<PAGE> 1
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995.
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number 0-9300
HARCOR ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0234380
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 POST OAK PARKWAY, SUITE 2220
HOUSTON, TX 77027-3413
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (713) 961-1804
. . . . . . . . . . . . . . . .
(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 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 [ ]
The number of shares of Registrant's Common Stock outstanding at
November 13, 1995 was 8,631,207.
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<PAGE> 2
HARCOR ENERGY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
----------------------------------------
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30,
1995 (unaudited) and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the Three
Months Ended September 30, 1995 and 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Nine
Months Ended September 30, 1995 and 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Stockholders' Equity
for the Nine Months Ended September 30, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 20
Part II - Other Information
---------------------------
Item 4. Submission of Matters to a Vote of Securities
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
<PAGE> 3
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1995 (UNAUDITED)
AND DECEMBER 31, 1994
- - --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments . . . . . . . . . . . . . . . . . . $ 8,350,733 $ 899,198
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 2,144,152 3,707,433
Prepaids and other . . . . . . . . . . . . . . . . . . . . . 352,899 307,241
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . 10,847,784 4,913,872
----------- -----------
PROPERTY AND EQUIPMENT, at cost,
successful efforts method:
Unproved oil and gas properties . . . . . . . . . . . . . . . 7,414,113 7,414,113
Proved oil and gas properties:
Leasehold costs . . . . . . . . . . . . . . . . . . . . . . 52,412,538 52,158,281
Lease and well equipment . . . . . . . . . . . . . . . . . 14,889,912 12,900,913
Intangible development costs . . . . . . . . . . . . . . . 10,007,025 4,745,579
Furniture and equipment . . . . . . . . . . . . . . . . . . . 253,178 231,354
----------- -----------
84,976,766 77,450,240
Less - accumulated depletion,
depreciation and amortization . . . . . . . . . . . . . . . (21,051,127) (16,674,540)
----------- -----------
Net property, plant and equipment . . . . . . . . . . . . . . 63,925,639 60,775,700
----------- -----------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 4,963,404 2,883,277
----------- -----------
$79,736,827 $68,572,849
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-1-
<PAGE> 4
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1995 (UNAUDITED)
AND DECEMBER 31, 1994
- - --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term
bank debt . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 2,511,200
Subordinated Bridge Loan . . . . . . . . . . . . . . . . . . - 5,000,000
Accounts payable and
accrued liabilities . . . . . . . . . . . . . . . . . . . . 6,465,367 5,345,967
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . 6,465,367 12,857,167
----------- -----------
LONG-TERM BANK DEBT, net of current
portion . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 31,888,800
----------- -----------
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 46,557 71,055
----------- -----------
14-7/8% SENIOR SECURED NOTES . . . . . . . . . . . . . . . . . 63,038,062 -
----------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SERIES D PREFERRED STOCK . . . . . . . . . . . . . . - 8,402,430
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
1,500,000 shares authorized;
65,000 and 67,500 shares out-
standing at September 30, 1995 and
December 31, 1994, respectively . . . . . . . . . . . . . . 650 675
Common stock, $.10 par value -
25,000,000 shares authorized;
8,631,207 and 7,192,837
shares outstanding at September
30, 1995 and December 31, 1994,
respectively . . . . . . . . . . . . . . . . . . . . . . . 863,121 719,284
Additional paid-in capital . . . . . . . . . . . . . . . . . 29,296,470 29,827,989
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (20,073,400) (15,194,551)
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . 10,086,841 15,353,397
----------- -----------
$79,736,827 $68,572,849
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-2-
<PAGE> 5
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1995 1994
----------- ----------
<S> <C> <C>
REVENUES:
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . $ 3,779,944 $3,500,554
Gas plant operating and marketing
revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,006,726 745,579
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . 64,202 5,717
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,313 204,878
----------- ----------
4,874,185 4,456,728
----------- ----------
COSTS AND EXPENSES:
Production costs . . . . . . . . . . . . . . . . . . . . . . . . 1,281,165 1,275,452
Gas plant operating and marketing
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628,306 774,005
Dry hole and abandonment costs . . . . . . . . . . . . . . . . . - 59,912
Engineering and geological costs . . . . . . . . . . . . . . . . 55,497 45,600
Depletion, depreciation,
amortization and impairment . . . . . . . . . . . . . . . . . . 1,933,714 1,303,103
General and administrative expenses . . . . . . . . . . . . . . . 741,401 534,693
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 2,350,027 946,298
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,907 -
----------- ----------
7,297,017 4,939,063
----------- ----------
Loss before provision for income
taxes and extraordinary items . . . . . . . . . . . . . . . . . (2,422,832) (482,335)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . - -
----------- ----------
Loss before extraordinary item . . . . . . . . . . . . . . . . . . (2,422,832) (482,335)
EXTRAORDINARY ITEM - Loss on early
extinguishment of debt . . . . . . . . . . . . . . . . . . . . . (1,888,433) -
----------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,311,265) (482,335)
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . (195,918) (325,000)
Accretion on Redeemable Preferred
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,981,821) (77,300)
----------- ----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . $(6,489,004) $ (884,635)
=========== ==========
NET LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM . . . . . . . . . . . . . . . . . . . . . . . $ (0.55) $ (0.12)
=========== ==========
NET LOSS PER COMMON SHARE AFTER
EXTRAORDINARY ITEM . . . . . . . . . . . . . . . . . . . . . . . $ (0.78) $ (0.12)
=========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<PAGE> 6
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1995 1994
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . $10,835,771 $ 6,776,370
Gas plant operating and marketing
revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,161,067 745,579
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . 85,120 11,195
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,029 217,981
----------- -----------
15,118,987 7,751,125
----------- -----------
COSTS AND EXPENSES:
Production costs . . . . . . . . . . . . . . . . . . . . . . . . 3,807,066 2,305,960
Gas plant operating and marketing costs . . . . . . . . . . . . . 2,832,456 774,005
Dry hole and abandonment costs . . . . . . . . . . . . . . . . . 3,719 70,392
Engineering and geological costs . . . . . . . . . . . . . . . . 237,513 166,700
Depletion, depreciation,
amortization and impairment . . . . . . . . . . . . . . . . . . 4,376,576 2,627,198
General and administrative expenses . . . . . . . . . . . . . . . 1,957,449 1,521,056
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 4,587,717 1,250,021
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,907 203,000
----------- -----------
18,109,403 8,918,332
----------- -----------
Loss before provision for income
taxes and extraordinary items . . . . . . . . . . . . . . . . . (2,990,416) (1,167,207)
Provision for income taxes . . . . . . . . . . . . . . . . . . . - -
----------- -----------
Loss before extraordinary item . . . . . . . . . . . . . . . . . (2,990,416) (1,167,207)
EXTRAORDINARY ITEM - Loss on early
extinguishment of debt . . . . . . . . . . . . . . . . . . . . . (1,888,433) (122,193)
----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,878,849) (1,289,400)
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . (866,760) (465,000)
Accretion on Redeemable Preferred
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,146,812) (77,300)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS . . . . . . . . . . . . $(7,892,421) $(1,831,700)
=========== ===========
NET LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM . . . . . . . . . . . . . . . . . . . . . . . $ (0.78) $ (0.28)
=========== ===========
NET LOSS PER COMMON SHARE AFTER
EXTRAORDINARY ITEM . . . . . . . . . . . . . . . . . . . . . . . $ (1.03) $ (0.30)
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
<PAGE> 7
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- --------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------ ------ --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994. . . . 67,500 $675 7,192,837 $719,284 $29,827,989 $(15,194,551)
Conversion of Convertible
Preferred Stock . . . . . . . . (2,500) (25) 64,100 6,410 (6,385) -
Issuance of common stock. . . . . - - 75,000 7,500 226,125 -
Issuance of common stock
pursuant to warrant exchange . - - 1,282,500 128,250 (128,250) -
Issuance of common stock and
warrants pursuant to
preferred stock dividends . . . - - 16,770 1,677 152,563 -
Issuance of warrants pursuant
to 14-7/8% Senior Notes . . . . - - - - 2,238,000 -
Preferred stock dividends . . . . - - - - (866,760) -
Accretion on Series D Preferred
Stock . . . . . . . . . . . . . - - - - (2,146,812) -
Net loss for the nine months
ended September 30, 1995. . . . - - - - - (4,878,849)
------ ---- --------- -------- ----------- ------------
Balance, September 30, 1995 . . . 65,000 $650 8,631,207 $863,121 $29,296,470 $(20,073,400)
====== ==== ========= ======== =========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
<PAGE> 8
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1995 1994
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,878,849) $(1,289,400)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depletion, depreciation, amortization
and impairment . . . . . . . . . . . . . . . . . . . . . . . . 4,376,576 2,841,027
Dry hole and abandonment costs . . . . . . . . . . . . . . . . . 3,719 70,392
Amortization of deferred financing costs . . . . . . . . . . . . 364,276 -
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . (11,873) (202,594)
Engineering and geological costs . . . . . . . . . . . . . . . . 237,513 166,700
Loss on partnership dissolution . . . . . . . . . . . . . . . . . - 203,000
Loss on early extinguishment of debt . . . . . . . . . . . . . . 1,888,433 122,193
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,907 -
----------- -----------
2,286,702 1,911,318
Changes in working capital, net of
effects of non-cash transactions . . . . . . . . . . . . . . . (477,114) (941,535)
----------- -----------
Net cash provided by operating activities . . . . . . . . . . . . 1,809,588 969,783
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Engineering and geological costs . . . . . . . . . . . . . . . . . . (237,513) (166,700)
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . 13,900 320,599
Acquisitions of oil and gas properties . . . . . . . . . . . . . . . (2,353,947) (44,286,532)
Other additions to property and equipment . . . . . . . . . . . . . . (2,768,547) -
Dry hole and abandonment costs . . . . . . . . . . . . . . . . . . . (3,719) (70,392)
----------- -----------
Net cash used in investing activities . . . . . . . . . . . . . . . . (5,349,826) (44,203,025)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge loan . . . . . . . . . . . . . . . . . . . . . . - 5,000,000
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . 64,647,700 29,436,875
Proceeds from issuance of Redeemable Preferred Stock . . . . . . . . . - 10,000,000
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . - 3,386,280
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . (39,300,000) (3,577,873)
Redemption of Redeemable Preferred Stock . . . . . . . . . . . . . . . (10,995,361) -
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . (3,004,407) (1,202,796)
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . (331,661) (210,000)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,498) (294,252)
----------- -----------
Net cash provided by financing activities . . . . . . . . . . . . . . 10,991,773 42,538,234
----------- -----------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . 7,451,535 (695,008)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . 899,198 2,161,512
----------- -----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 8,350,733 $ 1,466,504
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE> 9
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
- - --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (ALL DOLLAR AMOUNTS HAVE BEEN
ROUNDED TO THE NEAREST THOUSAND) -
HarCor Energy, Inc. (the "Company") made interest payments of
$2,182,000 and $1,040,000 during the nine months ended September 30, 1995 and
1994, respectively.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES
- - - NINE MONTHS ENDED SEPTEMBER 30, 1995
Pursuant to the terms of its bridge loan facility, the Company issued
to its secured lender 75,000 shares of its common stock to which was ascribed a
value of $253,000 and reflected in deferred financing costs.
