<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 June 30, 1996.
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 14, 1996 was 13,755,266.
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<PAGE> 2
HARCOR ENERGY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
-----------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996
(unaudited) and December 31, 1995 1
Consolidated Statements of Operations for the Three
Months Ended June 30, 1996 and 1995 (unaudited) 3
Consolidated Statements of Operations for the Six
Months Ended June 30, 1996 and 1995 (unaudited) 4
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 (unaudited) 6
Notes to Unaudited Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
</TABLE>
Part II - Other Information
---------------------------
<TABLE>
<S> <C> <C>
Item 6. Exhibits and Reports on Form 8-K 31
</TABLE>
<PAGE> 3
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
CASH AND CASH INVESTMENTS . . . . . $ 1,298,654 $ 12,204,460
ACCOUNTS RECEIVABLE . . . . . . . . 3,697,294 3,829,548
PREPAIDS AND OTHER . . . . . . . . 154,003 282,833
------------ ------------
TOTAL CURRENT ASSETS . . . . . . . 5,149,951 16,316,841
------------ ------------
PROPERTY AND EQUIPMENT, AT COST,
SUCCESSFUL EFFORTS METHOD:
UNPROVED OIL AND GAS PROPERTIES . . 5,383,566 5,039,553
PROVED OIL AND GAS PROPERTIES:
LEASEHOLD COSTS . . . . . . . . . 56,626,095 54,793,930
PLANT, LEASE AND WELL EQUIPMENT . 18,474,070 16,858,402
INTANGIBLE DEVELOPMENT COSTS . . 22,255,155 18,547,293
FURNITURE AND EQUIPMENT . . . . . . 290,539 256,211
------------ ------------
103,029,425 95,495,389
LESS - ACCUMULATED DEPLETION,
DEPRECIATION AND AMORTIZATION . . (25,992,365) (22,647,657)
------------ ------------
NET PROPERTY, PLANT AND EQUIPMENT . 77,037,060 72,847,732
------------ ------------
OTHER ASSETS 4,439,294 5,066,904
------------ ------------
$ 86,626,305 $ 94,231,477
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE> 4
HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
SHORT-TERM DEBT . . . . . . . . . . $ 311,412 $ 378,695
ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES . . . . . . . 8,210,882 14,612,813
------------ ------------
TOTAL CURRENT LIABILITIES . . . . . 8,522,294 14,991,508
------------ ------------
LONG-TERM BANK DEBT . . . . . . . . . 5,500,000 5,600,000
------------ ------------
OTHER LIABILITIES . . . . . . . . . . 16,912 316,469
------------ ------------
14-7/8% SENIOR SECURED NOTES . . . . 63,252,258 63,108,608
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE -
1,500,000 SHARES AUTHORIZED;
65,000 SHARES OUTSTANDING . . . . 650 650
COMMON STOCK, $.10 PAR VALUE -
25,000,000 SHARES AUTHORIZED;
8,696,207 AND 8,631,207 SHARES
OUTSTANDING AT JUNE 30, 1996 AND
DECEMBER 31, 1995, RESPECTIVELY . 869,621 863,121
ADDITIONAL PAID-IN CAPITAL . . . . 28,601,880 29,163,670
ACCUMULATED DEFICIT . . . . . . . . (20,137,310) (19,812,549)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY . . . . 9,334,841 10,214,892
------------ ------------
$ 86,626,305 $ 94,231,477
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE> 5
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1995
(UNAUDITED)
------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
REVENUES:
OIL AND GAS REVENUES . . . . . . . . . . $ 5,500,870 $ 3,372,518
GAS PLANT OPERATING
AND MARKETING REVENUES . . . . . . . . 1,791,131 1,369,035
INTEREST INCOME . . . . . . . . . . . . 1,410 14,085
OTHER . . . . . . . . . . . . . . . . . 75,901 5,434
------------ ------------
7,369,312 4,761,072
------------ ------------
COSTS AND EXPENSES:
PRODUCTION COSTS . . . . . . . . . . . . 1,236,960 1,263,559
GAS PLANT OPERATING
AND MARKETING COSTS . . . . . . . . . 1,030,280 796,775
ENGINEERING AND GEOLOGICAL COSTS . . . . 64,145 93,351
DEPLETION, DEPRECIATION AND
AMORTIZATION . . . . . . . . . . . . . 1,638,148 1,096,615
GENERAL AND ADMINISTRATIVE EXPENSES . . 820,929 550,148
INTEREST EXPENSE . . . . . . . . . . . . 2,675,652 1,107,694
------------ ------------
7,466,114 4,908,142
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAX . . (96,802) (147,070)
PROVISION FOR INCOME TAXES . . . . . . . . - -
------------ ------------
NET OPERATING LOSS . . . . . . . . . . . (96,802) (147,070)
DIVIDENDS ON PREFERRED STOCK . . . . . . . (132,500) (335,600)
ACCRETION ON REDEEMABLE
PREFERRED STOCK . . . . . . . . . . . . - (84,005)
------------ ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS . . . . . . . . . . . . . . $ (229,302) $ (566,675)
============ ============
NET LOSS PER COMMON SHARE . . . . . . . . $ (0.03) $ (0.08)
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE> 6
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1995
(UNAUDITED)
-------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
REVENUES:
OIL AND GAS REVENUES . . . . . . . . . . $ 11,456,928 $ 7,055,827
GAS PLANT OPERATING
AND MARKETING REVENUES . . . . . . . . 3,414,916 3,154,341
INTEREST INCOME . . . . . . . . . . . . 11,720 20,918
OTHER . . . . . . . . . . . . . . . . . 82,314 13,716
------------- --------------
14,965,878 10,244,802
------------- --------------
COSTS AND EXPENSES:
PRODUCTION COSTS . . . . . . . . . . . . 2,673,689 2,522,927
GAS PLANT OPERATING
AND MARKETING COSTS . . . . . . . . . 1,986,470 2,207,124
ENGINEERING AND GEOLOGICAL COSTS . . . . 165,152 185,735
DEPLETION, DEPRECIATION AND
AMORTIZATION . . . . . . . . . . . . . 3,344,708 2,442,862
GENERAL AND ADMINISTRATIVE EXPENSES . . 1,541,724 1,216,048
INTEREST EXPENSE . . . . . . . . . . . . 5,318,193 2,237,690
OTHER . . . . . . . . . . . . . . . . . 260,703 -
------------- --------------
15,290,639 10,812,386
------------- --------------
LOSS BEFORE PROVISION FOR INCOME TAX . . (324,761) (567,584)
PROVISION FOR INCOME TAXES . . . . . . . . - -
------------- --------------
NET OPERATING LOSS . . . . . . . . . . . (324,761) (567,584)
DIVIDENDS ON PREFERRED STOCK . . . . . . . (265,000) (670,842)
ACCRETION ON REDEEMABLE
PREFERRED STOCK . . . . . . . . . . . . - (164,991)
------------- --------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS . . . . . . . . . . . . . . $ (589,761) $ (1,403,417)
============= ==============
NET LOSS PER COMMON SHARE . . . . . . . . $ (0.07) $ (0.19)
============= ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE> 7
HARCOR ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(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, 1995 65,000 $ 650 8,631,207 $ 863,121 $ 29,163,670 $ (19,812,549)
ISSUANCE OF COMMON STOCK
PURSUANT TO WARRANT EXCHANGE - - 65,000 6,500 (6,500) -
CANCELLATION OF WARRANTS - - - - (290,290) -
PREFERRED STOCK DIVIDENDS - - - - (265,000) -
NET LOSS FOR THE SIX MONTHS
ENDED JUNE 30, 1996 - - - - - (324,761)
