UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Transition period ______________ to _______________ Commission File Number 1-12999 DOMAIN ENERGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 76-0526147 (State or Other Jurisdiction of (I.R.S Employer Identification No.) Incorporation or Organization) 16801 Greenspoint Park Drive, Suite 200 77060 Houston, Texas (Zip Code) (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (281) 618-1800 Not Applicable (Former Name, Former Address and Former Fiscal Year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of stock as of May 14, 1998: Common Stock $0.01 par value 15,107,719 DOMAIN ENERGY CORPORATION Table of Contents for Form 10-Q Quarter Ended March 31, 1998 PAGE NUMBER ------ COVER PAGE ................................................................... 1 DOCUMENT TABLE OF CONTENTS ................................................... 2 PART 1. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets at March 31, 1998 (unaudited) and December 31, 1997 ................................... 3 Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 (unaudited) ............... 4 Consolidated Statement of Shareholders' Equity for the three months ended March 31, 1998 (unaudited) ........... 5 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited) ........ 6 Notes to Consolidated Financial Statements (unaudited) .... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................... 10 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ......................................... 14 ITEM 2. Changes in Securities and Use of Proceeds .................. 14 ITEM 3. Defaults Upon Senior Securities ........................... 14 ITEM 4. Submission of Matters to a Vote of Security Holders ....... 15 ITEM 5. Other Information ......................................... 15 ITEM 6. Exhibits and Reports on Form 8-K ........................... 15 SIGNATURES ................................................................... 16 INDEX OF EXHIBITS ............................................................ 17 2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DOMAIN ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (Note 1) (in thousands, except share data) March 31, December 31, 1998 1997 --------- --------- (unaudited) ASSETS Cash and cash equivalents ..................................... $ 8,249 $ 4,731 Accounts receivable ........................................... 8,631 12,562 IPF Program notes receivable, current portion ................. 9,175 8,873 Notes receivable - stockholders .............................. -- 546 Prepaid and other assets ...................................... 2,808 2,858 --------- --------- Total current assets ................................... 28,863 29,570 IPF Program notes receivable, net ............................. 42,611 40,892 Oil and natural gas properties, full cost method Proved properties ........................................ 139,252 116,782 Unproved properties ...................................... 39,175 36,603 Less: Accumulated depreciation, depletion and amortization .. (20,822) (15,411) --------- --------- Total oil and natural gas properties, net ................ 157,605 137,974 Other assets, net ............................................. 4,369 4,113 --------- --------- Total assets .......................................... $ 233,448 $ 212,549 ========= ========= LIABILITIES Accounts payable and accrued expenses ......................... $ 15,985 $ 15,907 --------- --------- Total current liabilities ............................. 15,985 15,907 Long-term debt ................................................ 80,910 63,720 Deferred income taxes ......................................... 1,181 -- --------- --------- Total liabilities ..................................... 98,076 79,627 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 March 31, 1998 and December 31, 1997 ...................................... 151 151 Additional paid-in capital .................................... 129,019 128,730 Treasury stock ................................................ (10) (10) Retained earnings ............................................. 5,324 3,163 --------- --------- Total stockholders' equity ............................ 134,484 132,034 --------- --------- Total liabilities and stockholders' equity ............ $ 233,448 $ 212,549 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 3 DOMAIN ENERGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1) (in thousands, except per share data) (Unaudited) Three Months Ended March 31, --------------------- 1998 1997 ------- -------- REVENUES Oil and natural gas ................................ $13,312 $ 12,782 IPF Activities, net ................................ 1,958 732 Other .............................................. 688 (292) ------- -------- Total revenues ........................ 15,958 13,222 ------- -------- EXPENSES Lease operating .................................... 4,113 3,060 Production and severance taxes ..................... 305 413 Depreciation, depletion and amortization ........... 5,598 3,282 General and administrative, net .................... 1,607 792 Stock compensation ................................. 185 3,150 ------- -------- Total operating expenses .............. 11,808 10,697 Income from operations ............................. 4,150 2,525 Interest expense, net .............................. 655 1,109 ------- -------- Income before taxes ................................ 3,495 1,416 Income tax provision ............................... 