In connection with the refinancing of its long-term debt, the Company
incurred a non-cash charge of $1,888,000 in writing off all of the deferred
financing costs associated with the extinguished debt. Also in connection with
this refinancing, the Company issued warrants to which a value of $580,000 was
ascribed. These changes to deferred financing costs and addition to equity
resulting from the issuance of warrants are not reflected in financing
activities.
The Company paid dividends on its Series D Preferred Stock, which
included "in-kind" dividends consisting of $476,000 in newly-issued Series D
Preferred Stock (4,759 shares). The Company paid dividends on its Convertible
Series E Preferred Stock, which included 16,770 in newly-issued unregistered
shares of the Company's common stock to which a value of $60,000 was ascribed.
These portions of the dividend payments as described are not reflected in
financing activities.
The Company incurred aggregate non-cash accretion charges of
$2,147,000 on its Series D Preferred Stock which are not reflected in financing
activities.
The Company incurred a non-cash charge of $261,000 in connection with
the write-off of a long-term investment which is not reflected in investing
activities.
The Company had accrued capital expenditure costs of $2,406,000 at
September 30, 1995 which are not reflected in investing activities.
In connection with the early adoption of a new accounting standard,
the Company wrote down the carrying value of oil and gas
-7-
<PAGE> 10
properties by $608,000. This charge is not reflected in investing activities.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES
- - - NINE MONTHS ENDED SEPTEMBER 30, 1994
In connection with the dissolution of the South Texas Limited
Partnership in March 1994 and related property conveyance, the Company wrote
off $203,000 of its cost basis of the partnership, and expensed $122,000
reflecting a write-off of deferred financing costs resulting from the early
extinguishment of debt. These non-cash charges for the dissolution and debt
extinguishment are not reflected in investing or financing activities.
In connection with the amendment of the Company's credit agreement to
partially finance the above acquisition, the Company issued to the financial
institutions involved warrants to purchase 250,000 shares of the Company's
common stock to which the Company ascribed a value of $230,000. The deferred
financing cost and addition to equity resulting from this transaction are not
reflected in financing activities.
The Company paid "in-kind" dividends on its Series D Redeemable
Preferred Stock consisting of $225,000 in newly issued Series D Preferred
Stock. The Company paid dividends on its Convertible Series E Preferred Stock
consisting of $30,000 in newly issued unregistered shares of the Company's
common stock. In addition, the Company incurred a non-cash accretion charge of
$77,000 on its Series D Preferred Stock during the period. These dividend
payments and accretion are not reflected in financing activities.
In connection with the purchase of certain oil and gas assets, the
Company issued to the sellers, as a portion of the consideration, 30,000 shares
of its Series E Preferred Stock with a face value of $3,000,000, 25,000 shares
of unregistered common stock with a value of approximately $81,000 and a
warrant to purchase 1,000,000 shares of the Company's common stock to which the
Company ascribed a value of $850,000. The acquisition value of the assets
acquired and corresponding additions to equity resulting from these
transactions are not reflected in investing or financing activities.
The Company had accrued capital expenditure costs of $1,790,000 at
September 30, 1994 which are not reflected in investing activities.
The accompanying notes are an integral part
of these consolidated financial statements.
-8-
<PAGE> 11
HARCOR ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(1) Summary of Significant Accounting Policies
Principles of Consolidation -
The accompanying consolidated financial statements include the
accounts and results of HarCor Energy, Inc. ("HarCor"), its wholly-owned
subsidiaries, Warrior, Inc. ("Warrior") and HTAC Investments, Inc. ("HTACI");
HarCor's 37.875% general partner share of the assets, liabilities, revenues and
costs and expenses of South Texas Limited Partnership ("STLP") or, after STLP's
dissolution in March 1994, HarCor's direct working interests in the STLP
properties ("South Texas Properties"); and HarCor's interest in certain oil and
gas assets located in Kern County, California acquired on June 30, 1994 (the
"Bakersfield Properties"); (collectively, the "Company" or "HarCor" unless the
context specifies otherwise).
Separate financial statements or summary financial information of
Warrior, Inc. and HTAC Investments, Inc., HarCor's only direct or indirect
subsidiaries, have not been included herein because they are wholly owned and
the assets, revenues, earnings and equity of such subsidiaries are immaterial
individually and in total during the periods presented.
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that it
has made adequate disclosures so that the information presented herein is not
misleading.
A summary of the Company's significant accounting policies is included
in the consolidated financial statements and notes thereto, contained in its
Annual Report on Form 10-K for the year ended December 31, 1994 (the "10-K").
The unaudited consolidated financial data presented herein should be read in
conjunction with the 10-K.
In the opinion of the Company, the unaudited consolidated financial
statements contained herein include all adjustments (consisting of normal
recurring accruals and the elimination of intercompany transactions) necessary
to present fairly the Company's consolidated results of operations, cash flows
and changes in stockholders' equity for the periods ended September 30, 1995
and 1994.
-9-
<PAGE> 12
The results of operations for an interim period are not necessarily
indicative of the results to be expected for a full year.
New Accounting Standard -
The Company is required to adopt no later than January 1, 1996,
Statement of Financial Accounting Standards No. 121 (Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
("SFAS 121")). SFAS 121 will require the Company to review its oil and gas
properties whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. If the carrying amount
of any of the Company's oil and gas properties (determined on a field-by-field
basis) is greater than its projected undiscounted future cash flow, an
impairment loss is recognized.
The Company has elected to adopt SFAS 121 in the current period.
Accordingly, the estimated fair market value of its oil and gas properties at
January 1, 1995 were evaluated and compared to the carrying value of such
assets at that date. The resulting impairment loss of $608,000 is included in
Depletion, Depreciation, Amortization and Impairment in the current quarter.
Net Loss Per Common Share -
Net loss per common share was calculated by dividing the appropriate
net loss, after considering preferred stock dividends, by the weighted average
number of common shares outstanding during each period. Outstanding stock
options, warrants and convertible preferred shares were not included in the
calculations, since their effect was antidilutive. The weighted average number
of outstanding common shares utilized in the calculations was 8,344,000 and
7,101,000 for the three months ended September 30, 1995 and 1994, respectively,
and 7,658,000 and 6,201,000 for the nine months ended September 30, 1995 and
1994, respectively.
(2) Acquisition of Bakersfield Properties
On June 30, 1994, the Company acquired, for approximately $46 million,
a 75% interest in substantially all of the oil and gas properties, a natural
gas processing plant and gathering lines owned by Bakersfield Energy Resources,
Inc. and its affiliates ("BER"). BER has remained the operator of the
properties and plant acquired by the Company.
