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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 September 30, 1995
{ } 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
--- ---
12,063,238 Common Shares were outstanding on November 6, 1995.
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PART I. FINANCIAL INFORMATION
The financial statements included herein have been prepared in
conformity with generally accepted accounting principles and should be read in
conjunction with the December 31, 1994 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 the results of
operations.
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LOMAK PETROLEUM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, September 30,
1994 1995
--------------- --------------
(unaudited)
ASSETS
Current assets
Cash and equivalents . . . . . . . . . . . . . . . . . . $ 4,897 $ 2,401
Accounts receivable . . . . . . . . . . . . . . . . . . 9,431 10,559
Inventory and other . . . . . . . . . . . . . . . . . . 1,592 1,470
--------------- --------------
15,920 14,430
--------------- --------------
Oil and gas properties, successful efforts method . . . . 133,373 199,024
Accumulated depletion, depreciation and amortization . (20,409) (29,124)
--------------- --------------
112,964 169,900
--------------- --------------
Gas transportation and field service assets . . . . . . . 16,125 22,653
Accumulated depreciation . . . . . . . . . . . . . . . (3,241) (3,678)
--------------- --------------
12,884 18,975
--------------- --------------
$ 141,768 $ 203,305
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 8,421 $ 7,198
Accrued liabilities . . . . . . . . . . . . . . . . . . 5,790 5,093
Current portion of debt (Note 5) . . . . . . . . . . . . 707 399
--------------- --------------
14,918 12,690
--------------- --------------
Senior debt (Note 5) . . . . . . . . . . . . . . . . . . 61,885 112,839
Deferred taxes (Note 10) . . . . . . . . . . . . . . . . 16,390 17,222
Commitments and contingencies (Note 6) . . . . . . . . .
Minority interest . . . . . . . . . . . . . . . . . . . . 5,327 -
Stockholders' equity (Notes 7 and 8)
Preferred stock, $1 par, 2,000,000 shares authorized,
7-1/2% convertible preferred, 200,000 issued
(liquidation preference $5,000,000) . . . . . . . . 200 200
Common stock, $.01 par, 20,000,000 shares authorized,
9,754,010 and 12,039,968 issued . . . . . . . . . . 97 120
Capital in excess of par value . . . . . . . . . . . . . 50,495 65,342
Retained earnings (deficit) . . . . . . . . . . . . . . . (7,544) (5,108)
--------------- --------------
43,248 60,554
--------------- --------------
$ 141,768 $ 203,305
=============== ==============
SEE ACCOMPANYING NOTES
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LOMAK PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1994 1995 1994 1995
------------ ----------- ----------- ------------
(unaudited) (unaudited)
Revenues
Oil and gas sales . . . . . . . . . . . . . . . . $ 6,241 $ 8,802 $ 17,810 $ 24,135
Field services . . . . . . . . . . . . . . . . . . 2,033 2,216 6,293 7,109
Gas transportation and marketing . . . . . . . . . 622 817 1,531 2,332
Interest and other . . . . . . . . . . . . . . . . 165 301 407 1,052
------------ ----------- ----------- ------------
9,061 12,136 26,041 34,628
------------ ----------- ----------- ------------
Expenses
Direct operating . . . . . . . . . . . . . . . . . 2,436 3,496 7,254 9,935
Field services . . . . . . . . . . . . . . . . . . 1,590 1,315 4,861 4,192
Gas transportation and marketing . . . . . . . . . 130 206 346 595
Exploration . . . . . . . . . . . . . . . . . . . 120 197 262 473
General and administrative . . . . . . . . . . . . 651 669 1,707 2,187
Interest . . . . . . . . . . . . . . . . . . . . . 718 1,423 1,947 3,822
Depletion, depreciation and amortization . . . . . 2,631 3,704 7,647 9,808
------------ ----------- ----------- ------------
8,276 11,010 24,024 31,012
------------ ----------- ----------- ------------
Income before taxes . . . . . . . . . . . . . . . . . 785 1,126 2,017 3,616
Income taxes
Current . . . . . . . . . . . . . . . . . . . . . 4 19 19 66
Deferred . . . . . . . . . . . . . . . . . . . . . 59 210 110 832
------------ ----------- ----------- ------------
63 229 129 898
------------ ----------- ----------- ------------
Net income . . . . . . . . . . . . . . . . . . . . . $ 722 $ 897 $ 1,888 $ 2,718
============ =========== =========== ============
Net income applicable to
common shares . . . . . . . . . . . . . . . . . . $ 628 $ 803 $ 1,607 $ 2,437
============ =========== =========== ============
Earnings per common share . . . . . . . . . . . . . . $ .07 $ .07 $ .18 $ .21
============ =========== =========== ============
Weighted average shares outstanding . . . . . . . . . 9,240 12,130 9,039 11,588
============ =========== =========== ============
SEE ACCOMPANYING NOTES.
