<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ______ to ________
COMMISSION FILE NUMBER 0-9592
LOMAK PETROLEUM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1312571
(State of incorporation) (I.R.S. Employer
Identification No.)
500 THROCKMORTON STREET, FT. WORTH, TEXAS 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 870-2601
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
21,283,677 Common Shares were outstanding on August 12, 1998.
<PAGE> 2
PART I. FINANCIAL INFORMATION
The financial statements included herein have been prepared in
conformity with generally accepted accounting principles. They should be read in
conjunction with the December 31, 1997 Form 10-K filing. The statements are
unaudited but reflect all adjustments which, in the opinion of management, are
necessary to fairly present the Company's financial position and results of
operations.
2
<PAGE> 3
LOMAK PETROLEUM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents ........................................... $ 9,725 $ 13,526
Accounts receivable ............................................ 29,200 25,923
Marketable securities .......................................... 8,041 4,051
Inventory and other ............................................ 2,779 1,919
--------- ---------
49,745 45,419
--------- ---------
Oil and gas properties, successful efforts method ................. 785,223 874,752
Accumulated depletion ......................................... (161,416) (180,315)
--------- ---------
623,807 694,437
--------- ---------
Transportation, processing and field assets ....................... 85,904 86,626
Accumulated depreciation ...................................... (9,730) (12,392)
--------- ---------
76,174 74,234
--------- ---------
Other ............................................................. 9,107 8,894
--------- ---------
$ 758,833 $ 822,984
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................ $ 26,878 $ 24,253
Accrued liabilities ............................................. 22,241 24,068
Current portion of debt (Note 4) ................................ 413 26
--------- ---------
49,532 48,347
--------- ---------
Senior debt (Note 4) .............................................. 186,712 252,200
Senior subordinated notes (Note 4) ................................ 125,000 125,000
Convertible subordinated debentures (Note 4) ...................... 55,000 55,000
Deferred taxes (Note 10) .......................................... 25,639 26,690
Company-obligated preferred securities of subsidiary trust (Note 7) 120,000 120,000
Commitments and contingencies (Note 6) ............................ - -
Stockholders' equity (Notes 7 and 8)
Preferred stock, $1 par, 10,000,000 shares authorized,
$2.03 convertible preferred, 1,148,840 issued
(liquidation preference $28,746,000) ........................ 1,150 1,150
Common stock, $.01 par, 50,000,000 shares authorized,
21,058,442 and 21,170,459 issued ............................ 211 212
Capital in excess of par value .................................. 217,631 219,033
Retained earnings (deficit) ..................................... (22,412) (23,069)
Unrealized gain (loss) on marketable securities .................. 370 (1,579)
--------- ---------
196,950 195,747
--------- ---------
$ 758,833 $ 822,984
========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE> 4
LOMAK PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues
Oil and gas sales ...................... $ 26,629 $ 30,740 $ 60,967 $ 63,280
Transportation, processing and marketing 2,777 2,661 5,551 5,452
Interest and other ..................... 3,375 (103) 4,013 1,639
-------- -------- -------- --------
32,781 33,298 70,531 70,371
-------- -------- -------- --------
Expenses
Direct operating ....................... 7,512 7,647 15,284 16,043
Transportation, processing and marketing 712 1,025 1,581 2,088
Exploration ............................ 178 2,018 1,178 2,431
General and administrative ............. 1,051 2,096 2,133 3,936
Interest ............................... 7,225 9,374 11,184 18,108
Depletion, depreciation and amortization 12,015 12,556 24,666 24,764
-------- -------- -------- --------
28,693 34,716 56,026 67,370
-------- -------- -------- --------
Income (loss) before taxes ................ 4,088 (1,418) 14,505 3,001
Income taxes
Current ................................ 539 26 1,476 135
Deferred ............................... 1,181 (500) 4,097 1,051
-------- -------- -------- --------
1,720 (474) 5,573 1,186
-------- -------- -------- --------
Net income (loss) ......................... $ 2,368 $ (944) $ 8,932 $ 1,815
======== ======== ======== ========
Comprehensive Income (Note 2) ............. $ 2,218 $ (2,326) $ 7,355 $ 556
======== ======== ======== ========
Earnings per common share
Basic ................................ $ 0.09 $ (0.07) $ 0.42 $ 0.03
======== ======== ======== ========
Dilutive ............................. $ 0.09 $ (0.07) $ 0.40 $ 0.03
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE> 5
LOMAK PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
1997 1998
---------------- -----------------
(unaudited)
<S> <C> <C>
Cash flows from operations:
Net income................................................ $ 8,932 $ 1,815
Adjustments to reconcile net income to
net cash provided by operations:
Depletion, depreciation and amortization............. 24,666 24,764
Amortization of deferred offering costs.............. 338 654
Deferred taxes....................................... 4,097 1,051
Changes in working capital net of
effects of purchases of businesses:
Accounts receivable......................... (3,624) 5,444
Marketable securities....................... (1,189) (127)
Inventory and other......................... (1,412) 419
Accounts payable............................ 7,511 (2,625)
Accrued liabilities......................... 8,008 2,892
Gain on sale of assets and other..................... (2,685) (1,479)
---------------- -----------------
Net cash provided by operations........................... 44,642 32,808
Cash flows from investing:
Oil and gas properties............................... (329,041) (107,528)
Additions to property and equipment.................. (50,235) (807)
Proceeds on sale of assets........................... 9,260 16,363
---------------- -----------------
Net cash used in investing................................ (370,016) (91,972)
Cash flows from financing:
Proceeds from indebtedness........................... 400,217 65,500
Repayments of indebtedness........................... (134,008) (399)
Preferred stock dividends............................ (1,167) (1,167)
Common stock dividends............................... (807) (1,305)
Proceeds from common stock issuance.................. 65,845 446
Repurchase of common stock........................... (14) (110)
---------------- -----------------
Net cash provided by financing............................ 330,066 62,965
---------------- -----------------
Change in cash............................................ 4,692 3,801
Cash and equivalents at beginning of period............... 8,625 9,725
---------------- -----------------
Cash and equivalents at end of period..................... $ 13,317 $ 13,526
================ =================
Supplemental disclosures of non-cash investing and
financing activities:
Purchase of property and equipment financed with
common stock.......................................... $ 30,000 $ -
Common stock issued in connection with benefit plans.... 225 1,067
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE> 6
LOMAK PETROLEUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION:
Lomak Petroleum, Inc. ("Lomak" or the "Company") is an independent oil
and gas company engaged in development, exploration and acquisition activities
primarily in four core areas: Permian, Midcontinent, Gulf Coast and Appalachia.
