<PAGE> 1
==================================================================
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 June 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
August 11, 1995 was 8,631,207.
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<PAGE> 2
HARCOR ENERGY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1995
-----------------------------------
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30,
l995 (unaudited) and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the Three
Months Ended June 30, 1995 and 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Six
Months Ended June 30, 1995 and 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 . . . . . . . . . . . . . . . . . . . . . . . . . 22
<CAPTION>
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
<PAGE> 3
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994
-----------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash investments . . . . . . . . . . . . . . . . . . $ 1,254,469 $ 899,198
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 1,978,223 3,707,433
Prepaids and other . . . . . . . . . . . . . . . . . . . . . 297,758 307,241
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . 3,530,450 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 . . . . . . . . . . . . . . . . . . . . . . 52,329,652 52,158,281
Lease and well equipment . . . . . . . . . . . . . . . . . 13,331,622 12,900,913
Intangible development costs . . . . . . . . . . . . . . . 5,521,039 4,745,579
Furniture and equipment . . . . . . . . . . . . . . . . . . . 247,243 231,354
---------- ----------
78,843,669 77,450,240
Less - accumulated depletion,
depreciation and amortization . . . . . . . . . . . . . . . (19,117,402) (16,674,540)
---------- ----------
Net property, plant and equipment . . . . . . . . . . . . . . 59,726,267 60,775,700
---------- ----------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 3,511,353 2,883,277
---------- ----------
$66,768,070 $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 JUNE 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994
-----------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 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 . . . . . . . . . . . . . . . . . . . . 4,066,980 5,345,967
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . 4,066,980 12,857,167
---------- ----------
LONG-TERM BANK DEBT, net of current
portion . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,340,000 31,888,800
---------- ----------
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 54,723 71,055
---------- ----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SERIES D PREFERRED STOCK . . . . . . . . . . . . . . 8,949,022 8,402,430
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
1,500,000 shares authorized;
65,000 and 67,500 shares out-
standing at June 30, 1995 and
December 31, 1994, respectively . . . . . . . . . . . . . . 650 675
Common stock, $.10 par value -
25,000,000 shares authorized;
7,531,207 and 7,192,837
shares outstanding at June 30,
1995 and December 31, 1994,
respectively . . . . . . . . . . . . . . . . . . . . . . . 753,121 719,284
Additional paid-in capital . . . . . . . . . . . . . . . . . 29,365,709 29,827,989
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (15,762,135) (15,194,551)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . 14,357,345 15,353,397
---------- ----------
$66,768,070 $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
JUNE 30, 1995 AND 1994
(UNAUDITED)
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------------
1995 1994
----------- ----------
<S> <C> <C>
REVENUES:
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . $ 3,372,518 $1,639,762
Gas plant operating and marketing
revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,369,035 -
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . 14,085 2,885
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,434 6,755
----------- ----------
4,761,072 1,649,402
----------- ----------
COSTS AND EXPENSES:
Production costs . . . . . . . . . . . . . . . . . . . . . . . . 1,263,559 488,470
Gas plant operating and marketing
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 796,775 -
Dry hole, impairment and
abandonment costs . . . . . . . . . . . . . . . . . . . . . . . - 10,480
Engineering and geological costs . . . . . . . . . . . . . . . . 93,351 36,937
Depletion, depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . . . . . 1,096,615 691,156
General and administrative expenses . . . . . . . . . . . . . . . 550,148 449,478
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 1,107,694 163,918
----------- ----------
4,908,142 1,840,439
----------- ----------
Loss before provision for income
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (147,070) (191,037)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . - -
----------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (147,070) (191,037)
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . (335,600) (70,000)
Accretion on Redeemable Preferred
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (84,005) -
----------- ----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . $ (566,675) $ (261,037)
=========== ==========
NET LOSS PER COMMON SHARE . . . . . . . . . . . . . . . . . . . . . $ (0.08) $ (0.05)
=========== ==========
</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 SIX MONTHS ENDED
JUNE 30, 1995 AND 1994
(UNAUDITED)
-------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1995 1994
----------- ----------
<S> <C> <C>
REVENUES:
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . $ 7,055,827 $3,275,816
Gas plant operating and marketing
revenues . . . . . . . . . . . . . . . . . . . . . . . . . 3,154,341 -
Interest income . . . . . . . . . . . . . . . . . . . . . . . 20,918 5,478
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,716 13,103
----------- ----------
10,244,802 3,294,397
----------- ----------
COSTS AND EXPENSES:
Production costs . . . . . . . . . . . . . . . . . . . . . . 2,522,927 1,030,508
Gas plant operating and marketing
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,207,124 -
Dry hole, impairment and
abandonment costs . . . . . . . . . . . . . . . . . . . . . 3,719 10,480
Engineering and geological costs . . . . . . . . . . . . . . 182,016 121,100
Depletion, depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . . . 2,442,862 1,324,095
General and administrative expenses . . . . . . . . . . . . . 1,216,048 986,363
Interest expense . . . . . . . . . . . . . . . . . . . . . . 2,237,690 303,723
Loss on partnership dissolution . . . . . . . . . . . . . . . - 203,000
----------- ----------
10,812,386 3,979,269
----------- ----------
Loss before provision for income
taxes and extraordinary item . . . . . . . . . . . . . . . (567,584) (684,872)
Provision for income taxes . . . . . . . . . . . . . . . . . - -
----------- ----------
Loss before extraordinary item . . . . . . . . . . . . . . . (567,584) (684,872)
EXTRAORDINARY ITEM:
Loss on early extinguishment of