The following table presents the unaudited pro forma condensed
consolidated statements of operations for the nine months ended September 30,
1994, assuming the acquisition of the Bakersfield Properties and the related
financings had occurred at January 1, 1994 (amounts are in thousands except per
share data):
-10-
<PAGE> 13
<TABLE>
<S> <C>
Total revenues . . . . . . . . . . . . . . . . $ 13,842
========
Net loss attributable to common stockholders . $(1,725)
========
Net loss per common share . . . . . . . . . . $ (0.24)
========
</TABLE>
(3) Subordinated Bridge Loan
In connection with the acquisition of the Bakersfield Properties in
June 1994, the Company entered into a $5 million bridge loan facility (the
"Bridge Loan") with Internationale Nederlanden (U.S.) Capital Corp. ("ING
Capital"). Outstanding advances under the Bridge Loan bore interest at a
floating rate of, at the Company's option, prime plus 2% or LIBOR plus 4% per
annum until September 30, 1994 and escalating by (i) .75% per annum from
October 1, 1994 through January 31, 1995 and (ii) 1.5% per annum at all times
after January 31, 1995.
In July 1995, the Company refinanced the Bridge Loan with proceeds
from a long-term refinancing of its debt. (See Note 6.)
(4) Early Extinguishment of Long-Term Debt
Effective upon the closing of the acquisition of the Bakersfield
Properties in June 1994, the Company amended its credit facility with ING
Capital (the "Amended Credit Agreement") to provide for a total commitment of
$34.4 million. Outstanding advances under the Amended Credit Agreement bore
interest at a floating rate of, at the Company's option, prime plus 1% or LIBOR
plus 3% per annum.
In July 1995, the Company repaid $34.3 million of the amount
outstanding under the Amended Credit Agreement with proceeds resulting from a
long-term refinancing of its debt. A write-off of deferred financing costs of
approximately $1.9 million has been charged to expense as an extraordinary item
in the third quarter of 1995 resulting from this early extinguishment of debt
and early redemption of its Series D Preferred Stock. (See Notes 5 and 6.)
(5) Redemption of Series D Preferred Stock
In connection with the acquisition of the Bakersfield Properties in
June 1994, the Company issued 100,000 shares of Series D Preferred Stock with
detachable warrants in a private placement at a price of $100.00 per share for
an aggregate value of $10 million. The Series D Preferred Stockholders
("Series D Holders") received dividends at the rate of 9% per annum, payable in
cash or in shares of the Series D Preferred Stock, at the option of the
Company. Pursuant to the Company's election to pay dividends in shares from
the original issue date, and as a result of accretion, the face value of the
Series D Preferred had increased to $11 million at June 30, 1995.
-11-
<PAGE> 14
Upon issuance of the Series D Preferred Stock, the Company issued to
the Series D Holders warrants to purchase 2,305,263 shares of common stock at
an initial exercise price of $4.75 per share. The Company had ascribed a value
to these warrants of $0.92 per warrant, based on certain warrant valuation
models, for an aggregate value of $2.1 million. Pursuant to generally accepted
accounting principles, the Company had allocated the $2.1 million ascribed
value of the warrants to additional paid-in capital and correspondingly reduced
the face amount of the Series D Preferred Stock reflected on its balance sheet
to $7.9 million at the original date of issuance. Pursuant to the issuance of
share dividends and terms of the Series D Preferred Stock, the number of
warrants to purchase common stock issued to the holders thereof had increased
to 3,424,666 at June 30, 1995, and the exercise price had decreased to $3.67
per share.
In July 1995, the Company repaid the total $11 million Series D
Preferred Stock outstanding with proceeds resulting from a long-term
refinancing of its debt. (See Note 6.) Resultant from this early redemption
was an acceleration of accretion resulting in a non-cash, non-recurring charge
of approximately $2 million to paid-in capital in the current period.
Also in conjunction with the early redemption of the Series D
Preferred Stock, the Series D Holders exchanged all of their warrants to
purchase shares of common stock for unregistered common stock of the Company.
(See Note 8.)
(6) Senior Secured Note Offering
Sale of Units -
On July 24, 1995, the Company consummated the sale (the "Note
Offering") of 65,000 Units (the "Units") consisting of $65 million aggregate
principal amount of its 14-7/8% Senior Notes due in the year 2002 (the "Notes")
and 1,430,000 warrants to purchase an equal number of shares of common stock.
Each Unit consists of a $1,000 principal amount Note and 22 warrants to
purchase an equal number of shares of common stock. The Notes and warrants
became separately transferrable immediately after July 24, 1995.
Use of Proceeds -
The net proceeds to the Company from the offering of Units was
approximately $61.6 million after deducting discounts and estimated offering
expenses payable by the Company. The Company immediately used a portion of the
net proceeds to (i) repay $34.3 million outstanding under its Amended Credit
Agreement with ING Capital and repay $5 million outstanding under the Bridge
Loan with ING, (ii) redeem $11 million in outstanding shares of Series D
Preferred Stock and (iii) acquire interests in certain oil and gas wells
associated with the Bakersfield Properties (the "Carried Interests Wells") for
$2.3 million. The Company intends to use the balance of the proceeds from the
Note Offering to finance a portion of the
-12-
<PAGE> 15
development of the Bakersfield Properties over the remainder of the year.
Concurrent with the repayment of its outstanding bank debt, the
Company entered into a new credit agreement with ING Capital, providing for a
total credit facility of $15 million, $10 million of which is initially
available. (See "NEW CREDIT AGREEMENT," which follows.)
The Notes -
The Notes bear interest at the rate of 14-7/8% per annum. Interest
accrues from the date of issue and will be payable semi-annually on January 15
and July 15 of each year, commencing on January 15, 1996. The Notes are
redeemable, in whole or in part, at the option of the Company at any time on or
after July 15, 1999, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
commencing on July 15 of the year set forth below plus, in each case, accrued
interest thereon to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
1999 . . . . . . . . . . . . . . . . . . . . . . 110%
2000 . . . . . . . . . . . . . . . . . . . . . . 107%
2001 and thereafter . . . . . . . . . . . . . . . 100%
</TABLE>
The Notes are issued pursuant to an indenture, dated July 24, 1995,
between the Company and Texas Commerce Bank National Association, as Trustee
(the "Indenture"). All of the obligations of the Company under the Notes and
the Indenture are secured by a second priority lien on substantially all of the
assets of the Company and its subsidiaries securing its bank debt.
The Warrants -
Each warrant entitles the holder thereof to purchase one share of
common stock at an exercise price of $3.85 per share. The warrants are
exercisable at any time on or after July 24, 1996 and expire at the close of
business on July 24, 2000. Holders of the warrants have certain demand and
piggy-back rights to cause the Company to register the shares of common stock
issuable thereunder. Such shares of common stock collectively represent
approximately 10% of the common stock of the Company on a fully diluted basis
(after taking into account the conversion or exercise of all existing options,
warrants and other convertible securities).
Placement of Units -
Subject to the terms of the Purchase Agreement dated July 17, 1995
(the "Purchase Agreement"), the Company sold the Units to BT Securities
Corporation and Internationale Nederlanden (U.S.) Securities Corporation (the
"Initial Purchasers"). As part of the compensation to the Initial Purchasers
in connection with the offering of the Units, the Company issued to the Initial
Purchasers
-13-
<PAGE> 16
(i) additional warrants to purchase 350,000 shares of common stock at an
initial exercise price of $3.85 per share and (ii) warrants to purchase 150,000
shares of the Company's Series F Preferred Stock at an initial exercise price
of $3.85 per share. Each share of Series F Preferred Stock is convertible into
one share of common stock. The additional warrants issued as such compensation
have substantially the same terms as the warrants.
Equity Proceeds Offer and Redemption -
In the event the Company completes an offering for the sale of $5
million or more of its equity securities on or prior to July 15, 1997 ("Equity
Offering"), then following such Equity Offering, the Company must make an offer
to purchase from all the holders of the Notes (on a date not later than the
90th day after the date of the consummation of such Equity Offering) at a
purchase price equal to 110% of the aggregate principal amount of Notes to be
repurchased, plus accrued and unpaid interest thereon, an aggregate principal
amount of Notes equal to the lesser of (i) the maximum principal amount of
Notes such that 60% of the aggregate principal amount of Notes originally
issued remains outstanding after completion of the offer or (ii) the maximum
principal amount of the Notes which could be purchased with 50% of the amount
of net proceeds received or receivable by the Company from such Equity
Offering.
On or prior to July 15, 1997, the Company may, at its option, redeem
Notes with the net proceeds remaining following an Equity Proceeds Offer at a
price equal to 110% of their aggregate principal amount plus accrued and unpaid
interest thereon, if any, to the date of redemption; provided, however, that at
least 60% of the aggregate principal amount of Notes originally issued must
remain outstanding after any such redemption.
Excess Cash Flow Offer -
In the event that the Company has excess cash flow (as defined) in
excess of $2 million in any fiscal year, beginning with the fiscal year ending
December 31, 1996, the Company will be required to make an offer to purchase
Notes from all Holders in an amount equal to 50% of all such excess cash flow
for such fiscal year (not just the amount in excess of $2 million) at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest thereon ("Excess Cash Flow Offer"). The Company may credit the
principal amount of Notes acquired in the open market and retired prior to the
Excess Cash Flow Offer against such required Excess Cash Flow Offer, provided
that each Note may only be so credited once. Excess cash flow for this purpose
is generally defined as net cash flow provided by operations less capital
expenditures and payments on scheduled indebtedness.