1,334 1,735 ------- -------- Net income (loss) .................................. $ 2,161 $ (319) ======= ======== Net income (loss) per common share: Basic ......................................... $ 0.14 $ (0.03) Assuming dilution ............................. $ 0.14 $ (0.03) Weighted average common shares outstanding: Basic ......................................... 15,108 9,156 Assuming dilution ............................. 15,822 9,156 The accompanying notes are an integral part of the consolidated financial statements. 4 DOMAIN ENERGY CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Note 1) (in thousands) (Unaudited) Additional Common Paid in Treasury Retained Stock Capital Stock Earnings Total ------ ---------- -------- -------- -------- Balance at December 31, 1997 ...... $ 151 $ 128,730 $ (10) $ 3,163 $132,034 Stock compensation ................ -- 289 -- -- 289 Net income ........................ -- -- -- 2,161 2,161 ------ ---------- -------- -------- -------- Balance at March 31, 1998 ......... $ 151 $ 129,019 $ (10) $ 5,324 $134,484 ====== ========== ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 5 DOMAIN ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1) (in thousands) (Unaudited) Three Months Ended March 31, ------------------- 1998 1997 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................................. $ 2,161 $ (319) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization ................... 5,598 3,282 Stock compensation ......................................... 185 3,150 Deferred income taxes ...................................... 1,296 1,550 Minority interest .......................................... -- 32 Allowance for doubtful IPF investments ..................... 271 -- Changes in operating assets and liabilities: Decrease in accounts receivable ............................ 3,931 5,467 Decrease in prepaid and other current assets ............... 50 57 Increase (decrease) in accounts payable and accrued expenses 3,139 (5,107) -------- ------- Net cash provided by operating activities ......................... 16,631 8,112 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in oil and natural gas properties ...................... (17,052) (3,858) Investment in Oakvale Acquisition ................................. (11,575) -- Proceeds from sale of oil and gas properties ...................... 628 1,700 IPF Program investments of capital (notes receivable) ............. (6,849) (9,246) IPF Program return of capital (notes receivable) .................. 4,557 3,426 Other assets ...................................................... (558) 401 -------- ------- Net cash used in investing activities ............................. (30,849) (7,577) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt borrowings ..................................... 20,445 9,379 Repayment of debt borrowing ....................................... (3,255) (4,953) Issuance of common stock, net ..................................... 546 1,085 -------- ------- Net cash provided by financing activities ......................... 17,736 5,511 Increase in cash and cash equivalents ............................. 3,518 6,046 Cash and cash equivalents, beginning of period .................... 4,731 36 -------- ------- Cash and cash equivalents, end of period .......................... $ 8,249 $ 6,082 ======== ======= The accompanying notes are an integral part of the consolidated financial statements. 6 DOMAIN ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION, BASIS OF PRESENTATION AND NATURE OF OPERATIONS Domain Energy Corporation (the "Company") is an independent oil and gas company engaged in the exploration, development, production and acquisition of oil and natural gas properties, principally in the Gulf Coast region. The Company complements these activities with its Independent Producer Finance Program (the "IPF Program") pursuant to which it invests in oil and natural gas reserves through the acquisition of term overriding royalty interests. The consolidated balance sheet at March 31, 1998 and the consolidated statements of operations, stockholders' equity and cash flows included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have also been omitted from the interim financial statements pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the interim periods are not necessarily indicative of the results to be expected for an entire year. The consolidated balance sheet at December 31, 1997 is derived from the December 31, 1997 audited balance sheet, but does not include all disclosures required by generally accepted accounting principles. These financial statements should be read in conjunction with the Company's audited annual financial statements included at pages 36 through 57 in the Company's Annual Report on Form 10-K, dated March 23, 1998. 