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LOMAK PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended September 30,
--------------------------------
1994 1995
----------- -----------
(unaudited)
Cash flows from operations:
Net income . . . . . . . . . . . . . . . . . . . . . $ 1,888 $ 2,718
Adjustments to reconcile net income to
net cash provided by operations:
Depletion, depreciation and amortization . . . . 7,647 9,808
Deferred income taxes . . . . . . . . . . . . . 110 832
Changes in working capital net of
effects of purchases of businesses:
Accounts receivable . . . . . . . . . . 1,955 (1,063)
Inventory and other . . . . . . . . . . (496) 121
Accounts payable . . . . . . . . . . . 806 (1,223)
Accrued liabilities . . . . . . . . . . (2,660) (698)
Gain on sale of assets and other . . . . . . . . (445) (740)
----------- -----------
Net cash provided by operations . . . . . . . . . . . 8,805 9,755
Cash flows from investing:
Acquisition of businesses, net of cash . . . . . (7,992) -
Oil and gas properties . . . . . . . . . . . . . (19,148) (56,913)
Additions to gas transportation and field service
assets . . . . . . . . . . . . . . . . . . . . . (641) (7,733)
Proceeds on sale of assets . . . . . . . . . . . 2,851 1,770
----------- -----------
Net cash used in investing . . . . . . . . . . . (24,930) (62,876)
Cash flows from financing:
Proceeds from indebtedness . . . . . . . . . . . 19,773 50,929
Repayments of indebtedness . . . . . . . . . . . (967) (258)
Preferred stock dividends . . . . . . . . . . . (281) (281)
Proceeds from common stock issuance . . . . . . 548 464
Repurchase of common stock . . . . . . . . . . . (242) (229)
----------- -----------
Net cash provided by financing . . . . . . . . . . . 18,831 50,625
----------- -----------
Change in cash . . . . . . . . . . . . . . . . . . . 2,706 (2,496)
Cash and equivalents at beginning of period . . . . . 2,019 4,897
----------- -----------
Cash and equivalents at end of period . . . . . . . . $ 4,725 $ 2,401
=========== ===========
SEE ACCOMPANYING NOTES.
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LOMAK PETROLEUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION:
Lomak Petroleum, Inc. ("Lomak"), is engaged in the acquisition,
development and enhancement of oil and gas properties in the United States.
The Company was founded in 1976. Until 1988, Lomak primarily pursued drilling
opportunities in the Appalachian Basin. In 1988, the Company shifted its focus
to growth through acquisitions and subsequently expanded its core operating
areas to include Texas and Oklahoma. In 1993, Lomak began to exploit its
inventory of development projects. Since 1988, sixty-three acquisitions have
been consummated at a total cost of $183 million.
Lomak's acquisition effort is focused on properties with purchase
prices of less than $30 million within its core areas of operation. Management
believes these purchases are less competitive than those involving larger
property interests. To the extent purchases continue to be made primarily
within existing core areas, efficiencies in operations, drilling, gas marketing
and administration should be realized. In 1993, Lomak initiated a program to
exploit its inventory of over 500 development projects. In the future, Lomak
expects its growth to be driven by a combination of acquisitions and
development.
(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 properties. Temporary
investments with an initial maturity of ninety days or less are considered cash
equivalents.
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting.
Exploratory costs which result in the discovery of reserves and the cost of
development wells are capitalized. Geological and geographical costs, delay
rentals and costs to drill unsuccessful exploratory wells are expensed.
Depletion is provided on the unit-of-production method. Gas is converted to
equivalent barrels at the rate of six Mcf per barrel. The depletion rates per
equivalent barrel produced were $4.93 and $4.40 respectively, in the third
quarters of 1994 and 1995. Approximately $12.9 million and $10.5 million of
oil and gas properties were classified as proved undeveloped or unproved and,
therefore, not subject to depletion as of December 31, 1994 and September 30,
1995, respectively. These costs are assessed periodically to determine whether
their value has been impaired, and if impairment is indicated, the amount of
any impairment is charged to expense.
GAS TRANSPORTATION AND FIELD SERVICE ASSETS
The Company owns and operates approximately 1,900 miles of gas
gathering systems in proximity to its principal gas properties. Depreciation
is calculated on the straight-line method based on estimated useful lives
ranging from four to fifteen years.
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The Company receives fees for providing field related services. These
fees are recognized as earned. Depreciation is calculated on the straight-line
method based on estimated useful lives ranging from one to five years, except
for one building which is being depreciated over twenty years.
In September 1994, the Company sold substantially all of its water
hauling and disposal and well servicing assets located in Ohio for $1.8
million. These assets were used in the operations of the Company's brine
hauling and disposal and well servicing subsidiaries.
