material
expenditure of funds for drilling or other capital projects other than projects
with respect to which the operator is not required under the applicable
operating agreement to seek consent.
(d) Except as set forth in Section 5.20(d) of the Lomak Disclosure
Schedule, (i) there are no express contractual obligations to engage in
continuous development operations in order to maintain any producing Oil and Gas
Interest of Lomak or its Subsidiaries in force and effect; (ii) there are no
provisions applicable to the Oil and Gas Interests of Lomak and its Subsidiaries
that increase the royalty percentage of the lessor thereunder; and (iii) none of
the Oil and Gas Interests of Lomak and its Subsidiaries are limited by terms
fixed by a certain number of years (other than primary terms under oil and gas
leases).
Section 5.21 Permits. Immediately prior to the Effective Time and except
for Customary Post-Closing Consents, Lomak or its Subsidiaries will hold all of
the Permits required or necessary to construct, own, operate, use and/or
maintain their properties and conduct their operations as presently conducted,
except for such Permits, the lack of which, individually or in the aggregate,
would not have a Lomak Material Adverse Effect; provided, however, that
notwithstanding the foregoing, no representation or warranty in this Section
5.21 is made with respect to Permits issued pursuant to Environmental Laws,
which are covered exclusively by the provisions set forth in Section 5.12.
Section 5.22 Required Stockholder Vote or Consent. The only vote of the
holders of any class or series of Lomak's capital stock that will be necessary
to consummate the Merger and the other transactions contemplated by this
Agreement is the approval of the Stock Issuance by the holders of a majority of
the shares of Lomak Voting Stock represented in person or by proxy and voting
with respect thereto (the "Lomak Stockholder Approval"); provided, however, that
it is acknowledged that the Name Change (as defined below) would require
approval of the holders of at least a majority of the outstanding shares of
Lomak Common Stock. The "Lomak Voting Stock" shall include the outstanding
shares of Lomak Common Stock (on the basis of one vote per share) and the
outstanding shares of $2.03 Convertible Preferred Stock (on the basis of one
vote per share).
Section 5.23 Proxy Statement/Prospectus; Registration Statement. None of
the information to be supplied by Lomak or Merger Sub for inclusion in (a) the
Proxy Statement/Prospectus to be filed by the Company and Lomak with the SEC,
and any amendments or supplements thereto, or (b) the Registration Statement to
be filed by Lomak with the SEC in connection with the Merger, and any amendments
and supplements thereto, will, (i) in the case of the Registration Statement, at
the time it becomes effective, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading or (ii) in the case of the
Proxy Statement/Prospectus, at the time of the mailing of the Proxy
Statement/Prospectus and at the time of the
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Lomak Special Meeting, contain any untrue statement of material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements made therein, in light of the circumstances under which they
were made, not misleading; provided, however, that Lomak makes no representation
with respect to information supplied in writing by the Company for inclusion in
the Registration Statement or the Proxy Statement/Prospectus. If at any time
prior to the Effective Time any event with respect to Lomak, its officers and
directors or any of its Subsidiaries shall occur which is required to be
described in the Proxy Statement/Prospectus or the Registration Statement, such
event shall be so described, and an amendment or supplement shall be promptly
filed with the SEC and, as required by law, disseminated to the stockholders of
Lomak and such amendment or supplement shall comply with all provisions of
applicable law. The Registration Statement will, at the time it becomes
effective, comply as to form in all material respects with the provisions of the
Securities Act.
Section 5.24 Intellectual Property. Lomak and its Subsidiaries own, or are
licensed or otherwise have the right to use all Intellectual Property currently
used in the conduct of the business of Lomak and its Subsidiaries, except where
the failure to so own or otherwise have the right to use such intellectual
property would not, individually or in the aggregate, have a Lomak Material
Adverse Effect. No Person has notified either Lomak or any of its Subsidiaries
that their use of the Intellectual Property infringes on the rights of any
Person, subject to such claims and infringements as do not, individually or in
the aggregate, give rise to any liability on the part of Lomak and its
Subsidiaries that could have a Lomak Material Adverse Effect, and, to Lomak's
knowledge, no Person is infringing on any right of Lomak or any of its
Subsidiaries with respect to any such Intellectual Property. No claims are
pending or, to Lomak's knowledge, threatened that Lomak or any of its
Subsidiaries is infringing or otherwise adversely affecting the rights of any
Person with regard to any Intellectual Property.
Section 5.25 Hedging. Section 5.25 of the Lomak Disclosure Schedule sets
forth for the periods shown obligations of Lomak and each of its Subsidiaries
for the delivery of Hydrocarbons attributable to any of the properties of Lomak
or any of its Subsidiaries in the future on account of prepayment, advance
payment, take-or-pay or similar obligations without then or thereafter being
entitled to receive full value therefor. Except as set forth in Section 5.25 of
the Lomak Disclosure Schedule and except for fixed price gas contracts entered
into in the ordinary course of business, as of the date of this Agreement,
neither Lomak nor any of its Subsidiaries is bound by futures, hedge, swap,
collar, put, call, floor, cap, option or other contracts that are intended to
benefit from or reduce or eliminate the risk of fluctuations in the price of
commodities, including Hydrocarbons or securities.
Section 5.26 Brokers. No broker, finder or investment banker (other than
PaineWebber Incorporated, the fees and expenses of which will be paid by Lomak
and will not exceed the fee currently set forth in the Lomak Engagement Letter
described below, plus reimbursement of reasonable out of pocket expenses) is
entitled to any brokerage, finder's fee or other fee or commission payable by
Lomak or any of its Subsidiaries in connection with the transactions
contemplated by this Agreement based upon arrangements made by and on behalf of
Lomak or any of its Subsidiaries. True and correct copies of all agreements and
engagement letters currently in effect with PaineWebber Incorporated (the "Lomak
Engagement Letters") have been provided to the Company.
Section 5.27 Merger Sub's Operations. Merger Sub was formed solely for the
purpose of engaging in the transactions contemplated hereby and has not engaged
in any business activities or conducted any operations other than in connection
with the transactions contemplated hereby.
Section 5.28 Opinion of Financial Advisor. PaineWebber Incorporated has
delivered to the Board of Directors of Lomak its written opinion to the effect
that, as of the date of this Agreement, the Exchange Ratio is fair to Lomak from
a financial point of view.
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ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business by the Company Pending the Merger. From
the date hereof until the Effective Time, unless Lomak shall otherwise agree in
writing, or except as set forth in the Company Disclosure Schedule or as
otherwise contemplated by this Agreement, the Company and its Subsidiaries shall
conduct their business in the ordinary course consistent with past practice and
shall use all reasonable efforts to preserve intact their business organizations
and relationships with third parties and to keep available the services of their
present officers and key employees, subject to the terms of this Agreement.
Except as set forth in the Company Disclosure Schedule or as otherwise
contemplated by or provided in this Agreement, and without limiting the
generality of the foregoing, from the date hereof until the Effective Time,
without the written consent of Lomak, which consent shall not be unreasonably
withheld:
(a) Neither the Company nor its Subsidiaries will adopt or propose any
change to its Certificate of Incorporation or Bylaws;
(b) The Company will not, and will not permit any of its Subsidiaries to
(i) declare, set aside or pay any dividend or other distribution with respect to
any shares of capital stock of the Company or its Subsidiaries or (ii)
repurchase, redeem or otherwise acquire any outstanding shares of capital stock
or other securities of, or other ownership interests in, the Company or any of
its Subsidiaries, other than intercompany acquisitions of stock;
(c) The Company will not, and will not permit any of its Subsidiaries to,
merge or consolidate with any other Person or acquire assets having an
individual purchase price of more than $2.5 million or aggregate purchase prices
of more than $10 million;
(d) Except as set forth in Section 6.1(d) of the Company Disclosure
Schedule, the Company will not, and will not permit any of its Subsidiaries to,
sell, lease, license or otherwise surrender, relinquish or dispose of any assets
or properties with an individual fair market value exceeding $1 million or an
aggregate fair market value exceeding $5 million;
(e) The Company will not settle any material Audit, make or change any
material Tax election or file any material amended Tax Return;
(f) Except as otherwise permitted by this Agreement, the Company will not
issue any securities (except pursuant to existing obligations disclosed in the
Company SEC Reports or the Company Disclosure Schedule), enter into any
amendment of any term of any outstanding security of the Company or of any of
its Subsidiaries, incur any indebtedness except trade debt in the ordinary
course of business or pursuant to existing credit facilities or arrangements,
fail to make any required contribution to any Company ERISA Plan, increase
compensation, bonus (except as set forth in Section 6.1(f) of the Company
Disclosure Schedule) or other benefits payable to any executive officer or
former employee or enter into any settlement or consent with respect to any
pending litigation;
(g) The Company will not change any method of accounting or accounting
practice by the Company or any of its Subsidiaries, except for any such change
required by GAAP;
(h) The Company will not take any action that would give rise to a claim
under the WARN Act or any similar state law or regulation because of a "plant
closing" or "mass layoff" (each as defined in the WARN Act);
(i) The Company will not amend or otherwise change the terms of the Company
Engagement Letters, except to the extent that any such amendment or change would
result in terms more favorable to the Company;
(j) Neither the Company nor any of its Subsidiaries will become bound or
obligated to participate in any operation, or consent to participate in any
operation, with respect to any Oil and Gas Interests that will individually cost
in excess of $2.5 million unless the operation is a currently existing
obligation of the Company or any of its Subsidiaries or necessary to extend,
preserve or maintain an Oil and Gas Interest;
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(k) Neither the Company nor any of its Subsidiaries will enter into any
futures, hedge, swap, collar, put, call, floor, cap, option or other contracts
that are intended to benefit from or reduce or eliminate the risk of
fluctuations in the price of commodities, including Hydrocarbons, or securities,
other than in the ordinary course of business in accordance with the Company's
current policies;
(l) The Company will not, and will not permit any of its Subsidiaries to
(i) take, or agree or commit to take, any action that would make any
representation and warranty of the Company hereunder inaccurate in any material
respect at, or as of any time prior to, the Effective Time or (ii) omit, or
agree or commit to omit, to take any action necessary to prevent any such
representation or warranty from being materially inaccurate in any respect at
any such time;
(m) Neither the Company nor any of its Subsidiaries shall (i) adopt, amend
(other than amendments that reduce the amounts payable by the Company or any
Subsidiary, or amendments required by law to preserve the qualified status of a
Company Benefit Plan) or assume an obligation to contribute to any employee
benefit plan or arrangement of any type or collective bargaining agreement or,
except as described in Schedule 6.1(m) attached hereto, enter into any
employment, severance or similar contract with any Person (including, without
limitation, contracts with management of the Company or any Subsidiaries that
might require that payments be made upon the consummation of the transactions
contemplated hereby) or amend any such existing contracts to increase any
amounts payable thereunder or benefits provided thereunder, (ii) engage in any
transaction (either acting alone or in conjunction with any Company Benefit Plan
or trust created thereunder) in connection with which the Company or any
Subsidiary could be subjected (directly or indirectly) to either a civil penalty
assessed pursuant to subsections (c), (i) or (l) of section 502 of ERISA or a
tax imposed pursuant to Chapter 43 of Subtitle D of the Code, (iii) terminate
any Company Benefit Plan in a manner, or take any other action with respect to
any Company Benefit Plan, that could result in the liability of the Company or
any Subsidiary to any Person, (iv) take any action that could adversely affect
the qualification of any Company Benefit Plan or its compliance with the
applicable requirements of ERISA, (v) fail to make full payment when due of all
amounts which, under the provisions of any Company Benefit Plan, any agreement
relating thereto or applicable law, the Company or any Subsidiary are required
to pay as contributions thereto or (vi) fail to file, on a timely basis, all
reports and forms required by federal regulations with respect to any Company
Benefit Plan; and
(n) The Company will not, and will not permit any of its Subsidiaries to,
agree or commit to do any of the foregoing.