------ -------- --------- ---------- ----------- -------------
BALANCE, JUNE 30, 1996 65,000 $ 650 8,696,207 $ 869,621 $28,601,880 $ (20,137,310)
====== ======== ========= ========== =========== =============
</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, 1996 AND 1995
(UNAUDITED)
-------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS . . . . . . . . . . . . . . . . $ (324,761) $ (567,584)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPLETION, DEPRECIATION AND
AMORTIZATION . . . . . . . . . . . . . 3,344,708 2,442,862
AMORTIZATION OF DEFERRED CHARGES . . . 481,193 225,012
ENGINEERING AND GEOLOGICAL COSTS . . . . 165,152 185,735
OTHER . . . . . . . . . . . . . . . . . 260,703 --
------------- -------------
3,926,995 2,286,025
CHANGES IN WORKING CAPITAL, NET OF
EFFECTS OF NON-CASH TRANSACTIONS . . . 203,494 (926,730)
------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES . . . . . . . . . 4,130,489 1,359,295
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
ENGINEERING AND GEOLOGICAL COSTS . . . . (165,152) (185,735)
ADDITIONS TO PROPERTY AND EQUIPMENT . . (13,797,196) (515,201)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES . (13,962,348) (700,936)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM BANK DEBT . . . . . 1,900,000 --
REPAYMENT OF BANK DEBT . . . . . . . . . (2,000,000) (60,000)
DIVIDENDS ON PREFERRED STOCK . . . . . . (265,000) (135,000)
DECREASE IN OTHER DEBT AND LIABILITIES . (366,840) (16,321)
INCREASE IN OTHER ASSETS . . . . . . . . (342,107) (91,767)
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES . . (1,073,947) (303,088)
------------- -------------
NET INCREASE (DECREASE) IN CASH . . . . (10,905,806) 355,271
CASH AT BEGINNING OF PERIOD . . . . . . 12,204,460 899,198
------------- -------------
CASH AT END OF PERIOD . . . . . . . . . $ 1,298,654 $ 1,254,469
============= =============
</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, 1996 AND 1995
(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 $4,854,000
and $1,176,000 during the six months ended June 30, 1996 and 1995,
respectively.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING
ACTIVITIES - SIX MONTHS ENDED JUNE 30, 1996
During the current period the Company entered into agreements
resulting in the issuance of 65,000 unregistered shares of its common stock in
exchange for the cancellation of options and warrants to purchase an aggregate
of 376,000 of its common shares. Additionally, a warrant to purchase 350,000
shares of the Company's common stock, which was issued in connection with a
prior financing, was returned to the Company and canceled in exchange for the
issuance of 99,750 new warrants. These activities are not reflected in
financing activities in this statement of cash flows and did not result in a
gain or loss (see Note 5).
Included in investing activities in the current period are payments of
$8,188,000 relating to drilling costs which were accrued but unpaid at December
31, 1995. At June 30, 1996, the Company had accrued capital costs aggregating
$1,925,000 which are not reflected in investing activities in this statement of
cash flows.
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 and paid dividends on its Convertible
Series E Preferred Stock consisting of $60,000 in newly-issued unregistered
shares of the Company's common stock. The Company also 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.
-7-
<PAGE> 10
Pursuant to the terms of its bridge loan facility, the Company issued
to its secured lender 75,000 shares of its common stock during the period,
which was ascribed a value of $253,000 and recorded to deferred financing
costs.
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE> 11
HARCOR ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements for the six months
ended June 30, 1995 include the accounts and results of HarCor Energy, Inc.
("HarCor") and its wholly-owned subsidiaries, Warrior, Inc. ("Warrior") and
HTAC Investments, Inc.("HTACI"); (collectively, the "Company" or "HarCor",
unless the context specifies otherwise). The accompanying consolidated
financial statements for the six months ended June 30, 1996 include the
accounts and results of HarCor, and Warrior and HTAC until those subsidiaries'
merger into HarCor (see below).
Principally all of the assets, equity, revenue and earnings of the
Company as described herein are within HarCor Energy, Inc. Separate financial
statements of Warrior and HTACI, HarCor's only direct or indirect subsidiaries,
have not been included herein because they were wholly owned and not material.
In March 1996, Warrior and HTACI were merged into HarCor, and all of their
assets became the property, and all of their liabilities and guarantees became
the obligations, of HarCor.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
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, 1995 (the "10-K").
The unaudited consolidated financial data presented herein should be read in
conjunction with the 10-K.
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<PAGE> 12
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 three-month and six-month periods
ended June 30, 1996 and 1995.
The results of operations for an interim period are not necessarily
indicative of the results to be expected for a full year.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES-
Accounts payable and accrued liabilities at June 30, 1996 and December
31, 1995 were comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Accrued development costs. . . . $ 1,925 $ 8,188
Accrued interest payable . . . . 4,544 4,217
Trade accounts payable and other 1,741 2,208
------- -------
$ 8,210 $14,613
======= =======
</TABLE>
CAPITALIZED INTEREST COSTS-
Interest costs of $344,000 for the six months ended June 30, 1996 have
been capitalized as part of the historical costs of unproved oil and gas
properties.
USE OF ESTIMATES-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements include the
estimate of proved oil and gas reserve volumes and the related present value of
estimated future net revenues therefrom.
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<PAGE> 13
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 8,696,000 and
7,324,000 for the three months ended June 30, 1996 and 1995, respectively, and
8,690,000 and 7,275,000 for the six months ended June 30, 1996 and 1995,
respectively.
(2) LONG-TERM DEBT
In July 1995, the Company repaid all amounts outstanding under its
existing credit agreement with ING Capital ("ING") with proceeds resulting from
a long-term refinancing of its debt (see Note 3) and entered into a new credit
agreement with ING (the "Credit Agreement").