debt . . . . . . . . . . . . . . . . . . . . . . . . . . . - (122,193)
----------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . (567,584) (807,065)
Dividends on preferred stock . . . . . . . . . . . . . . . . . (670,842) (140,000)
Accretion on Redeemable Preferred
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (164,991) -
----------- ----------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . $(1,403,417) $ (947,065)
=========== ==========
NET LOSS PER COMMON SHARE
BEFORE EXTRAORDINARY ITEM . . . . . . . . . . . . . . . . . $ (0.19) $ (0.14)
=========== ==========
NET LOSS PER COMMON SHARE
AFTER EXTRAORDINARY ITEM . . . . . . . . . . . . . . . . . . $ (0.19) $ (0.16)
=========== ==========
</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 SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
--------------------- --------------- Additional
Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
--------- -------- ------ ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994. . . . 7,192,837 $719,284 67,500 $675 $29,827,989 $(15,194,551)
Conversion of Convertible
Preferred Stock . . . . . . . . 64,100 6,410 (2,500) (25) (6,385) -
Issuance of common stock
pursuant to warrant exchange . 182,500 18,250 - - (18,250) -
Issuance of common stock. . . . . 75,000 7,500 - - 245,625 -
Issuance of common stock and
warrants pursuant to
preferred stock dividends . . . 16,770 1,677 - - 152,563 -
Preferred stock dividends . . . . - - - - (670,842) -
Accretion on Series D Preferred
Stock . . . . . . . . . . . . . - - - - (164,991) -
Net loss for the six
months ended June 30, 1995. . . - - - - - (567,584)
--------- ------- ------ --- ---------- -----------
Balance, June 30, 1995. . . . . . 7,531,207 $753,121 65,000 $650 $29,365,709 $(15,762,135)
========= ======= ====== === ========== ===========
</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 SIX MONTHS ENDED
JUNE 30, 1995 AND 1994
(UNAUDITED)
-------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1995 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (567,584) $ (807,065)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depletion, depreciation and amortization . . . . . . . . . . . . . . . 2,442,862 1,324,095
Dry hole, impairment and abandonment
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,719 10,480
Amortization of deferred charges . . . . . . . . . . . . . . . . . . . 225,012 -
Gain on sale of property and equipment . . . . . . . . . . . . . . . . - (2,626)
Engineering and geological costs . . . . . . . . . . . . . . . . . . . . . . 182,016 121,100
Loss on partnership dissolution . . . . . . . . . . . . . . . . . . . . . . - 203,000
Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . - 122,193
--------- ----------
2,286,025 971,177
Changes in working capital, net of effects
of non-cash transactions . . . . . . . . . . . . . . . . . . . . . . . . (926,730) (433,508)
--------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . 1,359,295 537,669
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Engineering and geological costs . . . . . . . . . . . . . . . . . . . . . (182,016) (121,100)
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . - 2,626
Acquisitions of oil and gas properties . . . . . . . . . . . . . . . . . . - (42,113,358)
Other additions to property and equipment . . . . . . . . . . . . . . . . . (515,201) (1,127,505)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,719) (10,480)
--------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (700,936) (43,369,817)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge loan . . . . . . . . . . . . . . . . . . . . . . . . . - 5,000,000
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . - 29,283,681
Proceeds from issuance of Series D
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10,000,000
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . - 3,353,467
Repayment of bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . (60,000) (3,577,873)
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . (91,767) (496,638)
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . (135,000) (70,000)
Decrease in other liabilities . . . . . . . . . . . . . . . . . . . . . . . (16,321) (407,315)
--------- ----------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (303,088) 43,085,322
--------- ----------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 355,271 253,174
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 899,198 2,161,512
--------- ----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,254,469 $ 2,414,686
========= ==========
</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 SIX MONTHS ENDED JUNE 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 $1,176,000
and $147,000 during the six months ended June 30, 1995 and 1994, respectively.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING
ACTIVITIES - SIX MONTHS ENDED JUNE 30, 1995
During the six months ended June 30, 1995, the Company paid "in-kind"
dividends on its Series D Preferred Stock consisting of $476,000 in
newly-issued Series D Preferred Stock (4,759 shares). The Company also paid
dividends on its Convertible Series E Preferred Stock consisting of 16,770 in
newly-issued unregistered shares of the Company's common stock which were
valued at $60,000. In addition, the Company incurred an accretion charge of
$165,000 on its Series D Preferred Stock during the period. These dividend
payments and accretion are not reflected in financing activities.
Pursuant to the terms of its bridge loan facility, the Company issued
to its secured lender 75,000 shares of its common stock, which was ascribed a
value of $253,000 and recorded to deferred financing costs.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING ACTIVITIES
- SIX MONTHS ENDED JUNE 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. The charges for the dissolution and debt
extinguishment are not reflected in investing or financing activities.
As of June 30, 1994, the Company had declared dividends totaling
$140,000 on its Series A, B and C Convertible Preferred Stock, $70,000 of which
were accrued and unpaid and 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
-7-
<PAGE> 10
purchase 1,000,000 shares of the Company's common stock at $5.00 per share 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.
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 at $4.75 per share 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.
As of June 30, 1994, the Company had accrued but unpaid acquisition
costs of $167,000 and financing costs of $670,000 in connection with the above
referenced purchase of assets, $122,000 in developmental drilling costs and
$163,000 in other deferred financing costs. The additions to property and
equipment and deferred financing costs resulting from these transactions are
not reflected in investing and financing activities.
The above transactions resulted in non-cash net additions to property
and equipment totaling $4,099,000 for the six months ended June 30, 1994.
The accompanying notes are an integral part
of these consolidated financial statements.