2. ACQUISITIONS FUNDS ACQUISITION - On July 1, 1997, the Company consummated the acquisition (the "Funds Acquisition") of certain property interests from three unaffiliated institutional investors. The aggregate purchase price for the interests was approximately $28.4 million, which was paid in cash with a portion of the net proceeds of the initial public offering of the Company's common stock consummated on June 27, 1997. The acquisition was accounted for using the purchase method of accounting. The following unaudited pro forma summary presents the consolidated results of operations of the Company for the three months ended March 31, 1997 as if the Funds Acquisition had occurred at the beginning of 1997 (in thousands, except per share data). THREE MONTHS ENDED MARCH 31, 1997 ------------------ Revenues $ 15,784 Net loss $ (274) Net loss per share (1) $ (0.03) (1) EPS assuming dilution. GULFSTAR ACQUISITION - On December 15, 1997, the Company acquired all of the outstanding capital stock of Gulfstar Energy, Inc. and Mid Gulf Drilling Corp. (the "Gulfstar Acquisition"). The aggregate purchase price of these privately held, independent energy companies was $16.6 million, comprised of $8.6 million in cash and 499,990 shares of the Company's common stock valued at $16.00 per share. The acquisition was accounted for using the purchase method of accounting. The following unaudited pro forma summary presents the consolidated results of operations of the Company for the three months ended March 31, 1997 as if the Gulfstar Acquisition had occurred at the beginning of 1997. The 1997 pro forma amounts also give effect to the Funds Acquisition discussed above (in thousands, except per share data). 7 DOMAIN ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) THREE MONTHS ENDED MARCH 31, 1997 ------------------ Revenues $ 16,074 Net loss $ (459) Net loss per share (1) $ (0.05) (1) EPS assuming dilution. EPS calculation assumes that the 499,990 shares of common stock issued in connection with the Gulfstar Acquisition were outstanding for the entire year. OAKVALE ACQUISITION - On February 26, 1998, the Company acquired the Oakvale Field from Pioneer Natural Resources USA Inc. for an aggregate purchase price of $11.6 million. The acquisition was accounted for using the purchase method of accounting. The acquisition is not material to the Company's financial statements and therefore pro forma information is not provided. 3. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," (SFAS 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 the Company is evaluating what, if any, additional disclosures may be required when this statement is first applied. 4. EARNINGS PER SHARE The Company reports earnings per share ("EPS") in accordance with Financial Accounting Standards Board Statement No. 128, "Earnings Per Share," (SFAS 128). SFAS 128 requires the dual presentation of basic and diluted EPS. The following 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): FIRST QUARTER 1998 FIRST QUARTER 1997 --------------------------------------- --------------------------------------- INCOME SHARES PER SHARE INCOME SHARES (2) PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ------ ------ ----- ----- ----- ----- BASIC EPS Income available to common stockholders .. $2,161 15,108 $0.14 $(319) 9,156 $(0.03) ===== ====== EFFECT OF DILUTIVE SECURITIES Stock options (1) ........................ -- 714 -- -- ------ ------ ----- ----- DILUTED EPS Income available to common stockholders .. $2,161 15,822 $0.14 $(319) 9,156 $(0.03) ====== ====== ===== ===== ===== ====== 8 DOMAIN ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (1) The Company 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 the Company's acquisition in December 1996, the 486,003 shares of Common Stock issued to the Company's employees in February and April 1997, the 849,694 shares of Common Stock reserved for issuance pursuant to outstanding options under the Stock Purchase and Option Plan and the 643,037 shares of Common Stock purchased concurrently with the Company's initial public offering by First Reserve Fund VII, Limited Partnership were outstanding since January 1, 1997. 5. LONG-TERM DEBT At March 31, 1998 and December 31, 1997, notes payable and long-term debt consisted of the following (in thousands): March 31, December 31, 1998 1997 ------- ------- Company Credit Facility .................... $49,052 $34,552 IPF Credit Facility ........................ 31,858 29,168 ------- ------- Long-term debt ............................. 80,910 63,720 less current maturities .................... -- -- ------- ------- $80,910 $63,720 ======= ======= 5. SUBSEQUENT EVENTS On May 12, 1998, the Company entered into a definitive agreement to merge with Lomak Petroleum, Inc. ("Lomak"). Pursuant to the merger agreement, the Company's shareholders will receive $14.50 worth of Lomak common stock for each common share. 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 to the merger, the Company's majority shareholder, an affiliate of First Reserve Corporation ("First Reserve"), has agreed to sell to Lomak 3.3 million shares of the Company (22% of the total outstanding) for $43.9 million in cash ($13.50 per share). As contemplated by the merger agreement, First Reserve has voted all of its shares (52% of the total outstanding) in favor of the merger. As a result, no further approval of the Company's shareholders is necessary. Completion of the transaction is subject to approval of Lomak's shareholders and to customary regulatory approvals. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following review of operations for the three months ended March 31, 1998 and 1997 should be read in conjunction with the financial statements of the Company and Notes thereto included elsewhere in this Form 10-Q and with the Financial Statements, Notes and Management's Discussion and Analysis for the year ended December 31, 1997 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10 RESULTS OF OPERATIONS The following table summarizes certain financial data, non-GAAP financial data, production volumes, average realized prices and expenses for the Company's oil and natural gas operations for the periods shown: FOR THE THREE MONTHS ENDED MARCH 31, ---------------------- 1998 1997 -------- -------- FINANCIAL DATA (IN THOUSANDS): Revenues: Natural Gas ................................... $ 10,470 $ 10,094 Oil and condensate ............................ 