NET INCOME PER SHARE
Net income per share is computed by subtracting preferred dividends
from net income and dividing by the weighted average number of common and
common equivalent shares outstanding. The calculation of fully diluted
earnings per share assumes conversion of convertible securities when the result
would be dilutive. Outstanding options and warrants are included in the
computation of net income per common share when their effect is dilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period presentations
to conform with current period classifications.
(3) ACQUISITIONS AND DEVELOPMENT:
Since 1988, the Company has acquired $183 million of oil and gas
properties, gas gathering systems and field service assets. During 1994, the
Company completed $63 million of acquisitions. In the first nine months of
1995, acquisitions totaling $52.8 million were completed. The 1994 and 1995
acquisitions were funded by working capital, advances under a revolving credit
facility and the issuance of common stock. These acquisitions are discussed
below.
1995 ACQUISITIONS
Appalachia
- ----------
Transfuel, Inc. In September 1995, the Company acquired proved oil
and gas reserves, 1,100 miles of gas gathering lines and 175,000 undeveloped
acres of Ohio, Pennsylvania and New York from Transfuel, Inc. for $20.2 million
and approximately $800,000 of Common Stock.
Parker & Parsley Petroleum Company. In August, the Company purchased
proved oil and gas reserves, 300 miles of gas gathering lines and 16,400
undeveloped acres in Pennsylvania and West Virginia from Parker & Parsley
Petroleum Company for $20.2 million.
Oklahoma
- --------
The Company purchased interests in 52 wells in the Caddo and Canadian
counties for $4.8 million. The Company assumed operation of half of these
wells.
Interests in Company operated properties were acquired for $3.4
million.
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Texas
- -----
The Company purchased interests in 140 wells located primarily in the
Big Lake Area of west Texas and the Laura LaVelle Field of east Texas for $2.8
million.
1994 ACQUISITIONS
Oklahoma
- --------
Red Eagle Resources Corporation. In December 1994, the Company
acquired effective control of Red Eagle principally through the purchase of two
common stockholders' holdings. In February 1995, the remaining stockholders of
Red Eagle common stock voted to approve the merger of Red Eagle with a wholly
owned subsidiary of the Company in exchange for approximately 2.2 million
shares of the Company's common stock. The total purchase price was
approximately $31 million. The additional equity of Red Eagle acquired in
February 1995 is reflected as minority interest on the Company's balance sheet
at December 31, 1994. Red Eagle's assets included interests in approximately
370 producing wells located primarily in the Okeene Field of Oklahoma's
Anadarko Basin. Subsequently, the Company acquired additional interests in 70
Red Eagle wells for $1.7 million.
Texas
- -----
Grand Banks Energy Company. The Company purchased Grand Banks for
$3.7 million. Grand Banks' assets included interests in 182 producing wells
located in west Texas, essentially all of which are now operated by the
Company. Grand Banks owned an average working interest of 70% in the producing
reserves, of which 60% was oil. Approximately 40% of Grand Banks' proved
reserves are attributed to the Mills-Strain Unit located in the Sharon Ridge
Field of Mitchell County, Texas. The Mills-Strain Unit is a waterflood unit
producing from the Clearfork Formation at a depth of approximately 2,000 feet.
The Mills-Strain Unit has a remaining life of over 20 years. The Company also
purchased, for $1.2 million, additional interests in a number of the Grand
Banks properties.
Gillring Oil Company. The Company acquired Gillring for $11.5
million. Gillring's assets included $5.2 million of working capital and
interests in 106 producing oil and gas wells located in south Texas. Gillring
owned an average working interest of 80% in the producing reserves of which 80%
were gas. The Gillring properties are located principally in two fields
producing from the Wilcox and Vicksburg formations ranging in depths from 4,000
to 11,000 feet. Subsequent to the purchase of Gillring, the Company acquired,
for $2.1 million, the limited partner interests and associated debt of a
partnership for which Gillring acted as general partner.
The Company acquired from four parties interests in 118 producing
wells in the Big Lake Area of west Texas and the Laura LaVelle Field of east
Texas for $6.5 million.
Appalachia
- ----------
The Company acquired, for $5.0 million, interests in 98 new wells and
additional interests in 436 wells which the Company already operated.
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DEVELOPMENT
Beginning in late 1993, the Company instituted a development program
to compliment its acquisition activities. Approximately $3.7 million and $9.5
million of development expenditures were incurred in 1993 and 1994,
respectively. At September 30, 1995, over 600 proven recompletion and drilling
projects had been identified on the Company's properties. In 1995, the Company
estimates that it will spend approximately $11 million on development
activities, of which $6.4 million was spent in the first nine months.