Historically, the Company has increased its reserves and production through
acquisitions, development and exploration of its properties. At December 31,
1997, proved reserves totaled 753 Bcfe, having a pre-tax present value at
constant prices on that date of $632 million and a reserve life index of 15.3
years.
In May 1998, the Company announced that it had entered into a
definitive agreement to merge with Domain Energy Corporation ("Domain").
Pursuant to the merger agreement, Domain's shareholders will, based on current
stock prices, receive 1.2083 shares of Lomak common stock (approximately 14.8
million shares) for each Domain share. The final exchange ratio will be
determined based on the market price of Lomak's shares during the 15 day period
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 of
the merger, Lomak purchased 3.3 million Domain shares for $43.9 million in cash
from Domain's largest shareholder. As required by the merger agreements,
Domain's largest shareholder has voted all of its shares (53% of total
outstanding) in favor of the merger. Completion of the transaction is subject to
approval by Lomak's shareholders at a Special Meeting scheduled for August 25,
1998. The combined company is to be called Range Resources Corporation.
Lomak's objective is to maximize shareholder value through growth in
its reserves, production, cashflow and earnings through a balanced program of
exploration and development drilling and strategic acquisitions. In order to
effectively pursue its operating strategy, the Company has concentrated its
activities in selected geographic areas. In each core area, the Company has
established engineering, geological, operating, acquisition and other technical
expertise. The Company 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 developing and
operating its properties.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the
Company, all majority owned subsidiaries and its pro rata share of the assets,
liabilities, income and expenses of certain oil and gas partnerships and joint
ventures. Highly liquid temporary investments with an initial maturity of ninety
days or less are considered cash equivalents.
MARKETABLE SECURITIES
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under Statement No. 115, debt and marketable equity securities are
required to be classified in one of three categories: trading,
available-for-sale, or held to maturity. The Company's equity securities qualify
under the provisions of Statement No. 115 as available-for-sale. Such securities
are recorded at fair value, and unrealized holding gains and losses, net of the
related tax effect, are reflected as a separate component of stockholders'
equity. A decline in the market value of an available-for-sale security below
cost that is deemed other than temporary is charged to earnings and results in
the establishment of a new cost basis for the security. Realized gains and
losses are determined on the specific identification method and are reflected in
income.
6
<PAGE> 7
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting for oil
and gas properties. Exploratory costs which result in the discovery of reserves
and the cost of development wells are capitalized. Geological and geophysical
costs, delay rentals and costs to drill unsuccessful exploratory wells are
expensed. Depletion is provided on the unit-of-production method. Oil is
converted to Mcfe at the rate of six Mcf per barrel. Depletion rates per Mcfe
were $0.98 and $0.84 in the second quarters of 1997 and 1998, respectively.
Approximately $111.2 million and $105.0 million of oil and gas properties were
not subject to depletion as of December 31, 1997 and June 30, 1998,
respectively.
The Company has adopted Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill.
SFAS No. 121 requires a review for impairment whenever circumstances indicate
that the carrying amount of an asset may not be recoverable. Impairment is
recognized only if the carrying amount of an asset is greater than its expected
future cash flows. The amount of the impairment is based on the estimated fair
value of the asset.
TRANSPORTATION, PROCESSING AND FIELD ASSETS
The Company owns and operates over 3,000 miles of gas gathering systems
and gas processing plants in proximity to its principal gas properties.
Depreciation on transportation and processing assets is calculated on the
straight-line method based on estimated useful lives ranging from four to twenty
years.
The Company receives fees for providing field related services. These
fees are recognized as earned. Depreciation on field assets is calculated on the
straight-line method based on estimated useful lives ranging from one to five
years, except buildings which are being depreciated over ten to twenty-five year
periods.
DEBT ISSUANCE COSTS
Expenses associated with the issuance of the 6% Convertible
Subordinated Debentures due 2007, the 8.75% Senior Subordinated Notes due 2007
and the 5-3/4% Trust Convertible Preferred Securities are included in Other
Assets on the accompanying balance sheet and are being amortized on the interest
method over the term of the indebtedness.
GAS IMBALANCES
The Company uses the sales method to account for gas imbalances. Under
the sales method, revenue is recognized based on cash received rather than the
proportionate share of gas produced. Gas imbalances at December 31, 1997 and
June 30, 1998 were not material.
EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 "Earnings per Share." Statement 128 replaced the calculation of primary
and fully diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to Statement 128 requirements.