Availability under the Credit Agreement is limited to a "borrowing
base" amount which is determined semi- annually by ING, at its sole discretion,
and may be established at an amount up to $15 million. The borrowing base was
$10 million at June 30, 1996, and was subsequently increased by ING to $15
million in July 1996. Availability under the Credit Agreement will terminate on
June 30, 1997 (unless renewed by ING), at which time amounts outstanding will
convert to a term loan on September 30, 1997, with a set amortization schedule
of a percentage of the outstanding principal balance continuing through
December 31, 2000. There was $5.5 million outstanding under this facility at
June 30, 1996, with an effective interest rate of 8.125% at that date. Amounts
advanced under this facility bear interest at an adjusted Eurodollar rate plus
2.50% or Prime Rate (as determined by ING) plus 1% at the Company's option.
The Company repaid the total amount outstanding under the Credit
Agreement in July 1996 with proceeds from the public offering of its common
stock. (See Note 6.)
(3) SENIOR SECURED NOTES
On July 24, 1995, the Company consummated the sale (the "Note
Offering") of 65,000 units consisting of $65 million aggregate principal amount
of its 14-7/8% Senior Notes due July 15, 2002 (the "Notes") and warrants to
purchase 1,430,000 shares of common stock at $3.85 per share. Each unit
consisted of a $1,000 principal amount Note and 22 warrants to purchase an
equal number of shares of common
-11-
<PAGE> 14
stock. The warrants became immediately detachable upon the closing of the Note
Offering.
The Company used the net proceeds of approximately $61 million from
the Note Offering (after discounts and offering expenses) to retire all
outstanding debt, redeem the Series D Preferred Stock outstanding, acquire
interests in certain oil and gas wells associated with the Bakersfield
Properties, and finance a portion of the development of the Bakersfield
Properties during the remainder of 1995.
The difference between the $65 million face value of the Notes and the
balance sheet amount recorded herein is the result of an allocation to paid-in
capital of the value ascribed to the warrants at the time of their issuance.
This amount will amortize through interest expense over the life of 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 twelve-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 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.
Pursuant to the terms of the Notes, and as a result of the Company's
public offering of common stock in July 1996 (see Note 6), the Company must
make an offer to purchase from all the holders of the Notes ("Holders") on a
date not later than the 90th day after the close of the sale of common stock 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 maximum principal amount of the Notes which could
be purchased with 50% of the amount of net proceeds received by the Company
from the sale of common stock.
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<PAGE> 15
Accordingly, on July 31, 1996, the Company sent to the Holders notice
of its offer to purchase a minimum of $10.6 million of the Notes (at 110% of
par), and up to $12.7 million (at 110% of par) of the Notes in the event the
underwriters exercise their over-allotment option on the total 960,000 shares
available.
(4) COMMITMENTS AND CONTINGENCIES
RISK MANAGEMENT AND HEDGING ACTIVITIES-
The Company manages the risk associated with fluctuations in the price
of gas, and to a lesser extent oil, primarily through certain fixed price sales
and hedging contracts. The Company's price risk management strategy reduces
the Company's sensitivity to changes in market prices of oil and gas. Upon
consummation of an acquisition, the Company will usually enter into commodity
derivative contracts (hedges) such as futures, swaps or collars or forward
contracts which cover a substantial portion of the existing production of the
acquired property. Over time, as production increases as a result of further
development, the Company may continue to utilize hedging techniques to ensure
that a portion of its production remains appropriately hedged. Gains or losses
under the hedging agreements are recognized in oil and gas production revenues
in periods in which the hedged production occurs and such agreements are
settled on a monthly basis.
As of June 30, 1996, the Company was a party to gas contracts covering
volumes of approximately 1.8 Bcf and 1.2 Bcf for 1996 and 1997, respectively,
at prices ranging from $1.68/MMBtu to $2.07/MMBtu. The Company also has a gas
contract covering 2.2 Bcf for 1996 and 2.2 Bcf for 1997 which fixes volumes to
be sold at $0.3675 less than the NYMEX gas future price for each month. The
Company was a party to oil hedges covering notional volumes of approximately
243,000, 98,000 and 29,000 barrels for 1996, 1997 and 1998, respectively, at
prices ranging from $15.80/Bbl to $18.75/Bbl.
(5) STOCKHOLDERS' EQUITY
WARRANT EXCHANGES -
During the first quarter the Company completed exchange agreements
whereby certain holders of options and warrants to purchase the Company's
common stock exchanged all or a portion of their options and warrants
outstanding for unregistered shares of common stock of the Company. Pursuant
to these exchange agreements, an option to purchase 150,000 common shares at
$4.875 per share, and warrants to purchase an aggregate of 226,000 common
shares at prices ranging from $4.75 to $5.50 per share, were exchanged and
canceled for 65,000 unregistered shares of common stock of the Company.
-13-
<PAGE> 16
Additionally, a warrant to purchase 350,000 shares of the Company's common
stock at $3.85 per share, which was issued in connection with the Note
Offering, was returned to the Company and canceled, and a warrant for 99,750
shares with the same exercise price was issued in exchange.
PREFERRED STOCK DIVIDENDS-
The Company has paid dividends on preferred stocks for the six months
ended June 30, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
-------- ---------
<S> <C> <C>
8% Convertible (Series A, B, C) . . . . . . . . $130,000 $135,000
9% Redeemable (Series D) . . . . . . . . . . . . - 475,842
9% Convertible (Series E) . . . . . . . . . . . 135,000 60,000
-------- --------
$265,000 $670,842
======== ========
</TABLE>
Dividends on 8% Series A, Series B and Series C Preferred Stock were
paid in cash for both periods presented. Dividends on 9% Series D in 1995 were
paid, at the option of the Company, in additional shares of Series D Redeemable
Preferred Stock. Dividends on the Series E Preferred Stock for 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
period. The coupon rate on the Series E increased from 4% per annum to 9% per
annum effective July 1, 1995.
(6) SUBSEQUENT EVENT - COMMON STOCK OFFERING
On July 31, 1996, the Company completed a public offering of 6,400,000
shares of Common Stock at $4.50 per share (the "Equity Offering"). The Company
sold 5,059,059 primary shares in the offering, and certain of the Company's
existing stockholders sold 1,340,941 shares. The Company realized net proceeds
of approximately $21.3 million from the Equity Offering after underwriters'
discount and before direct expenses.
The Company granted to the underwriters at the close of the Equity
Offering an option exercisable for thirty days, to purchase up to an aggregate
of 960,000 additional shares of the Company's common stock to cover over-
allotments, if any, at the original offering price of $4.50 per share, less
underwriters' discounts.
The Company immediately used $10 million of the proceeds from the
Equity Offering to repay the total outstanding under its Credit Agreement.