The Company intends to continue to expand its asset base through
additional acquisitions of oil and gas properties within its areas of
operations. As the Company expands its inventory of development projects, a
larger portion of its growth will be derived from their exploitation. Lomak
has acquired oil and gas in a variety of forms. Besides acquiring direct
interests, Lomak has acquired companies and partnerships owning such assets.
After acquiring these entities, the Company then takes the action necessary to
acquire any remaining interests with the goal of dissolving the acquired entity
and owning the assets directly. All acquisitions to date have been accounted
for as purchases. Accordingly, the results of operations are included in the
accompanying financial statements from the respective dates of acquisition.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents unaudited, pro forma operating results as
if the transactions had occurred at the beginning of each period presented.
The pro forma operating results include the following acquisitions, all of
which were accounted for as purchase transactions; (i) the purchase of Grand
Banks Energy Company, (ii) the purchase of Gillring Oil Company, (iii) the
purchase of Red Eagle Resources Corporation, (iv) the purchase by the Company
of certain oil and gas properties from a subsidiary of Parker & Parsley
Petroleum, Co. and (v) the purchase by the Company of certain oil and gas
properties from Transfuel, Inc.
Nine Months Ended September 30,
------------------------------
1994 1995
--------- ---------
(in thousands except per share data)
Revenues . . . . . . . . . $ 48,532 $ 44,931
Net income . . . . . . . . 5,032 3,257
Earnings per share . . . . 0.39 0.24
The pro forma operating results have been prepared for comparative
purposes only. They do not purport to present actual results had the
acquisitions been made at the beginning of each period presented or to
necessarily be indicative of future operations. Included in the 1994 pro forma
financial information are revenues regarding partnership activities which
contributed $0.18 per share. These activities have been discontinued and
therefore are not reflected in the 1995 results.
(4) NOTES RECEIVABLE:
The Company issued $165,000 in notes receivable to three of its
officers in connection with their exercise of stock options. The notes accrued
interest at the prime rate plus 1% payable quarterly. During 1995, the notes
were repaid.
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(5) INDEBTEDNESS:
The Company had the following debt outstanding as of the dates shown.
Interest rates at September 30, 1995 are shown parenthetically (in thousands):
December 31, September 30,
1994 1995
----------- -----------
(unaudited)
Bank credit facility (7.70%) . . . . . . . $ 61,870 $ 112,839
Other (5.90% - 9.5%) . . . . . . . . . . . 722 399
----------- -----------
62,592 113,238
Less amounts due within one year . . . . . 707 399
----------- -----------
Senior debt, net . . . . . . . . . . $ 61,885 $ 112,839
=========== ===========
The Company maintains a $150 million revolving bank credit facility.
The facility provides for a borrowing base which is subject to semi-annual
redeterminations. At September 30, 1995, the borrowing base on the credit
facility was $115 million. As a result of the equity placement discussed in
Note 13 below, the amount outstanding under the credit facility was reduced to
$87.7 million at November 6, 1995. The facility bears interest at prime rate
or LIBOR plus 1.50% (which reduces to 1.25% in certain circumstances) and is
secured by substantially all of the Company's oil and gas properties. Interest
is payable quarterly and the loan is payable in sixteen quarterly installments
beginning October 1, 1997. A commitment fee of 3/8% of the undrawn balance is
payable quarterly. 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 6.1% and 7.5% for the nine months ended September 30, 1994 and
September 30, 1995, respectively. The weighted average interest rate gives
effect to interest rate swap arrangements which have the effect of fixing the
interest rate on $40 million of the credit facility at a rate of 6.9%. The
existing interest rate swap arrangements will remain in effect for no less than
two years.
The Company's other debt is comprised of a joint venture credit
facility and secured equipment financings. The joint venture credit facility
bears interest at prime rate plus 3/4% and is payable in quarterly installments
through December 31, 1995. At September 30, 1995 the Company owned 50% of the
joint venture and therefore included 50% (or $317,000) of the amount
outstanding under the joint venture credit facility. Until repaid in full in
September 1995, the Company was liable for an industrial revenue bond in
connection with an office building in Ohio, which was sold.
The debt agreements contain various covenants relating to net worth,
working capital maintenance and financial ratio requirements. Interest paid
during the nine months ended September 30, 1994 and 1995 totaled $1.9 million
and $3.5 million, respectively.
(6) COMMITMENTS AND CONTINGENCIES:
In January 1995, a lawsuit (the "Lawsuit") was filed in the Delaware
Court of Chancery, New Castle County, against Red Eagle Resources Corporation,
each of the members of the Board of Directors of Red Eagle and the Company.