7
<PAGE> 8
COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" which requires
disclosure of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as changes
in stockholders' equity from nonowner sources and, for the Company, includes net
income and changes in the fair value of marketable securities. The following is
a calculation of the Company's comprehensive income for the three and six months
ended June 30, 1997 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ---------------------------------
1997 1998 1997 1998
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 2,368 $ (944) $ 8,932 $ 1,815
Add: Unrealized gain/(loss)
Gross 18 (2,145) (547) (1,949)
Tax effect (7) 804 202 731
Less: Realized gains
Gross (256) (66) (1,956) (66)
Tax effect 95 25 724 25
------------- ------------- ------------- ---------------
Comprehensive income $ 2,218 $ (2,326) $ 7,355 $ 556
============= ============= ============= ===============
</TABLE>
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NATURE OF BUSINESS
The Company operates in an environment with many financial and
operating risks, including, but not limited to, the ability to acquire
additional economically recoverable oil and gas reserves, the inherent risks of
the search for, development of and production of oil and gas, the ability to
sell oil and gas at prices which will provide attractive rates of return, and
the highly competitive nature of the industry and worldwide economic conditions.
The Company's ability to expand its reserve base and diversify its operations is
also dependent upon the Company's ability to obtain the necessary capital
through operating cash flow, borrowings or the issuance of additional equity.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period numbers to
conform with the current period presentation.
(3) ACQUISITION AND DEVELOPMENT:
All of the Company's acquisitions have been accounted for as purchases.
The purchase prices were allocated to the assets acquired based on the fair
value of such assets and liabilities at the respective acquisition dates. The
acquisitions were funded by working capital, advances under a revolving credit
facility and the issuance of debt and equity securities.
8
<PAGE> 9
In the first quarter of 1997, the Company acquired oil and gas
properties located in West Texas, South Texas and the Gulf of Mexico (the
"Cometra Properties") from American Cometra, Inc. ("Cometra") for $385 million.
The Cometra Properties, located primarily in the Company's core operating areas,
include 515 producing wells and additional development and exploration potential
on approximately 150,000 gross acres (90,000 net acres). In addition, the
Cometra Properties include gas pipelines, a 25,000 Mcf/d gas processing plant
and an above-market gas contract with a major gas utility. The gas utility filed
an action concerning the above-market gas contract which is discussed in Note 6
Commitments and Contingencies.
In September 1997, the Company acquired properties in Appalachia ( the
"Meadville Properties") for a purchase price of $92.5 million. The Meadville
Properties are located in certain of the Company's core operating areas and
include 912 producing wells, 800 miles of gas gathering lines and leasehold
acreage covering 153,000 gross acres (146,000 net acres). The acquired reserves
were 80% developed and 95% operated on a pre-tax present value basis as of
December 31, 1996. The properties have access to a number of major interstate
pipelines and industrial end-users. In December 1997, the Company sold a net
profits interest in the properties for $36.3 million.
In December 1997, the Company completed the acquisition of certain oil
properties located in the Fuhrman-Mascho field in West Texas (the
"Fuhrman-Mascho Properties") for a purchase price of $40 million, with an
economic effective date of October 1, 1997. The Fuhrman-Mascho Properties
included 160 producing wells and leasehold acreage covering approximately 13,600
gross acres. On a present value basis, the acquired reserves were 40% developed
and greater than 95% operated.
In March 1998, the Company completed the acquisition of oil and gas
properties in the Powell Ranch Field in West Texas (the "Powell Ranch
Properties") for a purchase price of $57 million, including $42 million in cash
and $15 million of future consideration. At the Company's election, the future
consideration is payable in cash or Lomak Common Stock in eight equal monthly
installments beginning June 1, 1998. At June 30, 1998 the future consideration
is included in senior indebtedness. The acquired properties encompass 14,200
gross acres, include 32 producing wells, 28 drilling locations, and significant
exploration potential. On an equivalent reserve basis, the reserves were 85%
oil and 15% natural gas.
In addition to the above mentioned purchases, the Company acquired
other properties for an aggregate consideration of $26 million and $15 million
during the year ended December 31, 1997 and the six months ended June 30, 1998,
respectively.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents unaudited pro forma operating results as
if certain transactions had occurred at the beginning of each period presented.
The pro forma operating results include the following transactions: (i) the sale
of approximately 4 million shares of Common Stock and the application of the net
proceeds therefrom, (ii) the sale of $125 million of 8.75% Senior Subordinated
Notes and the application of the net proceeds therefrom, (iii) the sale of $120
million of 5 3/4% Trust Convertible Preferred Securities and the application of
the net proceeds therefrom, (iv) the purchase by the Company of the Meadville
Properties and (v) the purchase by the Company of the Powell Ranch Properties.
All acquisitions were accounted for as purchase transactions.
9
<PAGE> 10
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
1997 1998
----------------- -----------------
(in thousands except per share data)
<S> <C> <C>
Revenues....................... $ 79,173 $ 72,177
Net income..................... 8,887 1,554
Earnings per share - basic..... 0.38 0.02
Earnings per share - dilutive.. 0.37 0.02
Total assets................... 827,935 823,023
Stockholders' equity........... 219,769 195,772
</TABLE>
The pro forma operating results have been prepared for comparative
purposes only. They do not purport to present actual operating results that
would have been achieved had the acquisitions and financings been made at the
beginning of each period presented or to necessarily be indicative of future
results.
(4) INDEBTEDNESS:
The Company had the following debt outstanding as of the dates shown.
Interest rates at June 30, 1998 are shown parenthetically (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------------- ------------------
<S> <C> <C>
Bank facility (6.6%)................................. $ 186,700 $ 239,075
Other................................................ 425 13,151
------------------- ------------------
187,125 252,226
Less amounts due within one year..................... 413 26
------------------- ------------------
Senior debt, net..................................... $ 186,712 $ 252,200
=================== ==================
8.75% Senior Subordinated Notes due 2007............ $ 125,000 $ 125,000
6% Convertible Subordinated Debentures due 2007..... 55,000 55,000
------------------- ------------------
Subordinated debt, net............................... $ 180,000 $ 180,000
=================== ==================
</TABLE>
The Company maintains a $400 million revolving bank facility. The
facility provides for a borrowing base which is subject to semi-annual
redeterminations. At June 30, 1998, the borrowing base on the credit facility
was $325 million of which $86 million was available to be drawn. The facility
bears interest at prime rate or LIBOR plus 0.625% to 1.125% depending upon the
percentage of the borrowing base drawn. Interest is payable quarterly and the
loan matures in February 2003. A commitment fee is paid quarterly on the undrawn
balance at a rate of .25% to .375% depending upon the percentage of the
borrowing base not drawn. It is the Company's policy to extend the term period
of the credit facility annually. The weighted average interest rate on these
borrowings were 6.7% and 6.6% for the six months ended June 30, 1997 and 1998,
respectively.