Section 6.2 Conduct of Business by Lomak Pending the Merger. From the date
hereof until the Effective Time, unless the Company shall otherwise agree in
writing, or except as set forth in the Lomak Disclosure Schedule or as otherwise
contemplated by this Agreement, Lomak shall conduct, and shall cause its
Subsidiaries to conduct, its business in the ordinary course consistent with
past practice and shall use, and shall cause its each of its Subsidiaries to
use, all reasonable efforts to preserve intact its business organizations and
relationships with third parties and to keep available the services of its key
employees, subject to the terms of this Agreement. Except as set forth in the
Lomak Disclosure Schedule or as otherwise contemplated by or provided in this
Agreement, and without limiting the generality of the foregoing, from the date
hereof until the Effective Time, without the written consent of the Company,
which consent shall not be unreasonably withheld:
(a) Neither Lomak nor Merger Sub will adopt or propose any change to its
Certificate of Incorporation or Bylaws;
(b) Lomak will not, and will not permit any of its Subsidiaries to (i)
declare, set aside or pay any dividend or other distribution with respect to any
shares of capital stock of Lomak or its Subsidiaries other than regular
quarterly dividends not in excess of 150% of the per share dividends currently
paid or (ii) repurchase, redeem or otherwise acquire any outstanding shares of
capital stock or other securities of, or other ownership interests in, Lomak or
any of its Subsidiaries, other than intercompany acquisitions of stock;
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(c) Neither Lomak nor Merger Sub will merge or consolidate with any other
Person or acquire assets having an individual purchase price of more than $5
million or aggregate purchase prices of more than $20 million;
(d) Except as set forth in Section 6.2(d) of the Lomak Disclosure Schedule,
neither Lomak nor any of its Subsidiaries will sell, lease, license or otherwise
surrender, relinquish or dispose of any assets or properties with an individual
fair market value exceeding $2 million or an aggregate fair market value
exceeding $10 million;
(e) Lomak will not settle any material Audit, make or change any material
Tax election or file any material amended Tax Return;
(f) Except as otherwise permitted by this Agreement, Lomak will not issue
any securities (except pursuant to existing obligations disclosed in the Lomak
SEC Reports or the Lomak Disclosure Schedule), enter into any amendment of any
term of any outstanding security of Lomak or of any of its Subsidiaries, incur
any indebtedness except trade debt in the ordinary course of business or
pursuant to existing credit facilities or arrangements, fail to make any
required contribution to any Lomak ERISA Plan, increase compensation, bonus
(except as set forth in Section 6.2(f) of the Lomak Disclosure Schedule) or
other benefits payable to any executive officer or former employee or enter into
any settlement or consent with respect to any pending litigation;
(g) Lomak will not change any method of accounting or accounting practice,
except for any such change required by GAAP;
(h) Lomak will not amend or otherwise change the terms of the Lomak
Engagement Letters, except to the extent that any such amendment or change would
result in terms more favorable to Lomak;
(i) Neither Lomak nor any of its Subsidiaries will become bound or
obligated to participate in any operation, or consent to participate in any
operation, with respect to any Oil and Gas Interest that will individually cost
in excess of $2.5 million unless the operation is a currently existing
obligation of Lomak or any of its Subsidiaries or necessary to extend, preserve
or maintain an Oil and Gas Interest;
(j) Neither Lomak nor any of its Subsidiaries will enter into any futures,
hedge, swap, collar, put, call, floor, cap, option or other contracts that are
intended to benefit from or reduce or eliminate the risk of fluctuations in the
price of commodities, including Hydrocarbons, or securities, other than in the
ordinary course of business in accordance with Lomak's current policies;
(k) Lomak will not, and will not permit any of its Subsidiaries to (i)
take, or agree or commit to take, any action that would make any representation
and warranty of Lomak or Merger Sub hereunder inaccurate in any material respect
at, or as of any time prior to, the Effective Time or (ii) omit, or agree or
commit to omit, to take any action necessary to prevent any such representation
or warranty from being materially inaccurate in any respect at any such time;
(l) Neither Lomak nor any of its Subsidiaries shall (i) adopt, amend (other
than amendments that reduce the amounts payable by Lomak or any Subsidiary, or
amendments required by law to preserve the qualified status of a Lomak Benefit
Plan) or assume an obligation to contribute to any employee benefit plan or
arrangement of any type or collective bargaining agreement or enter into any
employment, severance or similar contract with any Person (including, without
limitation, contracts with management of Lomak or any Subsidiaries that might
require that payments be made upon consummation of the transactions contemplated
hereby) or amend any such existing contracts to increase any amounts payable
thereunder or benefits provided thereunder, (ii) engage in any transaction
(either acting alone or in conjunction with any Lomak Benefit Plan or trust
created thereunder) in connection with which Lomak or any Subsidiary could be
subjected (directly or indirectly) to either a civil penalty assessed pursuant
to subsections (c), (i) or (l) of section 502 of ERISA or a tax imposed pursuant
to Chapter 43 of Subtitle D of the Code, (iii) terminate any Lomak Benefit Plan
in a manner, or take any other action with respect to any Lomak Benefit Plan,
that could result in the liability of Lomak or any Subsidiary to any Person,
(iv) take any action that could adversely affect the qualification of any Lomak
Benefit Plan or its compliance with the applicable requirements or ERISA, (v)
fail to make full
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payment when due of all amounts which, under the provisions of any Lomak Benefit
Plan, any agreement relating thereto or applicable law, Lomak or any Subsidiary
are required to pay as contributions thereto or (vi) fail to file, on a timely
basis, all reports and forms required by federal regulations with respect to any
Lomak Benefit Plan; and
(m) Lomak will not, and will not permit any of its Subsidiaries to, agree
or commit to do any of the foregoing.
Section 6.3 Conduct of Business of Merger Sub. From the date hereof to the
Effective Time, Merger Sub shall not engage in any activities of any nature
except as provided in or contemplated by this Agreement.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access and Information. The parties shall each afford to the
other and to the other's financial advisors, legal counsel, accountants,
consultants, financing sources and other authorized representatives access
during normal business hours throughout the period prior to the Effective Time
to all of its books, records, properties, contracts, leases, plants and
personnel and, during such period, each shall furnish promptly to the other (a)
a copy of each report, schedule and other document filed or received by it
pursuant to the requirements of federal or state securities laws, and (b) all
other information as such other party reasonably may request, provided that no
investigation pursuant to this Section 7.1 shall affect any representations or
warranties made herein or the conditions to the obligations of the respective
parties to consummate the Merger. Each party shall hold in confidence all
non-public information until such time as such information is otherwise publicly
available and, if this Agreement is terminated, each party will deliver to the
other all documents, work papers and other materials (including copies) obtained
by such party or on its behalf from the other party as a result of this
Agreement or in connection herewith, whether so obtained before or after the
execution hereof. Notwithstanding the foregoing, the Confidentiality Agreement
dated March 31, 1998 between Lomak and the Company shall survive the execution
and delivery of this Agreement.
Section 7.2 Acquisition Proposals.
(a) From the date hereof until the termination hereof, the Company and its
Subsidiaries will not, and will cause their respective officers, directors,
employees or other agents not to, directly or indirectly, (i) take any action to
solicit, initiate or encourage any Company Acquisition Proposal or (ii) engage
in negotiations with, or disclose any nonpublic information relating to the
Company or its Subsidiaries, respectively, or afford access to their respective
properties, books or records to any Person that may be considering making, or
has made, a Company Acquisition Proposal. Nothing contained in this Section 7.2
shall prohibit the Company and its Board of Directors from taking and disclosing
a position with respect to a tender offer by a third party pursuant to Rules
14d-9 and 14e-2(a) promulgated by the SEC under the Exchange Act.
(b) The term "Company Acquisition Proposal" as used herein means any offer
or proposal for, or any indication of interest in, a merger or other business
combination directly or indirectly involving the Company or any Company
Subsidiary or the acquisition of a substantial equity interest in, or a
substantial portion of the assets of, any such party, other than the
transactions contemplated by this Agreement.
Section 7.3 Directors' and Officers' Indemnification.
(a) For six years after the Effective Time, Lomak shall indemnify, defend
and hold harmless the present and former officers and directors of the Company
and its Subsidiaries (each an "Indemnified Party") against all losses, claims,
damages, liabilities, fees and expenses (including reasonable fees and
disbursements of counsel and judgments, fines, losses, claims, liabilities and
amounts paid in settlement (provided that any such settlement is effected with
the prior written consent of Lomak, which shall not be unreasonably withheld))
in connection with any claim, action, suit, proceeding or investigation (an
"Action") arising out of actions or omissions in their capacity as such
occurring at or prior to the Effective Time to the full extent permitted under
the DGCL or the Company's Certificate of Incorporation, Bylaws or written
indemnification agreements in effect at the date hereof, including provisions
therein relating to the advancement of expenses
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incurred in the defense of any action or suit; provided, that in the event any
claim or claims are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims shall continue until
disposition of any and all such claims; and provided, further, that any
determination required to be made with respect to whether an Indemnified Party's
conduct complies with the standards set forth under the DGCL, the Company's
Certificate of Incorporation or Bylaws or such agreements, as the case may be,
shall be made by independent counsel mutually acceptable to Lomak and the
Indemnified Party; and provided, further, that nothing herein shall impair any
rights or obligations of any present or former directors or officers of the
Company. In the event of any Action, any Indemnified Party wishing to claim
indemnification will promptly notify Lomak thereof (provided that failure to so
notify Lomak will not affect the obligations of Lomak to provide indemnification
except to the extent that Lomak shall have been prejudiced as a result of such
failure). With respect to any Action for which indemnification is requested,
Lomak will be entitled to participate therein at its own expense and, except as
otherwise provided below, to the extent that it may wish, Lomak may assume the
defense thereof, with counsel reasonably satisfactory to the Indemnified Party.
After notice from Lomak to the Indemnified Party of its election to assume the
defense of an Action, Lomak will not be liable to the Indemnified Party in
connection with the defense thereof, other than as provided below. Lomak will
not settle any Action without the Indemnified Party's written consent (which
consent will not be unreasonably withheld). The Indemnified Party will have the
right to employ counsel in any Action, but the fees and expenses of such counsel
incurred after notice from Lomak of its assumption of the defense thereof will
be at the expense of the Indemnified Party, unless (i) the employment of counsel
by the Indemnified Party has been authorized by Lomak, (ii) the Indemnified
Party will have reasonably concluded upon the advice of counsel that there may
be a conflict of interest between the Indemnified Party and Lomak in the conduct
of the defense of an action, or (iii) Lomak shall not in fact have employed
counsel to assume the defense of an Action, in each of which cases the
reasonable fees and expenses of counsel selected by the Indemnified Party will
be at the expense of Lomak. Notwithstanding the foregoing, Lomak will not be
liable for any settlement effected without its written consent (which shall not
be unreasonably withheld) and Lomak will not be obligated pursuant to this
Section 7.3(a) to pay the fees and disbursements of more than one counsel for
all Indemnified Parties in any single Action, except to the extent two or more
of such Indemnified Parties have conflicting interests in the outcome of such
action.
(b) Lomak shall maintain the Company's existing officers' and directors'
liability insurance policy ("D&O Insurance") for a period of not less than six
years after the Effective Time, but only to the extent related to actions or
omissions prior to the Effective Time; provided, that Lomak may substitute
therefor policies of substantially similar coverage and amounts with a
comparably rated underwriter containing terms no less advantageous in any
material respect to such former directors or officers; provided further, that
the aggregate amount of premiums to be paid with respect to the maintenance of
such D&O Insurance for such six year period shall not exceed $600,000.
(c) Lomak will cause the Surviving Corporation to keep in effect provisions
in its certificate of incorporation and bylaws providing for exculpation of
director and officer liability and its indemnification of the Indemnified
Parties to the fullest extent permitted under the DGCL, which provisions will
not be amended except as required by applicable law or except to make changes
permitted by law that would enlarge the Indemnified Parties' right of
indemnification.
(d) The provisions of this Section 7.3 will survive the consummation of the
Merger and expressly are intended to benefit each of the Indemnified Parties.
Section 7.4 Further Assurances. Each party hereto agrees to use all
reasonable efforts to obtain all consents and approvals and to do all other
things necessary for the consummation of the transactions contemplated by this
Agreement. The parties agree to take such further action to deliver or cause to
be delivered to each other at the Closing and at such other times thereafter as
shall be reasonably agreed such additional agreements or instruments as any of
them may reasonably request for the purpose of carrying out this Agreement and
agreements and transactions contemplated hereby and thereby.
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Section 7.5 Expenses.
(a) All Expenses (as defined below) incurred in connection with this
Agreement and the transactions contemplated hereby will be paid by the party
incurring such expenses except as expressly provided herein and except that both
(i) the filing fee in connection with the filing of the Registration Statement
or Proxy Statement/Prospectus with the SEC and (ii) the expenses incurred in
connection with printing and mailing the Registration Statement and the Proxy
Statement/Prospectus will be shared equally by the Company and Lomak.
(b) "Expenses" as used in this Agreement shall include all reasonable
out-of-pocket expenses (including, without limitation, all reasonable fees and
expenses of counsel, accountants, investment bankers, experts and consultants to
a party hereto and its affiliates) incurred by a party or on its behalf in
connection with or related to the authorization, preparation, negotiation,
execution and performance of this Agreement, the preparation, printing, filing
and mailing of the Registration Statement, the Proxy Statement/Prospectus, the
solicitation of stockholder approvals and all other matters related to the
consummation of the transactions contemplated hereby.
Section 7.6 Cooperation. Subject to compliance with applicable law, from
the date hereof until the Effective Time, each of the parties hereto shall
confer on a regular and frequent basis with one or more representatives of the
other parties to report operational matters of materiality and the general
status of ongoing operations and shall promptly provide the other party or its
counsel with copies of all filings made by such party with any Governmental
Authority in connection with this Agreement and the transactions contemplated
hereby.
Section 7.7 Publicity. Neither the Company, Lomak nor any of their
respective affiliates shall issue or cause the publication of any press release
or other announcement with respect to the Merger, this Agreement or the other
transactions contemplated hereby without the prior consultation of the other
party, except as may be required by law or by any listing agreement with a
national securities exchange. The parties agree to respond promptly to any press
release or other announcement submitted for comment pursuant to this Section
7.7.
Section 7.8 Additional Actions. Subject to the terms and conditions of
this Agreement, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations, or
to remove any injunctions or other impediments or delays, to consummate and make
effective the Merger and the other transactions contemplated by this Agreement,
subject, however, to the appropriate vote of stockholders of the Company and
Lomak required so to vote.