The Plaintiff seeks to represent all holders (the "Class") of Red Eagle common
stock, excluding the Red Eagle Directors and Lomak. The Lawsuit seeks, other
remedies, some of which are in the alternative, certification of the Lawsuit as
a class action, designation of the Plaintiff as representative of the Class and
Plaintiff's counsel as counsel to the Class; declaration that the Red Eagle
Directors breached their fiduciary duties owed to the Class; recision of the
Red Eagle merger agreement; and award of unspecified compensatory damages,
prejudgment interest and costs and disbursements of the Lawsuit including
counsel fees.
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A stipulation of settlement among all defendants and the putative
representative of the Class was executed on September 22, 1995, and was filed
in the Delaware Court of Chancery without the Company and the defendants
admitting any liability. Under the terms of the settlement, the Class would
receive, at the Company's option, either (i) $900,000 in cash or (ii) $250,000
in cash plus 74,286 shares of the Company's Common Stock. A hearing on the
proposed settlement is scheduled to be held by the Delaware Court of Chancery
in November 1995. If the Court approves the settlement, the settlement
consideration will be paid to members of the Class. There can be no assurance
of approval by the Delaware Court of Chancery. In any event, in the opinion of
management, such litigation and claims will be resolved without material
adverse effect on the Company's financial position.
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.
(7) PREFERRED SHARES AND WARRANTS:
In June 1993, $5,000,000 (200,000 shares) of 7.5% cumulative
convertible exchangeable preferred stock ("7.5% Preferred") was privately
placed. The 7.5% Preferred is convertible, at the option of the holders, into
576,945 shares of common stock, at an average conversion price of $8.67 per
share. The Company may convert the 7.5% Preferred into common stock if the
closing price of the common stock has exceeded $11.475 per share for at least
twenty of the thirty preceding trading days. Beginning in July 1996, the
Company may redeem the 7.5% Preferred at a 7.5% premium to liquidation value.
Holders of the 7.5% Preferred are entitled to two votes per share on matters
presented to the shareholders. At the Company's option, it can exchange the
7.5% Preferred for convertible subordinate notes due July 1, 2003. The notes
carry the same conversion and redemption terms as the 7.5% Preferred.
Warrants to acquire 40,000 shares of common stock at a price of $7.50
per share were outstanding at September 30, 1995. These warrants expire in
December 1996.
(8) STOCK OPTION AND PURCHASE PLANS:
The Company maintains a Stock Option Plan which authorizes the grant
of options of up to 1.5 million shares of common stock. 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 nine months ended September
30, 1995 options covering 20,001 shares were exercised at $3.75 per share. At
September 30, 1995, a total of 933,149 options were outstanding under the plan,
of which 370,994 options were exercisable. The exercise prices of outstanding
options under the plan range from $3.38 to $9.38 per share.
In 1994, the stockholders approved an Outside Directors Stock Option
Plan (the "Directors Plan"). The Directors Plan covers a maximum of 200,000
shares and only non-employee directors are eligible under it. At September 30,
1995, 44,000 options were outstanding under the Directors Plan and of which
3,600 were exercisable. The exercise price of the outstanding options under
the plan is $7.75 per share.
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In 1994, the stockholders approved the 1994 Stock Purchase Plan (the
"1994 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 value may
be granted. The Company had a 1989 Stock Purchase Plan (the "1989 Plan") which
was identical to the 1994 Plan except that it covered fewer shares. Upon
adoption of the 1994 Plan, the 1989 Plan was terminated. The plan is
administered by the Compensation Committee of the Board. During the nine
months ended September 30, 1995, the Company sold 87,928 unregistered common
shares to officers and outside directors. Through September 30, 1995, a total
of 390,000 unregistered shares of common stock had been sold under the stock
purchase plans, for a total consideration of approximately $1.8 million at
prices equal to 75% of market value at the time of the sale.
(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 annually.
Company contributions for 1994 totaled $226,000.
(10) INCOME TAXES:
In 1993, the Company adopted FASB Statement No. 109, "Accounting for
Income Taxes". As permitted by Statement 109, the Company elected not to
restate prior year financial statements. As a result of tax basis in excess of
the basis on the financial statements at January 1, 1993, the Company estimated
deferred tax assets of $2.6 million and deferred tax liabilities of $900,000,
for net deferred tax assets of $1.7 million. Due to uncertainty as to the
Company's ability to realize the tax benefit, a valuation allowance was
established for the full amount of the net deferred tax assets. In 1993, 1994
and the first nine months of 1995, income taxes were reduced from the statutory
rate of 34% by approximately $500,000, $900,000 and $300,000, respectively
through realization of the total valuation allowance that was established.