-8-
<PAGE> 11
HARCOR ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(1) Summary of Significant Accounting Policies
Principles of Consolidation -
The accompanying consolidated financial statements for the six months
ended June 30, 1994 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").
The accompanying consolidated financial statements for the six months
ended June 30, 1995 include the accounts and results of HarCor, Warrior and
HTACI; HarCor's direct working interests in the South Texas Properties; and
HarCor's interest in the Bakersfield Properties; (collectively, the "Company"
or "HarCor" unless the context specifies otherwise).
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 June 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 intends to adopt during 1995 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 is currently evaluating what impact, if any, SFAS 121 may have.
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 7,324,000 and
5,752,000 for the three months ended June 30, 1995 and 1994, respectively, and
7,275,000 and 5,744,000 for the six months ended June 30, 1995 and 1994,
respectively.
Prior Year Reclassification -
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(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 six months ended June 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):
<TABLE>
<S> <C>
Total revenues . . . . . . . . . . . . . . . . $ 9,643
=======
Net loss attributable to common stockholders . $(1,097)
=======
Net loss per common share . . . . . . . . . . $ (0.15)
=======
</TABLE>
-10-
<PAGE> 13
(3) Subordinated Bridge Loan
In connection with the acquisition of the Bakersfield Properties, 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.
As a further condition to the Bridge Loan, the Company was required to
issue to ING Capital shares of its common stock on certain dates following
January 1, 1995 if the Bridge Loan had not been paid by in full by that date.
Pursuant to this requirement, the Company has issued 75,000 shares of its
common stock to ING Capital as of June 30, 1995.
In July 1995, the Company refinanced the Bridge Loan with proceeds
from a long-term refinancing of its debt. (See Note 7.)
(4) Long-Term Debt
Effective upon the closing of the acquisition of the Bakersfield
Properties, 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. There was $34.3 million outstanding under this credit facility at June
30, 1995.
In July 1995, the Company repaid the total $34.3 million outstanding
under the Amended Credit Agreement with proceeds resulting from a long-term
refinancing of its debt. Deferred financing costs of approximately $1.5
million will be charged to expense as an extraordinary item in the third
quarter of 1995. (See Note 7.)
(5) Commitments and Contingencies -
Risk Management and Hedging Activities
The Company has a contract with an affiliate of ING Capital 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 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.
-11-
<PAGE> 14
The Company has entered into another contract with the referenced ING
affiliate 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 has a gas sales contract with Washington Energy Marketing,
Inc. ("WEM"), a subsidiary of Cabot Oil and Gas Corporation, under which the
Company receives approximately $1.80 per one million British thermal units,
which is the heat required to raise the temperature of a one-pound mass of
water from 58.5 to 59.5 degrees fahrenheit ("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.
Beginning in January 1995, Cabot has not paid the $1.80 per MMBtu
price for volumes of gas delivered pursuant to the gas sales contract, but
rather has paid the spot market price for such gas because Cabot claims that,
as a result of the dissolution of STLP, the gas sales contract was cancelled
effective December 31, 1994. In March 1995, the Company filed a lawsuit
against Cabot to enforce the terms of the gas sales contract because the
Company believes that such contract was assigned to the Company as part of the
dissolution of STLP and, therefore, is still in effect. Although the Company
believes that it will recover the amounts owed by Cabot and the court will
enforce the terms of the gas sales contract, the Company cannot predict the
outcome of such lawsuit.
Pursuant to the terms of its credit facility, the Company entered into
a hedging contract covering 75% of its projected proved developed producing oil
production from the Bakersfield Properties until June 30, 1997 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 index price (the NYMEX price for
light, sweet crude oil) 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
entered into a gas sales contract covering the gas production from the
Bakersfield Properties pursuant to which the Company will receive (i) $1.985
per MMBtu for the delivery of 3,750 MMBtu of gas per day from October 1, 1994
to September 30, 1995; (ii) $2.0297 per MMBtu for the delivery of 3,000 MMBtu
of gas per day from October 1, 1995 to September 30, 1996 and (iii) $2.0753 per
MMBtu for the delivery of 2,500 MMBtu of gas per day from October 1, 1996 to
September 30, 1997.
-12-
<PAGE> 15
The Company has entered into a firm gas sales contract for 3,750
MMBtu/day delivered into the SoCal Pipeline System. The term of the contract
is one year, commencing December 1, 1994 and ending 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.
(6) 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 through June 30,
1995, and the Company recorded $253,000 of deferred financing costs.
In April 1995, holders of 2,500 shares of Series B Preferred Stock
converted their shares into 64,100 common shares of the Company.
Preferred Stock Dividends -
The Company has paid dividends on preferred stocks for the six-month
periods ended June 30, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
Preferred Stock 1995 1994
--------------- -------- --------
<S> <C> <C>
8% Convertible (Series A, B, C). . . $135,000 $140,000
9% Redeemable Series D . . . . . . . 475,842 -
4%/9% Convertible Series E . . . . . 60,000 -
-------- --------
$670,842 $140,000
======== ========
</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 were paid, at the option
of the Company, in additional shares of Series D Preferred Stock which included
detachable warrants to purchase 102,369 shares of the Company's common stock.
In addition to the initial issuance of 2,305,263 detachable warrants
to the holders of the Series D Preferred Stock ("Series D Holders") in June
1994 and the warrants issued pursuant to Series D dividends as described above,
the Company has issued 1,017,034
-13-
<PAGE> 16
detachable warrants related to certain dilution adjustments pursuant to the
terms of the Series D Preferred Stock. These dilution adjustments also
resulted in a decrease in the exercise price of all of the warrants issued to
the Series D Holders from an initial exercise price of $4.75 per share to $3.67
per share of common stock effective June 30, 1995. The Series D Preferred
Stock has subsequently been redeemed and the related warrants have been
exchanged for common stock. (See Note 7.)