Section 7.9 Filings. Each party hereto shall make all filings required to
be made by such party in connection herewith or desirable to achieve the
purposes contemplated hereby, and shall cooperate as needed with respect to any
such filing by any other party hereto.
Section 7.10 Consents. Each of Lomak, Merger Sub and the Company shall use
all reasonable efforts to obtain all consents necessary or advisable in
connection with its obligations hereunder.
Section 7.11 Employee Matters; Benefit Plans. After the Effective Time,
Lomak will provide to any employees of the Company who are employed by the
Company as of the Effective Time (the "Retained Employees") the same base salary
or wages provided to such employees prior to the Effective Time. From and after
the Effective Time until January 1, 1999, Lomak will provide, or cause to be
provided to, the Retained Employees employee plans that are comparable to the
employee plans that Lomak provides to its similarly situated employees or
provide coverage under existing Lomak benefit plans provided to similarly
situated employees. Further, Lomak shall (i) waive, or cause to be waived, any
preexisting condition limitations applicable to the Retained Employees under any
group medical plan to the extent that a Retained Employee's condition would not
have operated as a preexisting condition limitation under the Company's group
medical plan, (ii) cause any employee pension benefit plan (as such term is
defined in section 3(2) of ERISA) which is intended to be qualified under
Section 401 of the Code to be amended to provide that the Retained Employees
shall receive credit for participation and vesting purposes under such plan for
their period of
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employment with the Company and its predecessors to the extent such predecessor
employment was recognized by the Company, and (iii) credit the Retained
Employees under each other employee benefit plan or policy which is not
described in clause (ii) above for their period of employment with the Company
or its predecessors to the extent such predecessor employment was recognized by
the Company, but not in excess of the maximum credit available to Lomak's
employees under such plan or policy. At the Effective Time, Lomak shall assume,
and shall, and shall cause the Surviving Corporation to, honor and perform all
obligations of the Company under (i) the employment arrangements described in
Schedule 6.1(m), (ii) the Company's employment agreements with each of Michael
V. Ronca and Michael L. Harvey, as in effect on the date hereof and as may be
amended in the manner described in Schedule 6.1(m), (iii) the Company Employee
Plan and all Amended and Restated Non-Qualified Stock Option Agreements executed
thereunder, as same may be amended as contemplated by Section 3.3 hereof and
(iv) the Company Director Plan and all stock option grant agreements executed
thereunder, as the same may be amended as contemplated by Section 3.3 hereof.
Section 7.12 Lomak Board. Lomak shall take action to cause the number of
directors on the Lomak Board immediately after the Effective Time to be
increased by two directors and shall cause the President of the Company and
Chairman of the Board of the Company elected to the Board of Directors
immediately after the Effective Time. Lomak agrees to nominate such newly
appointed directors for election by Lomak's stockholders at Lomak's 1999 Annual
Meeting of Stockholders.
Section 7.13 Stockholders Meetings.
(a) Approval of the Company Stockholders. The Company shall, as promptly as
reasonably practicable after the date hereof (i) take all steps reasonably
necessary to call, give notice of, convene and hold a special meeting of its
stockholders (the "Company Special Meeting") for the purpose of securing the
Company Stockholder Approval, (ii) distribute to its stockholders the Proxy
Statement/Prospectus in accordance with applicable federal and state law and
with its certificate of incorporation and bylaws, which Proxy Statement/
Prospectus shall contain the recommendation of the Board of Directors of the
Company that its stockholders approve the Merger, this Agreement and the
transactions contemplated hereby, (iii) use all reasonable efforts to solicit
from its stockholders proxies in favor of the approval and adoption of the
Merger, this Agreement and the transactions contemplated hereby and to secure
the Company Stockholder Approval, and (iv) cooperate and consult with Lomak with
respect to each of the foregoing matters. The parties acknowledge that, in lieu
of the Company Special Meeting, the Company Stockholder Approval may be obtained
by the execution of written stockholder consents pursuant to Section 228 of the
DGCL by the holders of at least a majority of the outstanding shares of Company
Common Stock, and that in such event, the Registration Statement shall include
an information statement with respect to the holders of Company Common Stock
pursuant to Section 14(c) under the Exchange Act.
(b) Approval of Lomak Stockholders. Lomak shall, as promptly as reasonably
practicable after the date hereof (i) take all steps reasonably necessary to
call, give notice of, convene and hold a special meeting of its stockholders
(the "Lomak Special Meeting") for the purpose of securing the Lomak Stockholder
Approval, (ii) distribute to its stockholders the Proxy Statement/Prospectus in
accordance with applicable federal and state law and its certificate of
incorporation and bylaws, which Proxy Statement/Prospectus shall contain the
recommendation of the Lomak Board of Directors that its stockholders approve the
Stock Issuance and (iii) use all reasonable efforts to solicit from its
stockholders proxies in favor of the approval of the Stock Issuance and to
secure the Lomak Stockholder Approval, and (iv) cooperate and consult with the
Company with respect to each of the foregoing matters. Lomak, as the sole
stockholder of Merger Sub, has consented to the adoption of this Agreement by
Merger Sub and agrees that such consent shall be treated for all purposes as a
vote duly adopted at a meeting of the stockholders of Merger Sub held for this
purpose.
(c) Meeting Date. The Lomak Special Meeting and the Company Special Meeting
shall be held on the same day unless otherwise agreed by Lomak and the Company.
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Section 7.14 Preparation of the Proxy Statement/Prospectus and
Registration Statement.
(a) Lomak and the Company shall promptly prepare and file with the SEC a
preliminary version of the Proxy Statement/Prospectus and will use all
reasonable efforts to respond to the comments of the SEC in connection therewith
and to furnish all information required to prepare the definitive Proxy
Statement/ Prospectus. Each of Lomak and the Company shall use all reasonable
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing and to keep the
Registration Statement effective as long as is necessary to consummate the
Merger. Lomak shall also take any action (other than qualifying to do business
in any jurisdiction in which it is not now so qualified or filing a general
consent to service of process in any jurisdiction) required to be taken under
any applicable state securities laws in connection with the issuance of Lomak
Common Stock in the Merger and the Company shall furnish all information
concerning the Company and the holders of shares of the Company Common Stock as
may be reasonably requested in connection with any such action. The Company
authorizes Lomak to utilize in the Registration Statement the information
concerning the Company and its Subsidiaries provided to Lomak for the purpose of
inclusion in the Proxy Statement/Prospectus. The Company shall have the right to
review and comment on the form of proxy statement and prospectus included in the
Registration Statement. Promptly after the effectiveness of the Registration
Statement, each of Lomak and the Company shall cause the Proxy
Statement/Prospectus to be mailed to its respective stockholders, and if
necessary, after the definitive Proxy Statement/Prospectus shall have been
mailed, promptly circulate amended, supplemented or supplemental proxy materials
and, if required in connection therewith, resolicit proxies. Lomak shall advise
the Company and the Company shall advise Lomak, as applicable, promptly after it
receives notice thereof, of the time when the Registration Statement shall
become effective or any supplement or amendment has been filed, the issuance of
any stop order, the suspension of the qualification of the Lomak Common Stock
for offering or sale in any jurisdiction, or any request by the SEC for
amendment of the Proxy Statement/ Prospectus or the Registration Statement or
comments thereon and responses thereto or requests by the SEC for additional
information. Prior to the Effective Time or the termination of this Agreement,
each party shall consult with each other with respect to any material (other
than the Proxy Statement/Prospectus) that constitutes a "prospectus" relating to
the Merger within the meaning of the Securities Act. Lomak shall furnish such
information concerning Lomak as is necessary to cause the Proxy
Statement/Prospectus, insofar as it relates to Lomak, to be prepared in
accordance with this Section 7.14. Lomak agrees promptly to advise the Company
if at any time prior to the Company Special Meeting (or in the case of the
delivery of an information statement pursuant to Section 14(c) under the
Exchange Act, the date of mailing thereof) any information provided by Lomak in
the Proxy Statement/Prospectus becomes incorrect or incomplete in any material
respect, and to provide the information needed to correct such inaccuracy or
omission. The Company shall furnish Lomak such information concerning the
Company and its Subsidiaries as is necessary to cause the Proxy
Statement/Prospectus, insofar as it relates to the Company and its Subsidiaries,
to be prepared in accordance with this Section 7.14. The Company agrees promptly
to advise Lomak if at any time prior to the Lomak Special Meeting any
information provided by the Company in the Proxy Statement/Prospectus becomes
incorrect or incomplete in any material respect, and to provide the information
needed to correct such inaccuracy or omission.
(b) Letter of Lomak's Accountants. Following receipt by Arthur Andersen
LLP, Lomak's independent auditors, of an appropriate request from the Company
pursuant to SAS No. 72, Lomak shall use all reasonable efforts to cause to be
delivered to the Company a letter of Arthur Andersen LLP, dated a date within
two business days before the effective date of the Registration Statement, and
addressed to the Company, in form and substance reasonably satisfactory to the
Company and customary in scope and substance for "cold comfort" letters
delivered by independent public accountants in connection with registration
statements and proxy statements similar to the Proxy Statement/Prospectus. Lomak
shall also use all reasonable efforts to obtain from Arthur Andersen LLP any
consents of such firm required in connection with the filing of the Proxy
Statement/Prospectus with the SEC.
(c) Letter of the Company's Accountants. Following receipt by Deloitte &
Touche LLP, the Company's independent auditors, of an appropriate request from
Lomak pursuant to SAS No. 72, the Company shall use all reasonable efforts to
cause to be delivered to Lomak a letter of Deloitte & Touche LLP, dated a date
within
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two business days before the effective date of the Registration Statement, and
addressed to Lomak, in form and substance satisfactory to Lomak and customary in
scope and substance for "cold comfort" letters delivered by independent public
accountants in connection with registration statements and proxy statements
similar to the Proxy Statement/Prospectus. The Company shall also use all
reasonable efforts to obtain from Deloitte & Touche LLP any consents of such
firm required in connection with the filing of the Proxy Statement/Prospectus
with the SEC.
Section 7.15 Stock Exchange Listing. Lomak shall use all reasonable
efforts to cause the Lomak Common Stock to be issued in the Merger to be
approved for listing on the NYSE prior to the Effective Time, in each case,
subject to official notice of issuance.
Section 7.16 Notice of Certain Events. Each party to this Agreement shall
promptly as reasonably practicable notify the other parties hereto of:
(a) any notice or other communication from any Person alleging that the
consent of such Person (or other Person) is or may be required in connection
with the transactions contemplated by this Agreement;
(b) any notice or other communication from any Governmental Authority in
connection with the transactions contemplated by this Agreement;
(c) any actions, suits, claims, investigations or proceedings commenced or,
to the best of its knowledge, threatened against, relating to or involving or
otherwise affecting it or any of its Subsidiaries which, if pending on the date
of this Agreement, would have been required to have been disclosed pursuant to
Sections 4.10, 4.12, 5.10 or 5.12 or which relate to the consummation of the
transactions contemplated by this Agreement;
(d) any notice of, or other communication relating to, a default or event
that, with notice or lapse of time or both, would become a default, received by
it or any of its Subsidiaries subsequent to the date of this Agreement, under
any material agreement; and
(e) any Company Material Adverse Effect or Lomak Material Adverse Effect or
the occurrence of any event which is reasonably likely to result in a Company
Material Adverse Effect or a Lomak Material Adverse Effect, as the case may be.
Section 7.17 Site Inspections. Subject to compliance with applicable law
(including applicable Environmental Laws), from the date hereof until the
Effective Time, each of the parties hereto may undertake (at that party's sole
cost and expense) an environmental assessment or assessments (an "Assessment")
of any other party's operations, business and/or properties that are the subject
of this Agreement. An Assessment may include, but not be limited to, a review of
permits, files and records, as well as visual and physical inspections and
testing. Before conducting an Assessment, the party intending to conduct such
Assessment (the "Inspecting Party") shall confer with the party whose
operations, business or property is the subject of such Assessment (the
"Inspected Party") regarding the nature, scope and scheduling of such
Assessment, and shall comply with such conditions as the Inspected Party may
reasonably impose to avoid interference with the Inspected Party's operations or
business. The Inspected Party shall cooperate in good faith with the Inspecting
Party's effort to conduct an Assessment.
Section 7.18 Chief Operating Officer. Immediately after the Effective
Time, Michael V. Ronca shall be elected by the Lomak Board of Directors as Chief
Operating Officer of Lomak.
Section 7.19 Charter Amendments; Name. At the Effective Time, the name of
Lomak shall be changed to "Range Resources Corporation" (the "Name Change"), and
Lomak shall use all reasonable efforts to take such actions as are necessary to
amend the Certificate of Incorporation of Lomak to reflect the Name Change;
provided, however, that obtaining the requisite stockholder approval to effect
the Name Change shall not constitute a condition to the obligations of either
party to consummate the transactions contemplated by this Agreement.