New Credit Agreement -
Concurrent with the closing of the Note Offering in July 1995, the
Company repaid all borrowings under the Amended Credit
-14-
<PAGE> 17
Agreement and entered into a new credit agreement with ING Capital (the "New
Credit Agreement").
The New Credit Agreement provides that the Company initially may
borrow up to $10 million on a revolving credit basis. The New Credit Agreement
will convert to a term loan on January 31, 1996, with a set amortization
schedule and will have a final maturity date of December 31, 1998.
Availability under the New Credit Agreement is limited to a "borrowing
base" amount. The borrowing base will be determined semi-annually by ING
Capital, at its sole discretion, and may be established at an amount up to $15
million. Initially, the borrowing base is set at $10 million and ING Capital
will have no obligation to increase the borrowing base above this amount.
Availability under the New Credit Agreement will terminate on January 31, 1996,
at which time amounts outstanding under the New Credit Agreement will convert
to a term loan. Amounts advanced under the New Credit Agreement will bear
interest at an adjusted Eurodollar rate plus 2.50%.
The New Credit Agreement contains restrictive covenants which impose
limitations on the Company and its subsidiaries with respect to, among other
things: (i) the maintenance of current assets equal to at least 100% of
current liabilities, (ii) the maintenance of a minimum tangible net worth,
(iii) the incurrence of indebtedness (with exceptions for the Notes and the New
Credit Agreement and certain other limited exceptions), (iv) dividends and
similar payments (except dividends on Series A, B and C Preferred Stock of up
to $30,000), (v) the creation of additional liens on, or the sale of, the
Company's oil and gas properties and other assets, (vi) the Company's ability
to enter into hedging transactions, (vii) mergers or consolidations, (viii)
investments outside the ordinary course of business and (ix) transactions with
affiliates.
All indebtedness of the Company under the New Credit Agreement is
guaranteed by the Company's two subsidiaries and is secured by a first lien
upon substantially all of the Company's oil and gas properties as well as by a
pledge of all of the capital stock of the Company's subsidiaries and the
accounts receivable, inventory, general intangibles, machinery and equipment
and other assets of the Company. All assets not subject to a lien in favor of
the lender are subject to a negative pledge, with certain exceptions.
Pro Forma Financial Statements -
The following Unaudited Pro Forma Condensed Consolidated Statements of
Operations are derived from the historical financial statements of HarCor
Energy, Inc. set forth herein and are adjusted to reflect (i) the issuance of
the Units and the application of a portion of the net proceeds to repay all
indebtedness outstanding under the Amended Credit Agreement and the Bridge Loan
and to redeem the Series D Preferred Stock and (ii) the acquisition of the
Carried Interests Wells as if such transactions had occurred on
-15-
<PAGE> 18
January 1, 1995. This unaudited pro forma financial information should be read
in conjunction with the notes thereto.
The unaudited pro forma financial information does not purport to be
indicative of the financial position or results of operations that would
actually have occurred if the transactions described had occurred as presented
in such statements or which may be obtained in the future. In addition, future
results may vary significantly from the results reflected in such statements
due to normal crude oil and natural gas production declines, reductions in
prices paid for crude oil and natural gas, future acquisitions and other
factors. (Amounts are in thousands except per share data.)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
------------------------------------------------------------------
<TABLE>
<CAPTION>
Pro Forma
------------------------------------------
Adjustments
---------------------------
Carried Note
Historical Interests(A) Offering Adjusted
---------- ------------ -------- --------
<S> <C> <C> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . . $15,119 $1,281 $ - $16,400
------- ------ ------- -------
Costs and expenses:
Operating and exploration costs . . . . . . . . . 6,880 194 - 7,074
Depletion, depreciation,
amortization and impairment . . . . . . . . . . 4,377 445 - 4,822
General and administrative expenses . . . . . . . 1,957 - - 1,957
Interest expense . . . . . . . . . . . . . . . . 4,588 - 3,826(B) 8,414
Other . . . . . . . . . . . . . . . . . . . . . 307 - - 307
------- ------ ------- -------
Total costs and expenses . . . . . . . . . . . 18,109 639 3,826 22,574
------- ------ ------- -------
Loss from continuing operations . . . . . . . . . $(2,990) $ 642 $(3,826) $(6,174)
======= ====== ======= =======
Loss applicable to common shareholders . . . . . $(7,892) $(8,390)
======= =======
Loss from continuing operations per share
applicable to common shareholders . . . . . . . $ (0.50) $ (0.75)(C)
======= =======
Primary shares outstanding . . . . . . . . . . . . 7,658 8,631 (C)
======= =======
</TABLE>
All amounts in the tables above are in thousands except per share data.
See accompanying notes to pro forma financial statements.
Pro forma adjustments to the Unaudited Pro Forma Condensed
Consolidated Statements of Operations included herein are as follows (dollar
amounts are in thousands):
(A) Revenues and expenses resulting from the acquisition of the
Carried Interests Wells and adjustments to depletion,
depreciation and amortization for the six months ended June 30,
1995 (the Carried Interests were acquired effective July 1,
1995).
(B) Changes in interest expense associated with (i) the inclusion of
$6,030 in interest, discount amortization and amortization of
deferred financing costs associated with the Notes for the
period ended July
-16-
<PAGE> 19
25, 1995, the date of the completion of Note Offering, and (ii) the
elimination of $2,204 in interest expense and deferred financing costs
for that period related to the Amended Credit Agreement and the Bridge
Loan.
(C) The pro forma earnings per share data reflect dividends on
remaining preferred stock which increase loss applicable to
common shareholders. The write-off of deferred financing costs
and the charge to additional paid-in capital resulting from the
early extinguishment of debt and early redemption of preferred
stock have not been reflected in the earnings per share
calculation. Outstanding stock options, warrants and
convertible preferred shares were not included in the
calculation as their effect was antidilutive.
(7) Commitments and Contingencies -
Risk Management and Hedging Activities
The Company has a contract to hedge 8,000 barrels of oil per month
from February 1994 to August 1996, which provides for a "ceiling" price of
$18.75 per barrel and a "floor" price of $15.80 per barrel. Pursuant to such
contract, if the NYMEX price of light, sweet crude oil ("NYMEX price") is lower
than $15.80, then the Company is paid the difference between the NYMEX price
and $15.80 for each barrel hedged; and, if the NYMEX price is higher than
$18.75, then the Company pays the difference between the NYMEX price and $18.75
for each barrel hedged.
The Company has entered into another contract to hedge (i) 300 barrels
of oil per day from May 1995 to April 1996 and (ii) 250 barrels per day from
May 1996 to April 1997. The hedge provides for a fixed price of $18.505 per
barrel. Gains or losses under the above agreements are recorded in oil
revenues in periods in which the hedged production occurs and such agreements
are settled on a monthly basis.
The Company entered into an additional contract to hedge 6,750 barrels
per month at a reference price of $17.25 per barrel. Pursuant to such hedge
contract, the Company pays half of the difference between $17.25 and the NYMEX
price if the index price is higher than $17.25; and the Company receives the
difference between $17.25 and the index price if the index price is lower than
$17.25, as determined on a monthly basis.
The Company has a gas sales contract under which the Company receives
approximately $1.80 per MMBtu at the wellhead for all of its gas produced up to
an agreed level of production in each field of the South Texas Properties (up
to a maximum of approximately 3,031 MMBtu per day, net to the Company's
interest, in the aggregate for all such fields in 1995) through October 1995.
The gas sales contract was amended in September 1993 to provide a "floor" price
of $2.05 per MMBtu for certain volumes from January 1995 through December 1995.
The Company is currently in dispute with the purchaser of the gas under this
contract and has been receiving spot market prices for these indicated gas
volumes in lieu of the contract prices. The Company intends to use legal
remedies to enforce its rights under these contracts.
-17-
<PAGE> 20
The Company entered into a gas sales contract covering the gas
production from the Bakersfield Properties pursuant to which the Company
received $1.985 per MMBtu for the delivery of 3,750 MMBtu of gas per day from
October 1, 1994 to September 30, 1995; and pursuant to which it will receive
(i) $2.0297 per MMBtu for the delivery of 3,000 MMBtu of gas per day from
October 1, 1995 to September 30, 1996 and (ii) $2.0753 per MMBtu for the
delivery of 2,500 MMBtu of gas per day from October 1, 1996 to September 30,
1997.
The Company has in effect a firm gas sales contract for 3,750
MMBtu/day delivered, which commenced December 1, 1994 and ends November 30,
1995. The composite average price received by the Company for the gas sold is
$1.81/MMBtu. The Company also entered into a firm gas sales contract
commencing December 1, 1995 and ending November 30, 1997 for the sale of 3,000
MMBtu per day at an effective price of $1.70 per MMBtu. In July of 1995, the
Company entered into an additional contract commencing December 1, 1995 and
ending June 1, 1997 for the sale of 3,000 MMBtu per day at a price per MMBtu of
$.16 less than the NYMEX gas futures price for the applicable month. The term
of this contract may be extended to November 30, 1997, at the option of the gas
buyer.