Dividends on the Series E Preferred Stock were paid, at the option of
the Company, in 16,770 shares of common stock of the Company in lieu of cash.
The coupon rate on the Series E increases from 4% per annum to 9% per annum
effective July 1, 1995.
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 a refinancing of the Company's debt
(see Note 7), the Company and the Series D Holders entered into an agreement
pursuant to which the Series D Holders 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.
(7) Subsequent Event - 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.
-14-
<PAGE> 17
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 $10.9 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 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.
-15-
<PAGE> 18
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 (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
-16-
<PAGE> 19
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 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.
-17-
<PAGE> 20
Pro Forma Financial Statements -
The following unaudited pro forma financial statements 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, (ii) the acquisition of the Carried
Interests Wells and (iii) the write-off of deferred financing costs as a result
of the early extinguishment of debt and the recording of estimated transaction
costs relating to the Units.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet reflects
such adjustments as if such transactions had occurred at June 30, 1995 and the
Unaudited Pro Forma Condensed Consolidated Statements of Operations reflect
such adjustments as if such transactions had occurred on January 1, 1995. The
unaudited pro forma financial statements should be read in conjunction with the
notes thereto.
The unaudited pro forma financial statements do 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.)
-18-
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
<TABLE>
<CAPTION>
Pro Forma
-----------------------------
Historical Adjustments Adjusted
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
Current Assets . . . . . . . . . . . . . . . . . . . . . $ 3,530 $ 8,976 (I) $ 12,506
Property and equipment, net . . . . . . . . . . . . . . . 59,726 2,337 (A) 62,063
Other assets . . . . . . . . . . . . . . . . . . . . . . 3,512 2,053 (B) 5,565
-------- -------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 66,768 $ 13,366 $ 80,134
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities . . . . . . . . . . . . . . . . . . . $ 4,067 $ - $ 4,067
Long-term debt . . . . . . . . . . . . . . . . . . . . . 39,340 (39,340)(C) -
Senior Notes . . . . . . . . . . . . . . . . . . . . . . - 62,989 (D) 62,989
Other liabilities . . . . . . . . . . . . . . . . . . . . 55 - 55
Series D Preferred Stock . . . . . . . . . . . . . . . . 8,949 (8,949)(E) -
Stockholders' Equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . 1 - 1
Common stock . . . . . . . . . . . . . . . . . . . . . 753 110 (F) 863
Additional paid-in capital . . . . . . . . . . . . . . 29,365 83 (E,F) 29,448
Accumulated deficit . . . . . . . . . . . . . . . . . . (15,762) (1,527)(B) (17,289)
-------- -------- --------
Total stockholders' equity . . . . . . . . . . . . . 14,357 (1,334) 13,023
-------- -------- --------
Total liabilities and
stockholders' equity . . . . . . . . . . . . . . . . $ 66,768 $ 13,366 $ 80,134
======== ======== ========
</TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
Pro Forma
------------------------------------------
Adjustments
------------------------
Carried Note
Historical Interests(G) Offering Adjusted
---------- ------------ -------- --------
<S> <C> <C> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . . $10,245 $1,281 $ - $11,526
------- ------ ------- -------
Costs and expenses:
Operating and exploration costs . . . . . . . . . 4,916 194 - 5,110
Depletion, depreciation and
amortization . . . . . . . . . . . . . . . . . 2,443 445 - 2,888
General and administrative
expenses . . . . . . . . . . . . . . . . . . . 1,216 - - 1,216
Interest expense . . . . . . . . . . . . . . . . 2,237 - 3,081(H) 5,318
------- ------ ------- -------
Total costs and expenses . . . . . . . . . . . 10,812 639 3,081 14,532
------- ------ ------- -------
Loss from continuing operations . . . . . . . . . $ (567) $ 642 $(3,081) $(3,006)
======= ====== ======= =======
Loss applicable to common
shareholders . . . . . . . . . . . . . . . . . $(1,403) $(2,298)
======= =======
Loss from continuing operations
per share applicable to common
shareholders . . . . . . . . . . . . . . . . . . $ (0.19) $ (0.27)(F)
======= =======
Primary shares outstanding . . . . . . . . . . . . 7,275 8,631 (F)
======= =======
</TABLE>
All amounts in the tables above are in thousands except per share data.
See accompanying notes to pro forma financial statements.
-19-
<PAGE> 22
Pro forma adjustments to the Unaudited Pro Forma Condensed
Consolidated Financial Statements included herein are as follows (dollar
amounts are in thousands):
(A) Acquisition of the Carried Interests Wells.
(B) Increase in deferred financing costs estimated at $3,580
associated with the issuance of the Units and the write-off of
$1,527 of deferred financing costs resulting from the early
extinguishment of the Amended Credit Agreement.
(C) Repayment of outstanding borrowings under the Amended Credit
Agreement and the Bridge Loan.
(D) Issuance of the Notes in the principal face amount of $65,000
less an original issue discount of $352 and value ascribed to
the warrants of $1,659.
(E) Redemption of $10,995 (face value) Series D Preferred Stock.
The difference between the recorded value of $8,949 at June 30,
1995 and the face value represents the value ascribed to
warrants issued to the Series D Holders which was being accreted
to additional paid-in capital over the life of the Series D
Preferred Stock. Accordingly, at redemption, the difference of
$2,046 is recorded as a charge to additional paid-in capital.
The adjustment also includes the value ascribed to all of the
warrants issued in connection with the Note Offering in the
amount of $2,239 as an increase to additional paid-in capital.