The 8.75% Senior Subordinated Notes due 2007 (the "8.75% Notes") are
not redeemable prior to January 15, 2002. Thereafter, the 8.75% Notes will be
subject to redemption at the option of the Company, in whole or in part, at
redemption prices beginning at 104.375% of the principal amount and declining to
10
<PAGE> 11
100% in 2005. The 8.75% Notes are unsecured general obligations of the Company
and are subordinated to all senior debt (as defined) of the Company which
includes borrowings under the bank facility. The 8.75% Notes are guaranteed on a
senior subordinated basis by all of the subsidiaries of the Company and each
guarantor is a wholly owned subsidiary of the Company.
The 6% Convertible Subordinated Debentures Due 2007 (the "Debentures")
are convertible into shares of the Company's Common Stock at the option of the
holder at any time prior to maturity. The Debentures are convertible at a
conversion price of $19.25 per share, subject to adjustment in certain events.
Interest is payable semi-annually. The Debentures mature in 2007 and are not
redeemable prior to February 1, 2000. Thereafter the Debentures will be subject
to redemption at the option of the Company, in whole or in part, at redemption
prices beginning at 104% of the principal amount and declining to 101% in 2006.
The Debentures are unsecured general obligations of the Company subordinated to
all senior indebtedness (as defined) of the Company, which includes the 8.75%
Notes.
The debt agreements contain various covenants relating to net worth,
working capital maintenance and financial ratio requirements. The Company is in
compliance with all of its covenants. Interest paid during the six months ended
June 30, 1997 and 1998 totaled $6.0 million and $17.9 million, respectively.
(5) FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES:
The Company's financial instruments include cash and equivalents,
accounts receivable, accounts payable, debt obligations, commodity and interest
rate futures, options, and swaps. The book value of cash and equivalents,
accounts receivable and payable and short term debt are considered to be
representative of fair value because of the short maturity of these instruments.
The Company believes that the carrying value of its borrowings under its bank
credit facility approximates their fair value as they bear interest at rates
indexed to LIBOR. The Company's accounts receivable are concentrated in the oil
and gas industry. The Company does not view such a concentration as an unusual
credit risk. The Company has recorded an allowance for doubtful accounts of
$539,000 and $712,000 at December 31, 1997 and June 30, 1998, respectively.
A portion of the Company's future oil and gas sales are periodically
hedged against price risks through the use of futures, option or swap contracts.
The gains and losses on these instruments are included in the valuation of the
production being hedged in the contract month and are included as an adjustment
to oil and gas revenue. The Company also enters into interest rate swap
agreements. Gains and losses on swap agreements are included as an adjustment to
interest expense.
The following table sets forth the book value and estimated fair values
of the Company's financial instruments:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------------------------ ------------------------------
(In thousands)
Book Fair Book Fair
Value Value Value Value
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Cash and equivalents................ $ 9,725 $ 9,725 $ 13,526 $ 13,526
Marketable securities............... 7,671 8,041 5,630 4,051
Long-term debt...................... (367,125) (367,125) (432,226) (432,226)
Commodity swaps..................... - 1,071 - 836
Interest rate swaps................. - 73 - 102
</TABLE>
11
<PAGE> 12
The gains or losses on the Company's hedging transactions are
determined as the difference between the contract price and the reference price,
generally closing prices on the New York Mercantile Exchange. The resulting
transaction gains and losses are determined monthly and are included in net
income in the period the hedged production or inventory is sold. At June 30,
1998, the Company had open hedging contracts covering an average of 13,100 Mmbtu
per day at prices ranging from $2.15 to $2.72 per Mmbtu. Net gains(losses)
relating to these derivatives for the six months ended June 30, 1997 and 1998
approximated $(338,000) and $1.4 million, respectively.
Interest rate swap agreements, which are used by the Company in the
management of interest rate exposure, are accounted for on the accrual basis.
Income and expense resulting from these agreements are recorded in the same
category as expense arising from the related liability. Amounts to be paid or
received under interest rate swap agreements are recognized as an adjustment to
expense in the periods in which they accrue. At June 30, 1998, the Company had
$80 million of borrowings subject to four interest rate swap agreements at rates
of 5.64%, 5.71%, 5.59% and 5.35% through October 1998, September 1999, October
1999 and January 2000, respectively. The interest rate swaps may be extended at
the counterparties' option for two years. The agreements require that the
Company pay the counterparty interest at the above fixed swap rates and requires
the counterparty to pay the Company interest at the 30-day LIBOR rate. The
closing 30-day LIBOR rate on June 30, 1998 was 5.66%. The fair value of the
interest rate swap agreements at June 30, 1998 is based upon current quotes for
equivalent agreements.
These hedging activities are conducted with major financial or
commodities trading institutions which management believes entail acceptable
levels of market and credit risks. At times such risks may be concentrated with
certain counterparties or groups of counterparties. The credit worthiness of
counterparties is subject to continuing review and full performance is
anticipated.
(6) COMMITMENTS AND CONTINGENCIES:
The Company is involved in various legal actions and claims arising in
the ordinary course of business. In the opinion of management, such litigation
and claims are likely to be resolved without material adverse effect on the
Company's financial position.