Section 7.20 Voting Agreement. Concurrently with the execution of this
Agreement, Lomak shall enter into the Voting Agreement with the Principal
Stockholder regarding, among other things, the voting of shares of Company
Common Stock. Concurrently with the execution of this Agreement, Lomak and the
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Principal Stockholder shall enter into the Stock Purchase Agreement, pursuant to
which Lomak shall agree, on the terms and subject to the conditions set forth
therein, to acquire at least 3,250,000 of the outstanding shares of Company
Common Stock for $13.50 per share in cash.
ARTICLE VIII
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 8.1 Conditions to the Obligation of Each Party. The respective
obligations of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following conditions, any
or all of which may be waived in whole or in part by the party being benefitted
thereby, to the extent permitted by applicable law:
(a) The Company Stockholder Approval and the Lomak Stockholder Approval
shall have been obtained.
(b) No action, suit or proceeding instituted by any Governmental Authority
shall be pending and no statute, rule or regulation and no injunction, order,
decree or judgment of any court or Governmental Authority of competent
jurisdiction shall be in effect which would prohibit, restrain, enjoin or
restrict the consummation of the Merger.
(c) The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act and shall be effective at the
Effective Time, and no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceeding for such purpose
shall be pending before or threatened by the SEC.
(d) Each of the Company and Lomak shall have obtained such permits,
authorizations, consents, or approvals required to be obtained by such party (or
its Subsidiaries or Affiliates) to consummate the transactions contemplated
hereby.
(e) The shares of Lomak Common Stock to be issued in the Merger shall have
been approved for listing on the NYSE subject to official notice of issuance.
(f) Any applicable waiting period under the HSR Act relating to the
transactions contemplated hereby shall have expired.
Section 8.2 Conditions to the Obligations of Lomak and Merger Sub. The
obligation of Lomak and Merger Sub to effect the Merger is subject to the
satisfaction at or prior to the Effective Time of the following conditions, any
or all of which may be waived in whole or in part by Lomak and Merger Sub, as
the case may be, to the extent permitted by applicable law:
(a) The Company shall have performed in all material respects its
obligations under this Agreement required to be performed by it at or prior to
the Effective Time and the representations and warranties of the Company
contained in this Agreement shall be true and correct in all respects, in each
case except for such failures to be so true and correct (without giving effect
for purposes of this Section 8.2(a) to the individual materiality standards
otherwise contained in Article IV hereof) which would not, individually or in
the aggregate, reasonably be expected to have a Company Material Adverse Effect,
in each case as of the date of this Agreement and at and as of the Effective
Time as if made at and as of such time, except as expressly contemplated by this
Agreement, and Lomak shall have received a certificate of the President and
Chief Executive Officer and Chief Financial Officer of the Company as to the
satisfaction of this condition.
(b) The transactions contemplated by the Stock Purchase Agreement shall
have been consummated on or prior to the Effective Time in accordance with the
terms thereof, and as a result of such transactions, Lomak shall have acquired
at least 3,250,000 shares of outstanding Company Common Stock.
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Section 8.3 Conditions to the Obligations of the Company. The obligation
of the Company to effect the Merger is subject to the satisfaction at or prior
to the Effective Time of the following conditions, any or all of which may be
waived in whole or in part by the Company to the extent permitted by applicable
law:
(a) Each of Lomak and Merger Sub shall have performed in all material
respects its obligations under this Agreement required to be performed by it at
or prior to the Effective Time and the representations and warranties of each of
Lomak and Merger Sub contained in this Agreement, shall be true and correct in
all respects, in each case except for such failures to be so true and correct
(without giving effect for purposes of this Section 8.3(a) to the individual
materiality standards otherwise contained in Article V hereof) which would not,
individually or in the aggregate, reasonably be expected to have a Lomak
Material Adverse Effect, in each case as of the date of this Agreement and at
and as of the Effective Time as if made at and as of such time, except as
expressly contemplated by this Agreement, and the Company shall have received a
certificate of the President and Chief Executive Officer and Chief Financial
Officer of Lomak and an executive officer and the chief financial officer of
Merger Sub as to the satisfaction of this condition.
ARTICLE IX
SURVIVAL
Section 9.1 Survival of Representations and Warranties. The
representations and warranties of the parties contained in this Agreement shall
not survive the Closing.
Section 9.2 Survival of Covenants and Agreements. The covenants and
agreements of the parties to be performed after the Closing contained in this
Agreement shall survive the Closing.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
Section 10.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval by the
stockholders of Lomak and the Company:
(a) by the mutual written consent of the Boards of Directors of Lomak and
the Company;
(b) by either Lomak or the Company if the Effective Time shall not have
occurred on or before October 31, 1998 (provided that the right to terminate
this Agreement under this subsection (b) shall not be available to any party who
at the time of the proposed termination is in material breach of any of its
obligations under this Agreement);
(c) by the Company, if there has been a material breach by Lomak or Merger
Sub of any covenant or agreement set forth in this Agreement, the Voting
Agreement or the Stock Purchase Agreement or if there shall be a breach by Lomak
of any representation contained in Article V hereof that would result in a
failure to satisfy the conditions set forth in Section 8.3(a), in each case
which breach (if susceptible to cure) has not been cured in all material
respects within twenty business days following receipt by Lomak of notice of
such breach;
(d) by Lomak, if there has been a material breach by the Company or the
Principal Stockholder of any covenant or agreement set forth in this Agreement,
the Voting Agreement or the Stock Purchase Agreement, or if there shall be a
breach by the Company of any representation contained in Article IV hereof that
would result in a failure to satisfy the conditions set forth in Section 8.2(a)
or a material breach by the Principal Stockholder of the Voting Agreement or
Stock Purchase Agreement, in each case which breach (if susceptible to cure) has
not been cured in all material respects within twenty business days following
receipt by the Company or Principal Stockholder as applicable, of notice of such
breach (the "Company Breach");
(e) by either the Company or Lomak, if there shall be any applicable
domestic law, rule or regulation that makes consummation of the Merger illegal
or if any judgment, injunction, order or decree of a court or other Governmental
Authority of competent jurisdiction shall restrain or prohibit the consummation
of the Merger, and such judgment, injunction, order or decree shall become final
and nonappealable; or
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(f) by either the Company or Lomak, if the stockholder approvals referred
to in Section 7.13 shall not have been obtained by reason of the failure to
obtain the requisite vote upon a vote at a duly held meeting of stockholders or
at any adjournment or postponement thereof.
Section 10.2 Effect of Termination. In the event of termination of the
Agreement and the abandonment of the Merger pursuant to this Article X, all
obligations of the parties shall terminate, except the obligations of the
parties pursuant to this Section 10.2 and except for the provisions of Sections
7.5, 7.7 and 11.8 and the last two sentences of Section 7.1, provided that
nothing herein shall relieve any party from liability for any willful breaches
hereof.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Notices. All notices or communications hereunder shall be in
writing (including facsimile or similar writing) addressed as follows:
To Lomak or Merger Sub:
Lomak Petroleum, Inc.
500 Throckmorton Street, Suite 1900
Fort Worth, Texas 76102
Attention: John H. Pinkerton
Facsimile No.: (817) 870-2316
With a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Attention: J. Mark Metts
Facsimile No.: (713) 615-5605
To the Company:
Domain Energy Corporation
16801 Greenspoint Park Drive, Suite 200
Houston, Texas 77060
Attention: Michael V. Ronca
Facsimile No.: (281) 618-1977
With copies to:
Weil, Gotshal & Manges LLP
700 Louisiana, Suite 1600
Houston, Texas 77002
Attention: James L. Rice III
Facsimile No.: (713) 224-9511
and:
First Reserve Fund VII, Limited Partnership
c/o First Reserve Corporation
1801 California Street, Suite 4110
Denver, Colorado 80202
Attention: Thomas R. Denison
Facsimile No.: (303) 382-1275
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Any such notice or communication shall be deemed given (a) when made, if made by
hand delivery, and upon confirmation of receipt, if made by facsimile, (b) one
Business Day after being deposited with a next-day courier, postage prepaid, or
(c) three Business Days after being sent certified or registered mail, return
receipt requested, postage prepaid, in each case addressed as above (or to such
other address as such party may designate in writing from time to time).
Section 11.2 Separability. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof, which shall
remain in full force and effect.
Section 11.3 Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, legal
representatives, successors, and assigns; provided, however, that neither this
Agreement nor any rights hereunder shall be assignable or otherwise subject to
hypothecation and any assignment in violation hereof shall be null and void.
Section 11.4 Interpretation. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 11.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same Agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to each party.
Section 11.6 Entire Agreement. This Agreement (together with the Company
Disclosure Schedules and the Lomak Disclosure Schedules) represents the entire
Agreement of the parties with respect to the subject matter hereof and shall
supersede any and all previous contracts, arrangements or understandings between
the parties hereto with respect to the subject matter hereof.
Section 11.7 Governing Law. This Agreement shall be construed,
interpreted, and governed in accordance with the laws of Delaware, without
reference to rules relating to conflicts of law.
Section 11.8 Attorneys' Fees. If any action at law or equity, including an
action for declaratory relief, is brought to enforce or interpret any provision
of this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and expenses from the other party, which fees and expenses shall
be in addition to any other relief which may be awarded.
Section 11.9 No Third Party Beneficiaries. Except as provided in Section
7.3, no Person or entity other than the parties hereto is an intended
beneficiary of this Agreement or any portion hereof.
Section 11.10 Disclosure Schedules. The disclosures made on any disclosure
schedule, including the Company Disclosure Schedule and the Lomak Disclosure
Schedule, with respect to any representation or warranty shall be deemed to be
made with respect to any other representation or warranty requiring the same or
similar disclosure to the extent that the relevance of such disclosure to other
representations and warranties is evident from the face of the disclosure
schedule. The inclusion of any matter on any disclosure schedule will not be
deemed an admission by any party that such listed matter is material or that
such listed matter has or would have a Company Material Adverse Effect or a
Lomak Material Adverse Effect, as applicable.
Section 11.11 Amendments, Waivers, Etc. This Agreement may not be amended,
changed, supplemented, waived or otherwise modified except by an instrument in
writing signed by all the parties hereto. This Agreement may be amended by the
parties hereto, by action taken by their respective Board of Directors, at any
time before or after approval of matters presented in connection with the Merger
by the stockholders of Lomak, Merger Sub and the Company, but after any such
stockholder approval, no amendment shall be made which by law requires the
further approval of stockholders without obtaining such further approval.
Section 11.12 No Waiver. The failure of any party hereto to exercise any
right, power or remedy provided under this Agreement or otherwise available in
respect hereof at law or in equity, or to insist upon compliance by any other
party hereto with its obligations hereunder, and any custom or practice of the
parties at variance with the terms hereof, shall not constitute a waiver by such
party of its right to exercise any such or other right, power or remedy or to
demand such compliance.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
LOMAK PETROLEUM, INC.
By: /s/ JOHN H. PINKERTON
----------------------------------
John H. Pinkerton
President and Chief Executive
Officer
DEC ACQUISITION, INC.
By: /s/ JOHN H. PINKERTON
----------------------------------
John H. Pinkerton
President
DOMAIN ENERGY CORPORATION
By: /s/ MICHAEL V. RONCA
----------------------------------
Michael V. Ronca
President and Chief Executive
Officer
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ANNEX B
VOTING AND STANDSTILL AGREEMENT
VOTING AND STANDSTILL AGREEMENT ("Agreement") dated May 12, 1998, between
Lomak Petroleum, Inc., a Delaware corporation ("Lomak"), and First Reserve Fund
VII, Limited Partnership, a Delaware limited partnership ("FRLP").
W I T N E S S E T H:
WHEREAS, FRLP beneficially owns, and has the right to vote, 7,820,718
shares (the "Shares") of common stock, par value $.01 per share ("Domain Common
Stock"), of Domain Energy Corporation, a Delaware corporation ("Domain"), which
represent at least a majority of the shares of Domain Common Stock outstanding
on the date hereof;
WHEREAS, Lomak is prepared to enter into an Agreement and Plan of Merger
with Domain (as amended from time to time, the "Merger Agreement") providing for
the merger of a wholly owned subsidiary of Lomak into Domain and the conversion
in such merger of each share of Domain Common Stock into the number of shares of
common stock, par value $.01 per share, of Lomak (the "Lomak Common Stock") as
set forth in the Merger Agreement (the "Merger");
WHEREAS, pursuant to the Merger, FRLP would receive a substantial block of
Lomak Common Stock;
WHEREAS, FRLP fully supports the Merger and, in order to encourage Lomak to
enter into the Merger Agreement with Domain, FRLP is willing to enter into
certain arrangements with respect to (i) the Shares (ii) the shares of Lomak
Common Stock to be beneficially owned by the FRLP Group as a result of the
Merger and (iii) any shares of Lomak Common Stock beneficially owned by any
member of the FRLP Group from time to time other than (x) the number of shares
of Lomak Common Stock representing the excess on the date hereof of 19.9% of the
outstanding shares of Lomak Common Stock over the number of shares of Lomak
Common Stock to be beneficially owned by the FRLP Group in the aggregate as a
result of the Merger and (y) any shares of Lomak Common Stock that may be
acquired by any member of the FRLP Group as a result of any acquisition
transaction, business combination or similar transaction other than the
transactions contemplated by the Merger Agreement after the consummation of the
Merger (the shares described in clauses (x) and (y) shall be collectively
referred to herein as the "Exempt Lomak Shares" and any shares of Lomak Common
Stock described in clauses (ii) and (iii) other than the Exempt Lomak Shares
shall be referred to herein as the Lomak Shares);
NOW THEREFORE, in consideration of the premises set forth above, the mutual
promises set forth below, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Term. Except as otherwise expressly provided herein, the respective
covenants and agreements of Lomak and FRLP contained in this Agreement will
continue in full force and effect until the second anniversary of the
consummation of the Merger (the "Termination Date"). This Agreement may be
terminated by the mutual written agreement of the parties.