(F) 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 noted above 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. Primary shares outstanding reflects the impact of
a transaction subsequent to June 30, 1995, whereby existing
holders of warrants to purchase the Company's common shares
exchanged those warrants for common shares. The pro forma
increase in primary shares outstanding as a result of these
transactions is 1,100,000.
(G) Revenues and expenses resulting from the acquisition of the
Carried Interests Wells.
(H) Changes in interest expense associated with (i) the inclusion of
$5,234 in interest, discount amortization and amortization of
deferred financing costs associated with the Notes for the six
months ended June 30, 1995, and (ii) the elimination of $2,153
in interest expense and deferred financing costs for the six
months ended June 30, 1995, related to the Amended Credit
Agreement and the Bridge Loan.
(I) Pro forma net effects of these transactions on cash and cash
equivalents in the Pro Forma Balance Sheet are as follows:
<TABLE>
<S> <C>
Issuance of the Units . . . . . . . . . . . . . . . . . . . . . . . $64,648
Estimated Transaction Costs . . . . . . . . . . . . . . . . . . . . (3,000)
Retirement of Amended Credit Agreement . . . . . . . . . . . . . . (34,340)
Retirement of Bridge Loan . . . . . . . . . . . . . . . . . . . . . (5,000)
Redemption of Series D Preferred Stock . . . . . . . . . . . . . . (10,995)
Purchase of Carried Interests Wells . . . . . . . . . . . . . . . . (2,337)
-------
$ 8,976
=======
</TABLE>
-20-
<PAGE> 23
The Company intends to use the balance of the cash remaining from this
offering to finance its pro rata share of the development of the Bakersfield
Properties over the next six months. Projected results from this development
are not included in these pro forma financial statements as the success or
outcome of such development activities cannot be determined at this time.
Further, no investment income on cash balances has been assumed.
-21-
<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------
All dollar amounts referenced in this Item 2 have been rounded to the
nearest thousand.
COMPARISON OF RESULTS FOR THE THREE MONTHS
ENDED JUNE 30, 1995 AND 1994
ACQUISITION - Included in results of operations for the second quarter
of 1995 are the results of operations from the Bakersfield Properties, which
were acquired on June 30, 1994.
REVENUES - The Company's total revenues increased $3,112,000 (189%)
from $1,649,000 in second quarter 1994 to $4,761,000 in the current period.
The Company's oil and gas revenues increased $1,733,000 (106%) from
$1,640,000 in the second quarter of 1994 to $3,373,000 in the current period.
Oil revenues increased $1,002,000 (139%) from $722,000 in second quarter 1994
to $1,724,000 in the current period due to higher oil production. The
Company's oil production increased 56,200 barrels (123%) from 45,800 barrels in
the second quarter of 1994 to 102,000 barrels in the current period. The
increased production was a result of the acquisition of the Bakersfield
Properties, which produced 59,000 barrels during the second quarter of 1995.
Oil production from the Company's other properties remained relatively
unchanged in the aggregate between the periods. The average price received for
oil was $16.91 per barrel during second quarter 1995 compared to $15.77 per
barrel for the same period in 1994.
The Company's gas revenues increased $731,000 (80%) from $917,000 in
the second quarter of 1994 to $1,648,000 in the current period, despite a
significant drop in gas prices, due to increased production. Gas production
increased 661,000 thousand cubic fee ("Mcf") (161%) from 438,000 Mcf in second
quarter 1994 to 1,099,000 Mcf in second quarter 1995. The Bakersfield
Properties contributed an increase of 636,000 Mcf during the current period.
Gas production from the Company's other properties increased slightly (25,000
Mcf) in the aggregate during the current period. Average prices received for
gas were $1.50 per Mcf in second quarter 1995 as compared to $2.09 per Mcf in
the second quarter of 1994, representing a decrease of $.59 per Mcf (28%).
During the second quarter of 1995, the Company realized revenues of
$1,369,000 from its share of the operations of the natural gas processing plant
acquired as part of the Bakersfield Properties. These revenues consisted of
$518,000 in the resale of natural gas purchased from third parties, $820,000 in
the sale of processed natural gas liquids, including the sale of natural gas
liquids extracted from the natural gas purchased from third parties and $31,000
in gas processing fees.
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<PAGE> 25
COSTS AND EXPENSES - Total costs and expenses increased $3,068,000
(167%) from $1,840,000 in second quarter 1994 to $4,908,000 in the current
period.
The Company's production costs increased $775,000 (159%) from $488,000
in the second quarter of 1994 to $1,263,000 in the current period. This was
primarily due to the acquisition of the Bakersfield Properties, which accounted
for $686,000 of the production costs incurred during the second quarter of
1995. Production costs on the Company's other properties increased $89,000 in
the aggregate during the current quarter.
During the second quarter of 1995, the Company incurred costs of
$797,000 resulting from the operations of a natural gas processing plant
acquired with the Bakersfield Properties. These costs included $457,000 from
the purchase of natural gas for processing and resale and $340,000 of direct
operating expenses.
The Company incurred engineering and geological expenses of $93,000
and $37,000 during the quarters ended June 30, 1995 and 1994, respectively.
The increase in the current period was 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's depletion, depreciation and amortization ("DD&A")
expense increased $405,000 (59%) from $691,000 in second quarter 1994 to
$1,096,000 in the current quarter of 1995 as a result of a substantial increase
in acquisition and development costs related to the Bakersfield Property
acquisition. The DD&A rate for oil and gas reserves was $3.88 per barrel of
oil equivalent ("BOE") in the current period as compared to $5.43 per BOE
during second quarter 1994. Further affecting the increase in overall DD&A
expense was depreciation expense of $80,000 relating to the natural gas
processing plant acquired as part of the Bakersfield Properties.