During 1993, the Company acquired Mark Resources Corporation, a
taxable business combination accounted for as a purchase. Deferred tax assets
of $3.9 million and a deferred tax liability of $8.1 million were recorded in
the transaction. During 1994, the Company acquired Gillring Oil Company and
Grand Banks Energy Company, taxable business combinations accounted for as
purchases. Deferred tax assets of $3.5 million and deferred tax liabilities of
$3.4 million were recorded in these transactions. In late 1994, the Company
acquired Red Eagle Resources Corporation, a taxable business combination
accounted for as a purchase. Deferred tax liabilities of $12.7 million and
deferred tax assets of $500,000 were recorded in this transaction.
For the nine months ended September 30, 1994 and 1995, the Company
made a provision for federal income taxes of $129,000 and $898,000,
respectively. At September 30, 1995, the Company had available for federal
income tax reporting purposes net operating loss carryovers of approximately
$13.3 million which are subject to annual limitations as to their utilization
and expire between 1996 and 2009. The Company has alternative minimum tax net
operating loss carryovers of $8.2 million which are subject to annual
limitations as to their utilization and expire from 1996 to 2009. The Company
has statutory depletion carryover of approximately $8.5 million and an
alternative minimum tax credit carryover of $500,000. The statutory depletion
carryover and alternative minimum tax credit carryover are not subject to
limitation or expiration.
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(11) 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 58% of the Company's gas production is currently sold
under market sensitive contracts which do not contain floor price provisions.
For the nine months ended September 30, 1995, one customer accounted for 11% of
the Company's total oil and gas revenues. 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. The Company
sells to oil purchasers on a basis of price and service.
The Company has currently hedged less than 5% of its production
through September 1996. These hedges involve fixed price arrangements and
other price arrangements at a variety of prices, floors and caps. Although
these hedging activities provide the Company some protection against falling
prices, these activities also reduce the potential benefits to the Company of
price increases above the levels of the hedges.
(12) OIL AND GAS ACTIVITIES:
The following summarizes selected information with respect to oil and
gas activities (in thousands):
December 31, September 30,
1994 1995
----------------- -----------------
(unaudited)
Capitalized costs:
Proved properties . . . . . . . . . . . . . . . $ 132,775 $ 197,043
Unproved properties . . . . . . . . . . . . . . 598 1,981
----------------- -----------------
Total . . . . . . . . . . . . . . . . . . . 133,373 199,024
Accumulated depletion, depreciation and
amortization . . . . . . . . . . . . . . . . 20,409 29,124
----------------- -----------------
Net capitalized costs . . . . . . . . . . . $ 112,964 $ 169,900
================= =================
Nine Months
Year Ended Ended
December 31, September 30,
1994 1995
----------------- -----------------
(unaudited)
Costs incurred:
Property acquisition . . . . . . . . . . . . . $ 59,501 $ 59,609
Development . . . . . . . . . . . . . . . . . . 9,518 6,426
Exploration . . . . . . . . . . . . . . . . . . 192 251
----------------- -----------------
Total costs incurred . . . . . . . . . . . $ 69,211 $ 66,286
================= =================
13
14
(13) SUBSEQUENT EVENT:
On October 31, 1995, Lomak Petroleum, Inc. ("Lomak") sold in a private
offering $25 million of $2.03 convertible exchangeable preferred stock (the
"Preferred Stock"). The 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 Preferred Stock will be 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 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
Preferred Stock. Lomak has granted the Initial Purchasers an option through
November 30, 1995 to purchase up to an additional $3.75 million of the
Preferred Stock to cover over-allotments, if any.
(14) RELATED PARTY TRANSACTIONS:
Mr. Edelman, Chairman of the Company, is also an executive officer and
shareholder of Snyder Oil Corporation ("SOCO"). At September 30, 1995, Mr.
Edelman owned 6.6% of the Company's common stock. In 1994, the Company
repurchased 30,000 shares of its common stock from SOCO for $240,000. The
purchase price was based upon the prior day's closing price for the stock as
quoted on NASDAQ. By September 30, 1995, SOCO had sold all of its shares of
the Company's common stock.
In November 1995, the Company signed an agreement with SOCO whereby
the Company would acquire SOCO's interest in 468 wells located in Appalachia
for $4 million. The Company currently operates 136 of the wells and upon
completion of the transaction will operate, in aggregate, 325 of the wells.
The price was determined based on arms-length negotiations through a
third-party broker retained by SOCO. After the completion of this transaction,
the Company and SOCO will no longer hold interests in any of the same
properties.
During 1994 and the nine months ended September 30, 1995, the Company
incurred fees of $369,000 and $145,000, respectively, to the Hawthorne Company
in connection with acquisitions. Mr. Aikman, a director of the Company, is an
executive officer and a principal owner of the Hawthorne Company. The fees
were consistent with those paid by the Company to third parties for similar
services.
14
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
FACTORS AFFECTING FINANCIAL CONDITION AND LIQUIDITY
During the three months ended September 30, 1995, the Company added
$46.1 million of assets and increased stockholders' equity by $1.7 million.