2. FRLP's Support of the Merger. From the date hereof until April 30, 1999
or, if earlier, termination of this Agreement:
(a) FRLP will not, directly or indirectly, sell, transfer, pledge or
otherwise dispose of, or grant a proxy with respect to, any Shares to any person
other than Lomak or its designee, or grant an option with respect to any of the
foregoing, or enter into any other agreement or arrangement with respect to any
of the foregoing; provided, however, that if the Closing Date Market Price (as
defined in the Merger Agreement and calculated as if the date of consummation of
the Merger were the date of a proposed sale by FRLP) is greater than $17.00 per
share, then FRLP may sell pursuant to transactions exempt under Rule 144 ("Rule
144") under the Securities Act of 1933, as amended (the "Securities Act") a
number of Shares in the aggregate not
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greater than 1% of the number of outstanding shares of Domain Common Stock;
provided further that in no event shall FRLP execute any sale that would result
in FRLP's beneficially owning with power to vote less than an amount of Shares
that, when added to the shares sold under the Stock Purchase Agreement, will
aggregate a majority of the fully diluted shares of Domain Common Stock
(assuming for such purposes the full exercise and conversion of all outstanding
options, warrants and other rights to purchase shares of Domain Common Stock,
regardless of whether such options, warrants or rights are then exercisable or
"in-the-money").
(b) Neither FRLP nor any other member of the FRLP Group will, and will
cause their respective officers, directors, partners, employees or other agents
not to, directly or indirectly, (i) take any action to solicit, initiate or
encourage any offer or proposal for, or any indication of interest in, a merger
or other business combination directly or indirectly involving Domain or any
subsidiary of Domain or the acquisition of a substantial equity interest in, or
a substantial portion of the assets of, any third party, other than the
transactions contemplated by the Merger Agreement or this Agreement (a "Domain
Acquisition Proposal"), or (ii) engage in negotiations with, or disclose any
nonpublic information relating to Domain or its subsidiaries, respectively, or
afford access to Domain's or its subsidiaries' respective properties, books or
records to, any person that may be considering making, or has made, a Domain
Acquisition Proposal. FRLP shall promptly notify Lomak of all relevant terms of
any such inquiries or proposals received by FRLP or any other member of the FRLP
Group or by any such officer, director, partner, employee or other agent
relating to any of such matters and if such inquiry or proposal is in writing,
FRLP shall deliver or cause to be delivered to Lomak a copy of such inquiry or
proposal. For purposes of this Agreement, the term "FRLP Group" shall
collectively refer to FRLP, its general partner, First Reserve Corporation
("FRC"), managing directors and other senior officers of FRC and any affiliates
or associates of any of the foregoing controlled by any of the foregoing;
provided, however, that a person shall not be deemed a member of the FRLP Group
if the only reason that such person would be deemed an affiliate or associate of
FRLP is because it is a limited partner of FRLP.
(c) FRLP agrees that FRLP will vote all Shares beneficially owned by FRLP
(i) in favor of the Merger and the Merger Agreement and (ii) subject to the
provisions of paragraph (d) below, against any combination proposal or other
matter that may interfere or be inconsistent with the Merger (including without
limitation a Domain Acquisition Proposal). Without limiting the generality of
the foregoing provisions of this paragraph (c), FRLP agrees to execute and
deliver a stockholder consent pursuant to Section 228 of the Delaware General
Corporation Law immediately following the execution of the Merger Agreement in
favor of the Merger and Merger Agreement in form reasonably satisfactory to
Domain, Lomak and their respective counsels.
(d) FRLP agrees that, if requested by Lomak, it will not, and it will cause
each member of the FRLP Group not to, attend or vote any Shares beneficially
owned by any such person at any annual or special meeting of stockholders at
which a Domain Acquisition Proposal is being considered, or execute any written
consent of stockholders relating directly or indirectly to a Domain Acquisition
Proposal, during such period.
(e) FRLP shall take all affirmative steps reasonably requested by Lomak to
indicate its full support for the Merger, and hereby consents to Lomak's
announcement in any press release, public filing, advertisement or other
document, that FRLP fully supports the Merger.
(f) Lomak and FRLP agree that they shall use all reasonable efforts to seek
the successful completion of the Merger in an expeditious manner including the
preparation and filing of any necessary reports under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
(g) To the extent inconsistent with the provisions of this Section 2, each
member of the FRLP Group hereby revokes any and all proxies with respect to such
member's Shares or any other voting securities of Domain.
3. FRLP's Ownership of Lomak Voting Securities. Following the consummation
of the Merger and prior to the termination of this Agreement and subject to the
further provisions hereof, no member of the
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FRLP Group will, directly or indirectly, acting alone or in concert with others,
without the prior written consent of Lomak's Board of Directors:
(a) sell, transfer, pledge, distribute or otherwise dispose of, or grant a
proxy with respect to, any Lomak Shares to any person other than Lomak or its
designee, or grant any option with respect to any of the foregoing, or enter
into any other agreement or arrangement with respect to any of the foregoing,
except as follows (and the parties acknowledge that, solely for the purposes of
this paragraph (a), "FRLP Group" will exclude managing directors and officers of
FRC and any of their family members and family trusts created by any of such
persons or family members, but will not exclude any other affiliates of such
persons controlled by such persons):
(i) after the consummation of the Merger, bona fide sales of Lomak
Shares may be (x) made pursuant to a bona fide public offering otherwise
satisfying the requirements of Section 4 of this Agreement registered under
the Securities Act or (y) sold pursuant to Rule 144; provided that no sales
of Lomak Shares shall be made under clause (y) to any person or related
group of persons who would immediately thereafter, to the knowledge of any
member of the FRLP Group, beneficially own or have the right to acquire
Lomak Voting Securities representing more than 1% of the total combined
voting power of all Lomak Voting Securities then outstanding; provided
further that in connection with any such proposed sales the FRLP Group
shall use all reasonable efforts to advise Lomak of such proposed sales at
least two business days prior to such sales; and
(ii) after the consummation of the Merger, FRLP may distribute all or
a portion of the Lomak Shares to its partners in a pro rata distribution to
the extent required by the current terms of the limited partnership
agreement for FRLP, a copy of which has been provided to Lomak on or prior
to the date hereof;
(b) in any manner acquire, or attempt, seek or propose to acquire (or make
any request for permission with respect thereto), beneficial ownership of any
Lomak Voting Securities (other than any Exempt Lomak Shares) or any option with
respect to the foregoing, or enter into any other agreement or arrangement with
respect to the foregoing; provided, however, that the foregoing provisions of
this paragraph (b) shall not restrict or prohibit any purchase or acquisition by
any member of the FRLP Group of any Exempt Lomak Shares (as same may be adjusted
or reconstituted by any stock splits, stock dividends. stock combinations,
recapitalizations or similar corporate changes);
(c) initiate, submit or otherwise solicit any stockholders of Lomak with
respect to any proposal, including, without limitation, to seek the election or
removal of one or more members of the Lomak Board of Directors, for the vote of
stockholders of Lomak;
(d) become a member of or in any way participate in a "group" (other than
the FRLP Group) within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), with respect to any Lomak
Voting Securities;
(e) initiate or engage in, or induce or attempt to induce, or give
encouragement to any other person to initiate or engage in, any acquisition or
business combination proposal relating to Lomak, or any tender or exchange offer
for Lomak Voting Securities, or any proxy contest or other proxy solicitation or
change of control of Lomak (provided that the foregoing shall not restrict the
FRLP Group's ability to sell Lomak Shares pursuant to the terms of this
Agreement) or to communicate with, seek to advise, encourage or influence any
person or entity, in any manner, with respect to the voting of any Lomak Voting
Securities, or to become a "participant" in any "election contest" (as such
terms are defined or used in Rule 14a-11 under the Exchange Act) with respect to
Lomak;
(f) fail to be present in person or be represented by proxy at any
stockholder meeting of Lomak so that all Lomak Shares of which it is the
beneficial owner may be counted for the purpose of determining the presence of a
quorum at any such meeting;
(g) as a stockholder, vote or cause to be voted all Lomak Shares of which
any member of the FRLP Group is the beneficial owner with respect to each matter
submitted to Lomak's stockholders providing for,
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involving, expected to facilitate or that could reasonably be expected to result
in a business combination or other change in control of Lomak that has not been
approved by the Lomak Board of Directors (including without limitation the
election or removal of one or more Lomak directors or one or more nominees for
director proposed by the Lomak Board of Directors), in the manner recommended by
the Lomak Board of Directors;
(h) deposit any Lomak Shares in a voting trust, execute any written consent
with respect to any such securities or subject any Lomak Shares to any
arrangement or agreement with respect to the voting of such Lomak Shares (other
than this Agreement); or
(i) disclose any intention, plan or arrangement, or make any public
announcement (or request permission to many any such announcement) inconsistent
with the foregoing.
4. Registration Rights.
(a) RIGHT TO REQUEST REGISTRATION. At any time following the six-month
anniversary of the consummation of the Merger and prior to the fourth
anniversary of the consummation of the Merger, upon the written request of any
member of the FRLP Group, Lomak will use all reasonable efforts promptly to file
(but in any event within 90 days of such request) with the Securities and
Exchange Commission ("Commission") a registration statement under the Securities
Act, on such appropriate form as Lomak shall select, covering the Lomak Shares
then proposed to be sold by such member of the FRLP Group and will use all
reasonable efforts to cause such registration statement to become effective as
soon as practicable following such request; provided, however, that Lomak will
not be required to file any such registration statement during any period of
time (not to exceed 60 days) when Lomak (i) is contemplating a public offering
of the securities of Lomak or any subsidiary thereof and, in the judgment of the
managing underwriter thereof (or Lomak, if such offering is not underwritten),
such filing would have a material adverse effect on the contemplated offering,
(ii) is in possession of material information that it deems advisable not to
then disclose in a registration statement, or (iii) is engaged in any program
for the repurchase of Lomak Voting Securities which program cannot be suspended
without material adverse financial effects to Lomak or without breaching any
contractual obligations to which Lomak is subject; provided, however, that such
suspension of the obligation to file such registration statement resulting from
the occurrence of an event in clause (i), (ii) or (iii) or a series of similar
or related events may not last in excess of 60 days without the consent of FRLP,
which consent shall not be unreasonably withheld. In addition, Lomak shall not
be required (i) to effect any registration pursuant to this Section 4(a) unless
Lomak Shares representing at least 33% of the initial number of Lomak Shares
(subject to adjustment for any stock splits, stock dividends. stock
combinations, recapitalizations or similar corporate changes) are to be sold by
the FRLP Group or if the sale of such Lomak Shares would violate Section
3(a)(ii) hereof, or (ii) to consummate at the request of FRLP and/or any member
of the FRLP Group more than one registered offering under this Section 4(a).
Notwithstanding the foregoing, Lomak shall not be obligated to effect more than
one registration pursuant to this Section 4(a), but such obligation shall not be
deemed to have been satisfied until the sale of the registered shares is
consummated.
(b) INCLUSION IN OTHER REGISTRATIONS. If Lomak shall at any time after the
six-month anniversary of the consummation of the Merger and prior to the fourth
anniversary of the consummation of the Merger propose the registration under the
Securities Act of an offering of Lomak Voting Securities by Lomak solely for
cash (regardless of whether for its own account, for the account of other
security holders, or both), Lomak shall give notice as promptly as practicable
of such proposed registration to FRLP, and Lomak will use all reasonable efforts
to cause the offering of such Lomak Shares beneficially owned by the FRLP Group
as FRLP shall request within 15 days after the receipt of such notice to be
included, upon the same terms (including the method of distribution) in any such
offering; provided, however, that (i) Lomak shall not be required to give notice
or include such Lomak Shares in any such registration if the proposed
registration is (A) a registration of a stock option or compensation plan or of
securities issued or issuable pursuant to any such plan or (B) a registration of
securities proposed to be issued in connection with a merger or consolidation or
other business combination with another corporation or other person; (ii) Lomak
shall not be required to include such number of Lomak Shares in any such
registration as to which Lomak and FRLP are advised in writing by Lomak's
investment banking firm that the inclusion of such Lomak Shares would in the
opinion of
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such firm materially and adversely affect the successful marketing of the Lomak
Voting Securities originally proposed to be offered and sold in such offering
(provided, however, that the number of shares of Lomak Voting Securities to be
sold by persons other than Lomak, including members of the FRLP Group, shall be
reduced proportionately, based upon the number of shares proposed to be sold by
such persons); and (iii) Lomak may, without the consent of FRLP, withdraw such
registration statement and abandon the proposed offering in which FRLP has
requested to participate, in which case Lomak shall have no obligations under
this Section 4(b) with respect to the securities requested to be registered by
FRLP.