(8) Stockholders' Equity
Common Stock -
As a condition to the Bridge Loan, the Company had issued to ING
Capital an aggregate of 75,000 shares of its common stock during 1995 and
recorded $253,000 of deferred financing costs associated therewith.
In April 1995, holders of 2,500 shares of Series B Preferred Stock
converted their shares into 64,100 common shares of the Company.
Issuance of Warrants -
In July 1995, the Company issued an aggregate 1,930,000 warrants to
purchase shares of its common stock at $3.85 per share pursuant to the terms of
its Senior Secured Note Offering.
Warrant Exchanges -
In May 1995, BER exchanged its warrant to purchase 1,000,000 shares of
the Company's common stock at $5.00 per share for 182,500 unregistered shares
of the Company's common stock. The Company had ascribed a value of $850,000 to
the warrant upon its original issuance and has ascribed the same value to the
common stock issued in this exchange.
In July 1995, in connection with the Senior Secured Note Offering (see
Note 6), the Company and the Series D Holders effected an agreement pursuant to
which the Series D Holders
-18-
<PAGE> 21
exchanged their warrants to purchase shares of common stock for unregistered
common stock of the Company. The Series D Holders had warrants to purchase
3,424,666 shares of common stock at an exercise price of $3.67 per share at the
time of the exchange. Pursuant to the agreement, the Series D Holders
exchanged all of their warrants for 1,100,000 unregistered common shares of
common stock of the Company. This exchange agreement also contained certain
conditions including certain appreciation rights to the Series D Holders
effective during a two-year period following the exchange in the event of a
sale of the Company or its assets and certain registration rights to the Series
D Holders.
Preferred Stock Dividends -
The Company has paid dividends on preferred stocks for the nine-month
periods ended September 30, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
Nine Months Ended
--------------------
September 30, 1995
--------------------
Preferred Stock 1995 1994
--------------- -------- --------
<S> <C>
8% Convertible (Series A, B, C). . . $200,000 $210,000
9% Redeemable Series D . . . . . . . 539,000 225,000
4%/9% Convertible Series E . . . . . 128,000 30,000
-------- --------
$867,000 $465,000
======== ========
</TABLE>
Dividends on the 8% Series A, Series B and Series C Preferred Stock
were paid in cash for both periods indicated.
Dividends on the 9% Series D Preferred Stock for 1994 and the first
two quarters of 1995 were paid, at the option of the Company, in additional
shares of Series D Preferred Stock. Dividends on the Series D Preferred Stock
were paid in cash for the current quarter.
Dividends on the Series E Preferred Stock for 1994 and the first two
quarters of 1995 were paid, at the option of the Company, in shares of common
stock of the Company in lieu of cash. Dividends on the Series E Preferred were
paid in cash for the current quarter. The coupon rate on the Series E
increased from 4% per annum to 9% per annum effective July 1, 1995.
-19-
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Management's discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and notes thereto included
in Item 1. herein. All dollar amounts referenced in this Item 2., except per
unit or per share data, have been rounded to the nearest thousand.
OVERVIEW OF SIGNIFICANT EVENTS
These following events had a significant effect on the results of
operations and financial condition of the Company during the current quarter:
o In July 1995, the Company completed the sale of $65 million of
14-7/8% Senior Notes due in the year 2002. The Company immediately used a
portion of the net proceeds to (i) repay $34.3 million outstanding under its
Amended Credit Agreement with ING Capital and repay $5 million outstanding
under the Bridge Loan with ING, (ii) redeem the total $11 million in
outstanding shares of Series D Preferred Stock and (iii) acquire additional
interests in Bakersfield Properties for $2.3 million. The Company intends to
use the balance of the proceeds from the sale of these Senior Notes to finance
a portion of the development of the Bakersfield Properties over the remainder
of the year.
o The above refinancing resulted in non-recurring, non-cash charges
aggregating $3.9 million resulting from early extinguishment of debt and
acceleration of accretion in preferred stock.
o The Company elected to adopt early SFAS 121 (Accounting for
Impairment of Long-Lived Assets) which resulted in a non-cash impairment charge
of $608,000.
o The Company's development of the Bakersfield Properties was delayed
pending the completion of the refinancing of its long-term debt. Consequently,
the increases in production and revenues the Company had hoped to anticipate in
the current quarter were not fully realized.
o The Company began its development drilling program on the
Bakersfield Properties in late July. As of September 30, 1995, the Company had
spent $4.7 million on this program and drilled 14 wells (gross), 8 of which
were producing with 6 awaiting completion. As a consequence, and including the
acquisition of certain additional interests in the properties, HarCor's share
of sales production from the Bakersfield Properties was 750 BPD and 8,850 Mcfd
during the third quarter, increases of 14% and 25%, respectively, from 660 BPD
and 7,070 Mcfd produced in the second quarter.
-20-
<PAGE> 23
COMPARISON OF RESULTS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1994
REVENUES - The Company's total revenues increased $417,000 (9%) from
$4,457,000 in third quarter 1994 to $4,874,000 in the third quarter of 1995.
The Company's total oil and gas revenues increased $279,000 (8%) from
$3,501,000 in the third quarter of 1994 to $3,780,000 in the third quarter of
1995. Oil revenues increased $94,000 (6%) in the current quarter due primarily
to higher oil production. The Company's overall oil production increased 4,100
barrels (4%) from 98,800 barrels in the third quarter of 1994 to 102,900
barrels in the current quarter. The increased production was a result of
development drilling on the Bakersfield Properties, which increased 11,700
(21%) barrels during the current quarter. Oil production from the Company's
other properties declined 7,600 barrels in the aggregate between the periods
due to normal production declines. The average price received for oil was
$16.72 per barrel during third quarter 1995 compared to $16.46 per barrel for
the same period in 1994.
The Company's gas revenues increased $185,000 (10%) in the current
period, despite lower gas prices, due to increased production. Gas production
increased 243,000 Mcf (23%) from 1,061,000 Mcf in third quarter 1994 to
1,304,000 Mcf in third quarter 1995. The Bakersfield Properties increased
214,000 Mcf (37%) during the current quarter due to development drilling while
gas production from the Company's other properties increased slightly (29,000
Mcf) in the aggregate. Average prices received for gas were $1.58 per Mcf in
third quarter 1995 as compared to $1.77 per Mcf in the third quarter of 1994,
representing a decrease of $.19 per Mcf.
During the third quarter of 1995, the Company realized revenues of
$1,007,000 from its share of the operations of the natural gas processing plant
acquired with the Bakersfield Properties. These revenues consisted of $256,000
in the resale of natural gas purchased from third parties, $723,000 in the sale
of processed natural gas liquids (51,000 barrels) and $28,000 in gas processing
fees. During third quarter 1994, the Company realized gas plant revenues of
$746,000, which consisted of $277,000 in the resale of purchased natural gas,
$435,000 from the sale of processed natural gas liquids (37,600 barrels) and
$34,000 in gas processing fees.
The Company realized interest and other income of $64,000 and $23,000
in the current quarter, respectively. This compares to interest and other
income of $6,000 and $205,000, respectively, in third quarter 1994. The
increase in the current period's interest income is due to significantly larger
cash balances resulting from the recent Note Offering. Other income in 1994
was primarily a gain on sale of assets.
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<PAGE> 24
COSTS AND EXPENSES - Total costs and expenses increased $2,358,000
(48%) from $4,939,000 in third quarter 1994 to $7,297,000 in third quarter
1995.
The Company's production costs increased $6,000 during the current
period. Increased production activities on the Bakersfield Properties
accounted for a $70,000 increase during the third quarter of 1995 while
production costs on the Company's other properties decreased $64,000 in the
aggregate during the current quarter. Average production cost decreased to
$4.01 per BOE in the current quarter as compared to $4.63 per BOE in third
quarter 1994.
During the current quarter, the Company incurred costs of $628,000
resulting from the operations of a natural gas processing plant acquired with
the Bakersfield Properties. These costs included $220,000 from the purchase of
natural gas for processing and resale and $408,000 of direct operating
expenses. During third quarter 1994, the Company incurred gas plant costs of
$774,000 consisting of $337,000 of natural gas purchased for resale and
$437,000 of direct operating expenses.
The Company incurred $60,000 in abandonment costs during third quarter
1994. The Company also incurred engineering and geological expenses of $55,000
and $46,000 during the quarters ended September 30, 1995 and 1994.
The Company elected in the current quarter to adopt early SFAS 121
(Accounting for the Impairment of Long-Lived Assets) which resulted in a
non-cash impairment charge to oil and gas properties of $608,000. The
Company's depletion, depreciation and amortization ("DD&A") expense, excluding
the impairment charge, increased slightly in the current quarter, from
$1,326,000 in 1994 as compared to $1,266,000 in 1995. The DD&A rate for oil
and gas reserves was $3.55 per BOE in the current period as compared to $4.42
per BOE during third quarter 1994, as the Company's production from its
Bakersfield Properties increased.