In July 1997, a gas utility filed an action in the state district
court. In the lawsuit, the gas utility asserted a breach of contract claim
arising out of a 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. Lomak counterclaimed seeking damages for breach of contract and
repudiation of the contract. In May 1998, the court granted a partial summary
judgement on the liability issue in favor of the gas utility's interpretation of
the contract. Lomak anticipates the case will be scheduled for trial in late
1998 to determine the amount of damages, if any. The Company intends to defend
the damage claim and appeal the entire decision when final judgement is entered.
Accordingly, no damage amounts have been included in the Company's financial
statements.
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.
(7) EQUITY SECURITIES:
In October 1997, Lomak, through a newly-formed affiliate Lomak
Financing Trust (the "Trust"), completed the issuance of $120 million of 5 3/4%
trust convertible preferred securities (the "Convertible Preferred Securities").
The Trust issued 2,400,000 shares of the Convertible Preferred Securities at $50
per share. Each Convertible Preferred Security is convertible at the holder's
option into 2.1277 shares of Common Stock, representing a conversion price of
$23.50 per share.
The Trust invested the $120 million of proceeds in 5 3/4% convertible
junior subordinated debentures issued by Lomak (the " Junior Debentures"). In
turn, Lomak used the net proceeds from
12
<PAGE> 13
the issuance of the Junior Convertible Debentures to repay a portion of its
credit facility. The sole assets of the Trust are the Junior Debentures. The
Junior Debentures and the related Convertible Preferred Securities mature on
November 1, 2027. Lomak and Lomak Financing Trust may redeem the Junior
Debentures and the Convertible Preferred Securities, respectively, in whole or
in part, on or after November 4, 2000. For the first twelve months thereafter,
redemptions may be made at 104.025% of the principal amount. This premium
declines proportionally every twelve months until November 1, 2007, when the
redemption price becomes fixed at 100% of the principal amount. If Lomak redeems
any Junior Debentures prior to the scheduled maturity date, the Trust must
redeem Convertible Preferred Securities having an aggregate liquidation amount
equal to the aggregate principal amount of the Junior Debentures so redeemed.
Lomak has guaranteed the payments of distributions and other payments
on the Convertible Preferred Securities only if and to the extent that the Trust
has funds available. Such guarantee, when taken together with Lomak's
obligations under the Junior Debentures and related indenture and declaration of
trust, provide a full and unconditional guarantee of amounts due on the
Convertible Preferred Securities.
Lomak owns all the common securities of the Trust. As such, the
accounts of the Trust have been included in Lomak's consolidated financial
statements after appropriate eliminations of intercompany balances. The
distributions on the Convertible Preferred Securities have been recorded as a
charge to interest expense on Lomak's consolidated statements of income, and
such distributions are deductible by Lomak for income tax purposes.
In March 1997, the Company sold 4 million shares of common stock in a
public offering for $69 million.
In November 1995, the Company issued 1,150,000 shares of $2.03
convertible exchangeable preferred stock (the "$2.03 Preferred Stock") for $28.8
million. The $2.03 Preferred Stock is convertible into the Company's common
stock at a conversion price of $9.50 per share, subject to adjustment in certain
events. The $2.03 Preferred Stock is redeemable, at the option of the Company,
at any time on or after November 1, 1998, at redemption prices beginning at
105%. At the option of the Company, the $2.03 Preferred Stock is exchangeable
for the Company's 8-1/8% Convertible Subordinated Notes due 2005. The notes
would be subject to the same redemption and conversion terms as the $2.03
Preferred Stock.
(8) STOCK OPTION AND PURCHASE PLAN:
The Company maintains a Stock Option Plan which authorizes the grant of
options of up to 3.0 million shares of Common Stock. However, no new options may
be granted which would result in there being outstanding aggregate options
exceeding 10% of common shares outstanding plus those shares issuable under
convertible securities. Under the plan, incentive and non-qualified options may
be issued to officers, key employees and consultants. The plan is administered
by the Compensation Committee of the Board. All options issued under the plan
vest 30% after one year, 60% after two years and 100% after three years. During
the six months ended June 30, 1998, options covering approximately 55,000 shares
were exercised at prices ranging from $5.12 to $10.50 per share. At June 30,
1998, options covering a total of 2.1 million shares were outstanding under the
plan, of which approximately 983,000 options were exercisable. The exercise
prices of the outstanding options range from $3.38 to $18.06 per share.
In 1994, the stockholders approved the 1994 Outside Directors Stock
Option Plan (the "Directors Plan"). Only Directors who are not employees of the
Company are eligible under the Directors Plan. The Directors Plan covers a
maximum of 200,000 shares. At June 30, 1998, 140,000 options were outstanding
under the Directors Plan of which approximately 73,000 options were exercisable
as of that date. The exercise price of the options ranges from $7.75 to $16.88
per share.
In June 1997, the stockholders approved the 1997 Stock Purchase Plan
(the "1997 Plan") which authorizes the sale of up to 500,000 shares of common
stock to officers, directors, key employees and consultants. Under the Plan, the
right to purchase shares at prices ranging from 50% to 85% of market
13
<PAGE> 14
value may be granted. The Company previously had stock purchase plans which
covered 833,333 shares. The previous stock purchase plans have been terminated.
The plans are administered by the Compensation Committee of the Board. During
the six months ended June 30, 1998, the Company sold approximately 32,000 common
shares to officers, key employees and outside directors for total consideration
of $313,000. From inception through June 30, 1998, a total of 485,000 shares had
been sold through stock purchase plans, for a total consideration of
approximately $4 million.
(9) BENEFIT PLAN:
The Company maintains a 401(K) Plan for the benefit of its employees.
The Plan permits employees to make contributions on a pre-tax salary reduction
basis. The Company makes discretionary contributions to the Plan. Company
contributions for 1997 totaled $701,000.