The growth was achieved primarily through acquisitions and development. Net
income for the third quarter of 1995 increased 24% to $897,000 as compared to
$722,000 in the prior year. The increases were primarily due to higher
production volumes attributable to acquisitions and development projects.
Working capital at September 30, 1995 was $1.8 million, representing a $759,000
increase over the corresponding amount at December 31, 1994. At September 30,
1995, the Company had $2.4 million in cash and total assets of $203 million.
During the quarter, senior long-term debt rose from $71.1 million to $112.9
million.
At September 30, 1995, capitalization totaled $173 million, of which
35% was represented by stockholders' equity and 65% by long-term debt.
Essentially all of the long-term debt is comprised of borrowings under a $150
million revolving bank credit facility. The facility currently provides for
quarterly payments of interest with principal payments beginning October 1997.
On October 31, 1995, the Company completed a $25 million private placement of
convertible exchangeable preferred stock. After applying the proceeds to
repayment of debt, stockholders' equity represented 49% of capitalization and
long-term debt represented 51%.
For the nine months ended September 30, 1995, cash flow from
operations totaled $9.7 million, a 10% increase over the prior year period.
Cash flow plus bank borrowings funded $56.9 million of acquisitions and
development expenditures. Approximately 425 million of the bank borrowings
were recently repaid with the proceeds received from the private placement of
preferred stock. The Company expects to continue to fund its acquisition and
development activities from internally generated funds, borrowings under its
credit facility and the issuance of debt and equity securities. During the
next twelve months, non-discretionary capital requirements include $2.4 million
of preferred dividends, including dividends on the newly issued preferred
stock, and $424,000 of debt principal payments. Additionally, the Company
expects to continue its acquisition and development activities in 1995.
Although these expenditures are principally discretionary, the Company
estimates that it will spend approximately $11 million on development
activities in 1995, of which $6.4 million was incurred in the first nine
months. Cash flow from operations is expected to be more than sufficient to
fund development expenditures with the remainder available to fund
acquisitions. In 1994, the Company instituted a program to repurchase its
common stock from stockholders who own less than 100 shares. Through September
30, 1995, a total of 37,800 shares had been repurchased for $310,700, of which
8,700 were repurchased in 1995.
All oil and gas properties are subject to production declines over
time. Through acquisitions, the Company has increased its reserves in each of
the last five years. It is anticipated that the Company will continue to build
reserves primarily through acquisitions and development over the next several
years. The profitability of production and, to a lesser extent, other areas of
the Company's business are influenced by energy prices.
RESULTS OF OPERATIONS
The Company reported net income for the three months ended September
30, 1995 of $897,000, a 24% increase over third quarter 1994. The increase is
the result of higher production volumes attributable to acquisitions and
development.
15
16
During the quarter, oil and gas production volumes increased 63% to
746,000 equivalent barrels, an average of 8,110 BOE per day. The higher
production volumes were partially offset by a 14% decrease in the average price
received per BOE of production from $13.65 to $11.80. The average oil price
decreased marginally from $16.21 to $16.20 per barrel while average gas prices
dropped 20% from $2.03 to $1.63 per Mcf. As a result of the Company's larger
base of producing properties, operating expenses increased 44% to $3.5 million.
However, the average operating cost per BOE produced decreased 12% from $5.32
in 1994 to $4.69 in 1995.
Gas transportation and marketing revenues rose 31% to $817,000 versus
$622,000 in the third quarter of 1994. The higher revenues were due primarily
to the increasing activity in the marketing of oil and gas and increased gas
transportation revenues on its growing number of operated properties. Coupled
with this increase in gas transportation and marketing revenues was a 58%
increase in associated expenses for the year. The disproportionate increase in
expenses was due to higher general and administrative expenses associated with
these activities.
Field services revenues increased 9% in the third quarter of 1995,
despite the sale of virtually all well servicing and brine hauling and disposal
assets in Ohio in late 1994. The revenues eliminated due to the sale were
offset by higher well operating revenues on properties acquired in 1994.
Additionally, field service activities increased significantly in the third
quarter 1995 due to the Red Eagle acquisition. Field services expenses
decreased 17% in the third quarter of 1995 versus 1994. The increased costs of
well operations were more than offset by the elimination of costs resulting
from the 1994 sale of the well servicing and brine hauling and disposal
activities. Exploration expense increased 64% due to the Company's increased
involvement in acreage acquisition, seismic and exploratory drilling.
General and administrative expenses increased 3% from $651,000 in 1994
to $669,000 in 1995. As a percentage of revenues, general and administrative
expenses were 6% in the third quarter 1995, a decrease from those in third
quarter 1994. Interest and other income rose 82% primarily due to a higher
level of non-strategic property sales. Interest expense increased 98% to $1.4
million primarily as a result of the higher average outstanding debt balance
during the period due to the financing of acquisitions and, to a lesser extent,
rising interest rates.