The Company's general and administrative expenses increased $206,000
(39%) from $535,000 in the third quarter of 1994 to $741,000 in the current
period due to the Company's ongoing expansion and increased activities.
The Company's interest expense increased $1,404,000 (148%) from
$946,000 in third quarter 1994 to $2,350,000 in the current quarter as a result
of the refinancing of its long-term debt in July 1995. The refinancing
resulted in $65,000,000 Senior Notes outstanding at September 30, 1995, as
compared to approximately $49,400,000 in aggregate bank debt and Redeemable
Preferred Stock a year ago. Additionally, the current Senior Notes resulting
from the refinancing carry an interest rate of 14-7/8% as compared to an
overall average interest rate of approximately 8-1/4% on debt existing during
third quarter 1994. Also increasing interest expense in the current period was
increased amortization of deferred financing costs resulting from the
refinancing.
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<PAGE> 25
Other expense in the third quarter resulted from the write-down of a
long-term investment of $261,000 and bad debt expense of $46,000.
NON-RECURRING CHARGES -
Extraordinary Item - In connection with the refinancing of its
long-term debt, the Company incurred in the current period a non-cash
extraordinary charge of $1,888,000 resulting from the early extinguishment of
debt. This was primarily the write-off of all deferred financing costs
associated with the Company's bank debt and Redeemable Preferred Stock which
were repaid in July 1995.
Accretion - During the current quarter, the Company incurred a
non-cash accretion charge of $1,982,000 on its Series D Preferred Stock. This
accretion charge was a result of the early redemption of the Series D Preferred
Stock in connection with the refinancing of the Company's long-term debt.
PREFERRED DIVIDENDS - Total dividends on preferred stock were $196,000
in the third quarter of 1995 as compared to $325,000 in the third quarter of
1994. The decrease in dividends was a result of the early redemption of the
Series D Preferred Stock in July 1995. Dividends in third quarter 1995 were
all cash, while dividends in third quarter 1994 consisted of $70,000 in cash,
$225,000 in shares of Series D Preferred Stock and $30,000 in common stock of
the Company.
NET LOSS - The Company's net loss from continuing operations for third
quarter 1995 was $2,423,000, while net loss attributable to common stockholders
after extraordinary item, preferred dividends and accretion was $6,489,000
($.78 per share). In third quarter 1994, the Company had a net loss of
$482,000 and net loss to common shareholders of $885,000 ($.12 per share) after
preferred dividends and accretion.
COMPARISON OF RESULTS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1994
ACQUISITION OF BAKERSFIELD PROPERTIES - Included in results of
operations for the current period are an entire nine months of results of
operations from the Bakersfield Properties, as compared to three months in the
comparable period of 1994. The Bakersfield Properties were acquired on June
30, 1994.
REVENUES - The Company's total revenues increased $7,368,000 (95%)
from $7,751,000 for the nine months ended September 30, 1994 to $15,119,000 for
the nine months ended September 30, 1995.
The Company's total oil and gas revenues increased $4,060,000 (60%)
from $6,776,000 for the first nine months of 1994 to $10,836,000 for the first
nine months of 1995. Oil revenues increased $2,229,000 (74%) due primarily to
an increase in oil production volumes of 124,800 barrels (65%), from 191,600
barrels
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<PAGE> 26
in the first nine months of 1994 to 316,400 barrels in the current period. The
increased production was a result of the acquisition of the Bakersfield
Properties, which produced 198,600 barrels of oil during the first nine months
of 1995 as compared to 56,000 barrels in 1994 (three months). Oil production
from the Company's other properties decreased 17,800 barrels (13%) in the
aggregate due to normal production declines. The average price received for
oil was $15.74 per barrel during the first nine months of 1994 compared to
$16.58 per barrel in the current period.
The Company's gas revenues increased $1,830,000 (49%) in the current
nine-month period in spite of lower gas prices due to increased production.
Gas production increased 1,503,000 Mcf (73%) from 2,058,000 Mcf in the first
nine months of 1994 to 3,561,000 Mcf in the first nine months of 1995. The
Bakersfield Properties contributed 2,161,000 Mcf of production during the
current period as compared to 582,000 Mcf in 1994 (three months). Gas
production from the Company's other properties decreased 75,000 Mcf in the
aggregate during the current period due to normal production declines. The
average price received for gas was $1.57 per Mcf during the current period as
compared to $1.83 per Mcf during the first nine months of 1994, representing a
decrease of $.26 per Mcf (14%).
During the nine months ended September 30, 1995, the Company realized
revenues of $4,161,000 from its share of the operations of the natural gas
processing plant acquired with the Bakersfield Properties. These revenues
consisted of $1,913,000 in the resale of natural gas purchased from third
parties, $2,165,000 in the sale of processed natural gas liquids and $83,000 in
gas processing fees. In 1994, the Company realized gas plant revenues of
$746,000 (three months), which consisted of $277,000 in the resale of purchased
natural gas, $435,000 from the sale of processed natural gas liquids and
$34,000 in gas processing fees.
The Company realized interest and other income of $85,000 and $37,000
in the current period, respectively. This compares to interest and other
income of $11,000 and $218,000, respectively, in 1994. The increase in the
current period's interest income is due to significantly larger cash balances
resulting from the recent Note Offering. Other income in 1994 was primarily a
gain on sale of assets.
COSTS AND EXPENSES - Total costs and expenses increased $9,191,000
(103%) from $8,918,000 in 1994 to $18,109,000 in 1995.
The Company's production costs increased $1,501,000 (65%) from
$2,306,000 in the first nine months of 1994 to $3,807,000 in the first nine
months of 1995. This was primarily due to the acquisition of the Bakersfield
Properties, which accounted for $2,064,000 of production costs incurred in the
current period as compared to $674,000 in 1994 (three months). Production
costs on the Company's other properties increased $111,000 (7%) in the
aggregate during the current period. Average production cost
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<PAGE> 27
decreased to $4.18 per BOE in the current nine months as compared to $4.32 per
BOE in 1994.
During the first nine months of 1995, the Company incurred costs of
$2,832,000 resulting from its share of the operations of the natural gas
processing plant acquired with the Bakersfield Properties. These costs
included $1,634,000 for the purchase of natural gas for processing and resale
and $1,198,000 of direct operating expenses. During third quarter 1994, the
Company incurred gas plant costs of $774,000 (three months) consisting of
$337,000 of natural gas purchased for resale and $437,000 of direct operating
expenses.
The Company incurred incidental abandonment costs of $4,000 in the
current period as compared to $70,000 during the first nine months of 1994.
Engineering and geological expenses increased $71,000 (42%) from $167,000 in
the first nine months of 1994 to $238,000 in the first nine months of 1995 due
to an increase in the number of oil and gas properties owned by the Company and
activities related to their evaluation and management.
The Company elected in the current period to adopt early SFAS 121
(Accounting for the Impairment of Long-Lived Assets) which resulted in a
non-cash impairment charge to oil and gas properties of $608,000. Excluding
the impairment charge, the Company's DD&A expense increased $1,082,000 (41%)
from $2,627,000 for the nine months ended September 30, 1994 to $3,709,000 for
the nine months ended September 30, 1995. This was a result of the substantial
increase in acquisition and development costs related to the Bakersfield
Property acquisition. The DD&A rate for oil and gas reserves was $3.85 per BOE
in the current period as compared to $4.70 during the first nine months of 1994
as a result of higher production from the Bakersfield Properties. Further
affecting the increase in overall DD&A expense was $233,000 in depreciation
expense relating to the natural gas processing plant acquired with the
Bakersfield Properties.
The Company's general and administrative expenses increased $436,000
(29%) from $1,521,000 for the first nine months of 1994 to $1,957,000 in the
first nine months of 1995. Increases in G&A were a result of the additional
personnel and outside professional services resulting from the Company's
increased acquisition activities and general expansion.
The Company's interest expense increased $3,338,000 from $1,250,000 in
the first nine months of 1994 to $4,587,000 in the first nine months of 1995.
This was a result of the increased bank debt resulting from the financing of
the Bakersfield Properties in June 1994 and subsequent refinancing of that bank
debt and its Redeemable Preferred Stock with $65,000,000 in 14-7/8% Senior
Notes in July 1995. Also increasing interest expense in the current period was
increased amortization of deferred financing costs resulting from these
financings.
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<PAGE> 28
Other expense in the current period resulted from the write-down of a
long-term investment of $261,000 and bad debt expense of $46,000. In 1994, the
Company recorded a charge of $203,000 from a write-off of a portion of its
interests in the South Texas Properties, which portion was conveyed to a third
party pursuant to the terms of the dissolution of STLP.
NON-RECURRING CHARGES -
Extraordinary Item - In connection with the refinancing of its
long-term debt, the Company incurred in the current period a non-cash
extraordinary charge of $1,888,000 resulting from the early extinguishment of
debt. This was primarily the write-off of all deferred financing costs
associated with the Company's bank debt and Redeemable Preferred Stock which
were repaid in July 1995. During 1994, the Company incurred an extraordinary
non-operating charge of $122,000 resulting from the early extinguishment of
debt in the refinancing of the South Texas Properties in connection with the
dissolution of STLP.