(10) INCOME TAXES:
The Company follows FASB Statement No. 109, "Accounting for Income
Taxes". Under Statement 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
The Company has entered into several business combinations accounted
for as purchases. In connection with these transactions, deferred tax assets and
liabilities of $7.7 million and $23.8 million respectively, were recorded. In
1996 the Company acquired Eastern Petroleum Company in a taxable business
combination accounted for as a purchase. A net deferred tax liability of $2.1
million was recorded in the transaction. In 1997 the Company acquired Arrow
Operating Company in a tax free business combination accounted for as a
purchase. Accordingly, a deferred tax liability of $12 million was recorded.
As a result of the Company's issuance of equity and convertible debt
securities, it experienced a change in control during 1988 as defined by Section
382 of the Internal Revenue Code. The change in control placed limitations to
the utilization of net operating loss carryovers. At June 30, 1998, the Company
had available for federal income tax reporting purposes net operating loss
carryovers of approximately $26 million which are subject to annual limitations
as to their utilization and otherwise expire between 1998 and 2012, if unused.
The Company has alternative minimum tax net operating loss carryovers of $21
million which are subject to annual limitations as to their utilization and
otherwise expire from 1998 to 2012 if unused. The Company has statutory
depletion carryover of approximately $3.8 million and an alternative minimum tax
credit carryover of approximately $800,000. The statutory depletion carryover
and alternative minimum tax credit carryover are not subject to limitation or
expiration.
14
<PAGE> 15
(11) EARNINGS PER COMMON SHARE
The following table sets forth the computation of earnings per common
share and earnings per common share - assuming dilution (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C>
Numerator:
Net Income ................................. $ 2,368 $ (944) $ 8,932 $ 1,815
Preferred stock dividends .................. (584) (584) (1,167) (1,167)
-------- -------- -------- --------
Numerator for earnings per common share .... 1,784 (1,528) 7,765 648
Effect of dilutive securities:
Preferred stock dividends ................ -- -- -- --
-------- -------- -------- --------
Numerator for earnings per common
share - assuming dilution ................ $ 1,784 $ (1,528) $ 7,765 $ 648
======== ======== ======== ========
Denominator:
Denominator for basic earnings per common
share - weighted average shares .......... 20,290 21,162 18,640 21,136
Effect of dilutive securities:
Employee stock options ................... 628 350 682 443
Warrants ................................. 3 -- 5 --
-------- -------- -------- --------
Dilutive potential common shares ........... 631 350 687 443
-------- -------- -------- --------
Denominator for diluted earnings per share
adjusted weighted-average shares and
assumed conversions ...................... 20,921 21,512 19,327 21,579
======== ======== ======== ========
Earnings (loss) per common share ............... $ 0.09 $ (0.07) $ 0.42 $ 0.03
======== ======== ======== ========
Earnings (loss) per common
share - assuming dilution ................ $ 0.09 $ (0.07) $ 0.40 $ 0.03
======== ======== ======== ========
</TABLE>
For additional disclosure regarding the Company's Debentures and the
$2.03 Preferred Stock, see Notes 4 and 7, respectively. The Debentures were
outstanding during 1997 and 1998 but were not included in the computation of
diluted earnings per share because the conversion price was greater than the
average market price of common shares and, therefore, the effect would be
antidilutive. The $2.03 Preferred Stock was outstanding during 1997 and 1998 and
was convertible into 3,026,316 of additional shares of common stock. The
3,026,316 additional shares were not included in the computation of diluted
earnings per share because the effect would be antidilutive. There were employee
stock options outstanding during the three months ended June 30, 1997 which were
exercisable into 42,350 shares of the Company's common stock that were not
included in the second quarter 1997 computation of diluted earnings per share
because the effect was antidilutive. There were employee stock options
outstanding during the six months ended June 30, 1998, which were excercisable
into 1,104,150 shares of the Company's common stock that were not included in
the three or six month periods ended June 30, 1998 computations of diluted
earnings per share because the effect was antidilutive.
15
<PAGE> 16
(12) MAJOR CUSTOMERS:
The Company markets its oil and gas production on a competitive basis.
The type of contract under which gas production is sold varies but can generally
be grouped into three categories: (a) life-of-the-well (b) long-term (1 year or
longer) and (c) short-term contracts which may have a primary term of one year,
but which are cancelable at either party's discretion in 30-120 days.
Approximately 66% of the Company's gas production is currently sold under
market sensitive contracts which do not contain floor price provisions. For the
six months ended June 30, 1998, one customer accounted for 18% of the Company's
total oil and gas revenues. Management believes that the loss of any one
customer would not have a material adverse effect on the operations of the
company. Oil is sold on a basis such that the purchaser can be changed on 30
days notice. The price received is generally equal to a posted price set by the
major purchasers in the area. Oil is sold on a basis of price and service.
(13) OIL AND GAS ACTIVITIES:
The following summarizes selected information with respect to oil and
gas activities (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---------------- ----------------
(unaudited)
<S> <C> <C>
Oil and gas properties:
Subject to depletion............................... $ 674,067 $ 769,792
Not subject to depletion........................... 111,156 104,960
---------------- ----------------
Total.......................................... 785,223 874,752
Accumulated depletion.............................. (161,416) (180,315)
---------------- ----------------
Net oil and gas properties..................... $ 623,807 $ 694,437
================ ================
</TABLE>
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1997 1998
---------------- ----------------
(unaudited)
<S> <C> <C>
Costs incurred:
Acquisition........................................ $ 448,822 $ 72,666
Development........................................ 56,430 34,880
Exploration........................................ 2,375 739
---------------- ----------------
Total costs incurred........................... $ 507,627 $ 108,285
================ ================
</TABLE>
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
FACTORS AFFECTING FINANCIAL CONDITION AND LIQUIDITY
LIQUIDITY AND CAPITAL RESOURCES
General
Total assets at June 30, 1998 were $823 million. At June 30, 1998
capitalization totaled $748 million, of which approximately 42% was represented
by stockholders' equity and the Convertible Preferred Securities while, 34% was
represented by senior debt and 24% by subordinated debt. Approximately $252
million of the long-term debt at that date was comprised of borrowings under the
Credit Agreement and other long-term debt, $125 million of 8.75% Senior
Subordinated Notes and $55 million of 6% Convertible Subordinated Debentures.