(c) TERMS AND CONDITIONS. The registration rights of FRLP pursuant to this
Section 4 are subject to the following terms and conditions:
(i) The appropriate members of the FRLP Group shall provide Lomak with
such information with respect to the Lomak Shares to be sold, the plans for
the proposed disposition thereof and such other information regarding such
Lomak Shares and their proposed disposition as shall, in the opinion of
counsel for Lomak, be necessary to enable Lomak to include in such
registration statement all material facts required to be disclosed with
respect to the FRLP Group and the Lomak Shares to be sold.
(ii) Lomak shall not be required to furnish any audited financial
statements at the request of FRLP other than those statements customarily
prepared at the end of its fiscal year, unless (A) FRLP shall agree to
reimburse Lomak for the out-of-pocket costs incurred by Lomak in the
preparation of such other audited financial statements or (B) such other
audited financial statements shall be required by the Commission as a
condition to declaring a registration statement effective under the
Securities Act.
(iii) In connection with any registration pursuant to Section 4(a)
hereof, the appropriate members of the FRLP Group shall select the managing
underwriter, if any, for offering related to such registration; provided,
however, that the appropriate members of the FRLP Group shall consult with
Lomak in connection with such selection. Nothing in this clause (iii) shall
limit Lomak's ability to select any underwriter in connection with any
registration effected pursuant to Section 4(b) hereof.
(iv) Lomak and FRLP each agrees in connection with any registration of
Lomak Shares contemplated by this Section 4 (i) to enter into an
appropriate underwriting agreement containing terms and provisions in such
agreements (including reasonable lock-up provisions and, to the extent
consistent with the provisions hereof, indemnification and contribution
provisions) and (ii) to provide the FRLP Group and its representatives with
reasonable opportunity for due diligence.
(d) REGISTRATION PROCEDURES.
(i) If and whenever Lomak is required by the provisions of Sections 4(a) or
4(b) to use all reasonable efforts to effect the registration of any Lomak
Shares under the Securities Act, Lomak will, as expeditiously as possible:
(A) prepare and file with the Commission a registration statement, on
Form S-3 or such other appropriate form as Lomak shall select, with respect
to such securities and use all reasonable efforts to cause such
registration statement to become and remain effective for a period of up to
six months from the date on which the Commission declares such registration
statement effective or such shorter period that will terminate when all
Lomak Shares covered by such registration statement have been sold pursuant
to such registration statement;
(B) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for the period specified in paragraph (A) above and
comply with the provisions of the Securities Act with respect to the
disposition of all Link Shares covered by such registration statement in
accordance with FRLP's intended method of disposition set forth in such
registration statement for such period;
(C) furnish to FRLP and to each underwriter such number of copies of
the registration statement and each such amendment and supplement thereto
(in each case including all exhibits) and the
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prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or
other disposition of the Lomak Shares covered by such registration
statement;
(D) use all reasonable efforts to register or qualify the Lomak Shares
covered by such registration statement under the securities or "blue sky"
laws of such jurisdictions as FRLP or, in the case of an underwritten
public offering, the managing underwriter reasonably shall request;
provided, however, that Lomak shall not for any such purpose be required to
qualify generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general service
of process in any such jurisdiction;
(E) use all reasonable efforts to list the Lomak Shares covered by
such registration statement with any securities exchange on which the Lomak
Common Stock is then listed;
(F) promptly notify FRLP and each underwriter under such registration
statement, at any time when a prospectus relating thereto is required to be
delivered under the Securities Act, of the happening of any event of which
Lomak has knowledge as a result of which the prospectus contained in such
registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances then existing, and promptly prepare and furnish to
FRLP and each underwriter under such registration statement a reasonable
number of copies of a prospectus supplemented or amended so that, as
thereafter delivered to the purchasers of such Lomak Shares, such
prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances then
existing;
(G) if the offering is underwritten and at the request of FRLP, use
all reasonable efforts to furnish on the date that Lomak Shares are
delivered to the underwriters for sale pursuant to such registration: (1)
an opinion dated such date of counsel representing Lomak for the purposes
of such registration, addressed to the underwriters and to FRLP, to such
effects as reasonably may be requested by counsel for the underwriters or
by FRLP or its counsel, and (2) a letter dated such date from the
independent public accountants retained by Lomak, addressed to the
underwriters and to FRLP covering such matters as are customarily covered
in accountants' letters delivered to the underwriters in underwritten
public offerings and such other matters as such underwriters reasonably may
request; and
(H) make available for inspection by FRLP, any underwriter
participating in any distribution pursuant to such registration statement,
and any attorney, accountant or other agent retained by FRLP or
underwriter, reasonable access to all financial and other records,
pertinent corporate documents and properties of Lomak, as such parties may
reasonably request, and cause Lomak's officers, directors and employees to
supply all information reasonably requested by FRLP or any such
underwriter, attorney, accountant or agent in connection with such
registration statement.
(ii) In connection with each registration hereunder, FRLP will furnish to
Lomak in writing such information requested by Lomak with respect to itself and
the proposed distribution by it as reasonably shall be necessary in order to
assure compliance with federal and applicable state securities laws.
(iii) Lomak will permit FRLP to participate in good faith in the
preparation of such registration or comparable statement and to require the
insertion therein of material, furnished to Lomak in writing, which in the
reasonable judgment of FRLP, its counsel and Lomak should be included.
(iv) Lomak will otherwise cooperate in such manner as may be reasonably
requested by FRLP in the marketing of all Lomak Shares to be sold, including,
without limitation, participating in any customary "road shows" and related
presentations to prospective purchasers in connection therewith.
(v) In connection with each registration pursuant to Sections 4(a) or 4(b)
covering an underwritten public offering, Lomak and FRLP agree to enter into a
written agreement with the managing underwriter
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selected in the manner herein provided in such form and containing such
provisions as are customary in underwritten offerings.
(e) Expenses. Lomak shall pay for all expenses incurred by Lomak in
complying with Sections 4(a) and 4(b), including, without, limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel and independent public accountants for Lomak, fees and expenses
(including counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the securities exchange upon which the
common stock of Lomak is then listed, transfer taxes, fees of transfer agents
and registrars and the reasonable fees and disbursements of counsel to FRLP in
connection with such registration, but excluding any underwriting discounts and
selling commissions applicable to the sale of Lomak Shares (which discounts and
commissions shall be paid by FRLP).
(f) INDEMNIFICATION AND CONTRIBUTION.
(i) In the event of a registration of any of the Lomak Shares under the
Securities Act pursuant to Sections 4(a) or 4(b), Lomak will indemnify and hold
harmless FRLP, its officers and directors, each underwriter of such Lomak Shares
thereunder and each other person, if any, who controls FRLP or such underwriter
within the meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which FRLP or such officer, director,
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (A) any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such Lomak Shares were registered under the Securities Act
pursuant to Sections 4(a) or 4(b), any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, (B) any
blue sky application or other document executed by Lomak specifically for that
purpose or based upon written information furnished by Lomak filed in any state
or other jurisdiction in order to qualify any or all of the Lomak Shares under
the securities laws thereof (any such application, document or information
herein called a "Blue Sky Application"), (C) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, (D) any violation by Lomak or its agents
of any rule or regulation promulgated under the Securities Act applicable to
Lomak or its agents and relating to action or inaction required of Lomak in
connection with such registration, or (E) any failure to register or qualify the
Lomak Shares in any state where Lomak or any of its agents has affirmatively
undertaken or agreed in writing that Lomak will undertake such registration or
qualification on FRLP's behalf (provided that in such instance Lomak shall not
be so liable if it has undertaken its reasonable efforts so to register or
qualify the Lomak Shares) and will reimburse FRLP and each such officer,
director, underwriter and controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that Lomak
will not be liable in any such case if and to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission so made in conformity
with information furnished by FRLP, any such underwriter or any such controlling
person in writing specifically for use in such registration statement or
prospectus, and provided further, that Lomak shall not be liable to any person
who participates as an underwriter, in the offering or sale of Lomak Shares or
any other person, if any, who controls such underwriter within the meaning of
the Securities Act, in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based on such person's failure to send
or give a copy of the final prospectus, as the same may be then supplemented or
amended, to the person asserting an untrue statement or alleged untrue statement
or omission or alleged omission at or prior to the written confirmation of the
sale of Lomak Shares to such person if such statement or omission was corrected
in such final prospectus. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of FRLP or any such
director, officer, underwriter or controlling person and shall survive the
transfer of such securities by FRLP.
(ii) In the event of a registration of any of the Lomak Shares under the
Securities Act pursuant to Sections 4(a) or 4(b), FRLP will indemnify and hold
harmless Lomak, each person, if any, who control Lomak within the meaning of the
Securities Act, each officer and director of Lomak, each underwriter and each
person who controls any underwriter within the meaning of the Securities Act,
against any losses, claims,
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damages or liabilities, joint or several, to which Lomak or such officer,
director, underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (A)
any untrue statement or alleged untrue statement of any material fact contained
in any registration statement under which such Lomak Shares were registered
under the Securities Act pursuant to Sections 4(a) or 4(b), any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereof, (B) any Blue Sky Application and (C) the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse Lomak and each
such officer, director, underwriter and controlling person for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that FRLP will be liable hereunder in any such case if and only to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with information pertaining to FRLP, as
such, furnished in writing to Lomak by FRLP specifically for use in such
registration statement or prospectus, and provided further, that the liability
of FRLP hereunder shall be limited to the proportion of any such loss, claim,
damage, liability or expense which is equal to the proportion that the public
offering price of the Lomak Shares sold by FRLP under such registration
statement bears to the total public offering price of all securities sold
thereunder, but not in any event to exceed the proceeds received by FRLP from
the sale of Lomak Shares covered by such registration statement. Not in
limitation of the foregoing, it is understood and agreed that the
indemnification obligations of FRLP hereunder pursuant to any underwriting
agreement entered into in connection herewith shall be limited to the
obligations contained in this Section 4(d)(ii).
(iii) Promptly after receipt by an indemnified party hereunder of notice of
the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 4(e) and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 4(e) if and to the extent the indemnifying party is prejudiced by such
omission In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 4(e) for any legal expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that, if the defendants in
any such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or additional to
those available to the indemnifying party or if the interests of the indemnified
party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select a
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by the
indemnifying party as incurred. No indemnifying party shall, without the consent
of the indemnified party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.
(iv) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (A) any holder of
Lomak Shares exercising rights under this Agreement, or any controlling person
of any such holder, makes a claim for indemnification pursuant to this Section
4(e) but it is judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 4(e) provides
for indemnification in such case, or (B) contribution under the Securities Act
may be required on the part of any such selling holder or any such controlling
person in circumstances for which indemnification is provided under this Section
4(e), then,
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and in each case, Lomak and such holder will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportions so that FRLP is responsible for the portion
represented by the percentage that the public offering price of its Lomak Shares
offered by the registration statement bears to the public offering price of all
securities offered by such registration statement, and Lomak is responsible for
the remaining portion; provided, however, that, in any such case, (A) FRLP will
not be required to contribute any amount in excess of the public offering price
of all such Lomak Shares offered by it pursuant to such registration statement;
and (B) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
(f) RULE 144. Lomak will file the reports required to be filed by it under
the Securities Act and the Exchange Act and the rules and regulations adopted by
the Commission thereunder to the extent required from time to time to enable
FRLP to sell the Lomak Shares without registration under the Securities Act
within the limitation of the exemptions provided by (i) Rule 144 under the
Securities Act, as such rule may be amended from time to time, or (ii) any
similar rule or regulation adopted by the Commission.
(g) AVAILABILITY OF REGISTRATION RIGHTS TO FRLP GROUP. For purposes of this
Section 4, any reference to FRLP shall include members of the FRLP Group, unless
the context otherwise requires.
5. Legends, Stop Transfer Orders and Notice.
(a) FRLP agrees to the placement on the certificates representing the Lomak
Shares of the legends in substantially the following forms as well as any other
legends required by applicable state or federal securities laws:
"The securities represented by this certificate are subject to the
provisions of a Voting and Standstill Agreement, dated May 11, 1998,
between FRLP and Lomak, a copy of which is available for inspection at the
office of the Secretary of Lomak."
"These securities have not been registered under the Securities Act of
1933 or applicable state securities laws. They may not be sold, offered for
sale, pledged or hypothecated in the absence of a registration statement in
effect with respect to the securities under such Act or an opinion of
counsel satisfactory to Lomak that such registration is not required or
unless sold pursuant to Rule 144 of such Act."
(b) FRLP shall provide to Lomak (i) prior notice, as promptly as reasonably
practicable, of any planned acquisition by any member of the FRLP Group pursuant
to an open market buying program of more than 1% of any class of Lomak Voting
Securities in a two-week period, (ii) prior notice, as reasonably practicable,
of privately-negotiated purchases or proposed purchases of blocks of 10,000 or
more shares of Common Stock or equivalents of Lomak by any member of the FRLP
Group; (iii) prior notice, as reasonably practicable, of filings under Sections
13(d), 13(e) and 14(d) of the Exchange Act by any member of the FRLP Group with
respect to any class of Lomak Voting Securities; and (iv) prompt notice of
purchases of every 1% of any class of Lomak Voting Securities by any member of
the FRLP Group for which notice was not previously given. FRLP shall present
promptly to Lomak all certificates representing Lomak Shares of which any member
of the FRLP Group is now, or hereafter becomes, the beneficial owner for the
placement thereon of the legend referred to in subsection (a) above; and
(c) FRLP agrees to the entry of stop transfer orders with the transfer
agent (or agents) and the registrar (or registrars) of Lomak Voting Securities
against the transfer other than in compliance with the requirements of this
Agreement of Lomak Shares.