The Company's general and administrative expenses increased $69,000
(22%) from $450,000 in the second quarter of 1994 to $550,000 in the current
period due to the Company's recent expansion and increased activities.
The Company's interest expense increased $944,000 from $164,000 in
second quarter 1994 to $1,108,000 in the current quarter as a result of the
increased bank debt incurred in the financing of the Bakersfield Properties in
June 1994. The Company's bank debt outstanding increased from $8,847,000
during the second quarter of 1994 to $39,340,000 during the current period as a
result of that transaction. Also increasing interest expense in the current
period was $108,000 in amortization of deferred financing costs resulting from
the various financings effected in the Bakersfield Property acquisition.
Total dividends on preferred stock were $336,000 in the second quarter
of 1995 as compared to $70,000 in the second quarter of 1994. The increase in
dividends was a result of the issuance of additional preferred stock as part of
the financing for the
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<PAGE> 26
acquisition of the Bakersfield Properties. Dividends in second quarter 1995
consisted of $65,000 in cash, $241,000 in Series D Preferred Stock and $30,000
in common stock of the Company. The Company also incurred a non-cash charge of
$84,000 attributable to accretion on its Series D Preferred Stock in the
current period.
NET LOSS - The Company's net operating loss for second quarter 1995
was $147,000, while net loss attributable to common stockholders was $567,000
($.08 per share) after preferred dividends and accretion on preferred stock.
In second quarter 1994, the Company had a net loss of $191,000 after an
extraordinary item of $122,000 and net loss to common shareholders of $261,000
($.05 per share) after preferred dividends.
COMPARISON OF RESULTS FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1994
REVENUES - The Company's total revenues increased $6,951,000 (211%)
from $3,294,000 in the first half of 1994 to $10,245,000 in the first half of
1995.
The Company's oil and gas revenues increased $3,780,000 (115%) from
$3,276,000 for the first half of 1994 to $7,056,000 for the first half of 1995.
Oil revenues increased $2,134,000 (153%), due to an increase in oil production
volumes of 120,600 barrels (130%), from 92,900 barrels in the first half of
1994 to 213,500 barrels in the current period. The increased production was a
result of the acquisition of the Bakersfield Properties, which produced 130,800
barrels of oil during the first half of 1995. Oil production from the
Company's other properties decreased 10,200 barrels (11%) in the aggregate due
to normal production declines. The average price received for oil was $14.97
per barrel during the first six months of 1994 compared to $16.51 per barrel in
the current period, representing an increase of $1.54 per barrel (10%).
The Company's gas revenues increased $1,646,000 (87%) from $1,885,000
in the first half of 1994 to $3,531,000 in the current period due to increased
production. Gas production increased 1,260,000 Mcf (126%) from 997,000 Mcf in
first half 1994 to 2,257,000 Mcf in first half 1995. The Bakersfield
Properties contributed 1,364,000 Mcf of the production increase during the
current period. Gas production from the Company's other properties decreased
104,000 Mcf in the aggregate during the current period due to normal production
declines. The average price received for gas was $1.56 per Mcf during the
current period as compared to $1.89 per Mcf during the first six months of
1994, representing a decrease of $.33 per Mcf (17%).
During the first half of 1995, the Company realized revenues of
$3,154,000 from its share of the operations of the natural gas processing plant
acquired as part of the Bakersfield Properties. These revenues consisted of
$1,657,000 in the resale of natural gas purchased from third parties,
$1,442,000 in the sale of processed natural gas liquids, including the sale of
natural gas liquids extracted from the natural gas purchased from third
parties, and $55,000 in gas processing fees.
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<PAGE> 27
Interest and other income increased from $19,000 for the first half of
1994 to $35,000 in the first half of 1995 due principally to higher average
cash balances during the current period.
COSTS AND EXPENSES - Total costs and expenses increased $6,833,000
(172%) from $3,979,000 in 1994 to $10,812,000 in 1995.
The Company's production costs increased $1,492,000 (145%) from
$1,031,000 in the first half of 1994 to $2,523,000 in the first half of 1995.
This was primarily due to the acquisition of the Bakersfield Properties, which
accounted for $1,317,000 of production costs incurred in the first half of
1995. Production costs on the Company's other properties increased $175,000 in
the aggregate during the current period.
During the first half of 1995, the Company incurred costs of
$2,207,000 resulting from the operations of a natural gas processing plant
acquired with the acquisition of the Bakersfield Properties. These costs
included $1,414,000 for the purchase of natural gas for processing and resale
and $793,000 of direct operating expenses.
The Company incurred incidental abandonment costs on older
non-productive leases of $4,000 in the current period as compared to $10,000
during the first half of 1994. Engineering and geological expenses increased
$61,000 (50%) from $121,000 in the first half of 1994 to $182,000 in the first
half 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's DD&A expense increased $1,119,000 (84%) from $1,324,000
in 1994 to $2,443,000 in 1995 as 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 $3.84 per BOE in the
current period as compared to $5.11 during the first half of 1994. Further
affecting the increase in overall DD&A expense was $155,000 in depreciation
expense relating to the natural gas processing plant acquired as part of the
Bakersfield Properties.
The Company's general and administrative expenses increased $230,000
(23%) from $986,000 for the first half of 1994 to $1,216,000 in the first half
of 1995. Increases in G&A were a result of the additional personnel and
outside professional services resulting from the Company's increased
acquisition and financing activities.