Pursuant to the terms of its Note Offering completed in July 1995, the Company
will use a minimum of $10.6 million to redeem
-14-
<PAGE> 17
a portion of the Notes (see Note 3). The remaining net proceeds to the Company,
along with availability under the Credit Agreement, will be used to fund its
planned 3-D seismic and exploration activities.
PRO FORMA FINANCIAL STATEMENTS -
The following unaudited pro forma financial statements are derived
from the historical financial statements of the Company as set forth herein and
are adjusted to reflect (i) the sale by the Company of 5,059,059 primary shares
of common stock at a price of $4.50 per share, less underwriters' discount,
(ii) the redemption of $10.643 million of the Company's 14-7/8% Senior Secured
Notes at a purchase price of 110% of the principal note amount at par value and
(iii) the repayment of outstanding bank debt.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet reflects
such adjustments as if such transactions had occurred at June 30, 1996 and the
Unaudited Pro Forma Condensed Consolidated Statement of Operations reflects
such adjustments as if such transactions had occurred on January 1, 1996. The
unaudited pro forma condensed financial statements should be read in
conjunction with the notes thereto.
The unaudited pro forma condensed 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. All amounts are in
thousands except per share data.
-15-
<PAGE> 18
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
----------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ------------ ---------
<S> <C> <C> <C>
ASSETS:
CURRENT ASSETS . . . . . . . $ 5,150 $ 4,643 (A) $ 9,793
PROPERTY AND EQUIPMENT, NET . . 77,037 - 77,037
OTHER ASSETS . . . . . . . . . 4,439 (598) (B) 3,841
---------- --------- ---------
TOTAL ASSETS . . . . . . . . $ 86,626 $ 4,045 $ 90,671
========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT AND OTHER LIABILITIES . $ 8,539 $ - $ 8,539
---------- --------- ---------
LONG-TERM DEBT . . . . . . . . . . 5,500 (5,500) (C) -
---------- --------- ---------
14-7/8% SENIOR NOTES . . . . . . . 63,252 (9,394) (D) 53,858
---------- --------- ---------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK . . . . . . . . 1 - 1
COMMON STOCK . . . . . . . . . 870 506 (E) 1,376
ADDITIONAL PAID-IN CAPITAL . . . 28,601 20,280 (E) 48,881
ACCUMULATED DEFICIT . . . . . . . (20,137) (1,847) (F) (21,984)
---------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY . . 9,335 18,939 28,274
---------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . $ 86,626 $ 4,045 $ 90,671
========== ========= =========
</TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
-----------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------
HISTORICAL ADJUSTMENTS ADJUSTED
------------ ------------ ---------
<S> <C> <C> <C>
TOTAL REVENUES . . . . . . . . . . . $ 14,966 $ - $ 14,966
TOTAL EXPENSES . . . . . . . . . . . 15,291 (995) (G) 14,296
---------- --------- ---------
NET OPERATING INCOME (LOSS)
BEFORE EXTRAORDINARY ITEM . . . . (325) 995 670
EXTRAORDINARY ITEM - EARLY
EXTINGUISHMENT OF DEBT . . . . . . - (1,847) (F) (1,847)
---------- --------- ---------
NET OPERATING LOSS
AFTER EXTRAORDINARY ITEM . . . . $ (325) (852) $ (1,177)
--------- ---------- ----------
NET INCOME (LOSS) PER COMMON SHARE
BEFORE EXTRAORDINARY ITEM (H) . . $ (0.07) $ $ 0.05
========== ========== ==========
NET LOSS PER COMMON SHARE
AFTER EXTRAORDINARY ITEM (H) . . . $ (0.07) $ (0.09)
========== ========== ==========
WEIGHTED AVERAGE
PRIMARY SHARES OUTSTANDING . . . . 8,690 13,755
========== ==========
</TABLE>
ALL AMOUNTS IN THE TABLES ABOVE ARE THOUSANDS EXCEPT PER SHARE DATA.
SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL STATEMENTS.
-16-
<PAGE> 19
HARCOR ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(A) The pro forma net effect of these transactions on the Company's cash
and cash equivalents are as follows:
<TABLE>
<S> <C>
Sale of common stock . . . . . . . . . . . . . . . . . $ 22,766
Underwriters' discount . . . . . . . . . . . . . . . . (1,480)
Estimated transactions costs . . . . . . . . . . . . . (500)
Redemption of Notes (at 110%) . . . . . . . . . . . . (10,643)
Repayment of amount long-term debt . . . . . . . . . . (5,500)
----------
$ 4,643
==========
</TABLE>
(B) This adjustment represents the early write-off of a portion of
deferred financing costs associated with the Notes redeemed.
(C) This adjustment represents the repayment of long-term debt outstanding
at June 30, 1996.
(D) This adjustment represents the redemption of $9,675 of Notes (at par
value), net of accelerated accretion of $281 on the Notes redeemed.
(E) These adjustments represent the sale of 5,059,059 new common shares at
$4.50 per share, less underwriters' discount and estimated
transaction costs.
(F) This adjustment represents the loss from early extinguishment of debt
resulting from the redemption of a portion of the Notes. Such amount is
comprised of $968 representing the 10% premium over par value on the
purchase price of the Notes, $598 in the write-off of deferred
financing costs and $281 of accelerated accretion on the Notes
redeemed.
(G) This adjustment represents the elimination of interest expense for the
six months ended June 30, 1996, resulting from the redemption of
$9,675 of Notes and repayment of long-term debt.
(H) Net income or loss per common share includes preferred dividends and
accretion.
-17-
<PAGE> 20
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, 1996 AND 1995
REVENUES - The Company's total revenues increased $2,608,000 (55%)
from $4,761,000 in second quarter 1995 to $7,369,000 in the current period.
The Company's oil and gas revenues increased $2,128,000 (63%) from
$3,373,000 in the second quarter of 1995 to $5,501,000 in the current period.
Oil revenues increased $728,000 (42%) from $1,725,000 in second quarter 1995 to
$2,453,000 in the current period due to higher levels of oil production and
slightly higher prices. Oil production increased 30,000 barrels (29%) from
102,000 barrels in the second quarter of 1995 to 132,000 barrels in the current
period. The increased production was a result of the continued drilling and
development of the Bakersfield Properties, which contributed an incremental
31,000 barrels during the current period as compared to the second quarter of
1995. Oil production from the Company's Permian and other properties remained
flat in the aggregate from period to period. The average price received for
oil was $18.62 per barrel during second quarter 1996 compared to $16.91 per
barrel for the same period in 1995.
The Company's gas revenues increased $1,400,000 (85%) from $1,648,000
in the second quarter of 1995 to $3,048,000 in the current period also due to
increased production and higher prices. Gas production increased 426,000 Mcf
(39%) from 1,099,000 Mcf in second quarter 1995 to 1,525,000 Mcf in second
quarter 1996 primarily due to the continued drilling and development of the
Bakersfield Properties, which contributed an incremental 359,000 Mcf during the
current period as compared to second quarter 1995. Gas production from the
Company's South Texas Properties increased 64,000 Mcf during the current period
primarily due to the drilling of an additional development well, while gas
production from the Company's Permian and other properties remained flat from
period to period. Average prices received for gas were $2.00 per Mcf in second
quarter 1996 as compared to $1.50 per Mcf in the second quarter of 1995.