6. Nomination of Director. Notwithstanding any other provision in this
Agreement with respect to the term of this Agreement, until the first date, if
any, that FRLP ceases to beneficially own Lomak Common Stock in an aggregate
amount equal or greater than 5% of the outstanding shares of Lomak Common Stock,
Lomak will, in connection with each election of directors to the Lomak Board of
Directors at an annual meeting of shareholders, nominate, as one of the director
nominees proposed by Lomak, one individual
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designated by FRLP for election as a director; provided, however, that if a
member of the FRLP Group already serves as a director of Lomak, then FRLP agrees
that such person shall be FRLP's nominee pursuant to the provisions of this
Section 6. Notwithstanding the foregoing, in no event shall more than one member
of the FRLP Group serve on the Lomak Board of Directors at any given time.
7. Miscellaneous
(a) NOTICES. All notices or communications hereunder shall be in writing
(including facsimile or similar writing) addressed as follows:
To Lomak:
Lomak Petroleum, Inc.
500 Throckmorton Street, Suite 1900
Fort Worth, Texas 76102
Attention: John H. Pinkerton
Facsimile No.: (817) 870-2316
With a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Attention: J. Mark Metts
Facsimile No.: (713) 615-5605
To FRLP:
First Reserve Fund VII, Limited Partnership
c/o First Reserve Corporation
1801 California St., Suite 4110
Denver, Colorado 80202
Attention: Thomas R. Denison
Facsimile No.: (303) 382-1275
With a copy to:
Gibson, Dunn & Crutcher LLP
1801 California St., Suite 4100
Denver, Colorado 80202
Attention: Richard M. Russo
Facsimile No.: (303) 296-5310
Any such notice or communication shall be deemed given (i) when made, if made by
hand delivery, and upon confirmation of receipt, if made by facsimile, (ii) one
Business Day after being deposited with a next-day courier, postage prepaid, or
(iii) three Business Days after being sent certified or registered mail, return
receipt requested, postage prepaid, in each case addressed as above (or to such
other address as such party may designate in writing from time to time).
(b) SEPARABILITY. If any provision of this Agreement shall be declared to
be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.
(c) ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
successors, and assigns; provided, however, that neither this Agreement nor any
rights hereunder shall be assignable or otherwise subject to hypothecation and
any assignment in violation hereof shall be null and void.
B-10
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(d) INTERPRETATION. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(e) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same Agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to each party.
(f) ENTIRE AGREEMENT. This Agreement represents the entire Agreement of the
parties with respect to the subject matter hereof and shall supersede any and
all previous contracts, arrangements or understandings between the parties
hereto with respect to the subject matter hereof.
(g) GOVERNING LAW. This Agreement shall be construed, interpreted, and
governed in accordance with the laws of Delaware, without reference to rules
relating to conflicts of law.
(h) ATTORNEYS' FEES. If any action at law or equity, including an action
for declaratory relief, is brought to enforce or interpret any provision of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and expenses from the other party, which fees and expenses shall
be in addition to any other relief which may be awarded.
(i) AMENDMENTS, WAIVERS, ETC. This Agreement may not be amended, changed,
supplemented, waived or otherwise modified except by an instrument in writing
signed by all the parties hereto.
(j) NO WAIVER. The failure of any party hereto to exercise any right, power
or remedy provided under this Agreement or otherwise available in respect hereof
at law or in equity, or to insist upon compliance by any other party hereto with
its obligations hereunder, and any custom or practice of the parties at variance
with the terms hereof, shall not constitute a waiver by such party of its right
to exercise any such or other right, power or remedy or to demand such
compliance.
(k) DEFINITIONS. For purposes of this Agreement, the following terms shall
have the following meanings:
(i) AFFILIATE. "Affiliate" shall have the meaning ascribed to it in Rule
12b-2 of the General Rules and Regulations under the Exchange Act, as in effect
on the date hereof.
(ii) BENEFICIAL OWNER. A person shall be deemed a "beneficial owner" of or
to have "beneficial ownership" of Lomak Voting Securities or Shares, as the case
may be, in accordance with the interpretation of the term "beneficial ownership"
as defined in Rule 13-d(3) under the Exchange Act, as in effect on the date
hereof, provided that a person shall be deemed to be the beneficial owner of,
and to have beneficial ownership of, Lomak Voting Securities and/or Shares, as
the case may be, that such person or any Affiliate of such person has the right
to acquire (whether such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement or understanding or upon
the exercise of conversion rights, exchange rights, warrant or options, or
otherwise.
(iii) DAY. The term "day" shall mean a calendar day, except that when a
specified period shall terminate on a day other than a Business Day (a "Business
Day" being any day other than a day on which banks are required or authorized to
be closed in the City of New York) such period shall be extended until the next
Business Day.
(iv) LOMAK VOTING SECURITIES. "Lomak Voting Securities" includes Common
Stock and any other securities of Lomak entitled to vote generally for the
election of directors, and options and rights to acquire any such securities and
securities convertible into, or exercisable or exchangeable for, such
securities, in each case now or hereafter outstanding.
(v) PERSON. A "person" shall mean any individual, firm, corporation,
partnership, trust, limited liability company or other entity.
(l) DUE AUTHORIZATION; NO CONFLICTS. FRLP hereby represents and warrants to
Lomak as follows: FRLP has full power and authority to enter into this
Agreement. Neither the execution or delivery of this Agreement nor the
consummation of the transactions contemplated herein will (a) conflict with or
result
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in a breach, default or violation of (i) any of the terms, provisions or
conditions of the Certificate of Limited Partnership or limited partnership
agreement or other organizational documents of any member of the FRLP Group or
(ii) any agreement, proxy, document, instrument, judgment, decree, order,
governmental permit, certificate, license, law, statute, rule or regulation to
which any member of the FRLP Group is a party or to which it is subject, (b)
except as expressly contemplated herein, result in the creation of any lien,
charge or other encumbrance on any Shares or Lomak Shares or (c) require any
member of the FRLP Group to obtain the consent of any private nongovernmental
third party. No consent, action, approval or authorization of, or registration,
declaration or filing with, any governmental department, commission, agency or
other instrumentality or any other person or entity is required to authorize, or
is otherwise required in connection with, the execution and delivery of this
Agreement or FRLP's performance of the terms of this Agreement or the validity
or enforceability of this Agreement.
(m) SPECIFIC PERFORMANCE. Each party recognizes that its failure to carry
out the terms of this Agreement could result in financial injury to the other
party which would be substantial and not susceptible of measurement.
Accordingly, each party agrees that the other party shall be entitled to (i)
require such party specifically to perform its obligations under this Agreement
and (ii) sue in any court of competent jurisdiction to obtain such specific
performance.
(n) WAIVER OF JURY TRIAL. THE PARTIES HEREBY WAIVE THEIR RIGHT TO A TRIAL
BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT OR THE
TRANSACTION CONTEMPLATED BY THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date first above written.
LOMAK PETROLEUM, INC.
By: /s/ JOHN H. PINKERTON
------------------------------------
John H. Pinkerton
President and Chief Executive
Officer
FIRST RESERVE FUND VII, LIMITED
PARTNERSHIP
By: First Reserve Corporation, its
general partner
By: /s/ THOMAS R. DENISON
------------------------------------
Thomas R. Denison
Managing Director
B-12
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ANNEX C
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement"), is made and entered into
on May 12, 1998, by and between Lomak Petroleum, Inc., a Delaware corporation
("Lomak"), and First Reserve Fund VII, Limited Partnership, a Delaware limited
partnership ("FRLP").
W I T N E S S E T H:
WHEREAS, FRLP beneficially owns shares of common stock, par value $.01 per
share (the "Domain Common Stock"), of Domain Energy Corporation, a Delaware
corporation ("Domain").
WHEREAS, FRLP desires to sell to Lomak, and Lomak desires to purchase from
FRLP, 3,250,000 shares of Domain Common Stock (the "Shares") on the terms and
subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises set forth above, the
mutual promises set forth below, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Purchase and Sale. FRLP agrees to sell, assign, transfer, and convey to
Lomak, and Lomak agrees to purchase, accept and receive from FRLP on July 1,
1998 (the "Effective Date"), the Shares at a price equal to $13.50 per Share,
for an aggregate purchase price of $43,875,000 (the "Purchase Price"). On the
Effective Date, Lomak shall deliver to FRLP the Purchase Price in immediately
available funds and FRLP shall deliver to Lomak certificates representing all of
the Shares, accompanied by stock powers duly executed in blank for transfer by
the record holders thereof, together with such other documents and instruments,
if any, as may be necessary to permit Lomak to acquire the Shares free and clear
of any and all claims, liens, pledges, charges, encumbrances, security interests
or other restrictions of any kind whatsoever adverse to Lomak (collectively,
"Encumbrances"). Notwithstanding the foregoing, if between the date of this
Agreement and the Effective Date the outstanding shares of Domain Common Stock
shall have been changed into a different number of shares or a different class,
by reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares, the Shares to be
sold pursuant hereto and the Purchase Price per share shall be correspondingly
adjusted to reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares.
2. Representations and Warranties of Lomak. Lomak hereby represents and
warrants to FRLP that as of the date of this Agreement and the Effective Date:
(a) Lomak is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite corporate
authority to execute and deliver this Agreement and to perform all of the
transactions contemplated by this Agreement to be performed by it;
(b) The execution and delivery by Lomak of this Agreement, and the
consummation of the transactions contemplated by this Agreement to be performed
by Lomak, have been duly authorized by all necessary corporate action on the
part of Lomak, and this Agreement will, when executed and delivered by FRLP,
constitute a valid and binding obligation of Lomak, enforceable against Lomak in
accordance with its terms;
(c) There are no actions or proceedings pending or threatened against Lomak
before any court or administrative agency which do or will adversely affect
Link's ability to perform its obligations under this Agreement;
(d) Neither this Agreement nor the consummation of the transactions
contemplated herein conflict with or result in a breach, default or violation of
(i) any of the terms, provisions or conditions of the Certificate of
Incorporation or Bylaws of Lomak or (ii) any agreement, proxy, document,
instrument, judgment, decree, order, governmental permit, certificate, license,
law, statute, rule or regulation to which Lomak is a party or to which it is
subject; and
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(e) No consent, action, approval or authorization of, or registration,
declaration or filing with, any governmental department, commission, agency or
other instrumentality or any other person or entity is required to authorize, or
is otherwise required in connection with, the execution and delivery of this
Agreement or Lomak's performance of the terms of this Agreement or the validity
or enforceability of this Agreement.
3. Representations and Warranties of FRLP. FRLP hereby represents and
warrants to Lomak that as of the date of this Agreement and the Effective Date:
(a) FRLP is a limited partnership duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
partnership authority to execute and deliver this Agreement and to perform all
of the transactions contemplated by this Agreement to be performed by it;
(b) The execution and delivery by FRLP of this Agreement, and the
consummation of the transactions contemplated by this Agreement to be performed
by FRLP, have been duly authorized by all necessary partnership action on the
part of FRLP, and this Agreement will, when executed and delivered by Lomak,
constitute a valid and binding obligation of FRLP, enforceable against FRLP in
accordance with its terms;
(c) FRLP has good and valid title to the Shares, and upon delivery of the
Shares to Lomak against delivery by Lomak to FRLP of the Purchase Price as
provided in this Agreement, Lomak will have good and valid title to, the Shares,
free and clear of any and all Encumbrances, and the sole and unrestricted voting
power and power of disposition with respect thereto;
(d) There are no actions or proceedings pending or threatened against FRLP
before any court or administrative agency which do or will adversely affect
FRLP's ability to perform under this Agreement;
(e) Neither this Agreement nor anything provided to be done hereunder,
including, without limitation, the transfer of the Shares as herein contemplated
will (i) conflict with or result in a breach, default or violation of (A) any of
the terms, provisions or conditions of the Certificate of Limited Partnership or
limited partnership agreement of FRLP or (B) any agreement, proxy, document,
instrument, judgment, decree, order, governmental permit, certificate, license,
law, statute, rule or regulation to which FRLP is a party or to which it is
subject or (ii) result in the creation of any Encumbrance on any Shares; and
(f) No consent, action, approval or authorization of, or registration,
declaration or filing with, any governmental department, commission, agency or
other instrumentality or any other person or entity is required to authorize, or
is otherwise required to permit the execution and delivery of this Agreement or
FRLP's performance of the terms of this Agreement or the validity or
enforceability of this Agreement.
4. Investment Representation and Acknowledgment of Lomak. Lomak
acknowledges that the Shares have not been registered under the Securities Act
of 1933, as amended, or the securities laws of any state, and the Shares have
not been approved by the Securities and Exchange Commission, the security
commission of any state, or any other regulatory authority, nor have the merits
of the Shares been passed upon by any regulatory authority. Lomak represents and
warrants that it has independently assessed the risks of this investment and is
purchasing the Shares from FRLP for investment only and not with a view or
intent to resell or distribute all or any part of the Shares acquired from FRLP.