The Credit Agreement currently provides for quarterly payments of interest with
principal due in February 2003.
Common Stock and Note Offerings
In March 1997, the Company completed offerings of 4,060,000 shares of
Common Stock (the "Common Offering") and $125 million of 8.75% Senior
Subordinated Notes due 2007 (the "Notes Offering") (collectively the
"Offerings"). The Notes are unconditionally guaranteed on an unsecured, senior
subordinated basis, by each of the Company's Restricted Subsidiaries (as defined
in the Indenture for the Notes), provided that such guarantees will terminate
under certain circumstances. The Indenture for the Notes contains certain
covenants, including, but not limited to, covenants with respect to the
following matters: (i) limitation on restricted payments; (ii) limitation on the
incurrence of indebtedness and issuance of Disqualified Stock (as defined in the
Indenture for the Notes); (iii) limitation on liens; (iv) limitation on
disposition of proceeds of asset sales; (v) limitation on transactions with
affiliates; (vi) limitation on dividends and other payment restrictions
affecting restricted subsidiaries; (vii) restrictions on mergers, consolidations
and transfers of assets; and (viii) limitation on "layering" indebtedness.
Cash Flow
The Company's principal operating sources of cash include sales of oil
and gas and revenues from gas transportation, processing and marketing. The
Company's cash flow is highly dependent upon oil and gas prices. Decreases in
the market price of oil or gas could result in reductions of both cash flow and
the borrowing base under the Credit Agreement which would result in decreased
funds available, including funds intended for planned capital expenditures.
The Company has three principal operating sources of cash: (i) sales of
oil; (ii) sales of natural gas and (iii) revenues from transportation,
processing and marketing. The increases in the Company's cash flow from
operations can be attributed to its growth primarily through acquisitions and
development.
The Company's net cash used in investing for the six months ended June
30, 1997 and 1998 was $370 million and $92 million, respectively. Investing
activities for these periods are comprised primarily of additions to oil and gas
properties through acquisitions and development and, to a lesser extent,
exploitation and additions of field assets. These uses of cash have historically
been partially offset through the Company's policy of divesting those properties
that it deems to be marginal or outside of its core areas of operation. The
Company's acquisition and development activities have been financed through a
combination of operating cash flow, bank borrowings and capital raised through
equity and debt offerings.
The Company's net cash provided by financing for the six months ended
June 30, 1997 and 1998 was $330 million and $63 million, respectively. Sources
of financing used by the Company during the most recent six month period were
borrowings under its Credit Agreement and capital raised through the Offerings.
17
<PAGE> 18
Capital Requirements
During the six months ended June 30, 1998, $35 million and $0.7 million
of costs were incurred for development and exploration activities, respectively.
The Company is currently projecting that it will spend approximately $300
million on development, exploitation and exploration activities during the next
three years. Although these expenditures are principally discretionary,
development and exploration expenditures are currently expected to consume a
majority of internally generated cash flows. The remaining internally generated
cash flows will be available for debt repayment, acquisitions, or other capital
expenditures.
Bank Facility
The Bank Facility permits the Company to obtain revolving credit loans
and to issue letters of credit for the account of the Company from time to time
in an aggregate amount not to exceed $400 million. The borrowing base is
currently $325 million and is subject to semi-annual determination and certain
other redeterminations based upon a variety of factors, including the discounted
present value of estimated future net cash flow from oil and gas production. At
June 30, 1998, the Company had $86 million of availability under the Bank
Facility. At the Company's option, loans may be prepaid, and revolving credit
commitments may be reduced, in whole or in part at any time in certain minimum
amounts. At the Company's option, the applicable interest rate per annum is the
LIBOR plus a margin ranging from 0.625% to 1.125%. The facility contains other
alternative rate options which have never been utilized by the Company. Based on
levels of debt outstanding as of June 30, 1998, the margin was 0.875%.
Hedging Activities
Periodically, the Company enters into futures, option and swap
contracts to reduce the effects of fluctuations in crude oil and natural gas
prices. At June 30, 1998, the Company had open hedging contracts covering an
average of 13,100 Mmbtu per day at prices ranging from $2.15 to $2.72 per Mmbtu.
The gains or losses on the Company's hedging transactions are determined as the
difference between the contract price and a reference price, generally closing
prices on the NYMEX. The resulting transaction gains and losses are determined
monthly and are included in the period the hedged production or inventory is
sold. Net gains (losses) relating to these derivatives for the six months ended
June 30, 1997 and 1998, approximated $(338,000) and $1.4 million respectively.
INFLATION AND CHANGES IN PRICES
The Company's revenues and the value of its oil and gas properties have
been and will be affected by changes in oil and gas prices. The Company's
ability to maintain current borrowing capacity and to obtain additional capital
on attractive terms is also substantially dependent on oil and gas prices. Oil
and gas prices are subject to significant seasonal and other fluctuations that
are beyond the Company's ability to control or predict. During the first six
months of 1998, the Company received an average of $12.65 per barrel of oil and
$2.55 per Mcf of gas. Although certain of the Company's costs and expenses are
affected by the level of inflation, inflation did not have a significant effect
during the first six months of 1998.