Accretion - During the current quarter, the Company incurred a
non-cash accretion charge of $1,982,000 on its Series D Preferred Stock. This
accretion charge was a result of the early redemption of the Series D Preferred
Stock in connection with the refinancing of the Company's long-term debt.
PREFERRED DIVIDENDS - Dividends on preferred stock were $867,000 for
the nine months ended September 30, 1995 as compared to $465,000 in 1994.
Increased dividends in the current period were a result of the Series D and
Series E preferred stocks having been outstanding for the entire nine months of
1995 as compared to three months in 1994. Dividends in the first nine months
of 1995 consisted of $332,000 in cash, $475,000 in shares of Series D Preferred
Stock and $60,000 in common stock of the Company. Dividends for 1994 consisted
of $210,000 in cash, $225,000 in shares of Series D Preferred Stock and $30,000
in common stock of the Company. The Company also incurred an accretion charge
of $77,000 on its Series D Preferred Stock in that period.
NET LOSS - The Company's net loss from continuing operations for the
first nine months of 1995 was $2,990,000, while net loss attributable to common
stockholders after extraordinary item, preferred dividends and accretion was
$7,891,000 ($1.03 per share). For the same period in 1994, the Company had a
net loss from continuing operations of $1,167,000 and net loss to common
shareholders of $1,832,000 ($.30 per share) after extraordinary item, preferred
dividends and accretion.
LIQUIDITY AND CAPITAL RESOURCE
SUMMARY - The Company's sources of working capital have primarily been
cash flows from operations and debt and equity financings. During the nine
months ended September 30, 1995, the Company had cash flows from operations of
$1,810,000 as compared to
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<PAGE> 29
$970,000 during the same period in 1994. The Company also realized net
proceeds of $10,992,000 from debt financings during the current period. The
Company utilized a net of $5,350,000 for capital expenditure activities in the
current period.
WORKING CAPITAL - The Company had net working capital of $4,382,000
with a current ratio of 1.7:1 at September 30, 1995 as compared to a net
working capital deficiency of $7,943,000 and a current ratio of 0.4:1 at
December 31, 1994. At December 31, 1994, current liabilities included the
$5,000,000 Bridge Loan and $2,511,000 of current maturities under the Company's
Amended Credit Agreement. All borrowings outstanding under the Bridge Loan and
the Amended Credit Agreement were refinanced on a long-term basis in July 1995
with proceeds from the Note Offering.
OPERATING ACTIVITIES - Discretionary cash flow is a measure of
performance which is useful for evaluating exploration and production
companies. It is derived by adjusting net income (loss) to eliminate the
non-cash effects of exploration expenses, including dry hole costs,
depreciation, depletion, amortization, impairment and gain (loss) on sale of
assets. The effects of non-cash working capital changes are not taken into
account. This measure reflects an amount that is available for capital
expenditures, debt repayment or dividend payments.
During the current nine months, the Company generated discretionary
cash flow of $2,287,000 (before non-cash working capital charges of $477,000).
This compares to $1,911,000 (before non-cash working capital charges of
$942,000) for the same period in 1994. The improvement in the current
nine-month period was primarily a result of increased oil and gas revenues
resulting from the development of the Bakersfield Properties which resumed in
late July 1995. As of September 30, 1995, the Company had drilled 14 wells
(gross), 8 of which were producing with 6 awaiting completion at that date. As
a consequence, and including the acquisition of certain additional interests in
the properties, HarCor's share of sales production from the Bakersfield
Properties was 750 BPD and 8,850 Mcfd during the third quarter, increases of
14% and 25%, respectively, from 660 BPD and 7,070 Mcfd produced in the second
quarter.
The Company expects further improvement in operating cash flows in
future periods as a result of this drilling and development program. As of
early November, the Company had drilled 23 wells (gross) on the Bakersfield
Properties, 16 of which were producing with 7 awaiting completion. As a
result, production from these properties had risen to 1,073 BPD and 12,040
Mcfd, representing 53% and 51% increases in oil and gas, respectively, from
mid-year levels and 43% and 36% gains from third quarter levels.
FINANCING ACTIVITIES - On July 24, 1995, the Company consummated the
sale (the "Note Offering") of 65,000 Units (the "Units") consisting of $65
million aggregate principal amount of its 14-7/8% Senior Notes due in the year
2002 (the "Notes") and
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<PAGE> 30
1,430,000 warrants to purchase an equal number of shares of common stock. Each
Unit consists of a $1,000 principal amount Note and 22 warrants to purchase an
equal number of shares of common stock. The Notes and warrants became
separately transferrable immediately after July 24, 1995.
The net proceeds to the Company from the offering of Units was
approximately $61.6 million after deducting discounts and estimated offering
expenses payable by the Company. The Company immediately used a portion of the
net proceeds to (i) repay $34.3 million outstanding under its Amended Credit
Agreement with ING Capital and repay $5 million outstanding under the Bridge
Loan with ING; (ii) redeem the total $11 million in outstanding shares of
Series D Preferred Stock and (iii) acquire interests in additional producing
wells in the Bakersfield Properties for $2.3 million. The Company intends to
use the balance of the proceeds from the Note Offering to finance a portion of
the development of the Bakersfield Properties over the remainder of the year.
Concurrent with the repayment of its outstanding bank debt, the
Company entered into a new credit agreement with ING, providing for a total
credit facility of $15 million, $10 million of which is initially available.
(See "NEW CREDIT AGREEMENT," which follows.)
The Notes bear interest at the rate of 14-7/8% per annum. Interest
accrues from the date of issue and will be payable semi-annually on January 15
and July 15 of each year, commencing on January 15, 1996. The Notes are
redeemable, in whole or in part, at the option of the Company at any time on or
after July 15, 1999, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
commencing on July 15 of the year set forth below plus, in each case, accrued
interest thereon to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
1999 . . . . . . . . . . . . . . . . . . . . . . 110%
2000 . . . . . . . . . . . . . . . . . . . . . . 107%
2001 and thereafter . . . . . . . . . . . . . . . 100%
</TABLE>
In the event that the Company has excess cash flow (as defined) in
excess of $2 million in any fiscal year, beginning with the fiscal year ending
December 31, 1996, the Company will be required to make an offer to purchase
Notes from all Holders in an amount equal to 50% of all such excess cash flow
for such fiscal year (not just the amount in excess of $2 million) at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest thereon. (See Note 6 of Notes to Consolidated Financial
Statements contained in Item 1. herein for a complete description of the
Notes.)
All of the obligations of the Company under the Notes and the
Indenture are secured by a second priority lien on substantially all of the
assets of the Company and its subsidiaries securing the New Credit Agreement.
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<PAGE> 31
NEW CREDIT AGREEMENT - Concurrent with the closing of the Note
Offering in July 1995, the Company repaid all borrowings under the Amended
Credit Agreement and entered into a new credit agreement with ING Capital (the
"New Credit Agreement").
The New Credit Agreement provides that the Company initially may
borrow up to $10 million on a revolving credit basis. The New Credit Agreement
will convert to a term loan on January 31, 1996, with a set amortization
schedule and will have a final maturity date of December 31, 1998.
Availability under the New Credit Agreement is limited to a "borrowing
base" amount. The borrowing base will be determined semi-annually by ING
Capital, at its sole discretion, and may be established at an amount up to $15
million. Initially, the borrowing base is set at $10 million and ING Capital
will have no obligation to increase the borrowing base above this amount.
Availability under the New Credit Agreement will terminate on January 31, 1996,
at which time amounts outstanding under the New Credit Agreement will convert
to a term loan. Amounts advanced under the New Credit Agreement will bear
interest at an adjusted Eurodollar rate plus 2.50%. There was $100,000
outstanding under the New Credit Agreement at September 30, 1995.
The New Credit Agreement contains restrictive covenants which impose
limitations on the Company with respect to, among other things, certain
financial ratios or limitations, incurrence of indebtedness, the sale of the
Company's oil and gas properties and other assets, hedging transactions,
payment of dividends, mergers or consolidations and investments outside the
ordinary course of business. The New Credit Agreement also contains customary
default provisions.
All indebtedness of the Company under the New Credit Agreement is
secured by a first lien upon substantially all of the Company's oil and gas
properties as well as the accounts receivable, inventory, general intangibles,
machinery and equipment and other assets of the Company. All assets not
subject to a lien in favor of the lender are subject to a negative pledge, with
certain exceptions.
Additionally, the Company incurred $332,000 in cash dividends during
the current nine months, reflected in "FINANCING ACTIVITIES".
RESULTS OF HEDGING ACTIVITIES - The Company's hedging activities for
the three- and nine-month periods ended September 30, 1995 and 1994 have not
had any material effect on the Company's liquidity or results of operations.
(See Note 5 of Notes to Consolidated Financial Statements included herein.)
CAPITAL EXPENDITURES - The Company had curtailed its capital
expenditures during the first half of the year due to capital and liquidity
constraints. As a result, the Company's production rates
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<PAGE> 32
began to decline in accordance with engineering projections in the second
quarter.