The Company's interest expense increased $1,934,000 from $304,000 in
the first half of 1994 to $2,238,000 in the first half of 1995 as a result of
the increased bank debt resulting from the financing of the Bakersfield
Properties in June 1994. Also increasing interest expense in the current
period was $225,000 in amortization of deferred financing costs resulting from
the various financings effected in the Bakersfield Property acquisition. In
addition, interest rates were higher during the current period as compared to
the first half of 1994.
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<PAGE> 28
The Company recorded a charge of $203,000 in the first half of 1994
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. Also in connection with the dissolution of STLP, 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.
Dividends on preferred stock were $140,000 in the first six months of
1994 as compared to $671,000 in the first six months of 1995. The increase in
dividends was a result of the issuance of additional preferred stock as part of
the financing for the acquisition of the Bakersfield Properties. Dividends in
the first half of 1995 consisted of $135,000 in cash, $476,000 in Series D
Preferred Stock and $60,000 in common stock of the Company. The Company also
incurred a non-cash charge of $165,000 attributable to accretion on its Series
D Preferred Stock in the current period.
NET LOSS - The Company's net operating loss for first half 1995 was
$568,000, while net loss attributable to common stockholders was $1,403,000
($.19 per share) after preferred dividends and accretion on preferred stock.
In first half 1994, the Company had a net loss of $807,000 after an
extraordinary item of $122,000 and net loss to common shareholders of $947,000
($.16 per share) after preferred dividends.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL - The Company had a net working capital deficiency of
$537,000 with a current ratio of 0.9:1 at June 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. Included in current liabilities at June 30, 1995 was
approximately $650,000 of accrued costs related to the Company's Note Offering,
which were subsequently paid with proceeds from the Note Offering in July 1995.
At December 31, 1994, current liabilities included the $5,000,000 Bridge Loan
and $2,511,000 current maturities under the 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 - Net cash provided by operating activities was
$1,359,000 during the first six months of 1995 as compared to $538,000 of cash
used in operations during the first half of 1994.
During the first half of 1995, net cash flow was $2,286,000 after
adjusting net loss of $568,000 for the non-cash items consisting of DD&A
($2,443,000) and amortization of deferred charges ($225,000) and non-operating
charges of $186,000 relating to engineering, geological and abandonment costs.
Cash flow from operating activities for the first half of 1995 was also
impacted by decreases in accounts receivable and prepaids of $1,900,000 and
decreases in current liabilities of $2,827,000. In the first six
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<PAGE> 29
months of 1994, cash flow from operations after non-cash adjustments was
$971,000.
The improvement in the current six-month period was primarily a result
of substantially increased oil and gas revenues resulting from the Bakersfield
Property acquisition in June 1994. Revenues from these properties were further
enhanced subsequent to acquisition as a result of developmental drilling
activities in the latter half of 1994. The Company expects further improvement
in operating cash flows in future periods as a result of its planned drilling
and development program. (See "CURRENT AND FUTURE OUTLOOK.")
INVESTING ACTIVITIES - Net cash used in investing activities was
$701,000 during the first half of 1995 as compared to a net of $43,370,000 in
the first half of 1994. In the current period, the Company spent $515,000 on
lease and well development work and $186,000 on engineering activities and
abandonment costs.
In the first six months of 1994, the Company used cash of
approximately $42,113,000 in the purchase of the Bakersfield Properties. The
Company also used approximately $1,128,000 to fund development drilling and
enhancement activities, primarily on the South Texas Properties. An additional
aggregate amount of $129,000 was spent on engineering and geological and other
activities.
FINANCING ACTIVITIES - The Company expended $303,000 on financing
activities during the first six months of 1995 as compared to $43,085,000
realized from financing activities during the first six months of 1994.
During the current period, the Company repaid $60,000 on its credit
facility, paid $135,000 in cash dividends on preferred stock and $108,000 on
other financing activities. The Company elected to pay the dividends on the
Series D Preferred Stock in shares of Series D Preferred Stock with detachable
warrants to purchase common stock, and paid dividends on the Series E Preferred
Stock in common stock during 1994. The aggregate amount of these non-cash
dividends was $536,000.
LONG-TERM DEBT - At June 30, 1995, the Company's Amended Credit
Agreement with ING Capital provided for a total commitment of $34.4 million.
The Company had $34.3 million outstanding under this facility at June 30, 1995.
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. The principal balance outstanding under the Amended Credit Agreement
was payable in 22 quarterly installments commencing December 31, 1995, with
maturity at March 31, 2001. Pursuant to the terms of the Amended Credit
Agreement, the Company had entered into hedging contracts with respect to
certain of its proved developed producing oil and gas production volumes
attributable to the reserves from the Bakersfield Properties for up to five
years and hedge contracts limiting the interest rate to a specified ceiling on
portions of the outstanding loan balance through 1998.
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<PAGE> 30
The Amended Credit Agreement also contained material covenants and
restrictions regarding dividends, general and administrative expense
limitations, financial ratios and changes in control. (See Note 8 of Notes to
Consolidated Financial Statements contained in Item 8 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.)
In July 1995, the Company repaid the total of $34.3 million
outstanding under the Amended Credit Agreement with proceeds from the
refinancing of its debt. (See "NOTE OFFERING," which follows.)
BRIDGE LOAN - The Company had outstanding at June 30, 1995 a $5
million bridge loan facility obtained from ING Capital in connection with the
acquisition of the Bakersfield Properties. Outstanding advances under the
bridge loan facility bore interest at a floating rate of, at the Company's
option, prime plus 3.5% or LIBOR plus 5.5% per annum from February 1, 1995 to
July 1, 1995. The bridge loan facility contained substantially the same
restrictive covenants as the Company's Amended Credit Agreement. The Company
repaid the Bridge Loan in July 1995 with proceeds from the Note Offering.