Depletion, depreciation and amortization expense rose 41% as a result
of increased production volumes. Offsetting the effect of higher production
volumes was an 11% reduction in the depletion rate to $4.40 per BOE in the
third quarter of 1995.
16
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In January 1995, a lawsuit (the "Lawsuit") was filed in the Delaware
Court of Chancery, New Castle County, against Red Eagle Resources Corporation,
each of the members of the Board of Directors of Red Eagle and the Company.
The Plaintiff seeks to represent all holders (the "Class") of Red Eagle common
stock, excluding the Red Eagle Directors and Lomak. The Lawsuit seeks, other
remedies, some of which are in the alternative, certification of the Lawsuit as
a class action, designation of the Plaintiff as representative of the Class and
Plaintiff's counsel as counsel to the Class; declaration that the Red Eagle
Directors breached their fiduciary duties owed to the Class; recision of the
Red Eagle merger agreement; and award of unspecified compensatory damages,
prejudgment interest and costs and disbursements of the Lawsuit including
counsel fees.
A stipulation of settlement among all defendants and the putative
representative of the Class was executed on September 22, 1995, and was filed
in the Delaware Court of Chancery without the Company and the defendants
admitting any liability. Under the terms of the settlement, the Class would
receive, at the Company's option, either (i) $900,000 in cash or (ii) $250,000
in cash plus 74,286 shares of the Company's Common Stock. A hearing on the
proposed settlement is scheduled to be held by the Delaware Court of Chancery
in November, 1995. If the Court approves the settlement, the settlement
consideration will be paid to members of the Class. There can be no assurance
of approval by the Delaware Court of Chancery. In any event, in the opinion of
management, such litigation and claims will be resolved without material
adverse effect on the Company's financial position.
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.
Items 2 - 5. Not applicable
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
11.1 Statement re: computation of per share earnings for the three
months ended September 30, 1994 and 1995, filed herewith.
11.2 Statement re: computation of per share earnings for the nine
months ended September 30, 1994 and 1995, filed herewith.
27 Financial data schedule
(b) Reports on Form 8-K
Current report on Form 8-K, dated July 13, 1995 and 8-K/A
dated September 8, 1995 regarding the acquisition of oil and
gas properties from a subsidiary of Parker & Parsley Petroleum
Company.
Current report on Form 8-K dated September 27, 1995 and 8-K/A
dated November 8, 1995 regarding the acquisition of oil and
gas properties from Transfuel, Inc.
17
18
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
Vice President - Finance
Chief Financial Officer
November 13, 1995
18
19
EXHIBIT INDEX
Sequentially
Exhibit Number Description of Exhibit Numbered Page
-------------- ---------------------- -------------
11.1 Statement re: computation of 20
per share earnings for the
three months ended September
30, 1994 and 1995, filed
herewith.
11.2 Statement re: computation of 21
per share earnings for the nine
months ended September 30, 1994
and 1995, filed herewith.
27 Financial data schedule 22
19
1
EXHIBIT 11.1
----
LOMAK PETROLEUM, INC.
Computation of Earnings Per Common
and Common Equivalent Shares
(In thousands, except per share data)
Three Months Ended September 30,
--------------------------------
1994 1995
------------ ------------
Average shares outstanding 9,069 11,939
Net effect of conversion of warrants and stock options 171 191
----------- -----------
Total primary and fully diluted shares 9,240 12,130
=========== ===========
Net income $ 722 $ 897
Less preferred stock dividends (94) (94)
----------- -----------
Net income applicable to common shares $ 628 $ 803
=========== ===========
Earnings per common share $ .07 $ .07
=========== ===========
20
1
EXHIBIT 11.2
----
LOMAK PETROLEUM, INC.
Computation of Earnings Per Common
and Common Equivalent Shares
(In thousands, except per share data)
Nine Months Ended September 30,
-------------------------------
1994 1995
------------ -------------
Average shares outstanding 8,884 11,434
Net effect of conversion of warrants and stock options 155 154
---------- ----------
Total primary and fully diluted shares 9,039 11,588
========== ==========
Net income $ 1,888 $ 2,718
Less preferred stock dividends (281) (281)
---------- ----------
Net income applicable to common shares $ 1,607 $ 2,437
========== ==========
Earnings per common share $ .18 $ .21
========== ==========
21
5
1,000
9-MOS
DEC-31-1995
JAN-01-1995
SEP-30-1995
2,401
0
10,559
0
1,470
14,430
221,677
(32,802)
203,305
12,690
0
120
0
200
60,234
203,305
24,135
34,628
9,935
15,195
15,817
0
3,822
3,616
898
2,718
0
0
0
2,718
0.21
0.21