During the second quarter of 1996, the Company realized revenues of
$1,791,000 from its natural gas processing plant and gas marketing activities.
These revenues consisted of $1,042,000 from the sale of
-18-
<PAGE> 21
2,516,000 gallons of processed natural gas liquids (NGLs), $704,000 from the
resale of natural gas purchased from third parties, and $45,000 in processing
fees. During the second quarter of 1995, the Company realized revenues of
$1,369,000 from the gas plant and gas marketing activities, consisting of
$518,000 in the resale of purchased natural gas, $820,000 from the sale of
2,277,000 gallons of NGLs, and $31,000 in gas processing fees. The plant's net
operating margin increased $189,000 (33%) in the current period due primarily
to increased NGLs sales as a result of higher lease gas production and
improvements in operating efficiency.
The Company realized total interest and other income of $77,000 in the
second quarter of 1996 as compared to $19,000 during the second quarter of
1995.
COSTS AND EXPENSES - Total costs and expenses increased $2,558,000
(52%) from $4,908,000 in second quarter 1995 to $7,466,000 in the current
period.
The Company's oil and gas production costs decreased slightly ($26,000
or 2%) from $1,263,000 in the second quarter of 1995 to $1,237,000 in the
current period even though production increased significantly. This was
primarily due to the continuing development of the Bakersfield Properties and
resulting operating efficiencies in that area. Production costs on the
Company's South Texas and Permian properties also decreased slightly in the
current period. The Company's total aggregate production cost per barrel of
oil equivalent ("BOE") decreased from $4.43 per BOE in second quarter 1995 to
$3.21 per BOE in the current period.
During the second quarter of 1996, the Company incurred costs of
$1,030,000 resulting from the operations of its natural gas processing plant
and gas marketing activities. These costs included $637,000 for the purchase
of natural gas for resale and $393,000 of direct operating expenses. During
the second quarter of 1995, the Company incurred costs of $797,000 from gas
plant and gas marketing activities, consisting of $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 $64,000
and $93,000 during the three months ended June 30, 1996 and 1995, respectively.
The Company's total depletion, depreciation and amortization ("DD&A")
expense increased $542,000 (49%) from $1,096,000 in second quarter 1995 to
$1,638,000 in the second quarter of 1996 as a result of increases in
depreciable costs incurred in the continued development of the Bakersfield
Properties and increased production. The DD&A rate per BOE for oil and gas
reserves was $3.87 in the
-19-
<PAGE> 22
current period as compared to $3.88 per BOE during second quarter 1995.
The Company's general and administrative expenses increased $271,000
(49%) in the current period due to the Company's continued growth and
expansion.
The Company's interest expense increased $1,568,000 from $1,108,000 in
second quarter 1995 to $2,676,000 in second quarter 1996. This was due to the
refinancing of the Company's bank debt and Redeemable Preferred Stock with
$65,000,000 in 14-7/8% Senior Secured Notes in July 1995. Also affecting
interest expense in the current period was an increase in amortization of
deferred financing costs resulting from the July 1995 Note Offering.
Dividends on preferred stock were $132,000 in the second quarter of
1996, as compared to $336,000 in the second quarter of 1995. Second quarter
1996 dividends were comprised of cash, while second quarter 1995 dividends
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 in the prior period
a non-cash charge of $84,000 attributable to accretion on its Series D
Redeemable Preferred Stock which was subsequently redeemed in July 1995.
NET LOSS - The Company's net operating loss for the three months
ended June 30, 1996 was $97,000 while net loss attributable to common
stockholders was $229,000 ($.03 per share) after preferred dividends. For the
three months ended June 30, 1995, the Company had a net operating loss of
$147,000 and net loss to common stockholders of $567,000 ($.08 per share) after
preferred dividends and accretion.
COMPARISON OF RESULTS FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995
REVENUES - The Company's total revenues increased $4,721,000 (46%)
from $10,245,000 during the first six months of 1995 to $14,966,000 in the
current period.
The Company's oil and gas revenues increased $4,401,000 (62%) from
$7,056,000 in the first six months of 1995 to $11,457,000 in the current
period. Oil revenues increased $1,669,000 (47%) from $3,525,000 in first six
months of 1995 to $5,194,000 in the current period due to higher levels of oil
production and slightly higher prices. Oil production increased 76,000 barrels
(36%) from approximately 214,000 barrels in the first six months of 1995 to
290,000 barrels in the current period. The increased production was a result
of the continued drilling and development of the Bakersfield Properties, which
contributed an incremental 79,000 barrels during the current period as compared
to 1995. Oil production from the
-20-
<PAGE> 23
Company's Permian and other properties declined slightly (3,000 barrels) in the
aggregate due to normal production declines. The average price received for
oil was $17.92 per barrel during first six months of 1996 compared to $16.51
per barrel for the same period in 1995.
The Company's gas revenues increased $2,732,000 (77%) from $3,531,000
in the first six months of 1995 to $6,263,000 in the current period also due to
higher levels of production and higher prices. Gas production increased
1,000,000 Mcf (44%) from 2,257,000 Mcf in first six months of 1995 to 3,257,000
Mcf in the first six months of 1996 primarily due to the continued drilling and
development of the Bakersfield Properties, which contributed an incremental
881,000 Mcf during the current period as compared to the same period in 1995.
Gas production from the Company's South Texas Properties increased 115,000 Mcf
during the current period primarily due to developmental work, while gas
production from the Company's Permian and other properties remained flat from
period to period. Average prices received for gas were $1.92 per Mcf in six
months 1996 as compared to $1.56 per Mcf in the first six months of 1995.
During the first half of 1996, the Company realized revenues of
$3,415,000 from its natural gas processing plant and gas marketing activities.
These revenues consisted of $2,173,000 from the sale of 5,131,000 gallons of
processed natural gas liquids (NGLs), $1,172,000 from the resale of natural gas
purchased from third parties, and $70,000 in processing fees. During the first
half of 1995, the Company realized revenues of $3,154,000 from gas plant and
gas marketing activities, consisting of $1,657,000 in the resale of natural
gas, $1,422,000 from the sale of NGLs (3,838,000 gallons), and $55,000 in gas
processing fees. Although gas plant and marketing revenues increased only
slightly in the current period ($261,000 or 8%), the plant's net operating
margin increased $481,000 (51%) due primarily to increased NGLs sales as a
result of higher lease gas production and improved operating efficiencies.