2,842 2,688 IPF Activities ................................ 1,958 732 Total revenues ................................... 15,958 13,222 Total operating expenses ......................... 11,808 10,697 -------- -------- Operating income ................................. $ 4,150 $ 2,525 ======== ======== Net income (loss) ................................ $ 2,161 $ (319) Net cash provided by operating activities ........ 16,631 8,112 Net cash used in investing activities ............ (30,849) (7,577) Net cash provided by financing activities ........ 17,736 5,511 NON-GAAP FINANCIAL DATA (IN THOUSANDS): Cash flow from operations before changes in working capital ................................ $ 9,511 $ 7,695 EBITDA (1) .................................. 9,934 8,957 IPF Program return of capital (2) ........... 4,557 3,426 -------- -------- EBITDA plus IPF Program return of capital ............................... $ 14,491 $ 12,283 ======== ======== PRODUCTION VOLUMES: Natural gas (MMcf) ........................ 4,872 3,668 Oil and condensate (MBbls) ................ 190 141 Total (MMcfe) ............................. 6,013 4,516 AVERAGE REALIZED PRICES: (3) Natural gas (per Mcf) .................... $ 2.15 $ 2.75 Oil and Condensate (per Bbl) .............. $ 14.96 $ 19.06 EXPENSES (PER MCFE): Lease operating ........................... $ 0.68 $ 0.68 Production and severance taxes ............ $ 0.05 $ 0.09 Depreciation, depletion and amortization ........................... $ 0.90 $ 0.69 General and administrative, net (4) ....... $ 0.21 $ 0.14 (1) EBITDA represents earnings before stock compensation expense, interest, income taxes, depreciation, depletion and amortization. EBITDA is a financial measure commonly used in the oil and gas industry and should not be considered in isolation or as a substitute for net income, operating income, net cash provided by operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. Because EBITDA excludes some, but not all, items that affect net income and may vary among companies, the EBITDA calculation presented above may not be comparable to similarly titled measures of other companies. 11 (2) To more accurately reflect the actual cash flows generated by the Company, IPF Program return of capital is identified separately to allow such cash receipts to be combined with EBITDA. (3) Reflects the actual realized prices received by the Company, including the results of the Company's hedging activities. (4) Includes production attributable to properties managed for the Funds for the three months ended March 31, 1997 and excludes fees received from investors. 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 the Company's natural gas and a 21.5% decrease in the average realized price received for the Company's oil and condensate. These decreases in realized prices decreased revenues by $3.7 million. The Company 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, the Company 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, the Company 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, the Company 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 the Company 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 the Company sold in April 1997. Revenues from IPF Activities increased to $2.2 million, excluding a $271,000 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 $40.0 million in IPF Activities 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 quater 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 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. 12 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 the Company in the first quarter of 1997 under the 1996 Stock Purchase and Option Plan for Key Employees of Domain Energy Corporation and Affiliates (the "Stock Purchase and Option Plan"). 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. LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES As of March 31, 1998, the Company had cash and cash equivalents of approximately $8.2 million and working capital of $12.9 million. During the first quarter of 1998, the Company's primary sources of cash were from its operating activities and its revolving credit facilities. Net cash provided by operating activities increased to $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 revenues from IPF Activities, 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. 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. Total capital expenditures, including the IPF Program, were $35.5 million for the first quarter of 1998. The Company'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, the Company 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. The Company's expected capital expenditures and investments reflect changes due to current oil prices which impact acquisition and exploration and development activities as well as investments made by the IPF Program. Actual levels of capital expenditures may vary significantly due to a variety of factors, including drilling results, oil and gas prices, industry conditions, future acquisitions and IPF Program activity. The Company expects to selectively pursue acquisition opportunities for proved reserves where it believes significant operating improvement or exploration and exploitation potential exists. The Company expects to fund its activities for the remainder of 1998 through a combination of cash flow from operations and the use of its existing revolving credit facilities and, if necessary, new financings to borrow funds required from time to time to supplement internal cash flows. Based upon the Company's current level of operations and anticipated growth, management of the Company believes that 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 the Company's anticipated future requirements for working capital, capital expenditures and payments of principal and interest on its indebtedness. However, there can be no assurance that such anticipated growth will be realized, that the Company's business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable the Company to service its indebtedness or make necessary capital expenditures. Cash flows provided by financing activities increased to $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 the Company's revolving credit facilities of $12.8 million during the first quarter of 1998. 