SERIES D PREFERRED STOCK - The Company had outstanding at June 30,
1995, 109,312 shares of its Series D Preferred Stock with an aggregate face
value of $10.9 million. In connection with the issuance of the Series D
Preferred Stock and payment of subsequent Series D Preferred Stock dividends
and dilution adjustment warrants, the Company had issued to the Series D
Holders warrants to purchase 3,424,666 shares of the Company's common stock at
an adjusted exercise price of $3.67 per share. The Series D Preferred Stock
agreement contained material voting rights, restrictions and covenants. (See
Note 9 of Notes to Consolidated Financial Statements contained in Item 8 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.)
In July 1995, the Company redeemed the total Series D Preferred Stock
outstanding with proceeds from the Note Offering. The Company and the Series D
Holders also effected an agreement whereby the Series D Holders exchanged their
total 3,424,666 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 over 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.
SENIOR SECURED NOTE OFFERING - 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.
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<PAGE> 31
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 $10.9 million in outstanding shares of Series D
Preferred Stock and (iii) acquire interests in 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 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>
The Notes were 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 the New Credit Agreement.
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 Holders (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.
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<PAGE> 32
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.
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. (See Note 7 of Notes to
Consolidated Financial Statements contained in Item 1 herein.)
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%.
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
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<PAGE> 33
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.
The New Credit Agreement contains customary default provisions,
including, but not limited to, failure to pay principal, interest or other
monetary obligations owed to the lender within two days after the due date;
default in the performance of any covenant after the expiration of any
applicable grace period; bankruptcy or insolvency; any material adverse change
in the Company's individual or consolidated financial condition or business or
operations; default on other indebtedness of the Company in excess of $250,000
and material misrepresentation by the Company. It will also be a default under
the New Credit Agreement if any change of control occurs as defined.
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.
RESULTS OF HEDGING ACTIVITIES - The Company's hedging activities for
the three- and six-month periods ended June 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.)
CURRENT AND FUTURE OUTLOOK
DEVELOPMENT DRILLING RESULTS - During the last six months of 1994, the
Company drilled and completed 14 wells (10.5 net) on the Bakersfield Properties
at a cost of approximately $4 million (net to the Company). The drilling of
these wells resulted in a 45% increase in the Company's average daily oil
production from 546 barrels per day during June 1994, the month immediately
prior to the acquisition date, to a rate of approximately 792 barrels per day
during January 1995. Similarly, during the same time period, the Company's
natural gas production increased 22% from 7.2 MMcf per day to approximately 8.8
million cubic feet ("MMcf") per day. During the first quarter of 1995, the
Company curtailed its capital expenditures and did not drill or complete any
new wells. As a result, the Company's rate of production declined in
accordance with engineering projections from 3,682 BOE per day in the fourth
quarter of 1994 to 3,168 BOE per day in the second quarter of 1995. The
curtailment occurred because the Company was capital constrained and, using
proceeds and improved liquidity resulting from the recently completed Note
Offering, the Company intends to resume its planned drilling activities for the
balance of 1995.
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<PAGE> 34
The Company expects that an additional 38 gross (28.5 net) development wells
will be drilled on such properties in 1995, at an estimated cost of $14.6
million ($10.9 million net to the Company).
CAPITAL EXPENDITURES - The Company intends to spend approximately
$53.0 million for capital expenditures to develop the proved reserves of the
Bakersfield Properties, of which $10.9 million will be spent for the remainder
of 1995, $12.4 million in 1996 and $29.7 million thereafter. An additional
$3.0 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 a portion of the net 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 the net proceeds from the sale of the Units,
together with its available cash and expected cash flows from operating
activities will be sufficient to meet its financial obligations and fund its
developmental drilling activities for the foreseeable future, provided, that
(i) there are no further significant decreases in oil and gas prices beyond
those experienced at the end of 1994, (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 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 cash dividend obligations
and development costs, or results from
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<PAGE> 35
developmental drilling are not as successful as anticipated, then the Company
will either (i) curtail its developmental drilling activities or (ii) seek
additional 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 additional
debt or equity financing, as the Company does not currently have sufficient
financial resources to effect any additional material acquisitions. There can
be no assurances that the Company will be successful in these endeavors.
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<PAGE> 36
HARCOR ENERGY, INC.
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
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<PAGE> 37
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: August 11, 1995 /s/ Francis H. Roth
-------------------------------
Francis H. Roth
President and Chief Operating
Officer
Date: August 11, 1995 /s/ Gary S. Peck
-------------------------------
Gary S. Peck
Vice President-Finance Chief
Accounting Officer
-35-
<PAGE> 38
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000315272
<NAME> Harcor Energy, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 1,254,469
<SECURITIES> 0
<RECEIVABLES> 1,978,223
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,530,453
<PP&E> 78,843,669
<DEPRECIATION> 19,117,402
<TOTAL-ASSETS> 66,768,070
<CURRENT-LIABILITIES> 4,066,980
<BONDS> 38,340,000<F1>
<COMMON> 753,121
8,949,022
650
<OTHER-SE> 13,603,754
<TOTAL-LIABILITY-AND-EQUITY> 66,768,070
<SALES> 10,210,168
<TOTAL-REVENUES> 10,244,802
<CGS> 4,730,051<F2>
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,844,645<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,402,681<F4>
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,403,417)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
<FN>
<F1>LONG-TERM SECURED DEBT
<F2>INCLUDES OIL 7 GAS PRODUCTION & GAS PLANT COSTS
<F3>INCLUDES EXPLORATION, DD&A & GGA EXPENSE
<F4>INCLUDES INTEREST EXPENSE & ACCRETION
</FN>
</TABLE>