Subsequent to the refinancing of its debt, the Company spent $2.3
million on the acquisition of interests in additional producing wells on the
Bakersfield Properties, and spent approximately $4.7 million (including $2.4
million of accrued capital costs) on developmental drilling through September
30, 1995. (See "OPERATING ACTIVITIES" for current production rates.)
The Company intends to spend an additional estimated $48.3 million for
capital expenditures to develop the proved reserves of the Bakersfield
Properties, of which $6.2 million will be spent for the remainder of 1995,
$12.4 million in 1996 and $29.7 million thereafter. An additional $3 million
will be spent over the next several years for the development of the Company's
other properties. The Company intends to fund 1995 capital expenditures out of
cash flows and available proceeds provided by the recently completed Note
Offering. The Company plans to fund further future capital expenditures from
operating cash flows and borrowings under the New Credit Agreement.
The Company currently anticipates that total additional drilling
necessary to develop the Bakersfield Properties after 1995 will result in
approximately 123 gross (92.3 net) new wells. The projected total development
costs for the proved reserves assigned to the Bakersfield Properties after 1995
are estimated at approximately $56 million ($42 million net to the Company)
based on current drilling costs. No assurances can be given, however, that any
of such wells will be drilled, or that if such wells are drilled, they will be
either successful or completed in accordance with the Company's development
schedule.
The Company intends to continue participating in development drilling
on its South Texas Properties as those opportunities arise and as resources are
available. The Company is also involved in two small waterflood projects on
its Permian Basin properties and plans to participate in a third waterflood
project on such properties. It is anticipated that capital expenditures
required for these developmental activities will be funded from operating cash
flows.
The Company expects that its available cash, expected cash flows from
operating activities and availability under its New Credit Agreement will be
sufficient to meet its financial obligations and fund its developmental
drilling activities for the foreseeable future, provided, that (i) there are no
significant decreases in oil and gas prices beyond current levels or
anticipated seasonal lows, (ii) there are no significant declines in oil and
gas production from existing properties other than declines in production
currently anticipated based on engineering estimates of the decline curves
associated with such properties, (iii) drilling costs for development wells
with respect to the Bakersfield Properties do not increase significantly from
the drilling costs recently experienced by the operator in such area
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<PAGE> 33
with respect to similar wells and (iv) the operator continues its development
program with respect to the Bakersfield Properties on the schedule currently
contemplated.
In the event incremental cash flows from the Bakersfield Properties
are not sufficient to fund both increased debt and development costs, or
results from developmental drilling are not as successful as anticipated, then
the Company will either (i) curtail its developmental drilling activities or
(ii) seek alternative financing to assist in its developmental drilling
activities.
The Company intends to continue efforts to acquire additional
interests in selected producing oil and gas properties if and when these
opportunities become available. Any such acquisitions would require borrowings
under the New Credit Agreement and possibly additional debt or equity financing
if needed.
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<PAGE> 34
CERTAIN DEFINITIONS
The terms defined in this section are used throughout this Report.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
Bcf. Billion cubic feet.
BOE. Barrels of oil equivalent, determined using the ratio of six Mcf
of natural gas (including natural gas liquids) to one Bbl of crude oil or
condensate.
BPD. Barrels of oil per day.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees fahrenheit.
Development location. A location on which a development well can be
drilled.
Development well. A well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive in
an attempt to recover proved undeveloped reserves.
Dry hole. A well found to be incapable of producing either oil or gas
in sufficient quantities to justify completion as an oil or gas well.
Estimated future net revenues. Revenues from production of oil and
gas, net of all production-related taxes, lease operating expenses and capital
costs.
Exploratory well. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
Gross acre. An acre in which a working interest is owned.
Gross well. A well in which a working interest is owned.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent.
MBtu. One thousand Btus.
Mcf. One thousand cubic feet.
Mcfd. One thousand cubic feet per day.
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<PAGE> 35
MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
MMBOE. One million barrels of oil equivalent.
MMBtu. One million Btus.
MMcf. One million cubic feet.
Net acres or net wells. The sum of the fractional working interests
owned by the Company in gross acres or gross wells.
NGLs. Natural gas liquids such as ethane, propane, iso-butane, normal
butane and natural gasoline that have been extracted from natural gas.
Overriding royalty interest. An interest in an oil and gas property
entitling the owner to a share of oil and gas production free of costs of
production.
Present value of estimated future net revenues or pretax present value
at constant prices of estimated future net revenues. Estimated future net
revenues discounted by a factor of 10% per annum, before income taxes and with
no price or cost escalation or de-escalation, in accordance with guidelines
promulgated by the Securities and Exchange Commission.
Productive well. A well that is producing oil or gas or that is
capable of production.
Proved developed reserves. Proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Proved reserves. The estimated quantities of crude oil, natural gas
and NGLs which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions.
Proved undeveloped location. A site on which a development well can
be drilled consistent with local spacing rules for the purpose of recovering
proved reserves.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.
Recompletion. The completion for production of an existing wellbore
in another formation from that in which the well has previously been completed.
Undeveloped acreage. Lease acreage on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether such acreage contains proved
reserves.
Working interest. The operating interest which gives the owner the
right to drill, produce and conduct operating activities on the property and to
share in production.
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<PAGE> 36
HARCOR ENERGY, INC.
PART II - OTHER INFORMATION
Item 4. - Submission of Matters to a Vote of Securities Holders
On September 26, 1995, at the Company's Annual Meeting of
Stockholders, the Company's Stockholders elected Messrs. Herbert L. Oakes, Jr.
and Francis H. Roth as Class I and Ambrose K. Monell as Class II positions,
respectively, on the Board of Directors to hold office until the 1998 Annual
Meeting of the Company's Stockholders or until their respective successors have
been elected and qualified, or until their earlier resignation or removal.
The votes for Messrs. Monell, Oakes and Roth, respectively, were as
follows:
FOR: 7,563,779 and 7,563,779 and 7,563,779 votes
AGAINST: 13,844 and 13,844 and 13,844 votes
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule for the Quarter Ended September
30, 1995
(b) Reports on Form 8-K
During the quarter ended September 30, 1995, the Company filed
with the Securities and Exchange Commission the following
reports on Form 8-K:
1. Report on Form 8-K dated July 20, 1995 under "Item 5
-Other Events." Said report announced the Company's
pricing of its private placement of secured senior notes
with warrants, consisting of 65,000 Units including an
aggregate of $65 million of 14-7/8% Senior Secured Notes
due 2002 with warrants to purchase 1,430,000 shares of
common stock of the Company at $3.85 per share.
2. Report on Form 8-K dated July 20, 1995 under "Item 5
-Other Events." Said report announced the Company's sale
of 65,000 Units consisting of $65,000,000 aggregate
principal amount of its 14-7/8% Senior Notes due 2002 and
1,430,000 warrants to purchase an equal number of shares
of common stock, $.10 par value, of the Company, each Unit
consisting of a $1,000 principal amount Note and 22
warrants to purchase an equal number of shares of common
stock.
Included in said report was unaudited pro forma financial
data reflecting (i) the Company's balance sheet on a pro
forma basis as if the transactions as
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<PAGE> 37
described in the Report on Form 8-K had occurred on March
31, 1995, and (ii) the Company's results of operations on a
pro forma basis for the three months ended March 31, 1995
and the year ended December 31, 1994 as if such
transactions as described in the Report on Form 8-K had
occurred on January 1, 1995.
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<PAGE> 38
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.
HARCOR ENERGY, INC.
Registrant
Date: November 13, 1995 /s/ FRANCIS H. ROTH
-------------------------------
Francis H. Roth
President and Chief
Operating Officer
Date: November 13, 1995 /s/ GARY S. PECK
-------------------------------
Gary S. Peck
Vice President-Finance
Chief Accounting Officer
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<PAGE> 39
Index to Exhibits
Exhibit 27 Financial Data Schedule for the Quater Ended September 30, 1995.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 8,530,733
<SECURITIES> 0
<RECEIVABLES> 2,144,152
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,847,784
<PP&E> 84,976,766
<DEPRECIATION> 21,051,127
<TOTAL-ASSETS> 79,736,827
<CURRENT-LIABILITIES> 6,465,367
<BONDS> 63,038,062<F1>
<COMMON> 863,121
0
650
<OTHER-SE> 9,223,070
<TOTAL-LIABILITY-AND-EQUITY> 79,736,827
<SALES> 14,996,838
<TOTAL-REVENUES> 15,118,987
<CGS> 6,639,522<F2>
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,575,257<F3>
<LOSS-PROVISION> 306,907<F4>
<INTEREST-EXPENSE> 6,734,529<F5>
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 1,888,433<F6>
<CHANGES> 0
<NET-INCOME> (7,892,421)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> (1.03)
<FN>
<F1>14-7/8% Senior Secured Notes due 2002.
<F2>Includes Oil & GAs Production & Gas Plant Costs.
<F3>Includes Exploration, DD&A, Impairment & G&A
Expense.
<F4>Includes write-down of Long-Term Investment.
<F5>Includes Interest Expense & Accretion on
Preferred Stock.
<F6>Loss on early extinguishment of Debt.
</FN>
</TABLE>