13 The borrowing base under the Company's revolving credit facility with Chase Manhattan Bank, as agent, (the "Company Credit Facility") was increased to $60.0 million on April 12, 1998, giving the Company $11.9 million available under this credit facility. Effective May 14, 1998, the borrowing base under the Company's revolving credit facility with Compass Bank, as agent, (the "IPF Credit Facility") was increased to $49.0 million, giving the Company $16.0 million available under this credit facility. RECENT DEVELOPMENTS On May 12, 1998, the Company entered into a definitive agreement to merge with Lomak Petroleum, Inc. ("Lomak"). Pursuant to the merger agreement, the Company's shareholders will receive $14.50 worth of Lomak common stock for each common share. 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 to the merger, the Company's majority shareholder, an affiliate of First Reserve Corporation ("First Reserve"), has agreed to sell to Lomak 3.3 million shares of the Company (22% of the total outstanding) for $43.9 million in cash ($13.50 per share). As contemplated by the merger agreement, First Reserve has voted all of its shares (52% of the total outstanding) in favor of the merger. As a result, no further approval of the Company's shareholders is necessary. Completion of the transaction is subject to approval of Lomak's shareholders and to customary regulatory approvals. There can be no assurance that this transaction will not adversely affect the Company's ability to fund its planned 1998 capital expenditures. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The annual meeting of stockholders (the "Annual Meeting") of the Company was held on May 12, 1998 at which the stockholders voted on the following matters with the following results: (a) ELECTION OF DIRECTORS. At the Annual Meeting, the stockholders elected Jonathan S. Linker, Michael Harvey, William E. Macaulay, William P. Nicoletti, Steven H. Pruett, Michael V. Ronca and Gary K. Wright as directors of the Company, each to serve a term expiring at the 1999 annual meeting of stockholders. The results of voting were as follows: Director For Abstained or Withheld -------- ---------- --------------------- Jonathan S. Linker 13,397,595 233,100 Michael L. Harvey 13,397,295 233,400 William E. Macaulay 13,062,222 568,473 William P. Nicoletti 13,399,295 231,400 Steven H. Pruett 13,313,257 317,438 Michael V. Ronca 13,399,295 231,400 Gary K. Wright 13,398,095 232,600 (b) SECOND AMENDED AND RESTATED STOCK PURCHASE AND OPTION PLAN. The stockholders approved the Company's Second Amended and Restated 1996 Stock Purchase and Option Plan with 10,825,787 shares voting in favor of the proposal, 1,604,897 shares voting against the proposal and 203,638 shares abstaining from voting. (c) AMENDMENT TO CERTIFICATE OF INCORPORATION. The stockholders approved a proposal to amend the Company's Amended and Restated Certificate of Incorporation with 13,407,913 shares voting in favor of the proposal, 211,707 shares voting against the proposal and 11,075 shares abstaining from voting. (d) APPOINTMENT OF AUDITORS. The stockholders ratified the appointment of auditors with 13,589,625 shares voting for ratification, 23,163 shares voting against ratification and 17,907 shares abstaining from voting. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Index of Exhibits for a list of those exhibits filed herewith, which index only includes those contracts executed or becoming effective during the most recent period reflected in this Report as allowed pursuant to Instruction 2 to Item 601(b)(10) of Regulation S-K. (b) The Company did not file any reports on Form 8-K during the first quarter of 1998. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DOMAIN ENERGY CORPORATION May 14, 1998 /S/ RICK G. LESTER ------------------- Rick G. Lester Vice President, Chief Financial Officer and Treasurer 16 INDEX OF EXHIBITS EXHIBIT NO. DESCRIPTION - ------- ----------- 3.1 Second Amended and Restated Certificate of Incorporation of the Company filed with the State of Delaware on May 14, 1998. 3.2 Second Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.1 Second Amended and Restated 1996 Stock Purchase and Option Plan for Key Employees of Domain Energy Corporation and Affiliates. 10.2 Stock Purchase Agreement dated as of November 21, 1997, between the Company and Enron Capital & Trade Resources Corp. 10.3 Employment Agreement, executed on March 24, 1998, to be effective February 17, 1998 between Michael L. Harvey and the Company. 10.4 Non-Qualified Stock Option Agreement, dated as of March 24, 1998, between the Company and Michael L. Harvey. 10.5 Agreement and Plan of Merger by and among Lomak Petroleum, Inc., DEC Acquisition, Inc. and Domain Energy Corporation, dated May 12, 1998. 10.6 First Amendment to Agreement and Plan of Merger by and among Lomak Petroleum, Inc., DEC Acquisition, Inc. and Domain Energy Corporation, dated May 12, 1998. 27.1 Financial Data Schedule. 17