18
<PAGE> 19
RESULTS OF OPERATIONS
Comparison of 1998 to 1997
The Company reported a net loss for the three months ended June 30,
1998 of $944,000 versus a net profit of $2.4 million for the second quarter of
1997. The decrease was primarily the result of (i) lower product prices received
on oil and gas production, (ii) increased interest expense in connection with
the financing of acquisitions and capital expenditures and (iii)increased
exploration expenses. Oil and gas revenues increased 15% in the second quarter
of 1998 due primarily to production volume increases. During the period
presented, oil and gas production volumes increased 18% from 123,800 Mcfe/d in
1997 to 146,400 Mcfe/d in 1998. The average price received decreased 2% from
$2.36 per Mcfe in 1997 to $2.31 per Mcfe in 1998. The average oil price
decreased 29% to $12.20 per barrel while average gas prices increased 8% to
$2.47 per Mcf. As a result of the Company's larger base of producing properties
and production, oil and gas production expenses increased 2% to $7.6 million in
1998 versus $7.5 million in 1997. The average direct operating cost per Mcfe
produced decreased 9% from $0.67 in the first six months of 1997 to $0.61 in
1998.
Transportation, processing and marketing revenues decreased 4% to $2.7
million versus $2.8 million in 1997 principally due to lower amounts of gas
processed during 1998. During the first quarter of 1998, the Company sold its
San Juan Basin properties which contained certain of its gas processing assets.
Transportation, processing and marketing expenses increased 44% to $1.0 million
versus $0.7 million in 1997. The increase in expenses was due to production
growth, as well as the increase in transportation, processing and marketing
costs and higher personnel administrative costs associated with the growth in
gas marketing activities. Exploration expense increased sharply from $0.2
million to $2.0 million due to a number of 3-D seismic projects being performed
during the second quarter of 1998.
General and administrative expenses increased $1.0 million to $2.1
million in 1998. General and administrative expenses were $0.16 per Mcfe of
production in 1998 as compared to $0.09 in 1997. This increase in general and
administrative expenses was due to higher personnel and administrative costs
associated with the Company's growth and increased legal expenditures.
Interest and other income decreased from $3.4 million in 1997 to $(0.1)
million in 1998 primarily due to lower sales levels of marketable securities and
certain non-strategic assets. In 1998 interest expense increased 30% to $9.4
million as compared to $7.3 million in 1997. This was primarily a result of the
higher average outstanding debt balance during the year due to the financing of
acquisitions and capital expenditures. The average outstanding balances on the
Credit Agreement were $169 million and $202 million for 1997 and the six months
ended June 30, 1998, respectively. The weighted average interest rates on these
borrowings were 6.7% and 6.6% for the six months ended June 30, 1997 and 1998,
respectively.
Depletion, depreciation and amortization increased 5% compared to 1997
as a result of increased production volumes. The Company-wide depletion rate was
$0.98 per Mcfe in the second quarter of 1997 and $0.84 per Mcfe in the second
quarter of 1998.
YEAR 2000
The Company has developed an action plan and identified the resources
needed to convert all significant applications of its computer systems and
software applications to achieve a year 2000 date conversion with no effect on
customers or disruption to business operations. Implementation of the plan has
begun and the Company anticipates completion of testing of critical systems by
the end of 1998. The Company estimates that the cost to complete these efforts,
which primarily includes the purchase of software upgrades under normal
maintenance agreements with third party vendors, will not be material and will
be expended primarily in 1998. In addition, the Company has discussed with its
vendors and customers the need to be year 2000 compliant. Although the Company
has no reason to believe that its vendors and customers will not be compliant by
the year 2000, the Company is unable to determine the
19
<PAGE> 20
extent to which year 2000 issues will effect its vendors and customers, and the
Company continues to discuss with its vendors and customers the need for
implementing procedures to address this issue.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various other legal actions and claims
arising in the ordinary course of business. In the opinion of management, such
litigation and claims are likely to be resolved without material adverse effect
on the Company's financial position.
In July 1997, a gas utility filed an action in the state district
court. In the lawsuit, the gas utility asserted a breach of contract claim
arising out of a 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. Lomak counterclaimed seeking damages for breach of contract and
repudiation of the contract. In May 1998, the court granted a partial summary
judgement on the liability issue in favor of the gas utility's interpretation of
the contract. Lomak anticipates the case will be scheduled for trial in late
1998 to determine the amount of damages, if any. The Company intends to defend
the damage claim and appeal the entire decision when final judgement is entered.
Accordingly, no damage amounts have been included in the Company's financial
statements.
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.
Items 2 - 5. Not applicable
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
27 Financial data schedule
(b) Reports on Form 8-K
None
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned.
LOMAK PETROLEUM, INC.
By: (Thomas W. Stoelk)
-----------------------------------
Thomas W. Stoelk
Senior Vice President
Finance & Administration
Chief Financial Officer
August 14, 1998
21
<PAGE> 22
EXHIBIT INDEX
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- --------------------- ---------------------------------- ----------------
27 Financial data schedule 23
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,526
<SECURITIES> 4,051
<RECEIVABLES> 25,923
<ALLOWANCES> 0
<INVENTORY> 1,919
<CURRENT-ASSETS> 45,419
<PP&E> 961,378
<DEPRECIATION> 192,707
<TOTAL-ASSETS> 822,984
<CURRENT-LIABILITIES> 48,347
<BONDS> 0
0
1,150
<COMMON> 211
<OTHER-SE> 194,386
<TOTAL-LIABILITY-AND-EQUITY> 822,984
<SALES> 63,280
<TOTAL-REVENUES> 70,371
<CGS> 16,108
<TOTAL-COSTS> 20,562
<OTHER-EXPENSES> 28,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,108
<INCOME-PRETAX> 3,001
<INCOME-TAX> 1,186
<INCOME-CONTINUING> 1,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,815
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