The Company realized total interest and other income of approximately
$94,000 in the first half of 1996 as compared to $35,000 during the same period
in 1995.
COSTS AND EXPENSES - Total costs and expenses increased $4,479,000
(41%) from $10,812,000 in first half of 1995 to $15,291,000 in the current
period.
The Company's oil and gas production costs increased slightly in the
aggregate ($151,000 or 6%) from $2,523,000 in the first half of 1995 to
$2,674,000 in the current period even though production increased
significantly. This was primarily due to the continuing
-21-
<PAGE> 24
development of the Bakersfield Properties and resulting operating efficiencies
in that area. Production costs on the Company's South Texas and Permian
properties also decreased slightly in the current period. The Company's total
aggregate production cost per BOE declined from $4.28 per BOE for the first six
months of 1995 to $3.72 per BOE in the current period.
During the first half of 1996, the Company incurred costs of
$1,986,000 resulting from its natural gas processing plant and gas marketing
activities. These costs included $995,000 from the purchase of natural gas for
processing and resale and $991,000 of direct operating expenses. During the
first half of 1995, the Company incurred costs of $2,207,000 in gas plant and
gas marketing activities, consisting of $1,414,000 from the purchase of natural
gas for processing and resale and $793,000 of direct operating expenses.
The Company incurred engineering and geological expenses of $165,000
and $186,000 during the six months ended June 30, 1996 and 1995, respectively.
The Company's total DD&A expense increased $902,000 (37%) from
$2,443,000 in first half of 1995 to $3,345,000 in the first half of 1996 as a
result of increases in depreciable assets due to costs incurred in the
continued development of the Bakersfield Properties and increased production.
The DD&A rate per BOE for oil and gas reserves was $3.72 in the current period
as compared to $3.84 during first half 1995.
The Company's general and administrative expenses increased $326,000
(27%) in the current period due to the Company's continued growth and
expansion.
The Company's interest expense increased $3,080,000 from $2,238,000 in
first half 1995 to $5,318,000 in first half 1996. This was due to the
refinancing of the Company's bank debt and Redeemable Preferred Stock with
$65,000,000 in 14-7/8% Senior Secured Notes in July 1995. Also affecting
interest expense in the current period was an increase in amortization of
deferred financing costs resulting from July 1995 Note Offering.
Dividends on preferred stock were $265,000 in the first half of 1996,
as compared to $671,000 in the first half of 1995. Dividends in 1996 were
comprised of cash, while 1995 dividends 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 in 1995 a non-cash charge of $165,000 attributable to
accretion on its Series D Redeemable Preferred Stock which was subsequently
redeemed in July 1995.
-22-
<PAGE> 25
NON-RECURRING CHARGE - During the current period the Company incurred
a non-cash write-off of $261,000, representing the remaining portion of a
long-term investment made in a gas marketing company which recently declared
bankruptcy.
NET LOSS - The Company's net operating loss for the six months ended
June 30, 1996 was $325,000 while net loss attributable to common stockholders
was $590,000 ($.07 per share) after preferred dividends. For the six months
ended June 30, 1995, the Company had a net operating loss of $567,000 and net
loss to common stockholders of $1,403,000 ($.19 per share) after preferred
dividends and accretion.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY - The Company's sources of working capital have primarily been
cash flows from operations and a combination of debt and equity financings as
needs for capital have arisen. During the six months ended June 30, 1996, the
Company generated net cash from operations of $4,130,000 as compared to
$1,359,000 during the same period in 1995. The Company used net proceeds of
$1,074,000 in financing activities during the current period, which consisted
of repayment of debt, dividends on preferred stock and miscellaneous financing
costs. The Company had nominal financing activities during the same period in
1995. The Company utilized $13,962,000 (which included $8,188,000 in payments
for 1995 drilling costs) for investing activities in the current period as
compared to $701,000 during the first half of 1995.
WORKING CAPITAL - The Company had a working capital deficit of
$3,372,000 with a current ratio of 0.6:1 at June 30, 1996 as compared to net
working capital of $1,325,000 and a current ratio of 1.1:1 at December 31,
1995. Included in current liabilities at June 30, 1996, was $4,370,000 in
accrued interest on the Company's 14-7/8% Senior Secured Notes. This interest
was subsequently paid on July 15, 1996, with proceeds from the Company's credit
agreement resulting in a current ratio of 1.3:1 at that date.
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 or loss to eliminate the
non-cash effects of exploration expenses, depletion, depreciation, amortization
and non-recurring charges, if applicable. 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 service and repayment and
dividend payments.
-23-
<PAGE> 26
During the six months ended June 30, 1996, the Company generated
discretionary cash flow of $3,927,000 (before changes in other working capital
of $203,000). This compares to $2,286,000 (before changes in other working
capital of $927,000) during the same period in 1995. The improvement in the
current year, in spite of significantly increased debt service, was primarily
due to increased oil and gas production resulting from the continued drilling
and development of the Bakersfield Properties. The Company had a total of 146
producing wells in this area at June 30, 1996, as compared to 96 producing
wells at June 30, 1995. As a consequence of these drilling activities and the
acquisition of certain additional interests in these properties in July 1995,
HarCor's production from the Bakersfield Properties averaged 1,593 BPD and
17,895 Mcfd for the first half of 1996, showing increases of 35% and 44%,
respectively, over first half 1995 average rates of 1,180 BPD and 12,467 Mcfd.
The Company also realized a net operating margin of $1,429,000 on its
gas plant operations and marketing activities in first half 1996 as compared to
$947,000 in first half 1995. This was primarily due to increased NGLs sales as
a result of higher lease gas production levels and increased operating
efficiencies.
The Company expects further improvement in operating cash flows in
future periods as a result of its continuing drilling and development program.
As of June 30, 1996, all of the wells drilled on the Bakersfield Properties
were completed and producing. The Company is resuming its vertical drilling and
development program in the third quarter and has also drilled its first
horizontal well on the Ellis Lease, which has averaged approximately 300 BOE
per day since its completion in June. The Company is currently evaluating the
drilling of future additional horizontal wells on this lease. See "Capital
Expenditures and Future Outlook" which follows.
FINANCING ACTIVITIES: CREDIT AGREEMENT - In July 1995, the Company
repaid all amounts outstanding under its existing credit agreement with ING
Capital ("ING") with proceeds resulting from a long-term refinancing of its
debt and entered into a new credit agreement with ING (the "Credit Agreement").