5. Further Assurances. Each of the parties will, at any time, upon the
request of any other party hereto, take, or cause to be taken, all actions and
do, or cause to be done, all things (including without limitation executing,
acknowledging and delivering any additional agreements, instruments and
documents) as may be necessary, appropriate or advisable in order to consummate
or make effective transactions contemplated by, this Agreement.
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6. Miscellaneous.
(a) NOTICES. All notices or communications hereunder shall be in writing
(including facsimile or similar writing) addressed as follows:
To Lomak:
Lomak Petroleum, Inc.
500 Throckmorton Street, Suite 1900
Fort Worth, Texas 76102
Attention: John H. Pinkerton
Facsimile No.: (817) 870-2316
With a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Attention: J. Mark Metts
Facsimile No.: (713) 615-5605
To FRLP:
First Reserve Fund VII, Limited Partnership
c/o First Reserve Corporation
1801 California St., Suite 4110
Denver, Colorado 80202
Attention: Thomas R. Denison
Facsimile No.: (303) 382-1275
With a copy to:
Gibson, Dunn & Crutcher LLP
1801 California St., Suite 4100
Denver, Colorado 80202
Attention: Richard M. Russo
Facsimile No.: (303) 296-5310
Any such notice or communication shall be deemed given (i) when made, if made by
hand delivery, and upon confirmation of receipt, if made by facsimile, (ii) one
business day after being deposited with a next-day courier, postage prepaid, or
(iii) three business days after being sent certified or registered mail, return
receipt requested, postage prepaid, in each case addressed as above (or to such
other address as such party may designate in writing from time to time).
(b) SEPARABILITY. If any provision of this Agreement shall be declared to
be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.
(c) ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
successors, and assigns; provided, however, that neither this Agreement nor any
rights hereunder shall be assignable or otherwise subject to hypothecation and
any assignment in violation hereof shall be null and void.
(d) INTERPRETATION. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
C-3
<PAGE> 228
(e) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same Agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to each party.
(f) ENTIRE AGREEMENT. This Agreement represents the entire Agreement of the
parties with respect to the subject matter hereof and shall supersede any and
all previous contracts, arrangements or understandings between the parties
hereto with respect to the subject matter hereof.
(g) GOVERNING LAW. This Agreement shall be construed, interpreted, and
governed in accordance with the laws of Delaware, without reference to rules
relating to conflicts of law.
(h) ATTORNEYS' FEES. If any action at law or equity, including an action
for declaratory relief, is brought to enforce or interpret any provision of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and expenses from the other party, which fees and expenses shall
be in addition to any other relief which may be awarded.
(i) AMENDMENTS, WAIVERS, ETC. This Agreement may not be amended, changed,
supplemented, waived or otherwise modified except by an instrument in writing
signed by all the parties hereto.
(j) NO WAIVER. The failure of any party hereto to exercise any right, power
or remedy provided under this Agreement or otherwise available in respect hereof
at law or in equity, or to insist upon compliance by any other party hereto with
its obligations hereunder, and any custom or practice of the parties at variance
with the terms hereof, shall not constitute a waiver by such party of its right
to exercise any such or other right, power or remedy or to demand such
compliance.
(k) SPECIFIC PERFORMANCE. Each party recognizes that its failure to carry
out the terms of this Agreement could result in financial injury to the other
party which would be substantial and not susceptible of measurement.
Accordingly, each party agrees that the other party shall be entitle to (i)
require such party specifically to perform its obligations under this Agreement
and (ii) sue in any court of competent jurisdiction to obtain such specific
performance.
(l) WAIVER OF JURY TRIAL. THE PARTIES HEREBY WAIVE THEIR RIGHT TO A TRIAL
BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT OR THE
TRANSACTION CONTEMPLATED BY THIS AGREEMENT.
C-4
<PAGE> 229
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date first above written.
LOMAK PETROLEUM, INC.
By: /s/ JOHN H. PINKERTON
------------------------------------
John H. Pinkerton
President and Chief Executive
Officer
FIRST RESERVE FUND VII, LIMITED
PARTNERSHIP
By: First Reserve Corporation, its
general partner
By: /s/ THOMAS R. DENISON
------------------------------------
Thomas R. Denison
Managing Director
C-5
<PAGE> 230
ANNEX D
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
May 12, 1998
Board of Directors
Domain Energy Corporation
16801 Greenspoint Park Drive
Houston, Texas 77060
Members of the Board:
You have asked us to advise you with respect to the fairness to the holders of
the common stock of Domain Energy Corporation ("Domain") from a financial point
of view of the consideration to be received by such holders pursuant to the
terms of the Agreement and Plan of Merger dated May 12, 1998, as amended as of
May 12, 1998 (the "Merger Agreement"), by and among Lomak Petroleum, Inc.
("Lomak"), DEC Acquisition, Inc., a wholly owned subsidiary of Lomak ("Merger
Sub"), and Domain. The Merger Agreement provides for, among other things, the
merger of Merger Sub with and into Domain (the "Merger") pursuant to which each
outstanding share of the common stock, par value $0.01 share, of Domain (the
"Domain Common Stock") will be converted into the right to receive that number
of shares of the common stock, par value $0.01 per share, of Lomak (the "Lomak
Common Stock") equal to the quotient of (i) $14.50 divided by (ii) the average
of the closing sales prices of Lomak Common Stock during the period of the 15
most recent trading days ending on the third business day prior to the closing
date for the Merger (the number of shares of Lomak Common Stock into which
shares of Domain Common Stock will be so converted in the Merger, the "Exchange
Ratio"); PROVIDED that in no event will the Exchange Ratio be greater than
1.2083 or less than 0.8529.
In arriving at our opinion, we have reviewed the Merger Agreement and certain
publicly available business and financial information relating to Domain and
Lomak. We have also reviewed certain other information relating to Domain and
Lomak, including financial forecasts and reserve reports, provided to us by
Domain and Lomak, and have met with the managements of Domain and Lomak to
discuss the businesses and prospects of Domain and Lomak.
We have also considered certain financial and stock market data of Domain and
Lomak, and we have compared those data with similar data for other publicly held
companies in businesses similar to Domain and Lomak, and we have considered, to
the extent publicly available, the financial terms of certain other business
combinations and other transactions which have recently been effected. We also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that such forecasts have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of Domain and Lomak as to the future financial
performance of Domain and Lomak and the strategic benefits anticipated to result
from the Merger. We also have assumed that the reserve reports reviewed by us
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the preparers of such reports as to the oil and gas
reserves of Domain and Lomak. In addition, we have not been requested to make,
and have not made, an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Domain and Lomak, nor have we been
furnished with any such evaluations or appraisals. Our opinion is necessarily
based upon information available to us, and financial, economic, market and
other conditions as they exist and
D-1
<PAGE> 231
Board of Directors
Domain Energy Corporation
May 12, 1998
Page 2
can be evaluated, on the date hereof. We are not expressing any opinion as to
the actual value of the Lomak Common Stock when issued pursuant to the Merger or
the prices at which the Lomak Common Stock will trade subsequent to the Merger.
In connection with our engagement, we were not requested to, and we did not,
participate in the negotiation or structuring of the Merger, nor were we
requested to, and we did not, solicit third party indications of interest in
acquiring all or any part of Domain.
We have acted as financial advisor to Domain in connection with this opinion and
will receive a fee upon the delivery of this opinion. In the past, we have
provided financial services to Domain, Lomak and certain of their respective
affiliates unrelated to the proposed Merger, for which services we have received
compensation. In the ordinary course of business, Credit Suisse First Boston and
its affiliates may actively trade the debt and equity securities of both Domain
and Lomak for their own accounts and for the accounts of customers and,
accordingly, may at any time hold long or short positions in such securities.
It is understood that this letter is for the information of the Board of
Directors of Domain in connection with its evaluation of the Merger, does not
constitute a recommendation to any stockholder with respect to any matters
relating to the Merger, and is not to be quoted or referred to, in whole or in
part, in any registration statement, prospectus or proxy statement, or in any
other document used in connection with the offering or sale of securities, nor
shall this letter be used for any other purposes, without our prior written
consent.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Exchange Ratio is fair to the holders of Domain Common Stock from a
financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
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ANNEX E
[LETTERHEAD OF PAINEWEBBER INCORPORATED]
May 12, 1998
Board of Directors
Lomak Petroleum, Inc.
500 Throckmorton
Fort Worth, Texas 76102
Gentlemen:
Lomak Petroleum, Inc. (the "Company" or "Lomak") and Domain Energy
Corporation (the "Subject Company" or "Domain") propose to enter into an
agreement and plan of merger (the "Agreement") pursuant to which Lomak will form
a new subsidiary that will merge into Domain (the "Merger"). In connection with
the Merger, each share of Domain common stock issued and outstanding immediately
prior to the effectiveness of the Merger shall be converted into a number of
shares of common stock, par value $.01 per share, of Lomak ("Lomak Common
Stock") equal to the Exchange Ratio. The Exchange Ratio shall be equal to the
quotient of (i) $14.50 divided by (ii) the Closing Date Market Price (rounded to
four decimal places); provided, however, that in no event shall the Exchange
Ratio be greater than 1.2083 nor less than 0.8529. The term "Closing Date Market
Price" shall mean the average of the closing sales price of Lomak Common Stock,
rounded to four decimal places, as reported under "NYSE Composite Transaction
Reports" in The Wall Street Journal during the period of the 15 most recent
trading days ending on the third business day prior to the closing date.
You have asked us whether or not, in our opinion, the proposed Exchange
Ratio is fair to the Company from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the Subject Company's Annual Report, Form 10-K and
related financial information for the fiscal year ended December 31, 1997;
(2) Reviewed the Company's Annual Reports, Forms 10-K and related
financial information for the five fiscal years ended December 31, 1997;
(3) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets and prospects of the
Subject Company and the Company, furnished to us by the Subject Company and
the Company, respectively;
(4) Conducted discussions with members of senior management of the
Subject Company and the Company concerning their respective businesses and
prospects;
(5) Reviewed the historical market prices and trading activity for
the Subject Company shares and the Company shares and compared them with
that of certain publicly traded companies which we deemed to be relevant;
(6) Compared the results of operations of the Subject Company and the
Company with that of certain companies which we deemed to be relevant;
(7) Compared the proposed financial terms of the transactions
contemplated by the Agreement with the financial terms of certain other
mergers and acquisitions which we deemed to be relevant;
(8) Considered the pro forma effect of the Merger on the Company's
capitalization ratios and earnings and cash flow per share;
(9) Reviewed a draft of the Agreement dated May 8, 1998; and
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(10) Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary.
In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by the Subject
Company and the Company, and we have not assumed any responsibility to
independently verify such information. With respect to the financial forecasts
examined by us, we have assumed that they were reasonably prepared and reflect
the best currently available estimates and good faith judgments of the
management of the Company and the Subject Company as to the future performance
of the Company and the Subject Company, respectively. We have also relied upon
assurances of the management of the Company, and the Subject Company,
respectively, that they are unaware of any facts that would make the information
or financial forecasts provided to us incomplete or misleading. We have not made
any independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of the Company or the Subject Company nor have we been furnished
with any such evaluations or appraisals. We have also assumed, with your
consent, that (i) the Merger will be accounted for under the purchase method of
accounting and (ii) any material liabilities (contingent or otherwise, known or
unknown) of the Company and the Subject Company are as set forth in the
consolidated financial statements of the Company and the Subject Company,
respectively. This opinion does not constitute a recommendation to any
shareholder of the Company as to how any such shareholder should vote on the
Merger. This opinion does not address the relative merits of the Merger and any
other transactions or business strategies discussed by the Board of Directors of
the Company as alternatives to the Merger or the decision of the Board of
Directors of the Company to proceed with the Merger. No opinion is expressed
herein as to the price at which the securities to be issued in the Merger to the
shareholders of the Subject Company may trade at any time. Our opinion is based
on economic, monetary and market conditions existing on the date hereof.
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In the ordinary course of business, PaineWebber Incorporated may trade in
the securities of the Company and the Subject Company for our own account and
for the accounts of our customers and, accordingly, may at any time hold long or
short positions in such securities.
PaineWebber Incorporated is currently acting as financial advisor to the
Company in connection with the Merger and will be receiving a fee in connection
with the rendering of this opinion. In the past, PaineWebber Incorporated and
its affiliates have provided investment banking and other financial services to
the Company and the Subject Company and have received fees for rendering these
services.
On the basis of, and subject to the foregoing, we are of the opinion that
the proposed Exchange Ratio is fair to the Company from a financial point of
view.
This opinion has been prepared for the information of the Board of
Directors of the Company in connection with the Merger and shall not be
reproduced, summarized, described or referred to, provided to any person or
otherwise made public or used for any other purpose without the prior written
consent of PaineWebber Incorporated, provided, however, that this letter may be
reproduced in full in the Proxy Statement and Registration Statement related to
the Merger.
Very truly yours,
PAINEWEBBER INCORPORATED
By: /s/ PAINEWEBBER INCORPORATED
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