Availability under the Credit Agreement is limited to a "borrowing
base" amount which is determined semi- annually by ING, at its sole discretion,
and may be established at an amount up to $15 million. The borrowing base was
$10 million at June 30, 1996, and was subsequently increased by ING to $15
million in July 1996. Availability under the Credit Agreement will terminate on
June 30, 1997 (unless renewed by ING), at which time amounts outstanding will
convert to a term loan on September 30, 1997, with a set amortization schedule
of a percentage of the outstanding principal balance continuing through
December 31, 2000. There was $5.5 million
-24-
<PAGE> 27
outstanding under this facility at June 30, 1996, with an effective interest
rate of 8.125% at that date. Amounts advanced under this facility bear
interest at an adjusted Eurodollar rate plus 2.50% or Prime Rate (as determined
by ING) plus 1% at the Company's option. The Company repaid the total
outstanding under the Credit Agreement in July 1996 with proceeds from the
public offering of its common stock. See "Equity Offering" which follows.
The Credit Agreement contains restrictive covenants which impose
limitations on the Company and its subsidiaries 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 Credit Agreement also contains
customary default provisions.
All indebtedness of the Company under the Credit Agreement 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.
SENIOR SECURED NOTES - The Company's Senior Secured 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 thereof 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.
-25-
<PAGE> 28
All of the obligations of the Company under the Notes and related
indenture are secured by a second priority lien on substantially all of the
assets of the Company, which are also collateralized under its Credit
Agreement.
Pursuant to the terms of the Notes, and as a result of the Company's
public offering of common stock in July 1996, (see "Equity Offering" below),
the Company must make an offer to purchase from all the holders of the Notes
("Holders") on a date not later than the 90th day after the close of the 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 maximum principal amount of the Notes
which could be purchased with 50% of the amount of net proceeds received by the
Company from the Equity Offering.
Accordingly, on July 31, 1996, the Company sent to the Holders of the
Notes notice of its offer to purchase a minimum of $10.6 million of the Notes
(at 110% of par) and up to $12.7 million of the Notes (at 110% of par) in the
event the underwriters exercise their over-allotment option on the total
960,000 shares available thereunder.
The Company intends to explore other financial alternatives to redeem
additional Notes with lower-cost debt. Any such redemption would be at a price
in excess of the Notes' principal amount, but no higher than the 110% of
principal amount as provided for under the terms of the Note Offering, and
would result in an additional extraordinary loss from early extinguishment of
debt. The Company believes, however, that any such charge would be mitigated
by the benefit of future interest cost savings. There can be no assurances
that the Company will be successful in this endeavor.
EQUITY OFFERING - On July 31, 1996, the Company completed a public
offering of 6,400,000 shares of Common Stock at $4.50 per share. The Company
sold 5,059,059 primary shares in the offering, and certain of the Company's
existing stockholders sold 1,340,941 shares. The Company realized net proceeds
of approximately $21.3 million from the Equity Offering after underwriters'
discount and before direct expenses.
The Company granted to the underwriters at the close of the Equity
Offering an option exercisable for thirty days, to purchase up to an aggregate
of 960,000 additional shares of the Company's Common Stock to cover over-
allotments, if any, at the original offering price of $4.50 per share, less
underwriters' discounts.
The Company immediately used $10 million of the proceeds from the
Equity Offering to repay the total outstanding under its Credit
-26-
<PAGE> 29
Agreement. Pursuant to the terms of its Note Offering completed in July 1995,
the Company will use a minimum of $10.6 million to redeem a portion of the Notes
(see Note 3). The remaining net proceeds to the Company, along with
availability under the Credit Agrement, will be used to fund its planned 3-D
seismic, CAEX and exploration activities.
RESULTS OF HEDGING ACTIVITIES - The Company's hedging activities
during the six months ended June 30, 1996 have not had any material effect on
the Company's liquidity or results of operations. (See Note 4 of Notes to
Consolidated Financial Statements included herein.)
CAPITAL EXPENDITURES: DEVELOPMENTAL DRILLING ACTIVITIES - The Company
incurred a total of $13.9 million in drilling, development and related
expenditures during the current period, most of which were related to the
continued development of the Bakersfield Properties. Of this amount, $8.2
million related to costs incurred in 1995.
The Company anticipates that as of June 30, 1996, total additional
drilling necessary to develop the proven reserves of Bakersfield Properties
will result in approximately 166 new wells at an estimated capital cost of $52
million based on current drilling costs. Approximately $12 million is planned
to be spent during the remainder of 1996, $12 million in 1997 and $28 million
thereafter. These future development costs for the Bakersfield Properties also
include costs for a waterflood project in the Diatomite Formation on the Ellis
Lease. During July, 1996 water injection was initiated in a waterflood pilot
project area. Completion of the installation of the entire project is
anticipated by January 1, 1999.
In addition to the above, the Company drilled at the end of the second
quarter its first of two planned horizontal wells on the Ellis Lease in the
Diatomite formation to test a possible extension of the current proved area of
the field and to evaluate the use of horizontal wells to eliminate the drilling
of certain planned infill vertical wells on the Ellis Lease. The well has been
on production since June 16th, and is currently being evaluated. Production
for the first 52 days has averaged 171 BOPD and 862 Mcfd of natural gas. Based
on results of an engineering review, the second planned horizontal well will
either further test the Diatomite zone or will evaluate the applicability of
horizontal development for producing the deeper Reef Ridge Shale zones on the
Ellis Lease. If successful, additional horizontal locations may be identified
for future drilling on the Ellis Lease as well as the Company's Truman and
Tisdale Leases in areas currently outside the proven areas of these fields. 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
-27-
<PAGE> 30
successful or completed in accordance with the Company's development schedule.
The Company is also involved in two small waterflood projects on its
Permian Basin properties and has approximately $2.4 million in capital
expenditures planned in this area during the next two years.
EXPLORATION ACTIVITIES - The Company intends to continue participating
in development drilling on its South Texas Properties as these opportunities
arise. In the second half of 1995, the Company participated in a leasing
program which was undertaken in South Texas around the Company's existing
Hostetter Field for a 3-D seismic program. The 3-D seismic has been shot and
processing of data from this seismic program has commenced. If attractive
locations are identified as a result of seismic interpretation, drilling could
begin in the fourth quarter of 1996.
In furtherance of this effort and as part of the Company's strategy of
aligning itself with partners that have technological expertise, the Company
entered into an agreement with South Coast Exploration ("South Coast), a 3-D
seismic company, to jointly explore the Hostetter Field. South Coast in turn
has provided the Company with a similar opportunity in one of its current
exploration projects in Terrebonne Parish area of South Louisiana. The Company
and South Coast each purchased a 7.5% working interest in a 3-D
seismic/exploration project in Reeves County, Texas, the first phase of which
has been shot. The projects' area of mutual interest covers approximately
160,000 acres and will entail shooting 3-D seismic data over approximately 200
square miles with the first exploratory test well planned for the first quarter
of 1997. The Company and South Coast have also jointly formed a geologic team
to assist them in the evaluation of these 3-D projects.
The following table sets forth the estimated costs to the Company for
3-D seismic surveys, leasehold acquisitions and drilling of exploratory and
development wells relating to the exploration prospects that the Company
currently plans to pursue over the ensuing 18-month period.
<TABLE>
Estimated Cost to Company
-----------------------------------------
Prospect Area Seismic Land Drilling Total
------------- ------ ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
South Texas (Upper Wilcox Trend) $ 720 $ 640 $ 8,900 $ 10,260
West Texas (Permian Basin) 330 480 900 1,710
South Louisiana (Terrebonne Parish) --- 240 1,300 1,540
------- ------- -------- --------
Total $ 1,050 $ 1,360 $ 11,100 $ 13,510
======= ======= ======== ========
</TABLE>
-28-
<PAGE> 31
The Company expects that its available cash and expected cash flows
from operating activities will be sufficient to meet its financial obligations
and fund its planned developmental drilling on the Bakersfield Properties for
the foreseeable future, provided, that (i) there are no significant decreases
in oil and gas prices, (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 areas with respect to
similar wells and (iv) the operator continues its development program with
respect to the Bakersfield Properties on the schedule currently contemplated.
The Company also expects that its improved liquidity as a result of
the July 1996 Equity Offering, availability under its Credit Agreement and
improved cash flow from interest savings on the portion of the Notes redeemed
will enable it to fund its 3-D seismic and exploration activities for the next
eighteen months. Further exploration and resulting development drilling of
these projects will depend largely on the measure of success of these initial
activities.
In the event operating cash flows and available liquidity are not
sufficient to fund debt and development and exploration costs, or results from
developmental drilling and exploration are not as successful as anticipated,
then the Company will either (i) curtail its developmental drilling and/or
exploration activities or (ii) seek alternative financing to assist in these
activities.
The Company intends to continue efforts to acquire additional
interests in selected producing oil and gas properties and exploration projects
if and when these opportunities become available. Any such acquisitions or
projects would require borrowings under the Credit Agreement and possibly
additional debt or equity financing if needed.
The Company also intends to explore other financial alternatives to
redeem additional Notes with lower-cost debt. Any such redemption would be at
a price in excess of the Notes' principal amount, but no higher than the 110%
of principal amount as provided for under the terms of the Note Offering, and
would result in an additional extraordinary loss from early extinguishment of
debt. The Company believes, however, that any such charge would be mitigated
by the benefit of future interest cost savings. There can be no assurances
that the Company will be successful in this endeavor.
-29-
<PAGE> 32
UNCERTAINTIES INVOLVING FORWARD-LOOKING DISCLOSURE
Certain of the statements set forth above under "Liquidity and Capital
Resources - Capital Expenditures," such as the statements regarding estimated
production amounts, available cash and expected cash flows from operating
activities for 1996 and 1997, estimated development costs and number of
anticipated wells to be drilled in 1996 and thereafter and the planned 3-D
seismic program, are forward-looking and are based upon the Company's current
belief as to the outcome and timing of such future events. There are numerous
uncertainties inherent in estimating quantities of proved oil and gas reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the Company.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact way, and the
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. As a result,
estimates made by different engineers often vary from one another. In
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revisions of such estimate and such revisions, if
significant, would change the schedule of any further production and
development drilling. Accordingly, reserve estimates are generally different
from the quantities of oil and gas that are ultimately recovered. Furthermore,
the estimated production amounts and numbers of wells to be drilled in 1996 and
1997 are based upon product prices and costs as of December 31, 1995 (except
for gas sold under contract, in which case the contract prices were used),
which will probably be different from the actual prices recognized and costs
incurred in 1996 and 1997. Additional factors which could materially affect
the Company's oil and gas production and development drilling program in the
future are general economic conditions; the impact of the activities of OPEC
and other competitors; the impact of possible geopolitical occurrences
world-wide; the results of financing efforts, risks under contract and swap
agreements; changes in laws and regulations; capacity, deliverability and
supply constraints or difficulties, unforeseen engineering and mechanical or
technological difficulties in drilling or working over wells; and other risks
described under "Risk Factors" in the Company's Prospectus dated July 25, 1996,
filed with the Securities and Exchange Commission, relating to the July 1996
Equity Offering. Because of the foregoing matters, the Company's actual results
for 1996 and beyond could differ materially from those expressed in the
above-described forward-looking statements.
-30-
<PAGE> 33
HARCOR ENERGY, INC.
PART II - OTHER INFORMATION
Item 4. - Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders (the "Annual
Meeting") was held on June 21, 1996.
(b) At the Annual Meeting, Robert J. Cresci and Ambrose K. Monell
were elected as Class II directors of the Company for a three year
term. Mark G. Harrington, Herbert L. Oakes, Jr. And Francis H. Roth
are Class I directors whose terms expire at the 1998 Annual Meeting of
Stockholders. Vinod K. Dar, David E. K. Frischkorn, Jr. And Robert A.
Shore are Class III directors, whose terms expire at the 1997 Annual
Meeting of Stockholders.
(c) The number of shares voted for and against the two directors who
were elected at the Annual Meeting were as follows:
<TABLE>
<CAPTION>
Candidate Votes For Votes Against
--------- --------- -------------
<S> <C> <C>
Robert J. Cresci 8,059,540 11,951
Ambrose K.Monell 8,061,540 9,951
</TABLE>
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K - None
-31-
<PAGE> 34
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.
<TABLE>
<S> <C> <C>
HARCOR ENERGY, INC.
Registrant
Date: August 14, 1996 /s/ Francis H. Roth
-------------------------------
Francis H. Roth
President and Chief
Operating Officer
Date: August 14, 1996 /s/ Gary S. Peck
-------------------------------
Gary S. Peck
Vice President-Finance
Chief Accounting Officer
</TABLE>
-32-
<PAGE> 35
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,298,654
<SECURITIES> 0
<RECEIVABLES> 3,697,294
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,149,951
<PP&E> 103,029,425
<DEPRECIATION> 25,992,365
<TOTAL-ASSETS> 86,626,305
<CURRENT-LIABILITIES> 8,522,294
<BONDS> 63,252,258<F1>
<COMMON> 869,621
0
650
<OTHER-SE> 8,464,570
<TOTAL-LIABILITY-AND-EQUITY> 86,626,305
<SALES> 7,367,902
<TOTAL-REVENUES> 7,369,312
<CGS> 2,267,240<F2>
<TOTAL-COSTS> 2,267,240
<OTHER-EXPENSES> 2,523,222<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,675,652
<INCOME-PRETAX> (229,302)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (229,302)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
<FN>
<F1>14-7/8% SENIOR SECURED NOTES DUE 2002
<F2>OIL & GAS PRODUCTION COSTS & GAS PLANT COSTS
<F3>EXPLORATION, DD&A, GENERAL & ADMINISTRATIVE
</FN>
</TABLE>
